Good morning and welcome to the Creative Realities Inc. Second Quarter 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions] Alternatively, questions can be submitted during the call via email to ir@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, CEO; and myself, Will Logan, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include 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 and non-GAAP measures is included in our public filing. It is now my pleasure to introduce Rick Mills, CEO of CRI..

Thank you, Will. Good morning, everybody. Last quarter we announced Q1 is our best quarter ever, and now we get to use similar language again. Q2 results show the ongoing improvement across the entire organization. Thanks to the strategic reorganization of our sales and marketing team along with the talent we onboarded through the Allure acquisition.

We are participating in some of the largest highest quality customer opportunities in the market. Our operational improvements and financial discipline had enabled us to be very competitive while maintaining our gross margins.

We are now achieving the scale necessary to compete well for national accounts in the verticals that we know well, in particular, at QSR, branded retail, and large venue, including sports venues, etcetera at this moment. As many remember, we acquired Allure Global in November of 2018 and the integration of Allure is now complete.

All customers have transitioned and are now serviced by our -- the CRI network operation center, here in Louisville. They all receive invoices from CRI and are in transition. I want to thank all the CRI and Allure employees across the country who showed a willingness to pitch in and make this integration a success.

I'm proud to be working alongside such a great group who believe in our turnkey client-first approach to develop, developing and implementing innovative customer experiences across the country. Thank you for your effort.

Our progress thus far in 2019 sets us up well for our targets for 2020 and beyond, as we expect to continue to grow revenue significantly and enhance earnings at an even faster rate. Our current operating infrastructure is at a point where it can handle revenue growth with minimal incremental overhead needed.

This is the reason we continue to be focused on a consolidation strategy to accompany our organic growth results. And we are currently in talks with multiple potential acquisition candidates. I am cautiously optimistic that we can continue our growth trajectory and win market share within this multi-billion dollar industry.

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

Thank you, Rick. I'll now summarize our financial results for the quarter ended June 30, 2019, compared to 2018. Regarding the second quarter of 2019, we note that the MB&A section of our quarterly report on Form 10-Q provides unaudited 2019 and 2018 quarterly financial information derived from the company's annual and quarterly financial statements.

We have also provided a reconciliation of GAAP net income to non-GAAP quarterly EBITDA and adjusted EBITDA for the current and previous 4 quarters therein. Revenues were $9.3 million for the 3-month period ended June 30, 2019, an increase of 2.1 million or 30% compared to the same period in 2018.

Hardware revenue decreased approximately $1.2 million or 42% in the second quarter of 2019. This compared to the same period in the prior year, driven by a $1.7 million hardware-only project in the second quarter of 2018, which did not recur in 2019 partially offset by an increase in hardware sales to other customers.

Gross Margin on hardware revenue was 20% in second quarter of 2019 as compared to 35% in 2Q 2018 which was driven by the same large one term hardware-only sale in 2018. Services and other revenue grew approximately $3.3 million or 77% in the second quarter of 2019 as compared to the same period in the prior year.

Gross margin on services and other revenues increased to 51% in the second quarter of 2019 from 48% in the second quarter of 2018.

Managed services revenue which includes both SAS and help desk technical subscriptions services represented approximately $1.6 million of revenue in the second quarter of 2019, an increase of $1.1 million or 211%, as compared to the same period in the prior year.

Gross profit was $4.2 million for the quarter, an increase of $1.1 million or 37% compared to the prior year. Gross Margin increased to 45% in second quarter of 2019 from 43% for the same period in 2018, driven primarily by the aforementioned mix of hardware and services and other revenue.

The company achieved operating income of $0.5 million during the second quarter of 2019 as compared to operating breakeven in 2018.

General and administrative expenses increased $0.5 million to $2.4 million in second quarter, as compared to the second quarter of 2018 made up of $0.2 million in incremental stock compensation expense and $0.2 million of incremental rent expense associated with the acquisition of Allure in November 2018.

EBITDA was $0.8 million for the second quarter of 2019, compared to $0.5 million for the same period in 2018. Adjusted EBITDA was $1.1 million for the second quarter of 2019, compared to $0.4 million in the same period in 2008.

A couple of other highlights from the quarter; on May 10, 2019, we reached settlement of the Allure transaction for networking capital claims, resulting in a cash payment to us of $210,000.

In addition, in closing the networking capital claims the seller accepted collection risk for one acquired receivable in the amount of $666,000 which was net settled through the amended and restated seller note. As a result, the outstanding principal balance of that note as of June 30, 2019, has reduced to $1,637,000.

At this point, I'll turn the call back over to our CEO, Rick Mills..

Thanks Will, great update. Before we go to Q&A, I'd like to take a few minutes to highlight some of what we have accomplished in the first half of the year and some additional objectives we are focused on throughout the balance of the year. Number one, we executed a new agreement with FCA.

For many of you know that FCA has been a very long time long-standing customer of our company. And we executed a 3-year agreement. Some million dollar a year in SAS fees for use of one of our applications and more importantly, we transitioned that application off of FCA servers on to our servers, our AWS platform in the cloud.

So we now not only host the application, we manage it and it drives $1 million dollars a year in SAS revenue. We had a new board member Steve Nesbitt. Steve Nesbitt has been of the digital signage, digital advertising, digital out of home and digital merchandising industry since the late 1990s. Mr.

Nesbit's private advisory firm, Creston Woodtrail Holdings, has worked in an advisory capacity with companies both inside and outside the digital media market for the past 9 years. Steve brings a wealth of knowledge. We're really truly excited that he has joined our board.

