TRANSACT TECHNOLOGIES INC 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15I under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of December 31, 2021. In the Amendment to our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on November 21, 2019, we disclosed that management, including our CEO and CFO, concluded that our disclosure controls and procedures were not effective as of December 31, 2018, due to material weaknesses in our internal control over financial reporting. As of December 31, 2021, management has completed the implementation of new controls, which are described below, to fully remediate these material weaknesses. Upon completion of the remediation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2021, our disclosure controls and procedures are effective at the reasonable assurance level. Our management, including our CEO and CFO, has concluded that our consolidated financial statements, included in this Form 10-K, fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles, and that they can still be relied upon. Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Our management assessed our internal control over financial reporting as of December 31, 2021. Our management based its assessment on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“2013 COSO”). In the opinion of management, TransAct maintained effective internal control over financial reporting as of December 31, 2021. A material weakness is defined in Rule 12b-2 under the Exchange Act as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material Weaknesses in Internal Control Over Financial Reporting We identified a control deficiency that constituted a material weakness in our internal control over financial reporting as of December 31, 2020, 2019 and 2018 and has been fully remediated as of December 31, 2021. The control deficiency was that we did not design and maintain effective controls over the completeness and accuracy of information included in key spreadsheets supporting our accounting records (the “Spreadsheet Control Weakness”). This control deficiency constituted a material weakness, but did not result in a material misstatement to our annual or interim consolidated financial statements. 30 Remediation Efforts to Address Material Weaknesses Beginning December 31, 2019, we commenced developing and implementing a plan to enhance the design and operating effectiveness of our internal control over financial reporting, which included taking the following steps to remediate the identified control deficiency and material weakness: For each key spreadsheet we evaluated and determined (1) if a standard Oracle report existed containing the same information as the spreadsheet, and if so, we utilized the standard Oracle report (without modification) instead of the spreadsheet to support our accounting records, and (2) if a standard Oracle report cannot be used, we implemented a new key control whereby an employee performs a formal validation that the information from Oracle is completely and accurately transferred (automatically or manually) to a spreadsheet by verifying totals and other information on a test basis. For all key spreadsheets, we have designed and implemented a new key control to validate the completeness and accuracy of information supporting our accounting records. During 2020 and the first quarter of 2021, we completed the evaluation process for each key spreadsheet based on the above criteria, and during the second quarter of 2021, we completed the implementation of new key controls for all of our key spreadsheets to validate the completeness and accuracy of the information contained within and supporting each such spreadsheet. During the second half of 2021, we completed our evaluation of the new controls for effectiveness, and the Spreadsheet Control Weakness was deemed to be remediated as of December 31, 2021. Changes in Internal Control over Financial Reporting Other than the changes intended to remediate the material weakness noted above, no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information. Not applicable. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection. Not applicable. 31 PART III Item 10. Directors, Executive Officers and Corporate Governance. Set forth in Item 1 of this Form 10-K is certain information regarding our executive officers. The remaining information in response to this item will be contained in our Proxy Statement for our 2022 Annual Meeting of Stockholders (the “Proxy Statement”), as applicable, under the headings, “Delinquent Section 16(a) Reports,” “Corporate Governance,” “Proposal 1: Election of Directors,” “Audit Committee Report,” “Executive Compensation – Compensation Committee Report,” “Stockholder Proposals for 2023 Annual Meeting,” “Procedures for Submitted Director Nominations and Recommendations” and “Policy Regarding Stockholder Communications with the Board of Directors,” which will be filed within 120 days after the end of the year covered by this Form 10-K and is incorporated herein by reference. Code of Ethics We maintain a Standards of Business Conduct and Code of Ethics (“Standards of Business Conduct”) that includes our code of ethics that is applicable to all employees, including our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and Controller. Our Standards of Business Conduct, which require continued observance of high ethical standards, such as honesty, integrity and compliance with the law in the conduct of our business, are available for public access on our Internet website at https://transacttech.gcs-web.com/corporate-governance. Any person may request a copy of our Standards of Business Conduct free of charge by calling (203) 859-6800. Item 11. Executive Compensation. The information in response to this item will be contained in the Proxy Statement under the heading “Executive Compensation,” and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Set forth below is certain information regarding our equity compensation plans. The remaining information in response to this item will be contained in the Proxy Statement under the heading, “Security Ownership of Certain Beneficial Owners and Management,” and is incorporated herein by reference. Equity Compensation Plan Information Information regarding our equity compensation plans as of December 31, 2021 is as follows: Plan category (a) Number of securities to be issued upon exercise of outstanding options, warrants and rights (b) Weighted-average exercise price of outstanding options, warrants and rights (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) Equity compensation plans approved by security holders: 2005 Equity Incentive Plan 195,500 $ 9.52 – 2014 Equity Incentive Plan 1,229,080 7.97 611,652 Total 1,424,580 $ 8.18 611,652 In May 2014, our stockholders approved the adoption of the 2014 Equity Incentive Plan. In May 2020, our stockholders approved an amendment to the 2014 Equity Incentive Plan to increase the number of shares of common stock which may be subject to awards granted under the plan from 1,400,000 to its current level of 2,200,000. The Company also maintains the 2005 Equity Incentive Plan; however no new awards will be available for future issuance under this plan. Both plans generally provide for awards in the form of: (i) incentive stock options, (ii) non-qualified stock options, (iii) restricted stock, (iv) restricted stock units (which may include performance-based vesting), (v) stock appreciation rights or (vi) limited stock appreciation rights. The Company does not have any equity plans that have not been approved by its stockholders. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information in response to this item will be contained in the Proxy Statement under the headings “Certain Relationships and Related Transactions” and “Corporate Governance-Board Leadership Structure and Independence” and is incorporated herein by reference. Item 14. Principal Accounting Fees and Services. The information in response to this item will be contained in the Proxy Statement under the headings, “Policy Regarding Pre-Approval of Services Provided by the Independent Registered Public Accounting Firm” and “Independent Registered Public Accounting Firm’s Services and Fees” and is incorporated herein by reference. 32 PART IV Item 15. Exhibits and Financial Statement Schedules. (a) The following documents are filed as part of this Form 10-K: 1. Financial Statements. Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2021 and 2020 Consolidated Statements of Operations for the years ended December 31, 2021 and 2020 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2021 and 2020 Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2021 and 2020 Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020 Notes to Consolidated Financial Statements 2. Schedules. All schedules are omitted because they are either inapplicable or not required, or because the information required therein is included in the Consolidated Financial Statements and Notes thereto. 3. Exhibits. Exhibits Index 3.1(a) Certificate of Incorporation of TransAct Technologies Incorporated (conformed copy) (incorporated by reference to Exhibit 3(i) of the Company’s Quarterly Report on Form 10-Q (SEC File No. 000-21121) filed with the SEC on August 9, 2019). 3.1(b) Certificate of Designation, Series A Preferred Stock, filed with the Secretary of State of Delaware on December 2, 1997 (incorporated by reference to Exhibit C of the Company’s Current Report on Form 8-K (SEC File No. 000-21121) filed with the SEC on February 18, 1999). 3.1(c) Certificate of Designation, Series B Preferred Stock, filed with the Secretary of State of Delaware on April 6, 2000 (incorporated by reference to Exhibit 3.1(c) of the Company’s Quarterly Report on Form 10-Q (SEC File No. 000-21121) filed with the SEC on May 8, 2000). 3.2 Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K (SEC File No. 000-21121) filed with the SEC on August 2, 2019). 4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-1/A (No. 333-06895) filed with the SEC on August 1, 1996). 4.2 Description of Securities (incorporated by reference to Exhibit 4.2 of the Company’s Annual Report on Form 10-K (SEC File No. 000-21121) filed with the SEC on March 16, 2020). 