Good morning everyone and welcome to the Creative Realities Third Quarter 2019 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. [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 the 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. 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. Our Q3 results demonstrate our ability to consolidate acquisitions and flush out excess duplicative costs contained within those acquisitions. This ongoing improvement is apparent across the entire organization and clearly apparent across our P&L.

As always, I want to thank all of the CRI employees across the country as these employees continue to show a willingness to pitch in make this company a success and help us be the leader in the industry that we believe we are. So again, thank you CRI employees for your effort.

We continue to experience significant growth in our managed services revenue, the pure gross margin expansion in the customers we acquired as part of the Allure acquisition. With the enhanced purchasing volume, we were able to enhance the gross margin in this customer segment from approximately 16% to almost 50%.

I expect Will Logan will discuss this in greater detail as he goes through the numbers. In addition, I would point out the ability for us to generate operating income at this revenue level, as we strategically position the company and to be opportunistic as we evaluate not only customer opportunities, but also acquisitions.

We continue to reiterate our vision as a consolidator in the industry. We continue to demonstrate the scalability of our business. And finally, we continue to exercise pricing discipline as we evaluate additional acquisition transactions. I want to take a moment and address ongoing changes to our board of directors.

First and foremost, we extend a grateful farewell to Alec Machiels, who has been our Chairman for a number of years and Alec felt this would be an appropriate moment to step down, and pass the baton on as CRI interest the next period of expansion and growth. Alec as you transition out, we welcome, we wish you nothing but the best.

With that, I want to take a moment to welcome Dennis McGill, who joins our board effective immediately. Dennis brings 35 years of financial and operational enterprise leadership to our company. Dennis is currently CEO and Chairman of a private equity backed energy efficiency company, Phase Energy Change based in Asheboro, North Carolina.

When I first called Dennis, and I inquired number one about his level of availability, Dennis is a busy guy. And number two, his interest. And so we began a series of calls over and visits over a period of time and we talked about the areas where his expertise and his experience could add value.

And as we ended those series of conversations, I remember the one comment Dennis kind of ended with he said, Rick, this could be fun. Well, I echo that comment and I look forward to Dennis joining us. I look forward to his energy and knowledge as we continue to pursue our dual strategy of organic growth and acquisitions. Welcome aboard, Dennis.

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 quarter ended September 30, 2019 compared to 2018.

Regarding the third quarter of 2019 results, we note that the MD&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.

There we have also provided a reconciliation of GAAP net income to non-GAAP quarterly EBITDA and adjusted EBITDA for the current and previous four quarters there in.

Revenues were $6.7 million for the three-months period ended September 30, 2019 bringing year-to-date revenue to $25.5 million representing an increase of $8.3 million or 48% as compared to the same period in 2018.

Hardware and services revenues increased in the quarter approximately $0.5 million and $0.2 million respectively, or 34% and 5% respectively during the period.

Managed services revenue, which includes both our SaaS and help desk technical subscription services represented approximately $1.9 million revenue in the third quarter of 2019, an increase of $1 million or 126% as compared to the same period in the prior-year.

The company achieved an operating income of $0.1 million during the third quarter 2019 as compared to an operating loss of $0.5 million in the third quarter of 2018.

General and administrative expenses decreased $1.1 million to $2.1 million in third quarter 2019 versus third quarter 2018, primarily driven by about $800,000 of incremental stock comp expense in the third quarter of 2018.

Net income was $0.2 million during the three-months period ended September 30, 2019 compared to a net loss of $0.9 million for the same period in 2018. Earnings before interest taxes, depreciation and amortization was $0.8 million for the third quarter 2018 compared to breakeven for the same period in 2018.

Adjusting for one-time gains on settlement of obligations and stock-based compensation in both periods, adjusted EBITDA was $0.4 million for the third quarter 2019 compared to $0.9 for the same period in 2018. 2019 year-to-date EBITDA was $1.9 million as compared to a loss of $0.9 million for the same period in 2018.

The year-to-date adjusted EBITDA was $1.9 million as compared to $0.4 million for the same period in 2018. I'd like to take a couple of minutes to just expand further on a couple of the numbers that are presented.

First of all, with respect to revenue, the revenue generated by customers acquired as a result of the Allure transaction represented approximately $1.2 million for the third quarter of 2019 and $3.7 million for the nine-months ended September 30, 2019.

Excluding the revenues generated by Allure customers, CRI revenue for the nine-months ended September 30, 2019 was approximately $21.9 million, representing an increase of $4.6 million or 26.7% as compared to the nine-months ended September 30, 2018.

We continue to believe that CRI has positioned our brand as a leader in the digital signage industry as evidenced by our continued strong growth in top line revenue.

