Greg Falesnik - Managing Director, MZ North America Shlomi Cohen - CEO Assaf Cohen - CFO

Brian Kinstlinger - Alliance Global Partners Mike Latimore - Northland Capital Markets Kevin Dede - H.C. Wainwright

Thank you, operator. Earlier this morning, OTI released financial results for the first quarter ended March 31, 2018.

The release is available on the Investors section of the Company’s website at www.otiglobal.com. Please be advised that certain information discussed on this conference call may contain, express or imply forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other Federal Securities Laws.

Such statements can be identified by the use of terms such as may, will, expect, believe, intend, plan and other comparable terms. For example, forward-looking statements include statements regarding our expectation to continue growing sales and profitability, to continue to ramp up in ATM sales and deployment, to deliver cryptocurrency features that will make adoption easier and smoother, expected revenue increases in certain segments, adjusted EBITDA and expected margins and revenues, momentum and growth, initiatives, our expectations regarding future product launches and growth into new markets, our expected future deliveries and installed base, and our expectations regarding our outlook and opportunities.

While forward-looking statements reflect good faith, belief and best judgment based on current information, they are not guarantees of future performance or results. They are subject to known and unknown risks and uncertainties, and factors including those detailed from time to time in the Company’s filings, periodic reports, and registration statements filed with the SEC.

OTI assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. The full Safe Harbor provisions are set forth in the earnings press release we issued this morning.

OTI’s CEO Shlomi Cohen is your host today and he will introduce the rest of the team joining him on the call. With that I will turn the call over to you, Shlomi.

Thank you, Greg and thank you to everyone joining us on today’s call. The first quarter of 2018 marked yet another quarter of continued execution for OTI.

Our focus for the future is all about growth, which we continue to demonstrate. Not only that we show in the first quarter revenue growth of 46% compared to the first quarter of 2017, but we continue to grow the recurring revenue portion which now accounts for 24% of our total revenue.

We also ended the first quarter with $10.5 million in cash and cash equivalent which position us nicely to remain self sufficient while providing us with a flexibility and resources to invest in our sales growth. But before going further, I would like to turn the call over to our CFO, Assaf Cohen to walk us through some financials for the first quarter.

Assaf?

Thank you, Shlomi, and good morning, everyone. Before the market opened today, we issued the results of our first quarter ended March 31, 2018 in a press release.

A copy of the release is available in the Investor Relations section of our website. Revenues in the first quarter of 2018 increased by 46% to $5.9 million compared to $4 million of revenues for the first quarter of 2017.

The increase is mainly attributed to an increase in retail and mass transit ticketing segment sales in the United States and Japan. In the first quarter of 2018, retail and mass transit ticketing revenues were $4.5 million or 77%, petroleum revenues were $940,000 or 16%, and MediSmart revenues were $390,000 or 7%.

Looking at the first quarter of 2018, the Americas accounted for $2.2 million or 38% of total revenues, Europe accounted for $1.7 million or 29%, Africa accounted for $890,000 or 15% and APAC accounted for $1.1 million or 18%. Gross profit for the first quarter of 2018 increased by 40% to $3.1 million or 53% of revenue compared to $2.2 million or 55% of revenues in Q1 2017.

In the first quarter of 2018, operating expenses totaled $3.4 million compared to $2.9 million in the first quarter of 2017. Net loss from continuing operations in the first quarter of 2018 totaled $295,000 or negative $0.01 per share compared to a net loss from continuing operations of $782,000 or negative $0.02 per share for the first quarter of 2017.

Now, turning to our non-GAAP results. We use adjusted EBITDA from continuing operations, a non-GAAP metric as we believe it provides a useful indication of our operating results.

Positive adjusted EBITDA in the first quarter of 2018 totaled $114,000 compared with an adjusted EBITDA loss of $309,000 for the first quarter of 2017. The first quarter of 2018 marks our second consecutive quarter of positive adjusted EBITDA after ending the full year of 2017 with positive adjusted EBITDA for the first time in the Company’s 28-year history.

We view these as a remarkable achievements or efforts to focus on higher margin recurring revenues as well as our strength across all business units. Please see today’s earnings release on our website for further details about these non-GAAP metrics including a reconciliation of adjusted EBITDA to our comparable GAAP results.

Now, turning towards the balance sheet. Cash and cash equivalents and short-term investments on March 31, 2017 were $10.5 million, this compared with $10.1 million of cash and cash equivalents and short-term investments on December 31, 2017.

Our total debt balance as of March 31, 2018 was $4.9 million compared to $5 million as of December 31, 2017. This completes my financial summary.

