Good day, ladies and gentlemen. Welcome to the TransAct Technologies Second Quarter 2017 Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today's conference, Jim Leahy of JCIR. Sir, you may begin.

Thank you, Bernie. Good afternoon and welcome to TransAct Technologies 2017 Second Quarter Conference Call. 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 against these initiatives, and details on the second 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 obligations 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 the GAAP can be found in today's press release as well as on the Company's Web-site. At this time, I would like to turn the call over to Bart Shuldman. Bart?

Thank you, Jim, and welcome to everyone joining us on this afternoon's conference call and Webcast. Earlier this afternoon, we reported 2017 second quarter net sales of $13.6 million, operating income of $1.3 million, and EBITDA of $1.6 million. Steve will review the second quarter financials in more detail in a few moments, but I'd like to begin by providing some high-level comments about our results and our business. For the past several years, one of the key things we have frequently touched on in our conversations with investors is the diversification of our product offerings towards purposely-built, high value software and technology-driven solutions. This diversification is critical to our long-term success and we again made progress on this effort during the second quarter. The most important of these high-value offerings are our restaurant solution terminals, introduced first with the groundbreaking AccuDate 9700 in 2012 and furthered with the debut of our AccuDate PRO, and more recently the AccuDate XL. Since the debut of the 9700, we have worked consistently with our customers to evolve our solutions to meet the demands of their day to day back-of-the-house workflows and operations. This new market, which TransAct has helped create, is starting to organize around software-driven solutions that are additive to the original food safety labeling function of the terminal, particularly with the introduction of the CrunchTime and Jolt software solutions. Both CrunchTime and Jolt allow restaurant and food service operators to automate their food safety labeling, but then leverage software to drive productivity and efficiency gains in the back of the house. While this software was being developed, these two companies needed a terminal in order to offer labeling, while also serving as the back-of-the-house assistant to help with additional productivity tools they were developing. This led TransAct to design our…

Thanks Bart. Good afternoon everyone. Second quarter 2017 net sales were $13.6 million, down 8% from the $14.8 million of net sales recorded in the second quarter last year. Looking at our sales for the second quarter by market, restaurant solutions sales were $1 million, down 40% or $700,000 from last year's second quarter. The year-over-year decline in sales during the quarter was driven almost entirely by lower sales of our terminal solutions to our distributor as we pursue an internal sales model for our AccuDate XL, a change that we noted last quarter. However, on a sequential basis, sales of our terminal solutions nearly doubled from the first quarter as our growing sales team began to generate traction in the marketplace. POS automation and banking sales were down 36% or $1.2 million to $2 million in the 2017 second quarter, driven by lower sales of our Ithaca 9000 printers to McDonald's. While McDonald's continues to deploy our printer in their stores to support their various new menu initiatives, the pace of sales of our printers did slow from a record pace in the year ago period. Casino and gaming sales were down 23% year-over-year or $1.2 million to $4 million in the second quarter of 2017. Domestic printer sales grew 26% from the prior year due to a healthy U.S. market as well as shipments in support of a major new casino opening during the quarter. International casino and gaming printer sales were down 70% year-over-year, as we saw lower shipments of printers to our slot manufacturer customers as well as lower sales to our principal international distributor. In Epicentral, software sales were flat, as we had no new installations in either the second quarter of 2017 or 2016. Lottery sales of $2.8 million were up 30% or $600,000…