While the Allure revenue in 2019 has lagged out of the 2018 on a pro forma basis, gross margins have increased significantly due to a higher contribution of recurring managed services business, approximately 15% in the current year versus the 16% gross margin shown in the 2018 pro forma information previously disclosed.

This has resulted in the higher operating profit contribution in 2019 despite lower revenue. We expect this division to return to growth in 2020 and beyond. With respect to our operating leverage, we spoken in the past of our belief that profitability can accelerate quickly at scale in the digital signage industry.

We believe that our current year results continue to validate that thesis, I’ll highlight three items on this topic.

First, I would highlight the operating income for the year-to-date period has grown $2.9 million on an increase of $8.3 million in revenue, which indicates 36% of the incremental revenue dropped operating income and continue to believe that the operating income and EBITDA ratios have significant room for expansion as this business expands its scale.

Secondly, while our focus remains squarely on continued double-digit organic growth in revenue, we remain adamant that the right acquisition partner could further accelerate our growth and profitability, as evidenced by the Allure acquisition completed in November of 2018.

With consistent pro forma revenue for the year-to-date periods ended September 2019 and 2018, the combined companies have generated an operating profit of $0.6 million as compared to a $3.9 million loss in the prior-year.

We believe that companies within this industry can realize significant synergies through merger and acquisition activity and we believe that through our results, we can execute on that vision. Thirdly in a similar vein, I would highlight our year-over-year operating expenses have remained effectively flat for the nine-months ended September 2019.

These results are despite the retention of acquired office space in Atlanta and personnel onboarded as a result of the acquisition. Ultimately, these results evidence two points we have previously discussed.

First that CRI’s operating infrastructure has been built and remains ready and capable to support increased volume with limited additional overhead and second, that our management team remains squarely focused on achieving consistent profitability. Finally, I'd like to highlight an item disclosed in Item 4 of the third quarter 10-Q.

At that time, at the time when I joined CRI in November of 2017, the company had identified and disclosed four material weaknesses in internal control within its quarterly and annual financial statements.

The team has worked diligently over the course of two years to adequately design, implement and test the relevant controls in an effort to eliminate each of those material weaknesses.

I'm happy to report that during the third quarter of 2019, we completed our testing of the operating effectiveness of the financial statement closed process controls implemented during 2018. As a result of our testing, we have concluded that the material weaknesses in financial statement control process have been eliminated as of September 30, 2019.

This represented the last remaining previously identified material weaknesses for the company. So I'm proud to report the management SOX assessment is now a clean report. Great job CRI accounting and finance team. I'm proud of your extraordinary efforts over the recent two years to accomplish this goal.

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

Will thanks and again I add congratulations to you and your finance team for the elimination of the last remaining material weakness. As we look to scale this business that was a critical element to eliminate, so that we’re clean SOX reporting on a go forward basis.

So, last quarter on the call, we discussed the new agreement with one of our automotive customers FCA, which included a three-year agreement, approximately $1 million a year and SaaS or recurring revenue, and it also included hosting on our AWS platform. Today, this transition to our hosting platform is now complete.

Congratulations to our internal team for a tremendous effort at getting the FCA business transition to our platform. We expect this account to continue to grow throughout the term of the contract and beyond. Our customer opportunities or pipeline if you will, continues to grow.

As we have previously discussed on the last quarterly call, we had five opportunities really five plus, five or six, ranging from anywhere from $3 million to $25 million plus on the horizon. I'm happy to share with you the quantity of these opportunities now exceeds 10. And I expect us to win our fair share.

Several of these will be executed during the next 12 months and some will be multi-year in their implementation. I do want to emphasize that none of the opportunities we discussed on the second quarter call have been eliminated from our pipeline.

We remain in pursuit and are working closely with these potential customers and or opportunities as they further define their scope and timing. As we have previously discussed, some elements of our business continue to be lumpy as customers make decisions on when and how to deploy large scale signage.

In addition to enhance our pipeline, we continue to pursue what we would define as significant end-user accounts who installed digital signage systems during the year 2012 to 2015.

These customers are experienced digital signage users who understand the purpose of the technology and the business case of the technology, which is important because it shortens the sales cycle.

These systems are approaching end-of-life and these customers understand the value of transitioning to an enterprise scale provider as they deploy the NextGen signage solutions throughout their facilities across North America. As I've stated before, we are bullish and excited as we continue to execute throughout this year.

Finally, to summarize, we are organic growth oriented company with a very nimble, agile structure, which continues to execute and outgrow our industry peers. We continue to believe our stock is tremendously undervalued by many fundamental metrics.

