Creative Realities - Earnings Call - Q1 2020

Transcript

Speaker 0

Good morning, and welcome to the Creative Realities First Quarter twenty twenty Earnings Call. All lines have been placed on mute to prevent any background noise. After the company's remarks, there will be a question and answer session. If you would like to ask a question during that time, please hit the raise hand button within the webcast control panel. Alternatively, questions can be submitted during the call via email to [email protected].

This call will be recorded, and a copy will be available on our website at cri.com following completion of the call. Joining us on the call, we have Rick Mills, chief executive officer, and myself, Will Logan, chief financial officer. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward looking statements. The words anticipates, believes, expects, intends, plans, estimates, projects, should, may, propose and similar expressions or the negative versions of such words or expressions as they relate to us or our management are intended to identify forward looking statements. Actual results may differ materially from those contemplated by these forward looking statements.

Factors that could cause these results to differ materially are set forth in our quarterly financial statements on Form 10 Q and in our annual report on Form 10 ks filed with the SEC. Any forward looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both GAAP and non GAAP financial measures. A reconciliation of GAAP to non GAAP measures is included in our public filings. It is now my pleasure to introduce Rick Mills, CEO of Creative Realities Inc.

Speaker 1

Thank you, Will. Good morning, everyone. Thanks for joining the call. CRI entered 2020 with tremendous momentum, substantiated by a four year period where the company had average top line revenue growth of 29%. As we entered the year, our management team had expectations to continue in a similar trend for 2020 and beyond.

The COVID nineteen pandemic has driven unprecedented disruption and volatility in the marketplace. As a result, our business has been sharply impacted, most notably through reductions in revenue as both anticipated and previously planned large scale capital expenditures throughout our customer base were either suspended, delayed until future periods or in these uncertain times indefinitely placed on hold. As we readjusted to the uncertainty of the global crisis, our first and foremost responsibility has been to ensure the safety of our employees and community. In response to the COVID nineteen outbreak and the guidance of government and public health officials, CRI closed all of its facilities in mid March, and all of our employees are currently working from home to continue to support the business. With respect to the first quarter, historically a significant portion of our revenue has always been generated in March, the third month of the quarter.

Much of our customer base have calendar year operating cycles. So January was finalizing the budgets, February, it's starting to roll out the projects, and in March, kick off and move forward with current year projects, installations, upgrades, etcetera. While we certainly had volume through the first two months of the year, it tends to be significantly increased as we move into March. During March, as we experienced material delays and suspensions in planned customer projects, Our senior leadership team took definitive actions to reduce operating expenses to protect the company against the significant reduction in short term revenue. First, our executive team voluntarily reduced their salaries by 20%.

Second, we made a number of personnel decisions including the following. Number one, suspension of all nonessential hiring. Number two, elimination of select roles throughout the organization via a downsizing. Three, temporary temporary reduction of base salaries for our remaining personnel. And finally, suspending certain employee benefit programs, including the company's four zero one k matching program.

Additional steps we have taken include the following. Working closely with our vendor partners to diligently manage and defer payments for outstanding accounts payable, negotiating the restructure and or deferral of our long term leases, suspending travel, and every other possible expense line items. In adjusting to today's dynamic and challenging environment, we understand that not all decisions are easy. However, we believe these actions demonstrate our discipline and focus on managing the controllable elements of our business. As we move forward through the next two quarters, we continue to expect lumpy revenue as we help our customers reopen their facilities.

As I discussed on our earnings call in March, the impact of COVID nineteen on the digital signage industry as a whole is significant as the fundamental core of what we do is communicate and motivate consumers as they move through their day in an active society. Currently, society is not active and for the short term, it is uncertain when normal will return. Three of our four key verticals have been impacted. Number one, retail, which includes banking and automotive. Number two, the entertainment sector, which includes large venues, stadiums and movie theaters.

Food service, including quick serve restaurants and campus dining venues. Our fourth vertical convenience stores, not so much. Our customers are evaluating their short term capital commitments including the immediate delay and suspension of ongoing and planned anticipated projects. We anticipate challenges in our core business throughout at least the 2020 as our customers gradually reopen their businesses. However, there are some very positive events happening as we speak.

On 04/28/2020, we announced the launch of our non contact temperature inspection kiosk called Thermal Mirror with our partner in reality. We are the exclusive supplier of the thermal mirror solution in The United States. We quickly pivoted the business shifting our internal resources to focus on this contextually relevant and timely solution to accelerate adoption across The US and assist companies in their efforts to get back to work. The initial reception for this solution in the marketplace has been strong and we are optimistic about its potential. While we believe this solution in our launch will be successful, we are currently in the pilot phase with a number of our current and new customers.