Thanks, Steve. I got to tell you, I am very excited about what is going on inside of TransAct. Our restaurant solutions market is exciting and we have partnered with the leading software companies, and this market will now add to the growing recurring revenue opportunity with our new label offerings and the technical and service support we now offer. The potential outlook for this business looks really good to me. Our Epicentral software system is gaining traction and we should be able to install our first Epicentral SE version with a well-known casino provider this quarter. This opens up a brand new opportunity for TransAct. The domestic casino market seems to be healthier, market position quite good. The oil and gas market has improved and this little business in TransAct is quite profitable. And our lottery market is bringing TransAct much more recurring revenue, which should continue for quite a while. Our TransAct Services Group delivered 25% of our sales. Almost all of it is recurring. And as we sell more AccuDate XL terminals, our recurring revenue should continue to grow. What I see is a real transformation of TransAct that is only beginning. Software sales, terminal sales with much more technology, and our recurring revenue sales should help maintain higher gross margins. This in turn as revenues grow will expand our operating profit margins. You can now see what I am starting to get very excited about and about our long-term growth opportunities in TransAct. While nothing is guaranteed in this crazy world we live in, and even with the dysfunctional Washington D.C., I am very optimistic about our future. In closing, I offer my deep gratitude to the entire TransAct team for their diligent work as we seek to capitalize on the exciting markets we address. And I offer my sincere appreciations to our shareholders for their continued long-term support. With that, operator, we're ready to take questions.

[Operator Instructions] Our first question comes from Kara Anderson with B. Riley & Co. Your line is open.

To start, can you expand on the issue that you cited in Europe with respect to your casino and gaming business, and then also comment on whether that is having a rollover effect into Q3 to date?

Actually Q3 is going to be better than Q2. So we've already taken some action. It's the way we go to market in Europe and we're making adjustments right now. Q3 will be better and Q4 should be better. But it's the way we go to market there that has caused us an issue. So we're making the necessary adjustments.

And when you say better, you mean better year-over-year or on a sequential basis?

Clearly on a sequential basis. You know what? I haven't looked at the numbers. When I look at the numbers, I don't really ask Steve to compare it to last year, I just look at it quarter-to-quarter and Q3 will be better than Q2, no doubt. We've already got the orders.

And I think I heard you say you have two Epicentrals expected to close in Q3, correct?

That's correct, one is the Epicentral SE and one is our full program.

Okay. And then in terms of the Q2 sequential sales gain in restaurant solutions, what terminals drove that gain particularly?

It's both the 9700 and the XL. We got our first XL order, which we talked about, which was wonderful because it came with a full package. We sold labels, we sold our service, and what we're doing is with that first order we're able to gauge what we think will be the tie ratio of our labels to terminal sales, and we're trying to calculate what our recurring revenue could look like going forward as we sell more XLs and win the label business. And also, we're seeing a lot of interest in the support services as we are selling a much more technical solution. And at a minimum, we think it's going to be 20% per year of the original sale price of the terminal. So we did sell some XLs in the second quarter and continue to support our ongoing customers with the 9700. What we are seeing though is a constant move above quick-serve by our customers towards the XL solution. Now the move that we're seeing is not only for Jolt and CrunchTime software, some companies are just buying our XL with our labeling program, because we provide just the labeling program for the XL if customers don't want Jolt or CrunchTime, and the first order we got was just with our labeling program. So, the fact that the whole system, the XL just with the labeling program, is just a more sophisticated solution for the customers, and then if you add Jolt or CrunchTime, it gets even more sophisticated. We're seeing the market really endorse and like it. So we're seeing a lot of the opportunities shift over to the XL.

And then in terms of that selling method, is that going to be exclusive to you to sell that, or are you also going to allow Jolt or CrunchTime, are they going to sell the terminals?

In almost 99% of the cases, we'll sell it. Jolt can sell it if they want. I mean if they got a one-off deal where they have a customer that wants to buy onesie, twosies from them, we clearly would be very happy if they sold it for us. I would say that over 90% to 95% of the sales will come through us, if not more. And 100% of CrunchTimes will come through us.

Got it. And then can you talk about performance year-to-date relative to your internal expectations and what we might expect for the balance of the year? Specifically, I believe it was on Q4 call, Bart, you said that you expected to see sales growth in 2017, and I'm wondering if that is still your statement.

