UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
Commission File Number
Creative Realities, Inc.
(Exact Name of Registrant as Specified in its Charter)
| | | |
| State or Other Jurisdiction of | I.R.S. Employer | |
| Incorporation or Organization | Identification No. | |
| | | |
| Address of Principal Executive Offices | Zip Code |
| ( | ||
| Registrant’s Telephone Number, Including Area Code | ||
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| | | The | ||
| | | The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| | ☒ | Smaller reporting company | |
| Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
APPLICABLE ONLY TO CORPORATE ISSUERS
As of May 15, 2023, the registrant had
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CREATIVE REALITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Work-in-process and inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | $ | $ | ||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangibles, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Deferred revenues | ||||||||
| Customer deposits | ||||||||
| Current maturities of operating leases | ||||||||
| Short-term portion of Secured Promissory Note | ||||||||
| Short-term portion of related party Consolidation Term Loan, net of $ and $ discount, respectively | ||||||||
| Short-term related party Term Loan (2022) | ||||||||
| Total current liabilities | ||||||||
| Long-term Secured Promissory Note | ||||||||
| Long-term related party Acquisition Term Loan, net of $ and $ discount, respectively | ||||||||
| Long-term related party Consolidation Term Loan, net of $ and $ discount, respectively | ||||||||
| Long-term obligations under operating leases | ||||||||
| Contingent acquisition consideration, at fair value | ||||||||
| Other liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements
CREATIVE REALITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
| For the Three Months Ended |
||||||||
| March 31, |
||||||||
| 2023 |
2022 |
|||||||
| Sales |
||||||||
| Hardware |
$ | $ | ||||||
| Services and other |
||||||||
| Total sales |
||||||||
| Cost of sales |
||||||||
| Hardware |
||||||||
| Services and other |
||||||||
| Total cost of sales |
||||||||
| Gross profit |
||||||||
| Operating expenses: |
||||||||
| Sales and marketing expenses |
||||||||
| Research and development expenses |
||||||||
| General and administrative expenses |
||||||||
| Depreciation and amortization expense |
||||||||
| Deal and transaction expenses |
||||||||
| Total operating expenses |
||||||||
| Operating loss |
( |
) | ( |
) | ||||
| Other income (expenses): |
||||||||
| Interest expense, including amortization of debt discount |
( |
) | ( |
) | ||||
| Change in fair value of warrant liability |
||||||||
| Change in fair value of equity guarantee |
( |
) | ||||||
| Loss on extinguishment/settlement of obligations |
( |
) | ||||||
| Loss on debt waiver consent |
( |
) | ||||||
| Other income |
||||||||
| Total other income (expense) |
( |
) | ||||||
| Net (loss) income before income taxes |
( |
) | ||||||
| Provision for income taxes |
( |
) | ( |
) | ||||
| Net (loss) income |
$ | ( |
) | $ | ||||
| Basic (loss) earnings per common share |
$ | ( |
) | $ | ||||
| Diluted (loss) earnings per common share |
$ | ( |
) | $ | ||||
| Weighted average shares outstanding - basic |
||||||||
| Weighted average shares outstanding - diluted |
||||||||
See accompanying notes to condensed consolidated financial statements.
CREATIVE REALITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Operating Activities: | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Amortization of stock-based compensation | ||||||||
| Employee Retention and other Government Credits | ||||||||
| Loss on extinguishment of debt | ||||||||
| Loss on debt waiver consent | ||||||||
| Bad debt expense | ||||||||
| Gain on change in fair value of warrants | ( | ) | ||||||
| Loss on change in fair value of contingent consideration | ||||||||
| Deferred income taxes | ||||||||
| Changes to operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Work-in-process and inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Deferred revenues | ||||||||
| Customer deposits | ( | ) | ( | ) | ||||
| Other | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| Investing activities | ||||||||
| Acquisition of business, net of cash acquired | ( | ) | ||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Capitalization of labor for software development | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Principal payments on finance leases | ( | ) | ||||||
| Proceeds from sale of common stock in PIPE, net of offering expenses | ||||||||
| Proceeds from sale & exercise of pre-funded warrants in PIPE, net of offering expenses | ||||||||
| Proceeds from Acquisition Loan, net of offering expenses | ||||||||
| Repayment of Term Loan (2022) | ( | ) | ||||||
| Repayment of Secured Promissory Note | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Increase in Cash and Cash Equivalents | ||||||||
| Cash and Cash Equivalents, beginning of period | ||||||||
| Cash and Cash Equivalents, end of period | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
CREATIVE REALITIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except shares)
(Unaudited)
| Additional | ||||||||||||||||||||
| Common Stock | paid in | Accumulated | ||||||||||||||||||
| Shares | Amount | capital | Deficit | Total | ||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation | ||||||||||||||||||||
| Shares issued to directors as compensation | ||||||||||||||||||||
| Shares issued to vendors as compensation | ||||||||||||||||||||
| Shares issued to employees pursuant to the Retention Bonus Plan | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance as of March 31, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Additional |
||||||||||||||||||||
| Common Stock |
paid in |
Accumulated |
||||||||||||||||||
| Shares |
Amount |
capital |
(Deficit) |
Total |
||||||||||||||||
| Balance as of December 31, 2021 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Stock-based compensation |
||||||||||||||||||||
| Shares issued and warrants exercised in private investment in public entity ("PIPE") |
||||||||||||||||||||
| Shares issued in Reflect Systems, Inc. Merger |
||||||||||||||||||||
| Warrant repricing events |
- | ( |
) | |||||||||||||||||
| Net income |
- | |||||||||||||||||||
| Balance as of March 31, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
See accompanying notes to condensed consolidated financial statements.
CREATIVE REALITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(unaudited)
NOTE 1: NATURE OF ORGANIZATION AND OPERATIONS
Unless the context otherwise indicates, references in these Notes to the accompanying Condensed Consolidated Financial Statements to “we,” “us,” “our” and “the Company” refer to Creative Realities, Inc. and its subsidiaries.
Nature of the Company’s Business
Creative Realities, Inc. is a Minnesota corporation that provides innovative digital marketing technology and solutions to retail companies, individual retail brands, enterprises and organizations throughout the United States and in certain international markets. The Company has expertise in a broad range of existing and emerging digital marketing technologies, as well as the related media management and distribution software platforms and networks, device management, product management, customized software service layers, systems, experiences, workflows, and integrated solutions. Our technology and solutions include: digital merchandising systems and omni-channel customer engagement systems, interactive digital shopping assistants, advisors and kiosks, and other interactive marketing technologies such as mobile, social media, point-of-sale transactions, beaconing and web-based media that enable our customers to transform how they engage with consumers. We have expertise in a broad range of existing and emerging digital marketing technologies, as well as the following related aspects of our business: content, network management, and connected device software and firmware platforms; customized software service layers; hardware platforms; digital media workflows; and proprietary processes and automation tools.
Our main operations are conducted directly through Creative Realities, Inc., and under our wholly owned subsidiaries Allure Global Solutions, Inc. ("Allure), a Georgia corporation, Creative Realities Canada, Inc., a Canadian corporation, and Reflect Systems, Inc. ("Reflect"), a Delaware corporation.
Reverse stock split
On March 23, 2023, the Company filed Articles of Amendment with the Secretary of State of the State of Minnesota to effectuate, effective March 27, 2023, a 1-for-
As a result of the reverse stock split, effective 12:01 am on March 27, 2023, every three shares of common stock then-issued and outstanding automatically combined into one share of common stock, with no change in par value per share. No fractional shares were outstanding following the reverse stock split and any fractional shares resulting from the reverse split were rounded up to the nearest whole share of common stock. In connection with the reverse stock split, the total number of shares of common stock authorized for issuance was reduced from
Effective as of the same time as the reverse stock split, the number of shares of common stock available for issuance under the Company's equity compensation plans were reduced in proportion to the reverse stock split. The reverse stock split also resulted in reductions in the number of shares of common stock issuable upon exercising or vesting of equity awards in proportion to the reverse stock split and proportionate increases in exercise price or share-based performance criteria, if any, applicable to such awards. Similarly, the number of shares of common stock issuable upon exercise of outstanding warrants were reduced in proportion to the reverse stock split, and the exercise prices of outstanding warrants were proportionately increased.
Liquidity and Financial Condition
The accompanying Condensed Consolidated Financial Statements have been prepared on the basis of the realization of assets and the satisfaction of liabilities and commitments in the normal course of business and do not include any adjustments to the recoverability and classifications of recorded assets and liabilities as a result of uncertainties.
At March 31, 2023, we have an accumulated deficit of $
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of the accompanying Condensed Consolidated Financial Statements follows:
1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the applicable instructions to Form 10-Q and Article 10 of Regulation S-X and include all of the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”) for interim financial reporting. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes for the year ended December 31, 2022, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2023.
The results of operations for the interim periods are not necessarily indicative of results of operations for a full year. Management believes the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, including normal recurring items, considered necessary for a fair statement of results for the interim periods presented.
