Good day, everyone. Welcome to the TransAct Technologies Fourth Quarter 2020 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn things over to Mr. Marc Griffin, Investor Relations. Please go ahead, sir.

Thank you. Good afternoon. And welcome to TransAct Technologies fourth quarter and year end 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 fourth quarter financial results. Then we will open the call to participants for questions.

Thank you, Marc, and thanks to everyone joining us on this call today. As you know, the global pandemic continues to be a challenge. However, we are starting to see some improvement in our key markets as customers are reaching out to us again. There is a noticeable change in the market environment, with the vaccination process picking up speed and growing confidence in our business. Despite the difficulties we have faced due to the pandemic, we are feeling more positive about the future. We are satisfied with our performance throughout this tough year and we finished 2020 on a high note with a stronger quarter. We are especially encouraged by the strong momentum in our foodservice technology market, which experienced accelerating growth over the year. As I have mentioned to various investors, the key is the installation of hardware terminals and workstations for TransAct, and the good news is that we ended the year with 5,688 paid terminals installed, which is over 100% growth compared to the end of fiscal 2019. As Steve will elaborate on later during this call, our preliminary fourth quarter total net revenue decreased by 30% year-over-year to $7.8 million, aligning with our guidance of $7.5 million to $8 million. We recorded an EBITDA loss of $2 million and an adjusted EBITDA loss of $1.7 million. Our quarterly gross profit margin was 30.6%, and the diluted EPS loss for the quarter stood at $0.22 a share. In addition to the good news regarding terminal installations in fiscal 2020, our foodservice technology recurring revenue continued to grow, finishing up 96% compared to FY 2019. It's important to note the impact of store and restaurant closures earlier in the year and the significant slowdown we experienced during the Christmas period as the pandemic intensified. Nonetheless, our recurring revenue still increased by almost 100%.

Thanks, Bart. Good afternoon, everyone. We’re pleased with the progress TransAct has made in the fourth quarter and throughout the challenging year of 2020. Turning to our fourth quarter results, net sales were $7.8 million, which was down 30% from $11.2 million in the fourth quarter of last year, but up 6% sequentially compared to Q3. Net sales for our foodservice technology market, or FST, were up 55% to $2.8 million from $1.8 million in the fourth quarter of last year. Our FST hardware sales increased 65% to $1.8 million from $1.1 million in the year-ago period and we ended the quarter with 5,688 paid terminals in the market.

Thanks, Steve. Great job. As we look toward 2021, we are optimistic about the momentum in the restaurant and convenience store markets, and we remain confident that BOHA! is on track to become our largest revenue-generating opportunity. Our focus is on ensuring the success of BOHA! as we leverage our position in this emerging market to grow our business and create substantial long-term value for shareholders. Remember, it's all about the terminals. We will also be participating in the 33rd Annual Roth Conference on March 15th and 16th. Please reach out to your Roth associate for more information if you wish to participate. I'll be there. Now, I'd like to open the call to questions from our listeners.

Thank you. We’ll hear first today from Jeff Martin with Roth Capital Partners.

Thanks. Good afternoon, Bart and Steve. Hope you both are doing well.

Thanks.

Hi, Jeff. You too.

I wanted to start with Apple, $50 million of potential revenue in the pipeline. One, could you explain what that means in terms of the definition of pipeline? Is that you’ve made first contact with the prospective customer or is it defined as something different? And secondly, are you in the pilot stage with any of those prospects and any idea when you might close your first sale there?

We have a sales force program that we use, and over the past year, we made some adjustments. Our sales pipeline only includes potential orders we are actively pursuing. For example, with our convenience store customer, while we've shipped many thousands of terminals and still have many more to go, that constitutes a closed order and is recorded elsewhere. What we track are new potential orders coming to TransAct, which only make our list if there is genuine interest in progressing the discussions. This involves different phases, such as multiple team meetings between us and the customer. At times, this requires signing a non-disclosure agreement, and there are several steps including evaluation and possibly a pilot before closing. The opportunities we have vary; currently, I have a sheet detailing those that have passed qualification and set up meetings. The highest potential is those customers providing us with their menu items and data, indicating that we are ready to integrate their information into our system for testing. While some of these might be long-term prospects, we are excited about the business we’ve identified with the help of Apple. Although it doesn’t guarantee closure, we anticipate a few deals might close this year, likely in the small to medium category, based on ongoing discussions and tests.

