Good morning and welcome to the Creative Realities 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. [Operator Instructions] Alternatively, questions can be submitted during the call via e-mail 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, 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 anticipates, believes, expects, intends, plans, estimate, projects, should, may, propose and similar expressions or the negative versions of such words or expression as it 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 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 of 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 suspended, delayed until future periods, or indefinitely placed on hold. As we 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, kick-off and move forward with current year projects, installations, upgrades, et cetera. While we certainly had volumes 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 the significant reduction in short-term revenue. First, our executive team voluntarily reduced their salaries…

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 GAAP net income to non-GAAP 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 revenues 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 31, 2020, as compared to 44% in the same period in 2019. Consolidated gross margin increased to 43.4% in the first quarter of 2020 from 38.8% in the first quarter of 2019, primarily as a result of managed services revenue representing an increased percentage of consolidated revenue in the period. Managed services revenue, which includes both SaaS and help desk technical subscription services, represented approximately $1.3 million revenue in the first quarter of 2020, 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 recorded against our accounts receivable as a result…

Thanks, Will. I want to take a moment and discuss our view of the future and the trends we are anticipating and others we are beginning to see. First and foremost, we believe the need for digital signage to communicate with consumers where they are is going to accelerate, once society adjust to the new normal. Think of the many ways in which the little things are changing. For example, men use at restaurants. No more. Think touchless screens and interaction with your mobile device. Restaurant venue retail occupancy monitoring through sensors which will communicate through signage to control the occupancy of buildings. It’s clear that we are witnessing a sea change in the adoption of digital health solutions. Verbal, visual interaction with displays as consumers move through the shopping venues and creative spaces. Augmented reality, 3D holograms will transform our experiences. We believe this pandemic will be an accelerator for digital change that was already underway. As we reopen our economy and pick up the pace, it will move much faster. We are firmly committed to our long-term vision of being the go-to-enterprise provider of these digital solutions in the U.S. and we believe we have a number of opportunities to participate in these changes in the society. Let’s talk a little bit about M&A and industry consolidation. We do expect a significant fallout during the coming months. As we have discussed in the past, there are a significant number of smaller companies, we define those as companies with less than $10 million in revenue that likely will not make it through these tough times and we believe that provides CRI with strategic opportunities. Their revenue, earnings, and valuations have plummeted. So, we believe they have a choice. Number one, they can attempt to hang in there and rebuild for the next number four, five years, which really presents a very uncertain future and who knows what that looks like. Or, by joining forces with CRI, they can enjoy a much more predictable and positive outcome. We expect some of these transactions will happen in an orderly manner and some will happen in accelerated fashion as they simply held out for hope too long and need to make payroll and find a safe harbor for their employees and customers. We expect these opportunities will begin to present themselves as early as the third quarter of 2020. Time will tell. Finally, I do want to take one moment and want to compliment the team that I get to work with every day at CRI. In times of great uncertainty, the most critical skill is to be able to adapt as conditions change. This is kind of like business ambidexterity. Focusing on continuing the current moment while you also build towards thriving in our future that will look different. I am odd [Ph] by the CRI folks and their relentless focus and energy to make it happen. Thanks.

Thanks, Rick. We will now open the phone lines in order to respond to any questions. [Operator Instructions] Before we take the first call, it appears that there have been a few notes come in by email. So I will address those first. We had one question come in with respect to the PPP and whether we believe that we would be able to retain these funds or need to return them. The PPP program and the guidance from the SBA has been evolving. There has been pressure on certain public entities who may have additional access to capital to return those funds. We believe that our current circumstances combined with the most recent guidance from the SBA indicates that we will be able to retain this fund. As many people know, there still question marks about exactly how the forgiveness of those funds will play out. We do expect that the majority of those funds will be utilized by our company on payroll and rents and utilities, areas that have been identified for forgiveness. So we are still working through those forgiveness calculations, but we, at this time, do expect to keep those funds. The next question, that also came in via email was, whether we had any official agreements between Samsung or any of our other vendor partners. And I think one that’s maybe kind of related Rick, that I’ll turn to you was, can you talk more about the interest that we’ve seen from the Thermal Mirror thus far?

Okay. I mean, so the first question is, agreement with our partners such as Samsung and I assume that question is in conjunction with the Thermal Mirror.

Yes.

So, the answer is, one of our partners Samsung has embraced the Thermal Mirror and we do look to jointly continue to sell that product to some Samsung customers. The – as we stated earlier in the call, t he reception to the product has been extraordinary. And we do believe that there is the potential for a strong future with that product.

Great. Thanks, Rick. It looks like the first call or question that we have through the call is from Brian Kinstlinger with AGP. Brian, are you with us?

Hi guys. Can you hear me? Yes, can you hear me?

Hey, Brian. Yes.

Hey, Brian.