10.1 (x) 2005 Equity Incentive Plan (incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K (SEC File No. 000-21121) filed with the SEC on June 1, 2005). 10.2 (x) TransAct Technologies Incorporated 2014 Equity Incentive Plan, as Amended and Restated (incorporated by reference to Exhibit I to the Definitive Proxy Statement on Schedule 14A filed with the Commission on April 23, 2020, File No. 000-21121). 10.3 (x) 2014 Equity Incentive Plan Time-based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q (SEC File No. 000-21121) filed with the SEC on May 6, 2016). 10.4 (x) 2014 Equity Incentive Plan Performance-based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q (SEC File No. 000-211121) filed with the SEC on August 8, 2016). 10.5 (x) 2014 Equity Incentive Plan Nonstatutory Stock Option Agreement (incorproated by reference to Exhibit 10.2 of the Company's current Report on Form 8-K (SEC File No. 000-21121) filed with the SEC on May 19, 2014) . 10.6 (x) Employment Agreement, dated July 31, 1996, by and between TransAct and Bart C. Shuldman (incorporated by reference to Exhibit 10.20 of the Company’s Registration Statement on Form S-1/A (No. 333-06895) filed with the SEC on August 1, 1996). 10.7 (x) Severance Agreement by and between TransAct and Steven A. DeMartino, dated June 1, 2004 (incorporated by reference to Exhibit 10.8 of the Company’s Annual Report on Form 10-K (SEC File No. 000-21121) filed with the SEC on March 16, 2005). 10.8 (x) Amendment to Employment Agreement, effective January 1, 2008, by and between TransAct and Bart C. Shuldman (incorporated by reference to Exhibit 10.10 of the Company’s Annual Report on Form 10-K (SEC File No. 000-21121) filed with the SEC on March 16, 2009). 10.9 (x) Amendment to Severance Agreement by and between TransAct and Steven A. DeMartino, effective January 1, 2008 (incorporated by reference to Exhibit 10.12 of the Company’s Annual Report on Form 10-K (SEC File No. 000-21121) filed with the SEC on March 16, 2009). 10.10 (x)‡ Severance Agreement by and between TransAct and Andrew J. Hoffman (as amended), effective December 23, 2008. 10.11 (x)‡ Second Amendment to Severance Agreement by and between TransAct and Steven A. DeMartino, effective April 29, 2021 10.12 Lease Agreement by and between Bomax Properties and Ithaca, dated as of March 23, 1992 (incorporated by reference to Exhibit 10.14 of the Company’s Registration Statement on Form S-1 (No. 333-06895) filed with the SEC on June 26, 1996). 10.13 Second Amendment to Lease Agreement by and between Bomax Properties and Ithaca, dated December 2, 1996 ( incorporated by reference to Exhibit 10.27 of the Company’s Annual Report on Form 10-K (SEC File No. 000-21121) filed with the SEC on March 31, 1998). 33 10.14 Agreement regarding the Continuation and Renewal of Lease by and between Bomax Properties, LLC and TransAct, dated July 18, 2001 (incorporated by reference to Exhibit 10.8 of the Company’s Annual Report on Form 10-K (SEC File No. 000-21121) filed with the SEC on March 29, 2002). 10.15 Amendment No. 1 to Lease Agreement between Bomax Properties, LLC and TransAct (incorporated by reference to Exhibit 10.16 of the Company’s Quarterly Report on Form 10-Q (SEC File No. 000-21121) filed with the SEC on May 10, 2012). 10.16 Amendment No. 2 to Lease Agreement between Bomax Properties, LLC and TransAct, dated January 14, 2016 (incorporated by reference to Exhibit 10.13 of the Company’s Annual Report on Form 10-K (SEC File No. 000-21121) filed with the SEC on March 11, 2016). 10.17 Amendment No. 3 to Lease Agreement between Bomax Properties, LLC and TransAct, dated February 28, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (SEC File No. 000-21121) filed with the SEC on March 4, 2020). 10.18 Lease Agreement by and between Las Vegas Airport Properties LLC and TransAct dated December 2, 2004 (incorporated by reference to Exhibit 10.13 of the Company’s Annual Report on Form 10-K (SEC File No. 000-21121) filed with the SEC on March 16, 2005). 10.19 First Amendment to Lease Agreement by and between CIP Hughes Center LLC and TransAct dated August 24, 2009 (incorporated by reference to Exhibit 10.19 of the Company’s Annual Report on Form 10-K (SEC File No. 000-21121) filed with the SEC on March 16, 2010). 10.20 Second Amendment to Lease Agreement by and between The Realty Associates Fund IX LP and TransAct dated June 30, 2015 (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q (SEC File No. 000-21121) filed with the SEC on August 7, 2015). 10.21 Lease Agreement by and between 2319 Hamden Center I, L.L.C. and TransAct dated November 27, 2006 (incorporated by reference to Exhibit 10.14 of the Company’s Annual Report on Form 10-K (SEC File No. 000-21121) filed with the SEC on March 15, 2007). 10.22 First Amendment to Lease by and between 2319 Hamden Center I, L.L.C. and TransAct dated January 3, 2017 (incorporated by reference to Exhibit 10.20 of the Company’s Annual Report on Form 10-K (SEC File No. 000-21121) filed with the SEC on March 16, 2017). 10.23 Second Amendment to Lease by and between 2319 Hamden Center I, L.L.C. and TransAct Technologies dated April 30, 2021 (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q (SEC File No. 000-21121) filed with the SEC on May 13, 2021). 10.24 Loan and Security Agreement, dated as of March 13, 2020, among Siena Lending Group LLC, TransAct Technologies Incorporated and the other Loan Parties from time to time party thereto (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q (SEC File No. 000-21121) filed with the SEC on May 22, 2020). 10.25 Amendment No. 1 To Loan and Security Agreement, dated as of July 21, 2021, among Siena Lending Group and TransAct Technologies Incorporated (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K (SEC File No. 000-21121) filed with the SEC on July 26, 2021) 10.26 † Master License Agreement dated February 22, 2019 and amendments thereto (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K (SEC File No. 000-21121) filed with the SEC on March 12, 2021). 1 0.27 † Master Development and License Agreement dated July 20, 2018 (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K (SEC File No. 000-21121) filed with the SEC on March 12, 2021). 21 Subsidiaries of the Company(incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K (SEC File No. 000-21121) filed with the SEC on March 12, 2021). 23.1 * Consent of Marcum LLP 31.1 * Rule 13a-14(a) Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 * Rule 13a-14(a) Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. 32 ‡ Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). (x) Management contract or compensatory plan or arrangement. * These exhibits are filed herewith. † Certain portions of this exhibit (indicated by “[***]”) have been omitted pursuant to Item (601)(b)(10) of Regulation S-K. ‡ Furnished herewith. (b) Exhibits. The Exhibits required by Item 601 of Regulation S-K under the Exchange Act are included in the Exhibit Index above under a(3) of this Item 15. (c) Financial Statement Schedules. See the Notes to the Consolidated Financial Statements included in this Form 10-K. 34 Item 16. Form 10-K Summary. Not applicable. 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRANSACT TECHNOLOGIES INCORPORATED By: /s/ Bart C. Shuldman Name: Bart C. Shuldman Title: Chairman of the Board and Chief Executive Officer Date: March 24, 2022 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Bart C. Shuldman Chairman of the Board and Chief Executive Officer March 24, 2022 Bart C. Shuldman (Principal Executive Officer) /s/ Steven A. DeMartino President, Chief Financial Officer, Treasurer and Secretary March 24, 2022 Steven A. DeMartino (Principal Financial Officer) /s/ David B. Peters Vice President and Chief Accounting Officer March 24, 2022 David B. Peters (Principal Accounting Officer) /s/ John M. Dillon Director March 24, 2022 John M. Dillon /s/ Randall S. Friedman Director March 24, 2022 Randall S. Friedman /s/ Emanuel P. N. Hilario Director March 24, 2022 Emanuel P. N. Hilario /s/ Haydee Olinger Director March 24, 2022 Haydee Olinger 36 TRANSACT TECHNOLOGIES INCORPORATED INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID 688 ) F-2 Consolidated Balance Sheets as of December 31, 2021 and 2020 F-4 Consolidated Statements of Operations for the years ended December 31, 2021 and 2020 F-5 Consolidated Statements of Comprehensive Loss for the years ended December 31, 2021 and 2020 F-6 Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2021 and 2020 F-7 Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020 F-8 Notes to Consolidated Financial Statements F-9 F-1 Report of Independent Registered Publi c Accounting Firm To the Shareholders and Board of Directors of Transact Technologies Incorporated Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of TransAct Technologies Incorporated and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive loss , changes in shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Revenue recognition – Identification of Distinct Performance Obligations and Estimate of Standalone Selling Price As described in Note 2 to the consolidated financial statements, some of the Company’s contracts with customers contain multiple performance obligations (most commonly when contracts include a hardware product, software and extended warranties). A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. For a majority of the Company’s revenue, which consists of printers, terminals, consumables, and replacement parts, the Company recognizes revenue as of a point of time; the revenue is recognized upon shipment of the order when control of the goods is transferred to the customer and at the time the performance obligation is fulfilled. Performance obligations are satisfied over time if the customer receives the benefits as the Company performs work. The Company’s cloud-based BOHA! software, provided on a subscription basis, allows customers to use hosted software over the contract period without taking possession of the software and is recognized ratably over the contract period. For extended warranties, the transaction