Good morning. At this time, I would like to welcome everyone to the Second Quarter 2023 Creative Realities, Inc. Earnings Conference Call. This call will be recorded and a copy will be available on the company's website at cri.com following the completion of the call. The company has prepared remarks summarizing the interim results along with additional industry and company updates. Joining me on the call today is Rick Mills, CEO; and Will Logan, CFO. Thank you very much. Mr. Logan, you may begin.

Thank you, and good morning. This is Will Logan, Chief Financial Officer of Creative Realities, Inc. Welcome to our financial results and earnings call for the 3 and 6 months ended June 30, 2023. I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. The words anticipated, will, believes, expects, intends, plans, estimates, projects, should, may, propose and similar expressions or the negative versions of such words or expressions 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 filed with the SEC earlier today, August 4, 2023, and in our annual report on Form 10-K filed with the SEC on March 30, 2023. 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 will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our public filings and in our earnings release that was released this morning. It is now my pleasure to introduce Rick Mills, CEO of Creative Realities, Inc.

Thanks, Will. Good morning, everybody. Thanks for joining the call. In addition to discussing our second quarter 2023 results, we will cover some important updates and new developments. So let's jump into it. I am pleased to report Q2 2023 revenues of $9.2 million with gross profit of $4.3 million. Our gross profit margin for the second quarter came in at 46.7%. That's a 400 basis point improvement over last year and building on improved profitability year-over-year and in the first quarter. This brings the year-to-date gross margin percentage to 49%, with a gross profit for the first 6 months of the year of $9.4 million, both CRI records. On a year-to-date basis, our gross margin percentage has increased by nearly 1,000 basis points, owing to the revenue mix shifting towards SaaS and other higher-margin services, along with an approximately 600 basis point improvement in hardware margins due to continued economies of scale. We believe our second quarter results continue to demonstrate ongoing growth in our revenue as this is the sixth consecutive quarter for which revenues have approximated or exceeded $9 million, benefiting in large part from the expansion in our annual recurring revenue run rate, which is now at a record of $15.2 million and continuing to grow. This stability within our business is important as it highlights the reduction in reliance on any single individual customer for large-scale hardware deployments or refresh activities to produce revenue and profitability. This reduces risk with respect to customer concentration and enhances our operating leverage. As our ARR approaches a level where it covers our operating expenses, we project significant improvements in our adjusted EBITDA margins as every new dollar flows through to the bottom line at higher, more favorable margins. While the current quarter revenue is within the range of our prior expectations, we had approximately $2 million in revenue shift from the second quarter into the back half of the year due to an unexpected supply chain challenge for certain route switch equipment delivered by a third party. This supply chain issue, which has been alleviated fully in the third quarter, delayed the start for deploying the Bowling project from April to August, affecting the timing of revenue recognition for this project. This delay will cause some revenue recognition to shift from what was projected in the third quarter to the fourth in 2023 and possibly shift additional revenue from the fourth quarter to the first quarter in 2024 as we attempt to catch up to the installation schedule. Importantly, understand this revenue has not vanished. It is just experiencing a shift in timing. This revenue will be realized and we continue to project a significant change in our run rate revenue beginning in the third quarter with an increasing effect in subsequent quarters for the foreseeable future. The company expects to generate between $60 million and $80 million in revenue for the next 12-month period beginning in the third quarter of 2023, but expects that generating an $80 million run rate may take an additional quarter or two due to the third-party supply chain delays that have recently been resolved. Our pipeline continues to strengthen and our backlog remains steady at $110 million. As a reminder, our calculation comprises the anticipated rollout of projects as indicated by our current customers under contract and includes all revenues that would be received by deploying the projects and services necessary to service these projects, including projected revenues that are not currently subject to binding purchase orders or commitments. The backlog has no timeline and includes projects that may be realized, if at all, in the near future or at a much later date. Revenue growth continues to be driven by the fastest rate of new customer acquisition that the company has experienced during my tenure with CRI. We are experiencing wins in CRI's key verticals, including retail, digital out-of-home, ad networks, food service, sports and entertainment venues, and media contracts. As noted in the press release, our RFP win percentage approximates 70% over the past 12 months. CRI's presence in the market is widely acknowledged by vendors and customers, and we experience inbound sales referrals and/or inquiries on a weekly basis. For context, there has been a 300% increase in the past 6 months. These inbound referrals and inquiries are coming from both vendors who recognize that CRI is the best partner for signage solutions today and direct inquiries from end-user customers. We are actively competing in a significant number of new customer engagements for which an award of business is currently pending and our pipeline has never been stronger. Our vendor partnerships continue to expand. Samsung recently recognized CRI as its 2022 Gold Partner of the Year, marking the second year in a row that CRI has received this award from Samsung. Finally, I want to be very clear and explicit. CRI is not a $40 million revenue company moving forward. On a go-forward 12-month basis, we project between $60 million and $80 million in revenue. Both digital signage as an industry and CRI as a company have tremendous tailwinds. This revenue expansion will have a profound effect on continued improvements in profitability and works in parallel with paying down our debt. The compound effect of revenue increases, profitability improvements, and reduced debt translates to significant improvements in free cash flow for 2024 as we grow into an optimal leverage ratio and capital structure. We have terrific momentum in the business and are seeing productivity from our business strategy. We continue to win in the market, resulting in a corresponding reduction in the timeline to new customer acquisitions, and believe the company is uniquely situated to exploit the tremendous growth and opportunity in the industry. I will now turn it back over to Will for a few notes on our business activities.

