Shlomi Cohen - CEO Yishay Curelaru - CFO

Brian Kinstlinger - Maxim Group Josh Elving - Lake Street Capital Nick Goldman - Northland Capital Management Edward Schwartz - Schwartz Investments Mike Vermut - Newland Capital

Thank you. Good morning everyone.

Thank you for joining us today to discuss our results for the third quarter ended September 30, 2017. As you have likely seen already in our press release issued earlier today, our revenues for the third quarter were almost $4.7 million.

This reflects the quarter-to-quarter lumpiness that we have spoken about in previous calls. As we shift our customer base to purchaser of complete solution.

With this shift, we continue to grow the portion of our sales that will from recurring revenue and to increase our gross margin. As a result, 26% of the third quarter revenue are recurring and our gross margin increased to 53% during this quarter.

We also can see the result of our hard work in some of our new segments and market as we look our order pipeline for the year to come. And continue to believe that we will be able to present a positive adjusted EBITDA for the year in '17.

We have also settled all litigation procedures in connection with the lawsuit between the company and USA Technologies and Masterworks Electronics. Before I discuss our recent success and what lies ahead, I would like to turn the floor over to Yishay for his detailed report on our financial results.

Yishay?

Thank you, Shlomi and good morning, everyone. Before the market open today we issued the results of our third quarter ended September 30 in a press release.

A copy of the release is available in the Investor Relations section of our website. As we reported in the press release our total revenues for the third quarter were $4.7 million, a decrease of 17% from Q3 last year.

This result was primarily due to the fact that revenue for the Q3 last year included a onetime licensing fee that did not occur again this year. For the first nine months of '17 our revenues increased by 4% to $15.6 million or $15 million in the same year ago period.

Breaking down Q3 revenues by source and percentage of total revenue. Retail and mass transit ticketing revenues were $3.3 million or 59% [ph].

Petroleum revenues was $900,000 or 20% and MediSmart product revenues was $500,000 or 11%. Looking at Q3 revenues by geographic regions and the portion of each region contribution to the total revenue.

America accounted for $2.2 million or 47%, Europe accounted for $1.4 million or 30%, Africa accounted for $1 million or 21%, and Asia accounted for $70,000 or 2%. Our gross margin for the third quarter increased to 53% of revenue compared to 50% of revenue last quarter and decreased 1% from Q3 last year.

Now turning back to our expenses, for the third quarter operating expenses decreased 12% to $2.9 million from $3.3 million in the prior quarter. Our net loss from continued operation for the third quarter totaled $570,000 compared to net income from continued operation of $200,000 in Q3 last year.

The increase in net income from discontinued operation of $1.4 million in the third quarter is mainly attributed to $1.6 million, mainly covered by us pursuit of the judgment of the [indiscernible] Central District Court and the company lawsuit against their insurance company for damages incurred due to flooding in our certain manufacturing site. Our net income for the third quarter was $868,000 or $0.02 per share, compared to net loss of $70,000 or less than $0.01 per share in Q3 '16.

Now turning to our non-GAAP results, we use adjusted EBITDA from continued operations, a non-GAAP metrics, as we believe it provides a useful indication of our operating results. In the third quarter our adjusted EBITDA loss was $74,000 compared to an income of $700,000 in the third quarter of '16.

Please reference today's earnings release for further details about this non-GAAP metric, include a reconciliation of adjusted EBITDA to our comparable GAAP results. This completes my financial summary.

For a more detailed analysis of our financial result, please reference our quarterly report on Form 10-Q, which we plan to file day November 14. I would like to turn the call back to Shlomi for additional comment on our operational progress during the third quarter of '17.

Shlomi?

Thank you, Yishay. As mentioned earlier, we continue on the path towards shifting our business away from low margin hardware sales to high revenue and margin sales.

To this end we continue to put the focus on the sale of system, which generates recurring revenues and on the sale of specialty product such as ATM readers and petroleum payments products which relies on our strong technical knowledge and expertise. While our sales for the third quarter were affected by seasonality in product orders and sales cycle we saw important opportunities materialize into product orders and we are optimistic about the outlook ahead.

Within our retail segment, the most exciting news came from Japan. Earlier this year we delivered the first 3,000 FeliCa-certified payment system under a three-year letter of intent.

