PAR Technology Corporation (PAR) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the PAR Technology fiscal year 2016 first quarter financial results conference call. [Operator Instructions] I would now like to introduce your host for today's conference, Mr. Chris Byrnes. Sir, you may begin.

Thank you, Anton, and good afternoon, everyone. I'd also like to welcome you today to the call for PAR's first quarter 2016 financial results review. The complete disclosure of our first quarter results can be found in our press release issued today as well as in our related Form 8-K furnished to the SEC. To access the press release and the financial details, please see the Investor Relations and News section of our website at www.partech.com. At this time, I'd like to take care of certain issues in regards to the call today. Participants on the call should be aware that we are recording the call this afternoon and it will be available for playback. Also, we are broadcasting the conference call via the World Wide Web. So please be advised, if you ask a question, it will be included in both our live conference and any future use of the recording. I also need to remind participants that this conference call includes forward-looking statements that reflect management's expectations based on currently available data. However, actual results are subject to future events and uncertainties. The information on this conference call related to projections or other forward-looking statements may be relied upon and subject to the Safe Harbor statement included in our earnings release this afternoon and in our annual and quarterly filings with the SEC. Joining me on the call today is PAR's CEO and President, Karen Sammon; Matt Trinkaus, PAR's Chief Accounting Officer; and Matt Cicchinelli, President of PAR's Government Business. I'd now like to turn the call over to Karen Sammon for the formal remarks portion of the call, which will be followed by general Q&A. Karen?

Thanks, Chris. Good afternoon, and thank you for joining us today for our first quarter 2016 conference call. During this call, I will review our results for the quarter. Matt Trinkaus, our Chief Accounting Officer, will give the financial details. I will then give a brief summary, and at that time we'll open the call for Q&A. This afternoon we announced that the company reported first quarter revenues from continuing operations of $55.3 million, virtually flat when compared to $55.2 million in the first quarter last year. Our restaurant retail business grew revenues by 8% in the first quarter compared to the same period a year ago. Partially offsetting this growth was a decrease in government contract revenues, driven by the timing of orders associated with our Eagle Intel-X contract. We recorded GAAP net income of $15,000 and diluted EPS of zero in the quarter compared to net income of $192,000 and $0.01 diluted EPS in the same quarter in 2015. Although, net income was down as compared to the prior year, the company is encouraged with the performance of its two business segments, which experienced improved results in the quarter as compared to 2015. The decrease in GAAP net income was primarily due to legal fees incurred in connection with the investigation associated with the misappropriation of funds reported in Q4 2015 and the investments the company is making in our IT infrastructure. On a non-GAAP basis, PAR reported net income from continuing operations of $925,000 and diluted EPS of $0.06 versus $634,000 and $0.04 per diluted share reported in 2015. My comments from hereon will focus fully on our non-GAAP results. I will first address highlights for the quarter in our government segments. Our government business revenue declined 9.7% in the quarter from Q1 2015, as task orders associated with our Eagle Intel-X program and other contract shifted to the second half of this year. In spite of the lower revenue, this business performed well, reporting the highest first quarter profit in PAR's history of 42.7% increase over last year. We believe this is the validation of our strategy to increase direct labor high-tech contract work within our ISR business lines. The quarter was also favorably impacted by a contract close out. Within the quarter, we announced new contract awards, including a $12.9 million subcontract award supporting the U.S. Navy in Hawaii, a $3 million subcontract supporting the U.S. Navy at their Dixon, California facility and $3.4 million contract with the Air Force Research Laboratory in Rome, New York. We are pleased with our performance and are confident that we have top talent that will continue to operate stable and predictable government business, while positioning PAR to secure additional contracts with the DOD. Now, turning toward our restaurant retail business. We saw continued strength in our Tier 1 business in the quarter, as revenues within our strategic accounts grew more than 16% over Q1 2015. Our Tier 1 customers including McDonalds, Yum! Brands and Jack in the Box continue to select PAR for their technology requirements and manage services needs. In the quarter, we announced that we were selected by Jack in the Box and Qdoba Restaurant to provide their next-generation POS. We have been deploying hardware along with lifecycle support services to over 2,900 corporate and franchise restaurant location. We are proud to have been chosen by Jack and Qdoba, one of the largest U.S.-based restaurant organizations in a competitive environment. In the quarter, our software and software-related revenues increased my more than 34% from Q1 2015. These revenues include our SaaS, software maintenance and hosting fees from Brink, PixelPoint and SureCheck. Our Brink software business produced a solid first quarter, as the overall revenue tied to bring customers increased significantly from the first quarter last year. Additionally, Brink SaaS revenue contribution increased 94% over Q1 2015. While this growth is off of a modest base, it reflects the increasing demand for and growth of our Brink solution. In the first quarter we announced that Giardino Gourmet Salads and Modern Market had selected Brink for their network of stores. More recently we announced the selection of Brink for BIBIBOP, Asian Grill and MOD Pizza. Our customers select PAR, because Brink provides increase redundancy, lower infrastructure cost and seamless deployment. Our customers evangelists parse easy-to-use system, conversational ordering, online and mobile platforms among other things. We also appreciate that many of our customers select POS, because of our shared values. Our food safety and task management solution SureCheck is progressing. We are focused on expanding our customer base with new engagements and increasing our device base with existing customers, as we deploy to international market and new store openings. In Q1 we announce that Lund Food Holdings had selected SureCheck for their network of Lunds and Byerly's food stores based in the Midwest. There is an increased focused on food safety this year, with respect to consumer demands, news on recent outbreaks and the enforcement of [ph] SFMA regulations. Building off this heightened awareness, we are experiencing steady activity and interest in our cloud software. We are also seeing the adoption of our new SureCheck advantage tablet-based integrated solution by our existing customers. The investments we have made in SureCheck for Walmart are increasing new business opportunities in Europe, Asia Pacific and Latin America. We intend to leverage our existing international infrastructure that supports our current Tier 1 customers that includes McDonald's, KFC and Subway to grow of both SureCheck and PixelPoint revenues. Our principal objective is to create value for stakeholders. To accomplish this, our strategy remains focused on diversifying the company's through software-led solutions that attract a broader base of customers from Tier 1 through Tier 4 in QSR fast casual and casual dining restaurants, grocery and contract food. We are leveraging our Brink, PixelPoint and SureCheck solutions to create a frictionless experience between our customers and their customers through our technology. The adoption of our solutions will increase our recurring base of revenue and improve our margins, enabling our company to deliver consistent and predictable financial performance. The strategy is underway and as always the transformation of our company will not happen overnight, we are seeing steady progress in the pursuit of our goals. I would now like to turn the call over to Matt Trinkaus for further details of our financial performance. And we will then open the call for Q&A.

