Greetings. Welcome to the TransAct Technologies Second Quarter 2022 Earnings Conference Call. And please note that this conference is being recorded. I will now turn the conference over to Ryan Gardella, Senior Vice President of Investor Relations. Thank you, sir. You may begin.

Thank you, John. Good afternoon and welcome to TransAct Technologies Second Quarter 2022 Earnings Call. Today, we'll be discussing the results announced in our press release issued after market close. Joining us from the company is 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 second quarter financial results. We will then open the call to participants for questions. As a reminder, this conference call contains forward-looking 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 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, I'd like to turn the call over to Bart.

Thank you, Ryan, and thank you to everyone joining us on the call today. I'm incredibly pleased with our execution in the quarter and could not be prouder of how the TransAct team worked to navigate these difficult conditions. All the challenging work certainly paid off. Thank you, TransAct team. You accomplished almost the impossible, and I'm so proud of all that you have done. Last quarter, I spoke at length about the challenges that we were facing in the supply chain. And we all know we were hardly alone in dealing with these problems. I assembled a team comprised of engineering, operations and purchasing, tasked with finding more parts, redesigning product where parts were unavailable but other similar parts were, and then building and delivering the printers to meet customer demand. The team did an incredible job, as you can tell from the top line. But we've only just begun. Our production started to ramp up in May, expanded in June and now in full motion in July and August. We delivered many thousands of printers in Q2 and were able to satisfy demand in key markets where our competition could not, namely casino and POS automation. And I'm pleased to tell our shareholders in the second half of the year, we are on track to deliver near-record numbers of printers to our customers, barring any unforeseen parts issues. We are actively winning share in these markets. We are doing everything in our power to ramp production even more as the demand in the POS and casino markets continue. In addition, as I discussed last quarter, we raised prices and began to implement our cost-reduction plan and expect to see these results of these savings in the current quarter, Q3. The early results have been encouraging, and we believe…

Thanks, Bart, and thanks, everyone, for joining us. Before I start, I want to mention that all of our results for the prior periods that we will be discussing today are on an as-adjusted basis, taking into account the retrospective application of the change in accounting method we made on April 1. I'll talk more about the accounting method change a bit later. Now let's turn to our second quarter '22 results in more detail. Total net sales for the second quarter were $12.6 million, up 35% from $9.3 million in the second quarter of '21. Sales from our Food Service Technology market, or FST, were up 12% to $3.4 million compared to the second quarter of '21. FST hardware sales increased by 24% to $1.3 million from $1 million a year ago. We added 814 paid terminals during the quarter and finished with a total of 10,941 in the market. Our recurring FST sales, which includes software and service subscriptions as well as consumable label sales, were $2.2 million, which was up 5% from $2.1 million in the prior year period and up 39% sequentially. This improvement was due to a more normalized cadence of label sales as well as additional software deployments in the quarter. Our ARPU for the second quarter of '22 was $861, up from $638 in the first quarter of '22. The recovery of ARPU was due directly to the return of higher FST recurring revenue, which, as I just mentioned, had experienced a more normalized run rate during the quarter. Our casino and gaming sales were $6.5 million, up 88% from the second quarter of '21. We're seeing a very strong resurgence of international demand as those gambling floors continue to come back online with total sales up over 150% for the quarter. Domestic…

Thanks, Steve. As always, well done, very thorough. It was just a great -- I just got to tell you, it was just a great quarter and so proud of everybody of what we were able to complete going live on a new ERP system, the team getting all the parts, getting back into full production and now really ramped up. Operator, with that, I will -- we'll take some questions, please.

Our first question comes from the line of George Sutton with Craig Hallum.

Bart, nice job. So I wondered if you could just walk through the delta, the 2000 placement delta, from what you expected prior and what you're suggesting now. And could we break them down into what those might have come relative to sales changes you made or 7-Eleven cadence or supply chain? If you could just kind of break those down, I think that would be helpful.

Yes. George, thank you. No supply chain issues with our FST business. That's why we really don't -- we don't address anything around supply chain issues with FST because we've got the inventory. So we've had no supply chain issues with FST. The first quarter was just an anomaly, George, and it was so low that making up what we thought we were able to do through the year is going to be a little difficult. What I can say, George, is the pipeline is about as big as I've ever seen at TransAct right now. Our goal -- as we came through the pandemic, George, we really only had a couple of markets open to us. We had the convenience store, truck stop and food service management company opportunities in front of us. So we really focused our sales team there, but we didn't have as many as we have now. As we started getting through 2021 and into 2022, we realized that the restaurant market would open up. So we went and hired our new Head of Sales, who comes in with enterprise experience and spent the last 6 months just hiring people. And we've got a full complement of salespeople across all the different segments or all the different verticals that we serve, quick serve, fine dining, casual, convenience store, we've added another person. So it's just going to take them a little time to ramp up. We also have a couple of projects where we did believe they would roll out all the terminals. These are new projects this year. And in some cases, we've got one in particular, where we thought it was going to be 600. They will buy 600, but they're only going to roll out 100 this year. And that just has to do with rollout schedules, George. All I care about right now is what we call net new names, is closing new accounts. We have another deal that we worked on, where, again, it was like 500 units. They wanted to start with 50. We said, "Fine. Let's just get the order and get it going." So it's just a matter of ramping it up. I do -- just had a review today with our sales manager in regards to the opportunities. It wouldn't surprise me if we get back to that number this year. But I think it's just prudent that we lower the number just because of the difficult first quarter that we had and just some of the rollouts are not -- while they've agreed to do it all, they're only doing some this year.