Less than six months after the first batch delivery we were very pleased to report that in early October we received a follow-up purchase order for more than 2,000 additional units expected to be delivered this year. This is a strong growth for a confidence for our new product, but more importantly this demonstrate that OTI can deliver to the Japanese fast sales market successfully.

We believe this is a just starting point and that the Japanese market hold significant additional opportunities for OTI. Another important area of growth is in the ATM vertical where we continue to increase sales and deployments and expect to reach an install base of over 10,000 OTI advanced contactless reader in the ATM market globally by the end of '17.

This is a key milestone and we're expected to see a ramp up in ATM orders over the year to come. We're also optimistic about petroleum product sales as a result of long-term effort we expect to see PetroSmart enter new strategic market in this coming quarter and complete delivers to new customers and markets.

The bottom-line is simple on a quarterly basis we will continue to see lumpiness as we are affected both by seasonality and the long sales cycle in hand to drastically changing our business model. However, it's time factors we expect this sales cycle to end with orders and deliveries which will contribute to higher margin and more importantly higher revenues.

As I mentioned earlier, some of this sales cycles are now starting to bear fruits. When you analyze our sales growth in the first nine months of '17, we show an increase of 4% in sales year-over-year.

We hope this is just the beginning and that our current focus sales strategies will allows us to put strong finish on '17. And more importantly, will give us a solid foundation for 2018 and strong basis for which we'll be able to continue the reinvention of OTI through the development and introduction of new products and the execution of new opportunities.

I strongly believe that by the end of '17, we will present an annual positive adjusted EBITDA for what I believe is the first time since the company was established. We're now open to - open the call for your questions.

Operator please provide the appropriate instructions.

Hi, Shlomi, thanks for taking my questions. The first question I had is if you can talk about the initial installments in Japan, what customer feedback is kind of the near-term pipeline for that market?

And then any changes in the competitive landscape in that market, because I think you had some technology advantage there early on?

Yes, basically, following the fact that we are presenting now this latest achievement that we extended the amount of system installment by the end of the year, we are now actually finalizing few major accounts in our pipeline in the Japanese market. If - I need to emphasis something that is very important for us not only in Japan, but also out of Japan is the fact that in the last year we invested heavily in order to step into the easy charger.

You know that the amount of local crowd in the market have especially in Japan, but not only in Japan is going up and we are actually developing together with a strategic partner in the Japanese market also the ability to install the payment element inside of those chargers. So, I believe that we will see some product out of this intensive pipeline that we are having in Japan relatively soon during '18, during beginning of '18 and not only in Japan.

Sounds great. And then you mentioned optimism regarding the petroleum product in your comments and in the press release related to PetroSmart subsidiary that you are working with.

What are the factors that give you that confidence and how aggressive is PetroSmart pushing that solution?

First of all, I think that if everything will be according to our plan, we will present a double-digit growth with this division, this is the most profitable division that we are having in the OTI group, this is one thing. Second thing, following the intensive efforts, which we were having in the last few years and I think that I mentioned it in the beginning of this year, we are actually stepping into the U.S.

market and from the second half of this year we are already active in the U.S. market with Flip [ph].

The second strategic market that benefits from this investment is the Indian market, and I hope that by the end of the year we will be able to say a few words about the strategic account that we are having in this market. Basically, the steps that we were doing lately in the Indian market is the first step that we are doing in the retail.

And this is very important for us because so far, the company is absolutely focused on Flip and for the first time we are actually entering to the retail market as well.

And if we look at that market, what is your rough revenue base for petroleum in the currently completed quarter? And then how much of that is outside of Israel?

We're sending anything in Israel by the way, just as an important comment. All of our sales is outside of Israel and it's based in North America, South America, Africa, mainly for mining and now we're starting in April.

And how much revenue from petroleum in the third quarter?

In the third quarter, we had about $1 million from petroleum products.

Great. Thanks.

The last question I have is you have got some business and seasonality business and that's impacted you obviously. Can you talk about the seasonality or lumpiness that you might see in the fourth quarter or we look more like 2Q, or we more look like 3Q or look like in either of them maybe what you know so far?

So, we're still presenting a linear road, but year-over-year and this is very important to emphasize year-over-year we're going to see growth saying from '16 to '17 absolutely we're going to see growth. Regarding Q4, it's needless to say that it is going to be much higher than Q3 to tell you now that if it's going to be like Q2 we're doing efforts to be around this number.

