10-K 1 form10k2018.htm FORM 10K FOR THE YEAR ENDED DECEMBER 31, 2018  

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K

(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018
or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    .

Commission file number: 0-21121
                                                                                                                                                            
                                                                                                                                                            
(Exact name of registrant as specified in its charter)
Delaware
 
06-1456680
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
One Hamden Center, 2319 Whitney Avenue, Suite 3B, Hamden, CT
 
06518
(Address of principal executive offices)
 
(Zip Code)

Registrant's telephone number, including area code 203-859-6800

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class - Common Stock, par value $.01 per share
 
Name of Exchange on which Registered - Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes      No   

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes      No   

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      No   

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes       No   

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”  and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer  
Accelerated filer  
Non-accelerated filer  
Smaller reporting company  
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No   

The aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the Registrant was approximately $87,900,000 based on the last sale price on June 30, 2018.

As of February 28, 2019, the number of shares outstanding of the Registrant’s common stock, $0.01 par value, was 7,450,968.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement to be filed with the Securities and Exchange Commission  within 120 days after the year covered by this Form 10-K with respect to the 2019 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.


TRANSACT TECHNOLOGIES INCORPORATED

INDEX

 
PART I.
 
Business
1
Risk Factors
4
Unresolved Staff Comments
10
Properties
10
Legal Proceedings
10
Mine Safety Disclosures
10
 
 
 
 
PART II.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
11
Selected Financial Data
13
Management's Discussion and Analysis of Financial Condition and Results of Operations
13
Quantitative and Qualitative Disclosures About Market Risk
25
Financial Statements and Supplementary Data
25
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
25
Controls and Procedures
25
Other Information
26
 
 
 
 
PART III.
 
Directors, Executive Officers and Corporate Governance
26
Executive Compensation
27
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
27
Certain Relationships and Related Transactions, and Director Independence
27
Principal Accounting Fees and Services
27
 
 
 
 
PART IV.
 
Exhibits
28
Form 10-K Summary 
30
     
SIGNATURES
 
 
 
31
 
 
CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
F-1
 
 

 
 
 

 


PART I
 

Forward Looking Statements
Certain statements included in this report, including without limitation statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are not historical facts are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. (the “Exchange Act”)Forward-looking statements generally can be identified by the use of forward-looking terminology, such as “may”, “will”, “expect”, “intend”, ”estimate”, “anticipate”, “believe”, “project” or “continue” or the negative thereof or other similar words.  All forward-looking statements involve risks and uncertainties, including, but not limited to those listed in Item 1A of this Annual Report and such other risk and uncertainties as are described in our reports filed with the SEC from time to time..  Actual results may differ materially from those discussed in, or implied by, the forward-looking statements.  The forward-looking statements speak only as of the date of this report and we assume no duty to update them.

Item 1. Business.

The Company
TransAct Technologies Incorporated (“TransAct”, the “Company”, “we”, “us”, or “our”) was incorporated in June 1996 and began operating as a stand-alone business in August 1996 as a spin-off of the printer business that was formerly conducted by certain subsidiaries of Tridex Corporation.  We completed an initial public offering on August 22, 1996.

TransAct is a global leader in developing and selling software-driven technology and printing solutions for high growth markets including restaurant solutions, point of sale (“POS”) automation and banking, casino and gaming, lottery, and oil and gas.  Our world-class products are designed from the ground up based on market and customer requirements and are sold under the AccuDate™, EPICENTRAL™, Epic®, Ithaca®, and Printrex® brand names. Known and respected worldwide for innovative designs and real-world service reliability, our thermal, and inkjet printers and terminals generate top-quality labels, coupons and transaction records such as receipts, tickets and other documents, as well as printed logging and plotting of data. We sell our products to original equipment manufacturers (“OEMs”), value-added resellers, select distributors, as well as directly to end-users. Our product distribution spans across the Americas, Europe, the Middle East, Africa, Asia, Australia, the Caribbean Islands and the South Pacific. We also offer world-class service, spare parts, accessories and printing supplies to our growing worldwide base of products currently in use by our customers. Through our TransAct Services Group (“TSG”), we provide a complete range of supplies and consumables used in the printing and scanning activities of customers in the restaurant and hospitality, banking, retail, casino and gaming, government and oil and gas exploration markets.  Through our webstore, www.transactsupplies.com, and our direct selling team, we address the demand for these products. Our primary operating, hardware research and development, and eastern region service center is located in Ithaca, New York.  In addition, we have a casino and gaming sales headquarters, software research and development and western region service center in Las Vegas, Nevada; a European sales and service center at our subsidiary in the United Kingdom (“UK”), and a sales office located in Macau, China.  Our executive offices are located at One Hamden Center, 2319 Whitney Avenue, Suite 3B, Hamden, Connecticut, 06518, with a telephone number of (203) 859-6800.

Products, Services and Distribution Methods

Printers and terminals: TransAct designs, develops and markets a broad array of transaction-based and specialty printers and terminals utilizing thermal and inkjet printing technology for applications, primarily in the restaurant solutions, POS automation and banking, casino and gaming, lottery, and oil and gas printing markets.  Our printers and terminals are configurable and offer customers the ability to choose from a variety of features and functions.  Options typically include interface configuration, mounting configuration, paper cutting devices, paper handling capacities and cabinetry color.  Our restaurant solutions terminals also offer configurable menu options.  In addition to our configurable printers and terminals, we design and assemble custom printers for certain OEM customers.  In collaboration with these customers, we provide engineering and manufacturing expertise for the design and development of specialized printers tailored to our customers' business.

Restaurant Solutions: Our line of AccuDate™ terminals for the restaurant solutions market combine hardware and software 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 to help food service establishments and restaurants (including fine dining, casual dining, quick-serve, convenient stores  and hospitality establishments) effectively manage food safety and automate and manage back-of-the-restaurant operations.  Our newest addition to the AccuDate™ product line, the AccuDate XL2e, is a unique Android® 5.0-based restaurant management terminal specifically designed to meet the food preparation management and labeling needs of the restaurant and hospitality industries.  In 2019, we rebranded the AccuDate XL2e as BOHA!TM.  The BOHA!TM terminal can be used for food expiration date labeling and grab and go labeling, along with account management and an analytics portal.  In the restaurant solutions market, we use an internal sales force and, to a lesser extent distributors, to solicit sales directly from end-users.

POS automation and banking: In the POS market, we sell several models of printers utilizing thermal printing technology.  Our POS printers are used primarily by quick-serve restaurants located either at the checkout counter or within self-service kiosks to print receipts for consumers or print on linerless labels.  In the POS market, we primarily sell our products through a network of domestic and international distributors and resellers.  We use an internal sales force to manage sales through our distributors and resellers, as well as to solicit sales directly from end-users.  In the banking market, we sell inkjet printers that are used by banks, credit unions and other financial institutions to print deposit and withdrawal receipts and to validate checks at bank teller stations.   In the banking market, we primarily sell our products directly to end-user banks and financial institutions through the use of our internal sales force and, to a lesser extent, resellers.  We exited the banking market as of December 31, 2018 and therefore did not expect any future sales.
 
Casino and gaming:  We sell several models of printers used in slot machines and video lottery terminals (“VLTs”) and other gaming machines that print tickets or receipts instead of issuing coins (“ticket-in, ticket-out” or “TITO”) at casinos, racetracks and other gaming venues worldwide.  These printers utilize thermal printing technology to print tickets and receipts in monochrome, and offer various other features such as jam resistant bezels and a dual port interface that enables casinos to print coupons and promotions.  In addition, we sell printers using thermal roll-fed printing technology for use in non-casino establishments, including game types such as Amusements with Prizes, Skills with Prizes, Fixed Odds Betting Terminals and other off-premise gaming type machines around the world.  We sell our casino and gaming products primarily (1) to slot machine manufacturers, who incorporate our printers into slot machines and, in turn, sell completed slot machines directly to casinos and other gaming establishments and (2) through distributors.  Until December 31, 2017, the Suzo-Happ Group was our primary worldwide distributor.  However, effective January 1, 2018, we replaced Suzo-Happ Group with new distributors in Asia and Australia and adopted a direct selling model in Europe utilizing our UK sales office.  We also maintain a dedicated internal sales force to solicit sales from slot machine manufacturers and casinos, and to manage sales through our distributors.
1

We also offer a software solution, the EPICENTRAL™ Print System (“EPICENTRAL™” and “EPICENTRAL® SE”), 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. With EPICENTRAL™, casinos can utilize the system to create multiple promotions and incentives to either increase customer time spent on the casino floor or encourage additional visits to generate more revenue to the casinos.  In 2017, we introduced EPICENTRAL® SE, a system edition version our software solution, that is specifically designed to work with the existing bonusing modules of casino slot machine management systems.  In addition, EPICENTRAL® SE provides an upgrade path to a full EPICENTRALTM implementation in the event that an operator seeks to expand its promotion and bonusing options beyond the slot machine management systems currently offered.

Lottery:  We primarily supply lottery printers to International Gaming Technology and its subsidiaries (“IGT”), our largest customer and the world’s largest provider of lottery terminals.  We also sell the Epic 3000 printer, to our other lottery system customers.  Our lottery printers are designed for high-volume, high-speed printing of lottery tickets for various lottery applications.  Sales of our lottery products are made directly to IGT and other lottery system customers, and are managed by an internal sales representative.

Printrex:  Printrex printers include wide format, desktop and rack mounted and vehicle mounted black and white thermal printers used by customers in the oil and gas exploration industry to log and plot oil field and down hole well drilling data.  The Printrex® brand of printers also includes high-speed color inkjet desktop printers used by oil and gas field service companies to print logs at their data centers.  We primarily sell our Printrex® products directly to oil field service and drilling companies and OEM’s, as well as through regional distributors in the United States, Europe, Canada and Asia.  We also maintain a dedicated Printrex® internal sales representative.

TSG:  Through TSG, we proactively market the sale of consumable products (including inkjet cartridges, ribbons, receipt paper, color thermal paper, food safety labels and other printing supplies), replacement parts, maintenance and repair services and testing services for all of our products and certain competitor’s products.  Our maintenance services include the sale of extended warranties, multi-year maintenance contracts, 24-hour guaranteed replacement product service called TransAct Xpress™ and TransAct Care™, and other repair services for our printers and terminals.  Within the United States, we provide repair services through our eastern region service center in Ithaca, New York and our western region service center in Las Vegas, Nevada.  Internationally, we provide repair services through our European service center located in Doncaster, UK, and through partners strategically located around the world.

We also provide customers with telephone sales and technical support, and a personal account representative to handle orders, shipping and general information.  Technical and sales support personnel receive training on all of our manufactured products and services.

In addition to personalized telephone and technical support, we also market and sell consumable products 24 hours a day, seven days a week, via our online webstore www.transactsupplies.com.

Sources and Availability of Raw Materials
We design our products to optimize product performance, quality, reliability and durability.  These designs combine cost efficient materials, sourcing and assembly methods with high standards of workmanship.  Approximately 99% of our printer and terminal production is primarily through three third-party contract manufacturers in Asia.  The remaining 1% of our products are assembled in our Ithaca, New York facility largely on a configure-to-order basis using components and subassemblies that have been sourced from vendors and contract manufacturers around the world.

We procure component parts and subassemblies for use in the assembly of our hardware products in Ithaca, New York.  Critical component parts and subassemblies include thermal and inkjet print heads, printing/cutting mechanisms, power supplies, motors, injection molded plastic parts, LCD screens, circuit boards and electronic components, which are obtained from domestic and foreign suppliers at competitive prices.  As a result of the majority of our production being performed by our contract manufacturers, the majority of our purchases consist of fully-assembled printers and terminals produced by our contract manufacturers and, to a much lesser extent, component parts.  We typically strive to maintain more than one source for our component parts, subassemblies and fully assembled printers and terminals to reduce the risk of parts shortages or unavailability.  However, we could experience temporary disruption if certain suppliers ceased doing business with us, as described below.

We currently buy substantially all of our thermal print mechanisms, an important component of our thermal printers, and fully assembled printers for several of our printer and restaurant solutions terminal models, from one foreign contract manufacturer and to a much lesser extent, one other foreign contract manufacturer.  Although we believe that other contract manufacturers could provide similar thermal print mechanisms or fully assembled printers and terminals, on comparable terms, a change in contract manufacturers could cause a delay in manufacturing and possible loss of sales, which may have a material adverse effect on our operating results.  Although we do not have supply agreements with our foreign contract manufacturers, our relationship with our largest one remains strong and we have no reason to believe that they will discontinue their supply of thermal print mechanisms or fully assembled printers to us during 2019 or that their terms to us will be substantially less favorable than they have been historically.  We are currently seeking to find a second source for our largest contract manufacturer in 2020.

Hewlett-Packard Company (“HP”) is the sole supplier of inkjet cartridges that are used in all of our banking inkjet printers.  Though we have exited the banking market as of December, 31, 2018, we still sell a substantial number of HP inkjet cartridges as a consumable product through TSG.  Although other inkjet cartridges are compatible with our banking inkjet printers, the loss of the supply of HP inkjet cartridges could have a material adverse effect on the sale of our TSG consumable products.  Our relationship with HP remains stable and we have no reason to believe that HP will discontinue its supply of inkjet cartridges to us or that their terms to us will be materially different than they have been historically.  The inkjet cartridges we purchase from HP are used not only in our inkjet printers for the POS automation and banking market, but also in other manufacturer’s printing devices across several other markets.

