See notes to Condensed Consolidated Financial Statements.
See notes to Condensed Consolidated Financial Statements.
See notes to Condensed Consolidated Financial Statements.
See notes to Condensed Consolidated Financial Statements.
3. Inventories
The components of inventories net are:were:
| | September 30, 2017 | | December 31, 2016 | |
| | (In thousands) | |
| | | | | |
| Raw materials and purchased component parts | | $ | 6,525 | | | $ | 6,298 | |
| Work-in-process | | | 1 | | | | 8 | |
| Finished goods | | | 1,645 | | | | 3,401 | |
| | | $ | 8,171 | | | $ | 9,707 | |
| | June 30, 2022 | | | December 31, 2021 | |
| | | | |
| | | | | | | |
Raw materials and purchased component parts | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
3.
4. Accrued product warranty liability
We generally warrantprovide hardware warranties on our products for up to 24 months and record the estimated cost of such product warranties at the time the sale is recorded. Estimated warranty costs are based upon actual past experience of product repairs and the related estimated cost of labor and material to make the necessary repairs.
The following table summarizes the activity recorded in the accrued product warranty liability during the ninesix months ended SeptemberJune 30, 20172022 and 2016:2021:
| | | Six Months Ended | |
| | Nine Months Ended September 30, | | | June 30, | |
| | 2017 | | 2016 | | | | | | | |
| | (In thousands) | | | | |
| | | | | | | | | | | |
| Balance, beginning of period | | $ | 267 | | | $ | 277 | | | | | | | | | |
| Warranties issued | | | 184 | | | | 206 | | | | | | | | | |
| Warranty settlements | | | (187) | | | | (200) | | | | | | | | | |
| Balance, end of period | | $ | 264 | | | $ | 283 | | | | | | | | | |
As of SeptemberJune 30, 2017, $184,0002022, $63 thousand of the accrued product warranty liability iswas classified as current in "Accrued liabilities"“Accrued liabilities” in the Condensed Consolidated Balance Sheets and the remaining $80,000 is$17 thousand was classified as long-termnon-current in "Other liabilities"“Other liabilities”.
75. Debt
On March 13, 2020, we entered into a credit facility (the “Siena Credit Facility”) with the Lender. The Siena Credit Facility provides for a revolving credit line of up to $10.0 million expiring on March 13, 2023. Borrowings under the Siena Credit Facility bear a floating rate of interest equal to the greatest of (i) the prime rate plus 1.75%, (ii) the federal funds rate plus 2.25%, and (iii) 6.50%. The total deferred financing costs related to expenses incurred to complete the Siena Credit Facility was $245 thousand, which were reported as “Other current assets” in current assets and “Other assets” in non-current assets in the Condensed Consolidated Balance Sheets. We also pay a fee of 0.50% on unused borrowings under the Siena Credit Facility. Borrowings under the Siena Credit Facility are secured by a lien on substantially all the assets of the Company.
The Siena Credit Facility imposes a financial covenant on the Company and borrowings are subject to a borrowing base based on (i) 85% of eligible accounts receivable plus the lesser of (a) $5.0 million and (b) 50% of eligible raw material and 60% of finished goods inventory. The three-month period from April 1, 2020 to June 30, 2020 was the first period we were subject to the financial covenant, which required the Company to maintain a minimum EBITDA and continued through the 12-month period from April 1, 2020 to March 31, 2021. On July 21, 2021, the Company entered into an amendment (the “Credit Facility Amendment”) to the Siena Credit Facility. The Credit Facility Amendment changed the financial covenant under the Siena Credit Facility from a minimum EBITDA covenant to an excess availability covenant requiring that the Company maintain excess availability of at least $750 thousand under the Siena Credit Facility, tested as of the end of each calendar month, beginning with the calendar month ending July 31, 2021. From July 31, 2021 to June 30, 2022, we have been in compliance with our excess availability covenant. As of June 30, 2022, we had 0 outstanding borrowings under the Siena Credit Facility and $4.5 million of borrowing capacity available under the Siena Credit Facility, excluding the excess availability covenant. This agreement was further amended in the third quarter of 2022 – see Note 10.
On May 1, 2020 (the “Loan Date”), the Company was granted the PPP Loan from Berkshire Bank in the aggregate amount of $2.2 million, pursuant to the PPP. Under the terms of the PPP, the PPP Loan would be forgiven to the extent that funds from the PPP Loan were used for payroll costs and costs to continue group health care benefits, as well as for interest on mortgage obligations incurred before February 15, 2020, rent under lease agreements in effect before February 15, 2020, utilities for which service began before February 15, 2020, and interest on debt obligations incurred before February 15, 2020, subject to conditions and limitations provided in the CARES Act. At least 60% (under the PPP terms, as amended) of the proceeds from the PPP Loan were required to be used for eligible payroll costs for the PPP Loan to be forgiven.
On July 8, 2021, the Company received notifications from Berkshire Bank and the SBA that its PPP Loan (including all interest accrued thereon) of $2.2 million had been fully forgiven by the SBA and that the forgiveness payment date was July 1, 2021. The forgiveness of the PPP Loan was reported as “Gain on forgiveness of long-term debt” in the Consolidated Statement of Operations during the year ended December 31, 2021.
4.6. Earnings per share
The following table sets forth the reconciliation of basic weighted average shares outstanding and diluted weighted average shares outstanding:
| | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended | | | Six Months Ended | |
| | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | June 30, | | | June 30, | |
| | | (In thousands, except per share data) | | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | | | | | | | | | | | | | | (In thousands, except per share data) | |
| | | | | | | | | | | | | | |
| Net income | | $ | 1,813 | | | $ | 883 | | | $ | 3,623 | | | $ | 2,261 | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Basic: Weighted average common shares outstanding | | | 7,408 | | | | 7,498 | | | | 7,404 | | | | 7,673 | | | | | | | | | | | | | | | | | |
| Add: Dilutive effect of outstanding options and restricted stock units as determined by the treasury stock method | | | 178 | | | | 51 | | | | 100 | | | | 51 | | | | | | | | | | | | | | | | | |
| Diluted: Weighted average common and common equivalent shares outstanding | | | 7,586 | | | | 7,549 | | | | 7,504 | | | | 7,724 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income per common share: | | | | | | | | | | | | | | | | | |
Net loss per common share: | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.24 | | | $ | 0.12 | | | $ | 0.49 | | | $ | 0.29 | | | | | | | | | | | | | | | | | |
| Diluted | | $ | 0.24 | | | $ | 0.12 | | | $ | 0.48 | | | $ | 0.29 | | | | | | | | | | | | | | | | | |
The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock options and restricted stock units, when the average market price of the common stock is lower than the exercise price of the related stock award during the period. These outstandingperiod, as the inclusion of these stock awards are not included in the computation of diluted earnings per share because the effect would be anti-dilutive. For the three months ended SeptemberJune 30, 20172022 and 2016,2021, there were 382,0001.5 million and 833,000,0.3 million, respectively, of potentially dilutive shares consisting of stock awards that were excluded from the calculation of earnings per diluted share. For the ninesix months ended SeptemberJune 30, 20172022 and 2016,2021, there were 404,0001.2 million and 833,000,0.7 million, respectively, of potentially dilutive shares consisting of stock awards that were excluded from the calculation of earnings per diluted share. In periods for which a net loss is reported, such as the three and six months ended June 30, 2022 and 2021, basic and diluted net loss per common share are calculated using the same method.
5. Shareholders' equity7. Leases
ChangesWe account for leases in shareholders' equityaccordance with ASC Topic 842: Leases.
We enter into lease agreements for the nineuse of real estate space and certain equipment under operating leases and we have no financing leases. Our leases are included in “Right-of-use-assets” and “Lease liabilities” in our Condensed Consolidated Balance Sheet. Our leases have remaining lease terms of two to four years, some of which include options to extend. Our leases with options to extend provide for extensions of two to five years with the ability to terminate the lease within one year. Lease expense is recognized on a straight-line basis over the lease term.
On April 30, 2021, we entered into an amendment to modify the expiration date of our lease on our Hamden, Connecticut facility. The lease, which was last amended on January 3, 2017, was scheduled to expire on April 30, 2027. The lease amendment modified the expiration date to October 31, 2023 with an option to extend the lease for an additional two-year period, extending the expiration date to October 31, 2025. The modification resulted in reducing the right-of-use-asset and lease liability by $0.3 million.
On April 26, 2022, we entered into an amendment to modify the expiration date of our lease on our Las Vegas, Nevada facility. The lease was set to expire on November 1, 2022 and the amendment extended the lease term to November 30, 2025. The lease amendment resulted in an increase to the right-of-use-asset and lease liability of $0.8 million. The lease amendment modified the base rent and extended the lease term from October 31, 2022 to November 30, 2025.
Operating lease expense for the three months ended SeptemberJune 30, 20172022 and 2021 was $250 thousand and $239 thousand, respectively, and is reported as “Cost of sales”, “Engineering, design and product development expense”, “Selling and marketing expense”, and “General and administrative expense” in the Condensed Consolidated Statements of Operations. Operating lease expense for the six months ended June 30, 2022 and 2021 was $487 thousand and $482 thousand, respectively. Operating lease expenses include short-term lease costs, which were immaterial during the periods presented.
The following information represents supplemental disclosure for the statement of cash flows related to operating leases (in thousands):
| | | |
| | | |
| | | | | | | |
Operating cash outflows from leases | | | | | | $ | 522 | |
The following summarizes additional information related to our leases as of June 30, 2022 and December 31, 2021:
| | | | | | |
Weighted average remaining lease term (in years) | | | | | | | | |
Weighted average discount rate | | | | | | | | |
The maturity of the Company’s operating lease liabilities as of June 30, 2022 and December 31, 2021 were as follows (in thousands):
| Balance at December 31, 2016 | | $ | 24,109 | |
| Net income | | | 3,623 | |
| Share-based compensation expense | | | 484 | |
| Issuance of shares from exercise of stock options | | | 294 | |
| Foreign currency translation adjustment | | | 10 | |
| Relinquishment of stock options upon exercise and fully vested deferred stock units | | | (23 | ) |
| Reversal of deferred tax asset in connection with stock options forfeited | | | (110 | ) |
| Purchase of common stock for treasury | | | (358 | ) |
| Dividends declared and paid on common stock | | | (1,911 | ) |
| Balance at September 30, 2017 | | $ | 26,118 | |
| | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total undiscounted lease payments | | | | | | | | |
| | | | | | | | |
| | | | | | $ | 2,570 | |
For the three months ended September 30, 2017, our Board of Directors declared a quarterly cash dividend of $0.09 per share, totaling $661,000, which was paid in September 2017 to common shareholders of record at the close of business on August 21 2017. For the three months ended September 30, 2016, dividends declared and paid totaled $595,000, or $0.08 per share. For the nine months ended September 30, 2017 and 2016, dividends declared and paid totaled $1,911,000, or $0.26 per share, and $1,827,000, or $0.24 per share, respectively.
6.8. Income taxes
We recorded an income tax provisionbenefit for the thirdsecond quarter of 20172022 of $769,000$870 thousand at an effective tax rate of 29.8%(26.8%), compared to an income tax provision duringbenefit for the thirdsecond quarter of 20162021 of $344,000$664 thousand at an effective tax rate of 28.0%(24.6%). For the ninesix months ended SeptemberJune 30, 2017,2022, we recorded an income tax provisionbenefit of $1,657,000$2.2 million at an effective tax rate of 31.4%(24.9%), compared to an income tax provision duringbenefit for the ninesix months ended SeptemberJune 30, 20162021 of $1,010,000$1.2 million at an effective tax rate of 30.9%(22.4%). Our effective tax rate for the third quarter of 2017 was higher due to certain tax credits having less of an impact on significantly higher pre-tax income in the third quarter of 2017 compared to the third quarter of 2016.
We are subject to U.S. federal income tax, as well as income tax in certain stateU.S. states and foreign jurisdictions. We have substantially concluded all U.S. federal, income tax, state and local income tax, and foreign tax regulatory examination matters through 2013. During 2013, an examination of our 2010 federal tax return was completed.2017. However, our federal tax returns for the years 20142018 through 20162021 remain open to examination. Various state and foreign tax jurisdiction tax years remain open to examination as well, though we believe that any additional assessment would be immaterial to the Condensed Consolidated Financial Statements. No state or foreign tax jurisdiction income tax returns are currently under examination.
As of SeptemberJune 30, 2017,2022, we had $80,000$144 thousand of total gross unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. During the third quarter of 2017, we recognized $31,000 of previously unrecognized tax benefits as the statute of limitations on the use of our 2013 R&D credits expired during the third quarter of 2017.
We recognize interest and penalties related to uncertain tax positions in the income tax provision.provision reported as “Deferred Tax Assets” in the Condensed Consolidated Balance Sheet. As of SeptemberJune 30, 2017,2022, we have $14,000had $29 thousand of accrued interest and penalties related to uncertain tax positions. The Company maintains a valuation allowance against certain deferred tax assets where realization is not likely.