Again, there's no question that 2019 is a record year not only on top line revenue, but on bottom line EBITDA and profit. We again to reemphasize, we are 100% aligned with you, our shareholders. The board, and management continue to own a majority of the company's equity. As a management team, we are focused on creating value for you, our shareholders.

With that, I'll turn it over to Q&A.

Will?.

Thanks Rick. We will now open the phone lines in order to respond to any questions. [Operator Instructions] It looks like our first call or our question is from Bill Sutherland at Benchmark. Bill? Hey Bill, are you here? You are here..

Hey Will, hey Rick, how are you doing?.

Good morning, Bill..

So couple of things, you didn't mentioned the M&A pipeline, Rick, how is that looking?.

Bill, I would tell you I continue to talk to a number of folks, the M&A pipeline, I would use the term robust, because there's a number of folks that we continue to have ongoing conversations with.

I would temper that with, we're very, very disciplined in our pricing and our formulas on the best way to do transactions to create value for all of our shareholders, and not do a transaction for transaction sake, that's not the goal.

So we’re optimistic as we look into the future, conversations continue on a weekly, monthly basis with a number of them. And I look forward to sometime in the future when we make the next announcement. But I can also say that there is nothing immediately pending, but there's a bunch of catalysts on the stove, if you will..

So as far as the industry backdrop, is it and be interesting to hear what you think about whether it's more motivating or there's no catalyst or don't do, or building catalysts for folks to think about becoming part of Creative Realities?.

At this time, I think everybody continues to look around and continue to understand that they need to do something and over the -- as we transition to what we call Bill, Digital Signage 2.0 as I mentioned in my call, a number of customers who deployed the systems five, seven, eight years ago are now looking at, I'm going to redeploy this.

And I'm now really looking for an enterprise partner who can scale it across a number of locations right. So I think there's a lot of that going on. But yet there have not been a lot of significant transactions purely in our space because I think everybody's waiting to see who makes the move first..

Yes, so we've seen an increase in requests for interest, even inbound activity on the M&A front but not significant closed transactions to-date..

Okay. And Will, you mentioned you guys have confidence in Allure getting back to growth mode next year.

What's your confidence based on?.

Yes, so couple of points there. First of all, when we acquired Allure, we were excited about the ratio of recurring revenue. So that's been strong and continues to be strong.

We talked about at the time of the acquisition, their pipeline at that time was probably to be fare a little stronger from the standpoint of large scale customers with multi-thousand potential endpoints to their relationship with Coca-Cola. That relationship remains strong, the QSR space continues to be strong. They just haven't had one hit, right.

There's several similar to the CRI aggregate story that Rick told, several arms in the fire that are material, few pilots that are ongoing, but nobody that's flipped that switch. We feel strong that there's a customer to out there. They're going to make a decision here over the next 12 months that are going to be material in that division..

Bill, this is Rick. I’d add a couple, one other comment to that. There were two strong verticals that Allure customer base represented, one is QSR that Will has addressed. The other is theatres and so as we enter 2020, a significant amount of the theater customers are all due for equipment and software upgrades.

So as we look at 2020, we anticipate transitioning most, if not all of the theater customers to our NextGen software. And that NextGen software will involve a new year, a new three-year agreement with some in potentially significant hardware components behind it.

So I think that will also continue to drive increased revenue in the Allure customer base..

Yes, Rick spoken previously about the clarity platform and our transition. We've been rolling that out consistently across the menu board customers and are moving towards the implementation and conversion of those theater customers..

Got it.

And Will as far as 4Q, what this current quarter, remind us of your seasonality think about on either revenue or otherwise?.

Yes, we would say, so particularly with respect to third quarter, we wouldn't necessarily say that there is seasonality at our current size and scale, we continue to be subject to some level of lumpiness for data material, one-time transaction or rollout occur or not, and to put a little context around that, 2018, the third quarter, you look at the $6 million, there was one transaction in that quarter that was $2.4 million.

If you look at the revenue makeup of 2019, the largest individual transaction this quarter was $300,000. So you've seen, we've seen a large increase in the number of customers in the quarter and the volume of transaction activity in the quarter that supported that revenue growth.

But we didn't have one large rollout or transaction, so it's less about the seasonality today than it is about a customer action. The only thing that I'll reiterate is the fourth quarter has tended to have a little bit more seasonality than others, just with some of the retail space. Rick, I don't know if you want to expand upon that..

Yes, I would expand upon it specifically this year, because you've got a tremendous amount of retail customers, tremendous amount of theater customers.

And typically they don't want us in their facilities from Thanksgiving on, they are matter of fact, in New York City, there's a moratorium, we can't even go to work in December, in a number of places in New York City. This particular year, we have the, shall I call it the bring forward of Black Friday.

