Rick Mills - Chief Executive Officer John Walpuck - Chief Operating Officer and Chief Financial Officer.

Analysts:.

Good morning and welcome to the Creative Realities 2016 and Q4 ’16 earnings call. All participants will be in listen-only mode during this call. A brief Q&A session will follow the discussion. Please note that there is no presentation on the screen if you have logged into the webcast via computer.

[Operator Instructions] Joining us on the call and in the room today we have Rick Mills, CEO; and myself, John Walpuck, Chief Operating Officer and Chief Financial Officer. Joining us remotely we have Alan Levy, Corporate Controller.

Before we begin please be advised that certain matters discussed on this call will include forward-looking statements regarding among other things future operating results. Such statements are subject to a number of risks and uncertainties.

Actual results in the future could differ materially and adversely from those described in the forward-looking statements as a result of various factors. Such factors have been set forth in the Company's reports on Form 10-K filed with the SEC. In accordance with regulation ST, this call is being made available to the public.

A webcast, replay, and transcript will be available on the company's website cri.com later today, and will remain available for approximately the next 30 days. It is now my pleasure to introduce Rick Mills, CEO of Creative Realities, Inc. Over to you Rick..

John, thanks, and first and foremost welcome to everybody on the call. Thanks for joining us. Obviously some of you folks care about our company and we continue to grow and thanks for jumping on the call. So I guess I want to talk a – start with just a couple of statements and recap some of the stuff that we have been working on for the last 15 months.

As many of you know, we did a merger in middle of October in 2015, and so we are now essentially 18 months into that and we are going to recap some of what we have accomplished in that time. First and foremost, I want to start with a statement that we are absolutely firmly on track, and I think our Q4 results of 2016 show that.

I would call our 2016 Q4 our breakout quarter just a long list of accomplishments in that quarter. Number one, record revenue of $5.5 million and the company hasn’t seen those kind of numbers ever. Number two, record gross profit of $2.7 million in Q4. So again never seen that before.

Record operating profit of approximately $200,000 and EBITDA of $567,000. So again continuing to grow the business. We actually were accretive in our cash and generated free cash of $339,000 into the system from operations. So the company really hasn’t done those things before. So it was a breakout quarter and we expect more of those in the future.

So, let us recap 2016. Number one, the company consolidated facilities – it transferred people and functions to locations that really made sense because we moved people geographically.

We moved functions geographically, and some of you maybe aware that we did relocate the operating distribution center and operations center out of New Jersey to Louisville, Kentucky. So that was accomplished. Number two, we eliminated many layers of infrastructure that was duplicate in some cases or just not necessary.

And so all of that hard work is behind us. Finally, we transitioned 100% of all of our internal and production systems to the Amazon Cloud. We are an Amazon customer, but all of our financials, our CRM, our service and our customer facing production content management systems or CMS are today no longer on any physical presence in CRI facilities.

They are located in the Amazon Cloud, and so we got that work done. Some other additional things, we really rebuilt the sales teams from the ground up. We brought in a fellow by the name of Jerry Reese.

Jerry was an industry veteran for many, many, many years and we hired him as the VP of sales, and so we brought Jerry into really lead the sales charge, and that was in July of 2016, and we are starting to see results of that now. We added sales assets, sales folks, really all around the country. We added in San Francisco.

We added another person in Baltimore and DC, the Washington DC area, and we added somebody in Atlanta, and finally we added somebody in Windsor, Canada, which is just across the river from Detroit, who handles one of our large automotive accounts. So we brought in folks.

Other accomplishments, we really restructured the balance sheet and we did a number of settlements on old outstanding debt, generated a million plus in accounting gains and ultimately generated cash savings of $1.7 million. As a side note, for 2017 we budgeted another million in accounting gains from settlements. So let us talk about 2017.

We announced Q1 of $6.2 million. We have already announced that. I think we announced actually somewhere between $6.2 million and $6.4.

Is that correct, John?.

6.2 and 6.3..

Got it. That is an increase of 254% or growth of 154%. We have given guidance for the year, organic revenue growth of 90%. That guidance I gave at a conference in January, last day of January, which ultimately equates to 26 million this year. Folks, we are off to a good start. And last but not least, we clearly expect to be profitable for 2017.

Our growth is real and sustainable. A number of reasons why, but there are several factors that I want you to reflect on. Number one, we own our own content management system. I don't have to pay license fees to anybody. So we own it. We are not a content management system company.