Thanks, Karen, and good afternoon, everyone. Product revenue in the quarter was $22.1 million, an increase of 6.5% or $1.3 million as compared to the first quarter of 2015. During the quarter, the increase in product revenue was mostly driven by hardware sales sold to our largest global customers in hardware pull-through from deployments of Brink POS. Highlights for the quarter include strong U.S.-based hardware sales, driven by commitment from our Tier 1 accounts in executing their technology upgrades. In addition, we are concluding the rollout to Jack in the Box, our latest Tier 1 marquee account who upgraded to the next-gen POS hardware. The company's domestic operations continue to capitalize from market penetration within fast casual restaurants, noting an increased adoption of Brink and the attachment of PAR's hardware. Service revenue was favorable compared to Q1 2015, generating $11.7 million of revenue versus $10.6 million, noting an increase of 10% or $1.1 million. The increase was largely due to increased installation revenue that correlates with higher product revenue experienced in the quarter. Additionally, the company continued to grow software-related recurring revenue streams, primarily revenue SaaS-related, generated through deployments of Brink POS, software maintenance from Pixel and hosting revenue from international deployment of SureCheck. In addition, service revenue from the company's hardware repair center has increased compared to prior year, driven by higher volume of contracts. The company's recurring revenue base represents both software-related contracts and hardware support contracts. Overall recurring revenue, including hardware support contracts, represents 24% or $8 million of the total restaurant retail revenue during the quarter, an increase of 6% versus Q1 2015 and 1% on a sequential quarter basis. The company's software platform sold-as-a-service, primarily Brink POS and SureCheck, continue to grow its install base, with revenues increasing 94% over the same revenue streams in Q1 2015 and 16% increase on a sequential quarter basis. The volume of hardware support contracts continues to grow. The company has experienced a new type of contract, blending the on-site and repair center services that is favorably impacting the overall performance. Contract revenue from our government business was $21.5 million, decreasing $2.3 million from the $23.8 million reported in the first quarter of 2015. This is driven from a decrease in materials and subcontract revenue across all lines business of business, offset by an increase in direct labor and associated value-added revenue. Contract backlog continues to be significant, noting a total backlog of over $81 million as of March 31. Product margin for the quarter was 25.5% versus 29.1% in Q1 2015. The decrease in product margin is related to the mix of product revenue streams during the quarter as compared to prior year. In Q1 2016, the company experienced a higher percentage of revenue, driven by lower margin product offerings. Additionally, in 2015, the company reported a large deployment of our Pixel software sold at a contractual license for a specific customer that did not reoccur in 2016. Service margin for the quarter was 26.5% compared to the 24.5% reported in the first quarter of last year. Service margins were favorable during the quarter, due to an increase in software-related services during the period, primarily driven by higher SaaS revenue. Government contract margins increased to 8.7% as compared to 5.7% for the first quarter 2015. This increase is largely due to a favorable contract closeout and more profitable contract mix, with a high volume of revenue earned through higher margin contracts. GAAP SG&A was $7.5 million, an increase of $882,000 from Q1 2015. The increase was primarily due to three factors. Legal fees incurred from the company's investigation of the misappropriation of funds by former CFO, investments made in connection with the company's business transformation project and continued strategic focus and building the company's recurring revenue base. Non-GAAP SG&A was $6.4 million relatively flat from the $6.3 million recorded in Q1 2015. The adjusted SG&A reflects the exclusion of expenses incurred in connection with investigation, cost incurred from the business transformation project, equity compensation charges and acquisition-related expenses from Brink POS. The company continues to analyze its fixed overhead cost and efforts of reducing or reallocating the cost in support of higher performing products. Net R&D expense is $2.7 million, up from the $2.4 million recoded in Q1 2015. Majority of the increase is due to software investments made in acceleration of Brink and SureCheck product lines. Now to provide information on the company's cash flow and balance sheet position. Cash used in continuing operations during the three months ended March 31 was $1 million, mostly due to the working capital requirements and offset by the add back of non-cash charges. Cash used in investing activities was approximately $1 million. This includes expenditures for CapEx of $300,000 and cap software of $700,000. Cash used in financing activities were $7,000 in the quarter. Inventory increased from December 31, 2015, by $1 million. This was mostly related to inventory purchase for Q2 deployment. Inventory turns for our domestic and international operations continue to be consistent quarter-over-quarter. Accounts receivable increased $4.4 million compared to December 31, 2015, primarily due to the timing of revenues associated with the government segment. Days outstanding remain consistent with December 31, 2015, for hospitality and government. This concludes my formal remarks. And I'd like to turn it back to Karen for her closing comments.