2. Recently Issued and Adopted Accounting Pronouncements
Credit Losses. In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial Instruments—Credit Losses, which requires entities to estimate expected lifetime credit losses on financial assets and provide expanded disclosures. The ASU replaced the incurred loss methodology with one that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We adopted ASU No. 2016-13 on January 1, 2023. The adoption of this guidance did not have a material impact on the Company's Condensed Consolidated Financial Statements, as the Company's primary financial assets are its trade accounts receivable, which are short-term financings under industry standard credit and trade terms.
Debt. In August 2020, the FASB issued Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. This guidance will be effective for us in the first quarter of 2024 on a full or modified retrospective basis, with early adoption permitted. We do not intend to early adopt this standard, nor do we expect the adoption of this guidance to have a material impact on our Consolidated Financial Statements.
3. Revenue Recognition
We recognize revenue in accordance with ASC 606, Revenue from Contracts with Customers, applying the five-step model.
If an arrangement involves multiple performance obligations, the items are analyzed to determine the separate units of accounting, whether the items have value on a standalone basis and whether there is objective and reliable evidence of their standalone selling price. The total contract transaction price is allocated to the identified performance obligations based upon the relative standalone selling prices of the performance obligations. The standalone selling price is based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost plus margin approach.
The Company estimates the amount of total contract consideration it expects to receive for variable arrangements by determining the most likely amount it expects to earn from the arrangement based on the expected quantities of services it expects to provide and the contractual pricing based on those quantities. The Company only includes some or a portion of variable consideration in the transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company considers the sensitivity of the estimate, its relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to the overall arrangement. The Company receives variable consideration in very few instances.
Revenue is recognized when a customer obtains control of promised goods or services under the terms of a contract and is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. The Company does not have any material extended payment terms as payment is due at or shortly after the time of the sale, ranging between thirty and ninety days. Observable prices are used to determine the standalone selling price of separate performance obligations or a cost plus margin approach when one is not available. Sales, value-added and other taxes collected concurrently with revenue producing activities are excluded from revenue.
The Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced to the clients. A contract liability is recognized as deferred revenue when the Company invoices clients in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the related performance obligation.
The Company uses the practical expedient for recording an immediate expense for incremental costs of obtaining contracts, including certain design/engineering services, commissions, incentives and payroll taxes, as these incremental and recoverable costs have terms that do not exceed one year.
4. Allowance for Credit Losses
The allowance for credit losses is the Company's best estimate of the amount of expected lifetime credit losses in the Company's accounts receivable. The Company regularly reviews the adequacy of its allowance for credit losses. The Company estimates losses over the contractual life using assumptions to capture the risk of loss, even if remote, based principally on how long a receivable has been outstanding. Account balances are charged off against the allowance for credit losses after all reasonable means of collection have been exhausted and the potential for recovery is considered remote. Other factors considered include historical write-off experience, current economic conditions, customer credit, and past transaction history with the customer. The allowance for credit losses is included in accounts receivable, net in the accompanying Condensed Consolidated Balance Sheets.
The Company had the following activity for its allowance for credit losses from December 31, 2022 to March 31, 2023:
| Balance as of December 31, 2022 | $ | |||
| Amounts accrued | ||||
| Write-offs charged against the allowance | ( | ) | ||
| Balance as of March 31, 2023 | $ |
5. Inventories
Inventories are stated at the lower of cost or net realizable value, determined by the first-in, first-out (FIFO) method, and consist of the following:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Raw materials, net of reserve | $ | $ | ||||||
| Work-in-process | ||||||||
| Total inventories | $ | $ | ||||||
The reserve for obsolete inventory at March 31, 2023 and December 31, 2022 was $
6. Impairment of Long-Lived Assets
We review the carrying value of all long-lived assets, including property and equipment, for impairment annually as of September 30 in accordance with ASC 360, Accounting for the Impairment or Disposal of Long-Lived Assets. Under ASC 360, impairment losses are recorded whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable.
If the impairment tests indicate that the carrying value of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment loss would be recognized. The impairment loss is determined as the amount by which the carrying value of such asset exceeds its fair value. We generally measure fair value by considering sale prices for similar assets or by discounting estimated future cash flows from such assets using an appropriate discount rate. Assets to be disposed of are carried at the lower of their carrying value or fair value less costs to sell. Considerable management judgment is necessary to estimate the fair value of assets, and accordingly, actual results could vary significantly from such estimates.
7. Basic and Diluted (Loss)/Earnings per Common Share
Basic and diluted (loss)/earnings per common share for all periods presented is computed using the weighted average number of common shares outstanding. Basic weighted average shares outstanding includes only outstanding common shares. Diluted weighted average shares outstanding includes outstanding common shares and potential dilutive common shares outstanding in accordance with the treasury stock method.
Shares reserved for outstanding stock options, including stock options with performance restricted vesting, and warrants totaling approximately
8. Income Taxes
Deferred income taxes are recognized in the financial statements for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates. Temporary differences arise from a number of matters including, but not limited to, net operating losses, differences in basis of intangibles, stock-based compensation, reserves for uncollectible accounts receivable and inventory, differences in depreciation methods, and accrued expenses. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company accounts for uncertain tax positions utilizing an established recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We had
9. Goodwill and Intangible Assets
We follow the provisions of ASC 350, Goodwill and Other Intangible Assets. Pursuant to ASC 350, goodwill acquired in a purchase business combination is not amortized, but instead tested for impairment at least annually. The Company uses an annual measurement date of September 30 to assess impairment of goodwill and indefinite-lived intangible assets, or as indicators are identified.
Definite-lived intangible assets are amortized straight-line in accordance with their identified useful lives.
10. Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Our significant estimates include: contingent purchase consideration valuation, allowance for credit losses, valuation allowances related to deferred taxes, the fair value of acquired assets and liabilities, the fair value of liabilities reliant upon the appraised fair value of the Company, valuation of stock-based compensation awards and other assumptions and estimates used to evaluate the recoverability of long-lived assets, goodwill and other intangible assets and the related amortization methods and periods. Actual results could differ from those estimates.
11. Business Combinations
Accounting for acquisitions requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.
12. Contingent Consideration
The Company has contingent consideration arrangements related to certain acquisitions to potentially pay additional cash amounts in future periods based on the lack of achievement of certain share price performance goals of our common stock. Such contingent consideration arrangements are recorded at fair value and are classified as liabilities on the acquisition date and are remeasured at each reporting period in accordance with ASC 805-30-35-1 using a Monte Carlo simulation model.
NOTE 3: FAIR VALUE MEASUREMENT
We measure certain financial assets, including cash equivalents, at fair value on a recurring basis. In accordance with ASC 820-10-30, fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820-10-35 establishes a three-level hierarchy that prioritizes the inputs used in measuring fair value. The three hierarchy levels are defined as follows:
Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets.
Level 2 — Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly.
Level 3 — Valuations based on inputs that are unobservable and involve management judgment and the reporting entity’s own assumptions about market participants and pricing.
The calculation of the fair value of the contingent consideration contains inputs which are unobservable and involve management judgment and are considered Level 3 estimates. Additionally, the separately identifiable intangible assets rely on a discounted cash flow model which utilizes inputs including the calculation of the weighted average cost of capital and management’s forecast of future financial performance which are unobservable and involve management judgment and are considered Level 3 estimates.
The calculation of the weighted average cost of capital and management’s forecast of future financial performance utilized within our discounted cash flow model for the impairment of goodwill contains inputs which are unobservable and involve management judgment and are considered Level 3 estimates.
The calculation of the fair value of the warrant liability contains valuation inputs which are based on observable inputs (other than Level 1 prices) and are considered Level 2 estimates. The liability warrants were converted to equity warrants effective June 30, 2022.
NOTE 4: REVENUE RECOGNITION
The Company applies ASC 606 for revenue recognition. The following table disaggregates the Company’s revenue by major source for the three months ended March 31, 2023 and 2022:
| Three Months | Three Months | |||||||
| Ended | Ended | |||||||
| March 31, | March 31, | |||||||
| (in thousands) | 2023 | 2022 | ||||||
| Hardware | $ | $ | ||||||
| Services: | ||||||||
| Installation Services | ||||||||
| Software Development Services | ||||||||
| Managed Services | ||||||||
| Media Sales | ||||||||
| Total Services | ||||||||
| Total Hardware and Services | $ | $ | ||||||
System hardware sales
System hardware revenue is recognized generally upon shipment of the product or customer acceptance depending upon contractual arrangements with the customer in instances in which the sale of hardware is the sole performance obligation. Shipping charges billed to customers are included in hardware sales and the related shipping costs are included in hardware cost of sales. The cost of freight and shipping to the customer is recognized in cost of sales at the time of transfer of control to the customer. System hardware revenues are classified as “Hardware” within our disaggregated revenue.
Installation services
The Company performs outsourced installation services for customers and recognizes revenue upon completion of the installations. Installation services also includes engineering services performed as part of an installation project.
