Good day, and welcome to the TransAct Technologies First Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ryan Gardella, Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to TransAct Technologies first 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 first 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.

Thank you, Ryan, and thank you to everyone joining us on the call today. 2021 is off to a great start as the momentum from last year continued with an excellent first quarter. Our Food Service Technology market continues to pick up considerable speed and we added over 1,300 new paid terminals in the quarter for a total now of 7,009 paid terminals in the market. In addition, I'm extremely pleased that we achieved over $1.2 million in FST recurring revenue in the first quarter of 2021. With existing software contracts in orders already received in our second quarter of 2021, I expect Q2 will continue to exhibit very positive growth for our recurring revenue. Our industry-leading BOHA! solutions continued to demonstrate their unique value proposition and are driving promising results and significant opportunities as the headwinds of the global pandemic continued to subside. As Steve will discuss in detail shortly, our preliminary first quarter total net revenue was $8.3 million and we recorded an EBITDA loss of $2.5 million and adjusted EBITDA loss of $2.2 million. I am pleased our quarterly gross profit margin rose to 38.4% versus 30.6% in the fourth quarter of 2020. Now, speaking specifically about our Food Service Technology market. Revenue in the first quarter was $2.7 million, up 100% from the same period last year. Our recurring FST revenue, which includes software, subscriptions, labels and service, was $1.2 million or if you annualize that $4.8 million on an annualized basis. As a reminder, on our last call, we guided to between $5.5 and $6 million in recurring revenue, FST revenue by the end of 2021. Hardware sales and the number of paid terminals in the market are the lifeblood of our recurring revenue stream. And as we increase the number of terminals in the market, our recurring revenue will grow exponentially. As I mentioned, we had a tremendous first quarter in this regard with hardware sales up over 100% from the year ago period. This equates to an additional 1,321 paid terminals running on our system at the end of the first quarter of 2021, bringing the total to 7,009. On our last call, we guided to between 10,000 and 11,000 paid terminals in the market by the end of fiscal 21. As our paid terminal base expands, our recurring revenue will also grow, fueling consistent results in a predictable stream of FST revenue. In particular, I want to call out our label sales as a beneficiary effect. As our terminals become more prolific, not only will our label sales increase correspondingly, but we'll see that revenue smooth as the impact of large orders from our big customers become less apparent on a quarter-to-quarter basis.

Thanks, Bart, and good afternoon, everyone. Let's turn to our first quarter's results. Total net sales for Q1 were $8.3 million, which was down 19% from $10.2 million in the first quarter of 2020. However, sales from our Food Service Technology market, or FST, were up 100% to $2.7 million from $1.4 million in the first quarter of 2020. Our FST hardware sales increased 104% to $1.5 million from $755,000 in the year ago period. And as Bart discussed, we ended the first quarter of '21 with 7,009 paid terminals in the market, which was an increase of 1,321 units during the quarter. Our recurring FST sales, which include software and service subscriptions as well as consumable label sales came in at $1.2 million, which was up 96% from the 616,000 we reported in the year ago period.

Thanks, Steve, great job. In one way, it's hard to believe where we were just a year ago when the worldwide pandemic hit. But here we are, almost 14 months later with an exciting future ahead of us. I want to thank the TransAct employees for their commitment through the most challenging time in the Company's history. I also want to thank our shareholders for your loyal support. Thank you. At this time, operator, I'd like to open the call to questions.

Thank you. Our first question today comes from Chris Howe of Barrington Research.

Hello, can you hear me?

Yes, Chris. How are you?

Good afternoon, Bart, Steve. First off, fantastic quarter. You're making my job much easier with these results. I have many questions here. I'll start, first off, the restaurant order that we announced in conjunction with the previous quarter's results. Can you talk about the progression there as to your rollout? Is that still on schedule for year end?

Yes.

Okay. Next question is just - you highlighted the upgrade opportunity and module expansion. Can you provide some more color on this? I know the rollouts continue to happen, but I wanted to focus on your existing customer base. This seems like it could be a good opportunity for you moving forward.

Yes. So great question, Chris. Thank you. If you look at our early sales, our early sales were terminal and label software. And the way we presented BOHA! to all the customers at that point was you have all these other apps that you could add to the system to do temperature taking, temperature monitoring, task lists, checklists, timers, and things like that. So the base of customers that we have today that are using what's called the BOHA! terminal are all ripe, are all in the market, and they are all opportunities for us to add additional apps. A lot of them are looking at temperature taking and temperature sensing. If you look at our new technology that we're putting into the marketplace, which is BOHA! ROP with our workstation, there, we sell the bundle. So the software sales will be higher because they buy the whole bundle and get all the apps in a single portal-type arrangement. But all the original sales that we did were all on the terminal and are all there for the - for selling them additional apps. The one that we closed in the first quarter is a really interesting story because they're not only doing temperature taking, but they're actually doing other things regarding monitoring of their food. And this gave us an opportunity to do some customized software for them, which we charge them for, and then we'll roll it out. So that was an exciting opportunity because not only did we do temperature taking, but we did an additional function for them. And once all that software is done, we'll begin to roll out that software. And the nice thing about it is it's just software sales. So once they're ready to go, you just start downloading the software over what we call over the air, OTA; everything just goes over the air to each one of their terminals, and the new software gets loaded on to their terminal.

