Good afternoon, ladies and gentlemen, and welcome to the TransAct Technologies Third Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. Later, we will also conduct a question-and-answer session and instructions will follow at that time. [Operator instructions] As a reminder, this conference call is being recorded. I would like to turn the conference over to your host Investor Relations, Mr. Jim Leahy. You may begin.

Thank you, Laura. Good afternoon and welcome to TransAct Technologies 2019 Third Quarter Conference Call. Joining us today from the Company are Chairman and CEO, Bart Shuldman; and President and CFO, Steve DeMartino. Today's call will include a discussion of the Company's key operating strategies, progress against these initiatives and details on the third quarter financial results. We will then open the call to participants for questions. As a reminder, this conference call contains statements about our future events and expectations, which are forward-looking in nature. Statements on this call may be deemed as forward-looking and actual results may differ materially. For a full list of risks inherent to the business and the Company, please refer to the Company's SEC filings, including its reports on Form 10-K and 10-Q. TransAct undertakes no obligations to revise or update any forward-looking statements to reflect events or circumstances that occur after the call. Today's call webcast will include non-GAAP financial measures within the meaning of SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in today's press release as well as on the Company's website. At this time, I'd like to turn the call over to Bart Shuldman, Bart?

Thank you, Jim, and welcome everyone joining us on this afternoon's conference call and webcast. Before I begin my discussion regarding our preliminary financial and business results and update you on our exciting new restaurant solutions market in both our product, I want to spend a few minutes on recent form 8-K filed by TransAct. We issued the form 8-K to disclose material control weaknesses, but it is important to hear from me what occurred. It recently came to our attention that our independent registered public accounting firm, PricewaterhouseCoopers received the report regarding an inspection relating to PwC's audit of the effectiveness of our internal controls as of December 31, 2018, and that PwC then conducted an internal review of its own audit about 2018 consolidated financial statements and our internal controls. That internal review resulted in PwC's reconsideration of this conclusion about the effectiveness of our internal controls, and ultimately in our own reconsideration of our conclusion that our internal controls were effective as of year-end 2018. As result of our reconsideration, we determined that there existed control deficiencies, as of that date, mainly with respect to our internal controls over certain aspects of our information technology, including related access and segregation of duties and controls over key spreadsheets. We have concluded that these control deficiencies represent material weaknesses in our internal control over financial reporting as of the year 2018. Now, TransAct has received an unqualified opinion regarding our internal controls from Pricewaterhouse every year that internal controls audit has been required, including 2018 and including since 2007, when we implemented our new information technology. While we are very disappointed by what is occurred, we have now concluded that we have material control weaknesses and we'll work quickly and efficiently to rectify the situation. Please understand, we believe…

Thanks, Bart. Good afternoon everyone. In line of our determination regarding the effectiveness of our internal control that Bart discussed earlier, we're presenting our third quarter results in preliminary form subject to the completion of additional procedures. Upon completion of these procedures, we expect to finalize our operating results for the third quarter 2019 and file the related Form 10-Q as well as file the necessary amendments to our 2018 Form 10-K. As Bart noted, PwC has not withdrawn its opinion of our 2018 consolidated financial statements. And to our knowledge, the weaknesses did not result in a material misstatement of any of our previous issued financials. With that said third quarter 2019 net sales were 11.7 million, down 26% and 15.8 million in the third quarter last year. Looking at our third quarter sales by market, restaurant solutions sales grew 5% year-over-year to 1.4 million. During the quarter, we saw growth in both hardware and software sales given the growing traction for our entire ecosystem of BOHA! Solutions. In particular, hardware sales in the third quarter were up approximately 21% on a unit basis and up 2% on a dollar basis, as we aggressively extended the number of BOHA! terminal units out in the field, which we believe will lead to an increase in software subscription and label sales over time. Though starting from a low base, software subscription sales were up tenfold in the quarter as a result of the increase BOHA! terminal installed base. Strong sales pipeline of BOHA! terminal and other BOHA! hardware products, we believe we are well-positioned for G2E sales growth. Casino and gaming sales were down 39% year-over-year to 5.1 million in the 2019 third quarter. Domestic casino gaming sales were down 50% from the prior year. Sales for the year ago were…