Hey Rick. Hey Will. Can you guys talk about the sales strategy of the Thermo Mirror? Will you use direct sales, leverage resellers to help contain your cost while increasing your region, I guess, assuming you are using resellers what are they saying?

Great question. We expect these three-tiered approach, number one would be, national distributors and we are in discussion with national distributors. Number two, a referral program, which we have launched and that’s where we’ve reached out to influencers who are not necessarily in the “reseller space” but they are influencers who can help us get to key decision-makers in enterprise, businesses, federal, state, local government across America. So we’ve launched that. Third, there will be a direct reseller program that we release into specific verticals. And all that is coming in the next number of weeks.

Great. And then, in terms of – you mentioned, pilots. I am curious how this works for these paid pilots? I assume to test the product you need to be shipped. So I am just curious how those pilots are being executed?

Those pilots go from, pilot to full implementation, typically very fast. We shipped a number of units to Kwan anyone, given the one or two units, we shipped two units to a large transportation organization that has well over a 1000 facilities in the U.S. And so, they are going to try them, a week, ten days, two weeks, that kind of thing. And then, we would expect - they are either going to accept the technology and yes, this works for me or not. Many of these companies are still sorting through their own internal policies on how they manage through this unprecedented times. So most of the uncertainty or the startup is, really has nothing to do with the adoption of the product. As they get the product, they go, this works great. This is fabulous. Now how are we going to do this? How are we going to manage it with a thousand facility and that they are really turning to consternation as we speak trying to solve those issues.

Great. And then, just so, as I think about, it’s not just companies, I would think it’s local government wants to know where pockets of temperature, maybe that’s COVID, maybe it’s not are. So, are there also government resellers or communications with government about something like this?

Absolutely. One of our first resellers is a company that we have had a longstanding relationship with. They sell in the federal space and are in the process of putting the device on a whole number of federal procurement vehicles. Number one, number two, I was on the phone yesterday with somebody who had – who was working with a elementary school, right? And they put it in there and it’s taken all these – the kids’ temperatures and now they are trying to figure out how they can take it to the next step. So, we see this as being adopted by many businesses, many government organizations et cetera, because everybody has the same problem. The device we have works in conjunction and identifies the number one predictor of COVID-19, which is the temperature. And so, we have the device that can provide that in a non-contactless environment.

Great. And then, can you go over the recurring revenue model with the Thermal Mirror as it’s my understanding it creates some solid recurring revenue streams and I think given the lumpiness of your digital signage business, this is a material difference for your investor base.

Yes, the Thermal Mirror product is tied to recurring revenue and the ratio is about 80:20 in terms of the sale price and then 20% of ongoing is a recurring revenue model. So, we think it will build recurring revenue quite significantly over the coming months. Again, we’ve got to see some pilots got to roll out. So, today, the answer is, I don’t have any, but assuming it moves forward, we think it will clearly bolster our recurring revenue.

Yes, Brian, I would add. The incremental recurring revenue that’s associated is, our solution has a cloud hosted environment integrated with the hardware that’s capable of capturing as much as little data that the end-customer wants to capture. And consolidating that across one or many locations and to centralize databases for HR, IS, time tracking et cetera. So, the market will tell us over time what – how they want to use the device, but that capability is there and that’s what the customer is ultimately paying for. And there is a range of prices for that monthly ongoing depending on the level of capability.

Great. And then on the SaaS, you managed services revenue, I am curious how recurring that is and I guess, what I am curious about is, will you continue to build this or customers putting those managed services contracts on hold or they have the ability to?

So, technically, the contracts, they are locked in, right? They tend to be three years initially. One year auto renewals. Most of those have been renewed or renew at the beginning of the year. We have had some inquiries and some short-term requests for either deferrals of those fees or some form of credit. We are continuing to work with our customers on a case-by-case basis to come to the right answer. But we are continuing to build those. They are contractually obligated and we hope to find the right answer with our customers. You’ll see kind of year-over-year, it’s a pretty consistent number. We wouldn’t expect that to really reduce over time and hopefully if we can be successful with the Thermal Mirror, we can grow that number.

Great. Lastly, more of a comment, as your reseller agreements materialize or large orders are placed hopefully, you can announce them, whether you can announce the client or reseller name or not, I think that would be helpful to understand the progress. And I wish you guys all the success in this tough time.

Great. Appreciate that, Brian. Okay, it looks like we have another caller and apologies if I have mispronounced as Kwan fund, and is there a hand raise or leave with this. Okay. We will move on. We have another email from, concerning about cash on hand and what does that look like for the future runway of the company? We believe our cash on hand and our AR collections and ongoing revenue give us certainly a very long lead time. Any other questions?

Kwan, let’s take one more attempt at, see if we can Kwan on the line. Kwan, are you there? Okay, with no other questions coming through the call and no other hands raised, let me conclude by thanking all of our shareholders, clients, partners and employees for their continuing effort, commitment and support during these unprecedented times. This now concludes the CRI First Quarter 2020 Earnings Call.