TRANSACT TECHNOLOGIES INCORPORATED Overview
During the year endedDecember 31, 2022 , we continued to experience recovery from the negative impacts COVID-19 had on our business during 2021 and 2020. While we have experienced recovery in most of our markets, there are still uncertainties on how any future variants of COVID-19 and global supply chain disruptions may continue to impact our business, operations, supply chain, customers and vendors. During 2022, we continued to focus our efforts on sales execution, operating and engineering adjustments to react to global supply chain disruptions and expansion of our market share. We successfully navigated the supply chain disruptions, and thanks to a significant market share gain in our casino and gaming market, we returned to bottom line profitability in the third and fourth quarters of 2022. During the year endedDecember 31, 2022 , our total net sales increased 48% to approximately$58.1 million compared to the year endedDecember 31, 2021 . See the table below for a breakdown of our sales by market: Year Ended Year Ended (In thousands, except percentages) December 31, 2022 December 31, 2021 $ Change % Change Food service technology ("FST")$ 12,364 21.3 %$ 12,625 32.1 % $ ($261 ) (2.1 %) POS automation 10,659 18.3 % 4,825 12.2 %$ 5,834 120.9 % Casino and gaming 30,029 51.7 % 15,302 38.9 %$ 14,727 96.2 % Printrex - - 631 1.6 %$ (631 ) (100.0 %) TSG 5,087 8.7 % 6,003
15.2 %
$ 58,139 100.0 %$ 39,386 100.0 % $$18,753 47.6 % Sales of our food service technology products remained relatively flat (decreasing 2%) in the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . 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 decreased in 2022 primarily due to a 30% decrease in FST hardware sales to one of our largest customers. Our total installed base increased by 2,362 terminals and WorkStations during 2022 resulting in a total installed base of 12,180 terminals at the end of 2022. This was partially offset by record sales and an 18% increase in BOHA! recurring revenue. Recurring revenue increased 18% primarily due to higher label sales, as well as record sales of BOHA! software (largely from our labeling software application) recognized on a SaaS subscription basis due principally to the continued growth of the installed base of our BOHA! Terminals and WorkStations. Sales of our POS automation products increased 121% in the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . In the POS automation market, we focus primarily on supplying printers that print receipts or linerless labels to customers in the restaurant and quick serve markets. During the year endedDecember 31, 2022 , sales of our Ithaca 9000 printer benefitted from market share gain resulting from a competitor's supply chain issues, as well as a special project for our largest customer. Sales in 2021 were unusually low due to the significant negative impact of the COVID-19 pandemic on the POS automation market. Sales of our casino and gaming products increased 96% in 2022 compared to 2021. 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 which is 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 2022 as well as our expanding market share, as our largest competitor experienced supply chain issues and casinos continued to reopen compared to 2021 when the market was severely impacted by the COVID-19 pandemic and the related closures of casinos. 19 -------------------------------------------------------------------------------- Sales of our Printrex branded printers included 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. There were no Printrex sales in 2022 as we fulfilled last buy orders to legacy customers during the fourth quarter of 2021 and exited this market as ofDecember 31, 2021 to focus 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 for our non-FST products, continues to offer a recurring revenue stream from mostly our legacy products. TSG sales decreased 15% in 2022 compared to 2021, primarily due to declining service revenue from a legacy banking customer whose service contract ended during 2022, as well as lower replacement part and consumable product sales. Operationally, our gross margin rose to 42.0% in 2022, an increase of 290 basis points from 39.1% in 2021, due largely to higher volume of sales overall of our gaming and casino printers which have a higher margin, partially offset by higher material and shipping costs resulting from worldwide supply disruptions. During 2022, our operating margin improved to (13.2%) compared to (23.8%) in 2021 as the 48% increase in sales helped increase gross margin by 290 basis points, offset by an increase of$7.3 million of operating expenses. Operating expenses increased by 30% as we gradually returned to more normalized pre-COVID-19 spending levels. We reported a net loss of$5.9 million and a net loss per diluted share of$0.60 for 2022, compared to a net loss of$4.0 million and net loss per diluted share of$0.43 for 2021. In terms of cash flow, for 2022 we used$12.2 million of cash in operating activities. We ended the year with cash and cash equivalents of$7.9 million and we had$2.3 million of outstanding borrowings under the Siena Credit Facility on our Consolidated Balance Sheet atDecember 31, 2022 . Critical Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") 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, financing 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. 