For a more detailed analysis of our financial results, please reference our quarterly report on Form 10-Q, which we plan to file by May 15, 2018. With that, let me now turn the call back to Shlomi.

Thank you. As I noted in my opening remarks, we began 2018 in a strong position enabled for and successfully leverage our positioning to grow revenue 46% year-over-year.

Today, I’m proud to announce that our efforts in the last three years have proven very successful, having posted a positive adjusted EBITDA in the first quarter of ‘18 as well as for the full year ‘17, which as Assaf mentioned, was the first year of positive adjusted EBITDA in the Company’s 28 years history while continuing to reduce debt and grow revenue. Contributing to this was our first quarter revenue growth by 46%.

I would like to dig a little bit deeper into what drove revenue during the quarter and year as well as the areas of focus moving forward. Revenue growth and more specifically recurring revenue growth, which has been strong has been a core area of focus for OTI and is also a major strategic focus for the balance of 2018 and beyond.

We are pleased to announce that our recurring revenue streamed and now accounted for 24% of revenues in Q1 2018, up from 20% in the prior quarter. Our strategy of moving from being a product company to a company the utilizes software and offers complete turnkey solution is now paying off.

This strategy was designed to provide us with a stable customer base with predictable revenues at much higher margins making the Company significantly more valuable. As part of this focus, we have also worked to bring on some top talent to our sales and marketing teams.

In our automated retail division, we have made tremendous progress in several categories, I will catch on a few. First, Japan continues to be a very attractive opportunity for OTI.

While the Japanese market can be difficult to enter with new technology, we have made tremendous progress. In 2017, we delivered more than 5,000 FeliCa certified payment system under a three-year letter of intent.

In the first quarter, we announced an additional 2,000 cashless payment system purchase order from Japan. We expect additional order to follow.

Another key growth area for the Company in the automated retail space is ATM, where we continue to increase sales and deployments around the world. During 2017, our ATM sales went up dramatically from 1,800 systems in 2016 to more than 10,000 systems in ‘17, an increase of over 5 times.

In March, we announced that we received a purchase order for an additional 8,000 systems for the Smart ATM market. Clearly, our customers are very happy with the ATM specific reader product we have developed.

Moving forward, over the course of 2018, we expect to see a continued ramp up in ATM sales and deployment. As an innovative company, we are always looking to add our capabilities, ultimately allowing for enhanced experience for both our customers and the end users.

To that end, we have made efforts to invest some of our resources for the introduction of cryptocurrency capabilities across our solutions which we believe in the network fit for the automated retail vertical but also across other as well. I’m pleased to announce that we have completed and launched our cryptocurrency payment solution for automated machines and micropayment market, which is a simple, easy to use, full secured method and tackles the significant challenge of cryptocurrency in automated machines and micropayment.

This groundbreaking payment solution provides, high-speed, low fee transaction while also solvency global currency exchange issues that may arise from using crypto currency as a form of payment. To the best of our knowledge, this is the first and only cryptocurrency payment solution on the market today for automated machines and the micropayment market.

Although this cryptocurrency solution may take time for customer adoption and generation of meaningful sales, we believe this new product offering will add a great value for our shareholders and contribute to OTI’s growth over the long term. Moving to our fueling division, we have been pleased with the growth experienced in this segment and expect it to continue being a driver of revenues as we move through 2018.

Our fueling division’s provided OTI high margins and has continued to grow. In this quarter, we grew revenues 15% in this segment compared to the same year ago quarter.

Now, before providing my closing remarks, I would like to open the lines for Q&A and will turn it back to the operator. Operator, please?

So, as you’re reaching profitability, how do you weigh increasing your investment to drive accelerated top-line growth versus your desire to turn and then grow your profitability? Which is a higher priority as you look forward in the near-term?

This is indeed a challenge, but here today, we’re trying to utilize almost every cent that we’re generating in order to invest in our sales and marketing activities. We’re doing step by step.

Needless to say that any available resources that we’re enabling today, we’re injecting in our top line. And the idea is to continue accelerating these activities as much as possible.

But again, we’re today utilizing almost every available cent in order to promote our topline.

Yes. So, just to characterize that over the next 12 months or so, even as revenues grow, you’re going to be marginally profitable, even though you have the ability to be more profitable just as your expectation is right, so that you down the road be more profitable.

Is that right?

Correct.

And then, my other question is, as you’re investing in your products and your sales teams or solutions, can you prioritize kind of where that incremental investment dollar goes, which solutions are maybe the top priority and which ones are secondary, right, as you’re weighing the percentages of where money should go?

