Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto.
Overview
During the year ended December 31, 2021, we continued to
experience recovery from the negative impacts COVID-19 had on our business during 2020. While we have experienced recovery in most of our markets, there are still uncertainties on how COVID-19 will continue to impact our business, operations, supply
chain, customer and vendors. During 2021, we continued to focus our efforts on the sales execution and growing revenue of BOHA! software-as-a-service (“SaaS”)-based software and hardware ecosystem launched in 2019. Despite the negative impact from
COVID-19, food service technology sales increased 63% in 2021 compared to 2020 due primarily to sales of our BOHA! software, labels and other recurring revenue to both new customers and our existing installed base of BOHA! terminals.
During 2021, all markets other than lottery and TSG increased compared to 2020 as we have started to see recovery from the negative
impacts from the COVID-19 pandemic. POS automation sales increased primarily due to higher sales of our Ithaca 9000 printer to McDonald’s in 2021 compared to 2020. Casino and gaming sales were higher in 2021 due to casinos continuing to reopen and
increase capacity during 2021 after being closed in 2020 in response to the COVID-19 pandemic. Printrex sales increased in 2021 after being negatively impacted by lower worldwide oil prices largely attributable to the COVID-19 pandemic during 2020.
We had no lottery market sales during 2021 as we exited the lottery market in 2019 and completed our final sale of lottery printers in 2020. TSG sales decreased in 2021 compared to 2020 primarily due to lower service sales due to exiting the banking
market in 2018, lower replacement part sales and lower sales of our legacy consumable products.
During the year ended December 31, 2021,
our total net sales increased 29% to approximately $39.4 million compared to the year ended December 31, 2020. See the table below
for a breakdown of our sales by market:
Year Ended Year Ended
Sales of our food service technology products increased 63% in the year ended December 31, 2021 compared to the year ended December 31,
2020. In the food service technology market, we focus on providing hardware products, which include terminals/workstations, temperature probes, temperature sensors and gateways in addition to cloud-based software applications, labels and other
recurring revenue items. Food service technology sales increased in 2021 primarily due to a 95% increase in BOHA! recurring revenue, which include subscriptions for the software applications, as well as sales of labels, extended warranty and service
contracts, and technical support services. Our FST hardware sales also increased by 33% as we increased our total installed base by 4,130 terminals and workstations during 2021 resulting in a total installed base of 9,818 terminals at the end of 2021.
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Sales of our POS automation products increased 28% in the year ended December 31, 2021 compared to the year ended December 31, 2020.
In the POS automation market, we focus primarily on supplying printers that print receipts or linerless labels to McDonald’s, and to a lesser extent other customers in the restaurant and quick serve markets. During the year ended December 31, 2021,
sales of our Ithaca 9000 printer to McDonald’s recovered from the unusually low level we experienced in 2020 due to the significant negative impact of the COVID-19 pandemic on the POS automation market.
Sales of our casino and gaming products increased 39% in 2021 compared to 2020. In our casino and gaming market, our focus lies
primarily in supplying printers worldwide for use in slot machines at casinos and racetracks, as well as in other electronic gaming devices that print tickets or receipts. Additionally, we supplement these printer sales with revenue from EPICENTRAL our
promotional printing system that enables casino operators to create promotional coupons and marketing messages and print them in real time at the slot machine. The increase of casino and gaming printers was due to the recovery of the domestic and
international casino and gaming market during 2021, as casinos continued to reopen compared to 2020 when the market was severely impacted by the COVID-19 pandemic and the related closures of casinos.
On December 31, 2019, we ended our non-exclusive agreement with IGT and exited the lottery market as we shifted our focus to our
higher-value, technology-enabled market for food service technology and casino and gaming products. During 2020, IGT made a final purchase of lottery printers and we expect no future sales of our lottery printer.
Sales of our Printrex branded printers include wide format, rack-mounted and vehicle-mounted thermal printers used by customers to log
and plot oil field and down hole well drilling data in the oil and gas exploration industry. During the year ended December 31, 2021, we experienced a 110% increase in Printrex oil and gas printer sales, as the oil and gas market recovered from the
negative impact during 2020 of lower worldwide oil prices as a result of the COVID-19 pandemic. Additionally, we fulfilled last buy orders to legacy customers during the fourth quarter of 2021, as we decided to exit this market as of December 31,
2021. We expect no future Printrex sales as we have shifted our focus away from this market and towards our higher value, technology-enabled food service technology terminals and casino and gaming products.
TSG, which sells service, replacement parts and consumable products, including receipt paper, ribbons and other printing supplies,
continues to offer a recurring revenue stream from mostly our legacy products. TSG sales decreased 14% in 2021 compared to 2020, primarily due to declining service revenue from a legacy banking customer whose service contract is expected to end during
2022, as well as lower replacement part and consumable product sales. We expect TSG sales to continue to decline in 2022 due to the ending of the service contract with a legacy banking customer and lower expected sales of our lottery printer spare
parts to IGT for our legacy lottery printer.
Operationally, our gross margin was 38.7% in 2021, a
decrease of 360 basis points from 2020, due largely to lower margin on our BOHA! hardware sales during 2021 compared to 2020, as we have reduced prices to accelerate the growth of our BOHA! installed base, as well as higher material and
shipping costs resulting from worldwide supply disruptions caused by the COVID-19 pandemic.
During 2021, our operating margin improved to negative 24.1% compared to negative 26.7% in 2020 as the 29% increase in sales more than
offset the 360 basis point decrease in gross margin and increased operating expenses. Operating expenses increased by 17% as we gradually returned to more normalized pre-COVID-19 spending levels. During 2022, we expect operating expenses to continue
to increase compared to 2021, due to the continued investment in our food service technology products.
We reported a net loss of $4.1 million and net loss per
diluted share of $0.45 for 2021, compared to a net loss of $5.6 million and net loss per diluted share of $0.72 for 2020. In terms of cash flow, for 2021 we used $2.5 million of cash in operating activities. During 2021, we also successfully
completed an underwritten public offering of our common stock which raised net proceeds of $11.2 million. We ended the year with cash and cash equivalents of $19.5
million and no debt outstanding on our Consolidated Balance Sheet at December 31, 2021.
