Good day, and welcome to the TransAct Technologies Third Quarter 2021 Conference Call. Today's conference is being recorded. At this time, I’d like to turn the conference over to Mr. Ryan Gardella. Please go ahead, sir.

Thank you. Good afternoon and welcome to TransAct Technologies third quarter 2021 earnings call. Today, we'll be discussing the results announced in our press release issued after 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 the 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 occur after this 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, I'll turn the call over to Bart.

Thank you. Ryan, and that was very quick. Thank Ryan and thank you everyone joining us on the call today. Our third quarter results marked an important point in our business as we posted our highest net sales number since the fourth quarter of 2019. This was accomplished through a combination of sustained momentum in BOHA! And our food service technology market as a whole, as well as major rebounds in our casino and gaming market, which I will elaborate on shortly. As Steve will discuss in detail later, our preliminary third quarter total net revenue was $10.6 million representing a 46% gain year-over-year and as I just mentioned, our highest number since the fourth quarter of 2019. We also recorded net income of $910,000 and an adjusted EBITDA loss of $1.2 million. We’ll now let’s discuss some of the results in our key markets. First up is our food service technology or FST market. Our total FST revenue had another all-time high in the quarter, up 40% year-over-year to $3.3 million. Our FST recurring revenue, which includes software subscriptions, labels and service also showed strength with our second consecutive quarter of at least $2 million in recurring revenue and represents a 28% increase from the year prior period. As of important note, in September, we’ve recorded our highest revenue month for FST software and label sales as the Delta variant started to subside. Those sales started to accelerate in September and both software and label sales have continued to expand in October. Year-to-date, we have now generated $5.3 million in FST recurring revenue versus our guidance of at least $7 million for the full year of 2021. Barring anything outside our control, we should easily achieve this $7 million number that we provided. As our terminal base expands, this…

Thanks, Bart. Let's turn to our third quarter results in detail now. Total net sales were $10.6 million, which was up 46% from $7.3 million in the third quarter of 2020. Sales from our food service technology market or FST were up to $3.3 million, a 40% increase from $2.3 million in the third quarter of 2020. FST hardware sales increased 64% to $1.3 million from $771,000 a year ago period. We added 807 paid terminals during the quarter and we finished with a total of 8,749 in the market. Our recurring FST sales, which include software and service subscriptions, as well as consumable label sales were $2 million, which was up 28% from the $1.6 million reported in the prior year period. As Bart mentioned, our recurring revenue is a function of how many paid terminals we have in service and as those numbers continue to climb, so too will our label sales and our other recurring revenue. As we mentioned last quarter, given that we're in the early stages of building our installed base of terminals, our ARPU will likely fluctuate quarter-to-quarter based on the size of individual software, label and service orders and the timing of terminals shipped. As a reminder, we changed how we calculate ARPU to reduce the noise around the number. We now calculate ARPU by annualizing the quarter’s recurring revenue and then dividing that number by the number of paid terminals in service at the end of the prior quarter. Using this method, our ARPU for the third quarter 2021 was $1,016, which was down from $1,179 in the second quarter of 2021. Our casino and gaming sales were $4 million, up 100% from the third quarter of 2020 and up 16% sequentially. We are continuing to see improvements towards our pre-pandemic level…

Yes. Thanks, Steve. Nicely done. Operator, at this time we’ll open up the call to questions.

We’ll take our first question from George Sutton with Craig-Hallum. Please go ahead.

Thank you. Bart, I wondered if you could quantify the labor issues relative to the installed side and then, on the other side of that, talk about the impact in demand that you are seeing because of those supply issues from your customers?

So, on the installation side, clearly, we have one big customer that’s installing terminals every quarter. And they face the issue of part shortages and oven shortages and construction delays and all that. So, we are all just working through that. We still think we will ship 2,000 terminals this year to them. I think the biggest thing, George, is, we are hearing from two groups of customers. The convenience store market is hot right now, because the fresh food program seems to be taking hold and I would – when I look at the opportunities that we are working on right now, we’ve got a lot of big opportunities in the convenience store market. They are – if they haven’t got into fresh foods yet, they are playing catch-up and they need a labeling solution. But the interesting thing is they are also looking at other software to help them as they roll out a labeling solution. So, that market has become ripe for new orders for us. So, it’s been quite exciting in that side of the business. And I think what really helped us, George was being at NACS, North American Convenience Store Show, because customers – potential customers could go look at our product and our customers’ product. And there is a clear difference between us and the competitors. So it really helped to solidify in our potential new customers’ minds that we’ve got the best technology out there. What’s very encouraging also is the calls that we are receiving from restaurant companies. As I start the conversation by saying, look, we are on hold for the next 90 days, we are working through labor issues, we are working through, I mean, I don’t know, if you’ve heard some restaurants have run out of straws, some…

One other question if I could? I know, you have been going to market with Apple now. And I wondered if you could just either quantify the pipeline or just give us some perspective of what kind of success you expect particularly on the restaurant side with Apple?

