Good morning. I’m Will Logan, Chief Financial Officer of Creative Realities, Inc. Welcome to the CRI's Second Quarter 2021 Financial Results and Earnings Call. All lines have been placed on mute to prevent any background noise.

The company's prepared remarks will include a brief commentary from management, which can be viewed through the webinar by logging into joinwebinar.com and entering a meeting ID 250485091. Following the company’s prepared remarks, there will be a live 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@cri.com.

This call, including the materials presented, will be recorded and a copy will be available on our Web site at cri.com following completion of the call. Joining me on the call today is Rick Mills, CEO of CRI. 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 expression 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 filings. It is now my pleasure to introduce Rick Mills, CEO of CRI..

Thanks, Will. Good morning to everyone on the call. As we commented on the call during our last quarterly call, we continue to see momentum build as our customers attempt to reopen facilities and get back to some sense of normal operation. Everybody was on track.

However, the latest surge in the COVID variant will undoubtedly cause some additional disruption in the procurement, distribution and installation of products to work in our customer facilities. In Q2, we generated approximately 3.3 million in revenue with positive EBITDA.

The reduction in revenue compared to the prior three quarters is a direct correlation to the lack of supply of screens and to a lesser degree media player hardware. On our last call, I stated that we expected short-term supply issues to impact our next two quarters at a minimum. We thought it would be Q2 and Q3.

It has now become clear that the supply chain disruptions will extend into the first half of 2022. We are not the only industry affected. Recently, last week, Apple’s CEO, Tim Cook, recently warned that their silicon supply constraints, the chip problem would affect sales of the iPhone as well as other products like the iPad.

Look at the auto industry is another example where the supply chain has impacted the ability to deliver products. Currently, we have customer purchase orders on hand for 2,000 plus systems. It continues to build every month.

A system generally consist of a screen, a player mounting hardware, and we were unable to deliver these in Q2 is a direct result of the supply shortages. And as of today, our vendor partners have yet to deliver any significant quantities to us in Q3. This is expected to change over the next couple of weeks.

We have received verbal confirmation from a key manufacturing supplier that CRI will receive 1,000 screens the last two weeks of August with another large quantity to be delivered in late September or early October.

However, just because we get the screens, I've now got to get them scheduled to install, our customer facilities have to be open, et cetera. So we look forward to getting these out into the marketplace, but it will take some time.

I want to take one moment to emphasize, so everybody understands on this call, we are not losing orders due to the supply chain disruption. Every one of my competitors has the same issue. Instead, we experienced a shift in the timing of these projects to future quarters.

We continue to face logistical headwinds as COVID variants force employers to rethink a return to work and installations get delayed or postponed as a result. We do have some positive news in our automotive vertical.

We recently entered into a contract with a Canadian business unit of a large global auto manufacturer, and will roll out our automotive product set to approximately 440 locations in Canada. These locations and the incremental recurring revenue associated is expected to come online in January of 2022.

This is a great win for our automotive team and a great win for CRI. Finally, a little bit of an update on getting back to our facilities as CRI. As our vaccination rates increase dramatically, we're getting our facilities reopened. Our Canadian team will return back to the office starting September 7 approximately.

The Windsor office will formally reopen to all staff on a rotating schedule. We expect our Atlanta office to reopen in the same timeframe. In addition, in Atlanta in the October-November timeframe, we will transition from our current Atlanta office to a new facility in Atlanta.

Once this is completed, we will have 95% of our folks back in the office serving customers on a daily basis. Let's go into the financial overview of the quarter. I'll turn it back to Will Logan..

Thank you, Rick. I’ll now summarize our financial results for the three months ended June 30, 2021 as compared to the same period for 2020.

Regarding the 2021 results, we note that the MD&A section of our quarterly report on Form 10-Q provides unaudited 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 they're in. As a review of the quarterly results, all references to 2021 and 2020 represent results for the three months ended June 30 for each period, unless specifically indicated otherwise.

With respect to our revenue, gross profit and gross margin. Revenues were 3.3 million in 2021, representing a decrease of 0.4 million or 10% as compared to the same period in 2020.

Hardware revenues were 1.3 million in 2021, a decrease of 0.3 million or 19% as compared to the prior year, driven by a limited supply chain availability of semiconductor chips, delaying the delivery of digital displays and media players to the company and reduced sales of our Safe Space Solutions.

The supply disruption for digital displays prevented the company from delivery of hardware and execution of installation activities during the quarter. As of June 30, 2021, the company had customer purchase orders for equipment and installation activities in excess of 1.8 million, which were delayed as a result of product unavailability.