It is still too early to know whether this launch will be successful. I will now turn this back to Will to discuss the numbers in detail. Thanks,

Speaker 0

Rick. I will now summarize our financial results for the three months ended 03/31/2020 as compared to 2019. Regarding our first quarter twenty twenty results, we note that the MD and A section of our quarterly report on Form 10 Q provides unaudited 2020 and 2019 quarterly financial information derived from the company's annual and quarterly financial statements. We've also provided a reconciliation of GAAP net income to non GAAP quarterly EBITDA and adjusted EBITDA for the current and previous four quarters therein. Revenues were $3,700,000 for the quarter ended 03/31/2020, comprised of hardware revenue of $1,400,000 and services revenue of $2,300,000 This represents a $5,800,000 or 61% reduction in consolidated revenue as compared to the same period in 2019.

Gross margin on hardware was 28% in 1Q twenty twenty as compared to 14% in the 2019. Gross margin on services was 52% in the quarter ended 03/31/2020, as compared to 44% in the same period in 2019. Consolidated gross margin increased to 43.4% in the 2020 from 38.8% in the 2019, primarily as a result of managed services revenue representing an increased percentage of consolidated revenue in the period. Managed services revenue, which includes both SaaS and help desk technical subscription services, represented approximately 1,300,000.0 revenue in the 2020, decrease of approximately 200,000.0 or 11% as compared to the same period in the prior year. Gross profit was $1,600,000 for the 2020, a decrease of $3,700,000 or 64% compared to the same period in 2019, primarily driven by the reduction in revenue.

Excluding the effects of a non cash charge for goodwill impairment of $10,600,000 and incremental reserves recorded against our accounts receivable as a result of COVID-nineteen of $400,000 in the quarter ended 03/31/2020, operating expenses remained flat at approximately $3,600,000 for the three months ended 03/31/2020, as compared to the same period in 2019. Total operating expenses were $14,600,000 in the quarter ended 03/31/2020 inclusive of the goodwill impairment charge as compared to $3,600,000 in the same period in 2019. Excluding the effects of the goodwill impairment and the incremental reserves in the quarter ended 03/31/2020, operating loss was $2,000,000 for the three months ended 03/31/2020, as compared to approximately breakeven for the same period in the prior year. The operating loss was driven by a reduction in revenue in the period, partially offset by an increase in gross margin percentage. Net loss was $13,200,000 in the quarter ended 03/31/2020, as compared to a net loss 200,000 for the same period in 2019.

Excluding the $10,600,000 goodwill impairment charge in the quarter ended 03/31/2020, net loss increased $2,400,000 compared to the same period in the prior year. EBITDA was negative 12,700,000 for the three months ended 03/31/2020, compared to $300,000 for the same period in 2019. Adjusted EBITDA was negative $1,900,000 for the three months ended 03/31/2020, compared to $400,000 in adjusted EBITDA for the same period in 2019. I'd like to take a few minutes to expand further on a few of the numbers I've presented. With respect to our goodwill, our results for the quarter reflected a $10,600,000 noncash charge to record impairment previously record on previously recorded goodwill.

As a result of the COVID nineteen pandemic, we concluded the indicators of impairment were present and that a quantitative interim impairment assessment of our goodwill was necessary as of 03/31/2020. While our outlook for our industry in the long term remains strong, we've experienced rapid and immediate deterioration in our short term business as a result of COVID nineteen pandemic, generating increased uncertainty across our customer base in in most of our key vertical markets. The elective enforced closures of businesses across The United States has resulted in reduced short term demand for our services, which primarily assist businesses in engaging with their end customers in a physical space through digital technology. The elimination of public gatherings has materially impacted demand for products and services in our theater, sports arena and large entertainment markets in the short term. These conditions result in downward revisions of our internal forecasts on current and future projected earnings and cash flows, resulting in the non cash charge recorded in the period.

The valuation of goodwill is subject to a high degree of judgment, uncertainty and complexity, and this is particularly true during the COVID-nineteen pandemic when our visibility into future demand is further shortened. With respect to our reserve for bad debt, during March, we experienced reduced collections of accounts receivable as many of our customers were impacted by government mandated shutdowns and closures. These trends have continued since the reporting date, and we continue to work with our customers on payment plans and other options for collections of past due amounts. Due to increased uncertainty with respect to the operations of our customers and their ability to pay CRI for work previously performed, we substantially increased our allowance for doubtful accounts approximately $350,000 during the quarter. We remain confident that we can work with our customers to defer payments or generate payment plans that will allow our customers to pay for their services while they reopen their businesses.

With respect to our operating leverage, Rick highlighted previously many of the actions taken by our team in mid March to control our operating expenses moving forward. While our operating expenses were effectively flat for the first quarter year over year, we expect those costs to be significantly reduced in the second quarter based on our proactive approach. With respect to liquidity, the company's cash on hand as of 03/31/2020 was approximately $2,100,000 On 04/27/2020, the company did receive a loan from the SBA under the Payroll Protection Program in the amount of one approximately 1,500,000.0. As of 05/14/2020, the company's cash on hand inclusive of PPP funds was approximately 3,000,000. At this point, I'll turn the call back over to our CEO, Rick Mills.

