Good day and welcome to the TransAct Technologies Third Quarter 2020 Conference Call. Today’s conference is being recorded. And at this time, I would like to turn the conference over to Marc Griffin. Please go ahead.

Thank you. Good afternoon and welcome to TransAct Technologies third quarter 2020 earnings call. Today we’ll be discussing the results announced in our press release issued after the market close. 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 on these initiatives, and details on our third quarter financial results. We will then open the call to participants for questions. As a reminder, this conference call contains statements about 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 obligation to revise or update any forward-looking statements to reflect events or circumstances that occurred after the call. Today’s call and 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. And with that, let me turn it over to Bart.

Thank you, Marc, and thank you to everyone joining us on the call today. We are pleased with our execution in the third quarter and especially pleased with the strong momentum in our foodservice technology market. The global pandemic continues to create challenges for our customers in our key markets, including restaurants, food stores, and casinos. While activity has not returned to pre-COVID levels, we are nonetheless pleased with the sequential improvement we experienced in the quarter three for 2020, especially in our foodservice technology market. Before we get into quarterly results, a few weeks ago and subsequent to the quarter end, we closed an underwritten public offering of 1.38 million shares, raising $9.8 million. We were humbled by the immense support we received from the investment community and we plan to use the additional capital to support the expansion of our BOHA! hardware and software solutions. We thank all our capital partners for their support and efforts to complete the capital raise, along with the full team on both sides that worked together to get this accomplished. We thank you. Now on to the results. Our third quarter total net revenue came in at $7.3 million, well ahead of our expectations of $5.5 million to $6 million. Most importantly, the recurring revenue element of our foodservice technology business reported revenue of $1.6 million, an increase of 157% year-over-year and made up 22% of our total revenue. We recorded an operating loss of $1.5 million and adjusted EBITDA loss of $869,000, which was better than our internal projections for the third quarter. We delivered quarterly gross profit margin of 45.9%, and EPS loss for the third quarter was $0.11 per share. Of course, Steve will go into details later in the call. Total foodservice technology market revenue was $2.35 million,…

Thanks, Bart, and good afternoon, everyone. We’re pleased with the progress TransAct has made in our most recent quarter. Before I get into the details of our third quarter results, I’d like to highlight the recent public offering we completed. On October 16, we completed an underwritten public offering of 1,380,000 shares, including the exercise in full of the overallotment option at $7.10 per share, a total gross proceeds of approximately $9.8 million. As of the end of October, we had cash and cash equivalents of approximately $10.3 million. The capital raise will allow us to invest in additional staff and infrastructure to support the expanded rollout of our BOHA! solutions. Now, turning to our third quarter results. Net sales were $7.3 million, down 38% from $11.7 million in the third quarter of last year, but up 38% sequentially compared to the second quarter. Our foodservice technology market for FST was up 20% to $2.3 million from $2 million in the third quarter last year. Our FST hardware sales declined 42% to $771,000, and we ended the quarter with 3,813 paid terminals in the market. In the quarter, we experienced lower sales of both our BOHA! terminals and our 9700 terminals, which we believe were both impacted by reduced customer purchases due to COVID. Despite the lower hardware sales, our recurring FST sales, which includes software and service subscriptions as well as consumable label sales, came in at a record $1.6 million in Q3, which was up 157% from the $613,000 we reported in the year ago period. During the third quarter, we benefited from both a growing installed base of terminals and increasing label usage as our customers began to slowly recover. In addition, we benefited from a large stocking order from our largest consumer store customer. The increase…

Great job. Thanks, Steve. As you look towards the end of 2020 and into 2021, we’re optimistic about the momentum we are seeing in the restaurant industry and our convenience store too and remain confident that BOHA! is on pace to become our largest ever revenue-generating opportunity. Our focus is on driving the success for BOHA! as we are determined to leverage our position in this emerging market and leverage our relationship with Apple to grow our business and create significant long-term value for our shareholders. Before turning the call over for questions, I would like to thank the TransAct shareholders, both new and existing, for your support. I also want to thank the employees of TransAct who have helped us to withstand the impact of the virus and the impact on our markets and our business. You’re a bunch of great people, and I cannot thank you enough. At this time, I’ll turn the call over to questions. Operator?

[Operator Instructions]. And we will take our first question from Jeff Martin with Roth Capital Partners. Please go ahead.

Hi, Bart, and Steve, how are you doing?

Good. How are you?

Well, thank you. Bart, with the completion of the training of the Apple sales force on BOHA! restaurant operations platform. I was curious if you could share some anecdotes about their reactions to it. And what happens now?