Thanks Steve. As we wrap up 2019, I look ahead to 2020. We remained confident in our view that the BOHA! ecosystem and the restaurant solutions market is TransAct largest ever revenue opportunity. While 2019 has presented its challenges as we move toward the expected inflection point in our restaurant solutions business, we remain focused day in day out on driving year and long-term success of BOHA! and TransAct. The future is bright for TransAct and we look forward to delivering the long-term value our shareholders except. I will end my comments as I do every quarter, by thanking our shareholders for your support and trust. I'll also take this opportunity to thank the TransAct team for the great work as we position our company for the road ahead. I also would like to make a special thank you to Steve who over a last couple of years is to be a very difficult situation work has tail up. As we reform what was the trends buyer. I would also like to invite all shareholders to the Southwest ideas investor conference at the Western Dallas downtown hotels. I will be presenting on Thursday, November 21. Operator at this time, we are ready to take questions.

[Operator Instructions] Your first question comes from the line of Kara Anderson of B. Riley FBR. Please proceed.

Just wanted to clarify, I not sure, if I missed it. Did you quantify or talk about how much of the 1.4 million in restaurant solution was directly generated from BOHA!?

We don’t break out the hardware and software, Kara, is that what you're asking?

I guess I’m just trying to get a sense for, are you selling the AccuDate terminals? And is BOHA! generating more in revenue at this point versus what you're selling maybe to McDonald?

The new BOHA! portion is taking over to become the majority of the sales versus the AccuDate.

Yes, we still have some business with McDonalds, but as we announced all the new orders is BOHA! based.

And then, you have talked about in some press releases, pretty fairly steady flow of wins year-to-date. Just wondering, if you can speak to how those systems are shifting versus sort of their original schedules that were laid out?

Kara, pretty much on target, I guess the one that we talked about which is the one in Canada is a license to win business. And clearly, we're pleased with the progress we've made as we got a couple of the big franchises buying the technology. There is one that was pretty big also that I made a comment on that has recently told us that there -- I always said that, the success of this one win would be their success of this new product that they wanted to sell and how they needed our technology. And they informed us that it's going very well and that over the next couple of year, we could expect an installation of up to 10,000 terminals. Now, we just got to keep going, but it's never feels bad when a customer says, we think it was x and now its three times what they thought it was going to be. So, we're very pleased about that. We also in most of our customers, they are trailing other apps, so what we always said, we would pretty much star of with one or two apps, mainly one apps because of the label application is just such a easy application that make to implement, but we have one customers that is looking to five additional apps. So, -- and when you talk about AccuDate, I can't tell you that we have one customers that we rolled out AccuDate years ago that were negotiation the changeover to BOHA! So, from how we see the market and what we have been able to put out and share with the shareholders, we're very pleased with what we see, the other thing is the recurring revenue was coming in a little stronger than we thought and nice the third quarter in recurring revenue. So, where we look out, it looks very positive to us.

Kind of on that last point, I don't know, if you'll give it to me, certainly we can appreciate the growth that's coming from the recurring revenue for BOHA! Is it possible to sort of quantify the run rate you're at, at this point?

You know, not yet, there is a couple of things that we're trying to determine. We're trying to determine average revenue per unit, which as you hear we've got one customer of $2,500 per unit and other customer is going to do $275. So, what we'd like to do is see this all settled down, some of the initial sales as the initial rollout and then we will see what the ongoing sales labels offer. And so, I would say over the next couple quarters we will be start sharing that with you.

Okay. And then, I think you might have touched on this, but when you think about the price on the hardware. How much flexibility goes into that? I mean, are you willing into or capable of selling this at a lower margin than maybe we might all have thought it would sell out for the opportunity on the recurring revenue side? Just hoping you can provide a little bit of color around your strategy for pricing that.

