Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
Certain statements included in this report, including without limitation statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are not historical facts are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements generally can be identified by the use of forward-looking terminology, such as “may”, “will”, “expect”, “intend”, ”estimate”, “anticipate”, “believe”, “project” or “continue” or the negative thereof or other similar words. All forward-looking statements involve risks and uncertainties, including, but not limited to those listed in Item 1A of our most recently filed Annual Report on Form 10-K. Actual results may differ materially from those discussed in, or implied by, the forward-looking statements.
The forward-looking statements speak only as of the date of this report and we assume no duty to update them. As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to “we”, “us”, “our”, the “Company” and “TransAct” refer to the consolidated operations of TransAct Technologies Incorporated, and its consolidated subsidiaries.
Overview
TransAct Technologies Incorporated (“TransAct”) is a global leader in developing and selling
software-driven technology and printing solutions for high growth markets including food safety, POS automation, casino and gaming, lottery, mobile and oil and gas. Our world-class products are designed from the ground up based on market and customer requirements and are sold under the AccuDate™, Epic, EPICENTRAL
™
, Ithaca®, Printrex® and Responder® brand names. Known and respected worldwide for innovative designs and real-world service reliability, our thermal, inkjet and impact printers and terminals generate top-quality labels and transaction records such as receipts, tickets, coupons, register journals and other documents, as well as printed logging and plotting of data. We sell our products to original equipment manufacturers (“OEMs”), value-added resellers (“VARs”), select distributors, as well as directly to end-users. Our product distribution spans across the Americas, Europe, the Middle East, Africa, Asia, Australia, the Caribbean Islands and the South Pacific. TransAct also provides world-class service, spare parts, accessories and printing supplies to its growing worldwide installed base of products. Through our TransAct Services Group (“TSG”), we provide a complete range of supplies and consumables used in the printing and scanning activities of customers in the hospitality, banking, retail, casino and gaming, government and oil and gas exploration markets. Through our webstore,
www.transactsupplies.com
, and our direct selling team, we address the demand for these products.
We operate in one reportable segment: the design, development, assembly and marketing of software-driven technology and printing solutions including related software maintenance, hardware repair services, consumables and spare parts.
Critical Accounting Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared by us in accordance with accounting principles generally accepted in the United States of America. The presentation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and 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.
For a complete description of our accounting policies, see Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Critical Accounting Policies and Estimates,” included in our Annual Report on Form 10-K for the year ended December 31, 2015. We have reviewed those policies and determined that they remain our critical accounting policies for the nine months ended September 30, 2016.
Results of Operations: Three months ended September 30, 2016 compared to three months ended September 30, 2015
Net Sales.
Net sales, which include printer, terminal and software sales, as well as sales of replacement parts, consumables and maintenance and repair services, by market
for the three months ended September 30, 2016 and 2015 were as follows (in thousands, except percentages):
|
|
Three months ended
|
|
|
Three months ended
|
|
|
Change
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
$
|
|
|
|
%
|
Food safety
|
|
$
|
969
|
|
|
|
6.7%
|
|
|
$
|
1,107
|
|
|
|
7.8%
|
|
|
$
|
(138)
|
|
|
|
(12.5%)
|
POS automation and banking
|
|
|
2,889
|
|
|
|
20.0%
|
|
|
|
2,274
|
|
|
|
16.1%
|
|
|
|
615
|
|
|
|
27.0%
|
Casino and gaming
|
|
|
5,612
|
|
|
|
38.8%
|
|
|
|
4,399
|
|
|
|
31.0%
|
|
|
|
1,213
|
|
|
|
27.6%
|
Lottery
|
|
|
2,226
|
|
|
|
15.4%
|
|
|
|
1,797
|
|
|
|
12.7%
|
|
|
|
429
|
|
|
|
23.9%
|
Printrex
|
|
|
67
|
|
|
|
0.4%
|
|
|
|
225
|
|
|
|
1.6%
|
|
|
|
(158)
|
|
|
|
(70.2%)
|
TSG
|
|
|
2,711
|
|
|
|
18.7%
|
|
|
|
4,370
|
|
|
|
30.8%
|
|
|
|
(1,659)
|
|
|
|
(38.0%)
|
|
|
$
|
14,474
|
|
|
|
100.0%
|
|
|
$
|
14,172
|
|
|
|
100.0%
|
|
|
$
|
302
|
|
|
|
2.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International *
|
|
$
|
3,368
|
|
|
|
23.3%
|
|
|
$
|
2,510
|
|
|
|
17.7%
|
|
|
$
|
858
|
|
|
|
34.2%
|
|
|
|
*International sales do not include sales of printers and terminals made to domestic distributors or other domestic customers who may in turn ship those printers and terminals to international destinations.
|
Net sales for the third quarter of 2016 increased $302,000, or 2%, from the same period in 2015. Printer and terminal sales volume increased 28% to approximately 44,000 units driven primarily by a 30% increase in unit volume from the casino and gaming market, a 33% increase in unit volume in the POS automation and banking market and a 27% increase in unit volume in the lottery market. These increases were partially offset by decreases in unit volume of 45% from the Printrex market and 4% from the food safety market. The average selling price of our printers and terminals decreased approximately 8% in the third quarter of 2016 compared to the third quarter of 2015 primarily due to the larger volume of POS automation and banking printers sold during the third quarter of 2016, which carry a lower price than our other products.
International sales increased $858,000, or 34%, due primarily to a 93% increase in sales in the international casino and gaming market. The increase in the international casino and gaming market was partially offset by a 94% decrease in sales in the international lottery market.