2

Canon, Inc. (“Canon”) is the sole supplier of inkjet cartridges and other consumable items (“Canon Consumables”) that are used in our Printrex® 980 oil and gas printer.  The loss of supply of Canon Consumables would have a material adverse effect on the sale of Printrex 980® printers and the Canon Consumables.  We have a supply agreement with Canon to supply us with Canon Consumables until May 2019.  Prices under this agreement were fixed through May 2013, but may be changed during the remainder of the agreement if the exchange rate fluctuates significantly between the Japanese yen and the U.S. dollar.

 Patents and Proprietary Information
TransAct relies on a combination of trade secrets, patents, employee and third-party nondisclosure agreements, copyright laws and contractual rights to establish and protect its proprietary rights in its products.  We hold 35 United States and 37 foreign patents and have 8 United States and 5 foreign patent applications pending pertaining to our products.  The duration of these patents range from 1 to 15 years.  The expiration of any individual patent would not have a significant negative impact on our business.  We regard certain manufacturing processes and designs to be proprietary and attempt to protect them through employee and third-party nondisclosure agreements and similar means.  It may be possible for unauthorized third parties to copy certain portions of our products or to reverse engineer or otherwise obtain and use, to our detriment, information that we regard as proprietary.  Moreover, the laws of some foreign countries do not afford the same protection to our proprietary rights as do the laws of the United States. There can be no assurance that legal protections we rely upon to protect our proprietary position will be adequate or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technologies.

Trademarks, Service Marks and Copyrights
We own or have rights to trademarks, service marks, trade names and copyrights that we use in connection with the operation of our business, including our corporate names, logos and website names. Other trademarks, service marks and trade names appearing in this Annual Report on Form 10-K are the property of their respective owners.  The trademarks we own include TransAct®, BOHA!TM, AccuDate™, Epic, EPICENTRAL™, Ithaca® and Printrex®. Solely for convenience, some of the trademarks, service marks, trade names and copyrights referred to in this annual report on Form 10-K are listed without the ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks, service marks, trade names and copyrights.

Seasonality
Restaurants typically reduce purchases of equipment in the fourth quarter due to the increased volume of transactions during the holiday period, which may negatively impact sales of our restaurant solutions terminals or POS printers.

Working Capital
Inventory, accounts receivable, and accounts payable levels, payment terms, and where applicable, return policies are in accordance with the general practices of the industry and standard business procedures.  See also Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Certain Customers
IGT is our most significant customer and has been since 1996.  On May 29, 2015, we signed an agreement with IGT to sell on-line lottery and casino printers to IGT on a non-exclusive basis through December 31, 2019.   Under the terms of the agreement, we sell on-line lottery and casino printers to IGT on a non-exclusive basis, and IGT purchases such printers from us on a non-exclusive basis. This agreement allows TransAct to sell printers to other lottery system customers beyond IGT.

In September 2013, we signed an agreement with Suzo-Happ to be our exclusive worldwide distributor of casino and gaming products through December 31, 2017.  We did not renew the agreement upon its expiration.  Beginning January 1, 2018, we replaced Suzo-Happ with new distributors in Asia and Australia and expanded our sales office in the UK to begin selling directly to end-user customers in Europe.
 
Sales to IGT and Suzo-Happ representing 10% or more of our total net sales were as follows:
 
 
 
Year Ended December 31,
 
 
 
2018
   
2017
   
2016
 
IGT
   
18
%
   
35
%
   
26
%
Suzo-Happ
   
1
%
   
8
%
   
15
%

Backlog
Our backlog of firm orders was approximately $6.9 million as of February 28, 2019, compared to $10.3 million as of February 28, 2018.  Based on customers’ current delivery requirements, we expect to fill and recognize as revenue $5.4 million of our current backlog during 2019 and the remaining $1.5 million during 2020.

Competition
The market for transaction-based and specialty printers and restaurant solutions terminals is extremely competitive, and we expect such competition to continue in the future.  However, we experience less competition for EPICENTRALTM software due to the highly customized nature of the product.  We compete with a number of companies, many of which have greater financial, technical and marketing resources than TransAct.  We believe our ability to compete successfully depends on a number of factors both within and outside our control, including durability, reliability, quality, design capability, product customization, price, customer support, success in developing new products, manufacturing expertise and capacity, supply of component parts and materials, strategic relationships with suppliers, the timing of new product introductions by us and our competitors, general market, economic and political conditions and, in some cases, the uniqueness of our products.

3

In the restaurant solutions market, we compete with Avery Dennison Corporation, Ecolab Inc., ITD Food Safety, CMC Daymark and Integrated Control Corp.  We compete in this market based largely on our ability to provide highly specialized software and purpose-built products and ongoing technical support.

In the POS automation and banking market, we primarily compete with Epson America, Inc., which holds a dominant market position of the POS markets into which we sell.  We also compete, to a much lesser extent, with CognitiveTPG, Star Micronics America, Inc., Citizen -- CBM America Corporation, Pertech Industries, Inc., Addmaster, and Samsung/Bixolon.  Certain competitors of ours have greater financial resources and lower costs attributable to higher volume production which enables them to occasionally offer lower prices than us.  However, we have exited the banking market and will continue to deemphasize efforts in the POS automation market going forward as we have shifted our focus toward our higher-value, technology enabled restaurant solutions and casino and gaming products.

In the casino and gaming market (consisting principally of slot machine printing, VLT transaction printing and promotional coupon printing), we compete with several companies including JCM Global, Nanoptix, Inc., Custom Engineering SPA, Eurocoin and others.  Certain of our products sold for casino and gaming applications compete based upon our ability to provide highly specialized products, custom engineering and ongoing technical support.

In the lottery market (consisting principally of on-line lottery transaction printing), we compete with other lottery printer providers such as Custom Engineering SPA, Star Micronics and Wincor Nixdorf.

In the oil and gas market, our Printrex® products compete primarily with the products of Imaging Systems Group, Inc. and Neuralog Inc.  We compete in this market based largely on our ability to provide specialized, custom-engineered products.
 
The market in which TSG competes is highly fragmented, and we compete with numerous competitors of various sizes, including POS and internet resellers, and label converters depending on the geographic area.

Our strategy for competing in our markets is to continually develop new products (hardware and software), such as BOHA!TM in 2019, and product line extensions that are technologically advanced and provide differentiated features and functions, to increase our geographic market penetration, to take advantage of strategic relationships, and to lower the cost of our product by sourcing certain products overseas.  Although we believe that our products, operations and relationships provide a competitive foundation, there can be no assurance that we will compete successfully in the future.  In addition, our products utilize certain thermal and inkjet printing technologies.  If other technologies, or variations to existing technologies, were to evolve or become available to us, it is possible that we would incorporate these technologies into our products.  Alternatively, if such technologies were to evolve or become available to our competitors, our products could become obsolete, which could have a significant negative impact on our business.

Environment
We are not aware of any material noncompliance with federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment.

Available Information
We make available free of charge through the “Investor Relations” tab on our Internet website, www.transact-tech.com, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”).  The SEC maintains all reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http;//www.sec.gov.  As such, you may read any materials filed by the Company with the SEC at http://www.sec.gov.  The references to the foregoing website addresses do not constitute incorporation by reference of the information contained on the websites and should not be considered part of this document.

Employees
As of December 31, 2018, TransAct and our subsidiaries employed 126 persons, all of whom were full-time employees.  None of our employees are unionized, and we consider our relationships with our employees to be good.

Item 1A. Risk Factors
Investors should carefully consider the risks, uncertainties and other factors described below, as well as other disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations, because they could have a material adverse effect on our business, financial condition, operating results, and growth prospects.  The risks described below are not the only ones facing our Company.  Additional risks not known to us at this time or that we currently deem immaterial, may also impair our business operations.

We assume no obligation (and specifically disclaim any such obligation) to update these Risk Factors or any other forward-looking statements contained in this Annual Report to reflect actual results, changes in assumptions or other factors affecting such forward-looking statements, except as required by law.

4

Our operating results and financial condition may fluctuate.
Our operating results and financial condition may fluctuate from quarter to quarter and year to year and are likely to continue to vary due to a number of factors, many of which are not within our control.  If our operating results do not meet the expectations of securities analysts or investors, who may derive their expectations by extrapolating data from recent historical operating results, the market price of our common stock will likely decline.  Fluctuations in our operating results and financial condition may be due to a number of factors, including, but not limited to, those identified throughout this “Risk Factors” section:
 
delays between our expenditures to develop and market new or enhanced products and consumables and the generation of sales from those products;
the geographic distribution of our sales;
market acceptance of our products, both domestically and internationally;
development of new competitive products by others;
our responses to price competition;
our level of research and development activities;
changes in the amount that we spend to develop, acquire or license new products, consumables, technologies or businesses;
changes in the amount we spend to promote our products and services;
changes in the cost of satisfying our warranty obligations and servicing our installed base of products;
availability of third-party components at reasonable prices;
general economic and industry conditions, including changes in interest rates affecting returns on cash balances and investments, that affect customer demand;
fluctuations of world-wide oil and gas prices;
severe weather events (such as hurricanes) that can disrupt or interrupt the operation of our customers or suppliers facilities; and
changes in accounting rules.

Due to all of the foregoing factors, and the other risks discussed in this report, quarter-to-quarter comparisons of our operating results may not be an indicator of future performance.

Our revenue and profitability depend on our ability to continue to develop, on a timely basis, new products and technologies which are free from hardware or software anomalies and cannot be fraudulently manipulated.
The success of newer products, such as the AccuDate™ restaurant solutions terminals, is dependent on how quickly customers in the related markets accept them given the very little market penetration these products have experienced since they are new and innovative and have limited competition. Additionally, the success of innovative technology, such as our BOHA! restaurant solution software and hardware products released in 2019, is dependent on our customers' acceptance of such technology.  While the BOHA! terminals and software products were developed based on working with operators within the restaurant industry, such acceptance may nevertheless only build gradually over time or not at all.  Delays in acceptance by our customers of new technologies may adversely affect our operations.

Our success depends upon our ability to adapt our capabilities and processes to meet the demands of producing new and innovative products.  Because our newer products contain software and are generally more technologically sophisticated than those we have produced in the past, we must continually refine our capabilities to meet the needs of our product innovation.  If we cannot efficiently adapt our infrastructure to meet the needs of our product innovations in a timely manner, our business could be negatively impacted.

In the lottery market, we have been dependent on sales to one large customer; the loss of this customer or reduction in orders from this customer could materially affect our sales.
Sales to IGT have represented a material percentage of our net sales since 1995.  A reduction, delay or cancellation in orders from this customer, including reductions or delays due to market, economic, or competitive conditions in the industries in which we serve, could have a material adverse effect upon our results of operations.

Significant developments stemming from the UK’s membership in the EU could have a material adverse effect on us.
In 2016, the UK held a referendum and voted in favor of leaving the European Union, or EU. This referendum has created political and economic uncertainty, particularly in the UK and the EU. Our business in the UK, the EU, and worldwide could be affected during this period of uncertainty, and perhaps longer, by the impact of the UK’s referendum. There are many ways in which our business could be affected, only some of which we can identify as of the date of this annual report.

The referendum, and the likely withdrawal of the UK from the EU that it triggers, has caused and, along with events that could occur in the future as a consequence of the UK’s withdrawal, including the possible breakup of the UK, may continue to cause significant volatility in global financial markets, including in global currency and debt markets. This volatility could cause a slowdown in economic activity in the UK, Europe or globally, which could adversely affect our operating results and growth prospects. In addition, our business could be negatively affected by new trade agreements between the UK and other countries, including the United States, and by the possible imposition of trade or other regulatory barriers in the UK.

Infringement on the proprietary rights of others could put us at a competitive disadvantage, and any related litigation could be time consuming and costly.
Third-parties may claim that we violated their intellectual property rights. To the extent of a violation of a third-party’s patent or other intellectual property right, we may be prevented from operating our business as planned and may be required to pay damages, to obtain a license, if available, or to use a non-infringing method, if possible, to accomplish our objectives. Any of these claims, with or without merit, could result in costly litigation and divert the attention of key personnel. If such claims are successful, they could result in costly judgments or settlements.

General economic conditions could have a material adverse effect on our business, operating results and financial condition.
Our business is subject to general economic conditions.  Uncertainty or negative trends in U.S. or international economic and investment climates, including the impact of Brexit and recent developments in U.S.-China trade relations, could adversely affect our business.  For example,, customers or potential customers could reduce or delay orders, key suppliers and customers could become insolvent, which could result in production delays, and our customers may not be able to obtain credit.  Any of these possible effects could impact our ability to effectively manage inventory levels and collect receivables, create unabsorbed costs due to lower net sales, and ultimately decrease our net sales and profitability including write-downs of assets.
5

We rely on distributors and resellers to sell our products and services.
We use a variety of distribution channels, including OEMs and distributors, to market and sell our products and services.  We may be adversely impacted by any conflicts that could arise between and among our various sales channels.

Our dependence upon distributors and resellers exposes us to numerous risks, including:

loss of channel and the ability to bring new products to market;
concentration of credit risk, including disruption in distribution should the distributors and / or resellers’ financial condition deteriorate;
reduced visibility to end user demand and pricing issues which makes forecasting more difficult;
distributors or resellers leveraging their buying power to change the terms of pricing, payment and product delivery schedules; and
direct competition should a distributor or reseller decide to manufacture printers internally or source printers from a competitor.