Okay. We have few major segments and not only segments but also geographies that we are investing in.

I think that in 2018 ATM will continue to be one of our revenue generators. And this is on the vertical level.

On the geographic level, needless to say that Japan, and by the way also Russia, it’s become today more interesting market for us, it’s a huge market. And we can see that over there there’s a lot of doors opening now for OTI, and we are considering to certify our product according to the Russian mill [ph] certification.

And needless to say that the fuelling, this is also something that still being our -- part of our major activities globally. Again, I can mention the entire verticals, but those are actually the major one in ‘18.

So, in ‘18, are you talking about revenue growth or are you going to, just to be clear, increase your investments? If you’re increasing sales force and improving the solutions, ATM is where you’re investing resources in.

And then geographically, Japan and Russia is where you’re investing resources and solutions, is that right?

In all the activities we’re investing regarding ATMs, needless to say that we’re investing in order to accelerate the amount of sales that we are having in Russia. The investment is a little bit different; it’s related more to the infrastructure.

We already recruited, for example, [indiscernible] and from the other end, we are now starting to evaluate the entire activities that is needed for the mill [ph] certification. So, it’s different investment but in the end of the day, this is part of our annual investment that we’re doing in ‘18.

Great. Company is at a much more solid footing than a year-ago.

Thank you.

Thanks.

I guess, just on the ATM market, can you just elaborate on that a little bit? How many customers do you have, what’s the end geography there where you’re getting the most traction?

And I think, in the past, you talked about maybe even doubling at least ATM volume this year that’s still a thought?

I think, that in ‘18, we’ll continue to see growth in the ATM verticals. This is -- I don’t want to say almost obvious and clear, but according to our plan and according to the focus that we’re having in the ATM vertical, this is the direction.

I think that we started ‘18 quite good with our purchase order, as I mentioned before of 8,000 systems. And we’re actually working globally.

We’re working with an ATM manufacturer that I am not able to mention its name, but it’s a multimillion dollar company. And we don’t know always by the way where they’re installing our systems, because we’re actually channelizing the entire activities through this ATM manufacturer.

And then, in the first quarter there, how many units did you sale? Can you just give me a sense of the volumes that you are selling on a quarterly basis here?

You are referring to the ATM vertical?

No, just total units that kind of go through the hardware line there.

First of all, I don’t have the data in front of me. But, we have ay to consider if we want to make it public or not.

At the moment, we will keep it as is.

And then, is the thought that you’ll sort of remain EBITDA positive on a quarterly basis going forward here?

I’d say the following. I think that our goal is to present second year with a positive adjusted EBITDA.

To say that it will be -- during the entire four quarters that we are having in ‘18, I’m trying to be careful with that because as I mentioned previously in our other quarterly meetings that there is a seasonality and there is some kind of bumpiness in this activity. But, on annual level, I’ll say that we will present -- I believe that we will present positive adjusted EBITDA.

This is our goal.

And then, just last on the first quarter. How is the linearity of sales throughout the quarter, meaning -- did you have a lot in the last month of the quarter or how is your linearity trending overall on a quarterly basis?

I’m not sure that I understand the question. If you can, try again, please?

Yes. In terms of just the sales throughout the quarter on a monthly basis, January, February, March, or sales heavily backend loaded or was it relatively equally distributed by months and quarter?

It is difficult to say because we are not analyzing the stream of the purchase order that we are having on a monthly basis. We are doing it on a quarterly basis.

If I need to guess, I’ll say that the majority of our purchase order, we are receiving in the second half of the quarter. But, this is a guess.

If you want, we can check it out later, and I can share it with you.

I guess, just last. The DSOs have been trending down, which is good.

What do you think is a normalized DSO range for the Company?

What do you mean by DSO?

Day sales outstanding?

I don’t think that we have such kind of data. We are not doing it according to this structure, as far as I know.

We’re not doing that. We are not analyzing it according to this.

So, I was wondering if you could speak a little bit to backlog, give us some working trends. How has the business in Poland and Japan changed backlog since you talked about yearend?

So, in Poland -- I think that in Poland, we are having a very nice and positive progress over there. And when we analyzed the activities over there, we saw the growth of -- a significant growth compared to the previous year.

And I have to say that even it over performed compared to our plans end of last year. So, all in all, there is a positive progress in the Polish subsidiary.

And I would say more than that, they are actually now expanding the activities to other countries in the Eastern part of Europe. So, this is regarding Poland.

I think that over there we will continue to see more and more activities. And after a lot of investment that we were doing previous year, in the last two years before ‘18, we’re going to see better results compared to the previous year.