7. Accounting pronouncements9. Change in accounting principle
Effective April 1, 2022, TransAct changed its method of inventory valuation from standard costing which approximates FIFO to the average costing methodology. We believe this methodology is preferable because it reflects a better measurement estimate of inventory cost as we do not typically perform intensive manufacturing of our finished products which are therefore better measured under average cost. In addition, our business is projected to include an increasing sales volume of software going forward, which better aligns with average costing. Comparative financial statements of prior periods have been adjusted to apply the new method retrospectively. Tax effects are calculated at the Company’s marginal tax rate, or the tax impact of incremental income changes rather than the average tax rate applied to our total net loss before income taxes. The following financial statement line items for the periods presented were impacted by the change in accounting principle.
The effect of the changes made to the Company’s Condensed Consolidated Balance Sheets follows:
| | | December 31, 2021 | |
| | Under FIFO Cost | | | Under Average Cost | | | Effect of Change | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
The following accounting pronouncements will be adoptedending balance in future reporting periods:retained earnings as of December 31, 2020 was adjusted from $19,718 to $19,607.
In May 2014,The effect of the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers." This ASU is intended to clarify the principles for recognizing revenue by removing inconsistencies in revenue requirements; providing a more robust framework for addressing revenue issues; improving comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; and providing more useful information to users of financial statements through improved revenue disclosure requirements. In applying the amended guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction pricechanges made to the contract's performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Entities have the optionCompany’s Condensed Consolidated Statements of using either a full retrospective approach or modified retrospective approach to adopt the amended guidance. Operations follows:
| | | Three months ended March 31, 2022 | | | Three months ended June 30, 2021 | |
| | Under FIFO Cost | | | Under Average Cost | | | Effect of Change | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 3,325 | | | | 3,432 | | | | 107 | |
| | | | | | | | | | | | | | | (2,755 | ) | | | (2,648 | ) | | | 107 | |
| | | | | | | | | | | | | | | (2,801 | ) | | | (2,694 | ) | | | 107 | |
| | | | | | | | | | | | | | | 687 | | | | 664 | | | | (23 | ) |
| | | | | | | | | | | | | | | (2,114 | ) | | | (2,030 | ) | | | 84 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss per common share: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | $ | (0.24 | ) | | $ | (0.23 | ) | | $ | 0.01 | |
| | | | | | | | | | | | | | $ | (0.24 | ) | | $ | (0.23 | ) | | $ | 0.01 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Shares used in per-share calculation: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | 8,976 | | | | 8,976 | | | | | |
| | | | | | | | | | | | | | | 8,976 | | | | 8,976 | | | | | |
| | | Six months ended June 30, 2021 | |
| | | | | | | | | |
| | | | | | | | | | | | |
| | | 6,514 | | | | 6,771 | | | | 257 | |
| | | (5,421 | ) | | | (5,164 | ) | | | 257 | |
| | | (5,563 | ) | | | (5,306 | ) | | | 257 | |
| | | 1,243 | | | | 1,187 | | | | (56 | ) |
| | | (4,320 | ) | | | (4,119 | ) | | | 201 | |
| | | | | | | | | | | | | |
Net loss per common share: | | | | | | | | | | | | |
| | $ | (0.48 | ) | | $ | (0.46 | ) | | $ | 0.02 | |
| | $ | (0.48 | ) | | $ | (0.46 | ) | | $ | 0.02 | |
| | | | | | | | | | | | | |
Shares used in per-share calculation: | | | | | | | | | | | | |
| | | 8,962 | | | | 8,962 | | | | | |
| | | 8,962 | | | | 8,962 | | | | | |
The amended guidance applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. We are currently evaluating the impact this ASU may have on our consolidated financial position, results of operations or cash flows. During the first quarter of 2017, we engaged a national accounting firm to assist management in implementing the new standard.
We have developed a project plan to review our revenue streams and determine the impacteffect of the new standard, if any,changes made to each revenue stream. We have made significant progress on our project plan but have not finalized our evaluation on whether the new standard will result in changes to our revenue recognition policies. During the remainderCompany’s Condensed Consolidated Statements of Comprehensive Loss follows:
| | | Three months ended March 31, 2022 | | | Three months ended June 30, 2021 | |
| | Under FIFO Cost | | | Under Average Cost | | | Effect of Change | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | (2,082 | ) | | | (1,998 | ) | | | 84 | |
| | | Six months ended June 30, 2021 | |
| | | | | | | | | |
| | | | | | | | | | | | |
| | | (4,235 | ) | | | (4,034 | ) | | | 201 | |
The effect of the year we will continue to evaluate the potential impact, and if needed, establish policies, identify system impacts, integrate the standard into the financial reporting processes and systems, and develop an understanding of the financial impact of this standard on the Company's consolidated financial statements. The Company currently anticipates adopting the amended guidance using the modified retrospective transition approach, with any cumulative effect of initially adopting this standard recognized through retained earnings at the date of adoption. The provisions of this standard are effective for interim and annual periods beginning after December 15, 2017. We will adopt the amended guidance on January 1, 2018, at which time it becomes effective for the Company.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016-02 supersedes the previous leases standard, ASC 840, Leases, and is effective for public entities for annual periods beginning after December 15, 2018 and for interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact that the adoption of ASU 2016-02 will have on our financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 of the current goodwill impairment test, which requires a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment loss will instead be measured at the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the recorded amount of goodwill. The provisions of this standard are effective for years beginning after December 15, 2019, with early adoption permitted for any impairment test performed on testing dates after January 1, 2017. We are currently evaluating the impact that the adoption of ASU 2017-04 will have on our financial statements.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation-Stock Compensation: Scope of modification accounting". ASU 2017-09 provides guidance about which changes made to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU No. 2017-09 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted, including during an interim period for which financial statements have not yet been made available for issuance. The amendments should be applied prospectively to an award modified on or after the adoption date. We will adopt ASU 2017-09 in our consolidated financial statements in the first quarter of 2018 and the adoption is not expected to have an impact on our financial statements.
The following accounting pronouncements were adopted during 2017:
In July 2015, FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory." This ASU changes the measurement principle for inventory from the lower of cost or market to lower of cost or net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The provisions of this ASU became effective for years beginning after December 15, 2016. We adopted this guidance in the first quarter of 2017 and the adoption has not resulted in a change to the value of inventory.
In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting." This ASU is intended to simplify several aspects of the accounting for share based payment transactions. The amended guidance requires that all tax effects related to share-based payments are recorded at settlement (or expiration) through the income statement, rather than through equity. Cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The amended guidance also allows for an employer to repurchase additional employee shares for tax withholding purposes without requiring liability accounting and clarifies that all cash payments made to tax authorities on an employee's behalf for withheld shares should be presented as a financing activity on theCompany’s Condensed Consolidated Statements of Cash Flows. This ASU became effective for years beginning after December 15, 2016, and interim periods within those fiscal years, beginning after December 15, 2016.Flows follows:
| | | Three months ended March 31, 2022 | | | Six months ended June 30, 2021 | |
| | Under FIFO Cost | | | Under Average Cost | | | Effect of Change | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | (1,209 | ) | | | (1,153 | ) | | | 56 | |
| | | | | | | | | | | | | | | 2,591 | | | | 2,334 | | | | (257 | ) |
We adopted ASU 2016-09The effect of the changes made to the Company’s Condensed Consolidated Statements of Changes in Shareholders’ Equity follows:
| | | Three months ended March 31, 2022 | | | Three months ended June 30, 2021 | |
| | Under FIFO Cost | | | Under Average Cost | | | Effect of Change | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Retained earnings -- beginning of period | | | | | | | | | | | | | | | 17,512 | | | | 17,518 | | | | 6 | |
| | | | | | | | | | | | | | | (2,114 | ) | | | (2,030 | ) | | | 84 | |
Retained earnings -- end of period | | | | | | | | | | | | | | | 15,398 | | | | 15,488 | | | | 90 | |
| | | | | | | | | | | | | | | 26,873 | | | | 26,963 | | | | 90 | |
| | | Six months ended June 30, 2021 | |
| | | | | | | | | |
| | | | | | | | | | | | |
Retained earnings -- beginning of period | | | 19,718 | | | | 19,607 | | | | (111 | ) |
| | | (4,320 | ) | | | (4,119 | ) | | | 201 | |
Retained earnings -- end of period | | | 15,398 | | | | 15,488 | | | | 90 | |
| | | 26,873 | | | | 26,963 | | | | 90 | |
10. Subsequent events
The Company has evaluated all events or transactions that occurred up to the date the Condensed Consolidated Financial Statements were issued. Based upon this review, other than the below, the Company did not identify any other additional subsequent events that would have required adjustment or disclosure in the first quarter of 2017. This adoption required usCondensed Consolidated Financial Statements.
On July 19, 2022, the Company and the Lender entered into Amendment No. 2 (the “Credit Facility Amendment No. 2”) to reflect any adjustmentsthe Loan and Security Agreement, dated as of JanuaryMarch 13, 2020, between the Lender and the Company, as amended by Amendment No. 1, 2017,dated as of July 21, 2021, between the beginning ofLender and the annual period that includesCompany. Also on July 19, 2022, the interim period of adoption. InCompany and the first nine months of 2017, there were 70,560 options exercised that required $18,000 of excess tax benefits to be recordedLender entered into an Amended and Restated Fee Letter (the “Amended Fee Letter”) in the provision for income taxes. In the first nine months of 2016, there were 3,750 options exercised that required $1,000 of excess tax benefits to be recorded in additional paid-in-capital, as was required pursuant to the prior accounting guidance.
In connection with the adoptionCredit Facility Amendment No. 2. The Credit Facility Amendment No. 2 did not modify the aggregate amount of ASU 2016-09,the revolving commitment or the interest rate applicable to the loans.
The changes to the Siena Credit Facility provided for in the first quarterCredit Facility Amendment No. 2 include, among other things, the following:
| (i) | The extension of the maturity date from March 13, 2023 to March 13, 2025; and |
| (ii) | The termination of the existing blocked account control agreement and entry into a new “springing” deposit account control agreement, permitting the Company to direct the use of funds in its deposit account until such time as (a) the sum of excess availability under Siena Credit Facility (as amended by the Credit Facility Amendment) and unrestricted cash is less than $5 million for 3 consecutive business days or (b) an event of default occurs and is continuing. |
In addition, the Amended Fee Letter requires the Company, while it retains the ability to direct the use of 2017, we made an accounting policy electionfunds in the deposit account, to no longer estimate forfeitures expectedmaintain outstanding borrowings of at least $2,250,000 in principal amount. If the Company does not have the ability to occurdirect the use of funds in the deposit account, then the Amended Fee Letter requires the Company to determine thepay interest on at least $2,250,000 principal amount of compensation costloans, whether or not such amount of loans is actually outstanding.
The Company has evaluated all events or transactions that occurred up to the date the Condensed Consolidated Financial Statements were available to be recognized in each period. This election requiredissued. Based upon this review, the cumulative effect of the change to be recorded to retained earnings. As of January 1, 2017, we recorded $31,000 to decrease retained earnings and increaseCompany did not identify any other additional paid-in capital for the difference between the amount of compensation cost previously recorded and the amountsubsequent events that would have been recorded without assuming forfeitures.required adjustment or disclosure in the Condensed Consolidated Financial Statements.
The presentation requirements for cash flows related to excess tax benefits and employee taxes paid for withheld shares were applied retrospectively to all periods presented. This resulted in an increase in both net cash provided by operating activities and net cash used by financing activities of $23,000 for the first nine months of 2017.
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (as adjusted for a change in accounting principle) |
Forward Looking Statements
Certain statements included in this report,Quarterly Report on Form 10-Q for the period ended June 30, 2022 (this “Report”), including without limitation, statements in this Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations, which are not historical facts are "forward-looking statements"“forward-looking statements” within the meaning of Section 27A of the U.S. federal securities laws, including the Private Securities Litigation Reform Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").1995. Forward-looking statements generally can be identified by the use of forward-looking terminology, such as "may"“may”, "will"“will”, "expect"“expect”, "intend"“intend”, "estimate"“estimate”, "anticipate"“anticipate”, "believe"“believe”, "project"“project”, “plan” or "continue"“continue” or the negative thereof or other similar words. AllThe Company cautions readers not to place undue reliance on any such forward-looking statements, involveeach of which involves certain risks and uncertainties, including, but not limited to, those listed in Part 1, Item 1A of our most recently filed Annual Report on Form 10-K. Actual10-K for the year ended December 31, 2021 (our “2021 Form 10-K”), and in our other filings with the Securities and Exchange Commission (the “SEC”). Such risks and uncertainties could cause actual results mayto differ materially from those discussed in, or implied by, the forward-looking statements. TheAny such risks and uncertainties may also be exacerbated by the ultimate impact of the COVID-19 pandemic and the re- emergence of virus variants, supply chain disruptions, inflation which is unknown at this time and the Russia/Ukraine conflict and its impact on freight costs. In addition, statements made in this Report about the COVID-19 pandemic and the potential effects and impacts of the COVID-19 pandemic on the Company’s business, financial condition, liquidity and results of operations may constitute forward-looking statements due to factors and future developments that are uncertain, unpredictable and, in many cases, beyond our control, including the scope, duration and extent of the COVID-19 pandemic, actions taken by governmental authorities and businesses in response to the COVID-19 pandemic and any further resurgences or variants, vaccination rates and the direct and indirect impact of the COVID-19 pandemic on our employees, customers and third parties with which we conduct business, including difficulties or delays in manufacturing or delivery of inventory or other supply chain disruptions. Although management has taken steps to mitigate any negative effect of such risks and uncertainties, including the impact of the COVID-19 pandemic, significant unfavorable changes could severely impact the assumptions used. Forward-looking statements speak only as of the date of this reportthey are made, and we assume no dutydo not undertake any obligation to update them.them to reflect the impact of subsequent events or circumstances, except as required by law. As used in this Quarterly Report, on Form 10-Q, unless the context otherwise requires, references to "we"“we”, "us"“us”, "our"“our”, the "Company"“Company” and "TransAct"“TransAct” refer to the consolidated operations of TransAct Technologies Incorporated and its consolidated subsidiaries.