We cannot guarantee that resellers will not reduce, delay or eliminate purchases from us, which could have a material adverse effect upon the business, consolidated results of operations and financial condition.
 
We have outsourced substantially all of the assembly of our printers and terminals to three contract manufacturers and will be dependent on them for the manufacturing of such products.  A failure by these contract manufacturers, or any disruption in such manufacturing or the flow of product from these manufacturers, may adversely affect our business results.
In an effort to achieve additional cost savings and operation benefits, we have continued to outsource the manufacturing and assembly of our printers and terminals to contract manufacturers in Asia.  Approximately 80% of our printer and terminal manufacturing is conducted by one third party manufacturer in Asia, and an additional 19% is conducted by two other third party manufacturers in Asia.

However, to the extent we rely on a third-party service provider for manufacturing services, we may incur increased business continuity risks.  We will no longer be able to exercise control over the assembly of certain of our products or any related operations or processes, including the internal controls associated with operations and processes conducted and the quality of our products assembled by contract manufacturers.  If we are unable to effectively manage and oversee our outsourcing strategy, we may not realize cost structure efficiencies and our operating and financial results could be materially adversely affected.

In addition, if any of our contract manufacturers experiences business difficulties or fails to meet our manufacturing needs, then we may be unable to meet production requirements, may lose revenue and may not be able to maintain relationships with our customers.  Without the contract manufacturers continuing to manufacture our products and the continuing operation of the contract manufacturers’ facilities, we will have limited means for the final assembly of a majority of our products until we are able to secure the manufacturing capability at another facility or develop an alternative manufacturing facility, which could be costly and time consuming and have a material adverse effect on our operating and financial results.

The increased elements of risk that arise from conducting certain operating processes in foreign jurisdictions may lead to an increase in reputational risk.

Although we carry business interruption insurance to cover lost revenue and profits in an amount we consider adequate, this insurance does not cover all possible situations.  In addition, the business interruption insurance would not compensate us for the loss of opportunity and potential adverse impact, both short-term and long-term, on relations with our existing customers resulting from our inability to produce products for them.

The contract manufacturers have access to our intellectual property, which increases the risk of infringement or misappropriation of this intellectual property.

Political, social or economic instability in regions in which our manufacturers are located, could cause disruptions in trade, including exports to the U.S.
A significant portion of our printers and terminals are manufactured by contract manufacturers overseas and are exported to the U.S.  Any such disruption in trade, including exports to the U.S., could adversely affect our business results.  Events that could cause disruptions to such exports to the U.S. include:

the imposition of additional trade law provisions or regulations;
reliance on a limited number of shipping and air carriers who may experience capacity issues that adversely affect our ability to ship inventory in a timely manner or for an acceptable cost;
the imposition of additional duties, tariffs and other charges on imports and exports;
economic uncertainties and adverse economic conditions (including inflation and recession);
fluctuations in the value of the U.S. Dollar against foreign currencies;
significant labor disputes, such as dock strikes;
significant delays in the delivery of cargo due to port security considerations;
financial or political instability in any of the countries in which our printers and terminals are manufactured; and
regulatory changes and economic conditions leading up to and following Brexit in those countries that are negatively affected by Brexit and in which our printers and terminals are manufactured.

6

We source some of our component parts and consumable products from sole source suppliers; any disruptions may impact our ability to manufacture and sell our products.
Our products rely on certain key components from third party or sole source suppliers.  We do not have guaranteed supply contracts with any of our component suppliers, and our suppliers could delay shipments, increase prices or cease manufacturing such products or selling them to us at any time.  A disruption in the supply of such component parts and consumable products could delay our production and/or the release of our new products and hinder our ability to meet our commitments to customers.  If we are unable to obtain a sufficient quantity of these components on commercially reasonable terms or in a timely manner, or if we are unable to obtain alternative sources for the components, sales of our products could be delayed or halted entirely or we may be required to redesign our products.  Any of these events could result in lost sales, reduced gross margins or damage to our end-customer relationships, which would have a material adverse effect on our operations and financial results.

We sell a significant portion of our products internationally and purchase important components from foreign suppliers. These circumstances create a number of risks.
We sell a significant amount of our products to customers outside the United States. Shipments to international customers are expected to continue to account for a material portion of net sales. Risks associated with sales and purchases outside the United States include:

fluctuating foreign currency rates could restrict sales, or increase costs of purchasing, in foreign countries;
foreign governments may impose burdensome tariffs, quotas, taxes, trade barriers or capital flow restrictions;
political and economic instability may reduce demand for our products or put our foreign assets at risk;
restrictions on the export or import of technology may reduce or eliminate the ability to sell in or purchase from certain markets;
potentially limited intellectual property protection in certain countries, such as China, may limit recourse against infringing products or cause us to refrain from selling in certain geographic territories; and
regulatory changes and economic conditions leading up to and following, Brexit, including uncertainties as to its effect on trade laws, tariffs, instability and volatility in the global financial and currency markets, conflicting or redundant regulatory regimes in Europe and political stability.

If tariffs on imported steel and aluminum, such as those proposed by the President of the United States, are implemented, our cost of raw materials may increase, which could adversely affect our business, results of operations and financial condition.
We obtain raw materials, including stainless steel and aluminum, used in the production of some of our printer products from domestic, Asian affiliated and nonaffiliated sources.  The implementation of more restrictive trade policies, including the imposition of tariffs, or the renegotiation of existing trade agreements by the U.S. or by countries where we sell large quantities of products and services or procure supplies and other materials incorporated into our products, could negatively impact our business, results of operations and financial condition.   Because steel and aluminum are raw materials used in a wide-range of our printer products, a broad based cost increase would result in an increase in our cost of goods sold, which may require us to increase prices for some of our products.  However, an inability by us to pass such price increases through to our customers, or an inability of our suppliers to meet our raw material requirements, may have a material adverse impact on our business, results of operations or financial condition.

The effect of comprehensive U.S. tax reform legislation on us, whether adverse or favorable, is uncertain.
In December of 2017, President Trump signed into law the Tax Cuts and Jobs Reform Act (the “Tax Reform Act”). Among a number of significant changes to the U.S. federal income tax rules, the Tax Reform Act reduces the marginal U.S. corporate income tax rate from 35% to 21%, limits the deduction for net interest expense, shifts the United States toward a more territorial tax system, and imposes new rules to combat erosion of the U.S. federal income tax base. While we have evaluated the effects of the Tax Reform Act on us, there are a number of uncertainties and ambiguities as to the interpretation and application of many of the provisions in the Tax Reform Act. In the absence of guidance on these issues, we will use what we believe are reasonable interpretations and assumptions in interpreting and applying the Tax Reform Act for purposes of determining our cash tax liabilities and results of operations, which may change as we receive additional clarification and implementation guidance and as the interpretation of the Tax Reform Act evolves over time. It is possible that the Internal Revenue Service (“IRS”) could issue subsequent guidance or take positions on audit that differ from the interpretations and assumptions that we previously made, which could have an adverse effect on our cash tax liabilities, results of operations and financial condition. As we collect and prepare necessary data, and interpret the Tax Reform Act and any additional guidance issued by the IRS or other standard-setting bodies, we may make adjustments to the provisional amounts that could materially affect our financial position and results of operations, as well as our effective tax rate in the period in which the adjustments are made.  We recorded the impacts of the Tax Act on a provisional basis in 2017.  As of December 22, 2018, our accounting for the impact of the Tax Act was complete.  See Note 1, “Income Taxes” to our consolidated financial statements.

We face risks associated with manufacturing forecasts.
If we fail to predict our manufacturing requirements accurately, we could incur additional costs or experience manufacturing delays, which could cause us to lose orders or customers and result in lower net sales. We currently use a rolling 12-month forecast based primarily on our anticipated product orders and our product order history to help determine our requirements for components and materials. It is very important that we accurately predict both the demand for our products and the lead-time required to obtain the necessary components and raw materials.

Lead times for materials and components that we order vary significantly and depend on factors such as the specific supplier, the size of the order, contract terms, and demand for each component at a given time. If we underestimate our requirements, we may have inadequate manufacturing capacity or inventory, which could interrupt manufacturing of our products and result in delays in shipments and net sales. If we overestimate our requirements, we could have excess inventory of parts. In addition, delays in the manufacturing of our products could cause us to lose orders or customers.
 
Our success will depend on our ability to sustain and manage growth.
As part of our business strategy, we intend to pursue a growth strategy.  Assuming this growth occurs, it will require the expansion of customer relationships in international markets, the successful development and marketing of new products for our existing and new markets, expanded internal sales, customer service and support, and the continued implementation and improvement of our operational, financial and management information systems.

7

To the extent that we seek growth through acquisitions, our ability to manage our growth will also depend on our ability to integrate businesses that have previously operated independently.  We may not be able to achieve this integration without encountering difficulties or experiencing the loss of key employees, customers or suppliers.  It may be difficult to design and implement effective financial controls for combined operations and differences in existing controls for each business may result in weaknesses that require remediation when the financial controls and reporting functions are combined.  As we pursue acquisitions, we may incur legal, accounting and other transaction related expenses for unsuccessful acquisition attempts that could adversely affect our results of operations in the period in which they are incurred.

There can be no assurance that we will be able to successfully implement our growth strategy, or that we can successfully manage expanded operations, if they occur.  As we expand, we may from time to time experience constraints that will adversely affect our ability to satisfy customer demand in a timely fashion.  Failure to manage growth effectively could adversely affect our results of operations and financial condition.

We compete in highly competitive markets, which are likely to become more competitive. Competitors may be able to respond more quickly to new or emerging technology and changes in customer requirements.
We face significant competition in developing and selling our printers, terminals, software, transaction supplies and services.  Our principal competitors have substantial marketing, financial, development and personnel resources.  To remain competitive, we believe we must continue to provide:

technologically advanced products that satisfy the user demands;
superior customer service;
high levels of quality and reliability; and
dependable and efficient distribution networks.

We cannot ensure we will be able to compete successfully against current or future competitors.  Increased competition may result in price reductions, lower gross profit margins and loss of market share, and could require increased spending on research and development, sales and marketing and customer support.  Some competitors may make strategic acquisitions or establish cooperative relationships with suppliers or companies that produce complementary products.  Any of these factors could reduce our earnings.

We depend on key personnel, the loss of which could materially impact our business.
Our future success will depend in significant part upon the continued service of certain key management and other personnel and our continuing ability to attract and retain highly qualified managerial, technical and sales and marketing personnel.  There can be no assurance that we will be able to recruit and retain such personnel.  The loss of either Bart C. Shuldman, the Company's Chairman of the Board and Chief Executive Officer, or Steven A. DeMartino, the Company’s President, Chief Financial Officer, Treasurer and Secretary, or the loss of certain groups of key employees, could have a material adverse effect on our results of operations.

If we are unable to enforce our patents or if it is determined that we infringe patents held by others it could damage our business.
Prosecuting and defending patent lawsuits is very expensive.  We are committed to aggressively asserting and defending our technology and related intellectual property, which we have spent a significant amount of money to develop.  These factors could cause us to become involved in new patent litigation in the future.  The expense of prosecuting or defending these future lawsuits could also have a material adverse effect on our business, financial condition and results of operations.

If we were to lose a patent lawsuit in which another party is asserting that our products infringe its patents, we would likely be prohibited from marketing those products and could also be liable for significant damages.  Either or both of these results may have a material adverse effect on our business, financial condition and results of operations.  If we lose a patent lawsuit in which we are claiming that another party’s products are infringing our patents and thus, are unable to enforce our patents, it may have a material adverse effect on our business, financial condition and results of operations.  In addition to disputes relating to the validity or alleged infringement of other parties' rights, we may become involved in disputes relating to our assertion of our own intellectual property rights.  Whether we are defending the assertion of intellectual property rights against us or asserting our intellectual property rights against others, intellectual property litigation can be complex, costly, protracted, and highly disruptive to business operations by diverting the attention and energies of management and key technical personnel.  Plaintiffs in intellectual property cases often seek injunctive relief, and the measures of damages in intellectual property litigation are complex and often subjective or uncertain.  Thus, any adverse determinations in this type of litigation could subject us to significant liabilities and costs. During the course of these lawsuits there may be public announcements of the results of hearings, motions, and other interim proceedings or developments in the litigation.  If securities analysts or investors perceive these results to be negative, it could harm the market price of our stock.
 
The inability to protect intellectual property could harm our reputation, and our competitive position may be materially damaged.
Our intellectual property is valuable and provides us with certain competitive advantages.  Copyrights, patents, trademarks, service marks, trade secrets,  nondisclosure agreements and contracts are used to protect these proprietary rights. Despite these precautions, it may be possible for third parties to copy aspects of our products or, without authorization, to obtain and use information which we regard as trade secrets.

8

Our stock price may fluctuate significantly.
The market price of our common stock could fluctuate significantly in response to variations in quarterly operating results and other factors, such as:

changes in our business, operations or prospects;
developments in our relationships with our customers;
announcements of new products or services by us or by our competitors;
announcement or completion of acquisitions by us or by our competitors;
changes in existing or adoption of additional government regulations;
unfavorable or reduced analyst coverage; and
prevailing domestic and international market and economic conditions.