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 ofDecember 31, 2022 was$351 thousand , or 2.5% 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 average cost 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. EffectiveApril 1, 2022 , TransAct changed its method of inventory valuation from standard costing which approximated the "first-in, first-out" ("FIFO") costing methodology to the average costing methodology. We believe this methodology is preferable because it reflects a better 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. See Note 16 for further details. 20 --------------------------------------------------------------------------------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 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 ofDecember 31, 2022 , 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 the Company was substantially higher than our carrying value. We have evaluated the recoverability of the assets on our Consolidated Balance Sheet as ofDecember 31, 2022 in accordance with relevant authoritative accounting literature. We have considered the effects caused by the COVID-19 pandemic, the global supply chain disruptions, inflation 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 Annual Report on Form 10-K and reflected accordingly in the accompanying consolidated financial statements. 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. 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. 21 --------------------------------------------------------------------------------
Results of Operations: Year Ended
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 endedDecember 31, 2022 and 2021 are detailed in the below table. Year Ended Year Ended (In thousands, except percentages) December 31, 2022 December 31, 2021 $ Change % Change Food service technology$ 12,364 21.3 %$ 12,625 32.1 % $ ($261 ) (2.1 %) POS automation 10,659 18.3 % 4,825 12.2 %$ 5,834 120.9 % Casino and gaming 30,029 51.7 % 15,302 38.9 %$ 14,727 96.2 % Printrex - - 631 1.6 %$ (631 ) (100.0 %) TSG 5,087 8.7 % 6,003 15.2 %$ (916 ) (15.3 %)$ 58,139 100.0 %$ 39,386 100.0 % $$18,753 47.6 % International*$ 14,105 24.3 %$ 6,986 17.7 % $$7,119 101.9 %
* International sales do not include sales of products to domestic distributors
or other customers who in turn ship those products to international destinations. Net sales for 2022 increased$18.8 million , or 48%, from 2021. Printer, terminal and other hardware sales volume increased by 63% to approximately 134,000 units for 2022, driven by large unit volume increases in all casino and gaming and POS automation, partially offset by unit volume declines in FST and Printrex (the oil and gas market which we exited in 2021). The primary volume increases were an 80% increase in unit volume from the casino and gaming market, as the casino market continued to rebound from the impact of COVID-19 shutdowns and our market share increased due to our efforts to navigate supply chain restraints that prevented certain other suppliers from fully meeting customer demand and, to a lesser extent, a 60% unit volume increase in our POS automation market. We experienced a 32% decrease in hardware unit volume from the FST market, driven by a year-over-year reduction in sales from a large convenience store. The average selling price of our printers, terminals and other hardware increased 4% during 2022 compared to 2021, mainly due to price increases instituted during 2022 in response to product cost increases related to supply chain issues. Additionally, sales of our software, labels and other recurring revenue from our FST market increased$1.3 million , or 18%, during 2022 compared to 2021. International sales for 2022 increased$7.1 million , or 102%, compared to 2022, primarily due to a 141% increase in international casino and gaming sales due to unit volume increases noted above, partially offset by increased materials and shipping costs in the face of global supply chain disruptions. Food service technology. Our primary offering in the food service technology market is our line of BOHA! products, which can combine our latest generation terminal and workstation which includes one or two printers and our BOHA! Labeling, timers, and media software. In addition, customers may individually purchase cloud-based software applications that connect to a separate application on a separate mobile device into a solution to automate back-of-house operations in restaurants, convenience stores and food service operations. The additional software offering of BOHA! consists of a variety of individually purchased software-as-a-service ("SaaS")-based applications for both Android and iOS operating systems, including applications for, temperature monitoring, temperature taking and checklists and task lists. These applications are sold separately, and customers purchase the applications they need for their back-of-house operations. Customers may also purchase associated hardware, such as handheld devices, tablets, temperature probes and temperature sensors and gateways. The BOHA! Terminal combines an