Thanks, Matt. In summary, we delivered a solid quarter that has historically been our seasonal weakest. We are making progress on all of our 2016 objectives, and I believe we are positioning our company for predictable growth and profitability. As we look to the remainder of this year and beyond, we're encouraged by a combination of strong customer interest, exciting product portfolios, increased leverage from our partner ecosystem, and the growing recognition of our innovation and market leadership with customers of all sizes around the globe. As I said in March, a lot of work remains ahead of us to fully transition the company, we're investing in a new ERP platform that will provide us with increased visibility in our processes to streamline and scale our businesses for growth. We will continue to focus on delivering contemporary technology-based solutions for our customers that improve our recurring revenue and the overall profitability of the company. PAR's leadership is focused on executing our strategy and ensuring that our stakeholders, our employees, customers, partners, communities and you, our shareholders, to receive value through our actions. I am personally grateful for the loyalty and dedication of PAR's employees, our people make the PAR difference. This concludes my remarks. I'd now like to open the call for questions.

[Operator Instructions] Our first question comes from Sam Bergman from Bayberry Asset Management.

I have a few questions for you. Can you give me some kind of flavor from the recent McDonald's conference, what you saw coming out of the conference?

The McDonald's conference was in mid-April and PAR had a really strong presence at the conference. We were approved to show our EverServ 8000 platform. It's going through the certification process with McDonald's on a global basis right now, and they approved us for sale at the conference. There was a tremendous amount of excitement around this platform and we were able to take orders at the convention. There was also excitement from different regions globally with regard to our tablet, which we also showed. And we had some good conversations around SureCheck with the corporation and several of the international regions. So it's a very, very strong convention for us.

Can you talk to us about any pilots that have been started with McDonald's on SureCheck or Brink or has anything developed since beginning of the year?

McDonald's is a huge organization undergoing some tremendous changes themselves, as you know. And they've initiated the conversations with us with regard to SureCheck and are talking next steps within 2016 to go deeper dive and go to the next steps. And I can't be certain, but I think that we will probably see a pilot start in the second half of this year. It's a two-way street. We need to make sure that that McDonald's is committed, that they have a project team assigned. So we both spend our time going in the right direction.

