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0001356093 CREATIVE REALITIES, INC. false --12-31 Q3 2023 747 745 963 1,484 282 840 0.01 0.01 66,666 66,666 10,409 10,409 7,266 7,266 0 4 3 818 812 February 17, 2022 February 15, 2025 February 17, 2022 February 17, 2024 February 17, 2022 February 15, 2025 January 17, 2022 February 15, 2025 January 17, 2022 February 17, 2024 January 17, 2022 February 15, 2025 October 31, 2022 September 1, 2023 5 733 5 5 5 1 4.01 8.00 8.01 4.01 8.00 0.01 4.00 10 10 3 3 33.33 33.33 33.33 10 3 Represents the Reflect cash balance acquired at Closing. The Secured Promissory Note accrued interest at 0.59% (the applicable federal rate at the time of issuance of the Secured Promissory Note) and required the Company and Reflect to collectively pay equal monthly principal installments of $104 on the fifteenth (15th) day of each month, commencing on March 15, 2022. On February 11, 2023, the Company and the Stockholders’ Representative executed an amendment (the “Note Amendment”) to the Secured Promissory Note. The Note Amendment eliminated 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 $104, and the annual interest rate on the outstanding principal increased from 0.59% to 4.60%, which will accrue and is payable in full on the new maturity date. 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 $19.20 per share, multiplied by the amount of CREX Shares held by the Reflect stockholders on the Guarantee Date (subject to the Extension Option), subject to the terms of the Merger Agreement. Prior to the Merger, Reflect had engaged the Company on a project and paid the Company a deposit of $818. These amounts reduced consideration paid by the Company in accordance with ASC 805. Company common stock issued in exchange for outstanding shares of Reflect capital stock per Merger Agreement Company common stock issued to fund the Retention Bonus Plan per Merger Agreement Cash consideration for outstanding shares of Reflect capital stock per Merger Agreement. 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2023

 

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 001-33169

 

https://cdn.kscope.io/6b063182dc51913b1b904c1d37bcfa84-crexlogonew.jpg

 

Creative Realities, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Minnesota

 

41-1967918

State or Other Jurisdiction of

 

I.R.S. Employer

Incorporation or Organization

 

Identification No.

   

13100 Magisterial Drive, Suite 100, Louisville KY

 

40223

Address of Principal Executive Offices

 

Zip Code

 

 

(502) 791-8800

 
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

Common Stock, par value $0.01 per share

 

CREX

 

The Nasdaq Stock Market LLC

Warrants to purchase Common Stock

 

CREXW

 

The Nasdaq Stock Market LLC

 

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. Yes ☒ No ☐

 

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). Yes ☒ No ☐

 

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

Non-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 No ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of November 9, 2023, the registrant had 10,409,027 shares of common stock outstanding.

 

 

 

PART 1. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CREATIVE REALITIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

 

  

September 30,

  

December 31,

 
  

2023

  

2022

 
  

(unaudited)

     

ASSETS

        

CURRENT ASSETS

        

Cash and cash equivalents

 $8,376  $1,633 

Accounts receivable, net

  5,865   8,263 

Work-in-process and inventories, net

  2,306   2,267 

Prepaid expenses and other current assets

  960   1,819 

Total current assets

  17,507   13,982 

Property and equipment, net

  513   201 

Operating lease right-of-use assets

  1,198   1,584 

Intangibles, net

  23,975   23,752 

Goodwill

  26,453   26,453 

Other assets

  43   43 

TOTAL ASSETS

 $69,689  $66,015 
         

LIABILITIES AND SHAREHOLDERS’ EQUITY

        

CURRENT LIABILITIES

        

Accounts payable

 $3,340  $3,757 

Accrued expenses

  4,499   3,828 

Deferred revenues

  3,507   1,223 

Customer deposits

  3,532   2,478 

Current maturities of operating leases

  575   711 

Short-term portion of Secured Promissory Note

  521   1,248 

Short-term portion of related party Consolidation Term Loan, net of $747 and $745 discount, respectively

  3,690   1,251 

Short-term related party Term Loan (2022)

  -   2,000 

Total current liabilities

  19,664   16,496 

Long-term Secured Promissory Note

  -   208 

Long-term related party Acquisition Term Loan, net of $963 and $1,484 discount, respectively

  9,037   8,516 

Long-term related party Consolidation Term Loan, net of $282 and $840 discount, respectively

