Creative Realities - Earnings Call - Q2 2020

Transcript

Speaker 0

Good morning, and welcome to the Creative Realities Second 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 version 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 and non GAAP measures is included in our public filing. It is now my pleasure to introduce Rick Mills, CEO of Creative Realities Inc.

Speaker 1

Thank you, Will. Good morning, everybody. Thanks for joining the call. As I discussed on our first quarter earnings call in May, we anticipated that the impact of the COVID nineteen pandemic on CRI and the digital signage industry as a whole would be significant as the fundamental core of what our industry and CRI does is communicate and motivate consumers as they move throughout their day in an active society. Throughout the second quarter and still today in many parts of the country, society is not nearly as active.

There continues to be uncertainty about the reopening of many segments of our society, including education, government, sports, dining, retail, all have been impacted. Several of our key verticals have been impacted by the pandemic. These include our retail sector. That includes both banking and automotive. Entertainment, including large venues, stadiums, arenas, and movie theaters.

And finally, food service includes not only the quick serve restaurant, but also corporate or campus dining venues. During the quarter, we saw continuation of the trends that developed within our customer base in March. Suspension of current projects, delays in others, and finally, some cancellations of commitments to spend capital. Our entertainment vertical was particularly hit hard. While we have nearly 2,000,000 in quarterly contractual services revenues, Many of those customers were closed throughout the second quarter, and specifically the movie theater industry remains closed today.

Although there have been short term impacts to both our revenue generation and cash collections from segments of our customer base, we reinvested and doubled down on these relationships during the pandemic. We offer certain are offering certain short term deferrals or reductions in our subscription services, a move which we believe has helped to further solidify our position as a market leading provider. Despite the challenges faced in the second quarter, we generated revenue consistent with the first quarter. As a result of cost cutting measures we implemented during late March and throughout Q2, our operating expenses have been significantly reduced versus the first quarter. This is after consideration of certain discrete events, which Will Logan will address in his comments on the financial results.

Let's discuss the Thermal Mirror. We launched the Thermal Mirror at the April really to exceptional market reception. We worked tirelessly throughout May and June with our partner in reality to enhance features and functionality of the product and focused on our supply chain to ensure the availability of product. These were important steps to take as we now have several key differentiators with our solution. These include, number one, the lack of availability of competitors' products as they did not secure their supply chain in advance of marketing the product.

Number two, very important, our solution includes facial recognition software from a US based provider. While most, if not all, of our other competitors include facial recognition software supplied by Chinese companies, which have been blacklisted by the US government on May 22. Finally, our solution has the option of integration with mobile q and a question and answer technologies that can combine q and a screening with the temperature taking screening into one station or one solution. This solution, which offers both screening and temperature taking, has emerged as a best practice to help companies reopen their facilities and get employees back into the workplace. During the second quarter, we launched a substantial substantial trial program aimed initially at corporate enterprise customers with significant footprints throughout The United States and Canada.

Many of these trials have been ongoing and have expanded in scope since their launch as we introduced new capabilities and add ons, such as printer integration for printing up iPass the temperature sticker, digital signage integration with displays, access control integration for access into the building. These developmental achievements combined with the cloud integrated solution have proven to be the market leader at our price point. As we have entered the third quarter, we are seeing momentum build. As we announced over the past forty five days, all three of the major distributors of technology products that includes Ingram, Check Data, and SYNNEX have picked up the Thermal Mirror and are offering it to their many customers. In addition, all three have decided to distribute our Thermal Mirror SaaS offering to their customers.

Throughout the third quarter, we have seen week over week increases in purchase order commitments from customers and shipments of sold units. Momentum we expect to continue throughout the third quarter. Similar to our digital signage customer base, our mix of customers for this product includes enterprise corporations, k 12 and higher education institutions, some of the leading sports teams, entertainment venues, and finally, small and medium business. We believe this market continues to represent a significant opportunity for the company throughout the remainder of 2020 as we have positioned ourselves as a clear market leader in this space. As the product continues to evolve in the product offering and as business continues to reopen throughout The United States and Canada, we fully expect the Thermal Mirror to be a go to consideration for safe space solutions.

I will now turn this back to Will to discuss the numbers in detail.

Speaker 0

Thank you, Rick. I will now summarize our financial results for the three months ended June 3020 compared to 2019. Regarding our second 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 06/30/2020, a decrease of $5,700,000 or 61% as compared to the same period in 2019 and consistent with the 2020.