Okay. Great. And then, you mentioned, Apple’s interested in expanding their relationship to other markets. I am just curious what markets they are looking at?

Exactly all. So we’re working with them in Asia right now on an opportunity and we’re working with them in Europe on an opportunity. So they’ve introduced TransAct to their global sales team. So they have a sales team in Europe and the sales team in Asia. And together, we’re identifying certain customers that will be right for this type of technology. So we’re very excited. I can tell you this, Apple is holding a restaurant seminar in April and their plan is to invite somewhere around 200 restaurant companies to attend and there’s only three of us presenting. We’ve actually done a seven-minute video for them. And then we’ll be presenting to the many restaurant executives that are attending the meeting. Sometimes it’s interesting, Jeff, sometimes you get involved with a big company, they promised the world and then some new boss comes in or they set a different direction, all of a sudden, you look and say, what just happened? I thought we’re going in this direction together. I will say, at this point, and it could change, but at this point in the relationship with Apple, they have stayed amazingly focused on growing our restaurant business. They keep telling us they’re in it for the long-haul. They have shown us nothing but the facts and they’ve shown us nothing but they’re working hard to get us the leads and the opportunities in the marketplace. So at this time, where I stand right now, today, I could not be more thrilled with the relationship.

Any other things you are progressing at or ahead of expectation or could you give us some insight into hiring plans on the sales and support side of things? Are you at the point where you’re going to need to start staffing up or do you still have a path of either service to lead as well?

I believe the international opportunities will present challenges for us, and we're closely examining what additions we might need to make. There is a whole market out there that we've yet to analyze. In the U.S. alone, we estimate around 1.4 million opportunities to apply our technology, but we haven't fully assessed the potential of the rest of the world. However, we are beginning to discuss how we can support these new leads, and we want to be ready to assist them. One challenging moment was this winter when the pandemic surged in late fall. We had been optimistic in September as the situation was improving, but then the pandemic intensified more than a year prior. This led us to pause hiring again while we navigated through it. I am really excited about the ongoing vaccination efforts, as states are starting to reopen. There are differing opinions on the timing but we know that 10% of the population has been vaccinated, and many have recovered from the virus. It feels like we can see a brighter future ahead. As this situation progresses, we are noticing that customers are starting to reach out to us more frequently. As we continue to see these developments, we plan to add resources where necessary, both in sales and marketing. It's challenging to engage with clients face-to-face right now since we're limited to Zoom and virtual meetings, which means our marketing efforts will be crucial. You can expect to see an increase in our marketing spending next quarter. With Apple organizing a major event for restaurants where we will be featured, we're backing that with a notable marketing budget in trade publications. This increased marketing will lead to more incoming leads, so we may not need to hire additional sales staff right now, though we will likely need more personnel for installation and software support.

Okay. And then increased marketing spend pickup is Q1 and Q2, and we say next quarter…

Q2.

…I am not sure, I mean, this quarter…

Q2.

Okay.

So I’d say, we’re going to marry up to Apple’s major event that’s going to go on in April.

Got it. I’ve got a couple more questions but I’m going to circle back around but I am going to stop in here.

Okay.

We’ll hear next from Chris Howe with Barrington Research.

Good evening, Bart and Steve.

Okay.

Yeah. I guess, first off, some more color on this first restaurant sale, 13 restaurants, part of the multi-concept full service restaurant company. Perhaps you could provide some color, just on how this deal initially came about? And is there the potential for more after this within this full concept restaurant company?

This is a great story because we approached a full restaurant company to trial some of our new technology without any commitment. We expressed the need for a field location to test our technology, including our BOHA! ROP and new workstation. We conducted a test at two locations, focusing on various tech solutions without doing labeling. After we finished evaluating the system and its performance, they reached out to us indicating their desire to roll out 13 systems across one of their restaurant chains. They also have other restaurants, but they wanted to start with those 13 and were prepared to sign up. The purchase order actually came in last night, not aligned with the earnings call schedule, so we were excited to share that promptly with our shareholders. This opportunity to test in the market was invaluable, and the restaurant company was so impressed that they decided to buy our technology, as highlighted in the press release. We will be implementing temperature monitoring in walk-in freezers and labeling, among other technological advancements, across these 13 restaurants.