  1,537   4,349 

Long-term obligations under operating leases

  623   873 

Contingent acquisition consideration, at fair value

  11,250   9,789 

Other liabilities

  175   205 

TOTAL LIABILITIES

  42,286   40,436 
         

SHAREHOLDERS’ EQUITY

        

Common stock, $0.01 par value, 66,666 shares authorized; 10,409 and 7,266 shares issued and outstanding, respectively

  104   72 

Additional paid-in capital

  82,064   75,916 

Accumulated deficit

  (54,765)  (50,409)

TOTAL SHAREHOLDERS' EQUITY

  27,403   25,579 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 $69,689  $66,015 

 

See accompanying notes to condensed consolidated financial statements

 

 

1

 

 

CREATIVE REALITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2023

   

2022

   

2023

   

2022

 

Sales

                               

Hardware

  $ 4,847     $ 5,015     $ 12,606     $ 17,141  

Services and other

    6,721       6,165       18,102       15,719  

Total sales

    11,568       11,180       30,708       32,860  

Cost of sales

                               

Hardware

    3,384       3,811       9,314       13,803  

Services and other

    2,881       2,855       6,704       5,989  

Total cost of sales

    6,265       6,666       16,018       19,792  

Gross profit

    5,303       4,514       14,690       13,068  

Operating expenses:

                               

Sales and marketing expenses

    1,301       718       3,666       2,572  

Research and development expenses

    393       238       1,136       897  

General and administrative expenses

    2,632       2,847       8,125       8,269  

Depreciation and amortization expense

    817       885       2,393       2,060  

Deal and transaction expenses

    -       110       -       538  

Total operating expenses

    5,143       4,798       15,320       14,336  

Operating income (loss)

    160       (284 )     (630 )     (1,268 )
                                 

Other income (expenses):

                               

Interest expense, including amortization of debt discount

    (734 )     (757 )     (2,324 )     (1,956 )

Change in fair value of warrant liability

    -       -       -       7,902  

Change in fair value of equity guarantee

    (1,369 )     442       (1,461 )     369  

Loss on debt waiver consent

    -       -       -       (1,212 )

Loss on warrant amendment

    -       -       -       (345 )

Gain/(loss) on settlement of obligations

    -       37       -       (237 )

Other income (expense)

    (3 )     (2 )     132       3  

Total other income (expense)

    (2,106 )     (280 )     (3,653 )     4,524  

Net (loss) income before income taxes

    (1,946 )     (564 )     (4,283 )     3,256  

Benefit (provision) for income taxes

    15       10       (73 )     (46 )

Net (loss) income

  $ (1,931 )   $ (554 )   $ (4,356 )   $ 3,210  

Basic (loss) earnings per common share

  $ (0.22 )   $ (0.08 )   $ (0.56 )   $ 0.50  

Diluted (loss) earnings per common share

  $ (0.22 )   $ (0.08 )   $ (0.56 )   $ 0.50  

Weighted average shares outstanding - basic

    8,713       7,250       7,775       6,461  

Weighted average shares outstanding - diluted

    8,713       7,250       7,775       6,461  

 

See accompanying notes to condensed consolidated financial statements.

 

2

 

 

CREATIVE REALITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

Nine Months Ended

 
   

September 30,

 
   

2023

   

2022

 

Operating Activities:

               

Net (loss) income

  $ (4,356 )   $ 3,210  

Adjustments to reconcile net (loss) income to net cash provided by operating activities

               

Depreciation and amortization

    2,393       2,060  

Amortization of debt discount

    1,078       904  

Amortization of stock-based compensation

    539       1,587  

Loss on debt waiver consent

    -       1,212  

Loss on warrant amendment

    -       345  

Loss on settlement of obligations

    -       237  

Bad debt expense

    318       105  

Gain on change in fair value of warrants

    -       (7,902 )

Loss (Gain) on change in fair value of contingent consideration

    1,461       (369 )

Deferred income taxes

    44       -  

Changes to operating assets and liabilities:

               

Accounts receivable

    2,080       (2,835 )

Work-in-process and inventories

    (39 )     (1,032 )

Prepaid expenses and other current assets

    859       682  

Accounts payable

    (53 )     (227 )

Accrued expenses

    683       533  

Deferred revenues

    2,284       1,019  

Customer deposits

    1,054       (585 )