That's great. That's very helpful. And I'll ask one more and then I'll hop back in the queue. Your terminal growth is outstanding. You placed over 1,300 terminals in the quarter. I assume that will continue, especially - well, here, we're doing a full reopening. But on a domestic basis, it seems things are rapidly returning to normal quicker than other geographies. As we look at that, the different economic scenarios that are in front of us now, how should we think about your capital allocation to the business?

Okay. Yes. So clearly, in my opening remarks, we have over $140 million of opportunities in front of us. Some of them are very large opportunities. There's no doubt that the restaurant market has woken up to the fact that the pandemic is a bit behind us now, openings are occurring, and there's a real issue facing the restaurants, which is labor. And we could all get into the discussion of the labor issues that restaurants and people like Uber and Lyft are facing. But this is a real issue with restaurants trying to reopen and open up their dining rooms and have to bring in more people and struggle to find people, and that's where the back of the house, where our software will save on labels and make training a lot easier. So we are seeing a pretty dramatic increase in opportunities that have been presented to us, both through our relationship with Apple, which really covers the restaurant industry. But also on the foodservice side of our business, we're actually working with one large customer - a very large customer, Apple has been a great partner as they knew the customer. Also, once we get involved with the customer, it does take time; there's a whole onboarding process with a trial and evaluation and all that. But our pipeline is literally sitting at over $140 million of opportunities right now. And that has grown considerably since this pandemic started to subside a little and restaurants start thinking about opening again.

Yes. Definitely some positive optics ahead of us. I'll hop back in the queue. Thanks, Bart.

Yes. Thanks, Chris. Yes. Thank you. Thank you very much.

Our next question comes from Mitchell Sacks of Grand Slam Asset Management.

Hey guys. Congrats on a nice growth in units in the quarter.

Thank you. Thanks, Mitchell.

Thanks, Mitchell.

In your prepared remarks, you were talking about the 7-Eleven installations. And I thought I heard you say that you have another 2,000 stores on tap for this year. Is that correct?

Based on what we see in front of us, we're going to do 2,000 for the year. And I don't break out how many we did in the first quarter versus that, but we have plenty more to go this year and plenty more to go in 2022 and probably 2023 based on their construction schedule.

So for the unit guide of 10,000 to 11,000, 7-Eleven is going to get you a good part of the way there, that would be a proper way to look at it, correct?

Look, they're - we're being quite conservative in our terminal count for this year. What we don't want to do is get ahead of ourselves because 7-Eleven is kind of an interesting company. They work with us and what their construction schedule is, but they don't place an order for the year. So I don't want to get ahead of ourselves because should, for some reason, they decide in the fourth quarter not to do something in that quarter, it could go into the first quarter next year. I can say, though, that the forecast could be on spot or could be quite low based on some of the projects we're working on right now. Some of the projects are quite large, Mitch.

And then Steve talked a little bit about the average recurring revenue per terminal. As you use the fourth quarter of $847, and it was $688 in actual due to the, I guess, the timing of rollout. Do you guys track what you expect, what I'll call, average revenue per unit, or ARPU, to be per terminal based on the average contract? Or are you just really waiting to see how actual usage kind of runs because of some variability in there?

Well, if you divide the business into two kind of sub-businesses, right? You've got the Food Service Technology side, which is a big labeling market. We have one customer mix that uses a 2x12 label. So as long as that business keeps picking up, the label sales are going to be wonderful because it's a very expensive label, and they use a lot of them. On the restaurant side, Mitch, as we close more restaurants, there, the label sales will be less, but the software will be higher. So it will be a lot more predictable because they're going to eat by contract, they will subscribe to a three, four, or five-year contract with us. So there, the software is going to be a lot easier to project because we'll have that by contract. The only real issue that we faced in 2020 was the ups and downs of the economy as things opened up in the summer and then kind of crashed in the winter; we saw the label sales kind of follow that kind of pattern. Now what we're seeing, Mitch, is we've had a very good software quarter. We've had a very good label quarter. And I can tell you that Q2 is starting out much stronger than Q1. So if that continues, we'll have a very good Q2. And now what Steve was trying to explain about the terminals is even if we put a terminal out February 15. We have to count that whole terminal in that annual revenue. But at best, it's going to give us six weeks of software revenue and six weeks of label, even though we're counting in all 12 weeks. So eventually, we have the incremental terminals, let's say, we get to 30,000 or 40,000 terminals. If we add 1,300 in a quarter, it's not going to matter that much. It's just - if you think about it, Mitch, we went from, call it, 5,600, 5,700 terminals at the end of Q4 to 7,000 in Q1. That's a 25% increase. But a lot of those terminals didn't go in January 1, right? So it's just a function of timing. And what we were trying to do, what Steve was trying to do and saying, look, if we just look at the end of Q4, those terminals will have been in full-service for Q1, and we did $1.2 million in recurring revenue and bam, there's your $847 recurring revenue. So as the base of terminals grow, the increment won't have as big an effect on our ARPU because of this issue of timing of when the unit goes into the market and when we start collecting our software, our service, and our labels. It's pretty simple.