In addition, the stock market may experience significant price fluctuations year-to-year.  Broad market fluctuations, general economic conditions and specific conditions in the industries in which we operate may adversely affect the market price of our common stock.

Limited trading volume and a reduction in analyst coverage of our common stock may contribute to its price volatility.
Our common stock is traded on the Nasdaq Global Market.  During the year ended December 31, 2018 the average daily trading volume for our common stock as reported by the Nasdaq Global Market was approximately 25,000 shares.  We are uncertain whether a more active trading market in our common stock will develop.  In addition, many investment banks no longer find it profitable to provide securities research on micro-cap and small-cap companies.  As a result, relatively small trades may have a significant impact on the market price of our common stock, which could increase the volatility and depress the price of our common stock.

Future sales of our common stock may cause our stock price to decline.
In the future, we may sell additional shares of our common stock in public or private offerings, and we may also issue additional shares of our common stock to finance future acquisitions.  Shares of our common stock are also available for future sale pursuant to stock options and other equity awards that we have granted to our employees, and in the future we may grant additional stock options and other forms of equity compensation to our employees.  Sales of our common stock or the perception that such sales could occur may adversely affect prevailing market prices for shares of our common stock and could impair our ability to raise capital through future offerings.

If market conditions deteriorate or future results of operations are less than expected, a valuation allowance may be required for all or a portion of our deferred tax assets.
We currently have deferred tax assets, which may be used to reduce taxable income in the future.  We assess the realization of these deferred tax assets on a quarterly basis, and if we determine that it is more likely than not that some portion of these assets will not be realized, an income tax valuation allowance is recorded.  If market conditions deteriorate or future results of operations are less than expected, or there is a change to applicable tax rules, future assessments may result in a determination that it is more likely than not that some or all of our net deferred tax assets are not realizable.  As a result, we may need to establish a valuation allowance for all or a portion of our net deferred tax assets, which may have a material adverse effect on our business, results of operations and financial condition.

We cannot provide any assurance that current laws, or any laws enacted in the future, will not have a material adverse effect on our business.
Our operations are subject to laws, rules, regulations, including environmental regulations, government policies and other requirements in each of the jurisdictions in which we conduct business.  Changes in laws, rules, regulations, policies or requirements could result in the need to modify our products and could affect the demand for our products, which may have an adverse impact on our future operating results.  If we do not comply with applicable laws, rules and regulations we could be subject to costs and liabilities and our business may be adversely impacted.

Our business could be adversely affected by actual or threatened terrorist attacks or the related heightened security measures, military actions and other efforts to combat terrorism.
Our business could be adversely affected by actual or threatened terrorist attacks or the related heightened security measures, military actions and other efforts to combat terrorism.  It is possible that terrorist attacks could be directed at important locations for the gaming industry.  Heightened security measures and other efforts to combat terrorism may also have an adverse effect on the gaming industry by reducing tourism.  Any of these developments could also negatively affect the general economy and consumer confidence.  Any downturn in the economy in general, or in the gaming industry in particular could result in a reduced demand for our products and could adversely affect our business and results of operations.  In addition, heightened security measures may cause certain governments to restrict the import or export of goods, which may have an adverse effect on our ability to buy and sell goods.
 
Fluctuations in oil and gas prices could adversely affect drilling and exploration activities by oil and gas companies and our revenue in our Printrex market.  If oil and gas prices remain volatile, or if oil or gas prices remain low or decline further, the demand for our Printrex products could be adversely affected.
The demand for our Printrex products depends on the level of spending by oil and gas companies for drilling and exploratory activities, which are affected by short-term and long-term trends in oil and gas prices, including current and anticipated oil and gas prices.  Oil and gas prices, as well as the level of drilling and exploration, historically have been extremely volatile and are expected to continue to be highly volatile.  If oil and gas prices continue to remain low or decline further, or if there is a further reduction in drilling and exploration activities, the demand for our Printrex products could be materially and adversely affected.

Cyber-security and privacy breaches, cyber-attacks, or other disruptions could expose us to liability, affect our business, and damage our reputation.
We are increasingly dependent on our information technology systems and infrastructure for our business. We collect, store, and transmit sensitive information including intellectual property, proprietary business information and personal information in connection with business operations. The secure maintenance of this information is critical to our operations and business strategy. Some of this information could be an attractive target of criminal attack by third parties with a wide range of motives and expertise, including organized criminal groups, disgruntled current or former employees, and others. Cyber-attacks are of ever-increasing levels of sophistication, and despite our extensive security measures, our information technology and infrastructure may be vulnerable to such attacks or may be breached, including due to employee error or malfeasance.  Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. If our systems become compromised, we may not promptly discover the intrusion. Like other companies in our industry, we have experienced attacks to our data and systems, including malware and computer viruses that we have been able to detect and eliminate. If our systems fail or are breached or disrupted, we could lose product sales, and suffer reputational damage and loss of customer confidence. Such incidents would require notification to affected individuals, and may result in legal claims or proceedings and liability under federal and state laws that protect the privacy and security of personal information. Any one of these events could cause our business to be materially harmed and our results of operations to be adversely impacted.
9

Additional risks and uncertainties may affect our business
Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely impact our business.  Should any risks or uncertainties develop into actual events, these developments could have material adverse effects on our business, financial condition, and results of operations.

Item 1B. Unresolved Staff Comments.
Not applicable.

Item 2. Properties.
Our principal facilities as of December 31, 2018 are listed below.  We believe that all facilities generally are in good condition, adequately maintained and suitable for their present and currently contemplated uses.
 
Location
 
Operations Conducted
 
Size
(Approx. Sq.
Ft.)
 
Owned or
Leased
 
Lease Expiration
Date
Hamden, Connecticut
 
Executive offices and TSG sales office
 
 
11,100
 
Leased
 
April 30, 2027
Ithaca, New York
 
Hardware design and development, assembly and service facility
 
 
73,900
 
Leased
 
May 31, 2021
Las Vegas, Nevada
 
Software design and development, service center and casino and gaming sales office
 
 
19,600
 
Leased
 
October 31, 2022
Doncaster, UK
 
Sales office and service center
 
 
6,000
 
Leased
 
August 26, 2026
Macau, China
 
Sales office
 
 
180
 
Leased
 
June 30, 2019
 
 
 
 
 
110,780
 
 
 
 

Item 3. Legal Proceedings.
The Company may, in the ordinary course of business, become a party to litigation involving collection matters, contract claims and other legal proceedings relating to the conduct of its business.  As of December 31, 2018, we are unaware of any legal proceedings pending or threatened against us that management believes are likely to have a material adverse effect on our business, financial condition or results of operations.

Item 4. Mine Safety Disclosures.
Not applicable.

10

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is traded on the Nasdaq Global Market under the symbol TACT.  As of February 28, 2019, there were 278 holders of record of the common stock.  
 
On February 11, 2019, our Board of Directors approved the first quarter 2019 dividend in the amount of $0.09 per share payable on or about March 15, 2019 to common shareholders of record at the close of business on February 20, 2019.
Issuer Purchases of Equity Securities

On March 1, 2018, our Board of Directors approved a new stock repurchase program (the "2018 Stock Repurchase Program").  Under the 2018 Stock Repurchase Program, we are authorized to repurchase up to $5 million of our outstanding shares of common stock from time to time in the open market at prevailing market prices based on market conditions, share price and other factors.  The 2018 Stock Repurchase Program expires on December 31, 2019, if we do not discontinue the repurchase program prior to such time.  We use the cost method to account for treasury stock purchases, under which the price paid for the stock is charged to the treasury stock account.  Repurchases of our common stock are accounted for as of the settlement date.  From the start of the 2018 Stock Repurchase Program on March 1, 2018 through December 31, 2018, we repurchased 156,410 shares of our common stock for approximately $2 million at an average price per share of $12.79. 
During 2016 and 2017, under a prior repurchase program that was in place from February 25, 2016 through December 31, 2017, we purchased 499,843 shares of our common stock for $3.9 million at an average price of $7.86 per share.  From January 1, 2005 through December 31, 2018, we repurchased a total of 4,044,842 shares of common stock for $32.1 million, at an average price of $7.94 per share.
Sales of Unregistered Securities
None.

Securities Authorized for Issuance under Equity Compensation Plans
For a discussion of the Company’s equity compensation plan information, please see Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of this Form 10-K.




11

CORPORATE PERFORMANCE GRAPH
The following graph compares the cumulative total return on the Company’s Common Stock from December 31, 2013 through December 31, 2018, with the CRSP Total Return Index for the Nasdaq Stock Market (U.S.) and the Nasdaq Computer Hardware Stocks Index. The graph assumes that $100 was invested on December 31, 2013 in each of TransAct’s common stock, the CRSP Total Return Index for the Nasdaq Stock Market (U.S.) and the Nasdaq Computer Manufacturer Stocks Index, and that all dividends were reinvested.

COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
TRANSACT TECHNOLOGIES INCORPORATED COMMON STOCK,
THE CRSP TOTAL RETURN INDEX FOR THE NASDAQ STOCK MARKET (U.S.),
AND THE NASDAQ COMPUTER MANUFACTURER STOCKS INDEX

 
 
 
12/31/13
   
12/31/14
   
12/31/15
   
12/31/16
   
12/31/17
   
12/31/18
 
TransAct Technologies Incorporated Common Stock
 
$
100.00
   
$
43.66
   
$
68.56
   
$
52.67
   
$
105.75
   
$
71.67
 
CRSP Total Return Index for the Nasdaq Stock Market (U.S.)
 
$
100.00
   
$
112.46
   
$
113.00
   
$
127.70
   
$
155.01
   
$
146.57
 
Nasdaq Computer Hardware Stocks Index
 
$
100.00
   
$
135.56
   
$
123.42
   
$
142.26
   
$
204.61
   
$
191.61
 
 
12

Item 6. Selected Financial Data (in thousands, except per share amounts)
The following is summarized from our audited financial statements of the past five years:

 
 
Year Ended December 31,
 
 
 
2018
   
2017
   
2016
   
2015
   
2014
 
Consolidated Statement of Operations Data:
                             
Net sales
 
$
54,587
   
$
56,311
   
$
57,235
   
$
59,676
   
$
53,108
 
Gross profit
   
26,743
     
26,662
     
23,799
     
24,978
     
21,711
 
Operating expenses
   
19,984
     
19,848
     
18,599
     
20,510
     
25,483
 
Operating income (loss)
   
6,759
     
6,814
     
5,200
     
4,468
     
(3,772
)
Net income (loss)
   
5,426
     
3,211
     
3,617
     
3,092
     
(2,421
)
Net income (loss) per share:
                                       
Basic
   
0.73
     
0.43
     
0.48
     
0.40
     
(0.29
)
Diluted
   
0.70
     
0.42
     
0.47
     
0.39
     
(0.29
)
Dividends declared and paid per share
   
0.36
     
0.35
     
0.32
     
0.32
     
0.31
 

 
 
December 31,
 
 
 
2018
   
2017
   
2016
   
2015
   
2014
 
Consolidated Balance Sheet Data:
                             
Total assets
 
$
34,956
   
$
33,950
   
$
32,042
   
$
32,569
   
$
35,491
 
Shareholders’ equity
   
27,567
     
26,014
     
24,109
     
25,728
     
25,394
 

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, 2018, we continued to focus our efforts on sales execution and growing the revenue of our newer, value-added products and technologies.  In addition, on March 4, 2019 we launched our exciting new line of products for the restaurant solution’s market, the BOHA! branded suite of cloud-based applications and companion hardware solutions.  The new BOHA! products are a suite of products proving a solution to help restaurants and food service operators of any size automate back-of-house operations.

During the year ended December 31, 2018 we completed the build-out of our European casino and gaming internal sales team and started selling directly to our slot machine manufacturers and end-user casino and gaming customers in Europe as we terminated our relationship with our worldwide casino and gaming distributor.  As a result of this investment, international casino and gaming sales increased 81% in 2018 compared to 2017.  During 2018, we also recognized the initial sale of our new Epic Edge ticket-in, ticket-out  (“TITO”) printer for a large domestic operator's upcoming new casino opening.

Sales for our lottery market and TransAct Services Group (“TSG”) market decreased in 2018 compared to 2017 due to lower sales to International Gaming Technology and its subsidiaries  (“IGT”).  TSG sales to IGT decreased due to lower sales of spare parts in the lottery market during 2018 compared to 2017.  These sales declines were as expected as we are no longer focusing on the lottery markets.  Based on our backlog of orders and contractual commitments we expect lottery and TSG sales to continue to decrease in 2019 compared to 2018.