When system hardware sales include installation services to be performed by the Company, the goods and services in the contract are not distinct, so the arrangement is accounted for as a single performance obligation. Our customers control the work-in-process and can make changes to the design specifications over the contract term. Revenues are recognized over time as the installation services are completed based on the relative portion of labor hours completed as a percentage of the budgeted hours for the installation. Installation services revenues are classified as “Installation Services” within our disaggregated revenue.
Software design and development services
Software and software license sales are revenue when a fixed fee order has been received and delivery has occurred to the customer. Revenue is recognized generally upon customer acceptance (point-in-time) of the software product and verification that it meets the required specifications. Software is delivered to customers electronically. Software design and development revenues are classified as “Software Development Services” within our disaggregated revenue.
Software as a service
Software as a service includes revenue from software licensing and delivery in which software is licensed on a subscription basis and is centrally hosted by the Company. These services often include software updates which provide customers with rights to unspecified software product upgrades and maintenance releases and patches released during the term of the support period. Contracts for these services are generally
Maintenance and support services
The Company sells support services which include access to technical support personnel for software and hardware troubleshooting. The Company offers a hosting service through our network operations center, or NOC, allowing the ability to monitor and support its customers’ networks 7 days a week, 24 hours a day. These contracts are generally
Maintenance and support fees are based on the level of service provided to end customers, which can range from monitoring the health of a customer’s network to supporting a sophisticated web-portal to managing the end-to-end hardware and software of a digital marketing system. These agreements are renewable by the customer. Rates for maintenance and support, including subsequent renewal rates, are typically established based upon a fee per location, per device, or a specified percentage of net software license fees as set forth in the arrangement. These contracts are generally 12-36 months in length. Revenue is recognized ratably and evenly over the service period.
The Company also performs time and materials-based maintenance and repair work for customers. Revenue is recognized at a point in time when the performance obligation has been fully satisfied.
Media sales
Media revenues are derived from selling (i) sponsorship packages, including mobile takeover or physical presence, or (ii) advertising space to customers on digital displays or other outdoor structures, each within physical venues. We generally do not own the physical structures on which we display advertising for our customers but instead sell advertising or sponsorship opportunities on behalf of our media network owners to our brand customers. Media revenue services are recognized either on a straight-line basis over the available hours of advertising during the contracted period, or at the time of an event in the case of sponsorships.
Our media revenue contracts with customers range from weeks to years and billing commences at the beginning of the contract term, with payment generally due within ninety (90) days of billing. For the majority of our contracts, transaction prices are explicitly stated. Any contracts with transaction prices that contain multiple performance obligations are allocated primarily based on a relative standalone selling price basis. Any deferred revenues primarily consist of revenues paid in advance of being earned.
On a contract-by-contract basis, we evaluate whether we should be considered the principal (i.e., report revenues on a gross basis) or an agent (i.e., report revenues on a net basis). We are considered the principal in our arrangements and report revenues on a gross basis, wherein the amounts billed to customers are recorded as revenues and amounts paid to network owners are recorded as expenses. We are considered the principal because we control the advertising space before and after the contract term, are primarily responsible to our customers, and have discretion in pricing. For revenues generated through the use of a subcontracted advertising agency, commissions are calculated based on a stated percentage of gross advertising revenue and reported in the Consolidated Statement of Operations within Sales and Marketing expenses.
NOTE 5: BUSINESS COMBINATION
On November 12, 2021, the Company and Reflect, entered into an Agreement and Plan of Merger (as amended on February 8, 2022 and February 11, 2023, the “Merger Agreement") pursuant to which a direct, wholly owned subsidiary of Creative Realities, CRI Acquisition Corporation, or “Merger Sub,” would merge with and into Reflect, with Reflect surviving the merger and becoming our wholly owned subsidiary, which transaction is referred to herein as the “Merger.” On February 17, 2022, the parties consummated the Merger (the "Closing").
Reflect provides digital signage solutions, including software, strategic and media services to a wide range of companies across the retail, financial, hospitality and entertainment, healthcare, and employee communications industries in North America. Reflect offers digital signage platforms, including ReflectView, a platform used by companies to power hundreds of thousands of active digital displays. Through its strategic services, Reflect assists its customers with designing, deploying and optimizing their digital signage networks, and through its media services, Reflect assists customers with monetizing their digital advertising networks.
Subject to the terms and conditions of the Merger Agreement, at the Closing, Reflect stockholders as of the effective time of the Merger collectively received from the Company, in the aggregate, the following Merger consideration: (i) $
The Company may exercise an extension option (the “Extension Option”) to extend the Guarantee Date by six (6) months, from February 17, 2025 to August 17, 2025, if (i) the Extension Threshold Price is greater than or equal to
In connection with the Merger, the Company adopted a Retention Bonus Plan and raised capital to, among other things, pay the cash portion of the Merger consideration. The Retention Bonus Plan is described below.
Retention Bonus Plan
On February 17, 2022, in connection with the Closing, the Company adopted a Retention Bonus Plan, pursuant to which the Company is required to pay to key members of Reflect’s management team an aggregate of $
Upon the resignation of a participant’s employment for “good reason,” or termination of the employment of a participant without “cause,” each as defined in the Retention Bonus Plan, the participant will be fully vested and will receive all cash and shares allocated to such participant under the Retention Bonus Plan. Any amounts unpaid by reason of a lapse in continuous employment or otherwise will be reallocated among the remaining Retention Bonus Plan participants.
Purchase price
The preliminary purchase price of Reflect consisted of the following items:
| (in thousands) | Consideration | ||
| Cash consideration for Reflect stock | $ | (1) | |
| Cash consideration for Retention Bonus Plan | (2) | ||
| Common stock issued to Reflect stockholders | (3) | ||
| Common stock issued to Retention Bonus Plan | (4) | ||
| Secured Promissory Note | (5) | ||
| Earnout liability | (6) | ||
| Total consideration | |||
| Vendor deposit with the Company | (7) | ||
| Cash acquired | (8) | ||
| Net consideration transferred | $ | ||
| (1) | Cash consideration for outstanding shares of Reflect capital stock per Merger Agreement. |
| (2) | Cash consideration utilized to fund the Retention Bonus Plan per Merger Agreement. |
| (3) | Company common stock issued in exchange for outstanding shares of Reflect capital stock per Merger Agreement. |
| (4) | Company common stock issued to fund the Retention Bonus Plan per Merger Agreement. |
| (5) | The Secured Promissory Note accrued interest at |
| (6) | Represents an estimate of the fair value of the Guaranteed Consideration as of the Merger, which, if any, is payable on or after February 17, 2025 (subject to the Extension Option), in an amount by which the value of the CREX Shares on such anniversary is less than $ |
| (7) | Prior to the Merger, Reflect had engaged the Company on a project and paid the Company a deposit of $ |
| (8) | Represents the Reflect cash balance acquired at Closing. |
The Company incurred $
The Company accounted for the Merger using the acquisition method of accounting. The final allocation of the purchase price is based on the fair value of assets acquired and liabilities assumed as of February 17, 2022, which included the following:
| (in thousands) | Total | |||
| Accounts receivable | $ | |||
| Inventory | ||||
| Prepaid expenses & other current assets | ||||
| Property and equipment | ||||
| Operating right of use assets | ||||
| Other assets | ||||
| Identified intangible assets: | ||||
| Definite-lived trade names | ||||
| Definite-lived Developed technology | ||||
| Definite-lived Customer relationships | ||||
| Definite-lived Noncompete agreements | ||||
| Goodwill | ||||
| Accounts payable | ( | ) | ||
| Accrued expenses | ( | ) | ||
| Customer deposits | ( | ) | ||
| Deferred revenues | ( | ) | ||
| Current maturities of operating leases | ( | ) | ||
| Long-term obligations under operating leases | ( | ) | ||
| Other liabilities | ( | ) | ||
| Net consideration transferred | $ | |||
The Company engaged a third-party valuation specialist to assist in the identification and calculation of the fair value of those separately identifiable intangible assets.
The Company completed its valuation procedures by asset utilizing the following approaches:
| ● | Customer relationship asset was estimated using the income approach through a discounted cash flow analysis wherein the cash flows will be based on estimates used to price the Merger. Discount rates were benchmarked with reference to the implied rate of return from the Company’s pricing model and the weighted average cost of capital. |
| ● | Trade name asset represents the Reflect brand name as marketed primarily as a full services digital software solution, marketed in numerous verticals with the exception of food service. The Company applied the income approach through an excess earnings analysis to determine the fair value of the trade name asset. The Company applied the income approach through a relief-from-royalty analysis to determine the fair value of this asset. |
| ● | The developed technology assets are primarily comprised of know-how and functionality embedded in Reflect’s proprietary content management applications, which drive currently marketed products and services. The Company applied the income approach through a relief-from-royalty analysis to determine the preliminary fair value of this asset. |
The Company is amortizing the identifiable intangible assets on a straight-line basis over the weighted average lives ranging from
The table below sets forth the valuation and amortization period of identifiable intangible assets:
| (in thousands) | Valuation | Amortization Period (in years) | ||||||
| Identifiable definite-lived intangible assets: | ||||||||
| Trade names | $ | |||||||
| Developed technology | ||||||||
| Noncompete | ||||||||
| Customer relationships | ||||||||
| Total | $ | |||||||
The Company estimated the preliminary fair value of the acquired property and equipment using a combination of the cost and market approaches, depending on the component. The fair value of such property and equipment is $
The excess of the purchase price over the fair value of the tangible net assets and identifiable intangible assets acquired was recorded as goodwill. The factors contributing to the recognition of the amount of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the Merger. These benefits include a comprehensive portfolio of iconic customer brands, complementary product offerings, enhanced national footprint, and attractive synergy opportunities and value creation. None of the goodwill is expected to be deductible for income tax purposes.