Food safety:
Revenue from the food safety market includes sales of food safety terminals which are a combination of hardware and software in a device that includes an operating system, touchscreen and one or two thermal print mechanisms that print easy-to-read food rotation labels and “enjoy by” date labels to help restaurants (including fine dining, casual dining, quick-serve and hospitality establishments) effectively manage food spoilage and automate and manage back-of-the-restaurant operations. A summary of sales of our worldwide food safety products for the
three months ended September 30, 2016 and 2015 is as follows (in thousands, except percentages):
|
|
Three months ended
|
|
|
Three months ended
|
|
|
Change
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
$
|
|
|
|
%
|
Domestic
|
|
$
|
886
|
|
|
|
91.4%
|
|
|
$
|
1,073
|
|
|
|
96.9%
|
|
|
$
|
(187)
|
|
|
|
(17.4%)
|
International
|
|
|
83
|
|
|
|
8.6%
|
|
|
|
34
|
|
|
|
3.1%
|
|
|
|
49
|
|
|
|
144.1%
|
|
|
$
|
969
|
|
|
|
100.0%
|
|
|
$
|
1,107
|
|
|
|
100.0%
|
|
|
$
|
(138)
|
|
|
|
(12.5%)
|
The decrease in domestic food safety product revenue from the third quarter of 2015 was primarily driven by lower sales
of our
food safety terminals to our U.S. distributor. In the third quarter of 2015 we had a large initial order of our AccuDate Pro food safety terminals through our U.S. distributor for a large end user that did not repeat in 2016.
International food safety sales increased due to increased sales to our Latin American and Canadian distributors, largely for McDonald’s Corporation.
POS automation and banking:
Revenue from the POS automation and banking market includes sales of thermal and impact printers used primarily by restaurants (including fine dining, casual dining, quick-serve and hospitality establishments) located either at the checkout counter or within self-service kiosks to print receipts for consumers or print on linerless labels. In addition, revenue includes sales of inkjet printers used by banks, credit unions and other financial institutions to print deposit or withdrawal receipts and/or validate checks at bank teller stations. A summary of sales of our worldwide POS automation and banking products for the
three months ended September 30, 2016 and 2015 is as follows (in thousands, except percentages):
|
|
Three months ended
|
|
|
Three months ended
|
|
|
Change
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
$
|
|
|
|
%
|
Domestic
|
|
$
|
2,672
|
|
|
|
92.5%
|
|
|
$
|
2,210
|
|
|
|
97.2%
|
|
|
$
|
462
|
|
|
|
20.9%
|
International
|
|
|
217
|
|
|
|
7.5%
|
|
|
|
64
|
|
|
|
2.8%
|
|
|
|
153
|
|
|
|
239.1%
|
|
|
$
|
2,889
|
|
|
|
100.0%
|
|
|
$
|
2,274
|
|
|
|
100.0%
|
|
|
$
|
615
|
|
|
|
27.0%
|
The increase in domestic POS automation and banking product revenue from the third quarter of 2015 was primarily driven by a 45% increase in sales of our Ithaca® 9000 printer in the third quarter of 2016 compared to the third quarter of 2015 due to new initiatives by McDonald’s that started in 2015 and accelerated in 2016. The increase from our Ithaca® 9000 printers was partially offset by a 56% decline in sales of our legacy banking and other POS printers for the third quarter of 2016 compared to the third quarter of 2015 as we continue to deemphasize these products.
International POS automation and banking sales increased due to higher sales of our Ithaca® 9000 printer in the third quarter of 2016 compared to the third quarter of 2015 resulting from McDonald’s new initiatives being made internationally.
Casino and gaming:
Revenue from the casino and gaming market includes sales of printers used in slot machines, video lottery terminals (“VLTs”), and other gaming machines that print tickets or receipts instead of issuing coins (“ticket-in, ticket-out” or “TITO”) at casinos and racetracks (“racinos”) and other gaming venues worldwide. Revenue from this market also includes sales of printers used in the international off-premise gaming market in gaming machines such as Amusement with Prizes, Skills with Prizes and Fixed Odds Betting Terminals at non-casino gaming establishments. Revenue from this market also includes royalties related to our patented casino and gaming technology. In addition, casino and gaming market revenue includes sales of our software solution (including annual software maintenance for) the EPICENTRAL
TM
print system, which enables casino operators to create promotional coupons and marketing messages and to print them in real-time at the slot machine. A summary of sales of our worldwide casino and gaming products for the three months ended September 30, 2016 and 2015 is as follows (in thousands, except percentages):
|
|
Three months ended
|
|
|
Three months ended
|
|
|
Change
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
$
|
|
|
|
%
|
Domestic
|
|
$
|
2,779
|
|
|
|
49.5%
|
|
|
$
|
2,927
|
|
|
|
66.5%
|
|
|
$
|
(148)
|
|
|
|
(5.1%)
|
International
|
|
|
2,833
|
|
|
|
50.5%
|
|
|
|
1,472
|
|
|
|
33.5%
|
|
|
|
1,361
|
|
|
|
92.5%
|
|
|
$
|
5,612
|
|
|
|
100.0%
|
|
|
$
|
4,399
|
|
|
|
100.0%
|
|
|
$
|
1,213
|
|
|
|
27.6%
|
The decrease in domestic sales of our casino and gaming products was due largely to a 7% decline in domestic sales of our thermal casino printers in the third quarter of 2016 compared to the third quarter of 2015 due to continued weakness in the replacement cycle for slot machines. Domestic EPICENTRAL™ software sales for the third quarter 2016 remained consistent from the third quarter of 2015, as we had no new installations in either the third quarter of 2016 or 2015.
International casino and gaming printer sales increased in the third quarter of 2016 compared to the third quarter of 2015 due primarily to a 83% increase in sales of our thermal casino printers and a 79% increase in sales of our off-premises gaming printers, primarily to our European distributor. Sales of our off-premise gaming printers are largely project-oriented and therefore may fluctuate significantly from quarter-to-quarter and year-to-year. Additionally, international EPICENTRAL™ software sales increased as we completed an installation in the third quarter of 2016 in a casino located in Switzerland compared to no international installations completed in the third quarter of 2015.
Lottery
:
Revenue from the lottery market includes sales of thermal on-line and other lottery printers to International Game Technology and its subsidiaries (“IGT”) for various lottery applications.
