Thank you, operator. Welcome to On Track Innovations 2019 First Quarter Conference Call.

I would like also to thank management for hosting this call. With us on the call today are Mr.

Shlomi Cohen, CEO and Mr. Assaf Cohen, CFO.

Shlomi will provide some of the recent key highlights and Assaf will briefly review OTI's financial performance for 2019 first quarter. Following the prepared remarks, we will then open the call for the question and answer session.

Please be advised that certain information discussed on this conference call will contain forward-looking statements. They can be identified by the use of terms such as may, we expect, believe, intent, plan and other comparable terms.

While forward looking-statements reflect good faith belief and best judgment based upon current information, there are no guarantees of future performance. They are subject to unknown to known and unknown uncertainties and risk factors including those details from time to time in the company's fighting with the SEC.

OTI assume no obligation to update any forward-looking statements or information which speaks as for their respective dates. A full Safe Harbor provision are set forth in the press release we issued this morning.

And with that, I would now like to hand over the call to the Company's CEO, Shlomi Cohen. Shlomi, go ahead, please.

Thank you, Ehud. Welcome all and thank you for joining us today.

As we discussed during the last earning call, our first quarter of 2019 was weak from the revenue standpoint. The lower sales we experienced were mainly due to the impact of 10% U.S.

tariff on Chinese manufactured products which started in Q3 of last year. This impacted our product sales to many of our customers.

And it became clear last year that our sales will be impacted, we began the process of shifting production out of China to another manufacturing zone, the Philippines, where there is no impact from U.S. tariffs on imports.

I am pleased to say that as of the end the first quarter we had successfully completed the process. I recently returned from the new production facility in the Philippines and it was up and running as of the beginning of second quarter.

I, therefore, believe that this short-term issue is finally behind us. While the recent lower revenue levels were indeed significant short-term negative for us at OTI.

The slowdown was temporary and expect a return to revenue growth already in the second quarter and beyond. There are also few aspects of the results which we are indeed pleased about which paints a more positive picture and we believe will benefit us ahead.

First, the recurring portion of our revenue out of our long-term strategy continued to grow increasing by 12% on an absolute basis compared with the previous quarter and we expect that general trend of ongoing growth in recurring revenue will continue in the quarters ahead. As these continues, we will enjoy the more predictable growth that it will be provide us with in their quarters ahead.

Giving parts, the higher level of recurring revenue as well as our focus on higher margin product sales our gross margin benefited in the quarter jumping significantly to 55% compared with 48% last quarter. Therefore, we see that the ongoing increase in our recurring revenue levels together with the improvement in the gross margins provide us with an improved platform for growth ahead as the business began its recovery in the second quarter and increases from thereon.

On the sales front, at the beginning of April, we announced a 6,000 readers order for advanced payment system for use in Russian rail ticketing system. Russia remained a long-term growth market for us in 2018.

We already delivered 11000 advanced contact less readers to the retail self-service market in the region. In summary, it has not been an easy six months.

However, the challenge -- the challenges we faced I firmly believe are now behind us and the continued progress we have made on building recurring revenue as well as improvement to the gross margins better position us going forward. I look forward to our return to revenue growth in the coming quarters.

With that, I would like to hand over to our CFO, Assaf. Please go ahead.

Thank you, Shlomi. Before the market opened today, we issued the results for the first quarter of 2019 in a press release.

A copy of the release is available in the Investor Relations section of our website. I will be covering some non-GAAP metrics including adjusted EBITDA from continued operations.

We believe this provides a good understanding of our ongoing performance. Please see the earnings release on our website for further details about this non-GAAP metric including reconciliation of adjusted EBITDA to our comparable GAAP results.

In addition, as you know, we announced the sale of MediSmart in December 2018. The results of MediSmart are therefore included as discontinued operations and all the prior period information has been classified to confirm with the current period presentation.

Revenues in the first quarter of 2019 were $3 million. This is compared with $5.5 million in the first quarter of last year and $4.5 million in the fourth quarter.

As Shlomi explained, the lower level of revenues was due to the impact of import tariffs of product manufacturer in China affecting sales to many customers. We took steps to mitigate the tariff issue which were completed at the end of the first quarter of 2019.

In addition, the revenues were impacted also by the lower level of orders from the Asia-Pacific region. In terms of breakdown of where revenues were derived for the first quarter, retail and mass transit ticketing revenues were $2.2 million or 73% of sales and patrolling revenues were $0.8 million or 27% of sales.

Looking at geographic breakdown in the first quarter, the America is accounted for $0.6 million or 19%. Europe was $1.7 million or 57%.

Africa was $0.6 million or 19% and APAC was $0.9 million -- I'm sorry, $0.1 million or 5%. Recurring revenues in the first quarter accounted for $1.3 million which is 43% of total revenues.