During the year ended December 31, 2018, our total net sales decreased 3% to approximately $54.6 million.  See the table below for a breakdown of our sales by market:

 
 
Year Ended
   
Year Ended
   
Change
 
(In thousands)
 
December 31, 2018
   
December 31, 2017
     $    
%
 
Restaurant solutions
 
$
4,579
     
8.4
%
 
$
4,758
     
8.4
%
 
$
(179
)
   
(3.8
%)
POS automation and banking
   
7,273
     
13.3
%
   
7,905
     
14.0
%
   
(632
)
   
(8.0
%)
Casino and gaming
   
26,593
     
48.7
%
   
18,615
     
33.1
%
   
7,978
     
42.9
%
Lottery
   
3,093
     
5.7
%
   
9,805
     
17.4
%
   
(6,712
)
   
(68.5
%)
Printrex
   
1,297
     
2.4
%
   
1,052
     
1.9
%
   
245
     
23.3
%
TSG
   
11,752
     
21.5
%
   
14,176
     
25.2
%
   
(2,424
)
   
(17.1
%)
   
$
54,587
     
100.0
%
 
$
56,311
     
100.0
%
 
$
(1,724
)
   
(3.1
%)
 
Sales of our restaurant solutions products decreased approximately 4% in the year ended December 31, 2018 compared to the year ended December 31, 2017.  In the restaurant solutions market, we continue to focus on providing terminals that print food rotational date and nutritional labels to help restaurants and other food service establishments effectively manage food rotation and safety. The decrease in restaurant solutions sales resulted from lower sales of our AccuDate™ 9700 terminal due to lower sales to McDonald’s.  This decrease was partially offset by increased sales of our newer AccuDate XL2e terminal to three large corporate customers.  In 2019, we intend to focus on developing and selling our new BOHA! cloud-based SaaS applications and hardware solutions business.

Sales of our POS automation and banking products decreased 8% in the year ended December 31, 2018 compared to the year ended December 31, 2017.  In the POS market, we focus primarily on supplying printers that print receipts or linerless labels for customers in the restaurant and quick serve markets.  During the year ended December 31, 2018, the decline in sales of our POS automation and banking printers was primarily driven by a 75% decrease in sales of our legacy banking and other POS printers as we exit these markets.  In the banking market, we had focused mainly on supplying printers for use in bank teller stations at banks and financial institutions primarily in the U.S. As we continue to shift our focus to our newer products, we do not expect any future sales of these legacy products, as we exited the banking market at the end of 2018.  POS automation and banking sales also decreased, although to a lesser extent, due to lower sales of our Ithaca 9000 printers during 2018 compared to the record sales levels of the Ithaca 9000 in 2017.
 
13

Sales of our casino and gaming products increased approximately 43% in 2018 compared to 2017.  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 real time at the slot machine. The increase of casino and gaming printer sales is primarily due to increased domestic and international sales of our thermal casino printers of 20% and 143%, respectively.  The increase in domestic thermal casino printers was driven primarily by increased sales to our OEMs and a large order of replacement printers from a domestic casino operator.  The increase in international thermal casino printer sales was due to the successful transition away from using our former exclusive worldwide distributor.  Rather, we employed our new direct sales team to sell to end user casino and gaming customers in Europe.  Casino and gaming sales also increased due to a 58% increase in sales of our off-premise gaming printers.

During the year ended December 31, 2018, total lottery printer sales decreased approximately 69% due primarily to lower sales to IGT.  Domestic lottery sales decreased 65% in 2018 compared to 2017.  International lottery sales decreased $1.1 million due to a sale to IGT in 2017 for the Canadian lottery and no comparable sales in 2018.  Our sales to IGT each year are directly dependent on the timing and number of new and upgraded lottery terminal installations IGT performs and are not indicative of IGT’s overall business or revenue.  We expect lottery printer sales to be lower for 2019 compared to 2018, as we have shifted our focus away from the lottery market to our higher-value, technology-enabled market for restaurant solutions and casino and gaming products.

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, 2018, we experienced an approximately 23% increase in Printrex product sales due primarily to the continued recovery of the worldwide oil and gas market that had been negatively impacted from multiple years of declining worldwide oil prices.  Although we expect to see continued modest growth in the oil and gas markets during 2019, we do not anticipate significant contribution to total sales from our Printrex products as we shift our focus towards our higher value, technology enabled restaurant solution terminals and casino and gaming products.  

TSG, which sells service, replacement parts and consumable products, including food safety labels, receipt paper, ribbons and inkjet cartridges, continues to offer a recurring revenue stream for the Company.  TSG sales decreased 17% in 2018 from 2017 primarily due to unusually high sales of replacement parts to IGT for a legacy lottery printer in 2017.  Although the installed base of our thermal lottery printers remains large, and lotteries continue to extend lottery contracts utilizing our existing hardware, including our printers, based on our backlog of orders and contractual commitments, primarily from IGT for spare parts, we expect TSG sales to decrease in 2019 compared to 2018.

Operationally, our gross margin reached 49% in 2018, an increase of 170 basis points from 2017, representing the highest gross margin we have reported for a full year.  We believe gross margin will continue at similar levels in 2019 as our newer, technology-enabled products continue to grow and become a larger portion of our overall sales.  In 2018, although operating income decreased slightly by less than 1%, we achieved operating margin of 12.4% compared to 12.1% in 2017 due to our improved gross margin that was offset by slightly higher operating expenses primarily to support our two high growth markets--restaurant solutions and casino and gaming.  During 2019, we expect higher operating expenses compared to 2018, due to the full year impact of the investments made during 2018, as well as new investments, in selling and marketing for these two high growth markets

We reported net income of $5.4 million and net income per diluted share of $0.70 for 2018, compared to $3.2 million and net income per diluted share of $0.42 for 2017.  In terms of cash flow for 2018, we experienced a very strong year, generating $5.1 million of cash from operating activities.  We also returned $4.7 million to our shareholders in the form of $2 million for treasury share repurchases and $2.7 million for cash dividends.  We ended the year with cash and cash equivalents of $4.7 million and no debt on our Consolidated Balance Sheet at December 31, 2018.
 
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates, judgments and assumptions that affect both Balance Sheet items and Statement of Income categories.  Such estimates and judgments are based upon historical experience and certain assumptions that are believed to be reasonable in the particular circumstances.  We evaluate our assumptions on an ongoing basis by comparing actual results with our estimates.  Actual results may differ from the original estimates.  

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.  Please refer to Note 2 – Summary of significant accounting policies in the accompanying Consolidated Financial Statements for a complete listing of our accounting policies.

Revenue Recognition – ASU No. 2014-09, "Revenue from Contracts with Customers” and its related amendments (collectively, ASC 606) are effective for reporting periods beginning after December 15, 2017, and interim periods therein.  This ASU is intended to clarify the principles for recognizing revenue by removing inconsistencies in revenue requirements; providing a more robust framework for addressing revenue issues; improving comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; and providing more useful information to users of financial statements through improved revenue disclosure requirements.  Entities have the option of using either a full retrospective approach or modified retrospective approach to adopt the amended guidance.  We adopted ASC 606 effective January 1, 2018 and elected the modified retrospective approach.  The results for periods before 2018 were not adjusted for the new standard and there was no cumulative effect for the change in accounting at the date of adoption.
14

In accordance with ASC 606, a performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the customer. Some of our contracts with customers contain a single performance obligation, while other contracts contain multiple performance obligations (most commonly when contracts include product 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. When there are multiple performance obligations within a contract, we allocate the transaction price to each performance obligation based on its standalone selling price.

The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer.  To the extent the transaction price includes variable consideration, such as price protection, reserves for returns and other allowances, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the “expected value” method or the “most likely amount” method depending on the nature of the variable consideration.  Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.

For a majority of our revenue, which consists of printers, terminals, consumables, and replacement parts, the Company recognizes revenue as of a point of time.  The transaction price 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.  We also sell a software solution, EPICENTRAL™, that enables casino operators to create promotional coupons and marketing messages and to print them in real-time at the slot machine.  EPICENTRALTM is primarily comprised of both a software component, which is licensed to the customer, and a hardware component.  EPICENTRAL™ software and hardware are integrated to deliver the system's full functionality.  The transaction prices from EPICENTRAL™ software license and hardware are recognized upon installation and formal acceptance by the customer when control of the license is transferred to the customer.  For out-of-warranty repairs, the transaction price is recognized after the repair work is completed and the printer or terminal is returned to the customer, as control of the product is transferred to the customer and our performance obligation is completed.

Performance obligations are satisfied over time if the customer receives the benefits as we perform work, if the customer controls the asset as it is being produced, or if the product being produced for the customer has no alternative use and we have a contractual right to payment.  For our separately priced extended warranty, technical support for our restaurant solution terminals and maintenance agreements (including free one-year maintenance received by the customers upon completion of EPICENTRAL™ installation) revenue is recognized over time as the customer receives the benefit.  The transaction price from the maintenance services is recognized ratably over time, using output methods, as control of the services is transferred to the customer. 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. The Company sells the performance obligations separately and has established standalone selling prices for its products and services. In the case of an overall price discount, the discount is applied to each performance obligation proportionately based on standalone selling price. To determine the standalone selling price for initial EPICENTRAL™ installations, the Company uses the adjusted market assessment approach.

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, 2018 was $205 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 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, which indicate it is more likely than not an impairment exists. Factors considered that may trigger an impairment review 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.  Definite-lived intangible assets are amortized and are tested for impairment when appropriate. We reported $2.6 million of goodwill and $797 thousand of unamortized definite-lived intangible assets at December 31, 2018. 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 based on our assessment as of December 31, 2018 when the impairment review is performed.

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.

15

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.”  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. See Note 11 to the consolidated financial statements for further details of the impact of the Tax Reform Act.

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.  Prior to January 1, 2017, stock-based compensation expense included estimated effects of forfeitures.  Upon adopting ASU 2016-09, “Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting”, in 2017, an accounting policy election was made to account for forfeitures as they occur.  The amended guidance requires that all tax effects related to share-based payments are recorded at settlement (or expiration) through the income statement, rather than through equity.  Cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows.  This ASU also allows for an employer to repurchase additional employee shares for tax withholding purposes without requiring liability accounting and clarifies that all cash payments made to tax authorities on an employee's behalf for withheld shares should be presented as a financing activity on the Consolidated Statements of Cash Flows.  The presentation requirements

Results of Operations: Year ended December 31, 2018 compared to Year ended December 31, 2017

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, 2018 and 2017 were as follows:

 
 
Year Ended
   
Year Ended
   
Change
 
(In thousands)
 
December 31, 2018
   
December 31, 2017
     $    
%
 
Restaurant solutions
 
$
4,579
     
8.4
%
 
$
4,758
     
8.4
%
 
$
(179
)
   
(3.8
%)
POS automation and banking
   
7,273
     
13.3
%
   
7,905
     
14.0
%
   
(632
)
   
(8.0
%)
Casino and gaming
   
26,593
     
48.7
%
   
18,615
     
33.1
%
   
7,978
     
42.9
%
Lottery
   
3,093
     
5.7
%
   
9,805
     
17.4
%
   
(6,712
)
   
(68.5
%)
Printrex
   
1,297
     
2.4
%
   
1,052
     
1.9
%
   
245
     
23.3
%
TSG
   
11,752
     
21.5
%
   
14,176
     
25.2
%
   
(2,424
)
   
(17.1
%)
 
 
$
54,587
     
100.0
%
 
$
56,311
     
100.0
%
 
$
(1,724
)
   
(3.1
%)
 
                                               
International*
 
$
11,069
     
20.3
%
 
$
7,591
     
13.5
%
 
$
3,478
     
45.8
%
 
*
International sales do not include sales of products made to domestic distributors or other customers who in turn ship those products to international destinations.
 
Net sales for 2018 decreased $1.7 million, or approximately 3%, from 2017.  Printer and terminal sales volume decreased by 5% to approximately 142,000 units, driven primarily by a 71% decrease in unit volume from the lottery market and, to a lesser extent, a 6% and 18% decrease in the POS automation and banking market and restaurant solutions market, respectively. These decreases were partially offset by an increase in sales volume of 44% in the casino and gaming market.   Although unit volume decreased during 2018 compared to 2017, the average selling price of our printers and terminals increased 7% during 2018 compared to 2017, due primarily to the decreased volume of lottery printers, which carry lower prices than our other products.

International sales increased $3.5 million, or 46%, primarily driven by 81% higher international sales in the casino and gaming market.  This increase was partially offset by a $1.1 million sales decrease in our international lottery market during 2018 compared to 2017.

16

Restaurant solutions:  Revenue from the restaurant solutions market includes sales of terminals that combine hardware and software 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 to help food service establishments and restaurants (including fine dining, casual dining, quick-serve convenience and hospitality establishments) effectively manage food safety and automate and manage back-of-the-restaurant operations.  A summary of sales of our worldwide restaurant solutions products for the years ended December 31, 2018 and 2017 is as follows (in thousands, except percentages):

 
 
Year Ended
   
Year Ended
   
Change
 
(In thousands)
 
December 31, 2018
   
December 31, 2017
     $    
%
 
Domestic
 
$
4,133
     
90.3
%
 
$
4,384
     
92.1
%
 
$
(251
)
   
(5.7
%)
International
   
446
     
9.7
%
   
374
     
7.9
%
   
72
     
19.3
%
 
 
$
4,579
     
100.0
%
 
$
4,758
     
100.0
%
 
$
(179
)
   
(3.8
%)

The decrease in domestic restaurant solutions terminal sales in 2018 compared to 2017 was primarily driven by lower sales of our AccuDate 9700 terminal to McDonald’s.  This decrease was partially offset by increased sales of our newer AccuDate XL2e terminal to three large corporate customers.  We expect sales of our restaurant solutions products to increase in 2019 compared to 2018 following the launch of our new BOHA! cloud-based applications and hardware solutions in the first quarter of 2019.  The new BOHA! suite of products is designed to provide back-of-house automation solutions to restaurant and foodservice operators.