Thanks, Rick. We're truly excited about the sheer volume of activity in our pipeline, the win rate we are currently experiencing, and the inflection point the company has reached with respect to its operating leverage. As we convert these opportunities to customers, we are pressing subsequently to launch deployments, driving revenue and ultimately seeding downstream higher-margin SaaS and other services revenue. We struggle with patience, but even where deployments are developing slower than anticipated, they are growing in quantity and opportunity size, which will ultimately drive adjusted EBITDA, free cash flow, and bottom line results. A few other comments with respect to the period as of and for the period ended June 30, 2023. With respect to the company's cash position, we had cash on hand as of June 30, 2023, increased to $3.3 million from $1.6 million as of December 31, 2022. This was as a result of collections on accounts receivable, annual billings associated with our SaaS-based contracts, and increases in customer deposits on future deployments, partially offset by investments in software development projects and the repayment of debt. We continue to uncover long-term strategic opportunities within our existing customer base that will further entrench our platforms within the customer's design infrastructure and digital ecosystem, be it through API integration to other applications or unique adaptations of our platforms for specific customer use cases. These customizations, similar to what we have discussed with respect to our automotive platform, typically require an upfront capital investment but lead to significant expansion of our downstream SaaS revenue within the existing customer base and build a competitive moat around our business. Throughout 2022 and 2023, we have diligently managed our cash position and capital stack to enable continued servicing of our debt, including repayments, principal, and deployment of capital to capitalize on strategic investments in our platforms, which will enhance the long-term ARR of the business. Those investments are beginning to pay real dividends in the form of new customer acquisition via our best-in-class platforms and have seeded the future for material cash flow generation. We will continue to manage our cash position through the balance of 2023 via utilization of customer deposits and advanced SaaS billings associated with our ARR. With the anticipated ramp in our revenues beginning in the third quarter of 2023 and moving forward, we see 2024 as generating material free cash flow from operations. Regarding our debt, through June 30, 2023, the company has repaid in excess of $2.5 million in principal. Subsequent to the quarter-end date, we have made additional payments on debt principal, bringing that total to approximately $3.2 million, driving reductions in the company's leverage ratio. Effective this week, the company has now repaid in full the $2 million note drawn in October 2022 and has begun making incremental principal debt payments of approximately $399,000 per month related to the company's $7.2 million amortizing note that matures in February of 2025. We are executing our operating plan, onboarding new customers at a record pace, and continuing to grow our SaaS-based revenue. However, we are exploring options to either refinance or recapitalize this debt so that working in tandem with improvements in profitability, we reduce leverage and achieve a migration to the optimal capital structure in conjunction with growth. A quick update on the auto-platform globalization project that I referenced. We are rapidly approaching the anticipated U.S. launch of the upgraded automotive platform, preliminarily targeted for December 2023. This will represent the culmination of 2 years' worth of work on the modernization of the product and will prepare the company to launch internationally in 2024. Perhaps more importantly, completing this development will allow the company to significantly scale down its software development expenses, which while capitalized represented $0.5 million in spending quarterly during the project. We are excited to both free up certain key resources for other investment projects and to scale down our spending via reductions in third-party development professionals who have been assisting us along the way. Lastly, I wanted to note that CRI has elected to modernize its operating and ERP applications by moving to one consolidated platform, NetSuite by the end of 2023. This will ultimately provide deeper insights and analytics, improve operational efficiencies and visibility, and actually reduce the company's operating costs marginally as we move to retire at least 6 disparate applications currently in use. This project was launched in June 2023 and is expected to be completed by the end of the current year. Rick, would you please provide an update on our customer acquisitions and previously announced customer activities?