Hardware revenues were $1,600,000 for the quarter ended 06/30/2020, a decrease of $100,000 or 3% as compared to the same quarter in the prior year. Gross margin on hardware revenue was 19.1% as compared to 20.7% in the prior year. Services and other revenues were $2,100,000 for the quarter ended 06/30/2020, a decrease of $5,600,000 or 73% in the quarter ended 06/30/2020 as compared to 2019. Gross margin on services and other revenue was 73.6% in the quarter compared to 50.7% in the prior year. Managed services revenue, which includes both SaaS and help desk technical subscription services, were effectively flat year over year at $1,600,000 Gross profit was $1,800,000 for the 2020, a decrease of $2,400,000 or 57% compared to the same period in 2019.

Consolidated gross margin increased to 49.7% for the quarter from 45.4% in the same quarter in the prior year. This was driven primarily by a higher ratio of our managed services revenue to total revenue in the period as part of a reduction in installation services. Our operating loss was $1,600,000 in the quarter as compared to operating income of $500,000 during the same period in 2019. Net loss was $2,500,000 in the quarter ended 06/30/2020 as compared to net income of $400,000 for the same period in 2019. Net loss in the second quarter twenty twenty included a discrete non cash charge of $600,000 related to fair value accounting for the company's convertible special loan.

EBITDA was negative $1,700,000 for the three months ended 06/30/2020 compared to $900,000 for the same period in 2019. Adjusted EBITDA was negative $1,100,000 for the three months ended 06/30/2020 compared to $1,100,000 for the same period in 2019. As we have shown in the second quarter financial statements, the adjusted EBITDA was improved versus the first quarter approximately $800,000 despite flat revenue from the first quarter to the second quarter. I'd like to take a few minutes to expand further on a few items within our financial statements. With respect to our profitability, the PPP program was a loan that we received on March or in the April 2020, and it's been a success for our company.

We were exactly the type of company for which the program was created, and it has enabled us to continue to move our business forward during the pandemic. Our current calculations indicate that our PPP loan will be forgiven in full when the program is finalized and we submit our application. When you add back the forgiveness of the PPP loan and adjust for onetime accounting charges in the period, such as the the fair value accounting charge on our convertible loan, the company broke even. We've provided the discussion and walk from operating income to adjusted operating income in our earnings release. With respect to general and administrative expenses, the operating expenses for the 2020 is compared to the prior year.

Our sales and marketing expenses reduced by $200,000 or 39%, while research and development expenses reduced by $100,000 or 38%. Each of these were driven by a reduction in employee related expenses as a result of the combination of headcount reductions, salary reductions implemented for retained personnel, and a reduction in travel related expenses in the current year, including the elimination of participation in trade shows. We expect similar results for these expense captions in the 2020. General and administrative expenses were flat year over year on paper. However, when you look into the details, you'll see that the 2020, the company's employee related expenses decreased by approximately 600,000.0 as compared to the same period in 2019, representing a 45% reduction versus the prior year.

These reductions were offset by a $500,000 increase in the company's reserve for bad debt, primarily related to a customer bankruptcy that was filed during the 2020, and an increase of $200,000 related to deal and transaction costs associated with the company's entry into an at the market offering. Excluding the effects of these discrete events, general and administrative expenses decreased by $600,000 or 25% during the 2020. Finally, just to take a couple of minutes to talk about the debt on our balance sheet. During the second quarter, our term secured debt and convertible notes, which are approximately $6,500,000 held by Slipstream Communications, became classified as current in the balance sheet. Slipstream has been a great partner and supporter of CRI over the past decade, and we fully expect to extend the maturity of these notes prior to year end.

The financial statements for the six months ended also include a $700,000 noncash charge related to the fair value accounting for the convertible note. These charges are accounting related in nature and do not reflect actual cash due. We are actively working with Slipstream and other third parties to refinance this debt, and we do not anticipate this debt will be converted or paid as of 10/01/2020. The amended and restated seller note represents some debt from our acquisition of Allure Global Solutions from Christie Digital in 2018 and are also reflected as current. We have formally disputed these amounts in arbitration and anticipate resolution during 2020.