International restaurant solutions sales increased during 2018 compared to 2017 due to increased sales of the AccuDate 9700 for McDonald’s through our Canadian distributor.

POS automation and banking:  Revenue from the POS automation and banking market includes sales of thermal printers used primarily by quick serve restaurants located either at the checkout counter or within self-service kiosks to print receipts for consumers or print on linerless labels.  In addition, revenue includes sales of inkjet printers used by banks, credit unions and other financial institutions to print deposit or withdrawal receipts and/or validate checks at bank teller stations.  A summary of sales of our worldwide POS automation and banking products for the years ended December 31, 2018 and 2017 is as follows:

 
 
Year Ended
   
Year Ended
   
Change
 
(In thousands)
 
December 31, 2018
   
December 31, 2017
     $    
%
 
Domestic
 
$
7,122
     
97.9
%
 
$
7,596
     
96.1
%
 
$
(474
)
   
(6.2
%)
International
   
151
     
2.1
%
   
309
     
3.9
%
   
(158
)
   
(51.1
%)
 
 
$
7,273
     
100.0
%
 
$
7,905
     
100.0
%
 
$
(632
)
   
(8.0
%)

The decrease in domestic POS automation and banking sales in 2018 compared to 2017 was primarily driven by a 75% decrease in sales of our legacy banking and other POS printers.  We do not expect any future sales of these legacy products, as we exited the banking market at the end of 2018 and have shifted our focus to our newer products.  These decreases were partially offset by a slight increase in domestic sales of our Ithaca® 9000 printers of 1% during 2018 compared to 2017, as sales rebounded to prior year, near-record levels during the second and third quarters of 2018.  We expect sales of our Ithaca® 9000 for McDonald’s to decrease in 2019 compared to 2018.

International POS automation and banking sales decreased due to lower sales of our Ithaca® 9000 printer to our Canadian distributor for McDonald’s during 2018 compared to 2017.
 
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 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 real-time at the slot machine.  A summary of sales of our worldwide casino and gaming products for the years ended December 31, 2018 and 2017 is as follows:

 
 
Year Ended
   
Year Ended
   
Change
 
(In thousands)
 
December 31, 2018
   
December 31, 2017
     $    
%
 
Domestic
 
$
17,518
     
65.9
%
 
$
13,608
     
73.1
%
 
$
3,910
     
28.7
%
International
   
9,075
     
34.1
%
   
5,007
     
26.9
%
   
4,068
     
81.2
%
 
 
$
26,593
     
100.0
%
 
$
18,615
     
100.0
%
 
$
7,978
     
42.9
%

The increase in domestic sales of our casino and gaming products was due primarily to a 20% increase in domestic sales of our thermal casino printer in 2018 compared to 2017, driven primarily by increased sales to our OEMs and a large order from a domestic casino operator for replacement printers.  Domestic sales also increased due to a significant sale of our off-premise gaming printers to an OEM that we don’t expect to reoccur in 2019.  During the fourth quarter of 2018, we also sold our first order of our Epic Edge, our new thermal TITO casino printer, to a large domestic operator in connection with its upcoming casino opening.  Sales of EPICENTRAL™ software during 2018 were comparable with our 2017 EPICENTRAL™ sales as we completed two new installations during both 2018 and 2017.  Sales of EPICENTRAL™ are project based, and as a result, may fluctuate significantly quarter-to-quarter and year-to-year.

17

The increase in international sales in 2018 compared to 2017 was due to a 143% increase of thermal casino printer sales.  These increases were due to the success of the transition away from using our previous exclusive worldwide distributor whose contract ended at the end of 2017 and using our new direct sales team to sell to end user casino and gaming customers in Europe.  These increases were partially offset by a 5% decrease in international sales of off-premise gaming printers.

We expect domestic and international casino and gaming sales in 2019 to be relatively consistent with the sales levels achieved during 2018.

Lottery:  Revenue from the lottery market includes sales of thermal on-line and other lottery printers primarily to IGT and, to a lesser extent, other lottery system companies for various lottery applications.  A summary of sales of our worldwide lottery printers for the years ended December 31, 2018 and 2017 is as follows:

 
 
Year Ended
   
Year Ended
   
Change
 
(In thousands)
 
December 31, 2018
   
December 31, 2017
     $    
%
 
Domestic
 
$
3,046
     
98.5
%
 
$
8,626
     
88.0
%
 
$
(5,580
)
   
(64.7
%)
International
   
47
     
1.5
%
   
1,179
     
12.0
%
   
(1,132
)
   
(96.0
%)
 
 
$
3,093
     
100.0
%
 
$
9,805
     
100.0
%
 
$
(6,712
)
   
(68.5
%)
 
Our sales to IGT are directly dependent on the timing and number of new and upgraded lottery terminal installations that IGT performs, and as a result, may fluctuate significantly quarter-to-quarter and year-to-year.  However, our lottery market sales are not indicative of IGT’s overall business or revenue.  We expect lottery printer sales to be lower for 2019 compared to 2018, as we have shifted our focus away from the lottery market to our higher-value, technology enabled restaurant solutions and casino and gaming products.

The decrease in international lottery sales in 2018 compared to 2017 was primarily due to a sale of lottery printers to IGT for the Canadian lottery in 2017 and no comparable sale occurring in 2018.
 
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.  It also includes high-speed color inkjet desktop printers used to print logs at the data centers of the oil and gas field service companies.  Revenue in this market also includes sales of vehicle mounted printers used to print schematics and certain other critical information in emergency services vehicles and other mobile printing applications.  A summary of sales of our worldwide Printrex printers for the years ended December 31, 2018 and 2017 is as follows (in thousands, except percentages): 

 
 
Year Ended
   
Year Ended
   
Change
 
(In thousands)
 
December 31, 2018
   
December 31, 2017
     $    
%
 
Domestic
 
$
1,028
     
79.3
%
 
$
849
     
80.7
%
 
$
179
     
21.1
%
International
   
269
     
20.7
%
   
203
     
19.3
%
   
66
     
32.5
%
 
 
$
1,297
     
100.0
%
 
$
1,052
     
100.0
%
 
$
245
     
23.3
%

The increase in Printrex sales in 2018 compared to 2017 resulted from a 57% increase in domestic and international sales of our oil and gas printers due to a continued recovery in the oil and gas market.  This increase was partially offset by 87% lower sales of domestic and international medical and mobile printers in 2018 compared to 2017.  We expect total Printrex sales to increase slightly in 2019 compared to 2018, as we expect oil and gas sales to continue to increase.  However, we do not expect any future medical and mobile printer sales, as we exited this market at the end of 2018 in order to focus on our higher value, technology-enabled restaurant solutions and casino and gaming products.

TSG: Revenue generated by our TSG includes sales of consumable products (inkjet cartridges, ribbons, receipt paper, color thermal paper, food safety labels and other printing supplies), replacement parts, maintenance and repair services, testing services, refurbished printers, and shipping and handling charges.  A summary of sales in our worldwide TSG market for the years ended December 31, 2018 and 2017 is as follows:

 
 
Year Ended
   
Year Ended
   
Change
 
(In thousands)
 
December 31, 2018
   
December 31, 2017
     $    
%
 
Domestic
 
$
10,671
     
90.8
%
 
$
13,657
     
96.3
%
 
$
(2,986
)
   
(21.9
%)
International
   
1,081
     
9.2
%
   
519
     
3.7
%
   
562
     
108.3
%
 
 
$
11,752
     
100.0
%
 
$
14,176
     
100.0
%
 
$
(2,424
)
   
(17.1
%)

The decrease in domestic revenue from TSG in 2018 compared to 2017 was due primarily to lower sales of replacement parts, non-Printrex consumable products and service revenue.  Replacement part sales decreased 36% due to lower sales of lottery printer spare parts to IGT.  Non-Printrex consumables sales declined 10% due to lower sales of our legacy HP inkjet cartridges used in our banking printers, as we exited the banking market at the end of 2018.  Service revenue declined 10% in 2018 compared to 2017 due to paper testing sales that occurred in 2017 but did not repeat in 2018.  These decreases were partially offset by increased AccuDate label sales which more than quadrupled in 2018 compared 2017.  Based on our backlog of orders and contractual commitments for replacement parts, primarily from IGT, for our installed base of lottery printers, we expect TSG sales to decrease in 2019 compared to 2018.

Internationally, TSG revenue increased primarily due to a 134% increase in sales of replacement parts and accessories in 2018 compared to 2017, as sales of replacement parts and accessories to international casino and gaming customers have increased upon the transition away from using our previous exclusive worldwide distributor and using our new direct sales team to sell to end user casino and gaming customers.

18

Gross Profit.  Gross profit information for the years ended December 31, 2018 and 2017 is summarized below (in thousands, except percentages):

 
 
December 31,
   
Percent
   
Percent of
   
Percent of
 
 
 
2018
   
2017
   
Change
   
Total Sales - 2018
   
Total Sales - 2017
 
Year ended
 
$
26,743
   
$
26,662
     
0.3
%
   
49.0
%
   
47.3
%

Gross profit is measured as revenue less cost of sales, which includes primarily the cost of all raw materials and component parts, direct labor, manufacturing overhead expenses, cost of finished products purchased directly from our contract manufacturers and expenses associated with installations of our EPICENTRAL™ print system.   Gross profit increased $81 thousand, or less than 1%, and gross margin increased 170 basis points due primarily to a more favorable sales mix in 2018 compared to 2017.  The increased gross margin reflects a favorable shift in sales mix towards higher-value, technology driven solutions, as well as lower sales volume of lottery and POS printers, which carry lower margins than our other products.

Operating Expenses - Engineering, Design and Product Development.  Engineering, design and product development information for the years ended December 31, 2018 and 2017 is summarized below (in thousands, except percentages):

 
 
December 31,
   
Percent
   
Percent of
   
Percent of
 
 
 
2018
   
2017
   
Change
   
Total Sales - 2018
   
Total Sales - 2017
 
Year ended
 
$
4,576
   
$
4,303
     
6.3
%
   
8.4
%
   
7.6
%
 
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 contracted software development expenses).  Engineering, design and product development expenses increased $273 thousand, or 6%, in 2018 compared to 2017 due primarily to the hiring of additional engineering staff and increased expenses related to product development for the restaurant solutions and casino and gaming markets.  We expect engineering, design and product development expenses in 2019 to be consistent with 2018.
Operating Expenses - Selling and Marketing.  Selling and marketing information for the years ended December 31, 2018 and 2017 is summarized below (in thousands, except percentages):

 
 
December 31,
   
Percent
   
Percent of
   
Percent of
 
 
 
2018
   
2017
   
Change
   
Total Sales - 2018
   
Total Sales - 2017
 
Year ended
 
$
7,203
   
$
7,561
     
(4.7
%)
   
13.2
%
   
13.4
%

Selling and marketing expenses primarily include salaries and payroll related expenses for our sales and marketing staff, sales commissions, travel expenses, expenses associated with the lease of sales offices, advertising, trade show expenses, e-commerce and other promotional marketing expenses. Selling and marketing expenses decreased $358 thousand, or 5%, in 2018 compared to 2017 primarily due to the retirement of our EVP, Sales and Marketing in December 2017, whose position was replaced by an existing employee of TransAct, as well as the elimination of sales commission expense to our former international casino and gaming distributor, Suzo-Happ.  These decreases were partially offset by the hiring of additional sales staff to replace our former exclusive worldwide distributor with a direct selling team for our casino and gaming sales in Europe.  We expect selling and marketing expense to increase significantly in 2019 compared to 2018 due to the full year impact from the hiring of additional sales staff during the year ended December 31, 2018, as well as new investments to support our new suite of BOHA! software and hardware solutions. 

Operating Expenses - General and Administrative.  General and administrative information for the years ended December 31, 2018 and 2017 is summarized below (in thousands, except percentages):

 
 
December 31,
   
Percent
   
Percent of
   
Percent of
 
 
 
2018
   
2017
   
Change
   
Total Sales - 2018
   
Total Sales - 2017
 
Year ended
 
$
8,205
   
$
7,984
     
2.8
%
   
15.0
%
   
14.2
%

General and administrative expenses primarily include salaries, incentive compensation, and other payroll related expenses for our executive, accounting, human resources and information technology staff, expenses for our corporate headquarters, professional and legal expenses, telecommunication expenses, and other expenses related to being a publicly-traded company.  General and administrative expenses increased $221 thousand, or 3%, in 2018 compared to 2017 due primarily to increased legal expenses and increased administrative expenses related to the expansion of our restaurant solutions sales staff and transitioning to a direct selling model for the casino and gaming market in Europe.  These increases were partially offset by lower incentive compensation expense in 2018 compared to 2017.  We expect general and administrative expense to be higher in 2019 compared to 2018 due to higher incentive compensation and additional investment to support restaurant solutions.
 
Operating Income.  Operating income information for the years ended December 31, 2018 and 2017 is summarized below (in thousands, except percentages):

 
 
December 31,
   
Percent
   
Percent of
   
Percent of
 
 
 
2018
   
2017
   
Change
   
Total Sales – 2018
   
Total Sales – 2017
 
Year ended
 
$
6,759
   
$
6,814
     
(0.8
%)
   
12.4
%
   
12.1
%

Our operating income decreased by $55 thousand, or 1%.  Despite a sales decline of 3% our operating margin improved, increasing 30 basis points to 12.4% in 2018 compared to 12.1% in 2017, largely due to a 170 basis point increase in gross margin somewhat offset by a 1% increase in operating expenses.