So, this is our forecast regarding the Polish activities. Regarding Japan, Q1, we had positive one and this aspect we delivered more than 200 systems.

We continue by the way working with our partners with billing system inside the Japanese market. And we’re expecting to continue to see a more purchase orders coming from this market.

It’s challenging but we’re still positive regarding this market.

Can you speak to now, how the equipment sales there will help generate recurring revenue?

Look, in all of our divisions today, as part of the changes that we were bringing the last year, we’re actually generating recurring revenue. It’s relevant for payments, it’s relevant for the ticketing and also for the fueling.

In fueling, as I mentioned previously, we’re generating our compensation per gallon. This is part of the sales strategy that we’re having in the last 12 months.

In payment, due to fact that we became to be a one stop shop for the vending and kiosk operators, and we’re having a full solution that includes software, hardware, telemetry and other services, this is something that we’re generating per machine per month. And needless to say, ticketing for mass transit, it’s -- most of our activities after the infrastructure investment is based on recurring revenue.

And the contact that we’re having in ticketing for mass transit is until 2022 and 2023. It’s that we’re actually improving by increasing the recurring revenue and I believe that we will continue to increase our recurring revenue.

Okay. So, the contracts that are tied to the Japanese sales and the sales in Poland and in Eastern Europe are all connected to software upgrades and payment processing, to just to be clear?

Also in Japan, we’re generating recurring revenue with the fact that there is a payment purchaser in place and also from Japan something that we delivered in the first day but today we’re having it and we’re generating recurring revenue. Yes.

So, last question for me is kind of open ended on cryptocurrency solution. Can you talk about how you plan on marketing it and selling it?

And whether or not it’s going to be integrated in your terminals or partially sold separately or licensed separately as well? And then, lastly, it’s confusing for me to understand how in that process you’re able to -- I mean, aside from just selling it as a solution, how you’re able to participate in the -- I guess, in the processing aspect, given that the idea behind cryptocurrency is to minimize those transaction costs?

So, if you could just kind of maybe walk me through an example how you see it being implemented, maybe that would help.

I would try. So, first of all, we have to -- a lot of investment that we were doing during ‘17 and beginning of this year we were actually presenting a cryptocurrency solution for the automated machines and for the micropayment market.

Basically, we were able to tackle the most challenging things that related to cryptocurrency, related to automated machine. The two biggest challenges that we’re having over there is the fact that the transaction time is relatively slow and the other thing is related to the fees.

If you’re speaking about Bitcoin and you’ll try to pay with Bitcoin in one of the vending machine, assuming that it will expect it, the transaction time can take up to 10 minutes and no one is going to spend in front of a vending machine 10 minutes in order to get something. This is one.

And the second thing, the average fee in Bitcoin is something around 30 bucks. So, needless to say that it’s making irrelevant.

And we’ve tackled those two major issues by developing some kind of algorithm and system that reduced the fee to really minimum, even less than credit card, existing credit card that you’re familiar with. And the second thing we were able to do, we were able to present a transaction that is similar to a magnetic stripe.

So, we’re saying about less than three seconds. That’s the development that we are making.

Now, we are actually able to -- this is to the other question that you are having. We are able to integrate it in our system and we are able to integrate it also on other system as well.

It’s a question of integration and further development. The idea is that the new technology that probably we’ll present next year, it will be integrated.

And it’s not -- will not be something that we are adding to the existing technology. But basically today, with all the readers and telemetry system that we are having, we can implement the cryptocurrency solution and we can implement it also on other system, meaning not OTI system as well.

So, I hope it answered all your questions.

Yes. It certainly helps.

So, can you offer a timeline, I guess, on how you plan on getting it to market and when we might see sales of the software?

The idea is to -- we are now looking for digital wallet as well, because we need to be about full solution. And I believe that during Q2 -- Q3 and Q4 we will be able to complete and to commercialize the entire solution.

This is our plan. And during 2019 with a new reader and telemetry that we are going to present to the market, it will be all integrated.

Thank you. I’d like to add that throughout next few months, we expect to remain active in our investor awareness activities.

One example is that we will attend the forthcoming Ladenburg Thalmann Technology Expo on May 31st in New York. If you are interested in setting up a meeting, please contact our IR firm MZ Group.

In closing, we have seen strong operational execution in the first quarter and expect 2018 to be a breakout year for On Track Innovations. As a pioneer and leader in the cashless payment solution arena, we fully believe our technology will continue bringing tremendous amount of value to our industry while resulting in predictable, high-margin recurring revenue for the Company and great value for you, our shareholders.

In conclusion, we thank you for your continued support. Thank you, and thanks for your attention.