The good thing about Apple is, if you look at our solution, right, if you look at our workstation, we have to have a tablet, right? So, if you look at the total cost of our hardware solution, it’s the workstation itself, which is this device that is two printers and cordless communication. We got BOHA! link it where we communicate to the printers wirelessly and all that. We don’t use Bluetooth. But then you need a tablet. And with Apple going out and convincing restaurant companies across the board to start using the iPad. What happens to our solution towards is we become cheap in a way, because now the restaurant company has made a decision, not because of our technology, but because they want an iPad in every restaurant or two or three. Now that part of the cost side of the conversation with the customer goes away. Oh, you already have an iPad. Well, now all you need is the workstation. So, it’s actually been extremely helpful for us and of course, where they have gone into restaurants and sold, of course, they are sharing that information with us. I will say that, I am finding them to be very attentive and very interested in our success. I now have a weekly call with them personally. And we are really trying to align our efforts together. Their vision of the marketplace is, the iPad becomes the device for the front, middle and back of the house. And their partners, let’s call it partners or their friends, whatever they want to call, will be the ones that benefit. So what their big goal is, is that that iPad controls everything within the restaurant and then all of us that are providing the technology to go on that iPad win. So, it’s very encouraging and it does help us in the price of our technology, because we don’t have to include that anymore. They’ve gone and sold it.

Gotcha. Okay. Great. Thanks for your help. Congrats on the results.

Yes. Thanks. George.

Yes.

Thank you. We’ll take our next question from Jeff Martin with ROTH Capital Partners.

Thanks. Good afternoon. Bart, Steve, how are you?

Good, Jeff.

Hey, Jeff. How are you doing?

Doing well. Thanks. I was wondering if you could quantify or give a relative comparison, the uplift in FST ARR that you saw or experienced in September and are seeing so far in October. How does that compare relative to, say, second quarter average? Anything you can do to help either get back if I quantify. That will be helpful.

Yes. So, let’s talk about the third quarter. So, clearly, we saw an uptick in our software sales. So, if you look at Q3 versus Q2, we have more software sales and that’s because we are penetrating the restaurant market. Remember, we haven’t announced a big deal, but we are closing little deals every day. 40 restaurants, 30 restaurants, 20 restaurants and there is a bigger amount of software in those deals than what we have in the convenience store market. So, our software sales are rising. And one thing we got to remember, the third quarter of this year versus the third quarter of last year, we had that large one order that came through from one of our customers that was an overkill. So, even when we compare third quarter of this year to third quarter of last year, the third quarter of last year had some extra label sales that should have never happened. And so, our sales, actually this quarter, this third quarter was much higher than last year. But what we are seeing is that, what happened in July and August was what I think the country saw a rise. We had a delta variant. Things started to slow down again as transactions slow down. Label sales slow down because the amount of goods or the amount of grab and go with the amount of what they are making goes down. In September, as we kind of saw the Delta variant kind of slow down. Things really started opening again. We saw our label sales grow and grow a lot and we saw that continue into October. So, we are encouraged by that. But I would say, Steve, I think you would agree with me, it was the software sales that really was the difference between Q2 and Q3 in regards to increase.

I think labels were up nicely too in their build up?

Yes. Yes.

Okay, great.

And then, we had our best software quarter – we had our best software quarter ever in the third quarter.

Okay. Okay. And then, relative to your commentary around component and supply chain challenges. Did you feel any impact from that in Q3? Or is this a discussion that’s more relevant to Q4 and maybe the first part of next year?