Other

    (39 )     6  

Net cash provided by (used in) operating activities

    8,306       (1,050 )

Investing activities

               

Acquisition of business, net of cash acquired

    -       (17,186 )

Purchases of property and equipment

    (287 )     (123 )

Capitalization of labor for software development

    (2,851 )     (2,959 )

Net cash used in investing activities

    (3,138 )     (20,268 )

Financing activities

               

Principal payments on finance leases

    (14 )     -  

Proceeds from sale of common stock, net of offering expenses

    5,454       -  

Proceeds from sale of common stock in PIPE, net of offering expenses

    -       1,814  

Proceeds from sale & exercise of pre-funded warrants in PIPE, net of offering expenses

    -       8,295  

Proceeds from Acquisition Loan, net of offering expenses

    -       9,868  

Repayment of Term Loan (2022)

    (2,000 )     -  

Repayment of Consolidation Term Loan

    (930 )     -  

Repayment of Secured Promissory Note

    (935 )     (723 )

Net cash provided by financing activities

    1,575       19,254  

Increase (decrease) in Cash and Cash Equivalents

    6,743       (2,064 )

Cash and Cash Equivalents, beginning of period

    1,633       2,883  

Cash and Cash Equivalents, end of period

  $ 8,376     $ 819  

 

See accompanying notes to condensed consolidated financial statements.

 

3

 

 

CREATIVE REALITIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(in thousands, except shares)

(Unaudited)

 

                   

Additional

                 
   

Common Stock

   

paid in

   

Accumulated

         
   

Shares

   

Amount

   

capital

   

Deficit

   

Total

 

Three Months Ended September 30, 2023

                                       

Balance as of June 30, 2023

    7,409,027     $ 74     $ 76,618     $ (52,834 )   $ 23,858  

Stock-based compensation

    -       -       22       -       22  

Issuance of common stock, net

    3,000,000       30       5,424       -       5,454  

Net loss

    -       -       -       (1,931 )     (1,931 )

Balance as of September 30, 2023

    10,409,027     $ 104     $ 82,064     $ (54,765 )   $ 27,403  

 

                   

Additional

                 
   

Common Stock

   

paid in

   

Accumulated

         
   

Shares

   

Amount

   

capital

   

Deficit

   

Total

 

Nine Months Ended September 30, 2023

                                       

Balance as of December 31, 2022

    7,266,382     $ 72     $ 75,916     $ (50,409 )   $ 25,579  

Stock-based compensation

    -       -       436       -       436  

Shares issued to directors as compensation

    51,616       1       95       -       96  

Shares issued to vendors as compensation

    28,554       -       55       -       55  

Shares issued to employees pursuant to the Retention Bonus Plan

    62,475       1       138       -       139  

Issuance of common stock, net

    3,000,000       30       5,424       -       5,454  

Net loss

    -       -       -       (4,356 )     (4,356 )

Balance as of September 30, 2023

    10,409,027     $ 104     $ 82,064     $ (54,765 )   $ 27,403  

 

                   

Additional

                 
   

Common Stock

   

paid in

   

Accumulated

         
   

Shares

   

Amount

   

capital

   

(Deficit)

   

Total

 

Three Months Ended September 30, 2022

                                       

Balance as of June 30, 2022

    7,247,955     $ 72     $ 74,886     $ (48,521 )   $ 26,437  

Stock-based compensation

    -       -       514       -       514  

Shares issued to vendors as compensation

    2,561       -       5       -       5  

Net loss

    -       -       -       (554 )     (554 )

Balance as of September 30, 2022

    7,250,516     $ 72     $ 75,405     $ (49,075 )   $ 26,402  

 

                   

Additional

                 
   

Common Stock

   

paid in

   

Accumulated

         
   

Shares

   

Amount

   

capital

   

(Deficit)

   

Total

 

Nine Months Ended September 30, 2022

                                       

Balance as of December 31, 2021

    4,002,843     $ 40     $ 60,943     $ (52,254 )   $ 8,729  

Stock-based compensation

    -       -       1,406       -       1,406  

Shares issued to vendors as compensation

    25,504       -       70       -       70  

Shares issued and warrants exercised in private investment in public entity ("PIPE")

    2,388,835       24       2,254       -       2,278  

Shares issued in Reflect Systems, Inc. Merger

    833,334       8       4,992       -       5,000  

Warrant repricing events

    -       -       31       (31 )     -  

Warrant amendment

    -       -       5,709       -       5,709  

Net income

    -       -       -       3,210       3,210  

Balance as of September 30, 2022

    7,250,516     $ 72     $ 75,405     $ (49,075 )   $ 26,402  

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

CREATIVE REALITIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except shares and 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,” “Creative Realities”  and the Company refer to Creative Realities, Inc. and its subsidiaries.