It is. Right now if I looked at our internal plan, which we don't share with you, but we like where we are. We projected a downturn in McDonald's. It couldn't continue. I mean, selling 50,000, 60,000 printers a year just couldn't continue. So we knew that would happen and that drops low-margin business and replaces it with high-margin business. The thing that is – so we're a bit ahead of where we thought we would be. I got to tell you, I can't share with you what's going on with our leads with the XL, with the AccuDate XL, but when we use sales force and when we add it all up, Kara, it's huge, the opportunities that the sales team has identified and in the process is just huge. So I like where we are. The lottery business is really turning out to be a wonderful situation for us, because we're maintaining our printer sales, but they're not –so they are not changing out the old printers as quick and what's adding to our lottery sales is this recurring revenue of spare parts. And we had a huge second quarter, and we don't expect that really to slow down. So on top of all this, we're starting to build this recurring revenue business in TransAct that will continue for years. I mean lottery will add to it now, our label sales will add to it, and almost in every opportunity that we've highlighted for our XL sales, we're bidding labels. And everybody is talking to us of buying our service package, which if they do all that, will be more than 20% of the original terminal sale coming back to us in recurring revenue. So, where I sit right now is, I've seen the transformation, you saw the margin, right, you saw the gross margin, 47%, fabulous. I mean this is a Company that did 25% or 30% not too long ago. And I just see this – it's going to take a little more time, but we see the opportunities in front of us and the sales team is working hard and it looks very promising. So I can now say to our shareholders, I am really starting to get excited about what I see going forward.

And then in terms of that gross margin expectation for Q 3 and Q4, is 47% sustainable if you're going to see this big pickup or I guess the continued strength in the spare parts business?

It will stay close to that. It will be in this, let's call it, 45% to 47% range.

It all depends on the mix, Kara. To the spare parts, like Bart said, it's a good recurring business that's going to keep coming. It may be a little – might spike here and there quarter to quarter, and that would affect the margin.

And Epicentral helps a lot because that's software margins. And then it all depends on how many legacy printers we sell, because that will bring the margins down, and that's a function of the market, right. I mean, if McDonald's comes in with extra orders, that could lower the margin a little. Clearly, everything outside of our legacy printers; gaming, casino, food safety or restaurant solutions now, Epicentral, are all at higher margins, and TransAct Services Group, even our label business is pretty good margins. So this is all developing.

Okay, that's helpful. And then I guess last question for me, did you see any delays out of Q2 for your planned investments? I think you were initially looking for an incremental $1 million in OpEx this year. Is that still what you are expecting, and if not, please correct me?

Yes, it should be. I mean, we've got one to two more positions to fill. Our direct marketing program, we're going to spend a little less than we had projected. Some of our digital activity is driving a lot of awareness and a lot of customer calls. So, we are going to switch, we call it an audible, I'm going to switch a little more to our digital marketing, which actually is less costly. So we'll see some of the cost of that marketing program come down, but we'll see the extra sales people added.

Because a lot of the people we hired got hired during the second quarter, Kara, so we don't have the full quarter effect in the second quarter, but they will be in for the full effect starting in Q3, plus we are still trying to hire a few positions.

Are there any one-time expenses related to the hiring that might come out?

The recruiting expenses will be one-time. They will all happen this year. They won't recur next year.

In that direct marketing program, will not reoccur next year. So the money that we spent in Q1 and Q2 for that will not reoccur next year. And we've moved over to this digital program, which social media is just fabulous and it's not very expensive compared to a direct marketing program. The direct marketing program was really good for us because of NRA. We needed to get that awareness, we needed to get things to food safety managers and operation managers and all that. And we timed it perfectly, we thought it was perfectly a couple of weeks before NRA. So we really hit the market strong. But what was wonderful is, as we continued with that, but we continued, we kind of introduced our digital strategy at that point, the digital strategy really held and there is no reason to continue the direct marketing because the digital strategy is really working.

Great, thank you.

[Operator Instructions] Our next question comes from Todd Eilers with Eilers & Krejcik Gaming. Your line is open.

I wanted to ask on Epicentral SE, I believe you mentioned, which is the integration of that product with a slot system provider, could you maybe expand a little bit on that and what that might allow you to do now and could that be something that maybe spur some additional sales of that product for you guys?