NOTE 6: SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Supplemental non-cash Investing activities | ||||||||
| Capitalized software in accounts payable | $ | $ | ||||||
| Property and equipment in accounts payable | $ | $ | ||||||
| Right-of-use assets obtained in exchange for new finance lease liabilities | $ | $ | ||||||
| Supplemental disclosure information for cash flow | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Operating leases | $ | $ | ||||||
| Income taxes, net | $ | $ | ||||||
NOTE 7: INTANGIBLE ASSETS, INCLUDING GOODWILL
Intangible Assets
Intangible assets consisted of the following at March 31, 2023 and December 31, 2022:
| March 31, | December 31, | |||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
| Amount | Amortization | Amount | Amortization | |||||||||||||
| Technology platform | $ | $ | $ | $ | ||||||||||||
| Purchased and developed software | ||||||||||||||||
| In-Process internally developed software platform | ||||||||||||||||
| Customer relationships | ||||||||||||||||
| Trademarks and trade names | ||||||||||||||||
| Non-compete | ||||||||||||||||
| Accumulated amortization | ||||||||||||||||
| Net book value of amortizable intangible assets | $ | $ | ||||||||||||||
For the three months ended March 31, 2023 and 2022, amortization of intangible assets charged to operations was $
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is subject to an impairment review at a reporting unit level, on an annual basis at September 30th each fiscal year, when an event occurs, or circumstances change that would indicate potential impairment. The Company has only one reporting unit, and therefore the entire goodwill is allocated to that reporting unit.
The Company assessed the carrying value of goodwill at the reporting unit level based on an estimate of the fair value of its reporting unit. Fair value of the reporting unit was estimated using both (1) a market approach, leveraging recent industry merger and acquisition activity as well as comparable public company information, and (2) a discounted cash flow analyses consisting of various assumptions, including expectations of future cash flows based on projections or forecasts derived from analysis of business prospects and economic or market trends that may occur, specifically, the Company gave significant consideration to actual historic financial results, including revenue growth rates in the current and preceding three years, further informed by known backlog and customer acquisitions. Based on the Company’s assessment, we determined that the fair value of our reporting unit exceeds its carrying value, and accordingly, the goodwill associated with the reporting unit is not considered to be impaired at September 30, 2022.
At December 31, 2022, we concluded the decline in our market value represented an interim indicator of potential impairment. Based on a quantitative assessment of our fair value performed at December 31, 2022, using the same approach as our annual impairment performed at September 30, described above, we concluded that the carrying value of our goodwill did not exceed the reporting unit fair value. No indicators of impairment were identified as of March 31, 2023. The Company recognizes that any differences between our actual and projected future results, or changes in our projected future results, could potentially have a material impact on our assessment of goodwill impairment. The Company will continue to monitor the actual performance of its operations against expectations and assess further indicators of possible impairment. The valuation of goodwill and intangible assets is subject to a high degree of judgment, uncertainty and complexity. Should any indicators of impairment occur in subsequent periods, the Company will be required to perform an analysis in order to determine whether goodwill is impaired.
NOTE 8: LOANS PAYABLE
The outstanding debt with detachable warrants, as applicable, are shown in the table below. Further discussion of the debt follows.
| As of March 31, 2023 | ||||||||||||
| Issuance | Maturity | |||||||||||
| Debt Type | Date | Principal | Date | Warrants | Interest Rate Information | |||||||
| A |
| $ |
| 8.0% interest(1) | ||||||||
| B |
|
| 4.60% interest(2) | |||||||||
| C |
|
| 10.0% interest(3) | |||||||||
| D |
|
| 12.5% interest(4) | |||||||||
| Total debt, gross | ||||||||||||
| Debt discount | ( | ) | ||||||||||
| Total debt, net | $ | |||||||||||
| Less current maturities | ( | ) | ||||||||||
| Long term debt | $ | |||||||||||
| As of December 31, 2022 | ||||||||||||
| Issuance | Maturity | |||||||||||
| Debt Type | Date | Principal | Date | Warrants | Interest Rate Information | |||||||
| A |
| $ |
| 8.0% interest(1) | ||||||||
| B |
|
| 0.59% interest(2) | |||||||||
| C |
|
| 10.0% interest(3) | |||||||||
| D |
|
| 12.5% interest(4) | |||||||||
| Total debt, gross | ||||||||||||
| Debt discount | ( | ) | ||||||||||
| Total debt, net | $ | |||||||||||
| Less current maturities | ( | ) | ||||||||||
| Long term debt | $ | |||||||||||
A – Acquisition Term Loan with related party
B – Secured Promissory Note
C – Consolidation Term Loan with related party
D – Term Loan (2022) with related party
| (1) | |
| (2) | Annual interest rate on the outstanding principal increased from |
| (3) | |
| (4) | Interest was paid-in-kind through October 2021, at which point interest became payable in cash at the stated interest rates through maturity. |
Secured Promissory Note
On February 17, 2022, in connection with the Closing, the Company issued to RSI Exit Corporation (“Stockholders’ Representative”), the representative of Reflect stockholders, a $
The Secured Promissory Note accrued interest at
On February 11, 2023, the Company and the Stockholders’ Representative executed an amendment (the “Note Amendment”) to the Secured Promissory Note. The Note Amendment eliminates the balloon payment, extending the maturity date for a one-year period, to February 17, 2024. During the extended period, the Company will continue to make monthly principal payments of $
Second Amended and Restated Loan and Security Agreement
On February 17, 2022, the Company and its subsidiaries (collectively, the “Borrowers”) refinanced their debt facilities with Slipstream, pursuant to a Second Amended and Restated Credit and Security Agreement (the “Credit Agreement”). The Borrowers include Reflect, which became a wholly owned subsidiary of the Company as a result of the Closing on February 17, 2022. The debt facilities continue to be fully secured by all assets of the Borrowers.
The Credit Agreement also provides that the Company’s outstanding loans from Slipstream at December 31, 2021, consisting of its pre-existing $
In addition to refinancing the existing debt with Slipstream, the Company issued to Slipstream a $
In connection with the Acquisition Term Loan and Consolidation Term Loan warrant coverage, the Company issued to Slipstream a warrant to purchase an aggregate of
In certain circumstances, upon a fundamental transaction of the Company (e.g., a disposal or sale of all or the greater part of the assets or undertaking of the Company, an amalgamation or merger with another company, or implementation of a scheme of arrangement), the holder of the Lender Warrant will have the right to require the Company to repurchase the Lender Warrant at its fair value using a Black Scholes option pricing formula; provided that such holder may not require the Company or its successor entity to repurchase the Lender Warrant for the Black Scholes value in connection with a fundamental transaction that is not approved by the Company’s Board of Directors, and therefore not within the Company’s control.
Effective June 30, 2022, the Company amended the terms of the Lender Warrant to remove the holder’s option to exercise such warrant on a cashless basis utilizing the VWAP of the Company’s common stock on the trading day immediately preceding the date of a notice of cashless exercise in certain circumstances, and remove the condition to exercising such warrant that the Company’s shareholders approve the exercise thereof (which has already been obtained). The amendments to the Lender Warrant also extend the term of such warrants for an additional one year, such that the Lender Warrant will expire on February 17, 2028. The foregoing amendments to the Lender Warrant caused such warrants to be accounted for as equity instruments in the Company’s Consolidated Financial Statements.
On October 31, 2022, the Borrowers and Slipstream amended the Credit Agreement to provide the Borrowers with a $
NOTE 9: COMMITMENTS AND CONTINGENCIES
On August 2, 2019, the Company filed suit in Jefferson Circuit Court, Kentucky, against a supplier of the Company’s wholly owned subsidiary, Allure, for breach of contract, breach of warranty, and negligence with respect to equipment installations performed by such supplier for an Allure customer. On October 10, 2019, the Allure customer that is the basis of our claim above sent a demand to the Company for payment of $
Except as noted above, the Company is not party to any other material legal proceedings, other than ordinary routine litigation incidental to the business, and there were no other such proceedings pending during the period covered by this Report.
NOTE 10: INCOME TAXES
Our deferred tax assets are primarily related to net federal and state operating loss carryforwards (NOLs). We have substantial NOLs that are limited in usage by IRC Section 382. IRC Section 382 generally imposes an annual limitation on the amount of NOLs that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership within a statutory testing period. We have performed a preliminary analysis of the annual NOL carryforwards and limitations that are available to be used against taxable income. Based on the history of losses of the Company, there continues to be a full valuation allowance against the net deferred tax assets of the Company with a definite life.