operating system and hardware components in a device that includes a 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" date labels. The BOHA! WorkStation uses an iPad or Android tablet instead of an integrated touchscreen. The BOHA! Terminal and the BOHA! WorkStation are equipped with the TransAct Enterprise Management System to ensure that only approved touchscreen functions are available on the touchscreen device and to allow over-the-air updates to the operating system. BOHA! helps food service establishments and restaurants (including fine dining, casual dining, fast casual and quick-service 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 endedDecember 31, 2022 and 2021 were as follows: Year Ended Year Ended (In thousands, except percentages) December 31, 2022 December 31, 2021 $ Change % Change Domestic$ 11,602 93.8 %$ 11,738 93.0 %$ (136 ) (1.2 %) International 762 6.2 % 887 7.0 % (125 ) (14.1 %)$ 12,364 100.0 %$ 12,625 100.0 %$ (261 ) (2.1 %) Year Ended Year Ended (In thousands, except percentages) December 31, 2022 December 31, 2021 $ Change % Change Hardware$ 3,653 29.5 %$ 5,226 41.4 %$ (1,573 ) (30.1 %) Software, labels and other recurring revenue 8,711 70.5 % 7,399 58.6 % 1,312 17.7 %$ 12,364 100.0 %$ 12,625 100.0 %$ (261 ) 2.1 % 22
-------------------------------------------------------------------------------- Sales in food service technology decreased 2.1% in 2022 compared to 2021. This was driven by a decrease in sales of hardware, partially offset by an increase in BOHA! software, labels and other recurring revenue. Hardware sales decreased 30% during 2022 compared to 2021 due largely to a reduction in sales to a large retail customer. Recurring revenue increased 18% primarily due to higher label sales, as well as record sales Of BOHA! software (largely from our labeling software application) recognized on a SaaS subscription basis due principally to the continued growth of the installed base of our BOHA! Terminals and WorkStations.
We expect FST revenue to be higher in 2023 than in 2022 as we continue to grow our installed base of paid terminals and the related recurring revenue (primarily the sale of labels and subscription software revenue from our labeling software application).
POS automation. Revenue from the POS automation market includes sales of our Ithaca 9000 thermal printer used primarily by McDonald's and other quick-service restaurants located either at the checkout counter or within self-service kiosks to print receipts for consumers or print liner-less labels. Sales of our worldwide POS automation products for the years endedDecember 31, 2022 and 2021 were as follows: Year Ended Year Ended (In thousands, except percentages) December 31, 2022 December 31, 2021 $ Change % Change Domestic$ 10,657 100.0 %$ 4,817 99.8 %$ 5,840 121.2 % International 2 - 8 0.2 % (6 ) (75.0 %)$ 10,659 100.0 %$ 4,825 100.0 %$ 5,834 120.9 % The increase in POS automation product revenue during 2022 compared to 2021 was driven by a 121% increase in sales of our Ithaca® 9000 printer, primarily to McDonald's, as we benefited from market share gains resulting from a competitor's supply chain issues as well as a special project for McDonald's that utilized our printer. Sales for 2021 were unusually low due to the significant negative impact from the COVID-19 pandemic on POS automation sales during 2021. Due to the completion of the special project in 2022, we expect POS automation sales to be lower in 2023 compared to 2022. 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, 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 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 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 endedDecember 31, 2022 and 2021 were as follows: Year Ended Year Ended (In thousands, except percentages) December 31, 2022 December 31, 2021 $ Change % Change Domestic$ 17,686 58.9 %$ 10,173 66.5 %$ 7,513 73.9 % International 12,343 41.1 % 5,129 33.5 % 7,214 140.7 %$ 30,029 100.0 %$ 15,302 100.0 %$ 14,727 96.2 % The increase in domestic sales of our casino and gaming products during 2022 compared to 2021 was primarily due to a 74% increase in domestic sales of our thermal casino printers, as our business experienced a strong recovery from the COVID-19 pandemic during 2022 compared to 2021 and we increased our overall market share due largely to our largest competitor's inability to supply product due to supply chain issues. The overall increase in casino and gaming domestic sales was also driven by a 410% increase in domestic EPICENTRAL sales during 2022 as we completed several EPICENTRAL installations/expansions during 2022. EPICENTRAL sales 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 2022 compared to 2021, primarily due to a 155% increase in sales of our thermal casino printers. Similar to the domestic market, we experienced significant recovery during 2022 from the COVID-19 pandemic in the international gaming markets and increased our market share due largely to our competitor's inability to supply product due to supply chain issues. The substantial increase in international gaming sales was predominantly driven by the European and Australian markets while the Asian market still remained negatively impacted from the COVID-19 pandemic.