Great question. And Todd, thank you for asking that. What we provide with Epicentral SE is what we call our Design Center. If you think about what a casino system does today, they are constantly looking at the play and all that, and they've got some bonusing and they can send mailings out or they can do something electronically, but they can't do anything with a coupon. So what we provide is our Design Center, which allows the casino to do eye-catching types of promotions that will come out of the slot machine. And then we give them our Print Manager, which is the ability to ensure that when they trigger offer promotion to a player, that it gets to that direct slot machine and gets to the direct printer, and that's the benefit that we offer. Now the reason why we're really excited about this is as you know, we don't look at the meters of the slot machine, we look at the data that a casino system normally gives us, and then we hit a slot player with a promotion based on certain criteria. We've got some promotions running right now that if a player plays so long and plays so much coin in, they get a coupon, and they put it in a fishbowl, and in the fishbowl somebody draws it out and somebody wins $5,000 or something. But by working closely with the slot system, we can now do what we call playable free play. So we can actually print out a ticket that you can insert back into the bill acceptor and the player can then replay that amount of money. We couldn't do that before because we stayed away from the meters. Once you get involved with promotions and all that, then you start…

Okay, great, that was very helpful. And I think if I heard you correct, you guys didn't have any Epicentral sales in the second quarter, but you have this one coming in the third quarter. Did I hear you right that you have one in addition to that, so we have two in the third quarter, is that right?

Yes, we have one full Epicentral sale and we should have one full Epicentral SE sale.

That's right, Todd. And we had none in the second quarter.

Okay. And presumably, obviously those are higher margin, so that's obviously a net positive on the margin side for you guys sequentially going into next quarter as well, or is it big enough to drive that for you or not?

It's all going to depend on product mix. It's all going to depend on product mix. But what you're seeing now is we've moved from the low 40s to the mid to the high 40s on gross margin.

That's great I think that's if I'm not mistaken a record for you guys. So clearly you guys have done a great job there. Last question from me, on the casino business domestic, I think you said it was up 23% year-over-year. I think you guys benefited from a large new opening, which I'm assuming maybe that was the ilani possibly in the quarter. Can you maybe give us a sense for what the growth rate might have been ex that new opening? Certainly it feels like the market is improved here in the first half, along with the other verticals as well, but certainly seems that way in the casino side of things here domestically. Do you share the same kind of view and how are you kind of thinking about that in the second half?

You know, Todd, the second quarter domestically was up 26% and I think that's a combination of continuing to grow our market share. But I think in this case, it was a fair amount was due to the casino market looking healthier. Our outlook is good. But again, we need to see the orders come in. So, right now, we're feeling better about the domestic market. I think it's been four years since I think I've said, I think we are early, and told people we didn't like what we saw in the domestic market. We might be early in saying we like what we see in the domestic market right now. Truthfully, if it wasn't for this little hiccup in Europe, I think our results in the second quarter should have been even better, because our European business had a little hiccup there. Again, we should see that do better in the third and fourth quarter. But we do look at the domestic market in a more positive light right now. I think we need to see some time, Todd. I think we need to see a couple of quarters and see what the results are like, but it does feel better to us.

Okay, great. Thanks guys. Appreciate the color and congrats on a nice quarter.

And our next question comes from Jeff Bernstein with Cowen. Your line is open.

So obviously great news to have two Epicentral deals, but over the last couple of years it has been somewhat painfully slow-going. Do we see an inflection point here at some point in North America with the ticket-in ticket-out type guys, do we see interest in Macau where they need to move from the high rollers to develop a mass player market? How should we think about the cadence here going forward?