Overview
TransAct Technologies Incorporated ("TransAct") is a global leader in developing and selling software-driven technology and printing solutions for high growthhigh-growth markets including restaurant solutions, POSfood service technology, point of sale (“POS”) automation and banking, casino and gaming, lottery, mobile and oil and gas.gaming. Our world-class products are designed from the ground up based on market and customer requirements and are sold under the BOHA!™, AccuDate™, Epic, EPICENTRAL™EPICENTRAL®, and Ithaca®, Printrex®brand names. During 2019, we launched a new line of products for the food service technology market, the BOHA! branded suite of cloud-based applications and Responder® brand names.companion hardware solutions. The BOHA! software and hardware products help restaurants, convenience stores and food service operators of all sizes automate the food production in the back-of-house operations. Known and respected worldwide for innovative designs and real-world service reliability, our thermal inkjet and impact printers and terminals generate top-quality labels, coupons and transaction records such as receipts, tickets coupons, register journals and other documents, as well as printed logging and plotting of data. We sell our productstechnology to original equipment manufacturers ("OEMs"(“OEMs”), value-added resellers, ("VARs"),and select distributors, as well as directly to end-users. Our product distribution spans across the Americas, Europe, the Middle East, Africa, Asia, Australia, New Zealand, the Caribbean Islands and the South Pacific. TransActWe also providesoffer world-class service, support, labels, spare parts, accessories and printing supplies to itsour growing worldwide installed base of products.products currently in use by our customers. Through our TransAct Services Group ("TSG"(“TSG”), we provide a complete range of supplies and consumables used in the printing and scanning activities of customers in the restaurant and hospitality, banking, retail, casino and gaming, government and oil and gas explorationgovernment markets. Through our webstore, www.transactsupplies.com,, and our direct selling team, we address the demand for these products. We operate in one reportable segment, the design, development, and marketing of software-driven technology and printing solutions for high growth markets, and provide related services, supplies and spare parts.
Impact of the COVID-19 pandemic
In the first quarter of 2020, the COVID-19 pandemic and the resulting social distancing measures, including closures and restricted openings of restaurants and casinos implemented by federal, state and local authorities, negatively impacted customer demand and disrupted portions of our supply chain, including delayed product shipments from our two manufacturers located in Thailand and China. Our inventory levels decreased significantly during 2021 due to these supply chain disruptions, and although we have been able to increase inventory levels during the first six months of 2022, continuing delays and further disruptions have led to an increased backlog, increased freight costs, and impacted our ability to deliver products to our customers on time or at all. While we began to experience a modest recovery starting in the second half of 2020 and continuing through 2021, the recovery slowed again in the first quarter of 2022 due to a resurgence resulting from the Omicron variant and other variants. We again are beginning to see a resumption of the recovery in the second quarter of 2022 which we expect to continue during the remainder of 2022, though the exact timing and pace of recovery are unknown given uncertainty surrounding responsive measures to the spread of virus variants or any potential future resurgences of the virus and the significant disruption that we and our customers have already experienced and may continue to experience. We are monitoring indicators of demand recovery, including our sales pipeline, customer orders and product shipments to ascertain an estimate of the ultimate impact of the COVID-19 pandemic on our business, but the length and ultimate severity of the reduction in demand and supply chain disruptions due to the COVID-19 pandemic remains uncertain.
Below is a discussion of the impact we have experienced from the COVID-19 pandemic, and that we believe will continue to experience for the foreseeable future in each of our markets.
Food service technology and POS automation. In both our food service technology and POS automation markets, many restaurants and food service establishments that were closed during much of the second quarter of 2020 started to reopen in the third quarter of 2020 as state and local governments began to ease restrictions put in place in response to the COVID-19 pandemic. Many of our customers initially opened under restrictions that limited them to providing drive-through, take-out or delivery service without dine-in options, as well as limiting the volume of customers and employees on site at any one time. During the second half of 2020 and throughout 2021 and the first six months of 2022, as these food service customers reopened for business, we experienced sales improvement compared to the second quarter of 2020. Notwithstanding the gradual resumption of operations that began in the third quarter of 2020, our food service technology customers continue to recover from the financial impact of the COVID-19 pandemic, and we expect new capital expenditures to be a lower priority for them in the near term, which we believe will continue to negatively impact sales of BOHA! hardware, software and label products. However, food service providers have been and are likely to continue to be required to develop and implement new or enhanced policies and operating procedures regarding cleaning, sanitizing and social distancing to ensure the safety of their employees and customers. Additionally, our markets have experienced labor shortages and inflation in their food and labor costs. We believe that our BOHA! hardware, software and label products could prove to be helpful to our food service customers in efficiently and effectively managing and complying with these new procedures, while also helping to overcome staffing issues and inflation, especially as many establishments are and will likely continue to be operating with reduced staff levels due to the continuing labor shortage.
Casino and gaming. In the casino and gaming market, most casinos and other gaming establishments were closed worldwide during most of the second quarter of 2020. Many casinos began to reopen in late May and early June 2020, but similar to restaurants, casino openings were slow and measured, starting with reduced capacity and limited gameplay based on social distancing guidelines. During the fourth quarter of 2020, some casinos re-closed due to a resurgence of the COVID-19 pandemic. However, many casinos in the U.S. reopened during the first quarter of 2021 with limited capacity and continued to remain open and further expand capacity during the remainder of 2021. We anticipate that casinos world-wide will continue to increase capacity over time, barring any new closures or reduced capacity requirements in response to any new resurgence of the COVID-19 pandemic, including the emergence of variants. Though sales of our casino and gaming products increased during 2021 and the first six months of 2022, and we expect this trend to continue for the remainder of 2022, casinos continue to recover from the financial impact of the COVID-19 pandemic, and therefore we expect that certain casinos’ appetite for purchases of new slot machines may be diminished, which may negatively impact sales of casino and gaming printers purchased by slot manufacturers for use in slot machines at casinos during the balance of 2022.
Printrex. We made a strategic decision to exit the Printrex market as of December 31, 2021 and expect to have no future sales in this market beyond 2021.
TSG. Due to closures and reduced operating capacity of restaurants, food service establishments, casinos and other gaming establishments resulting from the COVID-19 pandemic, sales of spare parts, service and consumable products have declined, and we expect full year sales to remain at reduced levels, due to lower usage while the COVID-19 pandemic persists.
Although we have seen improvement in the second quarter of 2022, our gross margin has been negatively impacted by the COVID-19 pandemic and we expect our gross margin to continue to be negatively impacted while the COVID-19 pandemic and its economic effects on the markets we serve persists. As a result of significantly lower sales levels, which were expected, as well as increased material and shipping costs resulting from worldwide supply disruptions caused by the COVID-19 pandemic, we believe our gross margin may continue to be impacted due to fixed manufacturing overhead expenses (such as facility costs, depreciation, etc.) that cannot be reduced or eliminated even with the lower sales level.
We have also experienced supply chain disruptions, including delayed product shipments from our two contract manufacturers located in China and Thailand that conduct almost all of our printer and terminal manufacturing, due to reduced operations and parts shortages at these facilities. To date, these disruptions have only minimally impacted deliveries to customers due to our high inventory levels and reduced demand for our products. Our inventory levels have increased during the first half of 2022 as we have made adjustments to the COVID-19 pandemic-related supply chain problems.
In light of the uncertainty around the ultimate impact of the COVID-19 pandemic and the resulting economic impacts, we implemented a number of cost saving measures during 2020 to help mitigate the impact on our financial position and operations and continued to limit discretionary spending during the first nine months of 2021.
Since the onset of the COVID-19 pandemic, our top priority has been to ensure the health and safety of our employees while continuing to provide our customers with high-quality, personalized service. On March 20, 2020, we instituted work-from-home practices for the majority of our employees to reduce the spread of COVID-19 and to comply with government mandates. Because most of our employees already had laptop computers with remote access into our IT systems, we experienced only minor reductions in productivity and minimal costs related to the implementation of our work-from-home practices. In 2022, we have transitioned to a more hybrid and flexible model to accommodate both our employees and the needs of the business. In addition, even with the transition to a hybrid model, our internal control structure remains operational and unchanged.
We have evaluated the recoverability of the assets on our unaudited condensed consolidated balance sheet as of June 30, 2022 in accordance with relevant authoritative accounting literature. We considered the disruptions caused by the COVID-19 pandemic, including lower than previously forecasted sales and customer demand and macroeconomic factors potentially impacting accounts receivable, inventory, investments, intangible assets, goodwill and other assets and liabilities. Where forward-looking estimates are required, we made a good-faith estimate based on information available as of the balance sheet date. We have continued to monitor for indicators of impairment through the date of this Report.
Notwithstanding the foregoing, there is no assurance that the actions we have taken in response to the COVID-19 pandemic are sufficient or adequate, and we may be required to take additional preventive or responsive measures, as the ultimate extent of the effects of the COVID-19 pandemic on the Company, our financial condition, results of operations, liquidity, and cash flows are uncertain and are dependent on evolving developments which cannot be predicted at this time. See Part I, Item 1A, Risk Factors, of Form 10-K for the year ended December 31, 2021, and other filings we make with the SEC from time to time, for further discussion of risks related to COVID-19.
Critical Accounting Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared by us in accordance with accounting principles generally accepted in the United States of America. The presentation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities. Our estimates include those related to revenue recognition, accounts receivable, inventory obsolescence, goodwill and intangible assets, the valuation of deferred tax assets and liabilities, depreciable lives of equipment, warranty obligations, share-based compensation and contingent liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.
For a complete description of There have been no material changes in our critical accounting policies, seejudgements and estimates from the information presented in Part II, Item 7 - Management's7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations, "Critical Accounting Policies and Estimates," included” in our Annual Report on2021 Form 10-K for the year ended December 31, 2016. We have reviewed those policies and determined that they remain our critical accounting policies for the nine months ended September 30, 2017.
Results of Operations: Three months ended SeptemberJune 30, 20172022 compared to the three months ended SeptemberJune 30, 20162021
Net Sales. Net sales, which include printer, terminal, software and softwarelabel sales, as well as sales of replacement parts, consumables and maintenance and repair services, by market for the three and six months ended SeptemberJune 30, 20172022 and 20162021 were as follows (in thousands, except percentages):follows:
| | | Three months ended | | | Three months ended | | | Change | | | Three Months Ended | | | Three Months Ended | | | | |
| | | September 30, 2017 | | | September 30, 2016 | | | $ | | | | % | | |
| Restaurant solutions | | $ | 1,803 | | | | 11.6 | % | | $ | 969 | | | | 6.7 | % | | $ | 834 | | | | 86.1 | % | |
| POS automation and banking | | | 1,829 | | | | 11.8 | % | | | 2,889 | | | | 20.0 | % | | | (1,060 | ) | | | (36.7 | %) | |
| (In thousands, except percentages) | | | June 30, 2022 | | | June 30, 2021 | | | $ Change | | | % Change | |
Food service technology (“FST”) | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Casino and gaming | | | 5,111 | | | | 32.9 | % | | | 5,612 | | | | 38.8 | % | | | (501 | ) | | | (8.9 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
| Lottery | | | 2,160 | | | | 13.9 | % | | | 2,226 | | | | 15.4 | % | | | (66 | ) | | | (3.0 | %) | |
| Printrex | | | 358 | | | | 2.3 | % | | | 67 | | | | 0.4 | % | | | 291 | | | | 434.3 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| TSG | | | 4,263 | | | | 27.5 | % | | | 2,711 | | | | 18.7 | % | | | 1,552 | | | | 57.2 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 15,524 | | | | 100.0 | % | | $ | 14,474 | | | | 100.0 | % | | $ | 1,050 | | | | 7.3 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| International * | | $ | 2,050 | | | | 13.2 | % | | $ | 3,368 | | | | 23.3 | % | | $ | (1,318 | ) | | | (39.1 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
| * | International sales do not include sales of printers and terminals made to domestic distributors or other domestic customers whothat may, in turn, ship those printers and terminals to international destinations. |
Net sales for the thirdsecond quarter of 20172022 increased $1,050,000,$3.3 million, or 7%35%, from the same period in 2016. Although overall2021. Printer, terminal and other hardware sales unit volume increased due to increased sales contributions from our TSG market and increased sales of our higher priced restaurant solution terminals, printer and terminal sales volume decreased 15%27% year-over-year to approximately 38,000 units. Our printer and terminal sales volume decrease was driven by25,000 units for the second quarter of 2022 due primarily to a 37% decrease69% increase in unit volume from the POS automation and banking market, a 14% decrease in unit volume in the casino and gaming market and, to a lesser extent, a 3% decrease insales unit volume in the lottery market. These decreases were partially offset by an 80% increase in unit volume from the restaurant solutions market.volume. The average selling price of our printers, terminals and terminals other hardware increased approximately 10%18% in the thirdsecond quarter of 20172022 compared to the thirdsecond quarter of 20162021 due primarily to price increases instituted on most of our products in the latter part of the first quarter of 2022. In addition to the sales unit volume increases, FST software, labels and other recurring revenue increased $0.1 million, or 6%, in the second quarter of 2022 compared to the second quarter of 2021 due in part to increased sales of BOHA! terminals.