Okay. Thanks a lot. Appreciate it.

You got it, Mitchell.

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

Thank you. Hi, Bart. Hi, Steve. How you guys doing?

Hey, Jeff.

Wonderful. How are you? Yes, I made my first trip to Vegas. Made my first trip to Vegas. What's going on out there? It was pretty interesting.

How was it?

Tough. There are no Uber drivers. There are no lift drivers.

It would be tough.

So Bart, congratulations on the pipeline bill, $140 million is a nice number, obviously. Any ballpark - can you give us a sense of ballpark how many terminals that would translate to?

What our backlog - I mean, not our backlog, but our pipeline?

Your pipeline. Yes, your pipeline. Would $140 million in pipeline translate into terminals?

I do. We don't give that out. But I can tell you that some in the pipeline are quite large. But we don't break out like how many terminals does that mean.

An estimated number. That's what I'm getting at. Okay. Could you give us?

Yes. Jeff, it's interesting. Jeff, the good thing about what we see, though, and I've got it in front of me, is most of that pipeline are restaurants. One of them is foodservice. Not the top seven that I'm looking at, six of them are restaurant companies, and that's software. So that's where this whole change to the business where foodservice is more labels and restaurants, more software, sticks out of the seven large opportunities in front of us are restaurants - restaurant companies.

That's great. Great to hear. Any idea of when pilots are going to start from - lead from the Apple sales force? Do you have any visibility to line of sight on that relative to starting - basically starting the process I think in January or February of this year, still pretty early, but just wondering if you have a new line of sight there?

We do. I would say more than 30% of those opportunities are in test.

Great. And then I think you had your first ROP sale last quarter or you at least discussed it on your last earnings call. I was curious if - since that time, you've secured additional ROP customers?

Well, yes, we've actually won some very small customers that we did put out press releases. These are restaurants with four chains or three chains or two chains. We won't put out a press release for that, but we'll put out a press release for every customer that you would like to see. So no, there was no - I mean there were very small additions to our companies or restaurant companies that are using our system, but not enough for us to put out a press release. We - it's - but we will put out a press release once we close one that you would want to know about.

Right. Right. Okay. And then just curious on the inventory level, component supply chain is obviously a shortage of certain components, I would imagine. Just curious if you could give us an update there and how you're ordering to be prepared for that.

Oh, yes.

I can take that one.

Yes, good idea. Thank you.

Yes. So Jeff, we've been able to stave off a lot of the problems because we've had pretty large inventory levels, and we did that on purpose to make sure we had enough on hand. So we've been able to kind of avoid the issues that many companies are facing or have faced recently. I think it will or could cause us a small problem coming up because we can't avoid what everybody else is avoiding, right? Everybody is going after the same circuits and passive components and there's shortages on raw materials like copper and metals. It's all starting. So I don't think we'll be able to avoid everything. But we've done a good job so far. I think it could begin to have a small impact in the next quarter or two. But we put our orders out well ahead of time. So most of our orders would go out typically at least six months anyway. So it's not like we're just-in-time sort of place. We have contract manufacturers, so we're forced to put the orders out ahead of time, which actually helps us in this scenario.

Okay. So you feel comfortable that you can get the 10,000 or 11,000 units out without - just for this year without any supply constraint. Is that fair?

I think it's relatively low-risk on the FST side, yes.

Yes, yes.

Yes. Okay. Especially on the BOHA! side. Especially on the BOHA! side, yes.

It certainly sounds like that ROP is getting a lot of interest. Happy to see it and wish you luck during the quarter and the balance of the year.

Thanks, Jeff.

There are no further questions at this time.

Okay. Well, we thank everybody for attending the call today. I do hope that you and your families are all safe and healthy and getting through this horrible pandemic. There are some investor conferences that we're going to be doing at the end of the month. So if you need to find out about it, please call our IR firm at ICR. And they'll help you guide you to which conferences we're doing. We do look forward to continuing our conversation with the shareholders and keeping you up-to-date on what's going on with this exciting business. I very much thank you for attending and also thank you for your support, especially during what was clearly the toughest time in the company's history last year. Thank you, we'll talk to you again.

Ladies and gentlemen, that concludes today's conference call. We thank you for your participation.