Thanks for asking the question. It has been a slow go. We've been dealing with a depressed casino market and I think the casinos, especially domestically, held back on marketing dollars and things like that and to spend extra on a system. From what we see, we see more opportunities for the first time, and we've got two that should – one has already closed and one should close this quarter. The market does look better for us with Epicentral. Our new 3.8.2 also Jeff has been very good. We've got a lot of confidence in it and we've added some features to it that the industry has asked us for. But again, I think we're seeing just a much happier market, so the conversations are better. What's always nice is, you get a couple of systems out there and the neighboring casinos start feeling the impact of it and start calling us and saying, hey, can you come in and teach us about this system. We are seeing interest around the world. So it's not just domestic, we are seeing interest around the world, and that includes Europe and Asia, and not just in Macau in Asia. So we are seeing interest. Right now, we're taking it as it comes. We've really changed our engineering, our software engineering team. I've never had this good of a team before and I'm very proud of the work that they've done and the work that they are doing with our customers. It's the best team we've ever had. So, it does feel better. The cadence, it's tough right now. I wish I could tell you we have a lot more in backlog. We have a lot of quotes out there. The customers that are starting to buy this system, some of them own multiple casinos. So we'll remain hopeful that if they are successful in the one casino, they'll move it to, they'll buy it for their other casinos. But it does feel better. And I think our shareholders know that I've not been critical, but I've been very honest in saying, look, the domestic market is difficult, don't expect anything from us. I've said it for years. This is the first time I can say in front of you that I am starting to sense a bit of looseness in regards to buying technology and also buying new slot machines. Some of the floors I've walked on, by the way, over the last couple of months, you could see it, you could see the floors with newer slot machines. And so, it feels better, but I think we got to let a couple of quarters go by and see it come through.

Okay, great. And then just on the food safety side, so I hear that there is a new C position at the restaurant business, the Chief Safety Officer. Are those the guys you guys are selling to now or are you still selling to sort of large franchisees or are you talking to the franchisors and larger kinds of rollouts?

Most of the work that we have going on right now are with the parent company that are seriously looking at two things. They are looking at food safety, they are looking at labeling and saying, we've got to do a better job. But they are looking at the productivity gains that they can get from a CrunchTime system for instance. CrunchTime does supply a hell of a system in organizing the production of food in restaurants. And as you know, if you could save a couple of points on food waste and a couple of points on productivity, that's meaningful to restaurants, and the restaurants are feeling the impact of higher minimum wages, medical costs, things like that. Even food costs have gone up. So, we're seeing the action from both sides. Clearly we've addressed and targeted the food safety manager within these restaurant chains at the corporate level. We want that person to know that this technology is out there. But we're also targeting the operations team, because we want to let them know that these productivity tools are out there. And we're pleased because the response has been very good. Look, NRA was very good, very good for our partners, Jolt and CrunchTime, and very good for us, and it led to one hell of a big list of customer opportunities, it's large. We got to get through the sales process. So, it's occurring on both sides. And I think what's happened is, also when we talk to IT managers, they say, look, we know you do food labeling, but how do we do that or how do we do temperature monitoring? Do I need two or three different terminals in my restaurant? We don't know. You need two or three AccuDate XL terminals, put one in every prep station, have one as your back-of-the-house assistant that can help you manage all this. So, the IT managers are very happy with us because they're looking at such a different amount of technology that they would have to add to the back of the house, and with the XL they can have everything go through our terminal. So, there's a lot of discussions out there. I think on the last call, I talked about a large equipment manufacturer that wants to do Internet of Things and tell the restaurant when they think there could be a problem with the refrigerator or the oven, and they need a device to put that information through. So, this is all coming together that way.

So, do you have a sense now for what the sales cycle is, how many months?

We're learning, we're clearly learning. We've got one, nice one on the grill right now, and we're learning. We're learning what it's going to take, we're learning all the different people that are involved in this decision process, we're learning about our software providers, and we're learning. And what we've done, which is something that I wanted, is we basically take sales force, and as you know how it works, we call it phase-gates, how do you move from one phase-gate to the next phase-gate, to the next phase-gate, to get to the close. And we literally have a large TV in the office and we see all the opportunities and at what stage they are in this process to close the order. And the reason why I wanted to do that is I wanted to see if we get caught somewhere. Is it one particular – as we go through these phase-gates, meet the customer, go through some sales meetings, get their menu, do this, do a trial, is there a certain point where there is either a delay or does everything get hung up there. So, we're doing that so that we can follow it and see is there something that gets us – did we get all the way through or is there a certain phase-gate that things slow down. Right now, we see things flowing through, but it's too early. We really introduced the XL in May and we're only a couple of months later and we've got this very large list of opportunities. So we'll follow it. And as I said, we're learning.

