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Operator: Good day, ladies and gentlemen and welcome to the TransAct Technologies First Quarter of 2024 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Ryan Gardella of Investor Relations. You may begin.

Ryan Gardella: Good morning. Welcome to TransAct Technologies’ first quarter 2024 earnings call. Today, we will be discussing the results announced in our press release issued before market open. Joining us from the company is CEO, John Dillon; President and CFO, Steve DeMartino. Today’s call will include a discussion of the company’s key operating strategies, the progress on those initiatives and details on our 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 maybe 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 Forms 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 may include non-GAAP financial measures within the meaning of SEC Regulation G. When required, reconciliation of all non-GAAP financial measures and most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today’s press release as well as on the company website. And with that, I’d like to turn the call over to John. John?

John Dillon: Thank you, Ryan and good morning everyone or evening as the case maybe and thank you for joining us today. At a high level, the quarter came in mostly as expected. Total sales were $10.7 million, which is down as expected 52% year-over-year, mostly due to the dynamics that we discussed at the last call relative to casino and gaming. FST, that’s food service technology, recurring revenue increased to $2.4 million versus a year ago period. FST was a bit lighter than expected because two of the larger expected transactions slipped into Q2 and have been or will be closed shortly. Further, we are seeing strong demand for our FST technology from our large QSR client worldwide USA North America, Europe and even in Middle East and Africa are placing orders.

On a less positive note one of our large clients, convenience store client is moving to a smartphone application deployment model, single smartphone, and it will replace a considerable amount of our label sales revenue from the ARPU calculations. And while we enjoy the revenue from label sales, it’s not an important revenue stream for us. Nonetheless, it will impact our numbers going forward. Before we go any deeper into the financials, I wanted to take a step back and talk a little bit about TransAct as a business and discuss where we stand today as well as what we have in store for the future. It’s been just barely over a year since I took over as chief executive. And since then, I believe we’ve made considerable progress operationally by refocusing and retraining a new sales team, cutting expenses and spending, rolling out and winning important approvals for our new BOHA! T2 product and introducing a couple of new metrics for investors to help us track our progress.

While I am encouraged by what the team has accomplished so far, I want to spend some time talking today about the future for TransAct rather than the past. I think we have a great organization at TransAct. It has core strengths, fundamental goodness, and I believe there’s still considerable room for us to explore untapped potential and better define ourselves as an agile, industry-agnostic transaction validation platform that delivers tailored business solutions to our clients. And while our products like casino and gaming printers and our BOHA! platform might appear as serving two very separate markets with disparate goals, the reality is that both are industry-based solutions that leverage both hardware and software to validate transactions in the moment, at the point of occurrence.

And for a number of reasons, casino and gaming and restaurants back of the house are at two different stages in their transaction validation lifecycle. I mean, we recognize that. For casinos, there will always be a need for transaction validation, even if many players eventually switch from paper to an electronic form of validation. We’re also well-positioned to do that. I mean, this is a question I get frequently, and while we believe there will always be a place for paper receipts in gaming environments, TransAct is moving with the market, introducing cutting-edge technology to clients and providing custom solutions such that many transaction validation capabilities are possible. For example, sports betting is now the fastest-growing gaming segment at many casinos, which is why we introduced a purpose-built printer called the Epic 880, and soon this will be replaced by the TR80, which is the next generation for this exact application, and working with our OAN clients to design and optimize printers for kiosks.

Competitor solutions typically involve hastily redesigned existing products that put it into position where it’s either difficult to service, prone to error, hard to operate, or both. And on the BOHA! side, an example we’ve talked about in the past few months has been our entry into assisted living communities where our technology is used to monitor temperatures in refrigerators and freezers for controlled medicinals in their storage areas. And medication storage has not traditionally been a service we advertise, but that doesn’t mean we aren’t more than equipped to take it on. We work diligently with this client to ensure we could provide a custom solution utilizing the BOHA! platform to meet their unique particular requirements. I mean, FST is simply one market that can be one with our BOHA! platform, and we believe we have the ability to enter other markets with the same solution as well.

So these small steps towards entering new verticals and applying our technology and strengths in new ways in existing verticals are symbolic of all the opportunity there is for our services to grow and expand. We believe there are opportunities like these across a range of spaces, from places we’ve already previously been like lottery and banking to totally new white space opportunities that may not even know yet they can benefit from our technology. As an example, and those of you who have been with us for a long time remember, we used to have a substantial market segment back in the 2000s up until about 2017, was our banking business. Specifically, if you recall, our bank jet inkjet printers were used at bank teller stations all over the United States.