price is recognized ratably over the warranty period, using output methods, as control of the services is transferred to the customer. When there is more than one performance obligation in a customer arrangement, the Company typically uses the “standalone selling price” method to determine the transaction price to allocate to each performance obligation. F-2 In 2020, the Company launched a new service offering related to BOHA! for one customer that bundled the BOHA! products (cloud-based SaaS software applications, hardware and after-market service) in one price payable monthly over a three-year period. During the year ended December 31, 2021, the Company recognized revenue from this contract with the customer related to this service offering in the amount of approximately $312 thousand. Judgement was required by management to identify the performance obligations in the contract and allocate the transaction price to each performance obligation. The principal considerations for our determination that revenue recognition, specifically related to management’s identification of distinct performance obligations and the estimation of standalone selling prices related to this service offering, is a critical audit matter are that there was significant judgment by management in (1) the identification of distinct performance obligations related to this service offering, specifically the determination that one distinct performance obligation existed for point in time revenue recognition and three distinct performance obligations existed for over-time revenue recognition, (2) the estimation of the standalone selling price using market pricing conditions and other observable inputs, such as historical pricing practices, for each distinct performance obligation; (3) the determination that a significant financing component existed in the arrangement with the customer, therefore, requiring deferral of a portion of the point in time revenue to be recognized as interest income over the contract period; (4) management’s election of the accounting policy expedient to exclude sales taxes collected from customers from the transaction price in accordance with ASU 2016-12; and (5) the identification of costs incurred to obtain the contract and management’s decision to defer such costs and recognize the expense on a straight-line basis over the life of the contract. This in turn led to a high degree of auditor judgment and subjectivity in performing our audit procedures, which were designed to evaluate audit evidence related to management’s identification of distinct performance obligations within the contract with the customer related to this service offering and the judgments made by management to estimate the standalone selling prices used to allocate the transaction price to those distinct performance obligations identified. Due to this complexity, there was significant effort in performing our audit procedures to evaluate the reasonableness of management’s estimates used in the Company’s application of the accounting standard related to revenue recognition for this service offering. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, (i) evaluating the Company’s revenue recognition accounting policy resulting from its application of the accounting standard related to revenue recognition; (ii) evaluating management’s identification of distinct performance obligations in its contract with the customer; (iii) evaluating management’s process for estimating the standalone selling price which included testing the completeness and accuracy of input data used and evaluating the reasonableness of significant assumptions used by management, principally observable inputs such as historical pricing practices; and (iv) evaluation of the accuracy of management’s allocation of the transaction price to the performance obligations contained within the related contract with the customer. /s/ Marcum LLP We have served as the Company’s auditor since 2020. Hartford, Connecticut March 24, 2022 F-3 TRANSACT TECHNOLOGIES INCORPORATED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) December 31, 2021 December 31, 2020 Assets: Current assets: Cash and cash equivalents $ 19,457 $ 10,359 Accounts receivable, net 7,593 3,377 Employee retention credit receivable 1,500 – Note receivable – 100 Inventories 7,720 11,286 Prepaid income taxes 137 2,409 Other current assets 738 644 Total current assets 37,145 28,175 Fixed assets, net 2,684 1,950 Notes receivable, net of current portion – 1,584 Right-of-use asset 2,553 3,618 Goodwill 2,621 2,621 Deferred tax assets 5,141 2,939 Intangible assets, net 397 583 Other assets 400 777 13,796 14,072 Total assets $ 50,941 $ 42,247 Liabilities and Shareholders’ Equity: Current liabilities: Accounts payable $ 4,308 $ 1,691 Accrued liabilities 3,894 3,665 Lease liability 789 837 Deferred revenue 805 504 Total current liabilities 9,796 6,697 Long-term debt – 2,173 Deferred revenue, net of current portion 186 111 Lease liability, net of current portion 1,781 2,864 Other liabilities 187 166 2,154 5,314 Total liabilities 11,950 12,011 Commitments and contingencies Shareholders’ equity: Preferred stock, $ 0.01 value, 4,800,000 authorized, none issued and outstanding – – Preferred stock, Series A, $ 0.01 par value, 200,000 authorized, none issued and outstanding – – Common stock, $ 0.01 par value, 20,000,000 authorized at December 31, 2021 and 2020 ; 13,917,731 and 12,976,227 shares issued; 9,872,889 and 8,931,385 shares outstanding, at December 31, 2021 and 2020 , respectively 139 130 Additional paid-in capital 55,246 42,536 Retained earnings 15,573 19,718 Accumulated other comprehensive income (loss), net of tax 143 ( 38 ) Treasury stock, 4,044,842 shares, at cost ( 32,110 ) ( 32,110 ) Total shareholders’ equity 38,991 30,236 Total liabilities and shareholders’ equity $ 50,941 $ 42,247 See accompanying notes to Consolidated Financial Statements. F-4 TRANSACT TECHNOLOGIES INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Year Ended December 31, 2021 2020 Net sales $ 39,386 $ 30,595 Cost of sales 24,137 17,666 Gross profit 15,249 12,929 Operating expenses: Engineering, design and product development 7,475 5,703 Selling and marketing 7,658 6,144 General and administrative 9,626 9,255 24,759 21,102 Operating loss ( 9,510 ) ( 8,173 ) Interest and other income (expense): Interest expense ( 157 ) ( 130 ) Interest income 61 78 Other, net ( 283 ) 56 Gain from employee retention credit 1,500 – Gain on forgiveness of long-term debt 2,173 – 3,294 4 Loss before income taxes ( 6,216 ) ( 8,169 ) Income tax benefit 2,071 2,539 Net loss $ ( 4,145 ) $ ( 5,630 ) Net loss per common share: Basic $ ( 0.45 ) $ ( 0.72 ) Diluted $ ( 0.45 ) $ ( 0.72 ) Shares used in per-share calculation: Basic 9,298 7,827 Diluted 9,298 7,827 See accompanying notes to Consolidated Financial Statements. F-5 TRANSACT TECHNOLOGIES INCORPORATED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) Year Ended December 31, 2021 2020 Net loss $ ( 4,145 ) $ ( 5,630 ) Foreign currency translation adjustment, net of tax 181 ( 7 ) Comprehensive loss $ ( 3,964 ) $ ( 5,637 ) See accompanying notes to Consolidated Financial Statements. F-6 TRANSACT TECHNOLOGIES INCORPORATED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (In thousands, except share data) Common Stock Additional Paid-in Retained Treasury Accumulated Other Comprehensive Total Shares Amount Capital Earnings Stock Income (Loss) Equity Balance, January 1, 2020 7,470,248 $ 115 $ 32,604 $ 25,348 $ ( 32,110 ) $ ( 31 ) $ 25,926 Issuance of common stock from exercise of stock options 62,500 1 374 – – – 375 Issuance of common stock on restricted stock units 32,725 – – – – – – Issuance of common stock, net of issuance cost 1,380,000 14 8,723 – – – 8,737 Relinquishment of stock awards and deferred stock units to pay withholding taxes ( 14,088 ) – ( 41 ) – – – ( 41 ) Share-based compensation expense – – 876 – – – 876 Foreign currency translation adjustment, net of tax – – – – – ( 7 ) ( 7 ) Net loss – – – ( 5,630 ) – – ( 5,630 ) Balance, December 31, 2020 8,931,385 130 42,536 19,718 ( 32,110 ) ( 38 ) 30,236 Issuance of common stock from exercise of stock options 97,000 – 436 – – – 436 Issuance of common stock on restricted stock units 50,525 – – – – – – Issuance of common stock, net of issuance cost 842,375 9 11,201 – – – 11,210 Relinquishment of stock awards and deferred stock units to pay withholding taxes ( 48,396 ) – ( 133 ) – – – ( 133 ) Share-based compensation expense – – 1,206 – – – 1,206 Foreign currency translation adjustment, net of tax – – – – – 181 181 Net loss – – – ( 4,145 ) – – ( 4,145 ) Balance, December 31, 2021 9,872,889 $ 139 $ 55,246 $ 15,573 $ ( 32,110 ) $ 143 $ 38,991 See accompanying notes to Consolidated Financial Statements. F-7 TRANSACT TECHNOLOGIES INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2021 2020 Cash flows from operating activities: Net loss $ ( 4,145 ) $ ( 5,630 ) Adjustments to reconcile net loss to net cash used in operating activities: Share-based compensation expense 1,206 876 Depreciation and amortization 957 1,342 Deferred income tax benefit ( 2,150 ) ( 367 ) Loss on the sale of fixed assets 9 – Foreign currency transaction losses (gains) 272 ( 58 ) Gain on forgiveness of long-term debt ( 2,173 ) – Changes in operating assets and liabilities: Accounts receivable ( 4,217 ) 2,975 Employee retention credit receivable ( 1,500 ) – Inventories 3,573 876 Prepaid income taxes 2,210 ( 2,226 ) Other current and long-term assets 322 ( 198 ) Accounts payable 2,534 ( 1,276 ) Accrued liabilities and other liabilities 592 176 Net cash used in operating activities ( 2,510 ) ( 3,510 ) Cash flows from investing activities: Capital expenditures ( 1,384 ) ( 744 ) Proceeds from the sale of fixed assets 8 – Collection (issuance) of note receivable 1,598 ( 600 ) Net cash provided by (used in) investing activities 222 ( 1,344 ) Cash flows from financing activities: Revolving credit line borrowings – 2,756 Revolving credit line payments – ( 2,756 ) Long-term debt borrowings – 2,173 Proceeds from stock option exercises 436 375 Proceeds from the issuance of common stock 12,214 9,798 Payment of common stock issuance costs ( 1,014 ) ( 1,061 ) Withholding taxes paid on stock issuance ( 133 ) ( 41 ) Payment of bank financing costs ( 31 ) ( 213 ) Net cash provided by financing activities 11,472 11,031 Effect of exchange rate changes on cash and cash equivalents ( 86 ) ( 21 ) Increase in cash and cash equivalents 9,098 6,156 Cash and cash equivalents, beginning of period 10,359 4,203 Cash and cash equivalents, end of period $ 19,457 $ 10,359 Supplemental cash flow information: Interest paid $ 76 $ 64 Income taxes paid 57 46 Non-cash capital expenditure items 82 25 See accompanying notes to Consolidated Financial Statements. F-8 TRANSACT TECHNOLOGIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of business TransAct Technologies Incorporated (together with its subsidiaries, “TransAct,” the “Company,” “we,” “us,” or “our”), which has its headquarters in Hamden, Connecticut and its primary operating facility in Ithaca, New York, operates in one operating segment: software-driven technology and printing solutions for high growth markets including food service technology, casino and gaming and POS automation markets. Our solutions are designed from the ground up based on market and customer requirements and are sold under the BOHA! TM , AccuDate™, Epic, Ithaca®, EPICENTRAL and Printrex® product brands. We sell our products to original equipment manufacturers, value-added resellers, select distributors, and directly to end-users. Our product distribution spans across the Americas, Europe, the Middle East, Africa, Asia, Australia, New Zealand, the Caribbean Islands and the South Pacific. TransAct also provides world-class service, spare parts, accessories and printing supplies to its growing worldwide installed base of products. We also generate revenue from the after-market side of the business, providing printer and terminal service, consumables and spare parts in addition to revenue from our two software solutions; (i) our line of BOHA! software applications used to automate the back-of-house operations of restaurants, convenience stores and food service operators and (ii) the EPICENTRAL Print System (“EPICENTRAL”), that enables casino operators to create promotional coupons and marketing messages and print them in real time at the slot machine. Impact of the COVID-19 Pandemic In the first quarter of 2020, the COVID-19 pandemic and the resulting social distancing measures, including closures and restricted openings of restaurants and casinos implemented by federal, state and local authorities, negatively impacted customer demand and disrupted portions of our supply chain, including delayed product shipments from our two manufacturers located in Thailand and China. While we began to experience a modest recovery starting in the second half of 2020 into 2021 and expect this recovery to continue during 2022, the exact timing and pace of recovery are unknown given uncertainty surrounding responsive measures to the spread of virus variants or any potential future resurgences of the virus and the significant disruption that our customers have already experienced and may continue to experience. In light of this uncertainty, we implemented a number of cost saving measures during 2020 to help mitigate the impact on our financial position and operations and continued to limit discretionary spending during 2021. We are monitoring indicators of demand recovery, including our sales pipeline, customer orders and product shipments to ascertain an estimate of the ultimate impact of the COVID-19 pandemic on our business; however, the length and ultimate severity of the reduction in demand due to the pandemic remains uncertain. Balance Sheet, Cash Flow and Liquidity. In addition to the expense management actions implemented during 2020, we took the following actions to increase liquidity and strengthen our financial position. ● Public Offering – On October 16, 2020 and August 16, 2021, the Company raised net proceeds of $ 8.7 million and $ 11.2 million ( including the exercise of the underwriters overallotment options on October 16, 2020 and August 20, 2021) , respectively, after deducting underwriting discounts, commissions and offering expenses, through underwritten public offerings and sold an aggregate of 1,380,000 and 842,375 shares of common stock, respectively. ● PPP Loan – On May 1, 2020, the Company was granted a $ 2.2 million loan (the “PPP Loan”) under the Paycheck Protection Program (the “PPP”) administered by the Small Business Administration (“SBA”) established under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which enabled us to return employees we furloughed earlier in 2020 to full time employment and to restore employees to full pay following certain pay cuts . On July 8, 2021, we received notice that the PPP Loan had been forgiven as of July 1, 2021. See Note 9 for further details regarding the PPP Loan. ● Employee Retention Credit – Under the provisions of the CARES Act, the Company is eligible for a refundable employee retention credit subject to certain criteria. In connection with the CARES Act, the Company recognized the employee retention credit during the fourth quarter of 2021 and recorded $ 1.5 million as “Gain from employee retention credit” in the Consolidated Statement of Operations for the year ended December 31, 2021 and the related receivable as “Employee retention credit receivable” in the Consolidated Balance Sheets as of December 31, 2021. We expect to receive these funds during 2022. ● New Credit Facility – On March 13, 2020, we entered into a new credit facility with Siena Lending Group LLC that provides a revolving credit line of up to $ 10.0 million, subject to a borrowing base. ● Reduced Capital Expenditures – We limited capital expenditures during 2020 and gradually increased expenses during 2021 as our sales improved. F-9 We may further modify or supplement the expense management measures we have implemented and the actions we have taken to increase liquidity as the timing and extent of customer demand recovery develops and supply chains normalize. After reviewing whether conditions and/or events raise substantial doubt about our ability to meet future financial obligations over the 12 months following the date on which the Consolidated Financial Statements included in this Form 10-K (this “Report”) were issued, including consideration of the actions taken to manage expenses and liquidity, we believe that our net cash to be provided by operations combined with our cash and cash equivalents and borrowing availability under our revolving credit facility will provide sufficient liquidity to fund our current obligations, capital spending, and working capital requirements and to comply with the financial covenants of our credit facility over at least 12 months following the date that the Consolidated Financial Statements were issued. Use of Assumptions and Estimates Management’s belief that the Company will be able to fund its planned operations over the 12 months following the date on which the Consolidated Financial Statements were issued is based on assumptions which involve significant judgment and estimates of future revenues, capital expenditures and other operating costs. Our current assumptions are that casinos and restaurants remain open and consumer traffic continues to gradually increase during 2022, but that many casinos and restaurants may delay purchases of new slot machines and our BOHA! products, respectively, due to labor shortages and supply issues caused by the pandemic. Based on these assumptions, we anticipate that sales in casino and gaming and food service technology may continue to be negatively impacted for the foreseeable future. We have performed a sensitivity analysis on these assumptions to forecast the potential impact of a slower-than-anticipated recovery and believe that we are positioned to withstand the impact of lower-than-anticipated sales and that we will be able to take additional financial and operational actions to cut costs and/or increase liquidity if necessary. These actions may include additional expense reductions and capital raising activities. In addition, the presentation of the accompanying audited Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities. Our estimates include those related to revenue recognition, inventory obsolescence, the valuation of deferred tax assets and liabilities, depreciable lives of equipment, warranty obligations, and contingent liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates used. Smaller Reporting Company As a smaller reporting company, as defined in Item 10(f)(1) of Regulation S-K, we may choose to prepare our disclosures relying on certain scaled disclosure requirements for smaller reporting companies in Regulation S-K and in Article 8 of Regulation S-X. The scaled disclosure requirements for smaller reporting companies permit us (i) to include less extensive narrative disclosure than required of other reporting companies, particularly in the description of executive compensation and (ii) to provide audited financial statements for two fiscal years, in contrast to other reporting companies, which must provide audited financial statements for three years. We may lose our status as a smaller reporting company on the last day of the fiscal year in which (i) our public float exceeds $250 million as of the last day of the second fiscal quarter or (ii) if we have more than $100 million in annual revenues and (a) have no public float or (b) have a public float more than $700 million. 