International sales for the second quarter of 2022 increased $1.5 million, or 111%, from the same period in 2021, primarily due to a combination of increased volume of restaurant solution terminals, which carry a higher price than our other products, and decreased volume of POS automation and banking printers sold during the third quarter of 2017, which carry a lower price than our other products.
International sales decreased $1,318,000, or 39%, due primarily to a 44% decrease152% increase in sales in the international casino and gaming market.
Restaurant Solutions:
Revenue from the restaurant solutions market includesdriven largely by an increase in sales of terminals that combineour thermal casino printers.
Food service technology. Our primary offering in the food service technology market is our BOHA! ecosystem, which combines our latest generation terminal and workstation, cloud-based software applications and related hardware into a unique solution to automate back-of-house operations in restaurants, convenience stores and food service operations. The software component of BOHA! consists of a suite of software-as-a-service (“SaaS”)-based applications for both Android and iOS operating systems, including applications for temperature monitoring of food and equipment, timers, food safety labeling, media libraries, checklists and task lists, and equipment service management. These applications can be sold separately or combined into a single platform with the associated hardware, which includes the BOHA! terminal and workstation, handheld devices, tablets, temperature probes and temperature sensors. The BOHA! terminal combines the software and hardware components in a device that includes an operating system, touchscreen and one or two thermal print mechanisms that print easy-to-read food rotation labels, grab-and-go labels and nutritional labels for prepared foods, and "enjoy by"“enjoy by” date labelslabels. The BOHA! workstation uses an iPad or Android tablet instead of an integrated touchscreen. Both the BOHA! terminal and workstation are equipped with the TransAct Enterprise Management System to helpensure that only approved applications and functions are available on the device and allows over-the-air updates to the applications and operating system. BOHA! helps food service establishments and restaurants (including fine dining, casual dining, fast casual and quick-serve convenientrestaurants, convenience stores, hospitality establishments and hospitality establishments)contract food service providers) effectively manage food spoilagesafety and grab-and-go initiatives, as well as automate and manage back-of-the-restaurantback-of-house operations. A summaryRecurring revenue from BOHA! is generated by software sales, including software subscriptions that are typically charged to customers annually on a per-application basis, as well as sales of saleslabels, extended warranty and service contracts, and technical support services. Sales of our worldwide restaurant solutionsfood service technology products for the three months ended SeptemberJune 30, 20172022 and 2016 is2021 were as follows (in thousands, except percentages):
| | Three months ended | | Three months ended | | Change | | | | | | | | | | |
| | September 30, 2017 | | September 30, 2016 | | $ | | | | % | | |
(In thousands, except percentages) | | | | | | | | | | | | | |
| Domestic | | $ | 1,685 | | | | 93.5% | | | $ | 886 | | | | 91.4% | | | $ | 799 | | | | 90.2 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| International | | | 118 | | | | 6.5% | | | | 83 | | | | 8.6% | | | | 35 | | | | 42.2 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 1,803 | | | | 100.0% | | | $ | 969 | | | | 100.0% | | | $ | 834 | | | | 86.1 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
(In thousands, except percentages) | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Software, labels and other recurring revenue | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The increase of $0.4 million, or 12%, in domestic restaurant solutions revenue fromfood service technology sales for the thirdsecond quarter of 20162022 compared to the second quarter of 2021 was primarily driven by an increase in sales of both hardware as well as software, labels and other recurring revenue. FST hardware sales increased 24% due to higher sales of our AccuDateAccudate 9700 terminal to McDonald's to support a new food item initiative introduced in the third quarter of 2017 as well as, but(largely for use at McDonald’s) and to a lesser extent, growinghigher sales of our AccuDate ProBOHA! terminal and XL terminals. During the third quarter, we also completed the effortwork station to staff ournew and existing customers. BOHA! software (recognized on a SaaS subscription basis), labels and other recurring revenue increased by 5%, primarily due to increased label and software sales team devoted exclusivelydue to the restaurant solutions product line. We expect salesgrowth of the installed base of our restaurant solutions terminals to remain strong for the remainder of 2017 as we have started to see the benefits from the strategic sellingBOHA! terminal and marketing investments initiated in the first half of 2017.
International restaurant solution sales increased in the third quarter of 2017 compared to the third quarter of 2016 due to higher sales to our European distributor and McDonald's internationally.
workstation.
POS automation and banking:
automation. Revenue from the POS automation and banking market includes sales of our Ithaca 9000 thermal and impact printersprinter used primarily by restaurants (including fine dining, casual dining,McDonalds and other quick-serve and hospitality establishments)restaurants located either at the checkout counter or within self-service kiosks to print receipts for consumers or print on linerlessliner-less labels. In addition, revenue includes sales of inkjet printers used by banks, credit unions and other financial institutions to print deposit or withdrawal receipts and/or validate checks at bank teller stations. A summary of salesSales of our worldwide POS automation and banking products for the three months ended SeptemberJune 30, 20172022 and 2016 is2021 were as follows (in thousands, except percentages):
| | Three months ended | | Three months ended | | Change | | | Three Months Ended | | | Three Months Ended | | | | |
| | September 30, 2017 | | September 30, 2016 | | $ | | | | % | | |
(In thousands, except percentages) | | | | | | | | | | | | | |
| Domestic | | $ | 1,697 | | | | 92.8% | | | $ | 2,672 | | | | 92.5% | | | $ | (975 | ) | | | (36.5 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
| International | | | 132 | | | | 7.2% | | | | 217 | | | | 7.5% | | | | (85 | ) | | | (39.2 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 1,829 | | | | 100.0% | | | $ | 2,889 | | | | 100.0% | | | $ | (1,060 | ) | | | (36.7 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
The decrease in domestic POS automation and banking product revenue fromfor the thirdsecond quarter of 20162022 compared to the second quarter of 2021 of 7% was driven primarily driven by printer production limitations caused by the worldwide supply chain slowdown. As a 37% decreaseresult, we could not produce enough POS automation printers to fulfill customer orders during the second quarter of 2022. However, we expect production to ramp up in the second half of 2022 and sales of our Ithaca® 9000 printer, asPOS automation printers to be significantly higher in the new initiatives being rolled out by McDonald's are nearing completion during the third quartersecond half of 20172022 compared to the record pace infirst half of 2022 based on the second and third quartersbacklog of 2016. We expect sales of our Ithaca® 9000 to McDonald's to decreaseorders we have received for the full year 2017 compared to the full year 2016 as McDonald's nears completion of the implementation of their initiatives that use the Ithaca® 9000 which began in 2015. Additionally, we experienced 33% lower sales of our legacy banking and other POS printers for the third quarter of 2017 compared to the third quarter of 2016. We expect sales of these legacy products to continue to decline during 2017, as we continue to deemphasize these products and shift sales focus to our newer restaurant solution products.McDonald’s.
International POS automation and banking sales decreased due to 33% lower international sales of our Ithaca® 9000 printer in the third quarter of 2017 compared to the third quarter of 2016 resulting from completion of a Canadian kiosk initiative for McDonald's that started in 2015.
Casino and gaming:
gaming. Revenue from the casino and gaming market includes sales of thermal ticket printers used in slot machines, video lottery terminals, ("VLTs"), and other gaming machines that print tickets or receipts instead of issuing coins ("ticket-in, ticket-out" or "TITO") at casinos and racetracks ("racinos") and other gaming venues worldwide. Revenue from this market also includes sales of thermal roll-fed printers used in the international off-premise gaming market in gaming machines such as Amusement with Prizes, Skills with Prizes and Fixed Odds Betting Terminals and kiosks for sports betting at non-casino gaming and sports betting establishments. Revenue from this market also includes royalties related to our patented casino and gaming technology. In addition, casino and gaming market revenue includes sales of the EPICENTRAL™EPICENTRAL print system, our software solution (including annual software maintenance), that enables casino operators to create promotional coupons and marketing messages and to print them in real-timereal time at the slot machine. A summary of salesSales of our worldwide casino and gaming products for the three months ended SeptemberJune 30, 20172022 and 2016 is2021 were as follows (in thousands, except percentages):
| | Three months ended | | Three months ended | | Change | | | | | | | | | | |
| | September 30, 2017 | | September 30, 2016 | | $ | | | | % | | |
(In thousands, except percentages) | | | | | | | | | | | | | |
| Domestic | | $ | 3,511 | | | | 68.7% | | | $ | 2,779 | | | | 49.5% | | | $ | 732 | | | | 26.3 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| International | | | 1,600 | | | | 31.3% | | | | 2,833 | | | | 50.5% | | | | (1,233 | ) | | | (43.5 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 5,111 | | | | 100.0% | | | $ | 5,612 | | | | 100.0% | | | $ | (501 | ) | | | (8.9 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
The increase in domestic sales of our casino and gaming products was partially due to a 17% increase in thermal casino printer sales infor the thirdsecond quarter of 20172022 compared to the thirdsecond quarter of 20162021 of $1.5 million, or 61%, was primarily due to strengthan across-the-board increase in the overall domestic casino market. Additionally, EPICENTRAL™ softwareOEM printer sales were five times higherand price increases as we continue to experience continued recovery and believe we are increasing our market share compared to the thirdsecond quarter of 2016 due to two completed domestic installations in2021 when the thirdcasino and gaming market was negatively impacted by the COVID-19 pandemic. This increase was somewhat tempered by a continued global chip shortage that limited our printer production during the second quarter of 20172022. We also completed an installation of Epicentral software at a new casino during the second quarter of 2022 that contributed to the overall increase in domestic sales.
Similar to the domestic sales increase, the international sales increase of our casino and gaming products for the second quarter of 2022 was $1.6 million compared to no new domestic installations completed in the thirdsecond quarter of 2016. Sales of EPICENTRAL™ are project based,2021 and as a result, may fluctuate significantly quarter-to-quarter and year-to-year.
The decrease in international sales was primarily due to a 75% decrease157% increase in sales of our thermal casino printers. Though sales in Asia remain weak due to closures related to the thirdCOVID-19 pandemic, we experienced a sales recovery primarily in Europe and Australia during the second quarter of 20172022 compared to the same periodsecond quarter of 2021 when the international casino and gaming market was negatively impacted by the COVID-19 pandemic.
We expect production to continue to ramp up in 2016the second half of 2022 and sales of our off-premise gamingcasino printers to our European and Australian distributor. Sales of our off-premise gaming printers are largely project-oriented and therefore may fluctuate significantly from quarter-to-quarter and year-to-year. We also experienced lower international Epicentral™ software salesbe higher in the third quartersecond half of 20172022 compared to the third quarterfirst half of 2016, as we had no new foreign installations in the third quarter of 2017 compared to one completed installation in the same prior year period. Effective December 31, 2017, we terminated the relationship with our worldwide casino and gaming distributor and we plan to begin to sell directly to our slot manufacturers and end user casino and gaming customers. As a result, we expect sales for the remainder of 2017 and early 2018 may temporarily be impacted during the transition period until our direct sales efforts take hold.
Lottery:
Revenue from the lottery market includes sales of thermal on-line and other lottery printers to International Game Technology and its subsidiaries ("IGT") for various lottery applications. A summary of sales of our worldwide lottery printers for the three months ended September 30, 2017 and 2016 is as follows (in thousands, except percentages):
| | Three months ended | | Three months ended | | Change | |
| | September 30, 2017 | | September 30, 2016 | | $ | | | | % | |
| Domestic | | $ | 2,149 | | | | 99.5% | | | $ | 2,184 | | | | 98.1% | | | $ | (35 | ) | | | (1.6 | %) |
| International | | | 11 | | | | 0.5% | | | | 42 | | | | 1.9% | | | | (31 | ) | | | (73.8 | %) |
| | | $ | 2,160 | | | | 100.0% | | | $ | 2,226 | | | | 100.0% | | | $ | (66 | ) | | | (3.0 | %) |
Our sales to IGT are directly dependent2022 based on the timing and numberbacklog of new and upgraded lottery terminal installations IGT performs, and as a result, may fluctuate significantly quarter-to-quarter and year-to-year and are not indicative of IGT's overall business or revenue.orders we have received.