A summary of sales of our worldwide lottery printers for the three months ended September 30, 2016 and 2015 is as follows (in thousands, except percentages):
|
|
Three months ended
|
|
|
Three months ended
|
|
|
Change
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
$
|
|
|
|
%
|
Domestic
|
|
$
|
2,184
|
|
|
|
98.1%
|
|
|
$
|
1,053
|
|
|
|
58.6%
|
|
|
$
|
1,131
|
|
|
|
107.4%
|
International
|
|
|
42
|
|
|
|
1.9%
|
|
|
|
744
|
|
|
|
41.4%
|
|
|
|
(702)
|
|
|
|
(94.4%)
|
|
|
$
|
2,226
|
|
|
|
100.0%
|
|
|
$
|
1,797
|
|
|
|
100.0%
|
|
|
$
|
429
|
|
|
|
23.9%
|
Our sales to IGT are directly dependent on the timing and number of new and upgraded lottery terminal installations IGT performs, and as a result, may fluctuate significantly quarter-to-quarter and year-to-year and are not indicative of IGT’s overall business or revenue. Based on our backlog of orders and the customer’s forecast, we expect total lottery printer sales to IGT for 2016 to be consistent with those reported in 2015.
International lottery sales decreased due to a sale of lottery printers to IGT for the Spanish lottery in the third quarter of 2015 and no comparable sale occurring in 2016.
Printrex:
Printrex branded printers are sold into markets that include wide format, desktop and rack mounted and vehicle mounted black/white and color thermal printers used by customers to log and plot oil field, seismic and down hole well drilling data in the oil and gas exploration industry. It also includes high-speed color inkjet desktop printers used to print logs at the data centers of the oil and gas field service companies. Revenue in this market also includes sales of vehicle mounted printers used to print schematics and certain other critical information in emergency services vehicles and other mobile printing applications.
A summary of sales of our worldwide Printrex printers for the three months ended September 30, 2016 and 2015 is as follows (in thousands, except percentages):
|
|
Three months ended
|
|
|
Three months ended
|
|
|
Change
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
$
|
|
|
|
%
|
Domestic
|
|
$
|
64
|
|
|
|
95.5%
|
|
|
$
|
189
|
|
|
|
84.0%
|
|
|
$
|
(125)
|
|
|
|
(66.1%)
|
International
|
|
|
3
|
|
|
|
4.5%
|
|
|
|
36
|
|
|
|
16.0%
|
|
|
|
(33)
|
|
|
|
(91.7%)
|
|
|
$
|
67
|
|
|
|
100.0%
|
|
|
$
|
225
|
|
|
|
100.0%
|
|
|
$
|
(158)
|
|
|
|
(70.2%)
|
The decrease in sales of Printrex printers in the third quarter of 2016 compared to the third quarter of 2015 resulted from 78% lower domestic and international sales in the oil and gas market due to the continued impact from the decline in worldwide oil prices which we expect will continue to negatively impact our sales during the remainder of 2016. Worldwide medical and mobile printer sales during the third quarter of 2016 remained consistent with sales from the third quarter of 2015.
TSG:
Revenue from TSG includes sales of consumable products (including inkjet cartridges, ribbons, receipt paper, color thermal paper and other printing supplies), replacement parts, maintenance and repair services, testing services, refurbished printers, and shipping and handling charges.
A summary of sales in our worldwide TSG market for the three months ended September 30, 2016 and 2015 is as follows (in thousands, except percentages):
|
|
Three months ended
|
|
|
Three months ended
|
|
|
Change
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
$
|
|
|
|
%
|
Domestic
|
|
$
|
2,521
|
|
|
|
93.0%
|
|
|
$
|
4,210
|
|
|
|
96.3%
|
|
|
$
|
(1,689)
|
|
|
|
(40.1%)
|
International
|
|
|
190
|
|
|
|
7.0%
|
|
|
|
160
|
|
|
|
3.7%
|
|
|
|
30
|
|
|
|
18.8%
|
|
|
$
|
2,711
|
|
|
|
100.0%
|
|
|
$
|
4,370
|
|
|
|
100.0%
|
|
|
$
|
(1,659)
|
|
|
|
(38.0%)
|
The decrease in domestic revenue from TSG for the third quarter of 2016 as compared to the prior year period was due to a (1) 54% decrease in sales of replacement parts due mainly to IGT’s purchase of an unusually high volume of spare parts for the lottery market in the third quarter of 2015 that did not repeat in the third quarter of 2016 and is not likely to repeat in the fourth quarter of 2016, (2) 27% decline in service revenue primarily due to product-oriented testing services that occurred in the third quarter of 2015 that did not repeat to the same extent in the third quarter of 2016, (3) 15% decrease in non-Printrex consumables, largely from the decline of HP inkjet cartridges, as we continue to deemphasize our sales focus on these commoditized consumable products, and (4) 52% decrease of consumables sales for our Printrex color printer due to lower printing usage resulting from reduced drilling activity caused by the decline in worldwide oil prices.
Internationally, TSG revenue increased primarily due to higher sales of replacement parts and accessories in the third quarter of 2016 compared to the third quarter of 2015.
Gross Profit.
Gross profit information is summarized below (in thousands, except percentages):
Three months ended
September 30,
|
|
|
Percent
|
|
|
Percent of
|
|
|
Percent of
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Total Sales – 2016
|
|
|
Total Sales - 2015
|
$
|
5,915
|
|
|
$
|
6,291
|
|
|
|
(6.0%)
|
|
|
|
40.9%
|
|
|
|
44.4%
|
Gross profit is measured as revenue less cost of sales, which includes primarily the cost of all raw materials and component parts, direct labor, manufacturing overhead expenses, cost of finished products purchased directly from our contract manufacturers and expenses associated with installations of our EPICENTRAL
TM
print system. In the third quarter of 2016, gross profit decreased $376,000, or 6%, and our gross margin declined by 350 basis points compared to the third quarter of 2015 as we experienced a less favorable sales mix in the third quarter of 2016 compared to the third quarter of 2015. During the third quarter of 2016, we experienced higher sales of our Ithaca® 9000 printer to McDonald’s, which carries a lower margin than our other products. Additionally, we had significantly lower sales of our higher margin spare parts.