We expect both domestic and international sales of our casino printers to continue to be strong and higher in 2023 as compared to 2022 as we work to fulfil our large backlog of orders and continue to capitalize on our increasing market share in the industry.
23
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Printrex: Printrex branded printers were 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, 2022 and 2021 were as
follows:
Year Ended Year Ended
(In thousands, except
percentages) December 31, 2022 December 31, 2021 $ Change % Change
Domestic $ - 0.0 % $ 171 27.1 % $ (171 ) 100.0 %
International - 0.0 % 460 72.9 % (460 ) 100.0 %
$ - 0.0 % $ 631 100.0 % $ (631 ) 100.0 %
We 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 this market beyond
2021.
TSG: Revenue generated by TSG includes sales of consumable products (POS receipt
paper, inkjet cartridges, ribbons and other printing supplies for non-FST 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, 2022 and 2021 were as follows:
Year Ended Year Ended
(In thousands, except
percentages) December 31, 2022 December 31, 2021 $ Change % Change
Domestic $ 4,089 80.4 % $ 5,501 91.6 % $ (1,412 ) (25.7 %)
International 998 19.6 % 502 8.4 % 496 98.8 %
$ 5,087 100.0 % $ 6,003 100.0 % $ (916 ) (15.3 %)
The decrease in domestic revenue from TSG during 2022 as compared to 2021 on
significantly lower legacy lottery printer part sales was due primarily to lower
sales of replacement parts. Replacement part sales decreased 34%. Service
revenue and consumable sales also declined 8% and 19%, respectively.
Internationally, TSG revenue increased during 2022 compared to 2021, due primarily to a 136% increase in sales of replacement parts and accessories to international casino and gaming customers.
We expect TSG sales for 2023 to be higher than 2022.
Gross Profit. Gross profit information for the years ended
Year Ended December 31, Percent Percent of Percent of
2022 2021 Change Total Sales - 2022 Total Sales - 2021
$ 24,412 $ 15,382 58.7 % 42.0 % 39.1 %
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 our line of BOHA! products and royalty payments
to third-parties, including to the third party licensor of our food service
technology software products. Gross profit increased $9.0 million , or 59%, in
2022 compared to 2021, primarily due to the 48% sales increase in 2022 compared
to 2021. Gross margin increased to 42.0% in 2022 compared to 39.1% in 2021 due
largely to a favorable change in product sales mix and the effect from two
rounds of price increases we instituted during 2022 to mitigate higher product
and shipping costs related to the worldwide supply chain disruptions.
Operating Expenses - Engineering, Design and Product Development. Engineering,
design and product development information for the years ended December 31, 2022
and 2021 is summarized below (in thousands, except percentages):
Year Ended December 31, Percent Percent of
Percent of
2022 2021 Change Total Sales - 2022 Total Sales - 2021
$ 8,570 $ 7,475 14.6 % 14.7 % 19.0 %
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 $1.1 million , or 15%, in 2022 compared to 2021
resulting from an increase in expenses related to reconfiguring unavailable
parts and qualifying new parts, as well as a gradual return to more normalized
pre-COVID-19 spending levels and from the full effect (in 2022) of hiring
additional software developers in late 2021 to continue development of our food
service technology products.
24
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Operating Expenses - Selling and Marketing. Selling and marketing information
for the years ended
Year Ended December 31, Percent Percent of Percent of
2022 2021 Change Total Sales - 2022 Total Sales - 2021
$ 11,326 $ 7,658 47.9 % 19.5 % 19.4 %
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 $3.7
million , or 48%, during 2022 compared to 2021 primarily due to higher trade show
expenses, expanded marketing expenses as we returned to more normalized
pre-COVID-19 levels of sales and marketing expense during 2022 compared to lower
costs during 2021 due to cost saving measures implemented during 2020 that
carried into 2021, payroll expenses for the expanded sales and marketing staff
and increased commissions on higher sales in the casino and gaming market.