Critical Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make use of
estimates, judgments and assumptions that affect both Balance Sheet items and Statement of Operations categories. Such estimates and judgments are based upon historical experience and certain assumptions that are believed to be reasonable in the
particular circumstances; however, due to the inherent uncertainties in developing estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods.
The following accounting policies are those that we believe to be most critical in the preparation of our financial statements. These
items utilize assumptions and estimates about the effect of future events that are inherently uncertain and are therefore based on our judgment. Refer to Note 2 – Summary of significant accounting policies in the accompanying Consolidated Financial
Statements for a complete listing of our significant accounting policies.
Revenue Recognition – Application of GAAP related to the measurement and recognition of revenue requires us to make judgments and estimates. Specifically, the determination of whether
revenues related to our revenue contracts should be recognized over time or at a point in time. Other significant judgments include contracts that contain multiple
performance obligations (most commonly when contracts include a hardware product, software and extended warranties) which require a contract’s transaction price to be allocated to each distinct performance obligation and recognized as revenue when,
or as, the performance obligation is satisfied. Both of these determinations impact the timing and amount of our reported revenues and net income and loss.
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Accounts Receivable
– We have standardized credit granting and review policies and procedures for all customer accounts, including: credit reviews of all new customer accounts; ongoing credit evaluations of current customers; credit limits and payment terms based on
available credit information; and adjustments to credit limits based upon payment history and the customer’s current creditworthiness. We also provide an estimate of doubtful accounts based on historical experience and specific customer collection
issues. Our allowance for doubtful accounts as of December 31, 2021 was $219 thousand, or 2.8% of outstanding accounts receivable, which we believe is appropriate considering the overall quality of our accounts receivable. Although credit losses have
historically been within expectations and the reserves established, there is no assurance that our credit loss experience will continue to be consistent with historical experience.
Inventories –
Our inventories are stated at the lower of cost (principally standard cost, which approximates actual cost on a first-in, first-out basis) or net realizable value. We review net realizable value based on estimated selling prices in the ordinary course
of business less estimated costs of completion, disposal and transportation, historical usage and estimates of future demand. Assumptions are reviewed at least quarterly and adjustments are made, as necessary, to reflect changing market conditions.
Based on these reviews, inventory write-downs are recorded, as necessary, to reflect estimated obsolescence, excess quantities and net realizable value. Should circumstances change and we determine that additional inventory is subject to obsolescence,
additional write-downs of inventory could result in a charge to income.
Goodwill and
Intangible Assets – We acquire businesses in purchase transactions that result in the recognition of goodwill and intangible assets. The determination of the value of
intangible assets requires management to make estimates and assumptions. In accordance with ASC 350-20 “Goodwill,” acquired goodwill is not amortized but is subject to impairment testing at least annually and when an event occurs or circumstances
change that indicate it is more likely than not an impairment exists. We perform a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis (as of December 31) and, if
certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. The Company utilizes the option to first assess qualitative factors to determine whether it is necessary to perform the Step 1 quantitative
goodwill impairment test in accordance with the applicable accounting standards. Under the qualitative assessment, management considers relevant events and circumstances including, but not limited to, macroeconomic conditions, industry and market
considerations, Company performance, and events directly affecting the Company. If the Company determines that the Step 1 quantitative impairment test is required, management estimates the fair value of the reporting unit primarily using the income
approach, which reflects management’s cash flow projections, and also evaluates the fair value using the market approach. Factors considered that may trigger an interim
period impairment review of either acquired goodwill or intangible assets are: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of acquired assets or the
strategy for the overall business; significant negative industry or economic trends; and significant decline in market capitalization relative to net book value. Finite lived intangible assets are amortized and are tested for impairment when
appropriate.
As of December 31, 2021, upon the completion of our annual assessment for impairment, we have determined that no goodwill or intangible
asset impairment has occurred and the fair value of goodwill was substantially higher than our carrying value.
Income Taxes
– In preparing our Consolidated Financial Statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This involves estimating the actual current tax exposure together with assessing temporary differences
between the tax basis of certain assets and liabilities and their reported amounts in the financial statements, as well as net operating losses, tax credits and other carryforwards. These differences result in deferred tax assets and liabilities,
which are reflected in our Consolidated Balance Sheets. We then assess the likelihood that the deferred tax assets will be realized from future taxable income, and to the extent that we believe that realization is not likely, we establish a valuation
allowance.
Significant judgment is required in determining the provision for income taxes and, in particular, any valuation allowance or tax
reserves with respect to our deferred tax assets and uncertain tax positions. On a quarterly basis, we evaluate the recoverability of our deferred tax assets based upon historical results and forecasted taxable income over future years, and match this
forecast against the basis differences, deductions available in future years and the limitations allowed for net operating loss and tax credit carryforwards to ensure that there is adequate support for the realization of the deferred tax assets.
Although we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance, in the event we were to determine that we would not be able to realize all or part of our
deferred tax assets in the future, an adjustment to the valuation allowance or tax reserves would be charged as a reduction to income in the period such determination was made. Likewise, should we determine that we would be able to realize future
deferred tax assets in excess of its net recorded amount, an adjustment to the valuation allowance would increase net income in the period such determination was made.
We account for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). Among other things this provision prescribes a
minimum recognition threshold that an income tax position must meet before it is recorded in the reporting entity’s financial statements. It also requires that the effects of such income tax positions be recognized only if, as of the balance sheet
reporting date, it is “more likely than not” (i.e., more than a 50% likelihood) that the income tax position will be sustained based solely on its technical merits. When making this assessment, management must assume that the responsible taxing
authority will examine the income tax position and have full knowledge of all relevant facts and other pertinent information. The accounting guidance also clarifies the method of accruing for interest and penalties when there is a difference between
the amount claimed, or expected to be claimed, on a company’s income tax returns and the benefits recognized in the financial statements.