That’s great. I appreciate that color. And just going along the path of that question, following up on Jeff’s question about Apple expanding the partnership or the scope of it to include global markets? Europe seems to have an uneven reopening. Asia seems to be coming back faster than we have in North America. How should we think about expectations on a geographic basis? Will things concentrate more domestically and the global markets could be a further out opportunity or is that not the case and this will be all hands on deck global outreach for this?

Yes. The straightforward answer is that if an opportunity arises in Japan, for example, we will pursue it vigorously. In examining our sales pipeline, most of our activity has been domestic, although there is one project in Europe that we are currently engaged with. I would say that our initial successes will likely be within the domestic market. When we begin collaborating with a customer, whether they are domestic or international, it usually requires a few months of discussions. We discuss how the technology operates and what we can provide to replace existing solutions. This often involves extensive conversations before reaching the point where a test can be conducted in their office. We are likely several months, if not half a year away from that stage. What excites me, Chris, is that Apple is open to introducing us to international markets. They clearly have confidence in our technology to take that step. However, this is not a narrative we will emphasize this year because the sales cycle can last from 12 to 18 months, and we are at the beginning of that process. This opportunity also enables us to address the rest of the world, thereby broadening our total addressable market. I feel quite honored that a major company like Apple wants to collaborate with us in additional markets, appreciating what we have accomplished in the U.S. and expressing interest in replicating that success globally.

That sounds great. I’m looking forward to how that develops. My last question, we’ve had a series of great announcements in the convenience store channel. As we look at each of the recent announcements, specifically, my eyes are focused on the international convenience store operator that you announced with potential rollouts of 650 total locations? If we look at these announcements in comparison to the rest of your convenience store portfolio, should we think about the cadence of rollout to be somewhat consistent in thoughts across each of the customers or has there been any indication from a specific or maybe a handful of customers that they expect a rollout to be faster versus others?

Yeah. So we’re at the mercy of their rollout. Normally, though, they’ll take, let’s talk about this one to 650 stores, they’ve committed to doing 350, because that’s where they’ve rolled out their fresh food initiative. I would guess that over quarter two all 350 will rollout. Then we’ll take a breather as they rollout fresh food to their other stores and then roll in the technology after that. So, it’s not going to be a very linear and predictable like kind of rollout. We looked at our large convenience store customer. I mean, that’s been nothing but unpredictable. But the good news is we’ve got the backlog. And we ended last year with over 5,600 terminals. We do believe that it’s going to grow nicely this year. We could be close to 9,000, 10,000 terminals by the end of the year.

Yeah.

We also believe that the recurring revenue will eventually have to come back. We witnessed good recurring revenue, we witnessed the label sales when the pandemic wasn’t as bad in the summer; we did witness what it’s like when it gets bad and that’s what we’ve been going through. But the other thing that’s really good is, when you look at the restaurant side, it’s going to be much more predictable because they buy more software than labels. And so that side of the business will be a lot more predictable because we’re just going to bill them every month for the software and then we’ll buy some labels because it’s really the software that they’re using more than the labels, convenience stores are label and a lot of food. And that’s where we’re kind of held hostage to how many transactions they’re doing and how many people are walking in the door. One of the issues that a convenience store company faces is they don’t have gas stations. So when the pandemic hit, when it really took off again in October, November, not a lot of people stopped in to get something, but if you’re going to get gas, you might pick up some coffee or a muffin while you’re there to get gas. So I think their business was more impacted than others because they just don’t have a gas station. But there are still more convenience store companies to close. We don’t have them all yet. But you will get them all, but there are more convenience store customers to get and they’re clearly in need of label technology. So there’s more to go.

Great and thanks for taking my questions. I’ll hop back in the queue.

Yeah. Thanks, Chris.

We’ll move next to Mitchell Sacks with Grand Slam Asset Management.

Yeah. So question with respect to the casinos, obviously, part of the opportunity there is dealing with the slot machines, but could you talk about the opportunity with your relationships on their restaurant operations and kind of how you’re attacking that?