 

Nature of the Companys 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-3 reverse stock split of the shares of the Company's common stock, par value $0.01 per share.  All share and per share information (including share and per share information related to share-based compensation) has been retroactively adjusted to reflect the reverse stock split within this Quarterly Report on Form 10-Q.

 

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 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.

 

Public Offering

 

On August 17, 2023, the Company priced a "reasonable best efforts" public offering for the sale by the Company of an aggregate of 3,000,000 shares of common stock, par value $0.01 per share at a public offering price of $2.00 per share and received approximately $5,454 in net proceeds, after deducting underwriting fees of $478 and offering costs of $68.

 

5

 

Liquidity and Financial Condition

 

In accordance with Accounting Standards Update (“ASU”) No. 2014-15, Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern (Subtopic 205-40) (ASU 205-40), the Company has evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the Condensed Consolidated Financial Statements are issued.

 

At September 30, 2023, the Company has an accumulated deficit of $54,765, negative working capital of $2,157, including current debt obligations of $4,211, and cash of $8,376. For the nine months ended September 30, 2023, the Company incurred an operating loss of $630 and generated positive net cash flows from operations of $8,306. Pursuant to the Second Amended and Restated Credit and Security Agreement (the "Credit Agreement") made between the Company and Slipstream Communications, LLC ("Slipstream"), the Company is required and began to make monthly repayments of principal on the Consolidation Term Loan on September 1, 2023. The monthly principal payment is approximately $370 and will continue on the first day of each month thereafter until the Maturity Date on February 17, 2025, with total principal repayments of $4,440 during the twelve months subsequent to the reporting date of these Condensed Consolidated Financial Statements. Servicing this principal repayment raises substantial doubt about the Company's ability to continue as a going concern under the technical framework within ASU 205-40.

 

Management plans to control resource allocation with respect to new opportunities, implement more aggressive customer deposit protocols, transition portions of its workforce to just-in-time models, and implement other cost cutting initiatives to align cash spend with revenue production to ensure adequate debt servicing; however the supplemental plans have not been fully implemented and the level of improvement to be achieved is uncertain. As a result, the Company has concluded that management's plans do not alleviate substantial doubt about the Company's ability to continue as a going concern.  

 

The Condensed Consolidated Financial Statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

 

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 InstrumentsCredit Losses, which requires entities to estimate expected lifetime credit losses on financial assets and provide expanded disclosures. This 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.

 

6

 

Debt. In August 2020, the FASB issued Accounting Standards Update No. 2020-06, DebtDebt with Conversion and Other Options (Subtopic 470-20) and Derivatives and HedgingContracts in Entitys Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entitys 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 adopt this standard early, 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 Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, applying the five-step model.

 

If an arrangement involves multiple performance obligations, the obligations are analyzed to determine the separate units of accounting, whether the obligations 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.

 

7

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 September 30, 2023:

 

Balance as of December 31, 2022

 $984 

Amounts accrued

  318 

Write-offs charged against the allowance

  (228)

Balance as of September 30, 2023

 $1,074 

 

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:

 

  

September 30,

  

December 31,

 
  

2023

  

2022

 

Raw materials, net of reserve

 $1,745  $1,671 

Work-in-process

  561   596 

Total inventories

 $2,306  $2,267 

 

The reserve for obsolete inventory at September 30, 2023 and December 31, 2022 was $192 and $1,777, respectively.  The Company disposed of $1,707 related to Safe Space Solutions during the three month period ending September 30, 2023, all of which was fully reserved at December 31, 2022.  The Company is no longer actively promoting the sale of our Safe Space Solutions or purchasing inventory to support such solutions.

 

6. Impairment of Long-Lived Assets

 

We review the carrying value of all long-lived assets, including property and equipment, for impairment 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 7,391,651 and 7,490,962 at September 30, 2023 and 2022, respectively, were excluded from the computation of (loss)/earnings per share as the strike price on the options and warrants were higher than the Company's market price and therefore anti-dilutive.