Yes. So the one reaction that we’ve heard, which has been wonderful is that when you sell BOHA!, you sell BOHA! workstation ROP, it has to come with an iPad. So Apples loves that. So that has been one of the things that they continue to say is that it’s great because you can’t fill a system without our iPad, which is great. What happens next is exactly what we expected is sales force is trained and now they’ll go out and start to present our solution with their iPad. They’ve identified a certain amount of customers that go into it first, well over 100 customers. And they’re going to start talking to them about the iPad and about back of house automation and what BOHA! can do for them and to get engaged with those customers and then get us engaged. So, we’re right where we thought we – I mean, look, we just did the capital raise not too long ago. So it’s not like anything was going to change. We’re right where we thought we’d be. We trained our sales force. They’re very excited. There’s a lot of conversations going on between the two companies. And hopefully we’ll have more to say about that as we go forward. But they’re out selling. And it’s wonderful. So – and that’s why we’re gearing up. They have over 100 salespeople that are going to be representing us in the marketplace. So we expect to be pretty busy soon.

That’s very encouraging. Second question, do you have any increased visibility in terms of the rollout scheduled for 7/11? And are we on track to go full deployment in three years’ time frame?

Yes. Jeff, I would think so. They’re back in buying mode again. And through one of our shareholders who seems to like to follow them, we can track what they’re saying in the marketplace, which has been great. And I really thank our shareholders for sharing some of that information. And, yes, I would think that – and then we got – I mean, we got to think about Speedway. I think they just announced that they’re going to divest some stores due to the Speedway, but I think it probably add another 3,000 to the 10,000, we believe, it’s going to be. So there is nothing that I know that they’re not going to complete that in about three years.

And then last question, in terms of the sales pipeline for BOHA! general, how has that come together, how has that changed over the course of the third quarter, does it have it all?

Yes. So we’ve been successful in the C-store market, Jeff, as you know. And that continues to present opportunities to us. Not every C-store is doing fresh food. Clearly, it appears that a lot of them want to get into it. So there that continues to develop nicely for us with opportunities. In the food service market, we’re seeing some activity in regards to other people doing kind of kiosk operations in supermarkets. And there, they’ve got to do the labeling. So we see some action there, which is kind of new, which is nice. Clearly, we – the goal is to rollout 1,200 terminals by the end of the year to foodservice provider, to supermarkets. We’re also seeing on the food service side where companies that deal with office buildings and things like that, we’re starting to hear from them that they’re starting to think about, okay, when office buildings open up again, how are we going to sell food, right, low days of waiting online and saying, I’ll buy this, and I’ll buy that and make this sandwich or that sandwich is probably not going to happen again. So, I think we’ll see more grab-and-go type of offerings, which lines up with our labeling solution like we did for the C-store market. So, we do see some traction there and some of it’s pretty big. But we’ll see. I mean, this is – we’re probably the first inning of this, but it’s logical to say that a food service provider is now starting to think about being at the other end of this virus, saying, okay, come the summer when the vaccines are all there, what happens when we open up again and how are we going to run our business differently. So that makes a lot of…

Great. Thank you, Bart. And looking forward to seeing the technology interaction.

Yes. Thank you, Jeff.

Our next question will come from Chris Howe with Barrington Research. Please go ahead.

Good afternoon, Bart and Steve.

Hi, Chris.

Following up on some of Jeff’s questions previously about the completion of the Apple, training of their sales staff. With what you know now, how would you qualify the length of the sales cycle as we consider this pandemic environment is still ongoing? And what that sales cycle could look like as we normalize?

Yes. Look, I think the sales cycle is still going to be what we’ve seen, Chris, which is anywhere from six months to 18 months. I think it’s been quicker on the C-store and foodservice provider side because there, the FDA requirement hangs over their head. And so there, it’s how do we get it out there as quick as we can. And, yes, there’s work that we have to do. We’ve got to get to understand all of the food items and get the nutritional label information in the case of what I talked about on the call with [indiscernible] there’s things that we can do to quicken that. On the longer side, I think its restaurants. And there – that’s just because of the many food items, we’re not just dealing with food safety labeling or nutritional labeling. We’re dealing with timers and checklists and tabs list. We’re dealing with temp taking and temp sensing. So, the beauty of what we’re doing in the restaurant industry is we’re selling a package of software. And I think we’ve talked about this, Chris, where our recurring revenue for restaurants on a percentage basis will be higher on software, less on labels for restaurants and more on labels and less on software for C-stores and food service providers. So, I think that sales cycle is longer just because there’s more work. There’s more things to get involved with and to integrate into our system. So I would say that, that will be at the six to 18-month level easily.

And just led to some more thoughts. If we look at the comparison between label usage for a convenience store versus a preferred restaurant chain, how could we see the difference between the reoccurring revenue per terminal per year. As we look further out and compare a restaurant terminal versus C-store terminal on average?