Printrex:
Printrex. Printrex branded printers arewere sold into markets that include wide format, desktop and rack mounted and vehicle mounted black/white thermal printers used by customers to log and plot oil field, seismic and down hole well drilling data in the oil and gas exploration industry. It also includes high-speed color inkjet desktop printers used to print logs at the data centers of the oil and gas field service companies. Revenue in this market also includes sales of vehicle mounted printers used to print schematics and certain other critical information in emergency services vehicles and other mobile printing applications. A summary of salesSales of our worldwide Printrex printers for the three months ended SeptemberJune 30, 20172022 and 2016 is2021 were as follows (in thousands, except percentages):
| | Three months ended | | Three months ended | | Change | | | | | | | | | | |
| | September 30, 2017 | | September 30, 2016 | | $ | | | | % | | |
(In thousands, except percentages) | | | | | | | | | | | | | |
| Domestic | | $ | 258 | | | | 72.1% | | | $ | 64 | | | | 95.5% | | | $ | 194 | | | | 303.1 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| International | | | 100 | | | | 27.9% | | | | 3 | | | | 4.5% | | | | 97 | | | | 3,233.3 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 358 | | | | 100.0% | | | $ | 67 | | | | 100.0% | | | $ | 291 | | | | 434.3 | % | | | | | | | | | | | | | | | | | | | | | | | | |
The increaseWe made a strategic decision to exit the Printrex market as of December 31, 2021 and have had no sales, and expect to have no future sales in sales of Printrex printers in the third quarter of 2017 compared to the third quarter of 2016 resulted primarily from a 511% increase in domestic and international sales of our oil and gas printers. Though we have seen demand from our oil and gas customers steadily increase throughout 2017, we expect 2017 fourth quarter sales to be relatively consistent with the third quarter of 2017.this market beyond 2021.
TSG. Revenue fromgenerated by TSG includes sales of consumable products (including(POS receipt paper, inkjet cartridges, ribbons receipt paper, color thermal paper, food safety labels and other printing supplies)supplies for legacy products), replacement parts, maintenance and repair services, testing services, refurbished printers, and shipping and handling charges. A summary of salesSales in our worldwide TSG market for the three months ended SeptemberJune 30, 20172022 and 2016 is2021 were as follows (in thousands, except percentages):
| | Three months ended | | Three months ended | | Change | | | | | | | | | | |
| | September 30, 2017 | | September 30, 2016 | | $ | | | | % | | |
(In thousands, except percentages) | | | | | | | | | | | | | |
| Domestic | | $ | 4,174 | | | | 97.9% | | | $ | 2,521 | | | | 93.0% | | | $ | 1,653 | | | | 65.6 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| International | | | 89 | | | | 2.1% | | | | 190 | | | | 7.0% | | | | (101 | ) | | | (53.2 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 4,263 | | | | 100.0% | | | $ | 2,711 | | | | 100.0% | | | $ | 1,552 | | | | 57.2 | % | | | | | | | | | | | | | | | | | | | | | | | | |
The increase in domesticDomestic revenue from TSG for the thirdsecond quarter of 20172022 increased $0.1 million, or 7%, compared to the prior year periodsecond quarter of 2021. The increase was primarily due to a 157% increase inincreased sales of replacement parts and accessories as the installed base of our thermalfor lottery printers continues to grow and lotteries continue to extend lottery contracts utilizing the existing hardware, including our printer in the third quarter of 2017. TSG sales for the third quarter of 2017 also benefited from growing revenue contribution from our new line of AccuDate food safety labels as well as maintenance and support services for our AccuDate XL terminals. These increases werePOS printers. This increase was partially offset by 15% lower salesa reduction of non-Printrexlegacy consumables largely from the decline of HP inkjet cartridge sales, as we continue to deemphasize our sales of these commoditized consumable products. We expect TSG sales to be higher in the fourth quarter of 2017 compared to the fourth quarter of 2016 due to increased orders for replacement partsthat are no longer a focus for the lottery market.Company.
Internationally, TSG revenue decreased primarily due to a 63% decrease in sales of replacement parts and accessories$0.1 million, or 9%, in the thirdsecond quarter of 20172022 compared to the thirdsecond quarter of 2016.2021.
Gross Profit. Gross profit information for the three months ended SeptemberJune 30, 20172022 and 20162021 is summarized below (in thousands, except percentages):
Three months ended September 30, | | Percent | | Percent of | | | Percent of | |
| 2017 | | 2016 | | Change | | Total Sales – 2017 | | | Total Sales - 2016 | |
| | $ | 7,519 | | | $ | 5,915 | | | | 27.1% | | | | 48.4 | % | | | 40.9 | % |
Three Months Ended June 30, | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Gross profit is measured as revenue less cost of sales, which includes primarily the cost of all raw materials and component parts, direct labor, manufacturing overhead expenses, cost of finished products purchased directly from our contract manufacturers, and expenses associated with installations and support of our EPICENTRAL™EPICENTRAL® print system. Insystem and BOHA! ecosystem and royalty payments to third parties, including to the thirdthird-party licensor of our food service technology software products. For the second quarter of 2017,2022, gross profit increased $1,604,000,$2.0 million, or 27%, and58% due largely to a sales increase of 35% for the second quarter of 2022 compared to the second quarter of 2021. During the second quarter of 2022, our gross margin improved 750increased 620 basis points, to a record high43.0%, compared to 36.8% in the second quarter of 48.4%. These increases were driven by2021. The increase in gross margin resulted primarily from higher sales volume, a more favorable salesproduct mix and the effect of price increases instituted in the thirdlatter part of the first quarter of 2017 compared to the third quarter of 2016, due to a greater portion of sales coming from the sale of spare parts, restaurant solution terminals and EPICENTRAL™ software, in the third quarter of 2017.2022.
Operating Expenses - Engineering, Design and Product Development. Engineering, design and product development expense information for the three months ended SeptemberJune 30, 20172022 and 20162021 is summarized below (in thousands, except percentages):
Three Months Ended June 30, | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Three months ended September 30, | | Percent | | Percent of | | | Percent of | |
| 2017 | | 2016 | | Change | | Total Sales – 2017 | | | Total Sales - 2016 | |
| | $ | 1,147 | | | $ | 1,133 | | | | 1.2% | | | | 7.4 | % | | | 7.8 | % |
Engineering, design and product development expenses primarily include salary and payroll related expenses for our hardware and software engineering staff, depreciation and design expenses (including prototype printer expenses, outside design, development and testing services, supplies and supplies)contract software development expenses including those to the third-party licensor of our food service technology software products). Such expenses increased slightly by 1% in$0.4 million, or 20%, for the thirdsecond quarter of 20172022 compared to the thirdsecond quarter of 2016. Higher engineering2021, as we gradually return to more normalized pre-COVID-19 spending levels and continue development of our food service technology products which we expect to continue during the second half of 2022. In addition, we incurred higher design expenses forrelated to incorporating alternate electronic parts into our restaurant solutions products were almost entirely offset by decreased software development expenses for our EPICENTRAL™ software in the third quarter of 2017 comparedresponse to the third quarter of 2016.worldwide chip shortage in an effort minimize disruptions to our printer and terminal production.
Operating Expenses - Selling and Marketing. Selling and marketing expense information for the three months ended SeptemberJune 30, 20172022 and 20162021 is summarized below (in thousands, except percentages):
Three months ended September 30, | | Percent | | Percent of | | | Percent of | |
| 2017 | | 2016 | | Change | | Total Sales – 2017 | | | Total Sales - 2016 | |
| | $ | 1,895 | | | $ | 1,808 | | | | 4.8% | | | | 12.2 | % | | | 12.5 | % |
Three Months Ended June 30, | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Selling and marketing expenses primarily include salaries and payroll related expenses for our sales and marketing staff, sales commissions, travel expenses, expenses associated with the lease of sales offices, advertising, trade show expenses, public relations, e-commerce and other promotional marketing expenses. Such expenses increased by $87,000,$1.5 million, or 5%86%, infor the thirdsecond quarter of 20172022 compared to the thirdsecond quarter of 20162021, primarily due to investment spending for our FST sales and marketing groups. During the second quarter of 2022, we continued BOHA! market studies we began in the first quarter 2022, increased marketing programs and hired additional sales staff to support our BOHA! products. In addition to these investments, we incurred higher sales commissions, travel expenses and tradeshow expense, as we completed the build-out of our internal infrastructure, including the hiring of a direct sales force and implementation of a direct marketing campaign dedicatedreturned to pre-COVID-19 spending levels, compared to the restaurant solutions marketlower level of spending during the second quarter of 2021 resulting from the negative impacts of COVID-19. Despite the strategic investments we have made in 2017. The increase in expenses was partially offset by lower tradeshow costs as our largest tradeshow, G2E, was held in October 2017 compared to September 2016. WeFST sales and marketing groups, we expect overall selling and marketing expenses to be higher forlower in the full year 2017second half of 2022 compared to full year 2016, asthe first half of 2022 due to cost cutting measures we have committed more resources for our internal infrastructure and continue our direct marketing campaigns targeted to the restaurant solutions market to address significant market opportunities. In addition, we expect to incur incremental selling and marketing expensesimplemented in the fourth quarter 2017 as we begin to implement our plan to terminate the relationship with our international casino and gaming distributor and begin selling direct to slot manufacturers and end user casino and gaming customers in Europe beginning in 2018.other areas.
Operating Expenses - General and Administrative. General and administrative expense information for the three months ended SeptemberJune 30, 20172022 and 20162021 is summarized below (in thousands, except percentages):
Three months ended September 30, | | Percent | | Percent of | | | Percent of | |
| 2017 | | 2016 | | Change | | Total Sales – 2017 | | | Total Sales - 2016 | |
| | $ | 1,886 | | | $ | 1,737 | | | | 8.6% | | | | 12.1 | % | | | 12.0 | % |
Three Months Ended June 30, | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
General and administrative expenses primarily include salaries, incentive compensation, and other payroll related expenses for our executive, accounting,finance, human resourceresources, business development and information technology staff, expenses for our corporate headquarters, professional and legal expenses, telecommunicationinformation technology expenses, and other expenses related to being a publicly-traded company. General and administrative expenses increased $149,000,were up $0.4 million, or 9%17%, in the third quarter of 2017 compared to the thirdsecond quarter of 20162021 due primarily to higher professional fees, salary increases, and depreciation and other expenses related to the implementation of a new ERP system that was completed in April 2022. These increases were partially offset by a reduction in incentive compensation expense recorded in the third quarter of 2017. We expect general and administrative expenses for the full year 2017 to be higher than the full year 2016 due primarily to the recruiting expenses for the restaurant solutions market explained in the selling and marketing section above. expense.
Operating Income.Loss. Operating income informationloss for the three months ended SeptemberJune 30, 20172022 and 20162021 is summarized below (in thousands, except percentages):
Three months ended September 30, | | Percent | | Percent of | | | Percent of | |
| 2017 | | 2016 | | Change | | Total Sales – 2017 | | | Total Sales - 2016 | |
| | $ | 2,591 | | | $ | 1,237 | | | | 109.5% | | | | 16.7 | % | | | 8.5 | % |
Three Months Ended June 30, | | | | | | | | | | |
| | | | | | | | | | | | | |
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Our operating income more than doubled inloss increased $0.3 million, or 12%, for the thirdsecond quarter of 2017, increasing by $1,354,0002022 compared to the thirdsecond quarter of 2016, and our operating margin increased to 16.7% of net sales largely2021 due to a $2.0 million, or 58%, increase in gross profit on 35% higher sales and 620 basis point improvement in gross margin combined withwas more than offset by a 7%$2.3 million, or 38%, increase in total sales, partially offset by 5% higher operating expenses induring the thirdsecond quarter of 20172022 compared to the thirdsecond quarter of 2016.2021.
Interest, expense.net. Net interest expense remained consistent at$28 thousand for the second quarter of 2022 compared to $29 thousand for the second quarter of 2021. We expect interest expense to increase during the second half of 2022 compared to the first half of 2022 due to required minimum borrowings pursuant to the terms of the July 2022 Amendment No. 2 to the Siena Credit Facility.
Other, net. We recorded net interestother expense of $9,000 in$264 thousand for the thirdsecond quarter of 2017 compared to $7,000 in the third quarter of 2016. We do not expect significant changes in net interest expense for the remainder of 2017.
Other expense, net. We recorded no other income or expense in the third quarter of 20172022 compared to other expense of $3,000 in$17 thousand for the thirdsecond quarter of 2016. Foreign2021, primarily due to higher foreign exchange transaction losses recorded inby our U.K. subsidiary resulting largely from the thirdweakening of the British pound against the U.S. dollar during the second quarter of 2017 were offset by a gain on the sale of scrapped tooling. In the third quarter of 2016, we recorded $3,000 of foreign currency transaction exchange losses.2022.