 

8

 

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 no uncertain tax positions as of September 30, 2023 and December 31, 2022.

 

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.

 

9

 
 

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.

 

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 and nine months ended September 30, 2023 and 2022:

 

  

Three Months

  

Three Months

  

Nine Months

  

Nine Months

 
  

Ended

  

Ended

  

Ended

  

Ended

 
  

September 30,

  

September 30,

  

September 30,

  

September 30,

 

(in thousands)

 

2023

  

2022

  

2023

  

2022

 

Hardware

 $4,847  $5,015  $12,606  $17,141 
                 

Services:

                

Installation Services

  967   1,472   3,082   3,714 

Software Development Services

  203   105   1,023   405 

Managed Services

  4,320   3,900   12,227   10,435 

Media Sales

  1,231   688   1,770   1,165 

Total Services

  6,721   6,165   18,102   15,719 
                 

Total Hardware and Services

 $11,568  $11,180  $30,708  $32,860 

 

10

 

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 12-36 months in length. We account for revenue from these services in accordance with ASC 985-20-15-5 and recognize revenue ratably over the performance period. Software as a service revenues are classified as “Managed Services” within our disaggregated revenue.

 

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 12-36 months in length. Revenue is recognized over the term of the agreement in proportion to the costs incurred in fulfilling performance obligations under the contract. Maintenance and Support revenues are classified as “Managed Services” within our disaggregated revenue.

 

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.

 

11

 

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 four weeks to three 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, 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) $16,166 in cash, (ii) 777,778 shares of common stock of Creative Realities (valued based on an issuance price of $6 per share) (the “CREX Shares”), (iii) the Secured Promissory Note (as described below), and (iv) supplemental cash payments (the “Guaranteed Consideration”), if any, payable on or after February 17, 2025 (subject to the Extension Option described below, the “Guarantee Date”), in an amount by which the value of the CREX Shares on such anniversary is less than $19.20 per share, or if certain customers of Reflect collectively achieve over 85,000 billable devices online at any time on or before December 31, 2022, is less than $21.60 per share (such applicable amount, the “Guaranteed Price”), multiplied by the amount of CREX Shares held by the Reflect stockholders on the Guarantee Date (subject to the Extension Option described below).  At or before December 31, 2022, the condition of certain customers of Reflect collectively to achieve over 85,000 billable devices online was not met.  Accordingly, the contingent cash payment amount was reduced at December 31, 2022 from $21.60 per share to $19.20 per share, a reduction of $2.40 per share.   

 

12

 

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 70% of the Guaranteed Price described above, and (ii) the Company provides written notice of its election to exercise the Extension Option no later than February 7, 2025. The “Extension Threshold Price” means the average closing price per share of Creative Realities common stock as reported on the Nasdaq Capital Market (or NYSE) in the fifteen (15) consecutive trading day period ending February 2, 2025. If the Extension Threshold Price is less than 80% of the Guaranteed Price, then the Guaranteed Price will be increased by $3.00 per share.

 

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 $1,334 in cash, which was paid 50% at the Closing, and subject to continuous employment with Reflect or Creative Realities, 25% was paid on February 17, 2023 (the one-year anniversary of Closing) and 25% will be paid on February 17, 2024 (the two-year anniversary of the Closing). In connection with the closing of the Merger, the future cash payments due on the one-year and two-year anniversaries of the Closing were deposited into an escrow agreement. The Retention Bonus Plan also requires the Company to issue Common Stock having an aggregate value of $667 to the plan participants as follows: 50% of the value of such shares were issued at the Closing, and subject to continuous employment with Reflect or Creative Realities, 25% of the value of such shares was issued on February 17, 2023 (the one-year anniversary of Closing) and the remaining 25% of the value of such shares will be issued on February 17, 2024 (the two-year anniversary of the Closing). The shares issued on the Closing were valued at $6.00 per share. The shares issued on the one-year anniversary were valued at $2.22 based on the value of shares issuable divided by the trailing 10-day volume weighted average price ("VWAP") of the shares as of February 17, 2023 as reported on the Nasdaq Capital Market.  The Company issued 62,475 shares to key members of Reflect's management team pursuant to the Retention Bonus Plan. Certain participants made an election to have stock withheld to cover applicable withholding taxes.  In such cases, the Company reduced the stock award issued to the employee and settled the employees tax liability by remitting cash to the applicable taxing authorities. The shares to be issued on the two-year anniversary will be determined based on the value of shares issuable divided by the trailing 10-day VWAP of the shares as of February 17, 2024 as reported on the Nasdaq Capital Market.