Great, thanks so much.

Hey, thanks for taking my questions. I have I guess want to follow-up on I think it was Brian's question regarding petroleum.

I guess in looking at the numbers unless I wrote something down wrong it looks like you had revenue of around $1.9 million in the second quarter and then just under $1 million here in the third quarter. Is there lumpiness or seasonality in that business?

Did you have some maybe like deployment revenue in the second quarter, how do I think about the cadence of quarterly revenues out of petroleum?

Yes, look the seasonality and lumpiness that we're having is actually in both divisions, I'm speaking about the payment and the fueling. Yes, the answer is positive.

The reason for that is that in the last two years and we're still doing it's the fact that we're stepping out from I'll say low margin accounts and inefficient activities and we're stepping into new activities. I think that you saw it in the payment division that over there we are still increasing our sales, but in the same time we are stepping from a lot of low cost, low margin accounts.

The fact that we move from the position of selling hardware or being only a box mover and we're selling solution and following that we are generating recurring revenue it actually changed the entire business model that we were having in the past. And that's the reason that we're creating some kind of lumpiness.

My assumption and again this is an assumption that during '18 we will start to see some kind of linear growth. So, don't expect that it will be in the beginning of the year, but I believe that later on you'll see that we're reducing the lumpiness because of all those changes that we were doing in the last 24 months and a little bit more than that.

I'm saying again all-in-all when you're looking year-over-year we will present growth.

And when I think about the opportunity in petroleum I know you have...

Maybe just another comment regarding that, I think, that we'll analyze the entire revenue share that we're having year-over-year, you'll see that goal that we're presenting is much more than what the financial report are actually reflecting. Take for example Q3, Q3 compared to Q3 last year basically you can say that we are actually spending less than Q3 2016.

But basically, we're spending much more because in Q3 2016, we were having the AT&T settlement and onetime payment and if you're cleaning it out of the Q3 '16 you will see that we're actually presenting almost a double-digit growth year-over-year. And there is other activities as well that we decided to step out as part of the cleaning as part of making this company much more healthier and with biggest potential for growth in the coming years.

Thank you, that's helpful. I guess, you've talked about for many opportunities within petroleum, that could be fairly significant, and you suggested double-digit growth potential in 2018.

And if I look at the number petroleum looks like it should end up being up somewhere near 25% in 2017. And that's a double-digit number, so was 10%, so was 99%.

Can you give us any more like just high-level color around how big the petroleum business could be, could this be a $15 million or $20 million a year type business, a couple of years down the road? Or is this going to be a 10% grower?

No, I think that it can be even bigger than that. I think that with the existing product line that we're having and all the new technologies that we're developing, this division can be even $50 million.

I think that over with the petroleum division, we can expect to have in the next five years significant growth, mainly because of stepping to the retail and extending the operation that we're having with the fleets in North America and India.

Okay. And then, did you say that you're entering a new strategic market in petroleum, or is that India, which you reference in the press release?

Yes, it's India.

Okay. And then I just want to switch over and then I will hub back in queue, but I just wanted to kind of circle back on Japan.

I believe, I heard you say, you're in the late stages of finalizing some potential contracts with customers in Japan, did I hear that correctly? And can you give us any ballpark idea of how many solutions or how many systems might be covered?

I can say, first of all regarding the first part of your question, yes, the answer is we're working now, not only now but in the last six months, we're working intensively on new accounts, following the last delivery that we were doing for the biggest retailer in Japan. I'm assuming that during '18, we will see the fruit out of this successful installation that we were doing in the second quarter, and also what we are going to do in the fourth quarter of this year.

I prefer to keep it like that at this point of time without giving additional information regarding the Japanese market, but all-in-all we're very positive regarding this market. This is the most strategic one for us, and I'm speaking about the payment division.

And we will continue to invest probable efforts, both in R&D and also in sales.

Okay. And I guess, just a follow-up on that, and then I promise, I'll hop back in queue here, but I think given how much discussions has taken place around Japan, and given the size of that market and given some other discussions around whether or not there is a mandate to put cashless acceptance on the majority of the unattended marketplace items in Japan.

I think, it would be really helpful to offer some ballpark idea of what we can expect for readers next year. I mean, you do the math and there have to hundreds of thousands of readers deployed quarterly to get to the millions by the time the Olympics come.

Can we expect 50,000 to 100,000 new solutions put in place in 2018?