Income Taxes.We recorded an income tax provisionbenefit for the thirdsecond quarter of 20172022 of $769,000$870 thousand at an effective tax rate of 29.8%(26.8%), compared to an income tax provision duringbenefit for the thirdsecond quarter of 20162021 of $344,000$664 thousand at an effective tax rate of 28.0%(24.6%). The effective tax rate
Net Loss. As a result of the above, we reported a net loss for the thirdsecond quarter of 2017 was higher due to certain tax credits having less2022 of an impact on significantly higher pre-tax income in the third quarter of 2017$2.4 million, or ($0.24) per diluted share, compared to the third quartera net loss of 2016. We expect our effective tax rate to be between 32% and 33% for the full year 2017.
Net Income. We reported net income for the third quarter of 2017 of $1,813,000,$2.0 million, or $0.24 per diluted share. This is compared to $883,000, or $0.12($0.23) per diluted share for the thirdsecond quarter of 2016.2021.
Results of Operations: NineSix months ended SeptemberJune 30, 20172022 compared to ninesix months ended SeptemberJune 30, 20162021
Net Sales. Net sales, which include printer, terminal and software sales, as well as sales of replacement parts, consumables and maintenance and repair services, by market for the ninesix months ended SeptemberJune 30, 20172022 and 20162021 were as follows (in thousands, except percentages):follows:
| | | Nine months ended | | | Nine months ended | | | Change | | | Six Months Ended | | | Six Months Ended | | | | |
| | | September 30, 2017 | | | September 30, 2016 | | | $ | | | | % | | |
| Restaurant solutions | | $ | 3,351 | | | | 7.8 | % | | $ | 3,506 | | | | 8.0 | % | | $ | (155 | ) | | | (4.4 | %) | |
| POS automation and banking | | | 6,335 | | | | 14.7 | % | | | 8,407 | | | | 19.3 | % | | | (2,072 | ) | | | (24.6 | %) | |
(In thousands, except percentages) | | | | | | | | | | | | | |
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| Casino and gaming | | | 14,213 | | | | 32.9 | % | | | 16,204 | | | | 37.1 | % | | | (1,991 | ) | | | (12.3 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
| Lottery | | | 7,928 | | | | 18.4 | % | | | 7,311 | | | | 16.8 | % | | | 617 | | | | 8.4 | % | |
| Printrex | | | 818 | | | | 1.9 | % | | | 398 | | | | 0.9 | % | | | 420 | | | | 105.5 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| TSG | | | 10,472 | | | | 24.3 | % | | | 7,806 | | | | 17.9 | % | | | 2,666 | | | | 34.2 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 43,117 | | | | 100.0 | % | | $ | 43,632 | | | | 100.0 | % | | $ | (515 | ) | | | (1.2 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| International * | | $ | 6,596 | | | | 15.3 | % | | $ | 9,396 | | | | 21.5 | % | | $ | (2,800 | ) | | | (29.8 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
| * | International sales do not include sales of printers and terminals made to domestic distributors or other domestic customers whothat may, in turn, ship those printers and terminals to international destinations. |
Net sales for the first ninesix months of 2017 decreased $515,000,2022 increased $4.7 million, or 1%27%, from the same period in 2016.2021. Printer, terminal and other hardware sales unit volume decreasedincreased by 12%26% to approximately 118,00048,000, units for the first ninesix months of 20172022 driven primarily by a 25% and 13% decrease65% increase in unit volume from the POS automation and banking market andin our casino and gaming market, respectively, and to a lesser extent a 10% decrease in the restaurant solutions market. These decreases were partially offset by increased sales volume in the lottery market and Printrex market of 4% and 125%, respectively. The average selling price of our printers, terminals and other hardware increased 4% during5% for the first ninesix months of 20172022 compared to the first ninesix months of 2016,2021 due primarily due to decreased volumeprice increases instituted on most of POS automation and banking printers sold duringour products in the latter part of the first ninequarter of 2022. FST software, labels and other recurring revenue increased $0.5 million, or 15%, in the first six months of 2017, which carry lower prices than our other products.2022 compared to the first six months of 2021.
International sales decreased $2,800,000,for the first six months of 2022 increased $2.8 million, or 30%105%, from the same period in 2021 due primarily driven by 42% lower international salesto a 137% increase in the international casino and gaming market. This decrease was partially offset by a $1 million sales increase in our international lottery market during the first nine months of 2017.
Restaurant solutions:
A summary of salesFood service technology. Sales of our worldwide restaurant solutionsfood service technology products for the ninesix months ended SeptemberJune 30, 20172022 and 2016 is2021 were as follows (in thousands, except percentages):follows:
| | Nine months ended | | Nine months ended | | Change | | | | | | | | | | |
| | September 30, 2017 | | September 30, 2016 | | $ | | | | % | | |
(In thousands, except percentages) | | | | | | | | | | | | | |
| Domestic | | $ | 3,099 | | | | 92.5% | | | $ | 3,179 | | | | 90.7% | | | $ | (80 | ) | | | (2.5 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
| International | | | 252 | | | | 7.5% | | | | 327 | | | | 9.3% | | | | (75 | ) | | | (22.9 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 3,351 | | | | 100.0% | | | $ | 3,506 | | | | 100.0% | | | $ | (155 | ) | | | (4.4 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
(In thousands, except percentages) | | | | | | | | | | | | |
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Software, labels and other recurring revenue | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The decrease in domestic restaurant solutions terminalfood service technology sales of $0.3 million, or 4%, in the first ninesix months of 20172022 compared to the first ninesix months of 20162021 was primarily driven by lowera decrease in hardware sales, of our AccuDate 9700 terminal to our U.S. distributor. This decrease was partially offset by increasedan increase in sales of our AccuDate 9700 terminal to McDonald's, increasedBOHA! software, labels and other recurring revenue. Hardware sales of our AccuDate Pro terminal and the initial sales of our AccuDate XL terminaldecreased 29% in the first nine monthshalf of 2017.
International food safety terminal2022 compared to the first half of 2021 due largely to lower sales decreasedto a national convenience store customer and an initial sale to a new national travel center customer completed in the first ninequarter of 2021 that did not reoccur in the first half of 2022. FST software, labels and other recurring revenue sales increased 15% in the first six months of 20172022 compared to the same period in 2016first six months of 2021. This increase was primarily due to decreasedincreased label sales and, to a lesser extent, increased software sales, compared to the prior year period due principally to the growth of the installed base of our Latin AmericanBOHA! terminals and Canadian distributors.workstations
POS automation and banking:
A summary of salesautomation. Sales of our worldwide POS automation and banking products for the ninesix months ended SeptemberJune 30, 20172022 and 2016 is2021 were as follows (in thousands, except percentages):follows:
| | Nine months ended | | Nine months ended | | Change | | | | | | | | | | |
| | September 30, 2017 | | September 30, 2016 | | $ | | | | % | | |
(In thousands, except percentages) | | | | | | | | | | | | | |
| Domestic | | $ | 6,150 | | | | 97.1% | | | $ | 7,752 | | | | 92.2% | | | $ | (1,602 | ) | | | (20.7 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
| International | | | 185 | | | | 2.9% | | | | 655 | | | | 7.8% | | | | (470 | ) | | | (71.8 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 6,335 | | | | 100.0% | | | $ | 8,407 | | | | 100.0% | | | $ | (2,072 | ) | | | (24.6 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
The decrease in both domestic and internationalSales of POS automation and banking printer revenueprinters remained consistent, increasing $0.1 million, or 2%, for the first six months of 2022 compared to the first ninesix months of 2016 was primarily driven by a 23% decrease in sales of our Ithaca® 9000 printer, as sales to McDonald's began to slow during 2017 compared to the record pace experienced in 2016. Sales also decreased in the first nine months of 2017 compared to the first nine months of 2016 due to a 35% decline in sales of our other legacy POS and banking printers. We expect sales of these legacy products to continue to decline during 2017, as we continue to deemphasize these products and shift focus to our newer restaurant solution products.2021.
Casino and gaming:
A summary of salesgaming. Sales of our worldwide casino and gaming products for the ninesix months ended SeptemberJune 30, 20172022 and 2016 is2021 were as follows (in thousands, except percentages):follows:
| | Nine months ended | | Nine months ended | | Change | | | | | | | | | | |
| | September 30, 2017 | | September 30, 2016 | | $ | | | | % | | |
(In thousands, except percentages) | | | | | | | | | | | | | |
| Domestic | | $ | 9,790 | | | | 68.9% | | | $ | 8,612 | | | | 53.1% | | | $ | 1,178 | | | | 13.7 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| International | | | 4,423 | | | | 31.1% | | | | 7,592 | | | | 46.9% | | | | (3,169 | ) | | | (41.7 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 14,213 | | | | 100.0% | | | $ | 16,204 | | | | 100.0% | | | $ | (1,991 | ) | | | (12.3 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
The increase in domestic sales of our casino and gaming products inof $2.3 million, or 53%, for the first ninesix months of 20172022 compared to the first ninesix months of 20162021 was primarily due primarily to 21% higheran increase in domestic sales and price increases in our gaming and thermal casino printers, as we have experienced a positive recovery and believe we are increasing our market share during the first six months of 2022 compared to the same period in 2021 which was impacted by the COVID-19 pandemic. This increase was somewhat tempered by a continued global chip shortage that limited our printer production during the second quarter of 2022. We also completed an installation of EPICENTRAL software at a new casino during the second quarter of 2022 that contributed to the overall increase in domestic sales.
International sales of our casino and gaming products increased by $2.6 million, or 137%, in the first six months of 2022 compared to the first six months of 2021. Sales of our thermal casino printers due mainly to strength in the overall domestic casino market, including higher sales to our OEMs to support two new casino openings. This increase was partially offset by a decrease in domestic EPICENTRAL™ software sales of 31%. We completed two EPICENTRAL™ installations in both the first nine months of 2017increased 118% and 2016, however in 2017 our installations consisted of one full-feature version of EPICENTRAL™ and our first EPICENTRAL® SE version compared to two full-feature versions of EPICENTRAL™ in the first nine months of 2016. This was our first completed installation of EPICENTRAL® SE which is offered at a lower price compared to our full-feature version of EPICENTRAL™. Sales of EPICENTRAL™ are project based and as a result, may fluctuate significantly quarter-to-quarter and year-to-year.
International casino and gaming printer sales declined in the first nine months of 2017 compared to the first nine months of 2016 due to a 45% decrease in international sales of our thermal casino printers in Europe, Asia and Australia as well as a 32% decrease in international sales of our off-premise gaming printers increased 273%. These increases are attributable to our European and Australian distributors. Salesthe recovery of our off-premise gaming printers are largely project-oriented and therefore may fluctuate significantlythe international markets after significant negative impacts from quarter-to-quarter and year-to-year.the COVID-19 pandemic during the 2021 period.
Lottery:
A summary of sales of our worldwide lottery printers for the nine months ended September 30, 2017 and 2016 is as follows (in thousands, except percentages):
| | Nine months ended | | Nine months ended | | Change | |
| | September 30, 2017 | | September 30, 2016 | | $ | | | | % | |
| Domestic | | $ | 6,749 | | | | 85.1% | | | $ | 7,108 | | | | 97.2% | | | $ | (359 | ) | | | (5.1 | %) |
| International | | | 1,179 | | | | 14.9% | | | | 203 | | | | 2.8% | | | | 976 | | | | 480.8 | % |
| | | $ | 7,928 | | | | 100.0% | | | $ | 7,311 | | | | 100.0% | | | $ | 617 | | | | 8.4 | % |
Our sales to IGT are directly dependent on the timing and number of new and upgraded lottery terminal installations that IGT performs, and as a result, may fluctuate significantly quarter-to-quarter and year-to-year and are not indicative of IGT's overall business or revenue.
International lottery sales increased due to sales of lottery printers to IGT for the Canadian lottery in the first nine months of 2017 and no comparable sales occurring in 2016.
Printrex:
A summary of salesPrintrex. Sales of our worldwide Printrex printers for the ninesix months ended SeptemberJune 30, 20172022 and 2016 is2021 were as follows (in thousands, except percentages): follows:
| | Nine months ended | | Nine months ended | | Change | | | | | | | | | | |
| | September 30, 2017 | | September 30, 2016 | | $ | | | | % | | |
(In thousands, except percentages) | | | | | | | | | | | | | |
| Domestic | | $ | 628 | | | | 76.8% | | | $ | 326 | | | | 81.9% | | | $ | 302 | | | | 92.6 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| International | | | 190 | | | | 23.2% | | | | 72 | | | | 18.1% | | | | 118 | | | | 163.9 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 818 | | | | 100.0% | | | $ | 398 | | | | 100.0% | | | $ | 420 | | | | 105.5 | % | | | | | | | | | | | | | | | | | | | | | | | | |
The increaseWe made a strategic decision to exit the Printrex market as of December 31, 2021 and have had no sales, and expect to have no future sales in Printrex printers was due to an 89% increase in domestic and international sales of our oil and gas printers due to higher demand in the first nine months of 2017 compared to the first nine months of 2016 and a 168% increase in medical and mobile printers primarily due to sales of our mobile printer to one customer.this market beyond 2021.