So staying on SureCheck, you did mention about Walmart and Walmart internationally. What have you seen since the beginning of the year in terms of an uptick in SureCheck pilots internationally, because of the Walmart initiative overseas? And of course, you have the Walmart initiative that's probably finished in the U.S. But I would think by now and you would see some initiative by international players on that?

We attended an annual conference, food safety conference that is, every other year outside the U.S., and this year it was in Berlin. With our investment for Walmart and SureCheck International, we were well-positioned to demonstrate and discuss the product with many large players in predominantly, Europe, Latin America and then some in China. And so we've engaged in different conversations in Europe and in the U.K., with customers outside of the Walmart organization.

And outside the Walmart organization, one would think that if they are happy with the product, there should be some pilot initiative right away. Am I wrong to say that or not?

It's a longer sales cycle in customers. This is a different kind of customer that we're selling to. We're selling to operations as opposed into IT. They're big organizations, and so we're going through mutual discovery process and moving towards pilot with a number of organizations. Some are in the different stages of the pipelines.

Let's go on for Brink for a few minutes. Can you give us an update on Five Guys, what if any installations occurred in the first quarter? How has it gone since the third-party fixed? It's supposed to have happened maybe the second week of April. Can you give us an update on that?

So today we have installed a 115 Five Guys site, 45 in the first quarter. We have been turned on for deployment last weekend and I think we deployed roughly 15 last weekend. So all parties are aligned and moving forward. I don't know how fast it's going to accelerate, but the good news is that the implementation has turned on.

Can you give us a little bit color on the Brink product line in terms of sales people that you have out there selling the product and what the pipeline looks like?

The sales team for Brink is a combination of SMB web-based sales folks that really are focused on Tier 3 and lower Tier 2, rest of our customers, predominantly in fast casual. We have a team that's focused on upper Tier 2, Tier 1 direct. And we have really a growing number of strong partners that are U.S. based and are starting to pickup their Brink sales. So our sales team is a combination of direct and indirect then within the direct team Tier 1 and online SMB sales team. The pipeline continues to grow. There is strength in the fast casual moving up-market. When you go up-market the sales cycle becomes longer, but we expect that that's going to continue to grow, and so it looks favorable.

If you put Five Guys aside, can you give us any idea what size increase hard specs in the Brink division in the second quarter?

Well, I expect that that you'll see the revenue to grow at a similar pace that it did in the first quarter and our backlog continues to grow, as we bring on new customers and new customer contract. And then we get the corporate franchise stores aligned for deployment. We're finding that the deployment, because we're offering the POS piece of the platform that we're having to work with our partners in the sale, sometimes through the credit card companies or different part of the platform to deliver in unison. So it's a growing backlog and definitely growing pipeline.

Our next question comes from Gary Siperstein from Eliot Rose.

I want to start with the fact that government was down almost 10% in the quarter on the revenue line, and yet you had the most profitable first quarter in the company's history. So is this shift to higher margin business something that's continuing and those three contracts, Karen, that you called out in the quarter between the Navy in Hawaii, the Navy in California and the Air Force, are those examples of the new higher margin business you're going after?

I'll let Matt answer.

Thanks, Karen. Gary, what the quarter reflects is a couple of things. One is that as we built our 2016 and beyond execution, we actually sort of plateaued the PMO services line of business, which is a smaller return on sales with sort of a task order volume that is less responsive to actions we take, it's more of a larger built that the government makes decisions, that we reap the benefit of due to our relationship, and the build that went into the background. But we experienced a lot of lumpiness with that and it's very difficult for us to project with high accuracy where it's going to go. So we kind of kept that flat for the coming year with a concerted effort to grow the PMO services as a portfolio and have it be a growth compliment in the out years as we move forward. The coincident with that we're continuing to grow the business on what we call the value-added side of business, which is dominated by the types of contract work where we put talented people to work for the government, solving their hard problems. And those we bill out and soak up our general, administrative and overhead expenses, as well as charge up fee. And so that type of work has continued to grow. And we continue to project reasonably strong additional growth moving forward.

And so with the $81 million backlog and you're projecting additional growth going forward, can you tell us basically what the RFP pipeline looks like? I know you're not going to get all of them, but are you bidding on $10 million in business, $25 million, $50 million? Can you give us a little color on that?