Warranty –
We generally warrant 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. If actual future product repair rates or the actual costs of material and labor differ from the estimates, adjustments to the accrued warranty liability and related warranty expense
would be made.
Share-Based
Compensation – We calculate share-based compensation expense in accordance with ASC 718, “Compensation – Stock Compensation” using the Black-Scholes option-pricing model to calculate the fair value of share-based awards. The key assumptions
for this valuation method include the expected term of an option grant, stock price volatility, risk-free interest rate, and dividend yield. We account for forfeitures as they occur.
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Results of Operations: Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
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 years ended December 31, 2021 and 2020 are detailed in the below table.
Year Ended Year Ended
Net sales for 2021 increased $8.8 million, or 29%, from
2020. Printer, terminal and other hardware sales volume increased by 33% to approximately 82,000 units for 2021, driven by volume increases in all our markets except the lottery market, which we exited in 2020. The primary volume increases
were a 42% increase in unit volume from the casino and gaming market and, to a lesser extent, a 26% unit volume increase in our POS automation market and a 44% increase in unit volume from the FST market. The average selling price of our printers,
terminals and other hardware increased 1% during 2021 compared to 2020. Additionally, sales of our software, labels and other recurring revenue from our FST market increased $3.6 million, or 95%, during 2021 compared to 2020.
International sales for 2021 increased $1.1 million, or 19%, compared to 2020, primarily due to a 24% increase in international casino
and gaming sales.
Food service technology: Our
primary offering in the food service technology market is our BOHA! ecosystem, which combines our latest generation terminal/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 are combined into a single platform with the associated hardware, which includes the BOHA!
terminal/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 for prepared foods, and “enjoy by” date labels. The BOHA! workstation uses an iPad instead of an integrated touchscreen. Both the BOHA! terminal and BOHA! workstation are
equipped with the TransAct Enterprise Management System to ensure 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 restaurants, convenience stores, hospitality establishments and contract food service providers) effectively manage food safety and grab-and-go
initiatives, as well as automate and manage back-of-house operations. Recurring revenue from BOHA! is generated by software sales, including software subscriptions that are typically charged to customers annually on a per-application basis, as well as
sales of labels, extended warranty and service contracts, and technical support services. Sales of our worldwide food service technology products for the years ended December
31, 2021 and 2020 were as follows:
Year Ended Year Ended
Year Ended Year Ended
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The increase in food service technology sales in 2021 compared to 2020 was driven by an increase in sales of both hardware and BOHA!
software, labels and other recurring revenue. Hardware sales increased 33% during 2021 compared to 2020 due largely to sales to an existing national convenience store customer and a new national travel center customer, as well as higher sales of our
AccuDate 9700 terminal to McDonald’s. These increases in hardware sales were partially offset by a large sale completed in 2020 to a grab-and-go sushi chain that did not reoccur in 2021. Sales of BOHA! software recognized on a SaaS subscription
basis, labels and other recurring revenue increased by 95%, primarily due to increased 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 BOHA!
terminals and workstations.
POS automation:Revenue from the POS automation market includes sales of thermal printers used primarily by McDonald’s, and to a lesser extent, other quick serve restaurants either at
the checkout counter or within self-service kiosks to print receipts for consumers or print on linerless labels. Sales of our worldwide POS automation products for the years
ended December 31, 2021 and 2020 were as follows:
Year Ended Year Ended
The increase in POS automation product revenue during 2021 compared to 2020 was driven by a 28% increase in sales of our Ithaca® 9000
printer, primarily to McDonald’s, as POS automation sales continually improved during 2021 compared to the significant negative impact from the COVID-19 pandemic on POS automation sales during the final nine months of 2020.
Casino and Gaming: Revenue
from the casino and gaming market includes sales of thermal ticket printers used in slot machines, video lottery terminals, and other gaming machines that print tickets or receipts instead of issuing coins at casinos and racetracks and other gaming
venues worldwide. Revenue from this market also includes sales of thermal roll-fed printers used in the international off-premise gaming market in gaming machines such as Amusement with Prizes, Skills with Prizes and Fixed Odds Betting Terminals at
non-casino gaming and sports betting establishments. Revenue from this market also includes royalties related to our patented casino and gaming technology. In addition, casino and gaming market revenue includes sales of the EPICENTRAL print system,
our software solution (including annual software maintenance), that enables casino operators to create promotional coupons and marketing messages and to print them in real time at the slot machine. Sales of our worldwide casino and gaming products for the years ended December 31, 2021 and 2020 were as follows:
Year Ended Year Ended
The increase in domestic sales of our casino and gaming products during 2021 compared to 2020 was primarily due to a 57% increase in
domestic sales of our thermal casino printers, as we have experienced some recovery during 2021 compared to 2020, particularly the second quarter of 2020, when the casino and gaming market was most severely impacted by the COVID-19 pandemic. This
increase was partially offset by an 81% decrease in domestic EPICENTRAL sales to an existing EPICENTRAL customer during 2020 to expand its slot machine floor that did not reoccur in 2021. Sales of EPICENTRAL are project based, and as a result, may
fluctuate significantly quarter-to-quarter and year-to-year.
International sales of our casino and gaming products increased during 2021 compared to 2020, primarily due to a 40% increase in sales
of our thermal casino printers, as we experienced modest recovery during 2021, most significantly during the fourth quarter of 2021, after the significant negative impact of the COVID-19 pandemic on the international casino and gaming industry, which
is recovering at a slower pace than the domestic casino and gaming market. The increase from international sales of our thermal casino printers was partially offset by a 33% decline in sales of our off-premise gaming printers during 2021 compared to
2020.