2. Summary of significant accounting policies Principles of consolidation: The accompanying Consolidated Financial Statements include the accounts of TransAct and its wholly-owned subsidiaries, which require consolidation, after the elimination of intercompany accounts, transactions and unrealized profit. Use of estimates : The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities as of the date of the Consolidated Financial Statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. Segment reporting : We apply the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, “Segment Reporting.” We view our operations and manage our business as one segment: the design, development and marketing of software-driven technology and printing solutions and providing printer and terminal related software, services, supplies and spare parts. Factors used to identify TransAct’s single operating segment include the organizational structure of the Company and the financial information available for evaluation by the chief operating decision-maker in making decisions about how to allocate resources and assess performance. Cash and cash equivalents : We consider all highly liquid investments with a maturity date of three months or less at date of purchase to be cash equivalents. Allowance for doubtful accounts : We establish an allowance for doubtful accounts to ensure trade receivables are valued appropriately. We maintain an allowance for doubtful accounts based on a variety of factors, including the length of time receivables are past due, significant one-time events and historical experience. We record a specific allowance for individual accounts when we become aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to customers change, we further adjust estimates of the recoverability of receivables. F-10 The following table summarizes the activity recorded in the valuation account for accounts receivable: Year Ended December 31, (In thousands) 2021 2020 Balance, beginning of period $ 220 $ 221 Additions charged to costs and expenses – 1 Deductions ( 1 ) ( 2 ) Balance, end of period $ 219 $ 220 Inventories: 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 completions, disposal and transportation, historical usage and estimates of future demand. Based on these reviews, inventory write-downs are recorded, as necessary, to reflect estimated obsolescence, excess quantities and net realizable value. Fixed assets: Fixed assets are stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives. The estimated useful life of tooling is five years ; machinery and equipment is ten years ; furniture and office equipment is five years to ten years ; and computer software and equipment is three years to seven years . Leasehold improvements are amortized over the shorter of the term of the lease or the useful life of the asset. Costs related to repairs and maintenance are expensed as incurred. The costs of sold or retired assets are removed from the related asset and accumulated depreciation accounts and any gain or loss is recognized. Depreciation expense was $ 0.7 million and $ 1.0 million in 2021 and 2020, respectively. Leases: We account for leases in accordance with ASC 842, “Leases” (“ASC 842”), which requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification determines whether lease expense is recognized based on an effective interest method for finance leases or on a straight-line basis over the term of the lease for operating leases. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less are accounted for based on existing guidance for operating leases. If risks and rewards are conveyed without the transfer of control, the lease is treated as financing. If the lessor does not convey risks and rewards or control, the lease is treated as operating. We have elected certain practical expedients available under ASC 842 upon adoption. We have applied the practical expedient for short-term leases. We have lease agreements that include lease and non-lease components, and we have not elected the practical expedients to combine these components for any of our leases. We enter into lease agreements for the use of real estate space and certain equipment under operating leases and we have no financing leases. We determine if an arrangement contains a lease at inception. Our leases are included in “Right-of-use asset” and “Lease liability” in our Consolidated Balance Sheets. Right of use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Lease right of use assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. On February 28, 2020, we entered into an amendment to extend the lease on our facility in Ithaca, New York, which resulted in recording an additional right-of-use-asset and lease liability of $ 1.5 million. The lease, which was last amended on January 14, 2016, was scheduled to expire on May 31, 2021. The lease amendment provides for an extension of the lease for four additional years from June 1, 2021 to May 31, 2025. On April 30, 2021, we entered into an amendment to modify the expiration date of our lease on our Hamden, CT facility. The lease, which was last amended on January 3, 2017, was scheduled to expire on April 30, 2027. The lease amendment modified the expiration date to October 31, 2025. The modification resulted in reducing the right-of-use-asset and lease liability by $ 0.3 million. Lease expense is recognized on a straight-line basis over the lease term. As most of our leases do not provide an implicit rate, the Company determines its incremental borrowing rate by using the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. Our lease right of use asset excludes lease incentives. Our leases have remaining lease terms of one year to five years , some of which include options to extend. The exercise of lease renewal options is at our sole discretion and our lease right of use assets and liabilities reflect only the options we are reasonably certain that we will exercise. Lease expense is recognized on a straight-line basis over the lease term. F-11 Goodwill and Intangible assets : We acquire businesses in purchase transactions that result in the recognition of goodwill and intangible assets. The determination of the value of intangible assets requires management to make estimates and assumptions. In accordance with ASC 350-20 “Goodwill,” acquired goodwill is not amortized but is subject to impairment testing at least annually and when an event occurs or circumstances change that indicate it is more likely than not an impairment exists. We perform a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis (as of December 31) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. The Company utilizes the option to first assess qualitative factors to determine whether it is necessary to perform the Step 1 quantitative goodwill impairment test in accordance with the applicable accounting standards. Under the qualitative assessment, management considers relevant events and circumstances including but not limited to macroeconomic conditions, industry and market considerations, Company performance and events directly affecting the Company. If the Company determines that the Step 1 quantitative impairment test is required, management estimates the fair value of the reporting unit primarily using the income approach, which reflects management’s cash flow projections, and also evaluates the fair value using the market approach. Factors considered that may trigger an interim period impairment review of either acquired goodwill or intangible assets are: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of acquired assets or the strategy for the overall business; significant negative industry or economic trends; and significant decline in market capitalization relative to net book value. Finite lived intangible assets are amortized and are tested for impairment when appropriate. As of December 31, 2021, 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, 2021 when our annual review for impairment was performed. Revenue recognition: We account for revenue in accordance with ASC Topic 606: Revenue from Contracts with Customers. 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 a hardware product, software and extended warranties). A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. 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 in our casino and gaming market, EPICENTRAL, that enables casino operators to create promotional coupons and marketing messages and to print them in real time at the slot machine. EPICENTRAL 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, BOHA! cloud-based software applications, technical support for our food service technology terminals and maintenance agreements (including free one-year maintenance received by 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. Our cloud-based BOHA! software allows customers to use hosted software over the contract period on a subscription basis without taking possession of the software and the subscription price is recognized ratably over the contract period. For extended warranties, the transaction price is recognized ratably over the warranty period, using output methods, as control of the services is transferred to the customer. When there is more than one performance obligation in a customer arrangement, the Company typically uses the “standalone selling price” method to determine the transaction price to allocate to each performance obligation. 