Yes. So we don’t break out the individual sales and I don’t think we will. But I think what will happen is because we’re selling a software package, which will – which is a lot more than just selling BOHA! labeling. I think the recurring revenue is going to average somewhere around $1,300, $1,400 a terminal, but I think in the restaurant market, it can be more in softwares than labels. Restaurants that are just doing what we call food safety labels, where they’re just labeling food that goes back in the walk-in or sauces that they just made that needs to be labeled with a shelf life, those labels tend to be 1x1s and 2x2s and not very expensive. What we’re doing in the C-store in the food service market is we’re wrapping a label around a container. And they’re with Colors, we’re doing it in the restaurant – I mean in the C-store and the foodservice providers colors. We use their labels, we use their brand. We work very closely with them to design those labels. So there those labels are much more expensive. But I think at the end of the day, based on the models that we’ve done, and it’s going to take a couple of years, right? Because we got – right now, we’re so heavily focused on food service providers and C-stores, that once the restaurants come in, we’ll get a better understanding of what that recurring revenue is going to look like. But based on our model, I still think it’s about – it’s going to be around the same area we’re at right now.

And, yes, I guess I’ll ask one more here. Label usage, it seems to be in the early innings from realizing the full potential that this could add to the reoccurring revenue stream. Is there a way to quantify it per terminal per year as kind of a wide range of what you see as potential on the high end as well as on the low end, what we can expect for label usage?

Well, we haven’t been able to do that yet because every customer is so different, Chris. And we’re in the early innings. So it’s a great question. We – what we do is in our onboarding process, we’re working with them on what we’re labeling, what labels they need from us. We estimate what the label usage is going to be. And in some cases, we’ve been surprised at the low side. In many more cases, we’ve been surprised on the high side because they’re selling more products and using more labels than we had estimated. So again, like when we do a trial, so if we win C-store and we do a trial in 10 restaurants, we’re seeing what their volume is. But a year from then, it’s – okay. Well, in fact, we have one C-store customer right now that added a new food item. So that’s going to increase the amount of labels that they’re buying because it’s one more label and one more – they’re selling more fresh food because they’re selling it, right? So they’ve added another item to their fresh food, which means our label sales will go up. So, I think we’re in the early innings. It’s too early to call and try to do that yet. And I think over the next couple of years, we’ll be able to. But at the same time, I think we’re going to probably come to some average. And with getting into the restaurant business with the workstation and ROP, we now don’t sell individual software programs. We’re selling a full suite at one time. So that will take away like with certain customers where we started with labeling and then we added timers and then we added temp taking, that all goes away because it’s all sold upfront. And we feel very good that that’s what we need to do. So, I think over the next couple of years, we’ll try to get to some average. And that’s what we’ll probably say.

Yes, if you’re looking at the extreme, I would say, like the – probably the lowest end we’ve seen has been something around like $400 recurring revenue. And the highest has been over $2,000. And then everything in between, you heard me say on the call, we’re averaging right now around $1,600. That might give you at least some sense of where it could range.

And look, it’s also going to be a little noisy because we have a lot of terminals going out at the end of the month. And at the end of the year, the question is, when do they buy all their labels? I mean, they’re going to need labels for every 1,200 of those machines. Now do they buy them all upfront? Do they – I mean, how quickly can we install all the terminals. So do we see some of those label sales in January versus December, we don’t really care, right? We’re putting another 1,200 terminals in the marketplace. We’ll be at a minimum of 5,000 terminals by the end of the year. So some label sales go into January because they weren’t able to roll out all the terminals in December. That doesn’t affect us on our success. I mean we’re rolling out on 1,200 terminals to a customer that’s going to use a lot of labels. And those are perfect customer, right, that’s labeling a package, the label was pretty long. So those are perfect customer for us. We love them and we love having to do long labels. Long custom labels is a good thing to do. So again, over the years, we could see – I don’t think we’ll see anybody $400 anymore. Because with ROP, there’s a minimum of software they have to buy, and that’s clearly not going to be $400 a year. So – but no, I think we’ll get to an average in two or three years.

I appreciate that because it seems like as we go forward, there’s some intrinsic unrecognized value as you gain more data from these stores.

Yes.

And the other thing, Chris, that has happened, like I said, is we have a C-store customer that we started with. We’ve been with them for a couple of years. And they just added a new item. And it just like it’s fantastic, hey, can you add more items because it’s more labels. It’s not taking away our other label out. They found another product that they can sell. So it’s wonderful to us. And we hope that the C-stores and foodservice providers continue down that path of offering more fresh food because that just means we’re going to sell more labels.

Thanks. I appreciate the color. And thanks for taking my questions. I’ll hop in the queue.

Yep.

Thank you, Chris.

Our next question will come from Mitchell Sacks with Grand Slam Asset Management. Please go ahead.