Well, yes, I can. I'm just consulting some notes here real quickly. And our pipeline growing into 2017 really is sufficient to support continued growth from the value-added side in the scale that you've seen sort of across 2015, the growth across quarter-to-quarter is not something we would project to continue. There's a very specific reasons why that happened, as Karen explained in the opening narrative. The PMO services pipeline is much harder to predict and won't see that type of growth until probably '17 and '18.

But do have a figure on what you're bidding on? I understand you're not going at all in, there could be some deliveries in 2017. Do you have the RFPs out? Are you bidding on $10 million worth of business? Can you give us any color on that?

No. The pipeline is much larger than that. It's only the $100 million to $150 million range. But that's also reflective of probability of wins that are associated with the type of work we compete for.

So that's what I was looking for. So you're out there bidding on $100 million to $150 million. And are these supposed to get awarded this calendar year by the government or is that some of these could go into 2017 before the award is announced?

Correct. It's across multi-years. There is some impact to 2016 that's built into our 2016 plan. And there is very sizeable impact into '17 and '18.

And then moving back to restaurants. Karen, you called out the solid quarter for hardware with Tier 1, is the Jack in the Box continuing into Q2 or do that complete in Q1?

There will be a little bit of Jack in Q2. I believe it concluded in April.

And when you say, Jack in the Box that means both Jack and Qdoba?

Yes. I'm talking about them collectively. As a matter of fact, the Qdoba install were the last of the rollout. So they've concluded in this April, May, really May timeframe.

And I'm just trying to get some understanding of the cadence on the hardware side. So Q2 doesn't have a full quarter of Jack in the Box, can that get made up by McDonald's or other Tier 1s, because you were at the conference, and usually, I guess, what you guys showcase every four years at the conference, you were the exclusive showcase for this year, usually we get a bump after that. Is that the expectation?

So we're not the only supplier at the convention. We have competition. Panasonic and NCR are both there. But to your point, which is relevant that we do get a bump after the convention, and I expect that we'll see that to really materialize in the second half of the year. To answer your first question, Jack, is kind of winding down, but there are other opportunities that the strategic accounts group have to bring to the second quarter. And so we're looking for deployments and replacements of older hardware in all of our Tier 1s, and of course, there is the hardware component of the Five Guys roll out.

And is it just with your existing customer base in the hardware or have there been some new wins that you haven't gotten permission to announce yet?

We have some new logos that we are providing hardware for that we haven't been able to announce, but we haven't had a sizeable win like the Jack in the Box hardware only. Our concentration really has been down the software and really looking towards building that software-led solutions business.

I'm just trying to, I guess, get a sense, first, before I get to that, the surface side on that base business, the hardware and the government. So there is not necessarily going to be a decline in hardware. I know the margins aren't the same as the software and so forth, and the future of the company is mostly on the software side. But there is the possibility hardware stays steady with these new wins and the possibility and obviously the hardware from Jack in the Box and anything that happens additionally with your major Tier-1s?

The only thing I would say, you're right. So we do have opportunities with the different Tier 1s and Taco Bell, and certainly McDonalds and Subway. The Q2, as I am reflecting back, the Q2 of 2015 was a very big quarter for us and so the fact that we don't have a big rollout like that, it could be soft compared to Q2 of last year.

And then moving over to the software on the Brink side. So you mentioned, I guess, Sam just asked you about the pipeline in Brink. First, you mentioned the two or three announcements in the quarter. Are three or four of those done already? And I think it was MOD Pizza's continuing, but were the two or three completed already or some of those continuing into Q2?

There are a lot of customers that we're deploying. Those were a few that we announced in Q1; BIBIBOP is rolling out; MOD Pizza is continuing as they're growing, so there are customer that really is continuing to grow quite nicely, Giardino is really just beginning. Pita Pit, which we announced last year is in a big deployment right now. So there is customer's that we announced earlier this year and last year that are continuing to deploy. So one of the areas of focus for us is the Tier 2, Tier 3 part of the market, those are in fast casual, and we think that that's a good strategy for us, because of this, because they continued to growing in that stores and we can continue to sell through them and then return to them to sell them new products and that's what we've been doing.

And also on that Brink pipeline, I know it takes time with the Tier-1 and 2s to move up to them. But have you signed any Tier-3s for Brink that you haven't been able to announce yet?

Yes. You will see some new announcements coming. I think that you're raising a really good point. You've been accustomed to PAR winning a big Tier 1 hardware account and then we do the deployment and the revenue dries up and then it doesn't reappear for another five to seven years. And with Brink and with SureCheck, we're going after accounts that have growth opportunity that continue into the future and then coupling that with the SaaS revenue that they deliver, it's a very different model for us and the model that we're seeking to achieve for the company.