This is compared to $1.3 million or 23% of total revenues in the first quarter of last year and $1.2 million or 76% of total revenues in the prior quarter. Gross margin in the first quarter was 55%, a solid improvement over the 52% reported in Q1 last year and 48% reported in the prior quarter.

In the first quarter of 2019, operating expenses were $3.1 million versus $3.4 million in the first quarter of last year and $3 million in the prior quarter. Net loss from continued operations in the quarter was $1.6 million.

This compares to $400,000 loss in the first quarter of last year, and $862,000 lost in the prior quarter. Net loss in the quarter was $1.7 million or loss of $0.04 per share versus a net loss of $333,000 or loss of $0.01 per share in the first quarter last year.

And net income of $533,000 or positive $0.01 per share in the prior quarter. Now, turning to our non-GAAP results.

Adjusted EBITDA in the first quarter of 2019 was a loss of $1.1 million compared with an adjusted EBITDA loss of $104,000 in the first quarter of last year and adjusted EBITDA loss of $471,000 in the prior quarter. Looking at our balance sheet, OTI remains in a strong position with very low debt.

At March 31 2019, cash, cash equivalents and short-term investment was $4.9 million in short and long term debt was $0.5 million, giving us a net cash position of $4.4 million. At yearend 2018, we had $5.9 million in cash and equivalents and $0.3 million in debt and net of $5.6 million.

This completes my financial summary. For more detailed analysis of our financial results, please refer to our quarterly report on Form 10-Q which we plan to file by May 15, 2019.

And now, I'd like to open the call for Q&A. Operator?

Thank you. I want to look beyond the second half of this year and if we look out to what 2020 and 2021, is $25 million annual revenue a good number for 2020 or what do you think?

Higher or lower?

I believe that it will be higher. Maybe one thing that will be a key factor for our activity is -- not only for the second half of let say to the last quarter and also the coming years ahead.

The fact that we actually presented two weeks ago and during Nama -- the NAMA show in Vegas. This is actually the biggest event for automated retail machines our state-of-the-art technology TRIO-IQ that going to answer the demands that are presented by the FDA and also requested by many of the kiosks and vending players in the market in the worldwide markets.

And this is something that I believe is going to support our sales in the coming years. So therefore 25 million and the fact that we are going to do recovery on our revenue following the production shift should take us to this number and even higher than that.

Good. Thank you.

Good morning. Actually, good afternoon in Israel.

Thanks for taking my questions. Shlomi if I could.

You mentioned that you showcase the TRIO-IQ product at the NAMA show in Vegas last month. I was hoping you could provide a little more detail on how the FDA regulations might actually be beneficial to sales of this product going forward.

Yeah. First of all, let's see what was actually the major request.

The FDA for long time is actually requesting from the vending operators and not only I would say automated retail machine. This should be the right term.

To present the nutrition fact the calorie for each product when you're actually choosing product in the automated retail machine. Let’s say just for the sake of it, if you’re going to a vending machine and your choosing for example a Coke.

The idea is that the buyer would be able to see that the calorie level of each product before is actually pushing the button and he is buying the relevant product. So how we are going to do that.

We came out with a very powerful product called TRIO-IQ that actually consolidate the reader -- the credit card reader and the telemetry unit in one device when the entire font of the product is actually touchscreen and we are able to present a relatively huge amount of data regarding the relevant product. And not only that, when the machine is actually sleep you can run commercial.

This is another element that we are ready for hotel. We of course, having a longer set of features in this product such as camera for QR codes and coupons.

And we have a proximity element that we are able to identify when the potential buyer is actually approaching the machine and even before he is approaching the machine we are able to inject to the audio and video promotion. And there is few other features by the way that are going to increase the revenue per machine.

And this is actually the reason that I was saying that this is going to be one of our gamechanger for the coming years. Needless to say that the ramp up will be a step by step.

And the meetings that with the air during the NAMA show was very positive and we were able to set up a long list of meetings with potential accounts that we are not working with them today.

Okay. So this product is ready to be shipped, its already -- obviously showcased...

In Q4 it will be -- it will be available for commercial delivery.

Okay. That's what really setting up for the 2020 growth that you had mentioned prior.

If I could get in to the manufacturing from China to the Philippines. I'm not sure if you can actually quantify on this or how that might have impacted your first quarter sales and if do you see any potential impact from this move to show up in the second quarter at all.

I would say the following. First of all, I want to be very careful but I will say that we definitely can see acceleration in our revenue in the coming quarters, definitely in Q2 compared to Q1.

To tell you that we are going to close the entire gap that we actually created in Q1, the answer is no. Because I want to be totally transparent with the market.