Operating Expenses - General and Administrative. General and administrative
information for the years ended December 31, 2022 and 2021 is summarized below
(in thousands, except percentages):
Year Ended December 31, Percent Percent of Percent of
2022 2021 Change Total Sales - 2022 Total Sales - 2021
$ 12,193 $ 9,626 26.7 % 21.0 % 24.4 %
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 $2.6 million , or 27%,
during 2022 compared to 2021 due to higher recruiting fees and employee
compensation, as well as higher consulting fees and depreciation related to the
implementation of a new ERP system that we completed in early 2022. Legal fees
also increased year-over-year related to a shareholder matter that was resolved
on March 30, 2022 when we entered into a Cooperation Agreement with two
shareholders.
Operating Loss. Operating loss information for the years ended
Year Ended December 31, Percent Percent of
Percent of
2022 2021 Change Total Sales - 2022 Total Sales - 2021
$ (7,677 ) $ (9,377 ) (18.1 %) (13.2 %) (23.8 %)
Our operating loss decreased $1.7 million , or 18%, during 2022 compared to 2021
as a $9.0 million , or 59% increase in gross profit on 48% higher sales was
largely offset by a $7.3 million or 30% increase in operating expenses during
2022 compared to 2021..
Interest, net. We recorded net interest expense of $208 thousand in 2022
compared to $96 thousand in 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 . Interest
expense also increased during 2022 and we expect will continue to increase
during 2023 due to required minimum borrowings pursuant to the terms of the July
2022 Siena Credit Facility Amendment No. 2 along with expected interest rate
increases in the broader financial markets.
Other, net. We recorded other expense of $16 thousand in 2022 compared to other
expense of $283 thousand in 2021 primarily due to higher foreign exchange losses
recorded by our UK subsidiary during 2021. 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 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.
Gain on Forgiveness of Long-Term Debt. We recorded a
Income Taxes. We recorded an income tax benefit during 2022 of$2.0 million at an effective tax rate of 24.9%, compared to an income tax benefit during 2021 of$2.0 million at an effective tax rate of 33.6%. The tax benefit recorded for 2021 was higher as it included the recognition of the gain on the forgiveness of the PPP Loan which was not taxable. Net Loss. We reported a net loss for the year endedDecember 31, 2022 of$5.9 million , or$0.60 per basic and diluted share, compared to a net loss of$4.0 million , or$0.43 per basic and diluted share, in 2021. 25 -------------------------------------------------------------------------------- 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 at market-competitive rates, 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 for the 2023 fiscal year and beyond. Cash Flow During 2022, our cash balance decreased$11.5 million (versus an increase of$9.1 million in 2021) due primarily to operating activities, including an increase in inventories of$4.4 million to support the growing demand of our products and an increase of$6.4 million in receivables, reflecting stronger sales in 2022. We had$7.9 million in cash and cash equivalents as ofDecember 31, 2022 , of which$219 thousand was held by ourUK subsidiary. Operating activities: The following significant factors primarily affected our cash used in operating activities of$12.2 million in 2022 as compared to cash used in operating activities of$2.5 million in 2021.
During 2022:
? We reported a net loss of
? We recorded depreciation and amortization of$1.3 million and share-based compensation expense of$1.2 million . ? We recorded an increase in our deferred tax assets of$2.2 million due to our net loss in 2022.
? Accounts receivable increased
volume during the fourth quarter of 2022.
? Inventories increased
During 2021:
? We reported a net loss of
? We recorded depreciation and amortization of
compensation expense of
? We recorded a gain of
? Accounts receivable increased
sales volume during the fourth quarter of 2021.
? We recorded a receivable of
? Inventories decreased
inventory on hand to fulfill sales and significantly reduced inventory
purchases resulting from the supply chain disruptions caused by the COVID-19
pandemic.