TSG:
A summary of salesTSG. Sales in our worldwide TSG market for the ninesix months ended SeptemberJune 30, 20172022 and 2016 is2021 were as follows (in thousands, except percentages):follows:
| | Nine months ended | | Nine months ended | | Change | | | Six Months Ended | | | Six Months Ended | | | | |
| | September 30, 2017 | | September 30, 2016 | | $ | | | | % | | |
(In thousands, except percentages) | | | | | | | | | | | | | |
| Domestic | | $ | 10,105 | | | | 96.5% | | | $ | 7,259 | | | | 93.0% | | | $ | 2,846 | | | | 39.2 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| International | | | 367 | | | | 3.5% | | | | 547 | | | | 7.0% | | | | (180 | ) | | | (32.9 | %) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 10,472 | | | | 100.0% | | | $ | 7,806 | | | | 100.0% | | | $ | 2,666 | | | | 34.2 | % | | | | | | | | | | | | | | | | | | | | | | | | |
The increasedecrease in domestic revenue from TSG of $0.1 million, or 5%, for the first six months of 2022 as compared to the first six months of 2021 was primarily due to lower service revenue and sales of consumable products. Service revenue declined 35%, primarily related to declining revenue from a service contract with a legacy banking customer that is expected to expire during 2022. Consumable sales declined by 40% due to decreased sales of consumable products for our legacy products on which we are no longer focusing on. These decreases were offset by a 16% increase in sales of replacement parts and accessories.
Internationally, TSG revenue increased $0.3 million, or 136%, for the first six months of 2022 compared to the first six months of 2021, primarily due to a 96%205% increase in sales of replacement parts and accessories in the first nine months of 2017 compared to the same period in the prior year due to higher demand for spare parts in the lottery market in the first nine months of 2017. This increase was partially offset by a 9% decrease in non-Printrex consumables, largely for legacy POSinternational casino and banking printers, in the first nine months of 2017 compared to the first nine months of 2016.gaming customers.
Internationally, TSG revenue decreased primarily due to 41% and 42% lower sales of replacement parts and accessories and services, respectively, in the first nine months of 2017 compared to the first nine months of 2016.
Gross Profit. Gross profit information for the ninesix months ended SeptemberJune 30, 20172022 and 20162021 is summarized below (in thousands, except percentages):
Nine months ended September 30, | | Percent | | Percent of | | | Percent of | |
| 2017 | | 2016 | | Change | | Total Sales – 2017 | | | Total Sales - 2016 | |
| | $ | 20,042 | | | $ | 17,783 | | | | 12.7% | | | | 46.5 | % | | | 40.8 | % |
Six Months Ended June 30, | | | | | | | | | | |
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GrossFor the first six months of 2022, gross profit increased $2,259,000,$1.2 million, or 13%18%, due primarilylargely to a more favorable sales mixincrease of 27% in the first ninesix months of 20172022 compared to the first ninesix months of 2016. Our 2017 sales included a greater proportion of spare part sales and a lower portion of sales of POS automation and banking printers. This led to a 570 basis point increase2021. The decrease in our gross margin inpercentage resulted primarily from higher freight and product costs incurred due to the worldwide supply chain disruption and chip shortage during the first ninesix months of 2017 compared the first nine months of 2016.2022.
Operating Expenses - Engineering, Design and Product Development. Engineering, design and product development expense information for the ninesix months ended SeptemberJune 30, 20172022 and 20162021 is summarized below (in thousands, except percentages):
Nine months ended September 30, | | Percent | | Percent of | | | Percent of | |
| 2017 | | 2016 | | Change | | Total Sales – 2017 | | | Total Sales - 2016 | |
| | $ | 3,160 | | | $ | 3,458 | | | | (8.6%) | | | | 7.3 | % | | | 7.9 | % |
Six Months Ended June 30, | | | | | | | | | | |
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Engineering, design and product development expenses decreased $298,000,increased $0.8 million, or 9%24%, due primarily to higher product development costs induring the first ninesix months of 2016 related2022 compared to first six months of 2021, as we gradually return to more normalized pre-COVID-19 spending levels, as well as the substantial completionimpact from the hiring of certain softwareadditional engineering staff in late 2021 and the first quarter of 2022 for continued development projects for our EPICENTRALTM software compared to the first nine months of 2017.food service technology products.
Operating Expenses - Selling and Marketing. Selling and marketing expense information for the ninesix months ended SeptemberJune 30, 20172022 and 20162021 is summarized below (in thousands, except percentages):
Nine months ended September 30, | | Percent | | Percent of | | | Percent of | |
| 2017 | | 2016 | | Change | | Total Sales – 2017 | | | Total Sales - 2016 | |
| | $ | 5,601 | | | $ | 5,460 | | | | 2.6% | | | | 13.0 | % | | | 12.5 | % |
Six Months Ended June 30, | | | | | | | | | | |
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Selling and marketing expenses increased by $141,000,$2.8 million, or 3%86%, infor the first ninesix months of 20172022 compared to the first ninesix months of 20162021 primarily due to incurringinvestment spending for our FST sales and marketing groups. During the first half of 2022, we initiated BOHA! market studies, increased expenditures relatedmarketing programs and hired additional sales staff to support our BOHA! products. In addition to these investments, we incurred higher sales commissions, travel expenses and tradeshow expense, as we returned to pre-COVID-19 spending levels, compared to the builduplower level of our internal sales infrastructure and direct marketing campaigns targeted to the restaurant solutions market. The increased expenses from our restaurant solutions investmentsspending during the first nine monthshalf of 2017 compared to2021 resulting from the first nine monthsnegative impacts of 2016 were partially offset by lower travel and tradeshow expenses as our largest tradeshow, G2E, was held in October in 2017 compared to September in 2016.the COVID-19 pandemic.
Operating Expenses - General and Administrative. General and administrative expense information for the ninesix months ended SeptemberJune 30, 20172022 and 20162021 is summarized below (in thousands, except percentages):
Nine months ended September 30, | | Percent | | Percent of | | | Percent of | |
| 2017 | | 2016 | | Change | | Total Sales – 2017 | | | Total Sales - 2016 | |
| | $ | 5,968 | | | $ | 5,589 | | | | 6.8% | | | | 13.8 | % | | | 12.8 | % |
Six Months Ended June 30, | | | | | | | | | | |
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General and administrative expenses increased by $379,000,$1.0 million, or 7%20%, infor the first ninesix months of 20172022 compared to the first ninesix months of 2016 primarily2021 due to higher recruitingprofessional fees (including legal fees related to a shareholder matter that was resolved in March 2022 when we entered into a Cooperation Agreement with two shareholders), salary increases and depreciation and other expenses related to the expansionimplementation of our sales staff for our restaurant solutions market, as well as higher incentive compensation expense and legal expenses incurred during the first nine months of 2017 compared to the first nine months of 2016.a new ERP system that was completed in April 2022. These increased expensesincreases were partially offset by lower severance costs related to fewer headcount reductionsa reduction in incentive compensation expense during the first nine monthshalf of 2017 compared to the first nine months of 2016.2022.
Operating Income.Loss. Operating income informationloss for the ninesix months ended SeptemberJune 30, 20172022 and 20162021 is summarized below (in thousands, except percentages):
Nine months ended September 30, | | Percent | | Percent of | | | Percent of | |
| 2017 | | 2016 | | Change | | Total Sales – 2017 | | | Total Sales - 2016 | |
| | $ | 5,313 | | | $ | 3,276 | | | | 62.2% | | | | 12.3 | % | | | 7.5 | % |
Six Months Ended June 30, | | | | | | | | | | |
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Our operating incomeloss increased by $2,037,000,$3.4 million, or 62%66%, primarily duefor the first six months of 2022 compared to the first six months of 2021 as a 570 basis point improvement$1.2 million, or 18%, increase in gross marginprofit on a favorable product mix, somewhat27% higher sales was more than offset by a 2%$4.6 million, or 39%, increase in operating expenses induring the first nine monthshalf of 20172022 compared to the first nine monthshalf of 2016.2021.
Interest, expense.net. We recorded net interest expense of $25,000 in$92 thousand for the first ninesix months of 20172022 compared to $18,000 innet interest expense of $42 thousand for the first ninesix months of 2016. 2021. The increase in net interest expense was primarily due to lower interest income earned from the note receivable to a third-party software developer that was collected in March 2021. We expect interest expense to increase during the second half of 2022 due to required minimum borrowings pursuant to the terms of the July 2022 Credit Facility Amendment No. 2.
Other, expense, net. We recorded other expense of $8,000 in$299 thousand for the first ninesix months of 20172022 compared to other incomeexpense of $13,000 in$100 thousand for the first ninesix months of 2016. The change was2021 primarily due to increased foreign currency transaction exchange losses recorded by our U.K. subsidiary largely due to a weakening of $11,000 recordedthe British pound against the U.S. dollar in the first ninesecond quarter of 2017 compared to foreign currency transaction exchange gains of $8,000 recorded in the first nine months of 2016. In addition, we recorded a gain of $5,000 on the disposal of a fixed asset in the first nine months of 2016.2022.
Income Taxes.We recorded an income tax provisionbenefit for the first ninesix months of 20172022 of $1,657,000$2.2 million at an effective tax rate of 31.4%24.9%, compared to an income tax provision duringbenefit for the first ninesix months of 20162021 of $1,010,000$1.2 million at an effective tax rate of 30.9%22.4%.
Net IncomeLoss. We As a result of the above, we reported a net income duringloss for the first ninesix months of 20172022 of $3,623,000,$6.7 million, or $0.48$0.68 per diluted share, compared to $2,261,000,a net loss of $4.1 million, or $0.29$0.46 per diluted share for the first ninesix months of 2016.2021.
Impact of Inflation. We believe that inflation has not had a material impact on our results of operations for the nine months ended September 30, 2017 or 2016. However, there can be no assurance that future inflation would not have an adverse impact upon our future operating results and financial condition.
Liquidity and Capital Resources
Cash Flow
InFor the first ninesix months of 2017,2022, our cash and cash equivalents balance decreased by $15.6 million to $3.9 million as of June 30, 2022 due primarily to higher accounts receivable associated with higher sales volumes, increased $1,022,000, or 41%, from December 31, 2016inventory related to strategic inventory purchases in response to the global supply chain crisis and we endeda reported net loss for the third quarter of 2017 with $3,525,000 in cash and cash equivalents, of which $249,000 was held by our U.K. subsidiary, and no debt outstanding.period.
Operating activities: The following significant factors affected our cash provided byused in operating activities of $3,616,000 in$14.6 million for the first ninesix months of 20172022 as compared to our cash provided byused in operating activities of $3,235,000 in$3.9 million for the first ninesix months of 2016:2021:
During the first ninesix months of 2017:2022:
| ● | We reported a net incomeloss of $3,623,000.$6.7 million. |
| ● | We recorded depreciation and amortization of $0.6 million and share-based compensation expense of $1,350,000.$0.6 million. |
| ● | Accounts receivable increased $740,000, or 7%,$4.5 million due largely to a 14% increase inhigher sales volumes in the third quarterfirst half of 2017 compared2022. |
| ● | Deferred income taxes increased $2.2 million due to the fourth quarter of 2016.continued losses. |
| ● | Inventories decreased $1,539,000, or 16%, due to the sell through of inventory on hand to support sales in the third quarter of 2017. |
| ● | Other current assets and long-term assets increased $435,000, or 107%,$3.3 million due largely to prepaid engineering expenses relatedstrategic purchases of electronic parts in volume in an effort to the developmentminimize disruptions of production at our restaurant solutions terminals and prepaid tradeshow costs for G2E, our largest tradeshow, held in October 2017.contract manufacturers. |
| ● | Accounts payable decreased $1,943,000, or 40%, due primarily to increased inventory purchases made towards the end of the fourth quarter of 2016 to support anticipated sales of our restaurant solutions terminals and subsequently paid in the first nine months of 2017. |
| ● | Accrued liabilities and other liabilities increased $355,000, or 14%, due primarily to an increase in our income tax payable balance and accrued incentive compensation. |
During the first ninesix months of 2016:2021:
| ● | We reported a net incomeloss of $2,261,000.$4.1 million. |
| ● | We recorded depreciation and amortization of $0.5 million and share-based compensation expense of $1,435,000. $0.7 million. |
| ● | Accounts receivable increased $3,313,000, or 46%,$2.4 million primarily due to the increase and timing ofincreased sales volume during the thirdsecond quarter of 2016.2021. |
| ● | Inventories decreased 1,852,000, or 16%,$2.3 million due to the sell throughutilization of inventory on hand during 2016.to fulfill sales. |
| ● | Accounts payable increased $2,899,000, or 110%$1.0 million due primarily to increased inventory purchases towards the end of the third quarter 2016 and timing of payments to vendors.during the second quarter of 2021. |
| ● | Accrued liabilities and other liabilities decreased $1,419,000,$0.9 million, or 34%11%, due primarily to the payment of 20152020 annual bonuses in March 2016.2021. |
Investing activities: Our capital expenditures were $590,000 and $454,000 in$0.7 million for the first ninesix months of 2017 and 2016, respectively.2022 compared to $0.2 million for the first six months of 2021. Expenditures in the 2017 period2022 were primarily forrelated to the implementation of a new ERP system. Expenditures in 2021 were primarily related to computer and networking equipment and to a lesser extent, new product tooling equipment and leasehold improvements at our Ithaca, NY facility to upgrade to LED lighting. Expenditures in the 2016 period were primarily for computer and networking equipment and, to a lesser extent, new product tooling equipment and purchases of furniture and fixtures.