Engineering, Design and Product Development.
Engineering, design and product development information is summarized below (in thousands, except percentages):
Three months ended
September 30,
|
|
|
Percent
|
|
|
Percent of
|
|
|
Percent of
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Total Sales – 2016
|
|
|
Total Sales - 2015
|
$
|
1,133
|
|
|
$
|
766
|
|
|
|
47.9%
|
|
|
|
7.8%
|
|
|
|
5.4%
|
Engineering, design and product development expenses primarily include salary and payroll related expenses for our engineering staff, depreciation and design expenses (including prototype printer expenses, outside design and testing services, and supplies).
Such expenses increased $367,000, or 48%, due primarily to higher product development costs and the hiring of additional software engineers as we continue to focus and strategically invest in enhancements to our EPICENTRAL™ software and expansion of our line of food safety terminals. We expect engineering, design and product development expenses in full year 2016 to be higher than in 2015 due to the additional staff and higher product development expenses noted above.
Selling and Marketing.
Selling and marketing information is summarized below (in thousands, except percentages):
Three months ended
September 30,
|
|
|
Percent
|
|
|
Percent of
|
|
|
Percent of
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Total Sales – 2016
|
|
|
Total Sales - 2015
|
$
|
1,808
|
|
|
$
|
2,137
|
|
|
|
(15.4%)
|
|
|
|
12.5%
|
|
|
|
15.1%
|
Selling and marketing expenses primarily include salaries and payroll related expenses for our sales and marketing staff, sales commissions, travel expenses, expenses associated with the lease of sales offices, advertising, trade show expenses, e-commerce and other promotional marketing expenses.
Such expenses decreased by $329,000, or 15%, in the third quarter of 2016 compared to the third quarter of 2015 primarily due to reductions of certain sales staff, as well as lower sales commissions and lower travel costs in the third quarter of 2016 compared to the third quarter of 2015.
General and Administrative
.
General and administrative information is summarized below (in thousands, except percentages):
Three months ended
September 30,
|
|
|
Percent
|
|
|
Percent of
|
|
|
Percent of
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Total Sales - 2016
|
|
|
Total Sales - 2015
|
$
|
1,737
|
|
|
$
|
1,823
|
|
|
|
(4.7%)
|
|
|
|
12.0%
|
|
|
|
12.9%
|
General and administrative expenses primarily include salaries and payroll related expenses for our executive, accounting, human resource and information technology staff, expenses for our corporate headquarters, professional and legal expenses, telecommunication expenses, and other expenses related to being a publicly-traded company.
General and administrative expenses decreased by $86,000, or 5%, in the third quarter of 2016 due primarily to lower incentive compensation expense in the third quarter of 2016 compared to the third quarter of 2015. Additionally, we recorded lower severance cost as we did not undertake any headcount reductions in the third quarter of 2016 compared to several staff reductions during the third quarter of 2015.
Operating Income.
Operating income information is summarized below (in thousands, except percentages):
Three months ended
September 30,
|
|
|
Percent
|
|
|
Percent of
|
|
|
Percent of
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Total Sales - 2016
|
|
|
Total Sales – 2015
|
$
|
1,237
|
|
|
$
|
1,565
|
|
|
|
(21.0%)
|
|
|
|
8.5%
|
|
|
|
11.0%
|
Our operating income decreased by $328,000, or 21%, and our operating margin decreased to 8.5% of net sales primarily due to lower gross margin on a less favorable sales mix.
Interest.
We recorded net interest expense of $7,000 in both the third quarter of 2016 and the third quarter of 2015. We do not expect significant changes in net interest expense for the remainder of 2016.
Other, net.
We recorded other expense of $3,000 in the third quarter of 2016 compared to other income of $11,000 in the third quarter of 2015. The change was primarily due to foreign currency transaction exchange losses recorded in 2016 of $3,000 compared to foreign currency transaction exchange gains of $7,000 recorded by our U.K. subsidiary in the third quarter of 2015, and to a lesser extent, a gain of $4,000 recorded on the disposal of a fixed asset in the third quarter of 2015.
Income Taxes.
We recorded an income tax provision for the third quarter of 2016 of $344,000 at an effective tax rate of 28.0%, compared to an income tax provision during the third quarter of 2015 of $541,000 at an effective tax rate of 34.5.0%. Our effective tax rate for the third quarter of 2016 was lower than the third quarter of 2015 because it includes the benefit from the 2016 federal research and development credit (“R&D credit”). In 2015, the R&D credit was not renewed until December 2015, and as such, the benefit was not recorded until the fourth quarter of 2015. We expect our effective tax rate to be between 31% and 32% for the full year 2016.
Net Income
.
We reported net income for the third quarter of 2016 of $883,000, or $0.12 per diluted share, compared to $1,028,000, or $0.13 per diluted share, for the third quarter of 2015.
Results of Operations: Nine months ended September 30, 2016 compared to nine months ended September 30, 2015
Net Sales.