It was a great market for us, but obviously banking has changed. But the point is that we have been in many other vertical markets, and we do a good job of it. With updated products and a revised go-to-market strategy, we believe there is a lot of possibilities here for us. After all, TransAct is a company with a legacy of design wins in multiple verticals, spanning multiple decades, and that ability has not disappeared. We have those roots. It’s part of our DNA, and I think we have the opportunity to find more and new ways to win in different markets as a leading transaction validation and verification platform. We’ve already identified a few opportunities to explore. Don’t worry. We’re staying very focused on the markets we’re serving today, but the opportunity is exciting in these adjacent markets for our technology in the long-term, we believe that we can apply ourselves to a wider array of industries.

So having said that, let me move on to some key points from the quarter, and then I’ll pass it back to Steve for more detailed review of the financials. On the FST side, or food service technology, we saw revenues of $3.3 million, down about 5% year-over-year, with recurring revenues of $2.4 million, which was up about 3% year-over-year. We delivered 901 BOHA! terminals, resulting in 856 new installations, and we ended the quarter with 15,370 online terminals in service. As the initial cohort, our BOHA! terminal install base begins to hit contract renewals, we do experience a minimum amount of churn in the quarter. We don’t report that yet because it’s too early to get significant metrics, but it’s something that I expect to report in the future.

But that’s the difference between the terminals we sell and then the net new installation. So sometimes we’ll lose a few terminals if somebody goes out of business or whatever. And that’s an important metric that eventually as we get better statistics, we’ll probably begin to report. Our T2 product continues to be well received by customers and prospects as well. And I believe this new product will be crucial to our growth going forward. However, as I mentioned in the past, we expect progress to be lumpy quarter-to-quarter. We’re a small business, and these are big purchases typically when a business or a company that’s going to become a client has to change a process in the back of the house. So we expect it to be lumpy. We expect rollouts to be somewhat inconsistent, but we have a lot of optimism for the future here.

The new FST pipeline growth metric, which measures the quarter-over-quarter difference in our four-quarter looking forward pipeline, that grew about 4% quarter-over-quarter. So it’s going in the right direction. We scrub it carefully. We’re paying a lot of close attention to what’s in the pipeline. And as I pointed out earlier, we’ve added eight new customers in the last quarter with the potential to purchase as many as 10,000 terminals or more over the next 12 to 24 months. And that’s adding to the 12 new customers that we added in the prior quarter. Next, I want to provide an update on the status of 7-Eleven. Occasionally, some of you ask me about it. In April, 7-Eleven Corporations informed us that they would be moving to a net new system and moving off the BOHA! terminal.

There in the first generation, we had obviously hoped that we would sell them the Terminal 2. This loss was due to a cost-cutting project where virtually all of their in-store applications are going to be run on a single cell phone. These applications include point-of-sale, they’re replacing their point of sale system, their inventory system, waste management, ordering, and all the other back-of-the-house, in-front-of-the-house applications that they operate in a single store. They are all going to be moved to this in-house system by the end of the second quarter in 2024. While this is a disappointing development, we wanted to note that BOHA! was not specifically targeted. It had nothing to do with the decision to make at the executive level at headquarters, and we’re not taking it personally, as it were.

And it’s not due to any problems with our product or our services, but rather was a result of a long effort to create and institute their own technology. We really didn’t have much perspective on this. We were somewhat unaware of this until the termination. Their 7-Eleven’s parent company, Seven & I Holdings, generates tens of billions of dollars in revenue and staffs hundreds of engineers. And even then, it allegedly took years to build and roll out this very specific one-off product that is customized specifically for single-store 7-Eleven business. This development will impact approximately 5,400 terminals in our install base and will reduce recurring revenue an annualized rate of approximately $3.6 million, largely label sales, and this has been reflected in the updated guidance range that we’re going to provide.