Lottery: Revenue from the
lottery market includes sales of thermal on-line and other lottery printers to IGT for various lottery applications. Sales of our worldwide lottery printers for the years ended December 31, 2021 and 2020 were as follows:
Year Ended Year Ended
International – 0.0 % – 0.0 % – 0.0 %
On December 31, 2019, we allowed our non-exclusive agreement to provide lottery terminal printers to IGT to expire as we decided to exit
the lottery market and shift our focus towards our higher-value, technology-enabled food service technology and casino and gaming products. As a result, IGT made a final purchase of our lottery printers during the second quarter of 2020 and we do not
expect any further lottery printer sales in the future.
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Printrex: Printrex branded
printers are 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. Sales of our worldwide Printrex printers for the years ended December 31, 2021 and 2020 were as follows:
Year Ended Year Ended
The increase in sales of Printrex printers during 2021 compared to 2020 resulted from increased domestic and international sales in the
oil and gas market, which was negatively impacted during 2020 by the decline in worldwide oil prices attributable to the COVID-19 pandemic. Additionally, we decided to exit the Printrex market as of December 31, 2021 in order to shift focus towards
our higher-value, technology-enabled food service technology and casino and gaming products. As a result, we had increased sales in 2021 due to fulfilling last buy orders from legacy customers during the fourth quarter of 2021. We do not expect any
further Printrex sales beyond 2021.
TSG:Revenue generated by TSG includes sales of consumable products (POS receipt paper, inkjet cartridges, ribbons and other printing supplies for legacy products), replacement parts and
accessories, maintenance and repair services, refurbished printers, and shipping and handling charges. Sales in our worldwide TSG market for the years ended December 31, 2021 and 2020 were as follows:
Year Ended Year Ended
The decrease in domestic revenue from TSG during 2021 as compared to 2020 was due primarily to lower service revenue, lower sales of
replacement parts, and consumable products. Service revenue declined 39%, primarily related to declining revenue from a service contract with a legacy banking customer that is expected to expire during 2022. Replacement part sales decreased 4%
primarily from lower lottery printer spare part sales to IGT, which can vary significantly from quarter-to-quarter. Consumable sales declined 25%, due primarily to lower sales of HP inkjet cartridges used in our banking printers, as we exited the
banking market at the end of 2018. We expect TSG sales to continue to decrease in 2022 compared to 2021 due to lower expected sales of legacy lottery printer spare parts to IGT and lower service sales related to the banking service contract noted
above.
Internationally, TSG revenue decreased during 2021 compared to 2020, primarily due to 58% lower service revenue, a 64% decrease in
international consumable sales and a 15% decrease in sales of replacement parts and accessories to international casino and gaming customers due to the negative impact from the COVID-19 pandemic.
Gross Profit.
Gross profit information for the years ended December 31, 2021 and 2020 is summarized below (in thousands, except percentages):
Year Ended December 31, Percent Percent of Percent of
Gross profit is measured as revenue less cost of sales, which includes primarily the cost of all raw materials and component parts,
direct labor, manufacturing overhead expenses, cost of finished products purchased directly from our contract manufacturers, expenses associated with installations and support of our EPICENTRAL print system and BOHA! ecosystem and royalty payments to
third-parties, including to the third-party licensor of our food service technology software products. Gross profit increased $2.3 million, or 18%, in 2021 compared to 2020, primarily due to the 29% sales increase, which was largely offset by a
decrease in gross margin of 360 basis points during 2021 compared to 2020. Gross margin decreased to 38.7% in 2021 compared to 42.3% in 2020 due largely to lower margin on our BOHA! hardware sales during 2021 compared to 2020, as we have reduced
prices to accelerate the growth of our BOHA! installed base, as well as higher material and shipping costs resulting from worldwide supply disruptions caused by the COVID-19 pandemic.
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Operating Expenses
- Engineering, Design and Product Development. Engineering, design and product development information for the years ended December 31, 2021 and 2020 is summarized below (in thousands, except percentages):
Year Ended December 31, Percent Percent of Percent of
Engineering, design and product development expenses primarily include salary and payroll-related expenses for our hardware and
software engineering staff, depreciation and design expenses (including prototype printer expenses, outside design, development and testing services, supplies and contract software development expenses including those to the third-party licensor of our
food service technology software products).Engineering, design and product development expenses increased $1.8 million, or 31%, in 2021 compared to 2020 as we
gradually returned to more normalized pre-COVID-19 spending levels and continued development for our food service technology products. We expect engineering, design and product development expenses to continue to increase in 2022 compared to 2021 due
to planned investments in our food service technology products.
Operating Expenses
- Selling and Marketing. Selling and marketing information for the years ended December 31, 2021 and 2020 is summarized below (in
thousands, except percentages):
Year Ended December 31, Percent Percent of Percent of
Selling and marketing expenses primarily include salaries and payroll-related expenses for our sales, marketing and customer success
staff, sales commissions, travel expenses, expenses associated with the lease of sales offices, advertising, trade show expenses, public relations, e-commerce and other promotional marketing expenses.Selling and marketing expenses increased $1.5 million, or 25%, during 2021 compared to 2020 primarily due to higher trade show expense, expanded marketing expense and new sales and marketing staff as we returned
to more normalized pre-COVID-19 levels of sales and marketing expense during 2021 compared to lower costs during 2020 due to cost saving measures implemented during the second and third quarters of 2020. We expect selling and marketing expenses to increase in 2022, as we plan to make substantial strategic investments in our food service technology sales and marketing groups.
Operating Expenses
- General and Administrative. General and administrative information for the years ended December 31, 2021 and 2020 is summarized below (in thousands, except percentages):
Year Ended December 31, Percent Percent of Percent of
General and administrative expenses primarily include salaries, incentive compensation, and other payroll-related expenses for our
executive, accounting, human resources, business development and information technology staff, expenses for our corporate headquarters, professional and legal expenses, information technology expenses, and other expenses related to being a publicly
traded company.General and administrative expenses increased $0.4 million, or 4%, during 2021 compared to 2020 due to higher recruiting fees and employee
compensation, as well as higher consulting fees related to a planned implementation of a new ERP system expected to be completed in early 2022. These increases were partially offset by lower legal and professional fees and lower severance expense
during 2021 compared to 2020.
Operating Loss.