Net sales, which include printer, terminal and software sales as well as sales of replacement parts, consumables and maintenance and repair services, by market
for the nine months ended September 30, 2016 and 2015 were as follows (in thousands, except percentages):
|
|
Nine months ended
|
|
|
Nine months ended
|
|
|
Change
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
$
|
|
|
|
%
|
Food safety
|
|
$
|
3,506
|
|
|
|
8.0%
|
|
|
$
|
2,961
|
|
|
|
6.2%
|
|
|
$
|
545
|
|
|
|
18.4%
|
POS automation and banking
|
|
|
8,407
|
|
|
|
19.3%
|
|
|
|
6,069
|
|
|
|
12.8%
|
|
|
|
2,338
|
|
|
|
38.5%
|
Casino and gaming
|
|
|
16,204
|
|
|
|
37.1%
|
|
|
|
17,237
|
|
|
|
36.3%
|
|
|
|
(1,033)
|
|
|
|
(6.0%)
|
Lottery
|
|
|
7,311
|
|
|
|
16.8%
|
|
|
|
8,767
|
|
|
|
18.4%
|
|
|
|
(1,456)
|
|
|
|
(16.6%)
|
Printrex
|
|
|
398
|
|
|
|
0.9%
|
|
|
|
1,152
|
|
|
|
2.4%
|
|
|
|
(754)
|
|
|
|
(65.5%)
|
TSG
|
|
|
7,806
|
|
|
|
17.9%
|
|
|
|
11,374
|
|
|
|
23.9%
|
|
|
|
(3,568)
|
|
|
|
(31.4%)
|
|
|
$
|
43,632
|
|
|
|
100.0%
|
|
|
$
|
47,560
|
|
|
|
100.0%
|
|
|
$
|
(3,928)
|
|
|
|
(8.3%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International *
|
|
$
|
9,396
|
|
|
|
21.5%
|
|
|
$
|
11,187
|
|
|
|
23.5%
|
|
|
$
|
(1,791)
|
|
|
|
(16.0%)
|
|
|
|
*International sales do not include sales of printers and terminals made to domestic distributors or other domestic customers who may in turn ship those printers and terminals to international destinations.
|
Net sales for the first nine months of 2016 decreased $3,928,000, or 8%, from the same period in 2015. Printer sales volume decreased slightly by 1% to approximately 133,000 units driven primarily by a 20% and 9% decrease in unit volume from the lottery market and casino and gaming market, respectively, and to a lesser extent a 61% decrease in the Printrex market. These decreases were partially offset by a 44% and 20% increase in the POS automation and banking market and food safety market, respectively. The average selling price of our printers remained relatively consistent during the first nine months of 2016 compared to the first nine months of 2015. International sales decreased $1,791,000, or 16%, primarily driven by 14% and 77% lower international sales in the casino and gaming market and the lottery market, respectively.
Food safety:
A summary of sales of our worldwide food safety products for the
nine months ended September 30, 2016 and 2015 is as follows (in thousands, except percentages):
|
|
Nine months ended
|
|
|
Nine months ended
|
|
|
Change
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
$
|
|
|
|
%
|
Domestic
|
|
$
|
3,179
|
|
|
|
90.7%
|
|
|
$
|
2,686
|
|
|
|
90.7%
|
|
|
$
|
493
|
|
|
|
18.4%
|
International
|
|
|
327
|
|
|
|
9.3%
|
|
|
|
275
|
|
|
|
9.3%
|
|
|
|
52
|
|
|
|
18.9%
|
|
|
$
|
3,506
|
|
|
|
100.0%
|
|
|
$
|
2,961
|
|
|
|
100.0%
|
|
|
$
|
545
|
|
|
|
18.4%
|
The increase in domestic food safety terminal sales in the first nine months of 2016 compared to the first nine months of 2015 was primarily driven by an increase in sales
of our
food safety terminals to McDonald’s and increased sales penetration to a growing number of existing and new end user customers through our U.S. distributor.
International food safety terminal sales increased in the first nine months of 2016 compared to the same period in 2015 due to increased sales to our Latin American distributor.
POS automation and banking:
A summary of sales of our worldwide POS automation and banking products for the
nine months ended September 30, 2016 and 2015 is as follows (in thousands, except percentages):
|
|
Nine months ended
|
|
|
Nine months ended
|
|
|
Change
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
$
|
|
|
|
%
|
Domestic
|
|
$
|
7,752
|
|
|
|
92.2%
|
|
|
$
|
5,731
|
|
|
|
94.4%
|
|
|
$
|
2,021
|
|
|
|
35.3%
|
International
|
|
|
655
|
|
|
|
7.8%
|
|
|
|
338
|
|
|
|
5.6%
|
|
|
|
317
|
|
|
|
93.8%
|
|
|
$
|
8,407
|
|
|
|
100.0%
|
|
|
$
|
6,069
|
|
|
|
100.0%
|
|
|
$
|
2,338
|
|
|
|
38.5%
|
The increase in both domestic and international POS automation and banking printer revenue as compared to the first nine months of 2015 was primarily driven by a 68% increase in sales of our Ithaca® 9000 printer as we continue to supply printers to support new initiatives by McDonald’s that started in 2015 and accelerated in 2016.
This increase was partially offset by 42% lower sales of our legacy banking and other POS printers in the first nine months of 2016 compared to the same period in 2015.
Casino and gaming:
A summary of sales of our worldwide casino and gaming products for the nine months ended September 30, 2016 and 2015 is as follows (in thousands, except percentages):
|
|
Nine months ended
|
|
|
Nine months ended
|
|
|
Change
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
$
|
|
|
|
%
|
Domestic
|
|
$
|
8,612
|
|
|
|
53.1%
|
|
|
$
|
8,396
|
|
|
|
48.7%
|
|
|
$
|
216
|
|
|
|
2.6%
|
International
|
|
|
7,592
|
|
|
|
46.9%
|
|
|
|
8,841
|
|
|
|
51.3%
|
|
|
|
(1,249)
|
|
|
|
(14.1%)
|
|
|
$
|
16,204
|
|
|
|
100.0%
|
|
|
$
|
17,237
|
|
|
|
100.0%
|
|
|
$
|
(1,033)
|
|
|
|
(6.0%)
|
The increase in domestic sales of our casino and gaming products in the first nine months of 2016 compared to the first nine months of 2015 was due primarily to increased EPICENTRAL™ software sales of 26% as we completed two domestic installations in the first nine months of 2016 compared to one domestic installation completed in the first nine months of 2015. Sales of our thermal casino printers during the first nine months of 2016 was consistent with sales from the first nine months of 2015.