I also wanted to briefly mention our international QSR win that I have referenced in prior calls. The rollout has been an incredible success so far, and we have started receiving an increasing number of orders from locations around the world. We couldn’t be more thrilled with the positive reception and believe this is an opportunity that could provide over 1,000 BOHA! Terminal sales quarter-over-quarter-over quarter. We believe the worldwide footprint we have already will expand even wider. And then finally, moving on, I want to mention that we have a large sushi client that is converting from our original terminal to the new BOHA! Terminal, T2. We expect this will generate hundreds of additional sales of the T2 terminals over the next 12 to 18 months.

Most of them will probably occur in 2024. Moving on to casino and gaming, we reported revenue of $5.7 million for the quarter. That was down 64% from the prior year, and we’ve been discussing the changing dynamics in this largely duopoly market for the past several quarters and wanted to update everyone on how we see it progressing. First, on the competitive side, we believe our main competitor has reentered the market, and we’re seeing some of the pricing pressure we expected as this occurs. We’re taking appropriate steps needed to make sure that we retain as much of the captured market share as possible. Second, on the inventory side, we continue to hear from most of our OEM customers that they are in an oversupply position still. And we expect this to continue for at least the next quarter.

And this dynamic continues to be the larger reason for the sequential slowdown in sales. Previously, we expected the first quarter to be the peak of this oversupply. And now we believe that this will continue through at least the second quarter with order pickup beginning in the third quarter and then going forward from there. And finally, I wanted to provide an update to our financial outlook for 2024. Due to the changing dynamics around both FST and casino, and gaming, we’ve decided it’s most prudent to adjust our financial guidance to ensure that investors have an accurate idea of where we believe our performance will be for the remainder of the year. We now are currently estimating that our full-year revenues will be between $45 million and $50 million, and adjusted EBITDA will be between a negative $2.5 million and negative $3.5 million.

I’m relentlessly optimistic about the future of TransAct and believe that we have the right products, the right people to win in our existing markets, as well as some nuance in the future. While I acknowledge a continuing we need to execute, especially in the near-term, it is also important as ever, but I have complete confidence in the strength of the organization to perform. So those are my comments this morning, and now I’d like to pass it over to Steve DeMartino for a more detailed review of the financials. Steve?

Steve DeMartino: Thank you, John, and thanks, everyone, for joining us this morning. Let’s turn to our first quarter ‘24 financial results in more detail. Total net sales for the first quarter were $10.7 million, which was down 52% compared to $22.3 million in the year-ago period. Sales from our foodservice technology market, or FST, for the first quarter were $3.3 million, which was down 30% sequentially and also down 5% compared to $3.5 million in the prior year period. Our recurring FST sales, which include software and service subscriptions as well as consumable label sales for the first quarter, were $2.4 million, which was down 25% sequentially but up 3% compared to $2.3 million in the prior year periods. Our ARPU for the first quarter of ‘24 was $663.

That was down 13% compared to $764 in the first quarter of ‘23. As a reminder, we’re currently selling a number of BOHA! Terminals with no recurring revenue attached to them to start. While this presents an opportunity to sell recurring elements in the future, for now they represent a drag to our ARPU number. In the first quarter, a large number of our terminals fell into this category, and we expect this to continue in the near future. We’re working on ways to lift this number going forward, but we expect our ARPU to be in the $500 to $1,000 range for at least the rest of ‘24. Our casino and gaming sales were $5.7 million, which was down 64% from the first quarter of ‘23, primarily due to OEMs working down high levels of printer inventory that they stockpiled during the supply crisis earlier in ‘23 that is now eased.

As John mentioned, we expect the dynamics we experienced during the first quarter to continue through at least the second quarter of ‘24 and begin to improve in the back half of this year. POS automation sales for the first quarter decreased 64% from the prior year to $651,000. This decline was largely the result of difficult comps as we experienced unusually high sales in ‘23 due to a competitor’s inability to supply product. In addition, similar to the casino market, During Q1, our customers were finishing up working down unusually high levels of printer inventory they built up during the supply crisis in ‘23. We believe the competitors in the market are now fully back online, and we are taking the appropriate steps to maintain market share and ensure our products are in-line with the new dynamics of the marketplace.

Moving to TransAct Services Group, or TSG. For the first quarter, TSG sales were down 14% year-over-year to $1 million. This decrease was largely due to unusually high sales of legacy lottery spare parts in the prior year, which we don’t expect to repeat at the same levels in ‘24. Moving down the income statement, our first quarter gross margin was a solid 52.6%, which was up sequentially from 48%, but down from 55% in the prior year period. The sequential increase comes as a result of an improved sales mix and favorable overhead cost absorption. Somewhat offset by lower overall sales volume. Going forward, we expect our gross margin for the remainder of the year to be in the mid to high 40% range. Our operating – our total operating expenses for the first quarter decreased by 18% from their prior year first quarter to $6.9 million and were flat sequentially.