But on the other hand, we can see a positive momentum that we are starting to gain and I believe that this year we will see some kind of linear growth quarter-over-quarter. And this is actually the sign that we are actually stepping out from this negative event.

Needless to say, that we are investing heavily now in our front side of the business in order to make sure that the acceleration will be even faster.

Okay, great. That's good to hear.

And I was hoping that you could provide an update on the 6,000 payment systems you mentioned for Russia. Are they still on track?

I think it was the second quarter, this quarter delivery. And I was wondering if you could quantify the revenue from what you expect from this in the second quarter.

We believe that -- first of all, in the second quarter we will continue to see a growth in the Russian market. We definitely don't think that the purchase order that we got so far for the 6000 systems in H1 is the final one for this year.

As I mentioned before in the beginning Russia is actually one of our strategic market. And we definitely see where we are going to see our growth -- our business in Russia also in the second half.

All in all, OTI is actually positioned in the Russian markets at this point of time in very positive place, not only for the ticketing that we mentioned before but also for the ATM as well.

And in regard to your partnership with Puma Energy, is iFUELGUARD product. Is that still expected to launch in the second quarter I believe it was mentioned on a prior call of press release?

And is there any talk about further expansion of this product into additional South African market?

Yes. First of all, in South Africa, this is so far the biggest market that we are having for EasyFuel technology.

One of them -- I can say that -- I want to say the name of the account but I'm speaking about the major energy company that we are working with them for a long time and we are generating with them with the EasyFuel technology our recurring revenue as well. And I believe that we will continue to see growth in this part of the world and also in the coming years.

I believe that's also in their '19 and '20 South Africa will continue to be one of our major market for the EasyFuel technology.

That's great to hear. And I know you mentioned that your gross margins were up.

Obviously, they were higher. A greater percentage of your revenue coming from recurring but the product gross margins they were down they did drop to 20.4% in the first quarter.

And I know with the manufacturing shift that complete, should we anticipate gross margins returning to the mid 30% range.

I think I'm not sure that I understand the question because the gross margin that we were earning in Q4 was 48%. The gross margin that we are earning in Q1 is 55%.

I'm talking about the product gross margin so the sales volume there. The gross margins I see there were actually 20.4 -- I mean it dropped significantly from last year's first quarter.

So, I know typically you usually have it in the mid-30s. I'm just trying to get an expectation of what to anticipate in Q2?

Are we -- do you feel that now especially what is the shift into the Philippines we should look at gross margins and volume more volume with the 30% -- mid 30% range?

Okay. So my mistake.

Yes. The answer is positive.

We expect that the gross margin for that will go up in the second quarter. I think that's part of the reason that we were facing this negative impact on our gross margin -- on our product gross margin was mainly related to the fact that we were having we were actually facing them the production shift.

And I believe that from Q2 you will see also acceleration in our gross margin as well.

Understood. That's what I expected.

That is really -- that shift actually impacted not just the level but the shift itself had an impact on it. Okay.

And just one quick last question I don't want to take up the whole call here but the first quarter results that's in the books you have your current backlog expectations for Q2 and beyond. Do you believe for the full year that On Track will actually be able to achieve top line growth?

Because I know we're looking at -- in the first quarter revenue was really down about $2.5 million. So looking at the whole year should we anticipate positive growth for the full year?

I mean what you have on the books now?

It's like you were actually listening to our internal discussion in OTI in our management. But to give me few -- let's say I think that by the -- by the end of the six months we will be able to be in a position to present their more reliable forecast regarding the entire year because we just step out from this -- from this negative event that we were facing during Q4 and Q1.

So, at this point of time, it may be little bit early to forecast the entire year but we are doing quite a lot of steps in order to be in a position of presenting growth. But in order to be on the safe side I preferred to postpone my focus to end of June beginning of July.

Okay. Fair enough.

I understand. Thank you once again Shlomi for your comments.

Thanks. Just to be clear you're saying that you expect to see punctual growth in the second quarter, now getting back to year over year growth.

Is that correct?

Yes.

Okay. Got it.

And you said that the supply chain was the impediment to revenue last couple of quarters. Did those orders basically just go into backlog or -- and so you have a little more visibility because of that?

Look I would say that we have today much better visibility for the coming quarters compared to the beginning of this year or even compared to a Q4. And when you're looking in Q4, Q4 was not so bad.

It was below our expectation but I think that the major negative impact was actually due in Q1. This was actually a very weak quarter for us.

But this is actually behind us.

And when you get back to scale on the hardware product what kind of gross margin should we think about there now that you are in the Philippines and China. Is there much of a difference from once you get back to scale.

I think that in some way there is some kind of misunderstanding regarding the product gross margins because we are actually trying to calculate it in a different way. And I think that you actually taking the cost of sales and you're actually dividing it with I don't know with what.