International casino and gaming printer sales declined in the first nine months of 2016 as compared to the first nine months of 2015 due primarily to a 19% decrease in sales of our thermal casino printer and, to a lesser extent, a 7% decrease in sales of our off-premise gaming printers, primarily to our European distributor. These decreases were partially offset by increased EPICENTRAL™ software sales as we completed one international installation in the first nine months of 2016 compared to no international installations in the first nine months of 2015.
Lottery
:
A summary of sales of our worldwide lottery printers for the nine months ended September 30, 2016 and 2015 is as follows (in thousands, except percentages):
|
|
Nine months ended
|
|
|
Nine months ended
|
|
|
Change
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
$
|
|
|
|
%
|
Domestic
|
|
$
|
7,108
|
|
|
|
97.2%
|
|
|
$
|
7,886
|
|
|
|
90.0%
|
|
|
$
|
(778)
|
|
|
|
(9.9%)
|
International
|
|
|
203
|
|
|
|
2.8%
|
|
|
|
881
|
|
|
|
10.0%
|
|
|
|
(678)
|
|
|
|
(77.0%)
|
|
|
$
|
7,311
|
|
|
|
100.0%
|
|
|
$
|
8,767
|
|
|
|
100.0%
|
|
|
$
|
(1,456)
|
|
|
|
(16.6%)
|
Our sales to IGT are directly dependent on the timing and number of new and upgraded lottery terminal installations that IGT performs, and as a result, may fluctuate significantly quarter-to-quarter and year-to-year and are not indicative of IGT’s overall business or revenue. Based on our backlog of orders and the customer’s forecast, we expect total lottery printer sales to IGT for full year 2016 to be consistent with those reported in 2015.
International lottery sales decreased due to sales of lottery printers to IGT for the Spanish lottery in the third quarter of 2015 and no comparable
sales occurring in 2016.
Printrex:
A summary of sales of our worldwide Printrex printers for the nine months ended September 30, 2016 and 2015 is as follows (in thousands, except percentages):
|
|
Nine months ended
|
|
|
Nine months ended
|
|
|
Change
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
$
|
|
|
|
%
|
Domestic
|
|
$
|
326
|
|
|
|
81.9%
|
|
|
$
|
978
|
|
|
|
84.9%
|
|
|
$
|
(652)
|
|
|
|
(66.7%)
|
International
|
|
|
72
|
|
|
|
18.1%
|
|
|
|
174
|
|
|
|
15.1%
|
|
|
|
(102)
|
|
|
|
(58.6%)
|
|
|
$
|
398
|
|
|
|
100.0%
|
|
|
$
|
1,152
|
|
|
|
100.0%
|
|
|
$
|
(754)
|
|
|
|
(65.5%)
|
The decrease in Printrex printers was primarily due to a 61% decline in domestic and international sales in the oil and gas market due to the continued impact from the decline in worldwide oil prices. In addition, we experienced a 76% decline in medical and mobile printer sales due largely to the loss of a customer in the medical industry and as we shift our focus towards the food safety terminal business. Due to the low margin on this product, we believe the loss of this customer will not have a material adverse impact on our 2016 operating results.
TSG:
A summary of sales in our worldwide TSG market for the nine months ended September 30, 2016 and 2015 is as follows (in thousands, except percentages):
|
|
Nine months ended
|
|
|
Nine months ended
|
|
|
Change
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
$
|
|
|
|
%
|
Domestic
|
|
$
|
7,259
|
|
|
|
93.0%
|
|
|
$
|
10,696
|
|
|
|
94.0%
|
|
|
$
|
(3,437)
|
|
|
|
(32.1%)
|
International
|
|
|
547
|
|
|
|
7.0%
|
|
|
|
678
|
|
|
|
6.0%
|
|
|
|
(131)
|
|
|
|
(19.3%)
|
|
|
$
|
7,806
|
|
|
|
100.0%
|
|
|
$
|
11,374
|
|
|
|
100.0%
|
|
|
$
|
(3,568)
|
|
|
|
(31.4%)
|
The decrease in domestic revenue from TSG was due to a (1) 43% decrease in sales of replacement parts due mainly to IGT’s purchase of an unusually high volume of spare parts for the lottery market in the first nine months of 2015 that did not repeat in the first nine months of 2016 and is not likely to repeat in full year 2016, (2) 18% decrease in non-Printrex consumables, largely from the decline of HP inkjet cartridges, as we continue to deemphasize the commoditized consumable products, (3) 20% decline in service revenue primarily due to project-oriented testing services that occurred in the first nine months of 2015 that did not recur to the same extent in the first nine months of 2016, and (4) 63% decrease of consumables sales for our Printrex color printer due to lower printing usage resulting from reduced drilling activity caused by the decline in worldwide oil prices.
Internationally, TSG revenue decreased primarily due to 21% and 60% lower sales of replacement parts and accessories and non-Printrex consumables, respectively, in the first nine months of 2016 compared to the first nine months of 2015.
Gross Profit.
Gross profit information is summarized below (in thousands, except percentages):
Nine months ended
September 30,
|
|
|
Percent
|
|
|
Percent of
|
|
|
Percent of
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Total Sales - 2016
|
|
|
Total Sales - 2015
|
$
|
17,783
|
|
|
$
|
19,944
|
|
|
|
(10.8%)
|
|
|
|
40.8%
|
|
|
|
41.9%
|
Gross profit decreased $2,161,000, or 11%, due primarily to a decrease in sales of 8%. Our gross margin in the first nine months of 2016 decreased 110 basis points compared the first nine months of 2015, to 40.8% due to an unfavorable sales mix resulting from the large sales contribution of lower margin Ithaca® 9000 printers as well as lower sales of aftermarket replacement parts which carry higher margins than our printers and terminals.
Engineering, Design and Product Development.
Engineering, design and product development information is summarized below (in thousands, except percentages):
Nine months ended
September 30,
|
|
|
Percent
|
|
|
Percent of
|
|
|
Percent of
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Total Sales - 2016
|
|
|
Total Sales - 2015
|
$
|
3,458
|
|
|
$
|
2,494
|
|
|
|
38.7%
|
|
|
|
7.9%
|
|
|
|
5.2%
|
Such expenses increased $964,000, or 39%, due primarily to higher product development costs and the hiring of additional software engineers beginning in early 2016, as we continue to focus and strategically invest in enhancements to our EPICENTRAL™ software and expansion of our line of food safety terminals.