19

Interest.  We recorded net interest expense of $27 thousand in 2018 compared to $33 thousand in 2017.
 
Other, net.  We recorded other expense of $266 thousand in 2018 compared to $9 thousand in 2017.  The additional expense was due to higher foreign currency exchange losses recorded by our United Kingdom (“UK”) subsidiary in 2018 compared to 2017.  Going forward we may continue to experience more foreign exchange volatility as we increase our casino and gaming sales in Europe.

Income Taxes.  We recorded an income tax provision during the year ended December 31, 2018 of $1.0 million at an effective tax rate of 16.1%, compared to an income tax provision during the year ended December 31, 2017 of $3.6 million at an effective tax rate of 52.6%.  The effective tax rate in 2018 was lower than the effective tax rate in 2017 due to the enactment of the Tax Reform Act that was signed on December 22, 2017.  Additionally, the effective tax rate in 2017 was unusually high due to the initial impact of the Tax Reform Act as we recognized a provisional $1.3 million charge to income tax expense for the year ended December 31, 2017 as a result of revaluing our net deferred tax assets using the new U.S. corporate tax rate of 21%.  The Tax Reform Act significantly changed U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a one-time repatriation tax on undistributed foreign earnings.  The Tax Reform Act reduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate effective January 1, 2018 and, as a result, reduced our statutory U.S. corporate income tax rate from 34% to 21%.  We expect our annual effective tax rate for 2019 to be between 12% and 14%.

Net Income.  We reported net income during 2018 of $5.4 million, or $0.70 per diluted share, compared to $3.2 million, or $0.42 per diluted share, for 2017.
 
Results of Operations: Year ended December 31, 2017 compared to year ended December 31, 2016

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, 2017 and 2016 were as follows:

 
 
Year Ended
   
Year Ended
   
Change
 
(In thousands)
 
December 31, 2017
   
December 31, 2016
     $    
%
 
Restaurant solutions
 
$
4,758
     
8.4
%
 
$
5,162
     
9.0
%
 
$
(404
)
   
(7.8
%)
POS automation and banking
   
7,905
     
14.0
%
   
10,518
     
18.4
%
   
(2,613
)
   
(24.8
%)
Casino and gaming
   
18,615
     
33.1
%
   
21,006
     
36.7
%
   
(2,391
)
   
(11.4
%)
Lottery
   
9,805
     
17.4
%
   
9,913
     
17.3
%
   
(108
)
   
(1.1
%)
Printrex
   
1,052
     
1.9
%
   
540
     
1.0
%
   
512
     
94.8
%
TSG
   
14,176
     
25.2
%
   
10,096
     
17.6
%
   
4,080
     
40.4
%
 
 
$
56,311
     
100.0
%
 
$
57,235
     
100.0
%
 
$
(924
)
   
(1.6
%)
 
                                               
International*
 
$
7,591
     
13.5
%
 
$
11,693
     
20.4
%
 
$
(4,102
)
   
(35.1
%)
 
*
International sales do not include sales of products made to domestic distributors or other customers who in turn ship those products to international destinations.
 
Net sales for 2017 decreased $924 thousand, or 2%, from 2016.  Printer and terminal sales volume decreased by 13% to approximately 150 thousand units, driven primarily by a 25% and 13% decrease in unit volume from the POS automation and banking market and casino and gaming market, respectively and, to a lesser extent a 3% decrease in the lottery market and 13% decrease in the restaurant solutions market.  These decreases were partially offset by increased sales volume of 112% in the Printrex market.  The average selling price of our printers and terminals increased 4% in 2017 compared to 2016, primarily due to decreased volume of POS automation and banking printers sold in 2017, which carry lower prices than our other products.

Overall, international sales decreased $4.1 million, or 35%, primarily driven by lower sales in the international casino and gaming market.  This decrease was partially offset by a $1 million sales increase in our international lottery market during 2017. 

Restaurant solutions:  A summary of sales of our worldwide restaurant solutions products for the years ended December 31, 2017 and 2016 is as follows:

 
 
Year Ended
   
Year Ended
   
Change
 
(In thousands)
 
December 31, 2017
   
December 31, 2016
     $    
%
 
Domestic
 
$
4,384
     
92.1
%
 
$
4,747
     
92.0
%
 
$
(363
)
   
(7.6
%)
International
   
374
     
7.9
%
   
415
     
8.0
%
   
(41
)
   
(9.9
%)
 
 
$
4,758
     
100.0
%
 
$
5,162
     
100.0
%
 
$
(404
)
   
(7.8
%)

The decrease in domestic restaurant solutions terminal sales in 2017 compared to 2016 was primarily driven by lower sales of our AccuDate 9700 terminal to our U.S. distributor.  This decrease was partially offset by increased sales of our AccuDate 9700 terminal to McDonald’s, increased sales of our AccuDate Pro terminal and the initial sales of our AccuDate XL terminal in 2017.

International restaurant solution terminals decreased during 2017 compared to 2016 due to lower sales to our Latin American and Canadian distributors.

20

POS automation and banking:  A summary of sales of our worldwide POS automation and banking products for the years ended December 31, 2017 and 2016 is as follows:

 
 
Year Ended
   
Year Ended
   
Change
 
(In thousands)
 
December 31, 2017
   
December 31, 2016
     $    
%
 
Domestic
 
$
7,596
     
96.1
%
 
$
9,754
     
92.7
%
 
$
(2,158
)
   
(22.1
%)
International
   
309
     
3.9
%
   
764
     
7.3
%
   
(455
)
   
(59.6
%)
 
 
$
7,905
     
100.0
%
 
$
10,518
     
100.0
%
 
$
(2,613
)
   
(24.8
%)

The decrease in both domestic and international POS automation and banking printer revenue in 2017 compared to 2016 was primarily driven by a 23% decrease in sales of our Ithaca® 9000 printer, as sales to McDonald's began to slow compared to the record pace experienced in 2016.  Additionally, we experienced a 37% decline in sales of our legacy banking and other POS printers in 2017 compared to 2016. 

Casino and gaming:  A summary of sales of our worldwide casino and gaming products for the years ended December 31, 2017 and 2016 is as follows:

 
 
Year Ended
   
Year Ended
   
Change
 
(In thousands)
 
December 31, 2017
   
December 31, 2016
     $    
%
 
Domestic
 
$
13,608
     
73.1
%
 
$
11,553
     
55.0
%
 
$
2,055
     
17.8
%
International
   
5,007
     
26.9
%
   
9,453
     
45.0
%
   
(4,446
)
   
(47.0
%)
 
 
$
18,615
     
100.0
%
 
$
21,006
     
100.0
%
 
$
(2,391
)
   
(11.4
%)

The increase in domestic sales of our casino and gaming products in 2017 compared to 2016 was due primarily to 26% higher sales of our thermal casino printers due mainly to market share gain, including higher sales to our OEMs to support two new casino openings.  This increase was partially offset by a decrease in domestic EPICENTRAL™ software sales of 34%.  We completed two EPICENTRAL™ installations in both 2017 and 2016, however in 2017 our installations consisted of one full-feature version of EPICENTRAL™ and our first EPICENTRAL® SE version compared to two full-feature versions of EPICENTRAL™ in 2016.  Our EPICENTRAL® SE software is offered at a lower price compared to our full-feature version of EPICENTRAL™.

International casino and gaming printer sales declined in 2017 compared to 2016 due to a 46% decrease in international sales of our thermal casino printers in Europe, Asia and Australia, as well as a 46% decrease in international sales of our off-premise gaming printers to our former exclusive worldwide distributor in Europe and Australia.  Sales of our off-premise gaming printers are largely project-oriented and therefore may fluctuate significantly from quarter-to-quarter and year-to-year.  International EPICENTRAL™ software sales also declined 79% as we completed no international EPICENTRAL™ installations in 2017 compared to one completed international installation in 2016.

Lottery:  A summary of sales of our worldwide lottery printers for the years ended December 31, 2017 and 2016 is as follows:

 
 
Year Ended
   
Year Ended
   
Change
 
(In thousands)
 
December 31, 2017
   
December 31, 2016
     $    
%
 
Domestic
 
$
8,626
     
88.0
%
 
$
9,710
     
98.0
%
 
$
(1,084
)
   
(11.2
%)
International
   
1,179
     
12.0
%
   
203
     
2.0
%
   
976
     
480.8
%
 
 
$
9,805
     
100.0
%
 
$
9,913
     
100.0
%
 
$
(108
)
   
(1.1
%)

Our sales to IGT are directly dependent on the timing and number of new and upgraded lottery terminal installations IGT performs, and as a result, may fluctuate significantly quarter-to-quarter and year-to-year and are not indicative of IGT’s overall business or revenue. 

International lottery sales increased due to sales of lottery printers to IGT for the Canadian lottery in 2017 and no comparable sales occurring in 2016.

Printrex: A summary of sales of our worldwide Printrex printers for the years ended December 31, 2017 and 2016 is as follows (in thousands, except percentages): 

 
 
Year Ended
   
Year Ended
   
Change
 
(In thousands)
 
December 31, 2017
   
December 31, 2016
     $    
%
 
Domestic
 
$
849
     
80.7
%
 
$
463
     
85.7
%
 
$
386
     
83.4
%
International
   
203
     
19.3
%
   
77
     
14.3
%
   
126
     
163.6
%
 
 
$
1,052
     
100.0
%
 
$
540
     
100.0
%
 
$
512
     
94.8
%

The increase in Printrex printers was due to an 83% increase in domestic and international sales of our oil and gas printers due to higher demand in 2017 compared to 2016 and a 149% increase in sales of medical and mobile printers primarily due to sales of our mobile printer to one customer.

21

TSG:  A summary of sales in our worldwide TSG market for the years ended December 31, 2017 and 2016 is as follows:

 
 
Year Ended
   
Year Ended
   
Change
 
(In thousands)
 
December 31, 2017
   
December 31, 2016
     $    
%
 
Domestic
 
$
13,657
     
96.3
%
 
$
9,315
     
92.3
%
 
$
4,342
     
46.6
%
International
   
519
     
3.7
%
   
781
     
7.7
%
   
(262
)
   
(33.5
%)
 
 
$
14,176
     
100.0
%
 
$
10,096
     
100.0
%
 
$
4,080
     
40.4
%

The increase in domestic revenue from TSG was due primarily to a 108% increase in sales of replacement parts and accessories in 2017 compared to 2016 due to higher demand for spare parts in the lottery market in 2017.  The increase, to a lesser extent, was also due to a 12% increase in project-oriented testing services that occurred in 2017 but did not occur to the same extent in 2016.  These increases were partially offset by a 6% decrease in non-Printrex consumables, largely for legacy POS and banking printers in 2017 compared to 2016.

Gross Profit.  Gross profit information for the years ended December 31, 2017 and 2016 is summarized below (in thousands, except percentages):

 
 
December 31,
   
Percent
   
Percent of
   
Percent of
 
 
 
2017
   
2016
   
Change
   
Total Sales - 2017
   
Total Sales - 2016
 
Year ended
 
$
26,662
   
$
23,799
     
12.0
%
   
47.3
%
   
41.6
%

Gross profit increased $2.9 million, or 12%, and our gross margin improved 570 basis points to a record 47.3%.  These increases were driven by a more favorable sales mix in 2017 compared to 2016, as our 2017 sales included a greater proportion of spare parts sales and a lower portion of sales of POS automation and banking printers.

Operating Expenses - Engineering, Design and Product Development.  Engineering, design and product development information for the years ended December 31, 2017 and 2016 is summarized below (in thousands, except percentages):

 
 
December 31,
   
Percent
   
Percent of
   
Percent of
 
 
 
2017
   
2016
   
Change
   
Total Sales - 2017
   
Total Sales - 2016
 
Year ended
 
$
4,303
   
$
4,425
     
(2.8
%)
   
7.6
%
   
7.7
%

Engineering, design and product development expenses decreased $122 thousand or 3%, due primarily to higher product development costs during 2016 related to the substantial completion of certain software development projects for our  EPICENTRAL™ software compared to 2017.

Operating Expenses - Selling and Marketing.  Selling and marketing information for the years ended December 31, 2017 and 2016 is summarized below (in thousands, except percentages):

 
 
December 31,
   
Percent
   
Percent of
   
Percent of
 
 
 
2017
   
2016
   
Change
   
Total Sales - 2017
   
Total Sales - 2016
 
Year ended
 
$
7,561
   
$
6,907
     
9.5
%
   
13.4
%
   
12.1
%

Selling and marketing expenses increased $654 thousand, or 10%, as we completed the build-out of our internal infrastructure, including the hiring of a direct sales force and implementation of a direct marketing campaign dedicated to the restaurant solutions market in 2017.
 
Operating Expenses - General and Administrative.  General and administrative information for the years ended December 31, 2017 and 2016 is summarized below (in thousands, except percentages):

 
 
December 31,
   
Percent
   
Percent of
   
Percent of
 
 
 
2017
   
2016
   
Change
   
Total Sales - 2017
   
Total Sales - 2016
 
Year ended
 
$
7,984
   
$
7,267
     
9.9
%
   
14.2
%
   
12.7
%

General and administrative expenses increased $717 thousand, or 10%, due primarily to higher incentive compensation expenses incurred in 2017 compared to 2016 and higher recruiting expenses related to the expansion of our sales staff for our restaurant solutions market and European casino and gaming market.