Last week, we had discussions with a casino group about implementing our technology in their commissaries where food is prepared. I want to mention that we successfully got one casino group to consider using our technology, but everything came to a halt during the pandemic. It’s challenging to predict when casinos will seek new technology; we have to wait for them to reopen, for travel to resume, and for people to return to the slot machines and restaurant tables, which will drive volume again. This situation is likely to unfold in 2022. Restaurants are different since you can simply drive to one. For example, here in Florida, some areas are fully booked as many people are vaccinated and eager to dine out. However, traveling by plane adds another layer of complexity. Therefore, I expect a delay in casinos exploring our restaurant technology. We've already introduced it to them, but given their experiences and the hurdles they still face, it seems more likely to be a story for 2022.

Okay. And then the second question has to do with the order that we saw today from the restaurant chain. Can you just walk us through the different apps? The restaurant chain is taking and kind of contrast that with maybe the C-store customers and where they’re at in their development in terms of taking of apps.

Sure, Mitch. The restaurant order you see is indicative of what we expect from all restaurants moving forward. The ROP system is a comprehensive software package designed for various tasks in restaurant operations. If we examine the details in our press release, you'll notice that convenience stores don't utilize this system, as they primarily focus on labeling. We have consistently stated that the key value for us in convenience stores lies in the service contract. While we're charging them for software and labels, the restaurant we've worked with is using our ROP system, which includes labeling, temperature sensing, checklists, timers, and media management—all available for a single price. This package provides significantly more functionality compared to what we're offering convenience stores, which reflects in our pricing. Additionally, there's been a noticeable increase in hardware sales. We've been supplying workstations and BOHA! sensors, which need to communicate with our BOHA! gateway for effective operation. As a result, the value of hardware sales is substantially higher since we're not just selling a basic terminal but a combination of sensors, terminals, and gateways. This signifies that initial hardware sales for restaurants should be generally higher. We created the ROP system to simplify things for restaurants because they often felt overwhelmed by having to buy separate apps for labeling, testing, checklists, and timers. Now, with ROP, everything is integrated into a single portal where they can access all functions instead of dealing with multiple apps. Functions include BOHA! labeling, temperature, checklist, and timer functions. In contrast, convenience stores mainly focus on labeling, resulting in less software functionality because they're mostly selling grab-and-go food, leading to increased label sales. Does that clarify things for you, Mitch?

Yeah. Very much. Thank you.

That’s why, Mitch, when we look out and you look out a couple years and say, okay, we’re going to have a mixture now. Let’s say we go to 50-50 restaurants and convenience stores, while the label sales could fluctuate. Let’s hope we never get into another pandemic and slow down and all that and what we went through, it’d be predictable because we’ll see what the cadence of orders will be. But on the restaurant side, when they’re going to, they’re buying software and that’s a monthly fee that doesn’t go away. So it’s not hostage to the volume of transactions that they’re doing.

Super. Thanks.

Yeah. Thanks, Mitch.

We will hear next from Jeff Bernstein with Cowen.

Hey, Bart and Steve. Nice to hear from you guys. Just a quick question on gross margin, actually you cut out for a minute. Can you just talk a little bit about gross margin in the quarter and how we should think about the mix impacts there? I don’t know if there was anything unusual in it and how to think about it for ‘21?

Yeah. So I…

The gross margin, okay, Bart.

You start. Go ahead. No. Go ahead. Go ahead.

For the fourth quarter, we experienced two main issues. First, our sales volume was quite low, which combined with our fixed overhead affected our margins. Additionally, we had an unusual charge of about $300,000 due to tooling write-offs. Moreover, the significant order we received for terminals came with a lower margin. Now, Bart will discuss our pricing strategy for hardware in relation to software.

We are focused on how quickly we can introduce terminals to the marketplace to capitalize on recurring revenue in the following year. As long as we can manage costs effectively, I'm open to negotiations. In this case, the customer preferred a package deal, and although they are making monthly payments, we recorded the terminal as a sale. Our priority is to reach the target of 30,000 to 50,000 terminals for the recurring revenue stream. When we had the opportunity with the Sushi Company to fulfill an order for 1,200 terminals, we replaced a software package that wasn't meeting their needs. We are committed to pursuing these opportunities, ensuring we won't incur losses, and we achieved a gross margin of 30%. We need to consider the size of the orders and customers we are working with, as many involve larger quantities. If negotiations are tough, we will still secure that recurring revenue. I encourage every investor to keep their attention on the number of terminals we are deploying in the marketplace. Once they are operational, as we've seen with the Sushi Company that was announced in December, we'll see significant recurring revenue as they ramp up operations this year, benefiting from a higher margin. Our objective is to get as many terminals into the market as possible.