Thanks. So, I think you already talked a little bit about engineering and selling and marketing going forward. In terms of the engineering side, I assume you’ve spent some significant money getting the iOS version of your product up and running. As you go forward, does that start to level off? Or can you kind of just give us a feel for how that works going forward?

Yes. Great question. I don’t think software ever ends. And what you get accomplished today becomes something new that you got to get done tomorrow. We’re not stopping with what we have, right? So we already have our product plan list that goes out at least 12 months. It’s not 18 months because we think there’s more we can do in the market. And there’s more enhancements. I don’t think it ever ends, right? It’s not like a mechanical device like our printers, okay, we did our 950 and then we waited to do our Epic Edge 10 years later. There’s always upgrades, there’s 13.1, there’s 13.2%, there’s 13.3%. There’s always stuff that you’re going to do enhancement, improvements, I’m sure we’ll run into a bugger too. So, I don’t look at it that way. The question that I look at, what I look at, Mitch, is where can we get the revenue at a certain spend level. The recurring revenue, as Steve said, is exponentially growing, right? And the question is, how do we get more terminals out there? You look out two, three years and get, let’s say we finished 7/11, right, that’s got to add another bunch of thousands of terminals. Where does that revenue go? And the question is, what is the spend level against that to keep us as the forefront leader? I would imagine that people like Apple or Intel don’t finish something and say, okay, we’re done and let their engineers go. So the question is, what do we need to do to continue to be the innovator in the marketplace. We are the innovator. We are the leader. And there’s a thing needs to sit on my desk before we close the office that said, if you’re the lead dog, the view never changes. And that drives me every day. So – and I’m sure Apple is going to bring us – they’ll bring us ideas and things. So we want to make sure we have the staff to be able to continue our leadership.

And then in terms of sales team, and I guess it’s an odd selling environment, right, because most in person sales are not happening across all industries. How do you think about sales force and driving sales in your end?

Yes. Mitch, I think that – if I – the conversations that I have with other CEOs is exactly that, Mitch, which is a – it’s a total different market. We would always watch technology at trade shows. We use trade shows to bring customers to us because of our technology. And so the question is, how do you manage through this, right? What is the way to get in? Now the one thing that is good, Mitch, there’s no doubt that our friends at Apple have a role at that like we’ve never seen. And their ability to call people up and maybe not get an in person meeting, but clearly what we’ve seen them able to do is get a video meeting is pretty spectacular. So we’ll adjust our selling in regards to now, I call it, it’s more marketing than selling. But there’re demos, we’ve got to be able to do a demo. We’ve got to be able to do that efficiently using whether it’s Zoom or we happen to use Teams or Cisco Webex, how do you use the technology to be able to do what you used to be able to do in person. We’re learning along the way. I think – let me tell you, I think every company is going through this. But I think when you have a solution in a market like this, in certain markets, we take the C-store market where they – if they’re going to get into fresh food, they got to figure out a labeling solution. So the demand is there. It’s finding us, right? It’s how do they find us or how do we find them? So in one way, the C-store market and the food service market has been good for us because the demand is there. People are entering the market. They need to print labels and they got to figure it out and they’re finding us. And the restaurant markets are a little different. And I think we’re very fortunate to have a relationship with Apple, where they’re opening up their road [ph] and it might not be an in-person call, but it’s sure going to be a great Zoom call. Yes. And look, we’re – Mitch, look, we’re asking experts in the marketplace. We’ve got our ear to the ground on this one. I don’t think anybody truly figured it out yet. I think everybody’s got their ideas, and that’s – we’re listening. We’re listening to what other people do. I mean, clearly, we’re working with ICR, with their PR team. We’ve done more PR in the last three months than the company has probably ever done. Whether – and you know some of the stuff that we’ve done, webinars and things like that. Those are good events for us. And so we’ll continue down the path with that.

Great. Thanks for your time. Appreciate it.

And with no further questions, I’d like to turn the call back to Mr. Bart Shuldman for any closing remarks.

We’d like to thank everybody. Look, we’ve got some new investors, I’m sure, on the call, we’ve got our existing investors on the call. I really, really thank you for your support. Clearly, these are very different times. Mitch just talked about it. How do you sell in the non-travel environment? It’s a great question. But I really, really appreciate the support. We’ve got a lot ahead of us. We’re very excited about the future. We’ve now bifurcated the market into really two segments: the restaurant and everything else in our foodservice technology business. So we’re very excited about the future. And I guess the next call will be sometime after the first of the year. And I know it’s probably pretty early to do this, but I do wish you a happy Thanksgiving, merry Christmas, Happy Hanukkah, and Happy New Year. May 2021 be a lot different than 2020. We’ll talk to you again. Thank you.

And this concludes today’s conference. Thank you for your participation. And you may now disconnect.