And this is not the way that we are looking on that and I will explain why, because we are actually looking on the entire package that we are selling to the customer because not forget that when we are selling the full solution and this was actually part of our strategy of moving from being a product company to a solution company we actually -- we started to generate our recurring revenue. Now in our case in OTI approach is we are trying to inject as much and more solution.

In other words, we are trying to inject as much as more product to the market because the products are actually generating for us the recurring revenue. So, you can look on the fact that we are actually injecting products or hardware but this is not only our colleagues attached to services and also to software, we are actually generating the recurring revenue without doing that we are not able to generate the recurring revenue.

So, we are not doing the split. So when we are looking on the total gross margin that we are generating is going up and by the way it will continue to go up.

I'm not saying about Q1 that it was a onetime event but I am actually looking on the entire strategy that we are having in order to increase the gross margin and by the way when you're looking on Q1 one thing that is very important to emphasize is the fact that we continue to implement our strategy. And when you're looking on that we actually went up from 26% of recurring revenue to 43% recurring revenue and this is outstanding by the way.

Despite the fact by the way that we were having a low level of service. But even in absolute number not only in a percentage level also in absolute number we actually took the recurring revenue up.

So we are still keeping the positive -- the very positive momentum that we are having -- with our recurring revenue and therefore with our gross margin.

Thanks.

Sure.

Yes.

Thanks. Thanks, Shlomi for taking my call.

Would you mind just diving in a little bit on the TRIO-IQ? Are you -- do you think you've got some competitive differentiation from some of your -- from some of the other manufacturers?

I mean you are just at NAMA. You think it's I guess how can you explain how it would be difficult for other manufacturers to match your FDA requirement.

Okay. So basically, I'm not saying that it will be difficult to other competitors to match the FDA requirements.

But this is not only related to the FDA, it's also related to other needs that they unattended payments market is actually generating such as the cure or close proximity. The fact that you need to generate more revenue per machine and we're able to do that with HDMI that we -- HDMI technology that we integrated on our TRIO-IQ.

And when you're looking on our set of features, we definitely presenting competitive position compared to the other players in this market. And this is something that we are actually walking on that for the last 18 months, and I believe that at the moment that it will be commercially available to the market.

I think that you will see the advantage of this that we are actually presenting compared to others. I think by the way if you're taking the entire players today in the market and you are generating a competitive analysis.

Well you know a quiet confidence that we are actually at least I'm saying please in one level ahead compared to the best player in this market.

Okay. Okay.

Can you talk a little bit about the selling price? And how it's compares.

I mean if you had -- was curious about what the top line impact might be. And what would prevent some of your current customers say for instance 6,000 orders from Russia why would that customer want that product and not wait for this one.

Okay. So the TRIO-IQ is actually a very high end product and it's actually related to the fact that if you want to consolidate or if you're actually taking the decision of buying the entire solution meaning the telemetry the machine to machine device.

And today, we are having it in telebox and gobox and you need to readers well, meaning you need the entire solution together plus the entire set of features. Definitely its relevance.

Now where it's most relevant. It's relevant when you are actually approaching kiosk micro market.

This is very relevant and here we definitely have a huge advantage compared to the other players in these markets. If you're taking the Russian case, although the idea is to generate some kind of validators to the -- for the mass transit.

And the product is only contactless because all of they're in them and relevant vertical of the mass transit they are doing only contactless transactions but they don't need the entire package they don't use the magnetic stripe and they're not using contacts only contactless. Okay.

This is something that we see a little bit less in the U.S. market that's still most of the transaction is actually done by magnetic stripe, okay.

But again I'm saying when you are looking on the fast growing markets of the kiosk the payment kiosk in the U.S. market and not only in the U.S.

market and the Japanese market and also in Europe the technology that we are actually presenting put us actually in the front of this market.

Okay. Are you -- do you still have payment settlement?

In your crosshairs is that something you're still considering targeting?

What do you mean by payments settlements?

Well, integrating the transaction with a credit card company itself and a bank.

Yes, we are doing that. We are doing that with credit card with 11 with AID with six payment with all the giant in this market.

Yes, we are doing that.

Okay. So that falls into your recurring revenue.

Last question for me. Are you considering white labeling this the TRIO-IQ, is that still plan?

Of course. The answer is positive, yes.

Okay. Thanks very much, Shlomi.

Appreciated.

Thank you. See you soon.

Yeah. Operator, please.

Operator, looks like we don't have any more questions. We can move to the closing statement.

Thank you. On behalf of the management of OTI I would like to thank you for your continued interest and long-term support for our business.

I look forward to speaking with you in next quarter and updating you on our progress. Thank you for attendance.

Have a good day.