As of March 31, 2023, we reported tax liability of $
NOTE 11: WARRANTS
A summary of outstanding warrants is included below:
| Warrants | ||||||||||||
| Weighted | ||||||||||||
| Weighted | Average | |||||||||||
| Average | Remaining | |||||||||||
| Exercise | Contractual | |||||||||||
| Amount | Price | Life | ||||||||||
| Balance December 31, 2022 | $ | |||||||||||
| Warrants expired | ( | ) | - | |||||||||
| Balance March 31, 2023 | $ | |||||||||||
On February 3, 2022, the Company, entered into a Securities Purchase Agreement with a purchaser (the “Purchaser”), pursuant to which the Company agreed to issue and sell to the Purchaser, in a private placement priced at-the-market under Nasdaq rules, (i)
On February 17, 2022, in connection with the Credit Agreement with Slipstream, the Company issued to Slipstream
On February 17, 2022, in connection with obtaining a waiver of certain restrictions in investment documents between an investor and the Company in order to consummate the financing contemplated by the Credit Agreement, the Company paid consideration to such investor in the form of a warrant (the “Purchaser Warrant”) to purchase
Effective June 30, 2022, the Company amended the terms of the Common Stock Warrant (
The foregoing amendments to the warrants resulted in such warrants to be accounted for as equity instruments on the Company’s Condensed Consolidated Financial Statements as of June 30, 2022. As such, the Company reclassified the warrant liability from noncurrent liabilities to additional paid-in-capital as of June 30, 2022. These amounts are reflected as additional paid-in-capital in the Condensed Consolidated Balance Sheet as of December 31, 2022.
NOTE 12: STOCK-BASED COMPENSATION
A summary of outstanding options is included below:
| Time Vesting Options | Weighted | |||||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||||||
| Remaining | Average | Average | ||||||||||||||||||
| Range of Exercise | Number | Contractual | Exercise | Options | Exercise | |||||||||||||||
| Prices between | Outstanding | Life | Price | Exercisable | Price | |||||||||||||||
| $4.01 - $8.00 | $ | $ | ||||||||||||||||||
| $8.01+ | $ | |||||||||||||||||||
| $ | ||||||||||||||||||||
| Performance Vesting Options | Weighted | |||||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||||||
| Remaining | Average | Average | ||||||||||||||||||
| Range of Exercise | Number | Contractual | Exercise | Options | Exercise | |||||||||||||||
| Prices between | Outstanding | Life | Price | Exercisable | Price | |||||||||||||||
| $4.01 - $8.00 | $ | $ | ||||||||||||||||||
| $ | ||||||||||||||||||||
| Market Vesting Options | Weighted | |||||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||||||
| Remaining | Average | Average | ||||||||||||||||||
| Range of Exercise | Number | Contractual | Exercise | Options | Exercise | |||||||||||||||
| Prices between | Outstanding | Life | Price | Exercisable | Price | |||||||||||||||
| $0.01 - $4.00 | $ | $ | ||||||||||||||||||
| $ | ||||||||||||||||||||
| Performance Vesting | ||||||||||||||||||||||||
| Market Vesting Options | Time Vesting Options | Options | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Options | Exercise | Options | Exercise | Options | Exercise | |||||||||||||||||||
| Date/Activity | Outstanding | Price | Outstanding | Price | Outstanding | Price | ||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | ||||||||||||||||||||||
| Forfeited or expired | ( | ) | ||||||||||||||||||||||
| Balance, March 31, 2023 | $ | |||||||||||||||||||||||
The weighted average remaining contractual life for options exercisable is
Valuation Information for Stock-Based Compensation
For purposes of determining estimated fair value under FASB ASC 718-10, Stock Compensation, the Company computed the estimated fair values of stock options using the Black-Scholes model.
Amendment to Performance Options
On June 1, 2020, Rick Mills, CEO, and Will Logan, CFO, were issued -year options to purchase
On June 15, 2022, the Board approved of an amendment to the Performance Options to provide that the revenue target for the calendar year 2022 set forth therein ($
The Performance Options state that the calculation of EBITDA set forth in the Performance Options shall be calculated in a form consistent with the Company’s 2022 approved budget, which
| (i) | excludes any impact on EBITDA of: |
(a) the accounting treatment (including any “mark-to-market accounting”) of the Company’s warrants or the Guaranteed Consideration (as defined in the Merger Agreement),
(b) non-recurring transaction expenses associated with the Merger and the capital raising financing activities of the Company to effectuate the Merger, and
(c) any write-down or write-off of any Company inventory of Safe Space Solutions products.
(ii) includes deductions related to any cash or stock bonuses paid or payable to any employees of the Company for services provided in calendar year 2022 (even if such bonuses are actually paid after calendar year 2022), including bonuses paid pursuant to the terms of the 2022 Cash Bonus Plan (as described below) (collectively, the “EBITDA Calculations”).
The unvested portion of the Performance Options as of December 31, 2022 vested in full effective March 30, 2023 upon confirmation by the Board of Directors of achievement of the performance metrics for the year ended December 31, 2022.
The exercise price of the foregoing options is $
Issuance of New Options
On June 15, 2022, Messrs. Mills and Logan received -year options to purchase
| Share Price Target | ||||||||||||||||||||||||||||
| Guaranteed | Total | |||||||||||||||||||||||||||
| Executive | $6.00 | $9.00 | $12.00 | $15.00 | $18.00 | Price | Shares | |||||||||||||||||||||
| Mills Shares Vested | ||||||||||||||||||||||||||||
| Logan Shares Vested | ||||||||||||||||||||||||||||
| Percentage of Shares Vested | % | % | % | % | % | % | ||||||||||||||||||||||
The “Guaranteed Price” has the meaning ascribed to such term in the Merger Agreement, which currently means $
The exercise price of the New Options is $
The fair value of the options on the grant date varied between $
| Risk-free interest rate | % | |||
| Expected term (in years) | ||||
| Expected price volatility | % | |||
| Dividend yield | % |
At March 31, 2023, the Company evaluated the probability of achieving the share price targets in each tranche based, in part, on work performed by the Company’s third party valuation specialist in conjunction with evaluating the equity guarantee contingent liability. As a result of that evaluation of probability, during the three month period ending March 31, 2023 the Company recorded $
Stock Compensation Expense Information
ASC 718-10, Stock Compensation, requires measurement and recognition of compensation expense for all stock-based payments including warrants, stock options, restricted stock grants and stock bonuses based on estimated fair values. Under the Amended and Restated 2006 Equity Incentive Plan, the Company reserved 573,334 shares for purchase by the Company’s employees and under the Amended and Restated 2006 Non-Employee Director Stock Option Plan the Company reserved
In October 2014, the Company’s shareholders approved the 2014 Stock Incentive Plan, under which
Employee Awards
Compensation expense recognized for the issuance of stock options to employees for the three months ended March 31, 2023 and 2022 of $
At March 31, 2023, there was approximately $
Non-Employee Awards
Compensation expense recognized for the issuance of stock options, including those options awarded to our Board of Directors, for the three month period ended March 31, 2023 and 2022 of $
The Company engages certain consultants to perform services in exchange for Company common stock. Shares issued for services were calculated based on the ten (10) day VWAP for the last ten (10) days during the month of service provided.
During the three months ended March 31, 2023 and 2022, the Company issued or accrued shares issuable in exchange for services in the amount of $
NOTE 13: SIGNIFICANT CUSTOMERS/VENDORS
Significant Customers
We had
We had
Significant Vendors
We had
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements
The following discussion contains various forward-looking statements within the meaning of Section 21E of the Exchange Act. Although we believe that, in making any such statement, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. When used in the following discussion, the words “anticipates,” “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 such forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated, and many of which are beyond our control. Factors that could cause actual results to differ materially from those anticipated are set forth under the caption “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2022 as filed with the Securities and Exchange Commission on March 30, 2023.
Our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking statements. Accordingly, we cannot be certain that any of the events anticipated by forward-looking statements will occur or, if any of them do occur, what impact they will have on us. We caution you to keep in mind the cautions and risks described in this document and to refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of the document in which they appear. We do not undertake to update any forward-looking statement.
Overview
Creative Realities, Inc. (“Creative Realities,” “we,” “us,” or the “Company”) transforms environments through digital solutions by providing innovative digital signage solutions for key market segments and use cases, including:
| ● |
Retail |
| ● |
Entertainment and Sports Venues |
| ● |
Restaurants, including quick-serve restaurants (“QSR”) |
| ● |
Convenience Stores |
| ● |
Financial Services |
| ● |
Automotive |
| ● |
Medical and Healthcare Facilities |
| ● |
Mixed Use Developments |
| ● |
Corporate Communications, Employee Experience |
| ● |
Digital out of Home (DOOH) Advertising Networks |
We serve market-leading companies, so there is a good chance that if you leave your home today to shop, work, eat or play, you will encounter one or more of our digital signage experiences. Our solutions are increasingly visible because we help our enterprise customers achieve a range of business objectives including:
| ● |
Increased brand awareness |
| ● |
Improved customer support |
| ● |
Enhanced employee productivity and satisfaction |
| ● |
Increased revenue and profitability |
| ● |
Improved guest experience |
| ● |
Increased customer/guest engagement |
Through a combination of organically grown platforms and a series of strategic acquisitions, including our recent acquisition of Reflect in February 2022, the Company assist clients to design, deploy, manage, and monetize their digital signage networks. The Company sources leads and opportunities for its solutions through its digital and content marketing initiatives, close relationships with key industry partners, specifically equipment manufacturers, and the direct efforts of its in-house industry sales experts. Client engagements focus on consultative conversations that ensure the Company’s solutions are positioned to help clients achieve their business objectives in the most cost-effective manner possible.