Operating loss information for the years ended December 31, 2021 and 2020 is summarized below (in thousands, except percentages):
Year Ended December 31, Percent Percent of Percent of
Our operating loss increased $1.3 million, or 16%, during 2021 compared to 2020 on 29% higher sales due to a decrease in our gross
margin of 360 basis points and increased operating expenses of $3.7 million during 2021 compared to 2020.
Interest, net. We recorded net interest expense of $96 thousand in 2021 compared to $52 thousand in 2020. 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 and the full year impact of unused borrowing fees incurred from the Siena Credit Facility that was entered into on March 13, 2020.
Other, net. We recorded other expense of $283 thousand in 2021 compared to other
income of $56 thousand in 2020 primarily due to foreign exchange losses recorded by our UK subsidiary during 2021 compared to foreign exchange gains recorded in 2020. Going forward, we may continue to experience more foreign exchange gains
or losses depending on the level of sales to European customers through our UK subsidiary and the fluctuation in exchange rates of the Euro and Pound Sterling against the U.S. Dollar, which may be impacted by volatility in global economic conditions
due to the COVID-19 pandemic and political instability such as the Russia-Ukraine conflict.
Gain from Employee
Retention Credit. We recorded a $1.5 million gain during 2021 resulting from the recognition of the employee retention credit pursuant to the CARES Act upon meeting the conditions required to claim the credit.
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Gain on Forgiveness
of Long-Term Debt. We recorded a $2.2 million gain in 2021 resulting from the forgiveness of the PPP Loan in July 2021.
Income Taxes.We recorded an income tax benefit during 2021 of $2.1 million at
an effective tax rate of 33.3%, compared to an income tax benefit during 2020 of $2.5 million at an effective tax rate of 31.1%. The tax benefit recorded for 2021 included the recognition of the gain on the forgiveness of the PPP Loan which is not
taxable. The effective tax rate for 2020 included the impact of the net operating loss (“NOL”) we incurred during 2020 and was carried back to prior years. The CARES Act enacted on March 27, 2020 permitted NOLs incurred in 2018, 2019 and 2020 to be
carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. We generated an NOL in 2020, which we carried back to tax years that had a federal statutory tax rate of 34% compared to 21% in 2020.
Net Loss.
We reported a net loss for the year ended December 31, 2021 of $4.1 million, or $0.45 per diluted share, compared to a net loss of $5.6 million, or $0.72 per diluted share, in 2020.
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities.
Significant factors affecting the management of liquidity are cash flows from operating activities, capital expenditures, access to bank lines of credit and our ability to attract long-term capital with satisfactory terms.
Internal cash generation together with currently available cash and cash equivalents, available borrowing facilities and an ability to
access credit lines, if needed, are expected to be sufficient to fund operations, capital expenditures, and any increase in working capital that would be required to accommodate a higher level of business activity.
Cash Flow
During 2021, our cash balance increased $9.1 million, or 88%, from December 31, 2020 due primarily to financing activities providing
$11.5 million of cash primarily from the completion of an underwritten public offering. We had $19.5 million in cash and cash equivalents as of December 31, 2021, of which $1.8 million was held by our UK subsidiary.
Operating activities: The
following significant factors primarily affected our cash used in operating activities of $2.5 million in 2021 as compared to cash used in operating activities of $3.5 million in 2020. During 2021:
● We reported a net loss of $4.1 million.
● We recorded a gain of $2.2 million from the forgiveness of the PPP loan.
During 2020:
● We reported a net loss of $5.6 million.
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Investing activities: Our capital expenditures were $1.4 million and $0.7 million in 2021 and 2020, respectively. Expenditures in 2021 were primarily related to the implementation of a new
ERP system expected to be completed in early 2022, new product tooling and computer and networking equipment. Expenditures in 2020 were primarily for new product tooling equipment, leasehold improvements at our Las Vegas facility and computer and
networking equipment. Investing activities also provided $1.6 million in 2021 upon the collection of the remaining $1.6 million note receivable balance during the first quarter of 2021 from an unaffiliated third-party software developer from whom we
license our food service technology software, compared to $0.6 million of cash used in investing activities during 2020, for the issuance of a loan to the same unaffiliated third-party.
Financing activities: Financing
activities provided $11.5 million of cash during 2021 primarily from the completion of an underwritten public offering which raised net proceeds of $11.2 million, after deducting underwriting discounts, commissions and offering expenses and, to a
lesser extent, proceeds of $0.4 million from stock option exercises. These increases were partially offset by $0.1 million for the payment of withholding taxes on stock issued from our stock compensation plans and $31 thousand on the final payment of
financing costs associated with our Siena Credit Facility. During 2020, financing activities provided $11.0 million of cash primarily from the completion of an underwritten public offering which raised net proceeds of $8.7 million, after deducting underwriting discounts, commissions and offering expenses, and $2.2 million in funds received from the PPP Loan and, to a lesser extent, proceeds of $0.4 million from stock
option exercises. These increases were partially offset by the payment of $0.2 million in financing costs associated with signing our Siena Credit Facility.
Resource Sufficiency
Given the unprecedented uncertainty related to the impact of the COVID-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.
We believe that our cash and cash equivalents on hand, our expected cash flows generated from operating activities, the proceeds raised
through the underwritten public offering during August 2021, and borrowings available under our Siena Credit Facility will provide sufficient resources to meet our working capital needs, finance our capital expenditures and meet our liquidity
requirements through at least the next twelve months. Notwithstanding this belief, the duration and extent of the pandemic remain uncertain and its ultimate impact is unknown. Further, availability under the Siena Credit Facility depends in part on
inventory levels, which have been impacted and are expected to continue to be impacted by supply chain disruptions due to the COVID-19 pandemic. As a result, we continue to evaluate several different strategies to enhance our liquidity position as a
result of the significant financial and operational impacts due to the COVID-19 pandemic. These strategies may include, but are not limited to, seeking to raise additional capital through an equity or debt financing.