Sure. Sure, that's really easy because you see our margin in the third quarter, right, little over -- clearly lower gaming sales. But, as Steve said, our unit volume was up, but our revenue wasn't up as much because we found the sweet point in regards to what the terminal price needed to be in the marketplace. And once we found that, we've been continuing to sell at that price. So, it would from winning a business standpoint, we know where the terminal needs to be. All of the other pricing is sticking -- there is no special pricing on software, there is no special pricing on labels. We know exactly what we need to sell what labels at. We know exactly what we can sell our service at. We know exactly what we can sell the asset. So, it was really somewhat of a lower adjustment of our terminal that hits the sweet spot for restaurants and food service providers. And that's really, see I would think you would agree with me, that really has unchanged the over the last couple of months.

Yes. Like I said, there are -- our unit volume was up 22% quarter-over-quarter, but our revenues will be up 2% in restaurant solution that's because we consciously lowered the price on terminal. It's a laser blade model, Kara.

Yup, understood and definitely get that, and it sounds like that probably a trend that might see over the next of quarters now that found the sweet spot. That's it for me today. Thank you.

Thank you, Kara.

Thank you. [Operator Instructions] Your next question comes from the line of Mitchell Sacks with Grand Slam.

I think you mentioned earlier in the call that BOHA! is live today at 14 companies. You released I guess was around five or six -- five earlier. So, the other nine companies that are using BOHA!, are those customers that have switched over? Are those new customers and just gives little more color, if you could?

It’s a combination of customers that we won before the announcement of BOHA! Some of the customers actually remember ran our combination of our XL2e with [Jolt] and now have moved over to BOHA! or in the process of moving over to BOHA! So, there were some customers that we closed. That’s why look like when we talk about next fact that we had some recurring revenue in the third quarter of 2018 on the software side that was some of the wins that we had in regard to selling what we've been called the XL2e with the [Jolt] system now has moved over the thermals out there, but we move them over to the BOHA! labeling and temps solution.

Okay, and of the 14 customers that you've signed so far for BOHA! have any of them added apps or are they still in consideration mode?

Still in consideration mode.

And then, you mentioned that there was a customer that was tripling in size of what they expected to roll out. So, I think you would release a press release saying, you had a customer that was doing to do about 3,000 terminals over the next few years, so that customers now would be doing roughly 10,000 terminals over that few years.

Yes, sir. That’s it. You got it. The challenge metric can be 10,000. They are very pleased with the way there program is going, now again it will take probably three year unless it continues to go so well if they decide to actually roll it out faster, but that’s the customers actually we even said that the recurring revenue for that customers was $1,700 per terminal.

And then one of my final questions I think it was sort of based off of Kara's question. I wasn’t sure I quite grasped it, but as if today you guys or TransAct knows or has certain amount of recurring revenue that you are generating on either monthly, quarterly or annual basis. Because I think you talked about how much that grew year-over-year. Is that what you're saying, you don’t want to quite release it in terms of dollar volume? Or were you talking more about what your average revenue per unit was?

Both, what I would like to be able to tell the shareholders, what every deals is going to be between x and x of recurring revenue, even we'll little put up the dollar amount or start to build the average of what we believe it's going to be. And then I do believe, we have to start sharing with the shareholders exactly what our recurring revenue for restaurant solution. I do believe we have to do that.

Thank you very much.

It’s a decent number right now, but I think over the next couple of quarters it's going to turn again a bigger number and I will give you an idea, what we are doing. And you can see what the customers telling us, it could be 10,000 and its $1,700 per terminal, that’s quite a lot of recurring revenue.

Thank you. Your next question comes from the line of at Jeff Bernstein from Cowen. Sir, please proceed.

Hey, guys, just a couple questions. One, the hunting license you have in Canada, is that with a U.S. fast food company in their Canadian geography? Or is the Canadian fast food company?

This is great question. Steve, do know the answer to that? Do they have any in U.S.?

It's a Canadian company.