Selling and Marketing.
Selling and marketing information is summarized below (in thousands, except percentages):
Nine months ended
September 30,
|
|
|
Percent
|
|
|
Percent of
|
|
|
Percent of
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Total Sales - 2016
|
|
|
Total Sales - 2015
|
$
|
5,460
|
|
|
$
|
6,060
|
|
|
|
(9.9%)
|
|
|
|
12.5%
|
|
|
|
12.7%
|
Such expenses decreased by $600,000, or 10%, in the first nine months of 2016 compared to the first nine months of 2015 due to lower compensation costs related to headcount reductions made during the first nine months of 2016, lower sales commission due to lower sales experienced in 2016, and a decrease in travel expenses primarily in our Printrex markets as we consciously decided to reduce these expenses in response to the worldwide decline in the oil and gas markets.
General and Administrative
.
General and administrative information is summarized below (in thousands, except percentages):
Nine months ended
September 30,
|
|
|
Percent
|
|
|
Percent of
|
|
|
Percent of
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Total Sales - 2016
|
|
|
Total Sales - 2015
|
$
|
5,589
|
|
|
$
|
5,665
|
|
|
|
(1.3%)
|
|
|
|
12.8%
|
|
|
|
11.9%
|
General and administrative expenses remained relatively consistent, decreasing by 1%. During the first nine months of 2016, we incurred lower incentive compensation costs compared to the first nine months of 2015, which was largely offset by higher severance cost related to headcount reductions during the first nine months of 2016 compared to the first nine months of 2015.
Legal Fees and Settlement Expenses Associated with Lawsuit
.
Legal fee and settlement expense
information is summarized below (in thousands, except percentages):
Nine months ended
September 30,
|
|
|
Percent
|
|
|
Percent of
|
|
|
Percent of
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Total Sales - 2016
|
|
|
Total Sales - 2015
|
$
|
-
|
|
|
$
|
1,738
|
|
|
|
(100%)
|
|
|
|
-%
|
|
|
|
3.7%
|
As disclosed in Note 7 to the Condensed Consolidated Financial Statements, in June 2012
, AD filed a civil complaint against the Company. In connection with this lawsuit, we incurred legal fees and settlement expenses of $0 and $1,738,000 in the first nine months of 2016 and 2015, respectively. Due to the settlement of the AD lawsuit in March 2015, we do not expect to incur any further expenses related to this lawsuit in the future.
Operating Income.
Operating income information is summarized below (in thousands, except percentages):
Nine months ended
September 30,
|
|
|
Percent
|
|
|
Percent of
|
|
|
Percent of
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
Total Sales - 2016
|
|
|
Total Sales - 2015
|
$
|
3,276
|
|
|
$
|
3,987
|
|
|
|
(17.8%)
|
|
|
|
7.5%
|
|
|
|
8.4%
|
Our operating income decreased by $711,000, or 18%, primarily due to 8% lower sales in the first nine months of 2016 as compared to the first nine months of 2015. In addition, our operating income in the first nine months of 2015 reflects $1,738,000 of legal fees related to the AD lawsuit that did not recur in 2016.
Interest.
We recorded net interest expense of $18,000 in the first nine months of 2016 compared to $23,000 in the first nine months of 2015. Interest expense was higher in 2015 due to interest expense incurred from borrowing $2,500,000 to pay the AD lawsuit settlement in the first nine months of 2015. We did not borrow any funds during the first nine months of 2016.
Other, net.
We recorded other income of $13,000 in the first nine months of 2016 compared to other expense of $1,000 in the first nine months of 2015. The change was primarily due to foreign currency transaction exchange gains recorded in the first nine months of 2016 compared to foreign currency transaction exchange losses recorded by our U.K. subsidiary in the first nine months of 2015.
Income Taxes.
We recorded an income tax provision for the first nine months of 2016 of $1,010,000 at an effective tax rate of 30.9%, compared to an income tax provision during the first nine months of 2015 of $1,403,000 at an effective tax rate of 35.4%. Our effective tax rate for the first nine months of 2016 was lower than the first nine months of 2015 because it includes the benefit from the 2016 R&D credit. In 2015, the R&D credit was not renewed until December 2015, and as such, the benefit was not recorded until the fourth quarter of 2015.
Net Income
.
We reported net income during the first nine months of 2016 of $2,261,000, or $0.29 per diluted share, compared to $2,560,000, or $0.33 per diluted share, for the first nine months of 2015.
Impact of Inflation
.
We believe that inflation has not had a material impact on our results of operations for the three months ended September 30, 2016 and 2015. However, there can be no assurance that future inflation would not have an adverse impact upon our future operating results and financial condition.
Liquidity and Capital Resources
Cash Flow
In the first nine months of 2016, our cash and cash equivalents balance decreased $2,274,000, or 51%, from December 31, 2015 and we ended the third quarter of 2016 with $2,199,000 in cash and cash equivalents, of which $164,000 was held by our U.K. subsidiary, and no debt outstanding.
Operating activities
: The following significant factors affected our cash provided by operating activities of $3,234,000 in the first nine months of 2016 as compared to our cash provided by operating activities of $2,655,000 in the first nine months of 2015:
During the first nine months of 2016:
·
|
We reported net income of $2,261,000.
|
·
|
We recorded depreciation, amortization, and share-based compensation expense of $1,435,000.
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Accounts receivable increased $3,313,000, or 46%, due to the increase and timing of sales during the third quarter of 2016.
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Inventories decreased $1,852,000, or 16%, due to the sell through of inventory on hand during 2016.
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Accounts payable increased $2,899,000, or 110%, due primarily to increased inventory purchases towards the end of the third quarter 2016 and timing of payments to vendors.