Thanks, Will. First, I'd like to provide an update on a previous announcement. During our 2022 year-end earnings call, we discussed an RFP victory whereby we were selected as the go-forward digital signage provider for a national fast-casual restaurant chain. Throughout 2023, we have worked hand-in-hand with this customer on test sites, content layout, and custom integrations within our software to provide maximum flexibility and capability to the customer moving forward. We are pleased today to announce that the customer is Panera Bread. Panera has over 2,000 locations and is just beginning their digital journey. We expect to install both indoor digital menu boards and digital drive-through outdoor solutions for Panera, beginning with new construction and remodel sites in September of this year. We are actively working with Panera on their evaluation of existing site retrofit activities and a launch to allow franchisees to opt into the digital program. Panera will be utilizing CRI for hardware and deployment, as well as day 2 services including our clarity, CMS, and other content services. When a brand like Panera trusts you, many others are set to follow. We are working with Panera on a mutual press release and hope to announce something officially by the end of August. Next, I'd like to address artificial intelligence or AI, and specifically generative AI. Expect an additional press release in the next month or so where we will update the market on how CRI intends to utilize generative AI to enhance the capabilities and offerings of our content management systems. Generative AI will fundamentally change what we think about when we discuss content management systems and how using AI will completely overhaul how content is generated and shared with consumers. AI has the potential to revolutionize the CMS marketplace and will ultimately enable our clients to deliver more contextual messaging, drive consumer behavior, and improve operational throughput, basket size, and profitability. We are exploring generative AI now and anticipating adding it to our roadmap in 2024. The third area of interest is launching a channel partner program. CRI's target market has historically been marquee enterprise-grade customers with 500-plus endpoints or devices generating ARR. Traditionally, there is a segment of the market that we have not serviced, which includes small-to-medium sized business customers working with smaller integrators. As we continue to grow, we see an opportunity to roll out a channel partner program, leveraging our best-in-class software platforms to these integrators under a SaaS-based subscription license model. We do not anticipate a full services approach for these integrators as they will provide some services to their customer base. These integrators will have an ala carte ability to choose which CRI services makes sense for them to deploy to their end users. We have recently hired a longtime industry veteran to assist in launching this program, and we see a huge underpenetrated SMB market available for digital signage software and services. Regarding media sales momentum, we have a media sales division that performs direct sales activities on behalf of our customers and helps them monetize their digital networks. This division produced $1.5 million in revenue in 2022 as we emerged from COVID. In early 2023, we decided to invest in the opportunity to expand our team and pursue additional out-of-home networks as clients. This division is on pace to produce in excess of $3 million in revenue in the current year and has continued to gain momentum. To understand the progress being made, one example: our team has recently received confirmation of a contract worth $1 million annually for 8 years at one individual theme park. This deal for 2024 is almost equal to what the entire division produced in 2022. We could not be more excited about the momentum our team is experiencing. As we scale the revenue, it will generate opportunities to further in-source our sales activities while enhancing profitability in future periods. Lastly, a few updates on some previous announcements. Regarding Starlight Media, we discussed how the company CRI developed a custom digital outdoor fixture for their advertising network, with an opportunity to deploy in more than 2,000 locations. During July, the company deployed the first batch of units and has now been awarded the opportunity to do an additional 20 units in August. Assuming all goes well, the customer has indicated their intent to scale quickly to 500 locations throughout the balance of the calendar year 2023. Revenue generated from the hardware and installation of these devices represents a current year opportunity of approximately $6 million, with a 2024 and beyond opportunity in excess of an additional $17 million over a 2-year period. Lastly, let's talk about our drive-through products and solutions. CRI continues to secure commitments for our drive-through products and solutions. The product is in high demand, and we are well situated to capture a significant portion of the $3 billion market opportunity. During the second quarter and through July of 2023, we have added 4 new drive-through customers to our roster of new logos, and we expect additional announcements concerning these customer acquisitions throughout the balance of the year. Will, any further commentary you'd like to add on our second quarter 2023 results?