Terrific. Thank you.

We've taken a very methodical approach to this and I know it might sound boring and all that, but we've created the market. And so, it's not like we are replacing technology that already exists. Even the iPhone replaced existing phones out there, they just did it better. We're creating this market and it's important that we take the time to understand every step along the way, because the market is large, it's a very large opportunity, we see it, we see it in our board. So this methodical approach that we're taking is very important for us, so we learn about how the customers are reacting, how they are looking at it and how we can address any questions that they have.

And our next question comes from Mitchell Sacks with Grand Slam. Your line is open.

First question, you talked about the tie ratio or thinking about the tie ratio with be XL terminal, and you had talked about 20%. Was that a 20% tie ratio or is that just the ones that do take you to be roughly 20% of the sales of the XL?

I'm not sure I understood the question, but let me try and answer it. So we sell the XL for a certain price, and then we add to that one or two service packages. They can buy one or both. And then we try to close the label business. And right now, we've done both with one customer. Just one of the deals, if we just close on a service contract, that alone will be 15% to 20% of the original price of the terminal back to us. If you add in the labels, it goes even higher. So, we can't guarantee it on every order, but clearly the market has responded favorably to both our label offering and our offering for service and warranty. And that then would be a yearly – they could sign up and the yearly tie ratio, the yearly amount of recurring revenue should be larger than 20% a year.

Okay. And then the customer that you closed for the XL terminal, how long was that sales cycle for the XL terminal? Have they bought any other terminals, any of your previous terminals from you before?

Mitch, it wasn't normal, it was very quick. It was actually very quick. It was right after we – in fact, I think they bought it before we even introduced it at NRA. It was very quick, which was surprising. And they jumped in with labels and service right away. It's a smaller, not – I mean, we have some deals that are for big restaurant chains and they will clearly take their time. This was for a smaller company and we're willing to make a decision very quickly and we've got a repeat label order already. So, with that we're trying to, I will use the word 'cadence', as one of the other investors, we're trying to see the cadence of how many labels they are going to use, and we are building our recurring revenue model off that cadence right now.

And then with respect to your software partners, CrunchTime and Jolt, is there anything you need to do for them to allow them to have their customers purchase your terminals, or are you fully up to spec with what they need from a relationship standpoint?

From a relationship standpoint, we're good. I mean we're integrated, we've run both software programs on our terminal in our labs, we've done all the testing, we've done all the integration work. It's really the customer now, how they want to run it and how they want it set up. And as always with software, nobody does it the same at every customer. So, it could depend on Jolt's implementation of their software at that company, it could be CrunchTime's implementation, and some of the sales cycle will be their implementation. We feel good about where we are, but again, it's a combination of them getting their implementation done and then rolling out the terminals.

Okay. I asked my questions. Thank you very much.

And I'm showing no further questions in the queue. I would now like to turn the call over to Brat Shuldman for closing remarks.

Okay. Well, Bart's going to answer that anyway. Thank you everybody for joining us on the call this afternoon. Just a quick note, I'd like to thank our Investor Relations from JCIR, great people, and I think some of you know them, and I'd like to send out a happy birthday wish to Rich Land, whose birthday I believe is tomorrow. Happy birthday, Rich. We look forward to reporting back to you on further progress in our business when we report our third quarter results in early November. In addition, if any of you are at G2E in Las Vegas in early October, we'd love to see you at our booth where we can clearly demonstrate our full lineup of gaming technology and printer solutions. With that, I thank everybody for joining us on the call today and thank you for your support.

This does conclude the program. You may all disconnect. Everyone have a great day.