When comparing Creative Realities to other digital signage providers, our customers value the following competitive advantages:
| ● |
Breadth of solutions – Creative Realities is one of only a few companies in the industry capable of providing the full portfolio of products and services required to implement and run an effective digital signage network. We leverage a ‘single vendor’ approach, providing clients with a one-stop-shop for sourcing digital signage solutions from design through day two services. |
| ● |
Managed labor pool – Unlike most companies in our industry, we have a curated labor pool including thousands of qualified and vetted field technicians available to service clients quickly nationwide. We can meet tight schedules even in exceptionally large deployments and still ensure quality and consistency. |
| ● |
In-house creative resources – We assist clients in repurposing existing content for digital signage experiences or creating new content, an activity for which the Company has won several design awards in recent years. In each instance, our services can be essential in helping clients develop an effective content program. |
| ● |
Network scalability and reliability – Our software as a service (“SaaS”) content management platforms power some of the largest and most complex digital signage networks in North America evidencing our ability to manage enterprise scale projects. This also provides us purchasing power to source products and services for our customers, enabling us to deliver cost effective, reliable and powerful solutions to small and medium size business clients. |
| ● |
Ad management platform – Our customers are increasingly interested in monetizing their digital signage networks through advertising content. However, efficiently scheduling advertising content into digital signage playlists to meet campaign objectives can be a challenging and labor-intensive process. AdLogic, our home-grown, content management-agnostic platform, automates this process, allowing network owners to capture more revenue with less expense. |
| ● |
Media sales – Few, if any other digital signage solution providers, can offer their clients media sales as a service. We have in-house media sales expertise to elevate conversations with clients interested in better understanding network monetization. We believe this meaningful differentiation in the sales process provides an additional revenue stream to Creative Realities compared to our competitors. |
| ● |
Market sector expertise – Creative Realities has in-house experts in key market segments such as automotive, retail, quick-serve restaurants (QSR), convenience stores, and Digital Out of Home (DOOH) advertising. Our expertise in these business segments enables our teams to provide meaningful business conversations and offer tailored solutions with prospects and customers to their unique business objectives. These experts build industry relationships and create thought leadership that drives lead flow and new opportunities for our business. |
| ● |
Logistics – Implementing a large digital signage project can be a logistics nightmare that can stall an initiative even before deployment. Our expertise in logistics improves deployment efficiency, reduces delays and problems, and saves customers time and money. |
| ● |
Technical support – Digital signage networks present unique challenges for corporate IT departments. Creative Realities helps simplify and improve end user support by leveraging our own Network Operations Center (“NOC”) in Louisville, Kentucky. The NOC resolves many issues remotely and when field support is required, it can be dispatched from the NOC, leveraging our managed labor pool to resolve customer issues quickly and effectively. |
| ● |
Integrations and Application Development – The future of digital signage is not still images and videos on a screen. Interactive applications and integrations with other data sources will dominate the future. From social media feeds to corporate data stores to Point of Sale (“POS”) systems, our proven ability to build scalable applications and integrations is a key advantage clients can leverage to deliver more compelling and engaging experiences for their customers. |
| ● |
Hardware support – A number of digital signage providers sell a proprietary media player or align themselves with just one operating system. We utilize a range of media players including Windows, Android and BrightSign to provide clients the flexibility they need to select the appropriate hardware for any application knowing the entire network can still be served by a single digital signage platform, reducing complexity and improving the productivity of their teams. |
The three primary sources of revenue for the Company are:
| ● |
Hardware sales from reselling digital signage hardware from original equipment manufacturers such as Samsung and BrightSign. |
| ● |
Services revenue from helping customers design, deploy and manage their digital signage network, including: |
| o |
Hardware system design/engineering |
| o |
Hardware installation |
| o |
Content development |
| o |
Content scheduling |
| o |
Post-deployment network and field support |
| o |
Media sales, as a result of our acquisition of Reflect |
| ● |
Recurring subscription licensing and support revenue from our digital signage software platforms, which are generally sold via a SaaS model. These include: |
| o |
ReflectView, the Company’s core digital signage platform for most applications, scalable and cost effective from 10 to 100,000+ devices |
| o |
Reflect Xperience, a web-based interface that allows customers to give content scheduling access to local users via the web or mobile devices, while still maintaining centralized programming control |
| o |
Reflect AdLogic, the Company’s ad management platform for digital signage networks, which presently delivers approximately 50 million ads daily |
| o |
Reflect Clarity, the Company’s menu board solution, which has become a market leader for a range of restaurant and convenience store applications |
| o |
Reflect Zero Touch, which allows customers to turn any screen into an interactive experience by allowing guests to engage using their mobile device |
| o |
iShowroomProX, an omni-channel digital sales support platform targeted at original equipment manufacturers in the transportation sector, which integrates with dozens of key data services including dealer inventory at the VIN level |
| o |
OSx+, a digital VIN-level checklist used to assist in the tracking and delivery of new vehicles in the transportation sector, providing measurable lift in customer satisfaction scores and connected vehicle enrollments and subscription activations. |
While hardware sales and support services revenues can fluctuate more significantly year over year based on new, large-scale network deployments, the Company expects to see continuous growth in recurring SaaS revenue for the foreseeable future as digital signage adoption/utilization continues to expand across the vertical markets we serve.
Our Expenses
Our expenses are primarily comprised of three categories: sales and marketing, research and development, and general and administrative. Sales and marketing expenses include salaries and benefits for our sales, business development solution management and marketing personnel, and commissions paid on sales. This category also includes amounts spent on marketing networking events, promotional materials, hardware and software to prospective new customers, including those expenses incurred in trade shows and product demonstrations, and other related expenses. Our research and development expenses represent the salaries and benefits of those individuals who develop and maintain our proprietary software platforms and other software applications we design and sell to our customers. Our general and administrative expenses consist of corporate overhead, including administrative salaries, real property lease payments, salaries and benefits for our corporate officers and other expenses such as legal and accounting fees.
Recent Developments
Reverse stock split
On March 23, 2023, the Company filed Articles of Amendment with the Secretary of State of the State of Minnesota to effectuate, effective March 27, 2023, a 1-for-3 stock split of the shares of the Company's common stock, par value $0.01 per share.
As a result of the reverse stock split, effective 12:01 am on March 27, 2023, every three shares of common stock then-issued and outstanding automatically combined into one share of common stock, with no change in par value per share. No fractional shares were outstanding following the reverse stock split and any fractional shares resulting from the reverse split were rounded up to the nearest whole share of common stock. In connection with the reverse stock split, the total number of shares of common stock authorized for issuance was reduced from 200,000,000 shares to 66,666,666 shares in proportion to the reverse stock split.
Effective as of the same time as the reverse stock split, the number of shares of common stock available for issuance under the Company's equity compensation plans were reduced in proportion to the reverse stock split. The reverse stock split also resulted in the number of shares of shares of common stock issuable upon exercise of outstanding warrants, or the exercise or vesting of equity awards, in proportion to the reverse stock split and caused a proportionate increase in exercise price or share-based performance criteria, where applicable.
Rejection of unsolicited offer
On February 2, 2023, we received an unsolicited proposal from Pegasus Capital Advisors, L.P., on behalf of itself and certain of its affiliates, including Slipstream (collectively, “Pegasus”), to acquire all of the outstanding shares of common stock of the Company that are not owned by Pegasus for a purchase price of $0.83 per share (or, as a result of our recent reverse stock split, $2.49 per share) in cash. Pegasus is the beneficial owner of our common stock owned of record by Slipstream. The Special Committee of the Company’s Board of Directors (the “Special Committee”) has concluded that such proposal undervalues the Company based on the Special Committee’s views of the intrinsic value of the Company’s existing business and current and future prospects, and is not in the best interests of the Company’s existing shareholders. Consequently, the Special Committee has advised Pegasus that it has rejected the proposal.
On May 1, 2023, we received a subsequent unsolicited proposal from Pegasus to acquire all of the outstanding shares of common stock of the Company that are not owned by Pegasus for a purchase price of $2.85 per share in cash. The Special Committee, in consultation with its financial and legal advisors, is carefully reviewing and considering the updated proposal to pursue the course of action that it believes is in the best interests of the Company’s shareholders. There can be no assurance that any revised proposal or definitive offer will be made or accepted, that any agreement will be executed, or that any transaction will be consummated.