The year-over-year decline came as a result of our previously disclosed savings achieved from the cost-cutting efforts we began to put in place late in the third quarter last year. We estimated that these actions would produce operating expense savings of about $3 million on an annualized basis, and we experienced the full effect of these reductions during the first quarter. Breaking down our operating expenses a bit, our engineering and R&D expenses for the first quarter were down 13% year-over-year to $2 million. Our selling and marketing expenses decreased 24% year-over-year to $2.1 million, and our G&A expenses decreased 16% year-over-year to $2.9 million. For the first quarter, our operating loss was $1.3 million, or a negative 12.2% of net sales, and this compares to operating income of $3.8 million, or 17.1% of net sales in the prior year period.

On the bottom line, we recorded a net loss of $1 million, or a $0.10 cent loss per diluted share for the first quarter, and this compares to net income of $3.1 million, or $0.31 cents per diluted share in the year-ago period. Our adjusted EBITDA for the quarter was negative $701,000, and this compares to positive $4.5 million for the first quarter of last year. Taking a quick look at our balance sheet, it continues to remain solid. We ended the quarter with $10.6 million in cash, with only the minimum required $2.25 million of outstanding borrowings under our credit facility with Siena Lending. And finally, before I open the call to Q&A, I wanted to address the expected impact our new guidance range is anticipated to have on our projected cash flow for ‘24.

Even with a projected adjusted EBITDA loss of negative $2.5 million to $3.5 million for ‘24, we expect the business to be only slightly cash flow negative for the full year. We expect to sell down our inventories as we move through the year, which now sit at $19.2 million, and believe this, combined with liquidation of receivables resulting from lower sales levels, will likely be enough to fund a good portion of our projected EBITDA loss. So given these factors, we believe we will easily have enough cash to fund our business for at least the next 12 months. And with that, I’d like to turn the call over to the operator for questions. Operator?

Operator: Thank you, sir. [Operator Instructions] Our first question comes from Jeff Martin of ROTH MKM. Please go ahead.

Jeff Martin: Thanks. Good morning, guys. John wanted to dig in a little bit on the eight new logos. What kind of terminal volume does that represent potentially in the two FST transactions that flipped into Q2? Have those shipped as of today? And what kind of volume are we looking at in those two as well?

Steve DeMartino: John?

John Dillon: Jeff, thanks for the question. You would think we would figure out how to not be on mute during these virtual calls, so apologies for that. The eight transactions that are net new clients represent the potential for north of 1,000 units over time. As I mentioned in the prior call, we focused the team on selling to clients that have the potential to place a considerable amount of additional orders. We use a land and expand strategy. The product is, if you will, the best salesperson we have on team, it performs well. So, once it’s installed, it performs, and most clients want to make sure that it’s going to provide the ROI and the other capabilities that were the reason for their purchase in the first place. So, we start small with most clients and we expand.

So, that’s kind of where we are at with that. And we closed a net new clients of about 12 of them in 20 in Q1 of this year. So, looking at those clients for expansion is something that we spend a lot of time on. Relative to the two that slipped, one of them was a large QSR that was going to place orders. And at the last minute, they decided to do a security audit to make sure that everything in their shops were buttoned up, and they postponed placing orders until they got that done, and that delayed things for about two months. And all that business is back on track. We are shipping product. And the other one was a hold on an opportunity that was in place. I don’t think we have that order yet, but we expect to get it literally in the next couple of weeks.

Jeff Martin: Great. And then with respect to the change at 7-Eleven, that’s a Q2 event, correct? So, we had, full results still in Q1, and then two wanted to get a sense of what the other convenience stores are doing in terms of utilizing the BOHA! Terminal? Thanks.

John Dillon: Relative to 7-Eleven, I have seen the movie before. A big company decides they want to build it in-house. They are basically jettisoning all of their vendors, and they are going to roll out a homegrown system that’s taken them years to build. I don’t know how much they have spent on it, but it’s probably a lot. We don’t see this as a, if you will, a customer loss because our product was inferior or it’s not a replacement scenario. This is a custom in-house built project that they decided that was strategically in their interest. And I think the primary reason was to just cut costs. Labor rates and food rates are going through the roof. And 7-Eleven is operated typically by a single employee. And so this is going to be, the individual is going to have a cell phone in their hand, a little itty bitty printer.