 

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.

 

13

 

Purchase price

 

The purchase price of Reflect consisted of the following items:

 

(in thousands)

Consideration

 

Cash consideration for Reflect stock

$16,664

(1)

Cash consideration for Retention Bonus Plan

 1,334

(2)

Common stock issued to Reflect stockholders

 4,667

(3)

Common stock issued to Retention Bonus Plan

 333

(4)

Secured Promissory Note

 2,500

(5)

Earnout liability

 10,862

(6)

Total consideration

 36,360 

Vendor deposit with the Company

 (818)

(7)

Cash acquired

 (812)

(8)

Net consideration transferred

$34,730 

 

(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 initial issuances under the Retention Bonus Plan per Merger Agreement.

 

(5)

The Secured Promissory Note accrued interest at 0.59% (the applicable federal rate at the time of issuance of the Secured Promissory Note) and required the Company and Reflect to collectively pay equal monthly principal installments of $104 on the fifteenth (15th) day of each month, commencing on March 15, 2022. On February 11, 2023, the Company and the Stockholders’ Representative executed an amendment (the “Note Amendment”) to the Secured Promissory Note. The Note Amendment eliminated 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 $104, and the annual interest rate on the outstanding principal increased from 0.59% to 4.60%, which will accrue and is payable in full on the new maturity date.

 

(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 $19.20 per share, multiplied by the amount of CREX Shares held by the Reflect stockholders on the Guarantee Date (subject to the Extension Option), subject to the terms of the Merger Agreement.

 

(7)

Prior to the Merger, Reflect had engaged the Company on a project and paid the Company a deposit of $818. These amounts reduced consideration paid by the Company in accordance with ASC 805.

 

(8)

Represents the Reflect cash balance acquired at Closing.

 

The Company incurred $37 and $428 of direct transaction costs for the three and nine months ended September 30, 2022, respectively. These costs are included in deal and transaction expense in the accompanying Condensed Consolidated Statement of Operations.

 

14

 

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

 $1,359 

Inventory

  190 

Prepaid expenses & other current assets

  666 

Property and equipment

  96 

Operating right of use assets

  555 

Other assets

  36 

Identified intangible assets:

    

Definite-lived trade names

  960 

Definite-lived Developed technology

  5,130 

Definite-lived Customer relationships

  11,040 

Definite-lived Noncompete agreements

  30 

Goodwill

  18,935 

Accounts payable

  (104)

Accrued expenses

  (483)

Customer deposits

  (1,661)

Deferred revenues

  (1,259)

Current maturities of operating leases

  (277)

Long-term obligations under operating leases

  (278)

Other liabilities

  (205)

Net consideration transferred

 $34,730 

 

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 2 to 10 years as outlined in the table below.

 

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

 $960   5 

Developed technology

  5,130   10 

Noncompete

  30   2 

Customer relationships

  11,040   10 

Total

 $17,160     

 

15

 

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 $96.

 

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

 

   

Nine Months Ended

 
   

September 30,

 
   

2023

   

2022

 

Supplemental non-cash investing activities

               

Capitalized software in accounts payable

  $ 211     $ 998  

Property and equipment in accounts payable

  $ 1     $ -  

Right-of-use assets obtained in exchange for new finance lease liabilities

  $ 154     $ -  
                 

Supplemental non-cash financing activities

               

Conversion of liability warrant to equity warrants

  $ -     $ 5,709  
                 

Supplemental disclosure information for cash flow

               

Cash paid during the period for:

               

Interest

  $ 1,303     $ 835  

Operating leases

  $ 566     $ 256  

Income taxes, net

  $ 48     $ 19  
 

NOTE 7: INTANGIBLE ASSETS, INCLUDING GOODWILL

 

Intangible Assets

 

Intangible assets consisted of the following at  September 30, 2023 and December 31, 2022:

 

  

September 30,

  

December 31,

 
  

2023

  

2022

 
  

Gross

      

Gross

     
  

Carrying

  

Accumulated

  

Carrying

  

Accumulated

 
  

Amount

  

Amortization

  

Amount

  

Amortization

 