Thank you, Rick. An overview of our financial results for the quarter and year-to-date periods were provided in our earnings release report this morning, which included the condensed consolidated balance sheet as of June 30, 2023, in the prior year, along with the condensed consolidated statements of operations and statement of cash flows for the 6 months ended June 30, 2023, and a detailed reconciliation of net income to EBITDA and adjusted EBITDA for the current and immediately preceding 4 quarters. Regarding the results for the 3 and 6 months ended June 30, 2023, we note that the MD&A section of our interim report on Form 10-Q provides reviewed financial information. In the interest of time and in light of insights and comments provided earlier in this call, we will move to the Q&A portion of the call at this time.

Our first question is from Brian Kinstlinger with Alliance Global Partners.

First is relates to your next 4 quarter outlook, if you will. Do you expect to be below the $60 million run rate in the second half of the year given the timeline you've discussed with the Bowling contract? I know the fourth quarter is usually seasonally weak, but it sounds like this year, the third quarter might be the weakest given some of that timing. Maybe a little help as it relates to the next 2 quarters based on your outlook.

Yes. Now we've put the range of $60 million to $80 million because we've got the backlog that's out there. The biggest challenge we've had is the Bowling contract and getting it going. We had some Cisco route switch equipment that didn't come in, right? But we have since in late July received quantities sufficient to effectively do half the project. So we're back running here in August and starting to do the first installations. We have hundreds of sites surveyed and we're ready to rock and roll. So the question of getting from $60 million to $80 million is really about throughput and how quickly the customer can move, as opposed to whether the demand is there for the products and services and whether we can execute on it. So we feel comfortable with the $60 million based on the current backlog pipeline and existing customer expansion activities; getting up to that $80 million is really just a question of timing as opposed to demand and whether the customer can move fast enough. We are certainly working hand-in-hand with them to catch up as quickly as we can on the original schedule.

Okay. And if I recall correctly, the Bowling Alley themselves have to opt in, maybe any commentary on either the number or percentage? Or how have to opt-in going really well given there's a revenue share piece, but maybe any comments related to that.

Yes. I believe the third party, right, the customer controls the opt-in process, but we're certainly privy to it. I believe the numbers are well in excess of 300 have already opted in, with line of sight to another 300-plus that are in process. So we feel good that the pipeline of locations has been built, and we're starting to run and execute against it.

Great, and congratulations on the Panera news. That's significant for the company's portfolio. Can you share the number of screens for the four new drive-through customers? Also, regarding the quick-service restaurant sector, do you see more incoming inquiries or is it primarily an outgoing request for proposal process?

Yes. We're seeing demand in ad networks, food service, and retail. But food service, in particular, the digital drive-through has been an incredibly hot commodity in the product. That's where we've picked up 4 or 5 brand-new customers in the current year that, frankly, we didn't know at the turn of last year. We're seeing inbound and RFP activities regularly on those. You look at Panera; it's 2,000 locations, 1,000 drive-throughs, and certainly, their intent is to go digital. They are less than $100,000 of revenue year-to-date. So we're expecting some of these opportunities to really expand and flow. There is significant proof of concept and RFP inbound activity in excess of what we have in our backlog number. So we're really excited about that. We continue to iterate on the physical product itself to trim costs and position the product as a market leader, and that's been very successful.

And then just one to follow up on QSR. When there is a large enterprise RFP, what does the competitive landscape look like?

Typically, we see about 4 to 5 folks who are in that space. There are a couple of traditional sign providers, like Howard Sign, that are attempting to hold on to some of that business as it converts to digital. Then there are 2 or 3 digital signage players who are primarily focused on the food vertical, not broader digital signage companies servicing multiple market verticals. Those folks tend to be a little bit smaller, and we've competed very well against them, given our size and how the individual customer we are pursuing looks as a percentage of the total overall portfolio of customers or revenue. That concentration risk perceived by the customer of their vendor has been an important factor for CRI. As we grow, that will be another tool in our toolbox that makes us look more important and less risky.

Great. One last question. You've got these 2 really large enterprise ad network solutions for Starlight Media and Strike Ten, and BPAA. They seem to me to be long-term, the biggest driver of value because they are going to be recurring in addition to size. Can you just discuss from a high level, the opportunity and pipeline you see with those solutions compared to just your digital signage?

Yes. I think those opportunities individually, we've talked about Bowling being somewhere in the ballpark of a $40 million opportunity. Starlight Media certainly has the capability of getting up to and in excess of $30 million on one-time deployment revenue. Both of those would certainly be positioned to be $1 million-plus SaaS customers. When you flip the script and look at something in food service, there is still tremendous value there. If you took the Panera footprint, for example, and said, okay, they deployed 100% of their network, that likely translates into $50 million of one-time hardware installation services activities, but leaves behind another $2.5 million to $3 million of SaaS revenue. So there are still very material SaaS growth opportunities within that food service or drive-through space because that's one customer. We have 3 or 4 customers, certainly not the size right now of Panera being 2,000 locations, but several in the pipeline that are 200 to 500 sites, and you can do similar inverse math.