So just following up then on Brink. So I know you're subject to as you mentioned other partners as you start to rollout the Five Guys and you mentioned, once you got the green light, you did 15 over that weekend, and you did 45 in Q1. I'm just trying to get a sense of is it a function more or so of different partners that you work on combined with, what you know, the corporate for Five Guys and/or franchises, giving you the green light, in that we have enough people for implementation, that if they wanted to go really fast we could handle it or are we limited by our implementation teams?

The original hold up has to do with ensuring that the POS back office and EMV wall all tied together, and that was driven by Five Guys of corporate. That all system are go. They are recommending the deployment schedule, so as not to interfere with their business. And so we are not hindered at all by our own implementation team. We could scale up to hundreds of sites in a week, which we've done in the past with different concepts, so the speed of the Five Guys deployment will be dictated by the customer and was influenced by how well we're doing, and I know that the first stores went in without issue.

So you mentioned in your script, 115 to date, 45 in Q1, so that would be 70 I guess in Q4 roughly. Is 70 per quarter a good run rate or that was early days, and now that you've got the green light, assuming as you just discussed with the different partners and the back office, franchises, you obviously have the capacity, you said, you could do a 100, so should we assume the 70 in Q1 isn't necessarily a run rate, but it could accelerate from there and we'll know when we know. But you did 15 last weekend and we had two more months this quarter, so it could accelerate from there.

The earlier numbers occurred over the Q3 and Q4 of last year, as we were putting in the solutions it was a non-integrated solution, Five Guys wanted to put the new platform in to any new stores that were opening up, so we were putting the stores as they needed. So now that we can, we can put the total solution in, and that is PAR's responsibility, we can scale up 70 stores would be achievable and I think that we can probably exceed that. Now, I will know more when we talk again at the end of Q2 and I'll have a higher level of confidence about what Five Guys can handle. Now it's not going to be about what Par can handle, it will be about what Five Guys can handle. We also have a Five Guys franchisee conference coming up in June that will get the franchisee community again, reengage and excited about the new solutions. So we'll be pushing hard to accelerate this deployment.

And they have, I guess, roughly a total 1,200 restaurants. So if they want you to go with new corporate openings. Do you have figure on what the corporate openings are for the remainder of the year separate from the franchisees?

I don't know what the corporate openings are, but the corporate has a roughly 300 stores of the 1,200 or 1,300s that they operate. And the openings are happening small on the corporate side. They have to model that they want to franchise and that builds a corporate empire. So I wouldn't expect that the corporate openings would be large. It's going to be deploying both new stores corporate and existing stores for corporate and then moving to the franchisees at the same time.

And then moving to SureCheck. So the Walmart international, I think on the last call, we talked about them having like 7,000 stores and that they wanted to have the implementation done by the end of calendar 2017. Do you have any more color on the ramp there? Should we think of to be conservative and think of 5,000 stores instead of 7,000 and think of maybe 2,000 implementations this year and 3,000 next? Can you give us cadence on that?

That is a good question. Walmart's been giving us their predictions of how they can deploy SureCheck on a global basis. And after they get out of their key markets, the ones that we talked about, the U.K., Mexico, China, Canada, they're going to the much, much smaller market -- Japan will be another big one, then they'll go into much smaller markets. So I expect that that deployment schedule will elongate, but we do have line of site and markets like Mexico, Canada, Japan and China in our near-term. So to your point, 7,000 sites -- we don't really measured in terms of sites, we've measured in terms of units and they use two units per site. So we expect that we would have about 2,000 units added.

And my recollection was there is a small monthly hosting fee, but I thought the hardware, the handheld hardware was $400. Is it $400 each or for the two per store?

It's roughly $400 each, not quite $400, but its right around that range.

So if I say $350 --

We have different products, so let me make sure that we're talking about the same thing. So we have a TMD platform that we sell and then we have our SureCheck Advantage. The SureCheck Advantage retails for $1,600. Walmart is not buying that device at this time, but they're looking at it in different regions. And so I think that we're trying to back into a number for what the revenue will be, we do get a hosting fee and they do procure. Some regions have also already procured their hardware, so we can't really back into a SureCheck number.

That's what I was trying to do.

So I don't want to mislead you, because I could see where you're going, and I don't want you to try club with the bigger numbers than what you are expecting.