Credit Facility and Borrowings
On March 13, 2020, we entered into the Siena Credit Facility with Siena Lending Group LLC and terminated our credit facility with TD
Bank N.A.. The Siena Credit Facility provides for a revolving credit line of up to $10 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 were $245 thousand. We also pay a fee of 0.50% on unused borrowings under the Siena
Credit Facility. Borrowings under the Siena Credit Facility are secured by a lien on substantially all the assets of the Company. Borrowings under the Siena Credit Facility are subject to a borrowing base based on (i) 85% of eligible accounts
receivable plus the lesser of (a) $5 million and (b) 50% of eligible raw material and 60% of finished goods inventory.
The Siena Credit Facility imposes a financial covenant on the Company and restricts, among other things, our ability to incur
additional indebtedness and the creation of other liens. The three month period from April 1, 2020 to June 30, 2020 was the first period we were subject to the 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 December 31, 2021, we have been in compliance with our excess availability covenant. As of December 31, 2021, we had no outstanding borrowings under the Siena Credit
Facility and $5.1 million of available borrowing capacity under the Siena Credit Facility.
On May 1, 2020 (the “Loan Date”), the Company was granted the PPP Loan with 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.
28
The PPP Loan, which was evidenced by a Note dated the Loan Date issued by the Company in favor of Berkshire Bank as a lender, was
scheduled to mature on May 1, 2022 and had a fixed interest rate of 1.0% per annum, accruing from the Loan Date and payable monthly. The Company submitted its PPP Loan forgiveness application in May 2021 to the SBA through Berkshire Bank and submitted
the related loan necessity questionnaire in June 2021. 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. No payments were due on the PPP Loan for six months from the date of first disbursement, and because a loan forgiveness application was submitted to the SBA within 10 months after the end of the
covered period, no payments were due until the date on which the SBA remitted the loan forgiveness amount to the PPP Lender, and interest that accrued during the deferment period was included in the forgiveness amount. 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 ending December 31, 2021.
Stock Repurchase Program
During 2021 and 2020 we did not repurchase any shares of our common stock.
Shareholders’ Equity
Shareholders’ equity increased $8.8 million, or 29%, to
$39.0 million at December 31, 2021 from $30.2 million at December 31, 2020. The increase was primarily due to the completion of an underwritten public offering during 2021 which raised net proceeds of $11.2 million, after deducting underwriting
discounts, commissions and offering expenses. Shareholders’ equity also increased, although to a lesser extent, from share-based compensation expense related to stock awards of $1.2 million and $0.4 million from the issuance of 97,000 shares of common
stock related to employee stock awards, net of relinquishments. These increases were partially offset by a net loss of $4.1 million.
29
Item 7A. 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.
Item 8. Financial Statements and Supplementary Data.
The financial statements of the Company are annexed to this Form 10-K as pages F-4 through F-22. The “Report of Independent Registered
Public Accounting Firm” is annexed to this Form 10-K as of page F-2. An index to such materials appears on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief
Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15I under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of December 31, 2021. In the Amendment to our Annual Report on Form 10-K for the
year ended December 31, 2018, filed with the SEC on November 21, 2019, we disclosed that management, including our CEO and CFO, concluded that our disclosure controls and procedures were not effective as of December 31, 2018, due to material
weaknesses in our internal control over financial reporting. As of December 31, 2021, management has completed the implementation of new controls, which are described below, to fully remediate these material weaknesses. Upon completion of the
remediation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021, our disclosure controls and procedures are effective at the reasonable assurance level.
Our management, including our CEO and CFO, has concluded that our consolidated financial statements, included in this Form 10-K, fairly
present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles, and that they can still be relied upon.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule
13a-15(f) under the Exchange Act, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a
material effect on the financial statements.
Our management assessed our internal control over financial reporting as of December 31, 2021. Our management based its assessment on
criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“2013
COSO”). In the opinion of management, TransAct maintained effective internal control over financial reporting as of December 31, 2021.
A material weakness is defined in Rule 12b-2 under the Exchange Act as a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Material Weaknesses in Internal Control Over Financial Reporting
We identified a control deficiency that constituted a material weakness in our internal control over financial reporting as of December
31, 2020, 2019 and 2018 and has been fully remediated as of December 31, 2021. The control deficiency was that we did not design and maintain effective controls over the completeness and accuracy of information included in key spreadsheets supporting
our accounting records (the “Spreadsheet Control Weakness”).
This control deficiency constituted a material weakness, but did not result in a material
misstatement to our annual or interim consolidated financial statements.
30
Remediation Efforts to Address Material Weaknesses
Beginning December 31, 2019, we commenced developing and implementing a plan to enhance the design and operating effectiveness of our
internal control over financial reporting, which included taking the following steps to remediate the identified control deficiency and material weakness:
For each key spreadsheet we evaluated and determined (1) if a standard Oracle report existed containing the same information as the
spreadsheet, and if so, we utilized the standard Oracle report (without modification) instead of the spreadsheet to support our accounting records, and (2) if a standard Oracle report cannot be used, we implemented a new key control whereby an employee
performs a formal validation that the information from Oracle is completely and accurately transferred (automatically or manually) to a spreadsheet by verifying totals and other information on a test basis. For all key spreadsheets, we have designed
and implemented a new key control to validate the completeness and accuracy of information supporting our accounting records. During 2020 and the first quarter of 2021, we completed the evaluation process for each key spreadsheet based on the above
criteria, and during the second quarter of 2021, we completed the implementation of new key controls for all of our key spreadsheets to validate the completeness and accuracy of the information contained within and supporting each such spreadsheet.
During the second half of 2021, we completed our evaluation of the new controls for effectiveness, and the Spreadsheet Control Weakness was deemed to be remediated as of December 31, 2021.
Changes in Internal Control over Financial Reporting
Other than the changes intended to remediate the material weakness noted above, no change in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information.
Not applicable.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection.
Not applicable.