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Accrued liabilities and other liabilities decreased $1,419,000 due primarily to the payment of 2015 annual bonuses in March 2016.
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During the first nine months of 2015:
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We reported net income of $2,560,000.
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We recorded depreciation, amortization, and share-based compensation expense of $1,454,000.
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Accounts receivable increased $845,000, or 9%, due to the increase and timing of sales during the third quarter of 2015.
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Inventories increased $644,000, or 5%, due to the build-up of inventory in anticipation of higher sales volume in 2015.
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Accounts payable increased $2,957,000 due primarily to increased inventory purchases during the first nine months of 2015 to support a higher level of sales.
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Accrued liabilities and other liabilities decreased $4,434,000 due primarily to the payment of the AD lawsuit settlement in April 2015 and the payment of 2014 annual bonuses in March 2015.
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Investing activities:
Our capital expenditures were $454,000 and $491,000 in the first nine months of 2016 and 2015, respectively. Expenditures in 2016 were primarily for computer and networking equipment and to a lesser extent new product tooling equipment and purchases of furniture and fixtures.
Expendi
ture
s in 2015 included approximately $333,000 of cost incurred for the purchase of a new phone system and other computer equipment and the remaining amount was primarily for the purchase of new product tooling equipment.
Capital expenditures for 2016 are expected to be approximately $800,000 primarily for new product tooling and tooling enhancements for our existing products, as well as for new computer software and equipment purchases.
Financing activities:
We used $5,045,000 of cash from financing activities during the first nine months of 2016 to pay dividends of $1,827,000 to common shareholders and to purchase $3,242,000 of common stock for treasury, partially offset by proceeds and tax benefits from stock option exercises of $24,000. During the first nine months of 2015, we used $2,839,000 of cash from financing activities to pay dividends of $1,863,000 to common shareholders and to purchase $1,020,000 of common stock for treasury partially offset by proceeds and tax benefits from stock options exercises of $44,000. Additionally, during the second quarter of 2015 we borrowed $2,500,000 under the TD Bank Credit Facility to partially fund the $3,600,000 payment related to the AD lawsuit which we fully repaid before June 30, 2015.
Credit Facility and Borrowings
The TD Bank Credit Facility provides for a $20,000,000 revolving credit line. On November 26, 2014, we signed an amendment to renew the TD Bank Credit Facility through November 28, 2017. Borrowings under the revolving credit line bear a floating rate of interest at the prime rate minus one percent and are secured by a lien on all of our assets. We also pay a fee of 0.15% on unused borrowings under the revolving credit line. The amendment increased the amount of revolving credit loans we may use to fund future cash dividend payments or treasury share buybacks to $10,000,000 from $5,000,000. The amendment also modified the definition of EBITDA to exclude certain non-recurring expenses, including without limitation, non-recurring litigation and acquisition expenses (including the $3,625,000 expense we incurred in the fourth quarter of 2014 related to the settlement of the AD lawsuit); and modified the definition of Operating Cash Flow to exclude unfinanced capital expenditures for the quarters ending December 31, 2014, March 31, 2015 and September 30, 2015.
The TD Bank Credit Facility imposes certain quarterly financial covenants on us and restricts, among other things, our ability to incur additional indebtedness and the creation of other liens. We were in compliance with all financial covenants of the TD Bank Credit Facility at September 30, 2016. The following table lists the financial covenants and the performance measurements at September 30, 2016:
Financial Covenant
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Requirement/Restriction
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Calculation at September 30, 2016
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Operating cash flow / Total debt service
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Minimum of 1.25 times
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13.1 times
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Funded Debt / EBITDA
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Maximum of 3.0 times
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0 times
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As of September 30, 2016, borrowings available under the TD Bank Credit facility were $20,000,000.
Shareholder Dividend Payments
In 2012, our Board of Directors initiated a quarterly cash dividend program which is subject to the Board’s approval each quarter. For the three months ended September 30, 2016, our Board of Directors declared a quarterly cash dividend of $0.08 per share, totaling approximately $595,000, which was paid in September 2016 to common shareholders of record at the close of business on August 19, 2016. For the nine months ended September 30, 2016, dividends declared and paid totaled $1,827,000, or $0.24 per share. We expect to pay approximately $2,400,000 in cash dividends to our common shareholders during 2016.
Stock Repurchase Program
On February 25, 2016, our Board of Directors approved a new stock repurchase program (the “Stock Repurchase Program”). Under the Stock Repurchase Program, we are authorized to repurchase up to $5,000,000 of our outstanding shares of common stock from time to time in the open market through December 31, 2017 at prevailing market prices based on market conditions, share price and other factors. We use the cost method to account for treasury stock purchases, under which the price paid for the stock is charged to the treasury stock account. Repurchases of our common stock are accounted for as of the settlement date. During the nine months ended September 30, 2016, we purchased 413,378 shares of our common stock for $3,242,000 at an average price per share of $7.84.
During the nine months ended September 30, 2015 we repurchased 166,553 shares of our common stock for approximately $1,020,000 at an average price per share of $6.12 under a prior stock repurchase program that expired on July 31, 2015. Under the expired repurchase program, we were authorized to repurchase up to $7,500,000 of our outstanding shares of common stock from time to time in the open market, depending on market conditions, share price and other factors.
Resource Sufficiency
We believe that our cash and cash equivalents on hand, our expected cash flows generated from operating activities and borrowings available under our TD Bank Credit Facility will provide sufficient resources to meet our working capital needs, finance our capital expenditures and dividend payments and meet our liquidity requirements through at least the next twelve months.
Contractual Obligations / Off-Balance Sheet Arrangements
The disclosure of payments we have committed to make under our contractual obligations is set forth under the heading “Management's Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
On January 14, 2016 we signed Amendment No. 2 to the lease agreement for our facility in Ithaca, New York with Bomax Properties, LLC to extend our lease in Ithaca to May 31, 2021.
Other than the items mentioned above, there have been no other material changes in our contractual obligations outside the ordinary course of business since December 31, 2015. We have no material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.