? Prepaid income taxes decreased
refund in 2021 related to the net operating loss reported for 2020 that was
carried back to prior years as permitted by the CARES Act.
? Accounts payable increased
made towards the end of the fourth quarter of 2021 to support expected 2022
sales.
? Accrued liabilities and other liabilities increased
primarily to increased deferred revenue.
Investing activities: Our capital expenditures were$1.3 million and$1.4 million in 2022 and 2021, respectively. Expenditures in both 2022 and 2021 were primarily related to the implementation of a new ERP system which was completed in early 2022, new product tooling 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. Financing activities: Financing activities provided$2.1 million of cash during 2022 due primarily to required minimum borrowing on our Siena Credit Facility. During 2021, financing activities provided$11.5 million of cash 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. Resource Sufficiency Since early 2020, the COVID-19 pandemic has continued to cause uncertainty and disruption in the global economy and financial markets. We have also been impacted by global supply chain issues, increased shipping costs and inflationary pressures. Given the unprecedented uncertainty related to the impact of these external factors on the food service and casino industries, the Company continues to monitor 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, 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 these global economic pressures and the future of pandemic variants remain uncertain and the ultimate impact of these global pressures is unknown. 26 -------------------------------------------------------------------------------- Credit Facility and Borrowings OnMarch 13, 2020 , we entered into the Loan and Security Agreement (the "Siena Credit Facility") withSiena Lending Group LLC (the "Lender") and terminated our credit facility withTD Bank N.A . The Siena Credit Facility provides for a revolving credit line of up to$10.0 million and was originally scheduled to expire onMarch 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)$5.0 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 fromApril 1, 2020 toJune 30, 2020 was the first period we were subject to the original financial covenant, which required the Company to maintain a minimum EBITDA and continued through the 12-month period fromApril 1, 2020 toMarch 31, 2021 . OnJuly 21, 2021 , the Company entered into an amendment ("Siena Credit Facility Amendment No. 1") to the Siena Credit Facility. Siena Credit Facility Amendment No. 1 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 endedJuly 31, 2021 . FromJuly 31, 2021 throughDecember 31, 2022 , we have been in compliance with our excess availability covenant. As ofDecember 31, 2022 , we had$2.3 million in outstanding borrowings under the Siena Credit Facility and$3.9 million of net available borrowing capacity under the Siena Credit Facility. OnJuly 19, 2022 , the Company and the Lender entered into Amendment No. 2 ("Siena Credit Facility Amendment No. 2") to the Siena Credit Facility as amended by Siena Credit Facility Amendment No. 1. Also onJuly 19, 2022 , the Company and the Lender entered into an Amended and RestatedFee Letter (the "AmendedFee Letter ") in connection with Siena Credit Facility Amendment No. 2. Siena Credit Facility Amendment No. 2 did not modify the aggregate amount of the revolving commitment or the interest rate applicable to the loans.
The changes to Siena Credit Facility provided for in Siena Credit Facility Amendment No. 2 included, among other things, the following:
(i) The extension of the maturity date from
(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
(b) an event of default occurs and is continuing.
In addition, the AmendedFee 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 least$2,250,000 in principal amount. If the Company does not have the ability to direct the use of funds in the deposit account, then the AmendedFee 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. OnMay 1, 2020 (the "Loan Date"), the Company was granted the PPP Loan fromBerkshire 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, enactedMarch 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 beforeFebruary 15, 2020 , rent payments under lease agreements in effect before February15, 2020, utilities for which service began beforeFebruary 15, 2020 and interest on debt obligations incurred beforeFebruary 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. OnJuly 8, 2021 , the Company received notifications fromBerkshire 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 wasJuly 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 endedDecember 31, 2021 . Stock Repurchase Program During 2022 and 2021, we did not repurchase any shares of our common stock. Shareholders' Equity Shareholders' equity decreased$5.1 million , or 13%, to$33.9 million atDecember 31, 2022 from$39.0 million atDecember 31, 2021 . The decrease was primarily due to the net loss of$5.9 million in 2022. This was partially offset by share-based compensation expense related to stock awards of$1.0 million (net of withholding taxes paid by relinquishment of shares) in 2022.
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