Please see Note 5 Business Combinations, Note 8 Loans Payable, Note 11 Warrants, and Note 12 Stock-based Compensation to the Company’s Condensed Consolidated Financial Statements contained in this Report for a description of recent developments of the Company that occurred during, and subsequent to, the three months ended March 31, 2023.
Critical Accounting Policies and Estimates
The Company’s significant accounting policies are described in Note 2 Summary of Significant Accounting Policies of the Company’s Condensed Consolidated Financial Statements included elsewhere in this Report. The Company’s Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States. Certain accounting policies involve significant judgments, assumptions, and estimates by management that could have a material impact on the carrying value of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Our actual results could differ from those estimates.
Results of Operations
Note: All dollar amounts reported in Results of Operations are in thousands, except share and per-share information.
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
The tables presented below compare our results of operations and present the results for each period and the change in those results from one period to another in both dollars and percentage change.
| For the three months |
||||||||||||||||
| ended March 31, |
Change |
|||||||||||||||
| 2023 |
2022 |
$ |
% |
|||||||||||||
| Sales |
$ | 9,944 | $ | 10,757 | $ | (813 | ) | 8 | % | |||||||
| Cost of sales |
4,855 | 6,865 | $ | (2,010 | ) | 29 | % | |||||||||
| Gross profit |
5,089 | 3,892 | 1,197 | 31 | % | |||||||||||
| Sales and marketing expenses |
1,136 | 707 | 429 | 61 | % | |||||||||||
| Research and development expenses |
366 | 241 | 125 | 52 | % | |||||||||||
| General and administrative expenses |
2,898 | 2,860 | 38 | 1 | % | |||||||||||
| Depreciation and amortization expense |
779 | 707 | 72 | 10 | % | |||||||||||
| Deal and transaction expense |
- | 391 | (391 | ) | 100 | % | ||||||||||
| Total operating expenses |
5,179 | 4,906 | 273 | 6 | % | |||||||||||
| Operating loss |
(90 | ) | (1,014 | ) | 924 | 91 | % | |||||||||
| Other income/(expenses): |
||||||||||||||||
| Interest expense |
(803 | ) | (449 | ) | (354 | ) | 79 | % | ||||||||
| Change in fair value of warrant liability |
- | 5,469 | (5,469 | ) | 100 | % | ||||||||||
| Change in fair value of equity guarantee |
(76 | ) | - | (76 | ) | 100 | % | |||||||||
| Loss on extinguishment of debt |
- | (295 | ) | 295 | 100 | % | ||||||||||
| Loss on debt waiver consent |
- | (1,212 | ) | 1,212 | 100 | % | ||||||||||
| Other income/(expense) |
12 | 6 | 6 | 100 | % | |||||||||||
| Total other income/(expense) |
(867 | ) | 3,519 | (4,386 | ) | 125 | % | |||||||||
| Net (loss) before income taxes |
(957 | ) | 2,505 | (3,462 | ) | 138 | % | |||||||||
| Provision for income taxes |
(43 | ) | (3 | ) | (40 | ) | 1,333 | % | ||||||||
| Net loss |
$ | (1,000 | ) | $ | 2,502 | (3,502 | ) | 140 | % | |||||||
Sales
Sales were $9,944, representing a decrease of $813, or 8%, as compared to the same period in 2022. Hardware revenues were $4,322 for the three month period ending March 31, 2023, a decrease of $2,137, or 33%, as compared to the prior year which included a hardware refresh for two significant customers in the prior year that did not recur in the current year. Services and other revenues were $5,622 for the three month period ended March 31, 2023, an increase of $1,324, or 31%, driven by growth in managed services revenue. Managed services revenue, which includes both software-as-a-service (“SaaS”) and help desk technical subscription services, were $4,072 in the three months ended March 31, 2023 as compared to $2,703 in the same period in 2022, driven by expansion in the Company's SaaS revenue and the inclusion of Reflect revenue for a full three months in the current year as compared to approximately one and one half months during the three months ended March 31, 2022 as a result of the Merger closing on February 17, 2022. This represents a year-over-year growth rate of 51% in our higher margin, typically subscription-based, managed services revenue.
Gross Profit
Gross profit increased by $1,197, or 31% during the three months ended March 31, 2023 as compared to the same period in 2022 driven by an increase in (1) managed services revenue of $1,369 due to expansion in software subscription revenues and the inclusion of such revenues from Reflect for the full period in the current year as compared to approximately half the period in the prior year following the Merger on February 17, 2022, (2) software development revenue of $340 which has a higher contribution margin than other services, and (3) improvements in hardware gross margins as a result of a significant deployment with gross margin of approximately 25%.
Gross profit margin increased to 51.2% during the three months ended March 31, 2023, from 36.2% in the same period in 2022 driven by more favorable revenue mix during the three months ended March 31, 2023 as managed services, which includes high margin SaaS revenues, increased to 41% of total revenue as compared to 25% of total revenues in the three months ended March 31, 2022. The increase as a result of margin expansion in hardware and mix associated with increased managed services was partially offset by reduced revenue in the current year.
Sales and Marketing Expenses
Sales and marketing expenses generally include the salaries, taxes, and benefits of our sales and marketing personnel, as well as trade show activities, travel, and other related sales and marketing costs. Sales and marketing expenses increased by $429, or 61%, driven primarily by (i) the acquisition of Reflect via the Merger on February 17, 2022, and (ii) the Company’s enhanced investments into sales and marketing activities post-COVID-19 pandemic. Immediately following the Merger, the Company integrated the sales and marketing functions and did not disaggregate expenses between the two legacy companies. Following the Merger and through integration activities between the date of the Merger and March 31, 2023, the Company adopted certain tools, technology, and processes – particularly with respect to lead generation and brand marketing – that were undercapitalized historically by the Company. Additionally, through completion of the Merger, the Company acquired a media sales business unit that sells advertising on behalf of our customers to be displayed on digital advertising networks owned by those customers. This business utilizes internal and third party sales agents - the salaries and commissions of which are included within Sales and Marketing Expense within the Condensed Consolidated Statement of Operations. As a result, we expect the sales and marketing expenses of the Company for the three months ended March 31, 2023 to adequately reflect the pace for spend in these areas in future reporting periods.
Research and Development Expenses
Research and development expenses generally include personnel and development tools costs associated with the continued development of the Company’s content management systems and other related application development. Research and development expenses increased by $125, or 52%, for the three months period ended March 31, 2023 as compared to the same period in 2022 driven primarily by the completion of the Merger on February 17, 2022. Through the Merger, we acquired a fully staffed, experienced software development team and elected to keep that team in-tact, particularly given current competitive employment market conditions with respect to talented software engineers. We have integrated the pre-existing CRI development team with the acquired Reflect team and have experienced enhanced speed to market on new feature and functionality development activities from increasing our development team. We expect a continued elevated level of capitalized activity through the third quarter of 2023 associated with a customer-facing opportunity, followed by a return to spending levels consistent with the Company’s results for the second quarter of 2022, which adequately reflect the pace for spend in these areas in future reporting periods.
General and Administrative Expenses
General and administrative expenses were effectively flat, increasing $38, or 1%. As compared to the three months ended March 31, 2022, the Company experienced decreases of (1) $283 in stock compensation expense as all expense associated with outstanding performance awards was recorded as of December 31, 2022, and (2) reductions in certain expenses following completion of integration activities/projects completed during 2022 following the Reflect Merger (including but not limited to consolidation of CMS tools, cloud hosting environments, IT tools) that materialized through the balance of 2022. These decreases were partially offset by increases of (1) $117 in increased personnel costs, (2) $122 in legal expenses associated with the Company's establishment of a Special Committee of the Board of Directors to consider and respond to an unsolicited proposal of a Company shareholder to acquire certain outstanding shares of common stock of the Company and settlement of two open litigation matters during the period, and (3) other operating costs, each primarily associated with the consolidation of Reflect for three months in 2023 as compared to forty three (43) days during the three months ended March 31, 2022 as a result of completion of the Reflect Merger on February 17, 2022.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased $72, or 10%, in the three months ended March 31, 2023 compared to the same period in 2022. This was driven by the addition of $17,160 in amortizing intangible assets on February 17, 2022, as a result of the Merger.
Interest Expense
See Note 8 Loans Payable to the Condensed Consolidated Financial Statements for a discussion of the Company’s debt and related interest expense obligations.
Changes in Fair Value of Warrant Liability
During the three month period ended March 31, 2022, the Company recorded a gain of $5,469 as the result of assessing the fair value of warrant liabilities associated with the Company’s issuance of warrants in its debt and equity offerings completed in February 2022 to finance the Merger. These warrants were initially assessed at fair value through Black Scholes calculation, with changes in fair value recognized at each period end.
Effective June 30, 2022, the Company amended the terms of certain warrants previously issued to its creditor and an investor, which removed the holder’s option to exercise such warrants on a cashless basis utilizing the VWAP of the Company’s common stock on the trading day immediately preceding the date of a notice of cashless exercise in certain circumstances, and removed the condition to exercising such warrants that the Company’s shareholders approve the exercise thereof (which has already been obtained). The amendments to the warrants extended the term of such warrants for an additional one year. As a result of the extension in term provided in exchange for the amendment (collectively, the "Warrant Amendment"). The foregoing amendments to the warrants resulted in such warrants to be accounted for as equity instruments in the Company’s Condensed Consolidated Financial Statements.