I’ll take it from the sales side. We were in that product in Q3, so – in the gaming side. The gaming side just kind of exploded on us and we couldn’t take any more orders. I’ve never seen anything like it and if you think it’s just electronics, it’s not. Let me give you an example, I mean, we use light emitting sensors to watch paper move within our technology and our manufacturers, one the largest manufacturers of sensors couldn’t get the epoxy to glue the glass housing over the sensor. So, it’s not just electronic components. Steve, you want to talk about the shortages?

Yes. I mean, from a supply side, Jeff, like Bart said, we had them during the quarter. In some products, we completely depleted, like the gaming product, we actually completely depleted down to nothing. We are continuing to have what I would call like rolling stock outs where we might stock out of our products for a couple of weeks while we wait for a part to come in. And then, we catch it back up. so, I guess the way to look at is we are hand them off. I think our group – our operations group is doing a really good job of getting the parts in any way that we possibly can. It’s costing us a little bit more and we have to sometimes pay more for the parts and then typically we have to fly the parts in which cost more. But we are doing okay. I mean, so far so good, but it definitely going to impact us in Q4.

Okay. Okay, great.

And one last one if could, this new word called decommit and it’s not like we didn’t prepare for to place orders on our vendors. So – because we entered the year with a lot of inventory, but we – everybody was talking about part shortages. So we’ve placed our orders and you could be expecting a shipping on October 10, I am going to make this up. But on October 9, I run to calls and say I am decommitting we are going to be a month late. So this is a new word that none of us have ever experienced before. So, where we really thought, we weren’t going to experience it that much this year. It’s a thing called decommit where we are now getting calls from vendors saying, we are going to be a month later. We are going to be two weeks later. And they don’t tell you until the day you are expecting it to ship. So, it’s a phenomenon that we are living with. In the gaming side, the good news is, is we came out with a new Epic Edge printer for the casino market and not all the slot manufacturers had moved over to it and we are trying to end the life the 950. The good news is, we had Epic Edges in stock, because we had gone into production of the products. So, it really helped to motivate our slot machine manufacturers around the world to move over to the edge. So our goal is to end of life now the 950. At the G2 Gaming Show, we actually had a sign up that said, Epic Edge in stock to kind of worse, the casino has to talk to the slot manufacturers to get them to integrate the Epic Edge.

Yes. But another thing that’s kind of – all these kind of going to embed is our competitors stocked out before we did, because we had such a large inventory position. So we got, I think we stole a bunch of market share probably in POS and in gaming just because we had product in stock. So that also kind of exacerbated our shortage issue, because we were selling more than we normally would because of that too.

Okay. Great. And then, Bart, care to take a stab at a range of BOHA! terminal installs that you could foresee for 2022?

Great. It’s funny, Jeff, I have been working on that for the last couple hours, right. I’d figured you’d ask that question. So I was adding up all the opportunities and it’s in five digits. I won’t give you a number but it’s over 10,000 terminals that we are working on. And it’s just – the thing I can’t – it’s what we can commit to is, when will the customer be ready. They are very motivated. They’ve got this labor issue. They want to work on the back of the house. We’ve got new convenience stores that want to do fresh food. I think those will close. I think, there, we’ve got a better shot at because, that’s a revenue. That can drive more revenue for the convenience stores. It’s the restaurants that’s hard to quantify when they will close. We are working on some big deals and the roll out is what’s – what they are looking at saying, okay, how can we do the roll out when we don’t even up in that. We have some restaurants that are closing at 5 o'clock, because they can’t – they have nobody to work at night. So, it’s hard to handicap that, Jeff. But I can tell you that that our opportunities is in the five digits in the next year.

Thank you. Look forward to getting more of an update as we get into 2022. Thanks for your time.

Thank you. We will hear next from Chris Howe with Barrington Research.

Hi, Bart. Hi, Steve. Good afternoon.

Hey, Chris.

Hey, Chris.

Hey. You’ve talked about it a little bit. But I wanted to ask a question perhaps in a different way. With the challenges that essentially everyone is seeing at different ends of the supply chain causing things to get pushed out. Can you maybe talk about how this environment has made the sales process simpler and that it’s highlighted the need in the back of the house more so than ever and perhaps your pipeline of opportunities is accelerating faster than you have perhaps anticipated as we go into the later part of this recovery?