Capital expenditures for full year 2017 are expected to be approximately $800,000 primarily for new product tooling and tooling enhancements for our existing products, as well as for new computer software and equipment purchases and the leasehold improvements completed at our Ithaca facility.
Financing activities: We used $1,998,000 of cash from financing activities during the first nine months of 2017 to pay dividends of $1,911,000 to common shareholders, purchase $358,000 of common stock for treasury and $23,000 related to the relinquishment of shares to pay for withholding taxes on stock issued from our stock compensation plan, partially offset by proceeds from stock option exercises of $294,000.equipment. During the first ninesix months of 2016,2021, we limited our capital expenditures to help preserve liquidity amidst the height of the COVID-19 pandemic. Investing activities also provided $1.6 million in the first six months of 2021 for the collection of the remaining $1.6 million note receivable balance from an unaffiliated third party.
Financing activities: Financing activities used $5,046,000$0.1 million of cash fromin the first six months of 2022. During the first six months of 2021, financing activities to pay dividendsprovided $0.1 million of $1,827,000 to common shareholders and to purchase $3,242,000cash primarily from the exercise of common stock for treasury, partially offset by proceeds from stock options, exercisesnet of $23,000. withholding taxes paid.
Credit Facility and Borrowings
TheOn March 13, 2020, we entered into the Siena Credit Facility with Siena Lending Group LLC (the “Lender”) and terminated our credit facility with TD Bank N.A. The Siena Credit Facility provides for a $20,000,000 revolving credit line. On November 26, 2014, we signed an amendmentline of up to renew the TD Bank Credit Facility through November 28, 2017.$10.0 million and was originally scheduled to expire on March 13, 2023. Borrowings under the revolving credit lineSiena Credit Facility bear a floating rate of interest atequal to the greatest of (i) the prime rate minus one percentplus 1.75%, (ii) the federal funds rate plus 2.25%, and (iii) 6.50%. The total deferred financing costs related to expenses incurred to complete the Siena Credit Facility were $245 thousand. We also pay a fee of 0.50% on unused borrowings under the Siena Credit Facility. Borrowings under the Siena Credit Facility are secured by a lien on substantially all the assets of our assets. We also pay a fee of 0.15% on unused borrowingsthe Company. Borrowings under the revolving credit line. We may use up to $10,000,000 of revolving credit loans to fund future cash dividend payments or treasury share buybacksSiena Credit Facility are subject to applicable state law. We expect to renew our credit facility with TD Bank prior to its expirationa borrowing base based on November 27, 2017.(i) 85% of eligible accounts receivable plus the lesser of (a) $5.0 million and (b) 50% of eligible raw material and 60% of finished goods inventory.
The TD BankSiena Credit Facility imposes certain quarterlya financial covenantscovenant on usthe Company and restricts, among other things, our ability to incur additional indebtedness and the creation of other liens. WeThe three-month period from April 1, 2020 to June 30, 2020 was the first period we were subject to the financial covenant, which required the Company to maintain a minimum EBITDA and continued through the 12-month period from April 1, 2020 to March 31, 2021. On July 21, 2021, the Company entered into an amendment (the “Credit Facility Amendment”) to the Siena Credit Facility. The Credit Facility Amendment changed the financial covenant under the Siena Credit Facility from a minimum EBITDA covenant to an excess availability covenant requiring that the Company maintain excess availability of at least $750 thousand under the Siena Credit Facility, tested as of the end of each calendar month, beginning with the calendar month ending July 31, 2021. From July 31, 2021 to June 30, 2022, we have been in compliance with all financial covenantsour excess availability covenant. As of June 30, 2022, we had no outstanding borrowings under the Siena Credit Facility and $4.5 million of available borrowing capacity under the Siena Credit Facility, excluding the excess availability covenant.
On July 19, 2022, the Company and the Lender entered into Amendment No. 2 (the “Credit Facility Amendment No. 2”) to the Loan and Security Agreement, dated as of March 13, 2020, between the Lender and the Company, as amended by Amendment No. 1, dated as of July 21, 2021, between the Lender and the Company. Also on July 19, 2022, the Company and the Lender entered into an Amended and Restated Fee Letter (the “Amended Fee Letter”) in connection with the Credit Facility Amendment No. 2. The Credit Facility Amendment No. 2 did not modify the aggregate amount of the TD Bankrevolving commitment or the interest rate applicable to the loans.
The changes to the Siena Credit Facility Amendment No. 2 include, among other things, the following:
| (i) | The extension of the maturity date from March 13, 2023 to March 13, 2025; and |
| (ii) | The termination of the existing blocked account control agreement and entry into a new “springing” deposit account control agreement, permitting the Company to direct the use of funds in its deposit account until such time as (a) the sum of excess availability under the Siena Credit Facility and unrestricted cash is less than $5 million for 3 consecutive business days or (b) an event of default occurs and is continuing. |
In addition, the Amended Fee Letter requires the Company, while it retains the ability to direct the use of funds in the deposit account, to maintain outstanding borrowings of at September 30, 2017. The following table listsleast $2,250,000 in principal amount. If the financial covenantsCompany does not have the ability to direct the use of funds in the deposit account, then the Amended Fee Letter requires the Company to pay interest on at least $2,250,000 principal amount of loans, whether or not such amount of loans is actually outstanding.
On May 1, 2020 (the “Loan Date”), the Company was granted the PPP Loan from Berkshire Bank in the aggregate amount of $2.2 million, pursuant to the PPP which is administered by the SBA and was established under Division A, Title I of the CARES Act, enacted March 27, 2020. Under the terms of the PPP, the PPP Loan would be forgiven to the extent that funds from the PPP Loan were used for payroll costs and costs to continue group health care benefits, as well as for interest on mortgage obligations incurred before February 15, 2020, rent payments under lease agreements in effect before February 15, 2020, utilities for which service began before February 15, 2020 and interest on debt obligations incurred before February 15, 2020, subject to conditions and limitations provided in the CARES Act. At least 60% (under the PPP terms, as amended) of the proceeds of the PPP Loan needed to have been used for eligible payroll costs for the PPP Loan to be forgiven.
On July 8, 2021, the Company received notifications from Berkshire Bank and the performance measurements at September 30, 2017:SBA that its PPP loan (including all interest accrued thereon) of $2.2 million had been fully forgiven by the SBA and that the forgiveness payment date was July 1, 2021. The forgiveness of the PPP Loan was reported as “Gain on forgiveness on long-term debt” in the Consolidated Statement of Operations during the year ended December 31, 2021.
Financial Covenant | Requirement/Restriction | Calculation at September 30, 2017 |
Operating cash flow / Total debt service | Minimum of 1.25 times | 156.46 |
Funded Debt / EBITDA | Maximum of 3.0 times | 0 |
Resource Sufficiency
Given the unprecedented uncertainty related to the impact of September 30, 2017, borrowings available under the TD BankCOVID-19 pandemic on the food service and casino industries, the Company is closely monitoring its cash generation, usage and preservation including the management of working capital to generate cash. The Company does not currently anticipate requiring any additional credit facilities within the next twelve months beyond our Siena Credit facility were $20,000,000.
Shareholder Dividend Payments
In 2012, our Board of Directors initiated a quarterly cash dividend programFacility which is subject to the Board's approval each quarter. For the three months ended September 30, 2017, our Board of Directors declared a quarterly cash dividend of $0.09 per share, totaling approximately $661,000, which was paid in September 2017 to common shareholders of record at the close of business on August 21, 2017. For the nine months ended September 30, 2017, dividends declared and paid totaled $1,911,000, or $0.26 per share. We expect to pay approximately $2,600,000 in cash dividends to our common shareholders during 2017.discussed above.
Stock Repurchase Program
On February 25, 2016, our Board of Directors approved a new stock repurchase program (the "Stock Repurchase Program"). Under the Stock Repurchase Program, we are authorized to repurchase up to $5,000,000 of our outstanding shares of common stock from time to time in the open market through December 31, 2017 at prevailing market prices based on market conditions, share price and other factors. We use the cost method to account for treasury stock purchases, under which the price paid for the stock is charged to the treasury stock account. Repurchases of our common stock are accounted for as of the settlement date. During the nine months ended September 30, 2017, we purchased 36,465 shares of our common stock for $358,000 at an average price per share of $9.84. During the nine months ended September 30, 2016 we repurchased 413,378 shares of our common stock for approximately $3,242,000 at an average price per share of $7.84.
Resource Sufficiency
We believe that our cash and cash equivalents on hand, our expected cash flows generated from operating activities and borrowings available under our TD BankSiena Credit Facility will provide sufficient resources to meet our working capital needs, finance our capital expenditures and dividend payments and meet our liquidity requirements through at least the next twelve months.
Contractual Obligations / Off-Balance Sheet Arrangements
The disclosure Notwithstanding this belief, the duration and extent of payments we have committed to make under our contractual obligationsthe COVID-19 pandemic remain uncertain, and its ultimate impact is set forthunknown. Further, the availability under the heading "Management's DiscussionSiena Credit Facility depends in part on inventory levels, which have been impacted, and Analysis of Financial Condition and Results of Operations—Contractual Obligations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
On January 3, 2017 we signed the First Amendmentwill continue to be impacted, by supply chain disruptions due to the lease agreement forCOVID-19 pandemic. As a result, we continue to evaluate several different strategies to enhance our facility in Hamden, CT with 2319 Hamden Center I, L.L.C.liquidity position as a result of the significant financial and operational impacts due to extend our lease in Hamdenthe COVID-19 pandemic. These strategies may include, but are not limited to, April 30, 2027.seeking to raise additional capital through an equity or debt financing.
Other than the items mentioned above, there have been no other material changes in our contractual obligations outside the ordinary course of business since December 31, 2016. We have no material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
| Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
TransAct is a smaller reporting company, as defined in Item 10(f)(1) of Regulation S-K, and is not required to provide information under this item.
The disclosure of our exposure to market risk is set forth under the heading "Quantitative and Qualitative Disclosures about Market Risk" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. There has been no material change in our exposure to market risk during the nine months ended September 30, 2017.
| Item 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of SeptemberJune 30, 2017.2022. The term "disclosure“disclosure controls and procedures,"” as defined in Rules 13a-15(e) and 15d-15(e) underof the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission'sCommission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company'scompany’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizedrecognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of SeptemberJune 30, 2017,2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
During the second quarter of 2022, the Company completed the implementation of a new ERP system, NetSuite. We believe the implementation did not materially change our internal control over financial reporting.
No other change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended SeptemberJune 30, 20172022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ForThe Company may, in the ordinary course of business, become a description of our previously reportedparty to litigation involving collection matters, contract claims and other legal proceedings referrelating to Part I, Item 3the conduct of our Annual Report on Form 10-K for the year ended December 31, 2016. There have been noits business. As of June 30, 2022, we are unaware of any material changes from thepending legal proceedings, previously disclosed in that Annual Report on Form 10-K.or of any material legal proceedings contemplated by government authorities.
Information regarding risk factors appears inunder Part I, Item 1A, “Risk Factors”, of our Annual Report on2021 Form 10-K for the year ended December 31, 2016.10-K. There have been no material changes from the risk factors previously disclosed in that Annual Report onour 2021 Form 10-K. The risks factors described in our Annual Report on2021 Form 10-K are not the only risks facing our Company. Additional risks and uncertainties, not currently known to us or that we currently deem to be immaterial, also may materially adversely affect our business, financial condition or future results.
| Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
On February 25, 2016, our Board of Directors approved the Stock Repurchase Program. Under the Stock Repurchase Program, we are authorized to repurchase up to $5,000,000 of our outstanding shares of common stock from time to time in the open market through December 31, 2017 at prevailing market prices based on market conditions, share price and other factors. During the nine months ended September 30, 2017, we purchased 36,465 shares of our common stock for $358,000 at an average price per share of $9.84. As of September 30, 2017, $1,071,000 remains authorized for future repurchase under the Stock Repurchase Program. The following table summarizes the repurchase of our common stock in the three months ended September 30, 2017:
| | Total Number of Shares Purchased | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Approximate Dollar Value of Shares that May Yet Be Purchased under the Stock Repurchase Program | |
| July 1, 2017 - July 31, 2017 | | | - | | | $ | - | | | | - | | | $ | 1,429,000 | |
| August 1, 2017 - August 31, 2017 | | | 36,465 | | | | 9.84 | | | | 358,000 | | | $ | 1,071,000 | |
| September 1, 2017 - September 30, 2017 | | | - | | | | - | | | | - | | | $ | 1,071,000 | |
| Total | | | 36,465 | | | $ | 9.84 | | | | 358,000 | | | | | |
| Item 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| Item 4. | MINE SAFETY DISCLOSURES |
Not applicable.