Got you. Now relative to the supply chain, there was a suggestion of perhaps reengineering products. Can you just give us some perspective of -- as you brought these different teams together to try to move more quickly, just give us some examples of what you feel was accomplished there?

Oh, yes. Well, first, I'd like to thank our chip supplier who work hand-in-hand with us. So if you look at one of our products, I won't tell you where it goes, but we will have -- we started with one design. They were able to get us like processors but not the same processor and were able to get us enough to get us through most of this year. We had to redesign the product for that chip, which means we changed the firmware. If you look at how the printer works, we connect to another system. That is pretty much done. It's what's below that, that we have to do. We got a new chip. We have to program it to turn on the motors, turn on the sensors, move the paper, print on the paper. Every time you have a different chip, that machine code language changes. So with this one product, we completed that redesign, knowing we're only going to have enough chips for this year. And of course, our chip manufacturer told us, if we go to a certain line family of chips that that's the one that they can produce a lot of. And by the end of the year, we will have redesigned a second time for the next-generation chip. So this was a war room. This was operations, engineering, purchasing, working hand in hand. We had a motor driver, which we ran out of and went into the marketplace, found it. We had a capacitor. Actually, we couldn't find it, how to go to a different capacitor, which changed the way we look at black mark sensors. That's the way we look at the sensor that turns on and off and looks at the black mark, which tells us either when to…

That's great detail and very helpful. So lastly, you talked about May, June, July in terms of everything getting stronger with July, the strongest of the 3. Can you just give us a sense of that dynamic?

Sure. Probably in one aspect, we’ll ship 3x the amount of printers in the third quarter than we did in the second quarter. And most of the printers for that product went out in June. We shipped no product in April, very little in May as we ramped up production. Once we got through all the redesigns – it took us months to do the redesigns, and we ramped up as we called it in May and then went into production in June. In one aspect, we’ll triple production in the third quarter for that one product.

Our next question comes from the line of Jeff Martin with ROTH Capital Partners.

I wanted to get an update on 7-Eleven. I know they placed a larger-than-usual order for Q2. Did all that ship as expected? And how does your visibility for the balance of the year with 7-Eleven look at this point?

Visibility is good, Jeff. Some of it did go, I think, in the third quarter. Label sales continue to come in. Actually, they're going to be one of our first customers to re-up. Their 3-year ends in the fall, and we should be re-upping with them. So I know a lot of people ask us about, what do they call that, the -- whatever rate of customers that come on and come off the system, 7-Eleven being our largest. And we should expect to sign another 3-year agreement with them. So they're fine. They're fine. We are trying to figure out the Safeway deal -- Speedway deal, not Safeway, Speedway deal and see if they're going to be rolling out the Fresh Food program at Speedway. I can say -- I do talk to our sales manager on that account. And we are hearing that the Fresh Food program has been a real winner for them, and it wouldn't surprise them if they expand the program.

Okay. That's great to hear. Wondered if you could give us a little bit of insight into the average size deals within the pipeline. You've mentioned a couple of times that it's as big or bigger than it's been to date. Are you seeing larger potential deals on average? Are you seeing some megadeals in that pipeline? Just some relative perspective would be really helpful.

Yes. So we want -- today just happens to be my -- every other week, I review in detail the projects. We've got everybody on Salesforce now. So we had it before, but now everybody is using it. I mean, truthfully, Jeff, the deals go from 1 to 20,000 and everything in between.

Okay. And what about pipeline progression? Maybe you could speak to that. I know sales cycle is fairly long, and now you've added a lot of sales resources recently at the restaurant trade show, and that generated a lot of leads. But how are we looking in terms of pipeline progression? How many are -- is there anything near term that could really cause 2023 to be kind of a breakout year on the BOHA! Terminal installation? Maybe just give us some perspective so that could -- so we could think about how to model out next year.