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. For contracts with terms of less than 12 months, the Company expenses sales commissions as they are incurred, since the expected amortization period of the cost to obtain a contract is less than 12 months. F-12 Disaggregation of revenue The following table disaggregates our revenue by market type, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Sales and usage-based taxes are excluded from revenues. Year Ended December 31, 2021 (In thousands) United States International Total Food service technology $ 11,738 $ 887 $ 12,625 POS automation 4,817 8 4,825 Casino and gaming 10,173 5,129 15,302 Printrex 171 460 631 TransAct Services Group 5,501 502 6,003 Total net sales $ 32,400 $ 6,986 $ 39,386 Year Ended December 31, 2020 (In thousands) United States International Total Food service technology $ 6,956 $ 778 $ 7,734 POS automation 3,763 7 3,770 Casino and gaming 6,852 4,127 10,979 Lottery 817 – 817 Printrex 83 217 300 TransAct Services Group 6,262 733 6,995 Total net sales $ 24,733 $ 5,862 $ 30,595 Contract balances Contract assets consist of unbilled receivables. Pursuant to the over-time revenue recognition model, revenue may be recognized prior to the customer being invoiced. An unbilled receivable is recorded to reflect revenue that is recognized when such revenue exceeds the amount invoiced to the customer. Unbilled receivables are separated into current and non-current assets and included within “Accounts Receivable” and “Other Non-Current Assets” on the Consolidated Balance Sheets. We first recorded contract assets during 2020 upon the start of a long-term BOHA! contract. Contract liabilities consist of customer prepayments and deferred revenue. Customer prepayments are reported as “Accrued Liabilities” in current liabilities in the Consolidated Balance Sheets and represent customer payments made in advance of performance obligations in instances where credit has not been extended and is recognized as revenue when the performance obligation is complete. Deferred revenue is reported separately in current liabilities and non-current liabilities and consists of our extended warranty contracts, technical support for our food service technology terminals, EPICENTRAL maintenance contracts and prepaid software subscriptions for our BOHA! software applications, and is recognized as revenue as (or when) we perform under the contract. The increase in current and non-current deferred revenue in 2021 compared to 2020 was primarily due to increased BOHA! software subscriptions and increased extended warranty contracts on our BOHA! hardware products. During the year ended December 31, 2021, we recognized revenue of $ 0.7 million related to our contract liabilities as of December 31, 2020. Net contract (liabilities) assets consist of the following: December 31, (In thousands) 2021 2020 Unbilled receivables, current $ 314 $ 290 Unbilled receivables, non-current 308 591 Customer pre-payments ( 99 ) ( 216 ) Deferred revenue, current ( 805 ) ( 504 ) Deferred revenue, non-current ( 186 ) ( 111 ) Net contract (liabilities) assets $ ( 468 ) $ 50 Remaining performance obligations Remaining performance obligations represent the transaction price of firm orders for which a good or service has not been delivered to our customer. As of December 31, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 10.5 million. The Company expects to recognize revenue on $ 10.1 million of our remaining performance obligations within the next 12 months and $ 0.4 million within the next 24 months. F-13 Concentration of credit risk: Financial instruments that potentially expose us to concentrations of credit risk are limited to cash and cash equivalents held by our banks in excess of insured limits and accounts receivable. Accounts receivable from customers representing 10% or more of total accounts receivable were as follows: December 31, 2021 2020 Chain Link Services 10 % – International Gaming Technology (“IGT”) 3 % 11 % NCR Corporation 11 % 2 % Sales to customers representing 10% or more of total net sales were as follows: December 31, 2021 2020 IGT 9 % 15 % 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. The following table summarizes the activity recorded in the accrued product warranty liability: December 31, (In thousands) 2021 2020 Balance, beginning of period $ 140 $ 215 Warranties issued 44 56 Warranty settlements ( 83 ) ( 131 ) Balance, end of period $ 101 $ 140 $ 79 thousand and $ 112 thousand of the accrued product warranty liability was classified as current in Accrued liabilities at December 31, 2021 and 2020, respectively. The remaining $ 22 thousand and $ 28 thousand of the accrued product warranty liability as of December 31, 2021 and 2020, respectively, was classified as long-term in Other liabilities. Engineering, design and product development: Engineering, design and product development expenses include expenses incurred in connection with specialized engineering and design to introduce new products and to customize existing products, and are expensed as a component of operating expenses as incurred. We recorded $ 7.5 million and $ 5.7 million of research and development expenses in 2021 and 2020, respectively. Costs incurred in the engineering, design and product development of a computer software product are charged to expense until technological feasibility has been established, at which point all material software costs are capitalized within Intangible assets in our Consolidated Balance Sheet until the product is available for general release to customers. While judgment is required in determining when technological feasibility of a product is established, we have determined that it is reached after all high-risk development issues have been documented in a formal detailed plan design. The amortization of these costs have been included in cost of sales over the estimated life of the product. During 2019, we contracted several third-parties to develop software for our food service technology products, the cost for which we capitalized. Unamortized development costs for such software were $ 396 thousand as of December 31, 2021. The total amount charged to cost of sales for capitalized software development costs was $ 154 thousand and $ 153 thousand in 2021 and 2020, respectively. Advertising: Advertising costs are expensed as incurred. Advertising expenses, which are included in selling and marketing expense on the accompanying Consolidated Statements of Operations, for 2021 and 2020 totaled $ 1.8 million and $ 0.7 million, respectively. These expenses include items such as consulting and professional services, tradeshows, and print advertising. Income taxes: The income tax amounts reflected in the accompanying Consolidated Financial Statements are accounted for under the liability method in accordance with ASC 740, “Income Taxes” (“ASC 740”). Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. We assess the likelihood that net 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. In accordance with ASC 740, we identified, evaluated and measured the amount of benefits to be recognized for our tax return positions. Foreign currency translation: The financial position and results of operations of our foreign subsidiary in the UK are measured using local currency as the functional currency. Assets and liabilities of such subsidiary have been translated into U.S. dollars at the year-end exchange rate, related sales and expenses have been translated at the exchange rate as of the date the transaction was recognized, and shareholders’ equity has been translated at historical exchange rates. The resulting translation gains or losses, net of tax, are recorded in shareholders’ equity as a cumulative translation adjustment, which is a component of accumulated other comprehensive income and loss. Foreign currency transaction gains and losses, including those related to intercompany balances, are recognized in Other, net on the Consolidated Statements of Operations. F-14 Share-based payments: At December 31, 2021, we have share-based employee compensation plans, which are described more fully in Note 10 - Stock incentive plans. We account for those plans under the recognition and measurement principles of ASC 718, “Compensation – Stock Compensation.” Share-based compensation expense is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite service period. We use 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 the option, stock price volatility, risk-free interest rate, dividend yield, market price of our underlying stock and exercise price. Many of these assumptions require judgment and are highly sensitive in the determination of compensation expense. Forfeitures are recognized as they occur. Net loss per share: We report net income or loss per share in accordance with ASC 260, “Earnings per Share (EPS).” Under this guidance, basic EPS, which excludes dilution, is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted EPS includes in-the-money stock options using the treasury stock method. During a loss period, the assumed exercise of in-the-money stock options has an anti-dilutive effect, and therefore, these instruments are excluded from the computation of diluted EPS. See Note 12 - Earnings per share. 3. Note receivable The note receivable balance relates to loans given to a third-party software developer from whom we license our food service technology software with an interest rate of 4.5 % , which were originally due in April 2020. In March 2021, we received payment in the amount of $ 1.6 million representing the remaining principal balance and interest due from the third-party. Prior to the payment being received, notes receivable were stated at unpaid principal balances and interest income was recognized on the accrual method. Interest income for 2021 and 2020 was $ 17 thousand and $ 67 thousand, respectively. 4. Inventories The components of inventories are: December 31, (In thousands) 2021 2020 Raw materials and purchased component parts $ 6,479 $ 5,467 Work-in-process 11 – Finished goods 1,230 5,819 $ 7,720 $ 11,286 5. Fixed assets, net The components of fixed assets, net are: December 31, (In thousands) 2021 2020 Tooling, machinery and equipment $ 6,694 $ 9,508 Furniture and office equipment 1,660 1,706 Computer software and equipment 6,973 7,364 Leasehold improvements 2,872 2,873 18,199 21,451 Less: Accumulated depreciation and amortization ( 16,736 ) ( 19,979 ) 1,463 1,472 Construction in-process 1,221 478 $ 2,684 $ 1,950 F-15 6. Intangible assets, net Identifiable intangible assets are recorded in Intangible assets, net in the accompanying Consolidated Balance Sheets and are comprised of the following: December 31, 2021 2020 (In thousands) Gross Amount Accumulated Amortization Gross Amount Accumulated Amortization Purchased technology $ 1,591 $ ( 1,195 ) $ 2,526 $ ( 1,975 ) Customer relationships – – 1,300 ( 1,300 ) Trademark – – 480 ( 450 ) Covenant not to compete – – 146 ( 146 ) Patents 15 ( 14 ) 56 ( 54 ) Other – – 80 ( 80 ) Total $ 1,606 $ ( 1,209 ) $ 4,588 $ ( 4,005 ) Amortization expense was $ 186 thousand and $ 234 thousand in 2021 and 2020, respectively. Amortization expense for each of the next five years ending December 31 is expected to be as follows: $ 155 thousand in 2022; $ 154 thousand in 2023; $ 88 thousand in 2024; and none thereafter. 