Got you, okay. And then, in terms of gross margin, obviously, you talked about the pricing change on BOHA! The lack of the casino revenue, but we should still be thinking about gross margin being in a rising trend as a result of this is transformation of the Company.

No doubt, no doubt, because look Jeff, the casino industry is very profitable, but you still have legacy business in there. We still sold some lottery prints. We still sold about 1.5 million POS terminal. So as much as we lower the cost with BOHA! Terminal, still make money and clearly the labels are making money and the softwares making money. And I think you know the label sales, the label app sales is 100% TransAct. We don't share that with our partners. So clearly, as that grows the gross margin. I would say we're probably a couple of quarters away from may be getting to a new level.

I understand.

Even in this environment, you know, I mean, casino market was a little different for us this quarter. Europe is a mess, and I don't think I need to explain that to anybody. We're very happy with Asia and Australia, and the U.S. had a couple of one-time orders, but that should continue in that got some good margin. And in all fairness, we're very excited as much as we've had Epicentral for years and it never really materialized. One of the issues we had with that Epicentral, we just couldn't get real-time data from the casino system, which is bizarre. And we were dealing with connecting to a device that was designed and built in 1997 and 1999. And now Acres, we literally within a second or two, not only get the data, but can player will get their coupon; and I'm not kidding, when I'm talking about that this uncarded player could be big because there was no way for us to see an uncarded player using existing casino system. But now, we're watching every transaction in less than a second. So, we see some of the putting money into a casino that doesn't have a card or money into a slot machine that doesn't have a card. We know they're uncared and that's the Holy Grail for casinos to be, if they can increase their carded play. That's just huge and we don't need to talk to me. Just talk to a casino operator about what it means to get, to transfer an uncarded players to a carded player. So, even the opportunity over the next couple of years with Epicentral is guarding to look at a lot better because we're riding swap system people, that has antiquated technology, even though many casinos wanted to use our technology, which is the inability to get this real-time data and for anybody that was after shown got to see the demonstration of our technology, we're better. By the way, we've transitioned I should access this on the call. We have transitioned Epicentral from sales with a SaaS model also. So, we're not longer selling Epicentral. You buy a subscription for slot machine. So, we're building -- and Steve said it, we're really building a staff-based company. That was going to take time and God knows who got to get through this little hick up that happen, but maybe not a little hick up. But if you look it, what we're working on, one investor asked why did we invest again into Epicentral because casinos would like to have a marketing system, it's just the technology that we're connecting to is pretty that but we're working with Acres, we knew that opportunity could be wonderful. So you look out, to us it looks very promising.

That’s a good lead to my next question, which was about Saas model. So, as you are having more Saas revenue, we're not going to see that as quickly as if you had a onetime software sale, right. We're only going to get 12 or couple of 12 in the quarter, depending on right, when the sale took place, et cetera. We should start to see some build in deferred revenues and long-term deferred revenue on the balance sheet. Is that right? Is that sort of where we should be looking for evidence of more SaaS software sales?

That’s right, Jeff. A typical model will have customers sign a multiyear subscription agreement and then pay for upfront a year end time.

So, just kind of level that expectation here. With the razor, razor blade model, which makes all the sense in the world, we shouldn't expect that all the sudden we're going to in a quarter or two hockeystick revenue. We will get some benefit from hardware sales for sure, but the Saas is going to be littering in as you sign contract and we start getting quarterly deal signed and whatever and what we're really going to build is this slide we have recurring revenue and it maybe a little bit slower build than a real fast ramp up.

We are monitoring every lead, every trial, we had some great, great -- I mean, I'll tell you, with that, I had the pleasure of going to one restaurant with their CEO where they were trying trialing our system. The CEO turns me, he said he's never seen his people so excited about technology they've been running it for a couple of weeks because of the benefits. So, yes, it's going to take time, but that’s why we announced all these deals, that’s why we keep giving away the recurring revenue because overtime it's just keep building and building and building.

Thank you. And we have your next question coming from the line of [indiscernible]. Sir, please proceed

The cash level was there -- maybe what was the CapEx in the quarter? Because I know there is sequential drop in the cash level what seems that maybe came from some place, not in the income statement?