Because with $400, if you did 2,000 stores that'd be about $8 million in incremental revenue, and I know there is a small margin on that, but that would be incremental on top of the monthly hosting. So let me move away from that. In terms of the legal fees in the quarter, so is that it in terms of -- we have the write down of what the CFO purchase or invested in, whatever he did with that $750,000 in Q4, and then we have the investigation legal fees in Q1. So now are we done, done, or is there anything ongoing?

We are going to move forward with the first phase of the investigation with a modest expense. So we're taking it slowly. We want to make sure that we do the right things with regard to chasing the money, but we also want to be cautious with our expense, so we have to follow the money.

And then you still can't give us any color on what he invested in or who got the money and do different avenues of recourse?

I really have no information.

And in terms of, Matt, you mentioned that account receivables were up $4.4 million and you mentioned that was mostly government. Can you give us some color on that, because with the quarter being down on a revenue basis, it doesn't seem to equate with receivables being up like that. Is that something that's collectable like in the next 90 days or 120 days?

Yes. So government collection cycle is actually right around 42 days, Gary, this would have been revenue related towards the end of the quarter. So lot of the stuff, the AR from the yearend was quite different in the quarter, but then we had some build later on in mid-March to late March that as outstanding. I don't see any collection issues. We don't really ever have collection issues on the government side -- actually never do.

So if that's comes in and then we don't have any late in the quarter or any other stuff like that, that can go to cash, that is I guess closer to $10 million cash instead of $6 million, everything else being equal?

Definitely improve our cash flow position in Q2.

And in terms of the $8 million recurring revenue in the quarter, we move from I guess 22% up to 24%. Of that $8 million, how much is the maintenance on the hardware?

It makes up the majority -- not the majority, but it's definitely over half of it. I don't want to give the full number, but hardware is trending in the right direction. We've had some pricing contract mix that we noted in the remarks, but the software piece is really starting to grow and build that space amongst recurring revenue.

And at what point will you folks call out the software piece? I think you mentioned that, was it Brink and SureCheck were up over 100% or was it just Brink? You mentioned one figure that was -- the SaaS was up 97%, software up 34%. So I mean at what level will you be able to give us a figure, $2 million or $3 million in addition to the percentage growth?

That's a good question. The growth that you mentioned was within our SaaS product, which is mostly Brink and SureCheck. Those percentages, it is on a small base, as Karen noted. Once we feel we're at a good start, and we're really kind of have a well-oiled machine going forward with some of the larger rollouts that we're doing then we will look at to kind of disclosing the actual dollar figures, you know what those monthly revenues are, what the annual rates are, but we're not quite there yet, Gary.

I'm just looking you guys probably noticed in the news over the last few weeks Oracle I think purchased -- last couple months Oracle purchased a couple of companies. SaaS companies that were doing about $100 million in business, I think they were both not profitable, but they paid like five time sales. So I know its early days on our SaaS, but if we annualize our entire recurring figure that's $32 million and hardware is not going to go away anytime soon certainly for quick serve. So you can get it pretty excited plan with these numbers $8 million a quarter; four times eight is $32 million. Three or four times sales on that one could -- and again, I know we have to get SaaS to be most of it, but at some point it gets pretty interesting where the company with the valuation enterprise value under $100 million, they are software business alone and are recurring revenue piece alone in time could certainly be worth what the whole company is valued at now. So I just keep an eye on those things, but I was wondering if you saw the M&A in the SaaS base?

Gary, we're watching the same trends that you are. And at this point, we are focused on building our business, staying focused on the recurring revenue, so we can get those kinds of valuations.

Karen, I know you only technically took over January 1, but that's three quarters in a row with a positive year-over-year comparisons on a non-GAAP basis. And I think we did a $0.11 in Q3 and maybe $0.11 or $0.12 in Q4 and then we did the $0.06 in Q1 and you called out that it's a seasonally weak quarter. But I just wanted to congratulate you on three in a row and it's pretty exciting, if that's $0.06 in the quarter represents the low point for non-GAAP income with the seasonality.

We are very focused on building the business quarter-over-quarter and over sequential quarter. So we've got a ways to go like I said and the transformation of the company is taking time. We are doing the right things. We've got a good team to be able to achieve our goals.

And just two last ones, and I'll give someone else a chance. In terms of the ERP system, you expensed out over $300,000 in the quarter. Is part of the quarterly expense on that being capitalized as well and this was the piece to expense out, or is it all being expensed out?

Gary, at this point, it's all being expensed out. In the future we'll look towards capitalization depending on what stage we're in the project of.