7. Accrued liabilities The components of accrued liabilities are: December 31, (In thousands) 2021 2020 Salaries and compensation related $ 2,854 $ 2,328 Warranty 79 112 Professional and consulting 285 257 Other 676 968 $ 3,894 $ 3,665 8. Retirement savings plan We maintain a 401(k) plan under which all full-time employees are eligible to participate at the beginning of the month immediately following their date of hire. We match employees’ contributions at a rate of 50 % of employees’ contributions up to the first 6 % of the employees’ compensation contributed to the 401(k) plan. Our matching contributions were $ 312 thousand and $ 270 thousand in 2021 and 2020, respectively. 9. Borrowings On March 13, 2020, we entered into a credit facility (the “Siena Credit Facility”) with Siena Lending Group LLC. The Siena Credit Facility provides for a revolving credit line of up to $ 10.0 million expiring on March 13, 2023 . Borrowings under the Siena Credit Facility bear a floating rate of interest equal to the greatest of (i) the prime rate plus 1.75 %, (ii) the federal funds rate plus 2.25 %, and (iii) 6.50 %. The total deferred financing costs related to expenses incurred to complete the Siena Credit Facility was $ 245 thousand, which were reported as “Other current assets” in current assets and “Other assets” in non-current assets in the Condensed Consolidated Balance Sheets. We also pay a fee of 0.50 % on unused borrowings under the Siena Credit Facility. Borrowings under the Siena Credit Facility are secured by a lien on substantially all the assets of the Company. The Siena Credit Facility imposes a financial covenant on the Company and borrowings are subject to a borrowing base based on (i) 85 % of eligible accounts receivable plus the lesser of (a) $ 5.0 million and (b) 50 % of eligible raw material and 60 % of finished goods inventory. The three-month period from April 1, 2020 to June 30, 2020 was the first period we were subject to the financial covenant, which required the Company to maintain a minimum EBITDA and continued through the 12-month period from April 1, 2020 to March 31, 2021. On July 21, 2021, the Company entered into an amendment (the “Credit Facility Amendment”) to the Siena Credit Facility. The Credit Facility Amendment changed the financial covenant under the Siena Credit Facility from a minimum EBITDA covenant to an excess availability covenant requiring that the Company maintain excess availability of at least $ 750 thousand under the Siena Credit Facility, tested as of the end of each calendar month, beginning with the calendar month ending July 31, 2021. We have been in compliance with our excess availability covenant each month since July 31, 2021, and as of December 31, 2021 and 2020, we had no outstanding borrowings under the Siena Credit Facility and $ 5.1 million of borrowing capacity available under the Siena Credit Facility as of December 31, 2021. F-16 On May 1, 2020 (the “Loan Date”), the Company was granted the PPP Loan from Berkshire Bank in the aggregate amount of $ 2.2 million, pursuant to the PPP. Under the terms of the PPP, the PPP Loan may be forgiven to the extent that funds from the PPP Loan were used for payroll costs and costs to continue group health care benefits, as well as for interest on mortgage obligations incurred before February 15, 2020, rent under lease agreements in effect before February 15, 2020, utilities for which service began before February 15, 2020, and interest on debt obligations incurred before February 15, 2020, subject to conditions and limitations provided in the CARES Act. At least 60% (under the PPP terms, as amended) of the proceeds from the PPP Loan needed to have been used for eligible payroll costs for the PPP Loan to be forgiven. The PPP Loan, which was evidenced by a Note dated the Loan Date issued by the Company (the “Note”) in favor of Berkshire Bank, as lender (the “PPP Lender”), was scheduled to mature on May 1, 2022 and had a fixed interest rate of 1.0 % per annum, accruing from the Loan Date and payable monthly. The Company submitted its PPP Loan forgiveness application in May 2021 to the SBA through Berkshire Bank and submitted the related loan necessity questionnaire in June 2021. On July 8, 2021, the Company received notifications from Berkshire Bank and the SBA that its PPP Loan (including all interest accrued thereon) of $ 2.2 million had been fully forgiven by the SBA and that the forgiveness payment date was July 1, 2021. No payments were due on the PPP Loan for six months from the date of first disbursement, and because a loan forgiveness application was submitted to the SBA within 10 months after the end of the covered period, no payments were due until the date on which the SBA remitted the loan forgiveness amount to the PPP Lender and interest accrued during the deferment period was included in the forgiveness amount. The Note was unsecured and guaranteed by the SBA. The forgiveness of the PPP Loan was reported as “Gain on forgiveness of long-term debt” in the Consolidated Statement of Operations during the year ended December 31, 2021. 10. Stock incentive plans Stock incentive plans . We currently have two stock incentive plans: the 2005 Equity Incentive Plan and the 2014 Equity Incentive Plan, which provide for awards to executives, key employees, directors and consultants. The plans generally provide for awards in the form of: (i) incentive stock options, (ii) non-qualified stock options, (iii) restricted stock, (iv) restricted stock units (which may include performance-based vesting), (v) stock appreciation rights or (vi) limited stock appreciation rights. Awards granted under these plans have exercise prices equal to 100 % of the fair market value of the common stock at the date of grant. Awards granted have a ten-year term and generally vest over a two-year to five-year period, unless automatically accelerated for certain defined events. As of May 2014, no new awards may be made under the 2005 Equity Incentive Plan. Under our 2014 Equity Incentive Plan, as amended in May 2020, we are authorized to grant awards of up to 2,200,000 shares of TransAct common stock. At December 31, 2021, 611,652 shares of common stock remained available for issuance under the 2014 Equity Incentive Plan. Under the assumptions indicated below, the weighted-average per share fair value of stock option grants for 2021 and 2020 was $ 5.41 and $ 3.19 , respectively. We also issued restricted stock units for certain executives and directors that vest over a specified period of time, and in some instances require achieving certain performance metrics. The weighted-average per share fair value of these restricted stock units was $ 10.27 and $ 9.77 in 2021 and 2020, respectively. The table below indicates the key assumptions used in the option valuation calculations for options granted in 2021 and 2020 and a discussion of our methodology for developing each of the assumptions used in the valuation model: December 31, 2021 2020 Expected option term (in years) 6.9 7.0 Expected volatility 50.5 % 41.7 % Risk-free interest rate 1.2 % 0.9 % Dividend yield 0.0 % 0.0 % Expected Option Term - This is the weighted average period of time over which the options granted are expected to remain outstanding giving consideration to our historical exercise patterns. Options granted have a maximum term of ten years and an increase in the expected term will increase compensation expense. Expected Volatility – The stock volatility for each grant is measured using the weighted average of historical daily price changes of our common stock over the most recent period approximately equal to the expected option term of the grant. An increase in the expected volatility factor will increase compensation expense. Risk-Free Interest Rate - This is the U.S. Treasury rate in effect at the time of grant having a term approximately equal to the expected term of the option. An increase in the risk-free interest rate will increase compensation expense. Dividend Yield –The dividend yield is calculated by dividing the annual dividend declared per common share by the weighted average market value of our common stock on the date of grant. An increase in the dividend yield will decrease compensation expense. F-17 For 2021 and 2020, we recorded $ 1.2 million and $ 0.9 million of share-based compensation expense, respectively, included primarily in general and administrative expense in our Consolidated Statements of Operations. We also recorded income tax benefits of $ 265 thousand and $ 193 thousand in 2021 and 2020, respectively, related to such share-based compensation. At December 31, 2021, these benefits are recorded as a deferred tax asset in the Consolidated Balance Sheets. Equity award activity in the 2005 Equity Incentive Plan and the 2014 Equity Incentive Plan is summarized below: Stock Options Restricted Stock Units Number of Shares Average Price* Number of Units Average Price** Outstanding at December 31, 2020 1,287,605 $ 8.98 110,550 $ 10.30 Granted 153,000 10.55 95,200 10.27 Exercised ( 97,000 ) 8.47 ( 50,525 ) 10.29 Forfeited ( 45,750 ) 8.87 – – Expired ( 28,500 ) 10.22 – – Outstanding at December 31, 2021 1,269,355 $ 9.18 155,225 $ 10.28 * weighted average exercise price per share ** weighted average grant stock price per share The following summarizes information about equity awards outstanding that are vested and expect to vest and equity awards that are exercisable at December 31, 2021: Equity Awards Vested and Expected to Vest Equity Awards That Are Exercisable Awards Average Price* Aggregate Intrinsic Value Remaining Term** Awards Average Price* Aggregate Intrinsic Value Remaining Term** Stock Options 1,269,355 $ 9.18 $ 2,662 5.6 856,723 $ 9.00 $ 1,982 4.1 Restricted stock units 132,518 – 1,444 2.2 – – – – * weighted average exercise price per share ** weighted-average contractual remaining term in years Shares that are issued upon exercise of employee stock awards are newly issued shares and not issued from treasury stock. As of December 31, 2021, unrecognized compensation cost related to non-vested equity awards granted under our stock incentive plans is approximately $ 2.1 million, which is expected to be recognized over a weighted average period of 2.4 years. The total fair value of awards vested was $ 1.7 million during both the years ended December 31, 2021 and 2020. The total intrinsic value (which is the amount by which the stock price exceeded the exercise price on the date of exercise) of stock options exercised during the years ended December 31, 2021 and 2020 was $ 268 thousand and $ 174 thousand, respectively, and cash received from option exercises was $ 436 thousand and $ 375 thousand in 2021 and 2020, respectively. 