31
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Set forth in Item 1 of this Form 10-K is certain information regarding our executive officers. The remaining information in response
to this item will be contained in our Proxy Statement for our 2022 Annual Meeting of Stockholders (the “Proxy Statement”), as applicable, under the headings, “Delinquent Section 16(a) Reports,” “Corporate Governance,” “Proposal 1: Election of
Directors,” “Audit Committee Report,” “Executive Compensation – Compensation Committee Report,” “Stockholder Proposals for 2023 Annual Meeting,” “Procedures for Submitted Director Nominations and Recommendations” and “Policy Regarding Stockholder
Communications with the Board of Directors,” which will be filed within 120 days after the end of the year covered by this Form 10-K and is incorporated herein by reference.
Code of Ethics
We maintain a Standards of Business Conduct and Code of Ethics (“Standards of Business Conduct”) that includes our code of ethics that
is applicable to all employees, including our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and Controller. Our Standards of Business Conduct, which require continued observance of high ethical standards, such as honesty,
integrity and compliance with the law in the conduct of our business, are available for public access on our Internet website at https://transacttech.gcs-web.com/corporate-governance. Any person may request a copy of our Standards of Business Conduct
free of charge by calling (203) 859-6800.
Item 11. Executive Compensation.
The information in response to this item will be contained in the Proxy Statement under the heading “Executive Compensation,” and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Set forth below is certain information regarding our equity compensation plans. The remaining information in response to this item
will be contained in the Proxy Statement under the heading, “Security Ownership of Certain Beneficial Owners and Management,” and is incorporated herein by reference.
Equity Compensation Plan Information
Information regarding our equity compensation plans as of December 31, 2021 is as follows:
Equity compensation plans approved by security holders:
In May 2014, our stockholders approved the adoption of the 2014 Equity Incentive Plan. In May 2020, our stockholders approved an
amendment to the 2014 Equity Incentive Plan to increase the number of shares of common stock which may be subject to awards granted under the plan from 1,400,000 to its current level of 2,200,000. The Company also maintains the 2005 Equity Incentive
Plan; however no new awards will be available for future issuance under this plan. Both plans generally provide for awards in the form of: (i) incentive stock options, (ii) non-qualified stock options, (iii) restricted stock, (iv) restricted stock
units (which may include performance-based vesting), (v) stock appreciation rights or (vi) limited stock appreciation rights. The Company does not have any equity plans that have not been approved by its stockholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information in response to this item will be contained in the Proxy Statement under the headings “Certain Relationships and Related
Transactions” and “Corporate Governance-Board Leadership Structure and Independence” and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information in response to this item will be contained in the Proxy Statement under the headings, “Policy Regarding Pre-Approval of
Services Provided by the Independent Registered Public Accounting Firm” and “Independent Registered Public Accounting Firm’s Services and Fees” and is incorporated herein by reference.
32
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2021 and 2020
Notes to Consolidated Financial Statements
2. Schedules.
All schedules are omitted because they are either inapplicable or not required, or because the information required therein is included in
the Consolidated Financial Statements and Notes thereto.
3. Exhibits.
Exhibits Index
33
23.1* Consent of Marcum LLP
101.SCH Inline XBRL Taxonomy Extension Schema Document.
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.
(x) Management contract or compensatory plan or arrangement.
* These exhibits are filed herewith.
‡ Furnished herewith.
(b) Exhibits.
The Exhibits required by Item 601 of Regulation S-K under the Exchange Act are included in the Exhibit Index above under a(3) of this Item
15.
(c) Financial Statement Schedules.
See the Notes to the Consolidated Financial Statements included in this Form 10-K.
34
Item 16. Form 10-K Summary.
Not applicable.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
TRANSACT TECHNOLOGIES INCORPORATED
By: /s/ Bart C. Shuldman
Name: Bart C. Shuldman
Title: Chairman of the Board and Chief Executive Officer
Date: March 24, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature Title Date
Bart C. Shuldman (Principal Executive Officer)
Steven A. DeMartino (Principal Financial Officer)
/s/ David B. Peters Vice President and Chief Accounting Officer March 24, 2022
David B. Peters (Principal Accounting Officer)
/s/ John M. Dillon Director March 24, 2022
John M. Dillon
/s/ Randall S. Friedman Director March 24, 2022
Randall S. Friedman
/s/ Emanuel P. N. Hilario Director March 24, 2022
Emanuel P. N. Hilario
/s/ Haydee Olinger Director March 24, 2022
Haydee Olinger
36
TRANSACT TECHNOLOGIES INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID 688) F-2
Consolidated Balance Sheets as of December 31, 2021 and 2020 F-4
Notes to Consolidated Financial Statements F-9
F-1
Report of Independent Registered Public
Accounting Firm
To the Shareholders and Board of Directors of Transact Technologies Incorporated
Opinion on the Financial Statements
We have audited the
accompanying consolidated balance sheets of TransAct Technologies Incorporated and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective,
or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate
opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue recognition – Identification of Distinct Performance Obligations and Estimate of Standalone Selling Price
As described in Note 2 to the consolidated financial statements, some of the Company’s contracts with customers contain multiple
performance obligations (most commonly when contracts include a hardware product, software and extended warranties). A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the
performance obligation is satisfied. The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. For a majority of the Company’s revenue, which consists of
printers, terminals, consumables, and replacement parts, the Company recognizes revenue as of a point of time; the revenue is recognized upon shipment of the order when control of the goods is transferred to the customer and at the time the performance
obligation is fulfilled. Performance obligations are satisfied over time if the customer receives the benefits as the Company performs work. The Company’s cloud-based BOHA! software, provided on a subscription basis, allows customers to use hosted
software over the contract period without taking possession of the software and is recognized ratably over the contract period. For extended warranties, the transaction price is recognized ratably over the warranty period, using output methods, as
control of the services is transferred to the customer. When there is more than one performance obligation in a customer arrangement, the Company typically uses the “standalone selling price” method to determine the transaction price to allocate to
each performance obligation.