That number, as Rick mentioned, has continued to grow during the third quarter thus far. During the three months ended June 30, 2021 and 2020, our Safe Space Solutions product sales were 0.2 million and 0.5 million, respectively, representing a reduction of 0.3 million or 60%.

Services and other revenue were 2 million in 2021, a reduction of 0.1 million or 4% as compared to 2020, driven by a reduction of approximately 11% in managed services revenue.

Managed services revenue, which includes both software-as-a-service and help desk technical subscription services for our traditional digital signage and Safe Space Solutions product offerings, were 1.4 million in 2021 as compared to 1.6 million in 2020 as reductions in digital signage subscription revenue related to contracts and customers, which were partially or permanently closed during 2020 as a result of COVID-19 pandemic were only partially replaced with subscription revenues added to our Safe Space Solutions products and services.

Gross profit increased 3% during the three months ended June 30, 2021 as compared to the same period in 2020, driven by the decrease in sales but offset by an increase in gross profit margin. Gross profit margin increased to 57.2% in the current year from 49.7% during the same period in 2020.

The increase in gross profit margin is a result of a decrease in hardware revenue as a percentage of total revenue. High gross profit margin from services revenues in 2021 were driven by headcount reductions in personnel servicing customers as a result of cost reductions we executed throughout 2020.

With respect to our operating expenses, sales and marketing expenses and our research and development expenses both decreased 0.2 million in 2021 as compared to 2020, a reduction of 54% and 76%, respectively. These were each driven primarily by the Employee Retention Credits recognized during the three months ended June 30, 2021.

General and administrative expenses decreased by 0.3 million or 15% in 2021 compared to 2020. The decrease was driven by 0.5 million of Employee Retention Credits recognized during 2021. Excluding those, G&A increased 0.2 million or 11% compared to the prior year due to an increase of 0.2 million in non-cash stock compensation expenses.

With respect to our operating loss, net loss and EBITDA.

Operating loss was 0.4 million in 2021 as compared to 1.6 million in 2020, representing an increase in profitability of 1.2 million driven by 1.2 million of Employee Retention Credits recognized in June 30, 2021 quarter, a reduction of $0.5 million in bad debt expense from a non-recurrence of a customer bankruptcy that was reported in 2020, partially offset by an increase of 0.2 million in non-cash share-based compensation expense.

Net income was 1 million in 2021 as compared to a net loss of 2.5 million in 2020, an increase of 3.5 million in the current year. EBITDA was 1.9 million in 2021 as compared to an EBITDA loss of 1.7 million in 2020. Adjusted EBITDA was 0.3 million in 2021 compared to an adjusted EBITDA loss of 1.1 million in the prior year.

I'd like to take a moment and highlight just a couple of other items from our quarterly results that were material transactions in the period. First, with respect to the previously recorded Seller Note.

On May 13, 2021, the company and the Seller of Allure entered into a settlement agreement wherein neither party admitted liability, and the company agreed to pay, and Seller agreed to accept, $100,000 as settlement in full for the outstanding balance of principal and accrued interest under the Amended and Restated Seller Note and a mutual release of all claims related to the Amended and Restated Seller Note and sale transaction under the Allure Purchase Agreement and all related agreements.

The company recorded a gain on settlement of obligations of approximately $1.6 million during the three months ended June 30, 2021. This reduced our overall debt load and improved our net working capital position. Also in the quarter, we took advantage of Employee Retention Credits available.

The CARES Act previously provided Employee Retention Credits, which are refundable tax credits against certain employer taxes. On December 27 of 2020, Congress enacted the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which amended and extended the ERC availability under the CARES Act.

Previously, the businesses who were providing SBA PPP loan under the CARES Act were ineligible for the ERC. Following the enactment of the new law, such businesses, which included CRI, became eligible for the ERC.

During the three months into June 30, 2021, the company recorded an Employee Retention Credit totaling $1.2 million, which represented 0.4 million of credits earned for wages paid in each of 2020, the first quarter of 2021, and the second quarter of 2021, respectively.

These were included as a reduction in payroll taxes within the Condensed Consolidated Statement of Operations and allocated to the financial statement caption from which the employee taxes were originally incurred. We expect to receive cash refunds related to these filings in the next six months.

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

Thanks, Will. Let's do an update on other pieces of the business and some of the pending opportunities. I want to provide an update about an important pending contract which we have previously discussed. This contract has been on hold for about 18 months. But we are now moving to the execution phase.