Speaker 1

Thanks, Will. I want to take a moment and discuss our view of the future and the trends we're anticipating and others we are beginning to see. First and foremost, we believe the need for digital signage to communicate with consumers where they are is going to accelerate once society adjust to the new normal. Think of the many ways in which the little things are changing. For example, menus at restaurants.

No more. Think touchless screens and interaction with your mobile device. Restaurant venue retail occupancy monitoring through sensors, which will communicate through signage to control the occupancy of buildings. It it's clear that we are witnessing a sea change in the adoption of digital health solutions. Verbal visual interaction with displays as consumers move through the shopping venues and creative spaces.

Augmented reality, three d holograms will transform our experiences. We believe this pandemic will be an accelerator for digital change that was already underway. As we reopen our economy and pick up the pace, it will move much faster. We are firmly committed to our long term vision of being the go to enterprise provider of these digital solutions in The US and we believe we have a number of opportunities to participate in these changes in society. Let's talk a little bit about m and a and industry consolidation.

We do expect a significant fallout during the coming months. As we have discussed in the past, there are a significant number of smaller companies. We define those as companies with less than 10,000,000 in revenue that likely will not make it through these tough times and we believe that provides CRI with strategic opportunities. Their revenue, earnings, and valuations have plummeted. So we believe they have a choice.

Number one, they can attempt to hang in there and rebuild for the next number four, five years, which really presents a very uncertain future and who knows what that looks like. Or they can by joining forces with CRI, they can enjoy a much more predictable and positive outcome. We expect some of these tran transactions will happen in an orderly manner and some will knee will happen in an accelerated fashion as they simply held out for hope too long and need to make payroll and and find a safe harbor for their employees and customers. We expect these opportunities will begin to present themselves as early as the 2020. Time will tell.

Finally, I do wanna take one moment. I wanna compliment the team that I get to work with every day at CRI. In times of great uncertainty, the most critical skill is to be able to adapt as conditions change. This is kinda like business ambidexterity. Focusing on continuing in the current moment while you also build towards thriving in a future that will look different.

I am awed by the CRI folks and their relentless focus and energy to make it happen. Thanks.

Speaker 0

Thanks, Rick. We will now open the phone lines in order to respond to any questions. If you'd like to ask a question, please use the raise hand function within the webcast. Before we take the first call, it appears that there have been a few notes come in via email, so I'll address those first. We had one question come in with respect to the PPP and whether we believe that we would be able to retain these funds or need to return them.

You know, the the PPP program and the guidance from the SBA has been evolving. There has been pressure on certain public entities, who may have additional access to capital to return those funds. We believe that our current circumstances combined with the most recent guidance from the SBA, indicates that we will be able to retain these funds. As many people know, there's still question marks about exactly how the forgiveness of those funds will play out. We do expect that the majority of those funds will be utilized by our company on payroll and rent and utilities, areas that have been identified for forgiveness.

So we're still working through those forgiveness calculations, but we we, at this time, do expect to keep those funds. The next question that also came in via email was whether we had any official agreement between Samsung or any of our other vendor partners. And I think one that's maybe kinda related, Rick, that I'll throw to you was can you talk more about the interest that we've seen from the thermal mirror thus far?

Speaker 1

K. I mean, first, the question is agreement with our partners such as Samsung. And I assume that question is in conjunction with the thermal mirror. Yep. So the answer is one of our partners, Samsung, has embraced the thermal mirror, and we do look to jointly continue to sell that product to some Samsung customers.

The as we stated earlier in the call, the reception to the product has been extraordinary, and we do believe that there is the potential for a strong future with that product.

Speaker 0

Great. Thanks, Rick. Looks like the first call or question that we have through the call is from Brian Kenslinger with AGP. Brian, are you with us? Hey, guys.

Can you hear me?

Speaker 2

Yeah. Can you hear me?

Speaker 1

Hey, Brian.

Speaker 0

Hey, Brian.

Speaker 2

Hey, Rick. Hey, Will. Can you guys talk about the sales strategy of the Thermal Mirror? Will you use direct sales, leverage resellers to help contain your cost while increasing your reach? And I guess, assuming you are using resellers, what are they saying?

Speaker 1

Great question. We expect to use a three tiered approach. Number one would be national distributors, and we're in discussion with national distributors. Number two, referral program, which we have launched, and that's where we've reached out to influencers who are not necessarily in the, quote, reseller space, but they're influencers who can help us get to key decision makers in enterprise businesses, federal, state, local government across America. So we've launched that.