So not only they're not waiting for Thanksgiving this year. They're bringing Black Friday forward a week. So that’s even going to increase the timeframe or condense the timeframe with which to get work done, and delay the timeframe that we will begin new projects from mid-November until the first part of next year.

So just a specific lumpiness due to the calendar and Black Friday is being brought forward a week..

So, I mean unless something extraordinary happens sequentially, you're probably not going to be quarters four or quarters three in revenue or anything?.

I would say that's generally an accurate assessment. I would not learn for anything wildly and we expect to kind of smooth, smooth sail through the end of this year and then which ultimately will give us a tremendous year-over-year growth and we look forward to significant expansion in 2020..

And so, and last one for me, so when you kind of look through the lumpiness and assume some sort of reasonable conversion level on the pipeline, you think your, how would you characterize your core re-growth outlook double-digit, 2020, just kind of curious how you’re thinking about it?.

I certainly feel comfortable articulating that we feel it's double-digit is we head into 2020. But beyond that, because we have a number of these transactions that we've been pursuing for extended period, right. And these are all significant.

If I land one transaction, that's $15 million, and the customer decides to roll it out throughout 2020, our growth would be tremendous. And if I don't land that transaction, our organic growth is going to continue to exceed that of the industry. So it's pretty hard at this level to predict that lumpiness.

Now, as we continue to scale over, is it the next year or two or three, we expect that lumpiness to minimize but we're still in choppy waters of our revenue in the $30 million plus range to still be choppy till we get significantly north of that..

Got it, okay. Thanks, guys. Appreciate it..

Absolutely. Thank you Bill, appreciate the call. We will look to the next call, looks like we have someone on the line Jacob Silverman..

Hey guys, yes..

Jacob, are you with us?.

Yes, can you hear me?.

Yes, good morning..

Good morning, Jacob..

Good morning. Thanks for taking my questions.

Any details you can give on which verticals you are seeing the most demanding right now?.

Great question. So I would tell you today as you look at our verticals, we have four of them that we have predominantly focused our business on currently and that's number one’s retail, automotive number two, food/cinema is three and four, we kind of lump them together. And then the other growth is stadium arena.

So tremendous demand in food and cinema, and specifically QSR.

So there's tremendous demand not only inside for digital, and also the caloric content, consumer nutritional information, but also on the outside the drive-thru in the QSR space Jacob, roughly depending upon the QSR chain, 50% to 70% of the volume of their revenue is through the drive-thru window.

So the average if you can increase the speed through the drive-thru by 30 seconds per customer, that translates into a really significant ROI and enhance profitability for that QSR location. So those are areas that we tend to see an enhanced demand in growth.

Will?.

Yes and what I would add Jacob on that QSR front, what we've seen here throughout 2019 is kind of an inflection point is McDonald’s is the industry leader. What they do the others watch McDonald’s has been in a consistent conversion and rollout strategy for their outdoor digital menus throughout 2019.

So we've seen our customers and our customers that do not currently have digital start to come to the table and make a lot more inquiries about their outdoor digital, going digital outside because they're watching what McDonald's is doing..

Jacob Silverman:.

,:.

It is spread across, actually our pipeline is spread across automotive with three significant opportunities. One of them is 3,000 plus locations across the country. So there's some growth, tremendous pipeline opportunities in automotive. C-stores, so we continue to be engaged with a couple of C-stores, one is looking actually two of them, I'm sorry.

One's looking at several thousand locations and others about 500 plus. So that's a second area of growth in that, third is what I would call retail. And we have a significant relationship with a small retail player in the airport space with several thousand locations at airports around the country.

And they've been a customer now for three years and have signed contracts and execute and made internal announcements in their throughout their company that CRI is the go forward partner.

And they alone are looking at between 200 and 500 locations in 2020 and as many as 2,000 over the next three years that they will deploy signage to and some of it’s replacing existing signage.

So it's really spread across the board and then last but not least, our stadium and arena action that we just, we started that vertical or did acquisition of a couple of people to grow that about 15, 18 months ago, right? Will, I think ballpark that is started to pay significant dividends. And so Q4 some significant enhancements coming in that area.

And we look to continue that throughout 2020..

Okay, thanks..

We do see stadiums and arenas as an area of growth as we've talked about in the past an area we've invested in, got some software products there that we believe are best-in-class or maybe only available that serve the segment, starting to pick-up steam and hopefully will be there for delivery in 2020..

Okay, thank you. That's all for me..

Great, thanks for the call, Jacob. Great, at this time, it looks like there are no more questions. So 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 as the leading brand in digital marketing solutions.

This concludes the CRI third quarter 2019 earnings call. Thank you..

Thanks..