Creative Realities, Inc.

Good morning and welcome to the Creative Reality's first quarter 2020 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 ir at cri.com. 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-K 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 filing. It is now my pleasure to introduce Rick Mills, CEO of Creative Realities, Inc.

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 at 29%. As we entered the year, our management team had expectations to continue in a similar trend for 2020 and beyond. The COVID-19 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've 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-19 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, kickoff and move forward with current year projects, installations, upgrades, et cetera. 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 a 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 reduction of base salaries for our remaining personnel. And finally, suspending certain employee benefit programs, including the company's 401 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-19 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 third quarter of 2020, as our customers gradually reopen their businesses. However, there are some very positive events happening as we speak. On April 28, 2020, we announced the launch of our non-contact temperature inspection kiosk called Thermal Mirror with our partner InReality. 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, Rick. I will now summarize our financial results for the three months ended March 31, 2020 as compared to 2019. Regarding our first quarter 2020 results, we note that the MD&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 gap net income to non-gap quarterly EBITDA and adjusted EBITDA for the current and previous four quarters therein. Revenues were $3.7 million for the quarter ended March 31, 2020, comprised of hardware revenue of $1.4 million and services revenue of $2.3 million. This represents a 5.8 million or 61% reduction in consolidated revenue as compared to the same period in 2019. Gross margin on hardware was 28% in 1Q 2020 as compared to 14% in the first quarter of 2019. Gross margin on services was 52% in the quarter ended March 31st, 2020 as compared to 44% in the same period in 2019. Consolidated gross margin increased to 43.4% Thank you for joining us today. in the first quarter of 2020, a decrease of approximately $0.2 million or 11% as compared to the same period in the prior year. Gross profit was $1.6 million for the first quarter of 2020, a decrease of $3.7 million 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 $10.6 million and incremental reserves reported against our accounts receivable as a result of COVID-19 of $0.4 million in the quarter ended March 31, 2020, operating expenses remain flat at approximately $3.6 million for the three months ended March 31, 2020, as compared to the same period in 2019. Total operating expenses were $14.6 million in the quarter ended March 31, 2020, inclusive of the goodwill impairment charge, as compared to $3.6 million in the same period in 2019. Excluding the effects of the goodwill impairment in the incremental reserves in the quarter ended March 31, 2020, operating loss was $2 million for the three months ended March 31, 2020, as compared to approximately break-even 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 $13.2 million in the quarter ended March 31, 2020, as compared to a net loss of $0.2 million for the same period in 2019. Excluding the $10.6 million goodwill impairment charge in the quarter ended March 31, 2020, net loss increased $2.4 million compared to the same period in the prior year. EBITDA was negative 12.7 million for the three months ended March 31st, 2020, compared to 0.3 million for the same period in 2019. Adjusted EBITDA was negative 1.9 million for the three months ended March 31st, 2020, compared to 0.4 million 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 $10.6 million non-cash charge to record impairment previously recorded on previously recorded goodwill. As a result of the COVID-19 pandemic, we concluded the indicators of impairment were present and that a quantitative interim impairment assessment of our goodwill was necessary as of March 31st, 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 the COVID-19 pandemic generating increased uncertainty across our customer base 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 theaters, sports arena, and in the short term. These conditions resulted 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. Evaluation of goodwill is subject to a high degree of judgment, uncertainty, and complexity, and this is particularly true during the COVID-19 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 previous to perform, 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. Respect to liquidity, the company's cash on hand as of March 31, 2020 was approximately $2.1 million. On April 27, 2020, the company did receive a loan from the SBA under the Payroll Protection Program in the amount of approximately $1.5 million. As of May 14, 2020, the company's cash on hand inclusive of PPP funds was approximately $3 million. At this point, I'll turn the call back over to our CEO, Rick Mills.