We are a digital marketing organization that happens to own our own content management system. So number two, our cost structure is absolutely a competitive advantage. We have spent 15 months fine-tuning and working on the optimal cost structure for our company. We are laser focused on our cost and we continue to be.

But our cost is absolutely a competitive advantage, and obviously as many folks on this call can see the significantly different gross margin. Our gross margins now are north of 60% because our cost structure is absolutely in line.

And finally, we expect throughout 2017, we will continue to become even more efficient as our internal systems give us more capability and bandwidth.

We brought on a lot of new internal systems, new CRM, new finance and accounting, and new service software that just gives us this capacity to increase our efficiency and our bandwidth for all of our folks. So we are pleased about that.

This combination of a low-cost structure and highly efficient systems, the combination gives us a compelling value to price offering for our customers. This is as simple as that. You know, we look at the US market. The US market for digital signage and screens continues to grow.

As a matter of fact, in North America the analysts all say that in the US we will add 2 million screens per year. You know, these systems are moving in the mainstream production for many of our customers. This is no longer – what we do is no longer I want to have that, but it is now I need to have that.

So I am going to look at the bandwidth of companies who can provide that because now it is a production system for my retail business, it is a production system for my wholesale business. Whatever business you are in, it is a production system, and so customers are looking, who has the scale and the national capability to handle by business.

I got to tell you, our opinion is the smaller competitors will be increasingly left behind. We continue to take market share and [Indiscernible] performance. So now I'm going to turn it over to John, and John why don't you go through the numbers in detail..

Sure. Thank you Rick. I now want to summarize our financial results for the year ended December 31, 2016 compared to the year ended December 31, 2015. so 2016 calendar year highlights, revenues increased approximately 20% to 13.7 million, growing by $2.2 million year-over-year.

As a footnote to our full-year results, please note that adjusting for the 2015 termination of an unprofitable customer, revenues increased 46% year-over-year. While revenues increased in 2016, we note that our cost of goods sold decreased 13% to 6.8 million, declining by approximately a $1 million.

Gross profit year-over-year increased 90% to 6.9 million growing by 3.3 million year-over-year. Gross margin improved to approximately 50% of revenue in 2016 compared to 31% in 2015. Net loss decreased 26% from 8 million to 5.9 million. We will talk little bit more about net loss and non-cash impacts when we talk about Q4 2016.

As Rick stated, regarding settlements in our balance sheet, we executed settlements with historical creditors, resulting in 2016 GAAP accounting gains of $1 million and cash savings of $1.7 million.

Further regarding our balance sheet in December 2016 and January 2017 an affiliate of Pegasus Capital Partners purchased all of our outstanding senior secured convertible debt from the original debtholders. The terms of the debt have remained the same.

What does that mean? It means approximately 43 million of senior secured convertible notes are now controlled by our largest equityholder and in effect are in friendly hands. In March of 2017, that same affiliate of Pegasus Capital Partners elected to extend the maturity date of the 4.3 million in debt.

We anticipate making some announcements regarding our debt in calendar 2017. we believe that our significantly improving financial performance puts us in a favorable position to address the debt in calendar 2017.

On a final note regarding our 2016 results, we note that we received a clean and qualified on our financial statements from our independent auditors. Now let us talk a little bit about Q4 ’16.

regarding Q4 ’16, we note that the MD&A section of our annual report on form 10-K provides unaudited 2016 and 2015 quarterly financial information data from the company’s annual and quarterly financial statements. We have also provided a reconciliation of GAAP to non-GAAP quarterly EBITDA for 2016 and 2015 in our annual report on form 10-K.

so let us talk about some highlights. Comparing Q4 ’16 to Q4 ’15, Q4 ’16 was simply a record quarter for CRI on multiple levels. Q4 ’16 revenues increased approximately 70% to 5.5 million, growing by 2.2 million. Gross profit increased 180% to 2.7 million growing by 1.7 million.

Gross margin improved to approximately 50% of revenue from approximately 30%. CRI generated an operating profit of approximately 0.2 million versus an operating loss of 1.2 million in the same quarter of 2015. We generated positive EBITDA of approximately 0.6 million compared to negative EBITDA of approximately 0.5 million in 2015.

CRI’s net loss for Q4 ’16 and Q4 ’15 was essentially the same, i.e. it was a loss of about $2 million. Let us talk quickly about some non-cash impacts, please note that there are two large non-cash expenses below the operating line for Q4 ’16.