F-2
In 2020, the Company launched a new service offering related to BOHA! for one customer that bundled the BOHA! products (cloud-based
SaaS software applications, hardware and after-market service) in one price payable monthly over a three-year period. During the year ended December 31, 2021, the Company recognized revenue from this contract with the customer related to this service
offering in the amount of approximately $312 thousand. Judgement was required by management to identify the performance obligations in the contract and allocate the transaction price to each performance obligation.
The principal considerations for our determination that revenue recognition, specifically related to management’s identification of
distinct performance obligations and the estimation of standalone selling prices related to this service offering, is a critical audit matter are that there was significant judgment by management in (1) the identification of distinct performance
obligations related to this service offering, specifically the determination that one distinct performance obligation existed for point in time revenue recognition and three distinct performance obligations existed for over-time revenue recognition,
(2) the estimation of the standalone selling price using market pricing conditions and other observable inputs, such as historical pricing practices, for each distinct performance obligation; (3) the determination that a significant financing
component existed in the arrangement with the customer, therefore, requiring deferral of a portion of the point in time revenue to be recognized as interest income over the contract period; (4) management’s election of the accounting policy expedient
to exclude sales taxes collected from customers from the transaction price in accordance with ASU 2016-12; and (5) the identification of costs incurred to obtain the contract and management’s decision to defer such costs and recognize the expense on
a straight-line basis over the life of the contract. This in turn led to a high degree of auditor judgment and subjectivity in performing our audit procedures, which were designed to evaluate audit evidence related to management’s identification of
distinct performance obligations within the contract with the customer related to this service offering and the judgments made by management to estimate the standalone selling prices used to allocate the transaction price to those distinct
performance obligations identified. Due to this complexity, there was significant effort in performing our audit procedures to evaluate the reasonableness of management’s estimates used in the Company’s application of the accounting standard related
to revenue recognition for this service offering.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on
the consolidated financial statements. These procedures included, among others, (i) evaluating the Company’s revenue recognition accounting policy resulting from its application of the accounting standard related to revenue recognition; (ii)
evaluating management’s identification of distinct performance obligations in its contract with the customer; (iii) evaluating management’s process for estimating the standalone selling price which included testing the completeness and accuracy of
input data used and evaluating the reasonableness of significant assumptions used by management, principally observable inputs such as historical pricing practices; and (iv) evaluation of the accuracy of management’s allocation of the transaction
price to the performance obligations contained within the related contract with the customer.
/s/ Marcum LLP
We have served as the Company’s auditor since 2020.
Hartford, Connecticut
March 24, 2022
F-3
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Assets:
Current assets:
Employee retention credit receivable 1,500 –
Note receivable – 100
Notes receivable, net of current portion – 1,584
Liabilities and Shareholders’ Equity:
Current liabilities:
Long-term debt – 2,173
Deferred revenue, net of current portion 186 111
Lease liability, net of current portion 1,781 2,864
Commitments and contingencies
Shareholders’ equity:
Accumulated other comprehensive income (loss), net of tax 143 (38 )
Total liabilities and shareholders’ equity $ 50,941 $ 42,247
See accompanying notes to Consolidated Financial Statements.
F-4
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
Operating expenses:
Engineering, design and product development 7,475 5,703
Interest and other income (expense):
Interest income 61 78
Gain from employee retention credit 1,500 –
Gain on forgiveness of long-term debt 2,173 –
Loss before income taxes (6,216 ) (8,169 )
Net loss per common share:
Shares used in per-share calculation:
See accompanying notes to Consolidated Financial Statements.
F-5
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Year Ended December 31,
Foreign currency translation adjustment, net of tax 181 (7 )
See accompanying notes to Consolidated Financial Statements.
F-6
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except share data)
Shares Amount Capital Earnings Stock Income (Loss) Equity
Issuance of common stock from exercise of stock options 62,500 1 374 – – – 375
Issuance of common stock on restricted stock units 32,725 – – – – – –
Share-based compensation expense – – 876 – – – 876
Foreign currency translation adjustment, net of tax – – – – – (7 ) (7 )
Issuance of common stock from exercise of stock options 97,000 – 436 – – – 436
Issuance of common stock on restricted stock units 50,525 – – – – – –
Share-based compensation expense – – 1,206 – – – 1,206
Foreign currency translation adjustment, net of tax – – – – – 181 181
See accompanying notes to Consolidated Financial Statements.
F-7
TRANSACT TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation expense 1,206 876
Depreciation and amortization 957 1,342
Deferred income tax benefit (2,150 ) (367 )
Loss on the sale of fixed assets 9 –
Foreign currency transaction losses (gains) 272 (58 )
Gain on forgiveness of long-term debt (2,173 ) –
Changes in operating assets and liabilities:
Employee retention credit receivable (1,500 ) –
Other current and long-term assets 322 (198 )
Accrued liabilities and other liabilities 592 176
Net cash used in operating activities (2,510 ) (3,510 )
Cash flows from investing activities:
Capital expenditures (1,384 ) (744 )
Proceeds from the sale of fixed assets 8 –
Collection (issuance) of note receivable 1,598 (600 )
Net cash provided by (used in) investing activities 222 (1,344 )
Cash flows from financing activities:
Revolving credit line borrowings – 2,756
Revolving credit line payments – (2,756 )
Long-term debt borrowings – 2,173
Proceeds from stock option exercises 436 375
Proceeds from the issuance of common stock 12,214 9,798
Payment of common stock issuance costs (1,014 ) (1,061 )
Withholding taxes paid on stock issuance (133 ) (41 )
Payment of bank financing costs (31 ) (213 )
Net cash provided by financing activities 11,472 11,031
Effect of exchange rate changes on cash and cash equivalents (86 ) (21 )
Increase in cash and cash equivalents 9,098 6,156
Cash and cash equivalents, beginning of period 10,359 4,203
Cash and cash equivalents, end of period $ 19,457 $ 10,359
Supplemental cash flow information:
Interest paid $ 76 $ 64
Income taxes paid 57 46
Non-cash capital expenditure items 82 25
See accompanying notes to Consolidated Financial Statements.