I don't think that it will be in the range of 100,000, but I don't think that it will be in the same range that we were setting this year. So, we're targeting the higher number than '17.

But at the moment I cannot say more than that we've few strategic account that we're developing and if everything will be okay, I believe that we will share with you the information later on.

Okay, thanks.

Yes, hey guys. This is Nick Goldman on for Mike thanks for taking our questions.

Earlier you guys mentioned that you expect revenue to grow sequentially in the fourth quarter. Can you guys just talk about the one or two drivers there that will help you guys grow sequentially?

Yes, I think that the fact that we are going to deliver most of the purchase order that we got from Japan. I mentioned the Indian market the total there we're going to deliver for the first time to the retail segment in this great country.

We also - I also mentioned the acceleration that we were having in the ATM and I have to say that I didn't get too many feedback from that, but we're going to reach by the end of the year almost 10,000 advance reader that we're going to install in the ATM machines worldwide. And this is a significant milestone by the way, because it's a huge jump compared to '16.

When doing '16 we were delivering something like a few hundreds. We were actually doing significant ramp up in '17.

And our forecast for '18 is even higher than that. Those are actually the key, let's say, or the engines that we are having for Q4.

And needless to say, the rest of the activities that we are having both in Europe and also in North America.

Got it. And then just in regards to the purchase order in India.

How many - over how many quarters will that be recognized? And then I guess can you guys tell us if there is any additional orders possible with that customer or no?

What we are going to present in India mainly during Q4 is just the opening. It's - I would say it's how to say it's almost a pilot, but it's a huge pilot over there.

And we didn't have such size pilot at least during my time. In any other place I have to say it's a significant deal although there it's considered to be a pilot.

And needless to say, that if everything will be okay we are expecting to accelerate the business probably very dramatically. And I have to say that three to four of those focus that we are having is the fact that we are stepping into the retail market for the first time.

Got it, okay. And then just last one for me, one of your customers just got acquired.

I guess how do you guys view that influencing demand?

I'm not sure that I understand the question. Can you repeat it?

Yes, one of your customers just got acquired, so, I guess, I'm just trying to get…

Okay. Honestly, I cannot say more than you know.

I was raising the PR yesterday like you. At the moment we are trying to collect the information from the field.

Give us some time and I believe that I will be able to speak about it in a different way.

Alright, fair enough. Thanks, guys.

Hi, Shlomi, good morning.

Good morning.

Hello, can you hear me?

I can hear you.

Okay. Regarding Japan, are you looking into any other areas beside the vending machines?

Again, the question was if we are looking what? Sorry?

Are you looking at any other areas such as convenient stores to sell your product in Japan?

Yes. Once the verticals that we are having and, I think, that I mentioned it previously is the kiosk in other words it's micro market.

And the convenience store by the way is part of the market vertical. We already selling to this vertical not in Japan, but the solution that we're delivering today both for the vending and also for the kiosk is very relevant for this vertical in Japan as well.

So, the reason I asked the question Shlomi, is because I understand that there is a push in Japan to make the convenient stores unattended?

They're trying to make everything unattended and yes, the answer is yes. It's part of the pipeline that we are having, and I believe that we will see also in this segment that we're having outside of Japan, we will see fruits also in Japan as well.

All right, thank you very much.

Welcome.

I just want to circle back on a couple of items, just strategically and how we think about the company longer term, obviously you've had some items go against you with existing customers and for whatever reasons we've had a lot of trouble kind of breaking out of that call it $4.5 million, $5 million, $6 million revenue run rate per quarter. Can you talk a little bit about the future, about 2018 and beyond?

When are we going to move from the $5 million or $6 million a quarter run rate to like an $8 million or $9 million or $10 million a quarter rate? And where is that going to come from, I think you offered some great color on the opportunities long-term in petroleum, maybe just on the consolidated company, the outlook for the consolidated company, maybe in 2018 just some high-level kind of color around, what you can do with revenue?

I think, as I mentioned again we're presenting growth year-over-year regarding your direct questions when we will ramp up the quarterly revenue to a level of I don't know $7 million to $9 million or something like that. It's a little bit early for me to speak about it.

But I'll say the following, we're now going to finalize, by the end of this month we will finalize our plans for '18 and the focus that we're going to present to our Board of Directors until 2020. We're planning to invest in few areas that I believe will take us to higher level or the average level that we're having today on a quarterly basis.