Operating Income (Loss).  Operating income information for the years ended December 31, 2017 and 2016 is summarized below (in thousands, except percentages):

 
 
December 31,
   
Percent
   
Percent of
   
Percent of
 
 
 
2017
   
2016
   
Change
   
Total Sales – 2017
   
Total Sales – 2016
 
Year ended
 
$
6,814
   
$
5,200
     
31.0
%
   
12.1
%
   
9.1
%

Our operating income increased by $1.6 million, or 31%, primarily due to a 570 basis point improvement in gross margin on a favorable product mix, partially offset by a 7% increase in operating expenses in 2017 compared to 2016.

Interest.  We recorded net interest expense of $33 thousand in 2017 compared to $26 thousand in 2016.

22

Other, net.  We recorded other expense of $9 thousand in 2017 compared to $4 thousand in 2016.  The change was due to higher foreign currency exchange losses recorded by our UK subsidiary in 2017 compared to 2016.  In addition, we recorded a gain of $5 thousand on the disposal of fixed assets in 2016.

Income Taxes.  In 2017, we recorded an income tax provision of $3.6 million at an effective tax rate of 52.6% compared to an income tax provision in 2016 of $1.6 million at an effective tax rate of 30.0%.  The effective tax rate in 2017 was negatively impacted by the passage of the Tax Reform Act. As a result of the reduction of our U.S. corporate income tax rate from 34% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax asset at December 31, 2017 and recognized a provisional $1.3 million charge to income tax expense in the Company's Consolidated Statements of Income for the year ended December 31, 2017.

Net Income.  We reported net income during 2017 of $3.2 million, or $0.42 per diluted share, compared to $3.6 million, or $0.47 per diluted share, for 2016.

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, treasury share repurchases, dividend payments, 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, treasury share repurchases, dividend payments and any increase in working capital that would be required to accommodate a higher level of business activity.  We actively seek to expand by acquisition as well as through the growth of our current business.  While a significant acquisition may require additional debt and/or equity financing, although no assurances can be given, we believe that we would be able to obtain additional financing based on our historical earnings performance.

Cash Flow
During 2018 our cash balance decreased $816 thousand, or 15%, from December 31, 2017 and we returned a substantial portion of our cash flow to shareholders in the form of $2.7 million of cash dividends paid to common shareholders and $2 million of repurchases of our common stock.  Even after funding these items and our capital expenditures, we still ended 2018 with $4.7 million in cash and cash equivalents, of which $2.9 million was held by our UK subsidiary, and no debt outstanding.
 
Operating activities:  The following significant factors primarily affected our cash provided by operating activities of $5.1 million in 2018 as compared to $5.9 million in 2017. During 2018:
We reported a net income of $5.4 million.
We recorded depreciation and amortization of $1.0 million and share-based compensation expense of $629 thousand.
Accounts receivable decreased $2.7 million, or 25%, due to the collection of past due receivables from 2017 sales made to our former international casino and gaming distributor.
Inventories increased $4.0 million, or 46%, due to the buildup of inventory on hand to support future anticipated sales in the casino and gaming market and restaurant solutions market.
Accounts payable decreased $332 thousand, or 9%, due to the timing of inventory purchases in 2017 compared to 2018.
Accrued liabilities and other liabilities decreased $186 thousand, or 5%, due primarily to a decrease in our accrued incentive compensation.

 During 2017:
We reported a net income of $3.2 million.
We recorded depreciation and amortization of $1.1 million and share-based compensation expense of $609 thousand.
Deferred income tax provision increased $1.1 million largely due to a $1.3 million charge to income tax expense in 2017 to revalue our net deferred tax asset due to the Tax Reform Act.
Accounts receivable increased $355 thousand, or 3% due to a longer than normal collection process related to sales made to our international casino and gaming distributor.
Inventories decreased $834 thousand, or 9%, due to the sell through of inventory on hand during 2017.
Accounts payable decreased $988 thousand, or 20%, due primarily to increased inventory purchases made towards the end of the fourth quarter of 2016 to support anticipated sales of our restaurant solutions terminals and subsequently paid in 2017.
Accrued liabilities and other liabilities increased $1.1 million, or 35%, due primarily to an increase in our accrued incentive compensation.

Investing activities:  Our capital expenditures, including capitalized software costs, were $1.5 million and $1 million in 2018 and 2017, respectively. Expenditures in the 2018 period were primarily for computer and networking equipment and furniture and fixtures purchases related to investments made in our UK facility to support the build-out of our internal sales infrastructure to sell directly to slot machine manufacturers and end-user casino and gaming customers.  To a lesser extent, expenditures in the 2018 period included computer and networking equipment for our U.S. operations and leasehold improvements made at our Las Vegas facility.  Expenditures in 2017 were primarily comprised of computer and networking equipment, new product tooling equipment and, to a lesser extent, leasehold improvements at our Ithaca, New York facility to upgrade to LED lighting. 

Capital expenditures and additions to capitalized software for 2019 are expected to be approximately $1.3 million, primarily for software development for our new restaurant solutions BOHA! products, new product tooling, and new computer software and equipment purchases.

Financing activities:  We used $4.5 million of cash from financing activities during 2018 to pay dividends of $2.7 million to common shareholders, purchase $2 million of common stock for treasury and $265 thousand related to the relinquishment of shares to pay for withholding taxes on stock issued from our stock compensation plan, partially offset by proceeds from stock option exercises of $416 thousand.  During 2017, we used $1.9 million of cash from financing activities to pay cash dividends of $2.6 million to common shareholders, purchase $358 thousand of common stock for treasury and $23 thousand related to the relinquishment of shares to pay for withholding taxes on stock issued from our stock compensation plan, offset by proceeds from stock option exercises of $1 million.  

23

Resource Sufficiency
We believe that our cash and cash equivalents on hand and cash flows generated from operating activities will provide sufficient resources to meet our working capital needs, finance our capital expenditures and additions to capitalized software, dividend payments and meet our liquidity requirements through at least the next twelve months.

Credit Facility and Borrowings
We maintain a credit facility (the “TD Bank Credit Facility”) with TD Bank N.A. (“TD Bank) which provides for a $20 million revolving credit line.  On November 21, 2017, we signed an amendment to the TD Bank Credit Facility through November 28, 2022.  Borrowings under the revolving credit line bear a floating rate of interest at the prime rate minus one percent and are secured by a lien on all of our assets.  We also pay a fee of 0.125% on unused borrowings under the revolving credit line.  The amendment increased the amount of revolving credit loans we may use to fund future cash dividend payments or treasury share buybacks to $12.5 million from $10 million. 

The TD Bank Credit Facility imposes certain quarterly financial covenants on us and restricts, among other things, our ability to incur additional indebtedness and the creation of other liens. We were in compliance with all financial covenants of the TD Bank Credit Facility at December 31, 2018.

Financial Covenant
Requirement/Restriction
 
Calculation at December 31, 2018
 
Operating cash flow / Total debt service
Minimum of 1.25 times
   
117.21
 
Funded debt / EBITDA
Maximum of 3.0 times
 
  0 times
 

As of December 31, 2018, undrawn commitments under the TD Bank Credit facility were $20 million.

Shareholder Dividend Payments
In 2012, our Board of Directors initiated a quarterly cash dividend program which is subject to the Board’s approval each quarter.  Our Board of Directors declared an increase to the quarterly cash dividend from $0.06 to $0.07 per share in May 2013, from $0.07 to $0.08 per share in May 2014, and from $0.08 to $0.09 per share in May 2017.  Dividends declared and paid on our common stock totaled $2.7 million or $0.36 per share and $2.6 million or $0.35 per share, in 2018 and 2017, respectively.  On February 11, 2019, our Board of Directors approved the first quarter 2019 dividend in the amount of $0.09 per share payable on or about March 15, 2019 to common shareholders of record at the close of business on February 20, 2019.

Stock Repurchase Program
On March 1, 2018, our Board of Directors approved a new stock repurchase program.  Under the 2018 Stock Repurchase Program, we are authorized to repurchase up to $5 million of our outstanding shares of common stock from time to time in the open market at prevailing market prices based on market conditions, share price and other factors.  The 2018 Stock Repurchase Program expires on December 31, 2019, if we do not discontinue the repurchase program prior to such time.  We use the cost method to account for treasury stock purchases, under which the price paid for the stock is charged to the treasury stock account.  Repurchases of our common stock are accounted for as of the settlement date.  From the start of the 2018 Stock Repurchase Program on March 1, 2018 through December 31, 2018, we repurchased 156,410 shares of our common stock for approximately $2 million at an average price per share of $12.79. 

During 2016 and 2017, under a prior repurchase program that was in place from February 25, 2016 through December 31, 2017, we purchased 499,843 shares of our common stock for $3.9 million at an average price of $7.86 per share.  From January 1, 2005 through December 31, 2018, we repurchased a total of 4,044,842 shares of common stock for $32.1 million, at an average price of $7.94 per share.

Shareholders’ Equity
Shareholders’ equity increased $1.6 million to $27.6 million at December 31, 2018 from $26 million at December 31, 2017.  The increase was primarily due to net income of $5.4 million, as well as $148 thousand from the issuance of 96,615 shares of common stock related to employee stock awards, net of relinquishments and share-based compensation expense related to stock awards of $629 thousand.  These increases were partially offset by our payment of $2.7 million in dividends and the purchase of 156,410 shares of treasury stock for $2 million.

Off-Balance Sheet Arrangements
As of December 31, 2018, we had no off-balance sheet arrangements that have had or that we expect would be reasonably likely to have a future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations
Our contractual obligations as of December 31, 2018 were as follows:

 
 
Payments due by period
 
(In thousands)
 
Total
   
Less than
1 year
   
1-3 years
   
3-5 years
   
More than
5 years
 
Operating lease obligations
 
$
4,365
   
$
1,035
   
$
1,743
   
$
698
   
$
889
 
Purchase obligations
   
7,467
   
$
7,467
   
$
-
     
     
 
Total
 
$
11,832
   
$
8,502
   
$
1,743
   
$
698
   
$
889
 

Purchase obligations are for purchases made in the normal course of business to meet operational requirements, primarily of fully assembled printers, terminals and component part inventory.

24

Impact of Inflation
We believe that our business has not been affected to a significant degree by inflationary trends during the past three years.  However, inflation is still a factor in the worldwide economy and may increase the cost of purchasing products from our contract manufacturers in Asia, as well as the cost of certain raw materials, component parts and labor used in the production of our products.  It also may increase our operating expenses, manufacturing overhead expenses and the cost to acquire or replace fixed assets.  We have generally been able to maintain or improve our profit margins through productivity and efficiency improvements, cost reduction programs and to a lesser extent, price increases, and we expect to be able to do the same during 2019.  As such, we do not believe that inflation will have a significant impact on our business during 2019.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to the investment of our available cash and cash equivalents.  In accordance with our investment policy, we strive to achieve above market rates of return in exchange for accepting a prudent amount of incremental risk, which includes the risk of interest rate movements.  Risk tolerance is constrained by an overriding objective to preserve capital.  An increase or decrease of 10% in effective interest rates would not have a material effect on our results of operations or cash flows.
 
Foreign Currency Exchange Risk

Transaction Exposure – We transact business in foreign currencies and have international revenue, as well as costs denominated in foreign currencies which are the Euro and Pound Sterling.  As a result, we are exposed to the risk of fluctuations in foreign currency exchange rates.  Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, would negatively affect our revenue and other operating results as expressed in U.S. dollars.

Beginning in 2018, we have experienced increased fluctuations in our net loss as a result of transaction gains or losses related to revaluation and ultimately settling certain asset and liability balances that are denominated in currencies other than the functional currency of our UK subsidiary, which is Pound Sterling.  Net realized and unrealized foreign currency losses were $267 thousand, $11 thousand and $9 thousand in 2018, 2017 and 2016, respectively.  The increase in foreign currency losses from 2017 to 2018 is primarily a result of increased sales recognized by our UK subsidiary upon the adoption of a direct selling model in Europe.  We do not use derivative financial instruments to manage foreign currency exchange risk exposure.  As a result, both positive and negative currency fluctuations against the U.S. dollar may affect our results of operations.  Based on our foreign currency exposures from monetary assets and liabilities, we estimate that a 10% change in exchange rates against the U.S. dollar would have resulted in a gain or loss of approximately $300 thousand as of December 31, 2018.

Translation Exposure – We are also exposed to foreign exchange rate fluctuations as we translate the financial statements of our UK subsidiary into U.S. dollars in consolidation.  If there is a change in foreign currency exchange rates, the translating adjustments resulting from the conversion of our UK subsidiary into U.S. dollars would result in a gain or loss recorded as a component of accumulated other comprehensive loss which is part of stockholders’ equity.

Item 8. Financial Statements and Supplementary Data.
The financial statements of the Company are annexed to this Annual Report as pages F-3 through F-18.  The “Report of Independent Registered Public Accounting Firm” is annexed to this Annual Report 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.
None.
Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2018.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2018, our disclosure controls and procedures are effective at the reasonable assurance level.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

25

Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting 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.

Management assessed our internal control over financial reporting as of December 31, 2018.  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”). Based on our assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2018.

Attestation  Report of the Registered Public Accounting Firm
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in the report which appears herein.
 
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.