All contract documents have been reviewed and the terms have been agreed upon by both parties. We expected to announce the details during the second quarter. However, execution has again been delayed due to the combination of the resurgence of the COVID Delta variant and the supply chain disruptions previously discussed.

Once launched, this contract is expected to add 6 million in revenue in each quarter for four to six consecutive quarters. As we stated previously, this is subject to contract execution and the decision by the customer to launch. We currently believe that's in the Q4 timeframe.

We anticipate this contract will begin producing revenue in the first half of 2022, based on the availability and supply of digital displays. During the first two quarters to 2021, we added over 8,000 screens and media players under management of our content management system, each generating monthly recurring revenue.

This pace will slow in the second half of the year, simply because we could not get the equipment to install these systems. We expect the return of rapid growth of adding additional screens and media players to our count in Q1 of 2022. Again, this is simply a byproduct of getting deliveries of screens and media players.

With four consecutive quarters of positive EBITDA, we are moving forward with an extremely positive outlook.

However, storm clouds still are on the horizon due to the uncertainty of COVID, and we managed through that with discussions with our customers every day as they try and determine what they are going to do and how they manage through their COVID. Just recently, we've seen the cancellation of Digital Signage Summit in Munich.

This is an important industry show in Europe every year. InfoComm, which is going to be in Orlando in October, just announced mandatory mask and social distancing requirements. So again, we've got these storm clouds on the horizon. We think we continue to navigate them extremely well.

However, until COVID is fully resolved, it will always remain as a storm cloud on the horizon for our industry. Our sales funnel is consistently growing.

The stadium and arena vertical is heating up with just a lot of requests as these venues look to go back into full operation; Major League -- MLB baseball, NBA, football stadiums are all reopening and we're engaged, refurbishing some of them as they all look to reopen. So with that, Will, I’ll go back to you..

Great. Thanks, Rick. We will now open the phone lines in order to respond to any questions. If you would like to ask a question, please use the raise hand function within the webcast. I will start with -- it looks like a few questions have come in to the IR inbox. Rick, I think the first couple here are good for you.

The first question that's come in is what is the average lead time from handshake to signed contract for your services? And what would be the average size of a contract?.

Contracts typically come in two types. One is, it's a single one-off experiential and that can be anywhere from $50,000 to $250,000, because a retailer wants to try one store or a QSR wants to do one test drive-thru. So those are small contracts.

And the timing on them is anywhere from three months to some could be a year and a half long as the customer figures it out. Our larger contracts typically are seven-figure engagements that take anywhere from six months to two years to get signed and underway..

Great. Thanks. A couple of questions here about our business in general. At your current resource level of staffing, access to capital and supply chain, what yearly sales can you support? And of that, what percentage would be new installs versus ongoing servicing? I'll take that one, Rick, if you don't mind.

I think the answer on the split is a little complicated. What I would point you to is in 2019, we did approximately $32 million in revenue, $6 million of that was recurring revenue base, SaaS-based revenue. The remaining $26 million was split about a third hardware, two-thirds other services.

And I would tell you that our headcount was probably maybe 10 to 15 folks hired, and today we've gotten significantly more efficient. I would tell you, we could achieve that level of services less than five incremental heads.

We believe that the business and the infrastructure for the company is built to support a $100 million enterprise with an increase in personnel that would probably be 10% at most. And again, there's some mix or some split there with respect to the install and hardware sales.

But it doesn't take a significant increase in headcount to support incremental revenue. That's why we're bullish on the long-term value in the industry.

Rick, anything to add to that?.

No. I think it is spot on..

Perfect. I think last question that we did receive, it looks like at what sales volume are you projecting dividends? I would say on that question, we've used CRI as a growth company, an early stage growth company. And we would not expect to pay a dividend or to contemplate paying a dividend in the near future.

We would expect to reinvest any earnings back into the growth engine of the company. Likely that would occur not before a $100 million top line, at which point we believe the company is somewhere in the 20% to 30% EBITDA margin ratio.

Then it would become a matter of, are there investment opportunities or acquisition opportunities or not for the investor? Rick, any additional commentary there?.

Nope..

Great. Okay. It looks like no other individuals have raised their hand. We appreciate the questions that were sent into the IR mailbox. At this time, let me conclude by thanking all of our shareholders, clients, partners and employees for their -- there's one question that's come in late, I apologize. Can you activate? Kevin Shelton [ph]. Hi, Kevin.

Are you with us? Okay, no additional questions. Thanks to 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 now concludes the CRI 2021 second quarter earnings call..