Third, there will be a direct reseller program that we release into specific verticals and all that is coming in the next number of weeks.

Speaker 2

Great. And then in terms you mentioned pilots. I'm curious how this works with these paid pilots. I assume to test the product, you need you need to be shipped. So I'm just curious how those pilots are being executed.

Speaker 1

Those pilots go from, you know, pilot to full implementation typically very fast. We shipped a number of units to you know, quantity one. Give me one or two units. You know, we shipped two units to a large transportation organization that has well over a thousand facilities in The US. And so they're gonna try them a week, ten days, two weeks, you know, that kind of thing.

And then we would expect they're either gonna accept the technology and, yes, this works for me or not. Many of these companies are still sorting through their own internal policies on how they manage through this unprecedented times. So most of the uncertainty or the the startup is really has nothing to do with the adoption of the product because they get the product and they go, this works great. This is fabulous. Now how are we gonna do this?

How are we gonna manage it with a thousand facilities? And that they're they're really churning through consternation as we speak trying to solve those issues.

Speaker 2

Great. And then, just so I as I think about it's not just companies. I would think it's local government wants to know where pockets of temperature. Maybe that's COVID. Maybe it's not r r.

So are there also government resellers or communications with government about something like this?

Speaker 1

Absolutely. One of our first resellers is a company that we have had a long standing relationship with. They they sell in the federal space and are in the process of putting the putting the device on a whole number of federal procurement vehicles, number one. Number two, I was on the phone yesterday with a with somebody who had was working with a elementary school. Right?

And they put it in there and it's taken all the these the kids' temperatures and now they're trying to figure out how they can take it to the next step. So we see this as being adopted, I mean, by many businesses, many, many government organizations, etcetera, because everybody has the same problem. The device we have works in conjunction and identifies the number one predictor of COVID nineteen, which is the temperature. And so we have the device that can provide that in a noncontactless environment.

Speaker 2

Great. And then can you go over the recurring revenue model with Thermal Mirror? Is it to my understanding, it creates some solid recurring revenue streams. And I think given the lumpiness of your digital signage business, this is a material difference for your investor base.

Speaker 1

Yeah. The the Thermal Mirror product is tied to recurring revenue, and the the ratio is about eighty twenty in terms of the sale price, and then 20% of ongoing is is a recurring revenue model. So we think it will build recurring revenue, quite significantly over the coming months. Again, we've gotta see some pilots go to rollout. So today, the answer is I don't have any.

But assuming it moves forward, we think it will clearly bolster our recurring revenue.

Speaker 0

Yeah. Brian, I would I would add, you know, the the incremental recurring revenue that's associated is our solution has a cloud hosted environment integrated with the hardware that's capable of, you know, capturing as much or as little data that the end customer wants to capture and consolidating that across one or many locations into centralized databases for, you know, HRIS, you know, time tracking, etcetera. So the the market will tell us over time what how they want to use the device, but that capability is there, and that's what the customer is ultimately paying for. And and there's a range of prices for that monthly ongoing depending on the level of capability.

Speaker 2

Yep. And then on the SaaS and managed services revenue, I'm curious how recurring that is. And I guess what I'm curious about is will you continue to bill this, or are customers putting those managed services contracts on hold or do they have the ability to?

Speaker 0

So, technically, you know, the contracts, they are locked in. Right? They tend to be three years initially, one year auto renewals. Most of those have been renewed or renew at the beginning of the year. We have had some inquiries and some short term requests for either deferrals of those fees or some form of credit.

We're continuing to work with our customers on a case by case basis to, you know, come to the right answer. But we are continuing to build those. They are contractually obligated, and and we hope to find the right answer with our customers. And you'll see kinda year over year, it's a pretty consistent number. We wouldn't expect that to really reduce over time.

And, hopefully, if we can be successful, with the thermal mirror, we can grow that number.

Speaker 2

Right. Lastly, more of a comment. As your reseller agreements materialize or large orders are placed, hopefully, you can announce them whether you can announce the client or reseller name or not. I think that would be helpful to understand the progress, and I wish you guys all the success in this tough time.

Speaker 0

Great. Appreciate that, Brian. Okay. It looks like we have another caller, and apologies if I mispronounced this. Quan Phan.

Is their hand raised? Quan, are you with us?

Speaker 1

K. We'll move on. We have another email from concerning about cash on hand and what does that look like for the future runway of the company. We believe our cash on hand and our AR collections and and ongoing revenue give us certainly a very long lead time. Any other questions?

Speaker 0

Let's take one more attempt at at, seeing if we can get Quan on the line. Quan, are you there? Okay. With no other questions coming through the call and no other hands raised, let me conclude by thanking all of our shareholders, clients, partners, and employees for their continuing efforts, commitment, and support during these unprecedented times. This now concludes the CRI first quarter twenty twenty earnings call.