That’s great. As a large shareholder, we’re happy with that model.

There you go out three years, four years. It’s fantastic.

Great, guys. Thanks.

Thanks, Jeff.

We will go back to Jeff Martin with Roth Capital Partners.

Thanks. I wanted to get a sense of your sales experience with convenience stores in the fourth quarter and what you’ve observed so far in the first quarter.

So we’ve won a fair amount of them. We won the big one. What drives us towards a C-store is knowing they’re doing fresh food and grab-and-go. Once you get past that top seven or eight C-stores, as much as 140,000 in the country, you get down to C-stores that have 50, 35, or 75 stores. So what we’re focusing on is two things, Jeff. First, are they doing fresh food or some type of grab-and-go, where they need the label and then the size of the opportunity. So we have a couple that we’re working with right now that are sizable, and we’re working with them to try and close them on our technology. Like I said, the interesting thing about the marketplace is once you get past like the top seven or eight, they get kind of small. And now as we get into the restaurant industry, we’re starting to talk to some very large restaurant companies. We’re trying to hunt and farm where there are really good size opportunities, so because every opportunity takes time. But the C-store market has been good for us. A lot of it came directly to us. So we’ve got a couple on our list that we’re working with. And as you see, I think, we close two this quarter. So we’ll continue to try and close the remaining ones that are right now on our sales pipeline.

Okay. And I got one more if I may, the first is a two-part question. First part is with respect to 7/11 and the rollout plan, have they given you a clearer picture for this year or even this year and next year? And then, secondly, if you were to get to 9,000 or 10,000 terminals by the end of the year, how much of that will come from C-stores and how much of that will come from ROP?

Wow, so, considering we closed a bunch of C-stores and we’ve got more to go for 7/11. That’s a great question. I would say, half C-stores and half restaurants.

Okay. And then with respect to 7/11 plan roll out for this year, next year, have they given much indication, we have a clear, you have visibility on this what am I asking?

They actually don’t give us a purchase order, right? They don’t say, here’s what we’re buying in 2021. But they do give us an indication. And I think it’s going to be steady as we go. We’ve always told everybody it’s going to roll out over a couple years, three years, or four years. I mean, there’s no doubt in 2020 we fell behind; they fell behind just because of the pandemic, the stores being closed and all that. But they’re back up and running to where we thought they would be. And so we’ve got a couple more years to go to keep rolling it out and they seem to be very happy with it. So it’s going to be business every year as they get to their goal of 10,000, and then the question will be how many speedways do they do? That we don’t know, Jeff? We are waiting to hear from them, will they increase the 10,000 to include so many speedways. We have not heard yet?

Okay. Great. Good luck with the Apple seminar on April. I’d look to get at that.

We did a great job on some beautiful video content, which will be available on our website soon. You’ll see customer testimonials and demonstrations of our technology there. After we get through the Apple events, we will begin uploading that material. We're in the process of updating our website, currently running on an old server, which may take another three to four months to change. However, if you visit our corporate website now, you will notice some updates. You can explore different sections of our foodservice technology, including C-stores, quick-serve restaurants, and casual dining. Eventually, customer testimonials will be added too. We're looking forward to sharing everything on the website once the Apple event concludes.

Great. Looking forward to seeing that. Thanks for your time, Bart.

Yeah. Thanks, Jeff.

And gentlemen, at this time, I’d like to turn things back to you Bart for closing remarks.

Yeah. Hey. Well, it’s been a great call. It’s about an hour. Really appreciate it. Again, for those that have the opportunity to join us Monday, Tuesday, next week at the Roth Capital. The only thing I can say is I’m going to miss being in Southern California. I think the Roth Capital people throw one of the best parties and best conferences there is and one day we’ll all hopefully be together and be able to do that again. But really appreciate everybody’s support. You can see the excitement that we see in front of us, despite one horrible, horrible, March and April and May through the beginning of this pandemic. I think we came out of it as strong if not stronger and we’re just excited about the future. So look forward to talking to everybody next conference call. If not, I’ll talk to you at the Roth Conference. Thanks, everybody.

And that does conclude today’s conference. Again, thank you all for joining us.