And that supposedly is going to handle everything in the store. I don’t know how well it’s going to work. They are beginning to roll it out now. The only disappointment I have is we didn’t have a greater perspective on when this was going to happen. And in Q1 of this year, they were still placing orders, and really we were somewhat surprised by this sort of turn of events. But they were a first-generation customer. They were running our older products. And while we are delighted to have clients like that, the simplicity of a 7-Eleven store is sort of below the threshold where our technology really makes a big difference. So, I am happy to take this as for many convenience store operation, but frankly we are targeting more complex systems where our technology has a much greater competitive advantage.

Jeff Martin: Thank you.

Operator: [Operator Instructions] Our next question comes from Jeff Bernstein of Silverberg Bernstein Capital. Please go ahead.

Jeff Bernstein: Yes. Hi guys. You guys were just talking a little bit fast. I was wondering if you could just go back and give the terminal numbers again and if you could just talk about the model name of the new casino and gaming terminal that you are coming out with?

John Dillon: I will answer the first one. I will let Steve go back and pull up the number. We have had a product in the market called the 880, and we are replacing that with a new model that’s called the TR80. We have announced it. We have shipped some. We expect that to kind of go into full production here in the next few months. And essentially, it’s a kiosk printer for sports betting. We do that sort of technology really well. It has a form factor. It’s sort of a rack-mounted unit. You slot it right into a kiosk. And in a lot of places, sports betting, as you go into a device that’s got a screen, you fiddle around with the screen, you place your bets, and you have got to get a ticket. And we do that really well. It’s specifically built for this purpose. It’s very much like what I was talking about where we go in and work with the client and what do you really need it to do. But it’s a second generation of basically a sports betting kiosk printer.

Jeff Bernstein: Got it. And is there an EpicCentral type software opportunity here in sports betting, or does that not really apply?

John Dillon: I would say it’s too soon to know. In sports betting, it’s not so much like we need to know the personality of the person that would be betting, because they are deciding on a cricket match or a football game and the like. So, not clear, I do believe that client intimacy is something that most of these devices are going to need. We are going to a more and more telematic, centric system telematic, meaning we are communicating, WiFi, Bluetooth, near-field communication. And the devices that we installed in various machines have the ability or will have the ability to communicate digitally with clients, maybe through their cell phone or their smartwatches. And so the more you can know about your client, depending on who the ultimate vendor is, the better you can service them.

And so we think that things like EpicCentral will be a key part of the future. But we are working with clients, with our customers, who are mostly OEM-ing our products, to see if, in fact, we can help them engineer some of their stuff into their technology. But it’s early days still.

Jeff Bernstein: Great. Thanks.

Steve DeMartino: Jeff, did you want the terminal numbers?

Jeff Bernstein: Yes, please.

Steve DeMartino: Yes. So, we ended the quarter with 15,370. And we added 901 new terminals sold during the quarter.

Jeff Bernstein: Great. Thanks.

Steve DeMartino: You’re welcome.

Operator: Our next question comes from [indiscernible] of Creative Capital Partners. Please go ahead.

Unidentified Analyst: Good morning John. I wondered if you could provide an update on the strategic alternatives.

John Dillon: Well, we have announced we have an advisory service that’s helping us. We are in process. It’s going as it were. We don’t have anything to report at this point, but we are looking at strategy challenges and opportunities, and we are going to continue to do that. And if we come up with things that make a difference, we will be sure to basically post that stuff for our investors. But trust us that we are working it diligently.

Unidentified Analyst: Okay. And just to clarify, this encompasses M&A strategies?

John Dillon: That’s true.

Unidentified Analyst: Okay. Alright. Thank you.

Operator: Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now hand over to John Dillon to closing remarks.

John Dillon: Thank you. And I want to thank you all for joining and listening. And I want to thank everyone for their support and feedback. As always, if you want to speak about anything about TransAct related, please reach out to me or Ryan in our IR department to get a call set up, happy to take the calls, happy to spend the time.

Operator: Thank you, sir. Ladies and gentlemen, that concludes today’s event. Thank you for attending and you may now disconnect your lines.