Our next question is from the line of Howard Halpern of Taglich Brothers.

Regarding the impact on margins in the upcoming third quarter, is there any residual effect now that the supply chain issue has been addressed?

No, there are not. That issue has been resolved, and we do not see any forward impact. Certainly, we had a little bump there in July regarding that product. Otherwise, we look and feel similarly moving forward as we have in the past from a margin standpoint.

And well there, you talked about consolidating into NetSuite and some other activities. Is there going to be any incremental bump in G&A expenses in the second half of the year?

Nothing in particular, Howard. We may have some moderate rise with respect to headcount as we deliver on revenue, but it should be incrementally slower than top-line growth. So expect that to lead to expanding margins. There's no other particular driver of higher expense in the next half of the year. And certainly, as we look into 2024, we've got a couple of things that should fall off the radar. With the introduction of NetSuite as an example, I referenced 6 disparate applications that are going away. We think that will be net neutral at worst, despite a significant upgrade in our operating platform.

Okay. If you could just discuss a little bit like Rick talked about, what is the opportunity over the next 2, 3, 4, 5 years with the ad revenue on all the signage that's already deployed? The screens that are already out there because it seems like it's just starting and it's starting out pretty well.

Yes, that's a great point, Howard. I can't say for sure if we are ready to provide specific numbers yet. However, currently, we have two customers in this area and we expect to double our size in 2023 and again in 2024. This year, we are actively pursuing other advertising networks as customers, which will help us further increase our media revenue. Additionally, we have been discussing platform monetization for our existing customers who use our traditional digital signage services. There has been a significant amount of interest and inquiries from these customers, indicating a substantial opportunity. We believe this could potentially evolve into a business generating over $10 million by 2024 and perhaps even reach $20 million. While it's still a bit early to make concrete commitments, all indicators suggest a growing demand, and we are meeting the needs of our current customers.

And that's a relatively high margin business.

That's correct.

Our next question is a follow-up from Brian Kinstlinger with Alliance Global Partners.

Sorry, one more question. As it relates to Panera. First, did I understand correctly? Do the franchisees have to opt in? And then my second part of the question is, is there a significant piece that's represented in your backlog? I was confused about the timing of when it was signed. So I am also confused if the $110 million backlog includes anything from Panera.

So two good questions there. One, with Panera, it's similar to other large-scale enterprise customers that we've worked with that have a franchise network. The CRI solution and CRI as a vendor have been adopted at the corporate level, and there is no option for a franchisee to choose digital signage from another provider. The opt-in by franchisees does have to occur, but currently, we've got franchisees who are pressuring corporate to bring them a digital option. Corporate is finalizing their scope of work; we did a proof of concept. They want to make sure what they take to the franchisees meets their demand. So we do not anticipate any pushback or challenge in 'selling through to the franchisees.' It will be corporate-sponsored, and we will be the only option within that network. On the second question, there is some level of Panera in that backlog, since we signed them in 2022.

That completes the questions from the line today. Mr. Logan, are there any additional inquiries from the Investor Relations inbox that you would like to address?

Yes. There was one question that has come into the inbox with respect to merger and acquisition activity and what, if any, updates the company could provide there. So what I would say is that we have and will continue to evaluate strategic options including M&A. We're in a highly fragmented space, and strategic combinations can drive highly accretive value creation for ARR, EBITDA, free cash flow, and EPS basis. The deals come in all shapes and sizes, and the company has and will continue to evaluate them. Given our anticipated growth and market position, along with strengthening profitability, there have been a number of discussions for opportunities with favorable deal structure. We could utilize that prospective M&A in conjunction with some kind of capital stack play, but the issuance of equity in those prospective strategic combinations would likely only be considered if the currency was an inefficient use of capital. So we've had a few that have been on the sidelines, as we wait for a resolution or response to the growth that we anticipate. That was the only question from the inbox today. Okay. No other questions have come in. So let me conclude the call by thanking all of our shareholders, clients, partners, and employees for their continuing efforts, commitment, and support as we work together to transform Creative Realities into the leading brand in digital signage solutions. This concludes the Creative Realities 2023 Second Quarter Earnings Call.

This concludes today's conference call. Thank you for participating. You may now disconnect.