One is a $1.6 million expense for a non-cash change in warrant liability, and number two, there is a 0.4 million charge for the non-cash amortization of debt discount. Adjusting Q4 ’16 and Q4 ’15 to eliminate those non-cash charges, i.e., an apples to apples comparison in both quarters, the 2015 loss decreased from 2 million to a loss of 1.9 million.

The 2016 loss decreases from 2 million to a loss of only $60,000. At this point I will turn the call back over to my CEO, Rick Mills.

Rick?.

Thanks John. I appreciate that. So just a couple of things as we wrap up here. I got to tell you folks that the future of our company and the future of the digital marketing industry has never been more exciting than it is right now.

I think everybody on this call can relate to the fact that screens of all shapes and sizes are going in everywhere, all kinds of form factors, whether it be touch-enabled, motion-enabled, but you are seeing screens pop up everywhere.

Omnichannel marketing is driving behavioral change in how companies, brands, and retailers are interfacing with their customers. And frankly we expect to continue to participate in this revolution as screens continue to go in.

We spend a lot of time in the enterprise customer space because these deals represent the highest value and the highest return. But remember the resources required to win and maintain these accounts are significant. That is why scale, stability and the staying power is so important. So look for us to focus on that.

As we have stated, it is my expectation that we will do some acquisitions in 2017. We have nothing to announce at this time other than we are aggressively looking.

Obviously any acquisition will depend upon returns, arriving at the best returns for Creative Realities and number two, our currency price, what is the price of our stock? But we expect to continue to do acquisitions and grow the business.

Now before we answer any questions, I want to take a minute and talk about the market and specifically address our shareholders. Well, those of you who have been following our company for a while, now you know that we have high ambitions for Creative Realities.

Members of the management team here participated – we built other public and private companies from start-up and early stages, the companies with hundreds of millions of dollars in annual revenue. We aspire to grow and develop CRI into a leading provider of digital marketing solutions. We think we will do that.

We believe we have the right team and the right business model to accomplish that objective. We believe the market for our stock will ultimately reflect our accomplishments and will continue to develop as we continue to execute.

We also believe we have the responsibility to communicate effectively with our shareholders, not only current shareholders but prospective shareholders and to do our part in this process. We plan to increase our efforts to better inform the market of our progress.

We will devote additional resources to increasing our exposure and awareness in the marketplace. As a management team, our primary goal is to drive shareholder value through solid and consistent growth. We expect to continue our recent growth and we will continue to keep the market informed as we progress.

So now, at this point in time I will turn it back over to John and let John run the Q&A. We may have received some questions via e-mail.

John?.

[Operator Instructions] Here is one question we received Rick, why are we confident in giving guidance today for the first time?.

Great question John. And the answer really is we have received a number of contractual commitments in 2016, and some of those we have announced, some we have not announced. But we have specifically today through large contractual agreements with customers that we expect to fulfill throughout 2017 and 2018. so we are very bullish as we continue to grow.

The second reason is we have added a number of sales resources, who are all bringing in a number of new customers. So expect to see us announce new logos throughout 2017. As everybody on this call should know, we are not going to win them all. We understand that. But we absolutely are going to win our share of new logos in 2017.

So we are extremely bullish..

Here is another question we have.

You have answered part of it, but it was – what more can you tell us about recent wins or pending major programs with certain clients in 2017?.

Again, I talked about two of them. I will go into a little bit more detail. One, we are rolling out a number of video walls in a large convenience and C-store chain. They are the number one corporate owned C-store chain in North America with approximately 8,000 locations.

And we have been engaged by a marketing company to install and service and support 3,000 of those locations. And that is ongoing.

Number two, we have a large new engagement with one of the top three auto manufacturers in America, and today we are in roughly 1300 or 1400 dealerships across America, and this is a refresh of that program and we expect significant revenue in 2017 and 2018 from that program..

Okay, another question.

How do you anticipate using your free cash in 2017 more for debt reduction or for acquisition purposes?.

A combination of both. Ultimately today we ended – in 2017, we significantly improved our cash position, so ultimately we will use free cash when and where it is appropriate to reduce debt and that is it..

One more, the new sales folks that you hired, do they have an incentive comp program, or they are [street soured]?.

No, they are all incentive-based. All of our folks are incentive based. All the same team, actually most of the company has an incentive base in one way or another, but all of our sales folks are incentive based. We continue to add more sales resources throughout 2017.

Look for us to add [4 to 5] in 2017 to continue to grow the geographic areas of focus around the country..

That is it..

Folks, I'd like to thank you very much for joining the call. I look forward to doing this again in May when we announce our Q1 results and everybody have a great day..