There is no doubt, Chris. I think, in the restaurants I personally talk to, I talk to our sales people, almost every day and we are just chatting about what we are hearing. In the old days you just hired another body, right? Okay, I need to take temperature of this new food that we are making, $8 an hour, just put a body there and now it’s $15 an hour, they now want to bring college education and full medical and all that. So, now a body is expensive. I think it’s – look, I think the last two years through the pandemic the talk was, the front of the house, right. It was online ordering. It was delivery. It was the only way for restaurants to stay open and companies OLO did great with working with restaurants that they didn’t have delivery or online ordering they were closed. I think the next two to three years the stories can be technology and the technology for the back of the house. I mean, the only way to get out of this labor issue, especially the back of the house where that you got a lot of labor and it’s very difficult to hire, talk to any CEO of a restaurant company, they’ll tell you the back of the restaurant is the challenge. It’s just hard to hire. Literally, there is somebody putting a new line on a bill for the back of the house staff to tip them. So they can fry and drive more income to the back of the house people. I think the next two three years is easily the story of technology for the back of the house and this is – it’s driven the market to open up. Now, we just got to get through in the next couple of months or month or two, today, you heard some good news. Some government personnel I think came out and said, I think the supply chain is getting better. I think Fedex and UPS have that they are just going to be stopped from the shelves for Christmas and all that. I think we are all waiting to see it. But I think once we get through that, I think this is just going to be a great time for our company and anybody else that’s trying to get technology into the restaurants, I think that’s what the story is going to be.

And that kind of leads me to my follow-up question. That’s very helpful, by the way. As we move from these larger opportunities to the SMB market, can you talk about the SMB market? How that performed in the quarter? And as we think about the SMB market in the context of the overall business, given the shorter cycle of this business, could it in the long run be a more reliable, predictable stream of revenue for TransAct?

Yes, it’s a great question, Chris. Well, we had to hire. We had to add another sales person. We are seeing that market pick up. We are doing a fair amount of marketing as we – Steve talked to everybody about this spending that we are doing. We are about to kick off another major marketing program and what happens is, you get somebody that’s got 20 restaurants that’s facing the same issue that a larger corporation is facing, but they can move a lot quicker and that’s what we are seeing. So, we are seeing the SMB business move a lot quicker. And that’s what’s picked up. You look at how many terminals we installed and all that outside of our existing customers that are adding. A lot of that new business was all SMB. So we had to add it. We’ll probably add another person. We are going to kick off a major marketing program again. Just yesterday, my marketing manager called me and got two new leads just from some marketing that we are doing and how we are positioning our marketing and some of our investors are seeing, because you say meeting me, I’ll say yes, so there is some convenience store I saw this national restaurant news our ads and all that and it’s resonating. We are trying to really focus in on the issue of labor, on food safety, which is a major issue and it’s resonating. But clearly, the smaller people can act and react a lot quickly and we are seeing that.

That’s great. Thanks for taking my questions. Appreciate the time.

You got that. And yes, thank you.

Thank you. And it appears we have no further questions in the queue. I’d like to turn the conference back over to management for any additional or closing remarks.

Well, fantastic. Well, we thank you for your support. We thank our shareholders for your support. We are working hard. Yes, I got to be honest. I’ve never seen business like this where part shortages and labor shortages all hit at the same time, inflation, like I said, we are dealing with some of this by raising prices. So we are not absorbing all the cost increases. So, that’s – and I think that will hold. But I’ve never seen a world like this and I look forward to getting to the end of this. I thought we saw enough when the pandemic hit and now we are coming out of it and seeing that on this side. But as Chris just talked about, I think it’s an exciting time for the company, because all of these issues is highlighting to restaurants convenience stores, food service providers, kiosk companies that are selling food and grocery stores and all that that’s driving cost savings, labor efficiency, productivity is going to be the way of the future and that’s what we do for a living. So, I do think that the next couple of years, it will be pretty exciting for us. I do thank our employees what they had to go through and I am sure everybody’s firms had to go through this, but I do thank the TransAct employees. They just did a fantastic job. We are all back together. I am in our Las Vegas office. It’s a very exciting time here. It’s great to see everybody working together again. We did - we are a 100% vaccinated. So we are able to open up 100%. So, look, I thank our shareholders for your support. I look forward to continuing our conversation with you and look forward looking out of couple of years and seeing the success of what we’ve been able to create. So, look forward to talking to you after week after the New Year. Happy Thanksgiving, and if I don’t talk, you have a Happy New Year. Thanks.

Thank you. It does conclude today’s conference. We thank you all for your participation. You may now disconnect.