Yes. I think that's what Steve wants to know from me. So what -- we've got some good-sized opportunities. Some are in 600, 2,500, 4,000 range, progressing through the trials and all that. So I think 2023 has a great chance of being a lot bigger than any year we've ever done. The opportunity list that I looked at for the third and fourth quarter this year are way bigger than the numbers that I gave you. But I'm uncomfortable because we're still going through the trials and the conversations. I want to be conservative in my approach. I want to give the sales team an opportunity to do their work and close those orders. I've got to be honest with you, Jeff. I've never been this excited because we've got a whole team of people on our staff now that come from Oracle and other big companies that are very impressive and very impressive in their approach to sales. And in fact, we're -- we had a conference call today and an opportunity and they asked me to write a letter on their behalf to somebody I know at the restaurant company. And they took me through their logic and all that. I was just totally impressed with how they're navigating through the customer. It's -- we needed to get to this point, Jeff. It's very easy to forget what 2020 and '21 were like when all our customers in the restaurant market were closed and not interested in talking to us. But they're open again. We've got a full staff of people again. They're going after that restaurant market. We've even added people in the food service management. We've added some people -- one person into our convenience store because that's been so busy for us. The opportunities…

Great. And then last question is you ticked down the BOHA! Terminals number for the year. You maintained the recurring revenue -- annual recurring revenue component. What bridges the delta there? Is it higher-than-anticipated label sales relative to your last forecast there? Or is there something else...

No. That’s great question, Jeff. It’s exactly right that some of the new accounts are at a higher volume of labels and software. So you look at the enterprise deal, that was all software. That’s predictable, right? That – we know exactly what we’re going to be building every month. We do have one customer that’s at a higher rate of labels than some of the others. So we look – we kind of – we now – using Salesforce can put in exactly how many cases of labels will they use and try to from there calculate what that recurring revenue is going to be. Look at the cadence. We now have a report that goes back to the beginning of 2021. So we can now look at cadence of purchasing by our larger customers and ask if it drops off why and find out what’s going on. But we’ve also added a lot more customers. So those customers are coming into the – every time we add a customer, that’s going to add more recurring revenue. So we feel comfortable at the 8 to 10.

And our next question comes from the line of Erik Volfing from Grand Slam.

Congratulations on getting everything moving in the right direction. So my question really relates to all the increase that we're seeing in labor cost in the -- especially in the restaurant industry, and everybody seems to be shorthanded. Is that creating a greater sense of urgency at these restaurant companies for more technology and for BOHA! in particular?

Yes. I think you got a couple of dynamics. There’s no doubt that the labor shortage has driven them to look at ways to streamline their business. And clearly, whether it’s the front of the house, the middle of the house or the back of the house, that’s where they’re looking. So that, yes. I also think that during the slowdown or the restaurants not being able to be open or 25% or 50% open, they were really focused on the front of the house. And I’ve said it over and over again. It’s not like they abandoned our idea of how to streamline the back of the house, but if they didn’t have online ordering and maybe needed a ghost kitchen, needed ways for people to order online, pick up, delivery, if they didn’t have that, they had to get there, right? We could put all the equipment and all the technology in the back of the house, but if you’ve got no revenue, what are you going to – how are you going to pay your bills? And we’re through most of that. I mean you’re seeing that in some of the earnings lately, right? Olo didn’t have such good earnings, right? I mean a lot of the work in the front of the house has been done. It was a rush to get the technology. Now, of course, they’re looking at our technology because now the people are back in, we’re through all these shutdowns and all that. And now they’re having to run the restaurant, and they got food shortage issues. They’ve got wage inflation, they’ve got cost inflation, food inflation. If we can save them 3% or 4% on waste, that’s huge. So clearly, clearly, Erik, the pendulum has finally swung. It was going to take time. I kept saying it on our calls. It’s just going to take time for restaurants to get away from the focus of the front of the house, which they had to do, and now they’re going to the back of the house. So it’s all of it. It’s all of it, Erik.

At this time, we have reached the end of the question-and-answer session. And I will now turn the call back over to Bart for any closing remarks.

Look, it’s a minor miracle we got accomplished in the second quarter, but I just could not – I’ll say it over and over again, I could not be more pleased with the team here at TransAct. They did the work. They hunkered down and got us to this point. I really appreciate the support we’ve received from the shareholders during this time. I don’t think any of us created a pandemic nor did any of us want a pandemic. We launched our BOHA! Technology in 2019 to a great response and then got shut down by a pandemic in 2020 and 2021 and through the beginning of 2022. But here we are, we’re growing again. We’ve got our production up. We’ve been able to get through this massive supply chain problem. And we’ve got a full sales team out there representing you, representing us in that market to grow BOHA! So I look forward to our next call. I really appreciate all the support that the shareholders have given us through what was a really difficult time. And now I kind of look forward to better times for the company and better times for you as shareholders. Thanks for your time and thanks for your support.

Thank you, everyone. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a great rest of the day.