We expect him to help us in M&A, potential customer introductions and when the time is right, international expansion. So Steve, welcome aboard. Additionally, launch of our new CMS or content management system clarity. This is now in production currently being deployed to select QSR restaurants, as we discussed in our last call.

It is our expectation to have 2,000 plus players migrated to the clarity solution prior to year-end so that that project is well underway. As I have stated previously, it is our belief this is the single best platform for the QSR industry really bar none, supporting indoor kiosk, outdoor with order confirmations, really all configurations in QSR.

We talked on last quarterly call about the seat exhibition that we were participating in July the Daytona Speedway. Well, we're here to tell you that was a tremendous success. We actually sold out the luncheon.

We had 42 people standing for a moment, these attendees are all the owners, general managers of the large venue, exhibition type facilities all across the country. We presented 3 topics; first, topic was immersing the modern fan. How retailers engage millennials and Gen Z. That presentation was by Beth Warren.

Beth Warren is our subject matter expert on retail and she led that session. The next session was the digital journey through the lens of sponsorship. Scott Werlein senior -- he is our subject matter expert in stadium and large venue and Scott lead that session. And then finally, activating concessions through the use of our product UCI.

That's our universal content interface and that was presented by Robert Glass. Robert is our subject matter expert in QSRM concessions. So tremendous success, lots of activity around the seat engagement with potential new customers. So it is clear we're bullish and excited as we continue to execute throughout 2019.

To summarize our feelings and where we are, we are an organic growth-oriented company with a very nimble agile structure which continues to execute and outgrow our industry peers. There is no question 2019 would be a record year, not only in top line revenue but in bottom line even [ph]. We are 100% aligned, our shareholders.

The board and management continue to own up a majority of the company's equity, and as management team we are focused on creating value for our shareholders. With that let's open the phone lines..

[Operator Instructions] It appears that we have the first question from Andrew Chong [ph] at AGP. Andrew, welcome to the call. Andrew, are you there? Okay, we'll move to the next call. Question appears to be from Bill Sutherland at the Benchmark Company. Bill welcome to the call..

So anything that should be called out from the back half of '18 that would impact comps in the next two quarters this year?.

I think that -- you know, if you look the back half of 2018; I think second quarter of 2018 was our strongest quarter for the prior year. So I think there is a bit of a reduction in the second half of 2018, so we see those as head comps that we certainly expect to lapse and nothing specific within those periods that give us the specific challenge..

Okay. And then on the deferred revenue line, I was just noticing that big change on the cash flow on the cash flow, Will. So you're -- just provide us a little color on the implications from the business -- the highlights..

Yes. Rick has talked about in some prior calls, there was some work sold throughout 2017 and early 2018 where the company had some revenue recognition challenges and hurdles to meet; those were achieved throughout the first half of 2019, and those amounts were recorded into revenue in this first half.

We expect that maybe that will come in into the P&L throughout 2019, and kind of -- most that has happened in the first half of 2019, so that's simply a flip that we were anticipating in the current year..

And would you -- is deferred revenue at all helpful in also understanding business that you might be adding, that -- it would be right, you know, to give us a sense of the business to -- that could drive revenue in future quarters?.

Yes. So we have customers who pay annualized contracts or 3-year contracts in various formats. Some that pay on a month-to-month basis, some that pay quarterly, and some that pay annually or even tri-annually.

So, while there is some visibility in those deferred revenues represent cash collection that have been made but not yet recognized, they are not perfectly even in their projection i.e. some of those will turn in a quarter, some will turn over a 3-year period. The majority of those tend to be within a 1-year annual period..

Okay..

But they do not encapture all the assessed [ph] revenue that will come in on a month-to-month basis because those are being paid monthly and never hit deferred revenue..

Of course, right.

So -- and then, on the FCA agreement, that sounds like a real positive; how incremental is that to what you're already been doing before them?.

It's -- I will tell you probably about 30% of it represents a price increase, right.

The other we had been doing at adhoc month-to-month getting a PO here, getting a PO there; and this just allowed us to take that service that we have been providing at a significant increase in price, contractually lock it in for 3-years and then move it onto our servers so that we could better manage it at a lower cost..

Yes, that said Bill on aggregate, the way that that turned out from the numbers standpoint, it's probably about $0.5 million increase in what we see from those that specific incremental service to FCA compared to the prior year..

Now this doesn't relate does it to the big implementation you've been -- I know piloting at a few dealerships’ south dealerships -- this is unrelated to that, right?.

Unrelated, this is in relation to the software sales support tool that we provide and host for CA..

Okay.

And then last, Rick any it sounds like you're not going to be talking about providing the sort of [inaudible] into the back half the way you all did in first half, if you could give us a sense of, kind of, way where you think things stand at the moment with? I know you got a lot of [inaudible] wide and that would be helpful thanks?.

Sure so I mean I can tell you that we believe that the back half will show significant growth over the back half of 2018. But we're still we got a lot of irons in the fire, a lot of -- we currently are involved in 3 to 5 projects that we are in final details.

I should say with customers in these projects went from, as lowest $3 million and that's high from $28 million, and that's one project. so we got four or five of these and so they are a little unpredictable, but we feel good about good about our year-over-year growth, it's still going to be very significant so that's what I'll tell you..

Okay, that's helpful. Thanks, guys. Appreciate it..

Thanks, Bill..

It appears at this time that no other questions have been submitted, no other hands raised. Let me conclude by thanking all of our shareholders, clients, partners, and employees for their continuing efforts, commitment and support, as we work together to transform CRI into the leading brand in digital marketing solutions.

This concludes CRI's second quarter 2019 earnings call..