We're doing a lot of effort, and I think that we're in this direction to tell you that tomorrow morning it will be between $9 million and $10 million or between $7 million and $8 million. It's a little bit early to say, but needless to say that we're focusing all of our efforts into this direction.

I think, that I spoke with you about it previously. and I think it's not a question, if we're going to be there in this.

And needless to say, we're going to be there. It's a question of when.

And also, needless to say that we're doing all the efforts in order to be there as soon as possible. And I prefer to leave it like that, because few things that we're going to present shortly to our Board of Directors and following that we're going to take a significant decision that will support the company hopefully being in this direction.

I'm optimistic regarding this direction and I think that we will be there.

Great. What part of your business are you most excited about, as we sit here today?

It seems like there've been reasons to be excited about different parts of the business at different times over the past couple of quarters. As we sit here today, what is the biggest opportunity for you?

I think, both in fueling and also in payment, we've exciting activities, I think again, I don't think that all of you were able to touch enough the fact that 26% of our revenue is actually based on recurring revenue, this is dramatic. If you are looking on Q2 it was 18% we are now speaking about 26%, and it was even in my forecast I didn't see that the fact that we are changing the business model will be so fast.

I think that if I am going back to the previous question regarding the top-line of being between $7 million to $10 million, in the end of the day, the fact that we changed the business model in a dramatic way is going to take us to this level and I believe even beyond that. So, I know that the market is actually expecting always to a linear growth and everything should be yesterday, but I think that with all the obstacle that we have facing, with all the fact that we are stepping from a lot of accounts and activities, we are doing a great focus to so far and we will continue to do that.

Thank you very much for the color, I appropriate it.

Anytime.

Hi, Shlomi, how are you doing? Two quick questions, on the petro what's the model on - can you just go over that with us what the model how we are getting paid on that, is that per use, is that are monthly fee, how are we doing that right now?

And how is that can develop?

Okay, I think that, if I need to answer that the way that we were making the change also in the PetroSmart division. So, eighteen months ago we were selling solutions.

This was the business model over there it was very nice, very profitable, long-term relations, but we didn't have the most important element for me, and this is the recurring revenue. Today we are also generating recurring revenue out of this business and this is very important and needless to say that specially increase the sale.

So, I can tell you that in few accounts without mentioning them we are generating recurring revenue and basically, we are compensated per gallon. And this is significant because it's only the revenue that we are generating on a monthly basics in total related to the fact that we are having long tail with this customer and this is the most important thing for me.

So, yes both in payment and fueling today we are having our recurring revenue element.

Excellent. And then how this is developing in the U.S., just with U.S., India what's the rollout going to look like here in the U.S.?

So, we started, and we will continue also in '18 and still keeping the momentum in fleets and I think that compared to '17 during '18 our expectation is actually to double the business of our fueling business in North America. And hopefully in the second half of '18 we will be able to sell also to the retail market in North America.

Excellent. Can you also just touch on the fast-food chains that you are working with how that's going, how the growth looks there and how that rollout is proceeding?

Yes, so far, we are having already few hundred of installation over there, I am speaking about the full payment solution for the kiosk and basically during the current quarter we will continue in this direction. Not only the fast-food, but also [indiscernible].

Excellent. And two more question here.

When you are talking, I guess, Josh had asked the question prior and you said that there is a decision you guys are looking at can you elaborate on what that is at all, I guess, put the company on another footing or is that to be announced at a later date?

Not sure, I am not sure that I understand the question.

I thought you were saying something that will be presented to the Broad that there is a decision that was going to be made I don't know exactly what you were talking about I might have missed something.

Look on annual basis end of November we're presenting to our Board the entire annual plan for the upcoming year. So, there's a lot of exciting things that we're planning.

A lot of things that we want to establish quite soon, and I believe that after the Board Meeting that we're going to have by the end of this month I believe that I will be able to speak about a few things in more intelligent way.

Excellent, okay. And then lastly, I know the question was asked about the Cantaloupe and USA combination.

Would you say, and I know we have a great relationship with Cantaloupe is it likely or would the company like to start doing business with USA once again is that - I know we can't say yes, it's going to happen or not but is there something we would consider?

I cannot comment on that.

Okay. Okay, all right looking forward to the fourth quarter thanks, Shlomi.

Thank you.