And what is the ETA on this being complete?

This is going to be product that's going to extend until this time next year. So we're going in -- we just finished the discovery phase, to Matt's point, and that was expense, so as we go into the design phase it will likely be capitalized, that could be the big bulk of the project. So we're expecting that it will extend into this time next year.

That's fine. Yes, because there are a lot of other companies I follow capitalize that. So the next four quarters it will be an impact

That's our expectation.

I'm sorry?

That's our expectation.

So we'll be trying to capitalize going forward. And then last question on the IR calendar. Do you have any presentations coming up, any conferences on the Investor Relations side?

Yes, I think we have two before the summer kicks out. There is one in Boston, I think at the end of June and another one in New York City at the end of this month. And we'd be releasing the news on that shortly.

We have a follow-up question from Mr. Sam Bergman from Bayberry Asset Management.

Just a couple of quick follow-ups. Karen, would you give us units installed in the fourth quarter versus the first quarter, but minus out Five Guys and Brink?

I don't really have those numbers in front of me. So what I can tell you is that month-over-month since the acquisition in September 14, we've seen positive growth.

So now we're down at all or not?

Good try, Sam.

I work hard to try.

What I can tell you, Sam, as I think we haven't released this publicly or disclosed it, but there was a run rate average deployment rate for 2015 per quarter, and we exceeded that in first quarter of 2016 by a fair amount.

So should we expect some time in the future putting aside the fact that we'd like to see you guys come out with a revenue concentration on software, some time in the near future coming out with units delivery per quarter?

I think as Karen said this to Gary earlier, I think there is going to be at that point in the future and it's hard to predict that thresholds we cross --.

But I'm not talking about software, I'm talking about units of software installed without giving a revenue amount?

Dan, for Brink, I definitely get what you're looking for, and our revenue is not just driven store count, it's driven by configurations of those stores. We could have stores have that have six or eight licenses versus stores that have two or three. But it's something that we manage and we do look at in our projections. Going forward as the store counts grow and unit accounts grow, we could look at disclosing more information around the actual numbers in percentages.

And the last question, can you give us some color on R&D for the rest of the year. It was up a $200,000, maybe close to $300,000 this quarter, what's your expectation the rest of the year?

So for the R&D spend I would think that Q1 is mostly likely a good parameter as far as go forward expense.

So your expectations are similar for the rest of the year?

Yes, right around that similar run rate of 2.7 that we add in Q1. We are continuing to accelerate the investments within Brink and SureCheck. So I think we'll see a trend similar to what we saw in Q1.

And is there any Brink in the pipeline similar to Pita Pit or even the Five Guys that you have not announced? And I have one.

There are some nice-sized accounts that we will start to -- everybody started to deploy in different stages of deployment. And we intend to make some announcements in this quarter.

And SureCheck being a much slower type of product, in the U.S., not focusing on international, is there similar situation there?

SureCheck has a good number of grocery and restaurant accounts that we're working with in various stages. And again, I believe that we'll be -- we're entering into pilots and we will have announceable news in the next quarter.

Now, and are those pilots going into actual contracts get to a license fee similar to Walmart or are they a SaaS model?

No. We've moved everything to a SaaS model. So we made that conscious move in 2015. And so we are not doing any on-prem licensing, we're not doing any enterprise licensing, it's all SaaS.

We have a follow-up question from Mr. Gary Siperstein.

I just want to put my true sense in following what Sam just requested of you folks. So just to clarify, I think he is talking about in future quarters if you could, say, for example, we installed SureCheck in 28 stores and we installed Brink in 47 restaurants, and the restaurants could be Pita Pit, it could be Five Guys, it could be MOD Pizza, so you don't have to give us how may per customer name, but just an aggregate in the quarter, so since you're not breaking out the revenue for the unit, it would just give us some color on direction for implementation on both the SureCheck and Brink.

I totally understand what you're requesting. And we're watching the growth of our business and the development of our pipelines and gaining confidence in where we're headed with our SaaS business. And it's noted what you're looking for, and we will at the right time provide information to you, so you can start to gauge our business growth as well. It's important to us as well.

And last question, I completely forgot to ask you how the CFO search is going?

The CFO search continues. We've had a number of candidates in and I haven't found the right person for where the company is at this time, but we are continuing our search.

I am showing no further questions at this time. I would now like to turn the call back over to Ms. Karen Sammon for any closing remarks. End of Q&A

I just want to thank everybody for your time this afternoon. And we look forward to talking with you at our Q2 results. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.