Yes, the CapEx wasn’t anything usual. We typically run about a $1 million a year that can be a little bit spiky going from quarter-to-quarter, but it's actually fairly regular. So, the cash decline really was inventory. So, we invested in some inventory. And actually since deployment has ended our cash, balance has actually gone up significantly because we're liquidating receivable. So, you're going to see -- you will probably see us spike up in the fourth quarter and the cash balance.

We had also had an OEM ask us to give them an extra 30 days, which we did. So, we didn't collect it in September. We collected in October, and it built the relationship with the customer. They very much appreciated what we did for them and of course they paid us in October. So, we also had one of those in the quarter, but that's -- because our balance sheet is so good, we could do that.

Can you help me directionally fourth quarter revenue? Is more likely to be like the third quarter just ended? Is it more likely to be something else? I'm just trying to figure out kind of what the comparisons from various entities across the line items from last year. Any thoughts on that would be helpful for fourth quarter revenue?

Well, we don't give our projection. And I think, it's not for us to do that right now. We're clearly monitoring the installation and the shipments that are going out. We're also monitoring the casino industry. We think this is the level that we're at right now looks about right, but they've actually could go up a little we show ended. And that tends to be a buying show. So, we will see what happens. Look, I really apologist, we just don't give projection out.

On expenses, any help on that, the expense level you did this year cross engineering, SG&A are those good levels to work with going forward?

The one thing I could say that we are doing that is with board is looking at our expense level, the Company is very excited about BOHA! and the question is how fast can we go. And it is a conversation that we're having with the board right now because the market response has been very, very positive and the more sales people we have, the more opportunities we get, the more marketing is spend the more opportunities we get. So, we are having the conversation with the Board about and we had our Board meeting just a couple of days ago where we spent a lot of time on what we should do. We've analyzed the size of the market and it's very large and the thing is we want to maintain our first to market position. So, we're looking at that and we're looking at spent just to see if we did spend more, how much more sales we bring in quicker, how many more opportunities, because it does take time for all this to layer in as Jeff Bernstein did say. So, we're going to look at it. We want to what's right, with regards to the opportunity and aim as much momentum as we can at the earliest as can.

Thank you. Okay.

From an engineering standpoint, we pretty good. We've got a couple of tough people that we brought in to help with test the software. We've got a couple of opportunities where we have some changes to the application or actually new app that customers asking us to look at, which means we've got it tested. So we're looking at that. If anything I think you could potential see growth in our sales and marketing just because that the excitement inside the business with regard to the market is there.

Did the dividend come up in that context at all? I mean, it seems like the transition to a little growth line at company and then the historical dividend might not necessarily be great partners so to speak or maybe the complexion with the investor base might be -- it might not be problematic, if you would cut it or eliminate it in orders to support your growth, given you don't have a lot of excess cash around. My first question, I’m just kind of wondering if that interesting for discussion with the board?

It did. It clearly did. Look, there was a reason to pay the dividend when we went through this, right. We told the shareholders that we're investing very heavily in a, what we consider a large opportunity and we had a lot of cash. We’ve generating a fair amount of cash, and we didn’t have to ramp up, we didn’t have to deep up the inventory and do other things and we haven't picked up our marketing because we were in a development mode. So, we decided to reward, not reward, but give something back to the shareholders while they waited. But clearly, we're in a restaurant solution we are in a high growth opportunity. And so, the Board is looking at that, it's looking at what we should do.

Thank you. I'm showing no further questions at this time. I would now like to turn the conference back to CEO, Mr. Bart Shuldman.

Okay. Thank you, everybody for joining us on the call this afternoon. We look forward to reporting back to further progress in our business when we report our fourth quarter results in early March and what you -- if you can look EBIT 2020. Anyway, I really appreciate everybody joining us on the call, but the questions were wonderful. Of course, both, Steve and I are reachable, so if you got any question, please give us a call. And as we into the holiday season, may you and your family have a great holiday. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.