Changes in fair value of equity guarantee
The Company has contingent consideration arrangements related to the Merger to potentially pay additional cash amounts in future periods based on the lack of achievement of certain share price performance goals of our common stock. Such contingent consideration arrangements are recorded at fair value and are classified as liabilities on the acquisition date and are remeasured at each reporting period in accordance with ASC 805-30-35-1 using a Monte Carlo simulation model. The change in the period represents the mark-to-market adjustment as of the balance sheet dates.
Loss on extinguishment of debt
During the three months ended March 31, 2022, the Company refinanced its debt facilities with Slipstream. The Company assessed the combination of the pre-existing senior secured term loan and secured convertible loan in accordance with ASC 470 Debt and determined the transaction should be accounted for as an extinguishment, in part as the Consolidation Term Loan eliminated a substantive conversion feature. In aggregate the Company recorded a loss on extinguishment of $295, primarily associated with the write-off of pre-existing debt discounts. No such transactions occurred in the current period.
Loss on debt waiver consent
During the three months ended March 31, 2022, in connection with obtaining a waiver of certain restrictions in investment documents between an investor and the Company in order to consummate the financing contemplated by the Company's credit agreement with Slipstream Communications, the Company paid consideration to such investor in the form of the Purchaser Warrant to purchase 466,667 shares of Company common stock in an at-the-market offering under Nasdaq rules. The number of shares of Company common stock subject to the Purchaser Warrant was equal to the waiver fee ($175) divided by $0.375 per share. The exercise price of the Purchaser Warrant is $4.23 per share, and the Purchaser Warrant became exercisable on August 17, 2022. The Purchaser Warrant expires six years from the date of issuance following execution of the Warrant Amendment. At the date of issuance, the Company performed a Black-Scholes valuation of the Purchaser Warrant, resulting in a fair value of $2.5968 per warrant. In recording the warrant liability, the Company recorded an expense in the Condensed Consolidated Statement of Operations associated with the issuance of the Purchaser Warrant of $1,212 for the three months ended March 31, 2022. No such transactions occurred in the current period.
Summary Unaudited Quarterly Financial Information
The following represents unaudited financial information derived from the Company’s quarterly financial statements:
| Quarters Ended |
||||||||||||||||||||
| March 31 |
December 31 |
September 30 |
June 30 |
March 31 |
||||||||||||||||
| Quarters ended |
2023 |
2022 |
2022 |
2022 |
2022 |
|||||||||||||||
| GAAP net income (loss) |
$ | (1,000 | ) | $ | (1,334 | ) | $ | (554 | ) | $ | 1,262 | $ | 2,502 | |||||||
| Interest expense: |
||||||||||||||||||||
| Amortization of debt discount |
356 | 364 | 363 | 360 | 181 | |||||||||||||||
| Other interest, net |
447 | 423 | 394 | 390 | 268 | |||||||||||||||
| Depreciation/amortization: |
||||||||||||||||||||
| Amortization of intangible assets |
754 | 743 | 848 | 431 | 680 | |||||||||||||||
| Amortization of employee share-based awards |
225 | 448 | 456 | 316 | 469 | |||||||||||||||
| Depreciation of property, equipment |
25 | 30 | 37 | 37 | 27 | |||||||||||||||
| Income tax expense/(benefit) |
43 | 33 | (10 | ) | 53 | 3 | ||||||||||||||
| EBITDA |
$ | 850 | $ | 707 | $ | 1,534 | $ | 2,849 | $ | 4,130 | ||||||||||
| Adjustments |
||||||||||||||||||||
| Gain on fair value of warrant liability |
- | - | - | (2,433 | ) | (5,469 | ) | |||||||||||||
| (Gain)/loss on settlement of obligations |
- | - | (37 | ) | (21 | ) | 295 | |||||||||||||
| Loss on debt waiver consent |
- | - | - | - | 1,212 | |||||||||||||||
| Loss on warrant amendment |
- | - | - | 345 | - | |||||||||||||||
| (Gain)/loss on fair value of equity guarantee |
76 | (705 | ) | (442 | ) | 73 | - | |||||||||||||
| Disposal of Safe Space Solutions inventory |
- | 909 | - | - | - | |||||||||||||||
| Deal and transaction expenses |
- | 54 | 110 | 37 | 391 | |||||||||||||||
| Other (income)/expense |
(12 | ) | 7 | 2 | 1 | (6 | ) | |||||||||||||
| Stock-based compensation – Director grants |
43 | 56 | 82 | 82 | 82 | |||||||||||||||
| Adjusted EBITDA |
$ | 957 | 1,028 | 1,249 | 933 | 635 | ||||||||||||||
Liquidity and Capital Resources
See Note 1 Nature of Organization and Operations to the accompanying Condensed Consolidated Financial Statements for a discussion of liquidity and financial resources.
Operating Activities
The cash provided by operating activities were $3,868 for the three months ended March 31, 2023 compared to $1,201 for the same period in 2022. Cash provided by operating activities in the three month period ending March 31, 2023, was driven by a reduction in accounts receivable and prepaid assets of $1,177 and $1,015, respectively. In addition, deferred revenue increased $2,382, partially offset by a decrease in customer deposits of $1,693.
Investing Activities
Net cash used in investing activities during the three months ended March 31, 2023 was $1,034 compared to $17,969 during the same period in 2022. The use of cash in the prior year was driven by completion of the Merger. We currently do not have any material commitments for capital expenditures as of March 31, 2023; however, we anticipate continued elevated capital expenditures in excess of historical trends through third quarter of 2023 as we complete the modernization and internationalization of our automotive platform in an effort to capture incremental SaaS-based revenue contracts.
Financing Activities
Net cash used in financing activities during the three months ended March 31, 2023 was ($562) compared to net cash provided by financing activities of $19,873 for the same period in 2022. The change is the result of the Company’s completion of equity and debt financing in the first quarter of 2022 to facilitate the Merger, which provided net cash of $10,109 and $9,868, respectively. Net cash used in financing activities during the three month period ended March 31, 2023, primarily represents repayments made on the Secured Promissory Note and Term Loan (2022) of $310 and $250, respectively.
Off-Balance Sheet Arrangements
During the three months ended March 31, 2023, we did not engage in any off-balance sheet arrangements set forth in Item 303(a)(4) of Regulation S-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of March 31, 2023, and designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
As a smaller reporting company, we are not required to provide the information required by this Item; however, the discussion of our business and operations should be read together with the Risk Factors set forth in our Annual Report on Form 10-K filed with the SEC on March 30, 2023 and subsequent filings made with the SEC. Such risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flow, strategies or prospects in a material and adverse manner.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
| Exhibit No. |
Description |
|
| 10.1 |
||
| 10.2 |
||
| 10.3 |
||
| 31.1 |
Chief Executive Officer Certification pursuant to Exchange Act Rule 13a-14(a). |
|
| 31.2 |
Chief Financial Officer Certification pursuant to Exchange Act Rule 13a-14(a). |
|
| 32.1 |
Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350. |
|
| 32.2 |
Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350. |
|
| 101.INS |
Inline XBRL Instance Document |
|
| 101.SCH |
Inline XBRL Taxonomy Extension Schema. |
|
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase. |
|
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase. |
|
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase. |
|
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase. |
|
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
* Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
Creative Realities, Inc. |
|
|
|
|
|
| Date: May 15, 2023 |
By |
/s/ Richard Mills |
|
|
|
Richard Mills |
| Chief Executive Officer | ||
| By | /s/ Will Logan | |
| Will Logan Chief Financial Officer |
||
EXHIBIT 31.1
CHIEF EXECUTIVE OFFICER CERTIFICATION
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)
I, Richard Mills, certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q for the three months ended March 31, 2023, of Creative Realities, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Dated: May 15, 2023
| By: | /s/ Richard Mills | |
|
Richard Mills Chief Executive Officer |
EXHIBIT 31.2
CHIEF FINANCIAL OFFICER CERTIFICATION
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)
I, Will Logan, certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q for the three months ended March 31, 2023, of Creative Realities, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Dated: May 15, 2023
| By: | /s/ Will Logan | |
|
Will Logan Chief Financial Officer |
EXHIBIT 32.1
CHIEF EXECUTIVE OFFICER CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Quarterly Report of Creative Realities, Inc. (the “Company”) on Form 10-Q for the three months ended March 31, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard Mills, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
1. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Dated: May 15, 2023
| By: | /s/ Richard Mills | |
|
Richard Mills Chief Executive Officer |
EXHIBIT 32.2
CHIEF FINANCIAL OFFICER CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
In connection with the Quarterly Report of Creative Realities, Inc. (the “Company”) on Form 10-Q for the three months ended March 31, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Will Logan, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
1. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Dated: May 15, 2023
| By: | /s/ Will Logan | |
|
Will Logan Chief Financial Officer |