The company currently does not anticipate paying this note. Finally, as I noted, on April 27, we received approximately $1,600,000 under the Paycheck Protection Program as part of the CARES Act. PPP loans are eligible forgiveness, and we've been tracking and updating our forgiveness calculation biweekly. Based on our current forecast, we believe that this debt will ultimately be forgiven, but will remain classified as debt in the balance sheet until the forgiveness actually occurs. At this point, I'll turn the call back over to our CEO, Rick Mills.

Speaker 1

Thanks, Will. Great overview. I wanna discuss our view of the future and the trends we are anticipating and others that we're beginning to see. We believe that we have clearly weathered the worst of the COVID nineteen pandemic with respect to its impact on our business. And we're optimistic about CRI's opportunities with respect to our traditional digital marketing technologies and the immediate opportunity with respect to the thermal mirror solution.

CRI has remained an open, flexible, and transparent business partner to our vendors and customers, and we believe our flexibility and responsiveness during this crisis will contribute to our success as businesses reopen and markets stabilize. We believe the long term opportunity for both the digital signage industry and the CRI remain bright, and we look forward to supporting our customers in their pursuit to reopen as we move forward together. We stated on our first quarter call and we continue to believe that this pandemic will be an accelerator for digital change that was already underway. As we reopen our economy and the economy picks up the pace, it will move 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 believe we have a number of opportunities to participate in these changes in society.

We continue to expect industry consolidation in the digital signage space, particularly if stay at home orders or business closures continue into the fourth quarter. We have seen and heard from several of our peer companies and understand the challenges that many of our smaller competitors have and are facing in these difficult times. Finally, I do wanna compliment the team that I work with every day at CRI. The last few months have been some of the most challenging of my career, but they've also been some of the most rewarding as I have witnessed the effort the entire CRI team has put in to pivot our business in order to alter our market offerings to stay relevant to new and existing customers. CRI is grateful for your efforts and your commitment.

Speaker 0

Thanks. Great. Before we open the phone lines, we do have a few questions that have come into the IR at CRI inbox, so we will clear those and then open the phones.

Speaker 1

Rick, the first question is how many sales personnel do we currently have in the organization, and what does that structure look like today? Today, we have approximately 12 people involved in sales. We have four vertical, what we call subject matter experts that lead four pillars or vertical industries. One is in retail, one is in automotive, one is in QSR movie theater, and finally, our fourth subject matter experts is in stadium and large venue. Then we have an inside sales team that consists of about six, seven people that work with many of our customer base on an ongoing basis and deal with the day to day orders as they come in.

Speaker 0

Great. Thanks, Rick. So a few questions here on on Thermal Mirror. The first one is with respect to any updates on the FDA approval process and what does that look like for Thermal Mirror?

Speaker 1

The FDA approval process is a very complex one as many folks can imagine, and we are continue continuing the process of applying for five k five ten k clearance for our thermal mirror. Today, though, the FDA has released a waiver on it, so we are we are fully within compliance of the FDA requirements today. Great. Could you provide any update on the current status of the Samsung relationship and digital signage tie ins to the thermal mirror? Sure.

Samsung is, of course, one of our largest, most valued partners, and they're the largest supplier of displays in North America today. And we partnered with Samsung. They adopted our product. They have taken it to many of their large commercial customers. We have a dedicated team that supports Samsung's initiative in this area.

And so we have a number of customers who are adopting the thermal mirror because of the Samsung relationship. Finally, Samsung is actually a current customer of the thermal mirror, and we announced in a press release earlier this year that Samsung adopted it and today has installed many units, 50 plus units across many of Samsung's corporate facilities across America today.

Speaker 0

And then next question few folks have sent in just how many devices have we sold of the thermal mirror thus far?

Speaker 1

Well, we we've shipped over 1,200 units, a thousand here in The US. We finally shipped 200 into Canada that got landed within the last week. Some of those are at distributors who are then selling them and shipping them every day.

Speaker 0

K. I believe that's the last of the calls that have come in via email. We will open the phone lines here. Reminder, if you have a question, please hit the raise hand button now, we and will address any question. It appears that there are no, individuals on the line.

So I haven't responded to all inquiries received via email. We will now open, excuse me. We will now, close the call. Let me conclude by thanking all of our shareholders, clients, partners, and employees for their continued efforts, commitment, and support during these unprecedented times. This now concludes the CRI second quarter twenty twenty earnings call.