97,000 and 62,500 stock options were exercised during the year ended December 31, 2021 and 2020, respectively. We recorded a realized tax provision in 2021 and 2020 from equity-based awards of $ 35 thousand and $ 14 thousand, respectively, related to options exercised. 11. Income taxes The components of the income tax benefit are as follows: December 31, (In thousands) 2021 2020 Current: Federal $ 26 $ ( 2,141 ) State 51 17 Foreign 2 ( 48 ) 79 ( 2,172 ) Deferred: Federal ( 2,086 ) ( 483 ) State ( 62 ) ( 36 ) Foreign ( 2 ) 152 ( 2,150 ) ( 367 ) Income tax benefit $ ( 2,071 ) $ ( 2,539 ) Our effective tax rates were 33.3 % and 31.1 % for 2021 and 2020 , respectively. The tax benefit recorded for 2021 included the recognition of the gain on the forgiveness of the PPP Loan which is not taxable. The effective tax rate for 2020 included the impact of the net operating loss (“NOL”) that we carried back to prior years. The CARES Act permits NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. We generated a NOL for 2020 which was carried back to tax years that had a federal statutory tax rate of 34 % compared to 21 % in 2020 and resulted in a tax refund of $2.2 million that was received in October 2021 causing a significant reduction in prepaid income taxes at December 31, 2021 compared to December 31, 2020. F-18 At December 31, 2021, we have $ 2.0 million of federal net operating loss carryforwards and $ 78 thousand of state net operating loss carryforwards, $ 901 thousand in R&D credit carryforwards, and no state tax credit carryforwards. Foreign loss before taxes was $ 404 thousand and $ 468 thousand in 2021 and 2020, respectively. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the Consolidated Financial Statements. Our deferred tax assets and liabilities were comprised of the following: December 31, (In thousands) 2021 2020 Deferred tax assets: Federal net operating losses $ 1,976 $ – Foreign net operating losses 624 563 Depreciation 306 302 Inventory reserves 710 719 Deferred revenue 24 47 Warranty reserve 22 31 Stock compensation expense 796 731 Other accrued compensation 308 388 R&D credit carryforward 901 460 Other liabilities and reserves 250 394 Gross deferred tax assets 5,917 3,635 Valuation allowance ( 733 ) ( 659 ) Net deferred tax assets 5,184 2,976 Deferred tax liabilities: Other 43 37 Net deferred tax liabilities 43 37 Total net deferred tax assets $ 5,141 $ 2,939 As of December 31, 2021, a valuation allowance of $ 733 thousand has been established for foreign net operating loss carryforwards that are not expected to be used. The following table summarizes the activity recorded in the valuation allowance on the deferred tax assets: Year Ended December 31, (In thousands) 2021 2020 Balance, beginning of period $ 659 $ 444 Additions charged to income tax provision 74 215 Balance, end of period $ 733 $ 659 Differences between the U.S. statutory federal income tax rate and our effective income tax rate are analyzed below: Year Ended December 31, 2021 2020 Federal statutory rate 21.0 % 21.0 % PPP loan forgiveness 7.4 – R&D credit 7.1 4.2 Stock award excess tax benefit 0.3 ( 0.3 ) State income taxes, net of federal income taxes 0.1 0.2 U.S. corporate tax rate change – 9.5 Business meals and entertainment ( 0.2 ) 0.1 Miscellaneous permanent items ( 0.3 ) – Uncertain tax positions ( 0.4 ) ( 0.2 ) Stock option cancellations ( 0.6 ) ( 0.5 ) Valuation allowance and tax accruals ( 1.2 ) ( 2.6 ) Other 0.1 ( 0.3 ) Effective tax rate 33.3 % 31.1 % F-19 We had $ 144 thousand and $ 121 thousand of total gross unrecognized tax benefits at December 31, 2021 and 2020, respectively that, if recognized, would favorably affect the effective income tax rate in any future periods. We are not aware of any events that could occur within the next twelve months that could cause a significant change in the total amount of unrecognized tax benefits. A tabular reconciliation of the gross amounts of unrecognized tax benefits at the beginning and end of the year is as follows: December 31, (In thousands) 2021 2020 Balance, beginning of period $ 121 $ 107 Tax positions taken during the current period 47 41 Lapse of statute of limitations ( 24 ) ( 27 ) Balance, end of period $ 144 $ 121 We expect $ 28 thousand of the $ 144 thousand of unrecognized tax benefits will reverse in 2022 upon the expiration of the statute of limitations. We recognize interest and penalties related to uncertain tax positions in the income tax provision. We have accrued interest and penalties related to uncertain tax positions of $ 20 thousand and $ 19 thousand as of December 31, 2021 and 2020, respectively. We are subject to U.S. federal income tax as well as income tax of certain state and foreign jurisdictions. We have substantially concluded all U.S. federal income tax, state and local, and foreign tax matters through 2017. However, our federal tax returns for the years 2018 through 2021 remain open to examination. Various state and foreign tax jurisdiction tax years remain open to examination as well, though we believe that any additional assessment would be immaterial to the Consolidated Financial Statements. 12. Earnings per share Earnings per share was computed as follows (in thousands, except per share amounts): Year Ended December 31, 2021 2020 Net loss $ ( 4,145 ) $ ( 5,630 ) Shares: Basic: Weighted average common shares outstanding 9,298 7,827 Add: Dilutive effect of outstanding equity awards as determined by the treasury stock method – – Diluted: Weighted average common and common equivalent shares outstanding 9,298 7,827 Net loss per common share: Basic $ ( 0.45 ) $ ( 0.72 ) Diluted ( 0.45 ) ( 0.72 ) The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock options, restricted stock units and performance stock awards, when the average market price of the common stock is lower than the exercise price of the related stock award during the period. These outstanding stock awards are not included in the computation of diluted earnings per share because the effect would be anti-dilutive. Furthermore, in periods when a net loss is reported, such as 2021 and 2020, basic and diluted net loss per common share are calculated using the same method. Anti-dilutive stock awards excluded from the computation of earnings per dilutive share were 391,000 and 1,284,000 at December 31, 2021 and 2020, respectively. 13. Stock repurchase program We use the cost method to account for treasury stock purchases, under which the price paid for the stock is charged to the treasury stock account. Repurchases of our common stock are accounted for as of the settlement date. During 2021 and 2020, we did no t repurchase any shares of our common stock. From January 1, 2005 through December 31, 2019, 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. F-20 14. Geographic area information Information regarding our operations by geographic area is contained in the following table. These amounts in the geographic area table are based on the location of the customer and asset. Year Ended December 31, (In thousands) 2021 2020 Net sales: United States $ 32,400 $ 24,733 International 6,986 5,862 Total $ 39,386 $ 30,595 Fixed assets, net: United States $ 1,770 $ 1,079 International 914 871 Total $ 2,684 $ 1,950 Sales to international customers were 18 % and 19 % of total sales in 2021 and 2020, respectively. Sales to Europe represented 53 % and 45 %, sales to the Pacific Rim (which includes Australia and Asia) represented 35 % and 45 %, and sales to Canada represented 11 % and 8 % of total international sales in 2021 and 2020, respectively. International long-lived assets consist of net fixed assets located at our foreign subsidiary in the UK as well as our contract manufacturers in China, Thailand, Malaysia and Mexico. 15. Leases Operating lease expense was $ 1.0 million for both years ended December 31, 2021 and 2020 and is reported as “Cost of sales,” “Engineering, design and product development expense,” “Selling and marketing expense,” and “General and administrative expense” in the Consolidated Statements of Operations. Operating costs include short-term lease costs, which were immaterial during the period. The following information represents supplemental disclosure for the statement of cash flows related to operating leases (in thousands): Year Ended December 31, 2021 2020 Operating cash outflows from leases $ 982 $ 1,040 The following summarizes additional information related to our leases as of December 31, 2021: Year Ended December 31, 2021 2020 Weighted average remaining lease term (in years) 3.5 4.9 Weighted average discount rate 4.4 % 4.1 % The maturity of the Company’s operating lease liabilities as of December 31, 2021 are as follows (in thousands): December 31, 2021 2022 $ 886 2023 721 2024 721 2025 426 2026 23 Total undiscounted lease payments 2,777 Less imputed interest 207 Total lease liabilities $ 2,570 F-21 16. Quarterly results of operations (unaudited) Our quarterly results of operations for 2021 and 2020 are as follows: Quarter Ended (In thousands, except per share amounts) March 31 June 30 September 30 December 31 2021: Net sales $ 8,301 $ 9,325 $ 10,637 $ 11,123 Gross profit 3,189 3,325 4,317 4,418 Net (loss) income ( 2,206 ) ( 2,114 ) 910 ( 735 ) Net (loss) income per common share: Basic ( 0.25 ) ( 0.24 ) 0.10 ( 0.07 ) Diluted ( 0.25 ) ( 0.24 ) 0.09 ( 0.07 ) 2020: Net sales $ 10,247 $ 5,285 $ 7,300 $ 7,763 Gross profit 4,918 2,290 3,349 2,372 Net loss ( 992 ) ( 1,853 ) ( 867 ) ( 1,918 ) Net loss per common share: Basic ( 0.13 ) ( 0.25 ) ( 0.11 ) ( 0.22 ) Diluted ( 0.13 ) ( 0.25 ) ( 0.11 ) ( 0.22 ) 17. Subsequent events The Company has evaluated all events or transactions that occurred up to the date the consolidated financial statements were available to issue. Based upon this review, the Company did not identify any subsequent events that would have required adjustment or disclosure in the consolidated financial statements. F-22