Technology platform

 $9,765  $4,929  $9,765  $4,354 

Purchased and developed software

  5,635   3,948   4,682   3,375 

In-Process internally developed software platform

  5,618   -   4,074   - 

Customer relationships

  15,000   3,820   15,000   2,849 

Trademarks and trade names

  1,600   952   1,600   808 

Non-compete

  30   24   30   13 
   37,648   13,673   35,151   11,399 

Accumulated amortization

  13,673       11,399     

Net book value of amortizable intangible assets

 $23,975      $23,752     

 

16

 

For the three months ended September 30, 2023 and 2022, amortization of intangible assets charged to operations was $766 and $848, respectively. For the nine months ended September 30, 2023 and 2022 amortization of intangible assets charged to operations was $2,274 and $1,959, respectively.

 

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, 2023.

 

The Company recognizes that any changes in our actual fourth quarter 2023 or projected 2024 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 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.

 

While our overall business performance has been consistent with our expectations, both before and after the acquisition of Reflect, we believe a significant portion of the decline in our market price relates primarily to both macroeconomic and recent capital transaction factors including: (1) market wide recessionary fears, (2) a lack of comprehension by the markets of the contingent consideration issued in the Merger with Reflect, and (3) the Company’s recent execution of a public offering of 3,000,000 shares of our common stock at a discount to then-market prices, resulting in significant short-term negative volume and price pressure on our common stock unrelated to the Company fundamentals. We do not believe these factors are consistent with or reflective of the underlying value of the business, and there were no other indicators of potential impairment as of September 30, 2023. However, should our market price remain at this level for an extended period of time, there could be potential future impairment. Based on the relatively recent decline in our share price and market capitalization, along with improving Company fundamentals and a share price and market capitalization that was substantially higher prior to the Company’s public offering, we believe our implied fair value continues to exceed our total carrying value.

 

 

17

 

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 September 30, 2023

  

Issuance

    

Maturity

     

Debt Type

 

Date

 

Principal

 

Date

 

Warrants

 

Interest Rate Information

A

 

2/17/2022

 $10,000 

2/15/2025

  833,334 

8.0% interest(1)

B

 

2/17/2022

  521 

2/17/2024

  - 

4.6% interest(2)

C

 

2/17/2022

  6,256 

2/15/2025

  898,165 

10.0% interest(3)

  

Total debt, gross

  16,777    1,731,499  
  

Debt discount

  (1,992)      
  

Total debt, net

 $14,785       
  

Less current maturities

  (4,211)      
  

Long term debt

 $10,574       

 

As of December 31, 2022

  

Issuance

    

Maturity

     

Debt Type

 

Date

 

Principal

 

Date

 

Warrants

 

Interest Rate Information

A

 

2/17/2022

 $10,000 

2/15/2025

  833,334 

8.0% interest(1)

B

 

2/17/2022

  1,456 

2/17/2024

  - 

0.59% interest(2)

C

 

2/17/2022

  7,185 

2/15/2025

  898,165 

10.0% interest(3)

D

 

10/31/2022

  2,000 

9/1/2023

  - 

12.5% interest(4)

  

Total debt, gross

  20,641    1,731,499  
  

Debt discount

  (3,069)      
  

Total debt, net

 $17,572       
  

Less current maturities

  (4,499)      
  

Long term debt

 $13,073       

 

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)

8.0% cash interest per annum through maturity at February 15, 2025.

(2)

Annual interest rate on the outstanding principal increased from 0.59% to 4.60% per annum effective February 17, 2023 through maturity at February 17, 2024. Annual interest rate was 0.59% cash interest per annum (the applicable federal rate) through February 17, 2023. 

(3)

10.0% cash interest per annum through maturity date at February 15, 2025.

(4)

12.5% cash interest per annum through maturity at  September 1, 2023.

 

18

 

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 $2,500 Note and Security Agreement (the “Secured Promissory Note”).

 

The Secured Promissory Note accrued interest at 0.59% per annum (the applicable federal rate on the date of issuance of the Secured Promissory Note) and required the Company and Reflect to collectively pay equal monthly principal installments of $104 on the fifteenth (15th) day of each month, commencing on March 15, 2022. Any remaining or unpaid principal was due and payable on February 17, 2023. All payments under the Secured Promissory Note are paid to the escrow agent in the Merger Agreement to be placed into the escrow account to secure the Reflect stockholders’ indemnification obligations until released on February 17, 2023 (the one-year anniversary of the Closing), at which time any remaining proceeds not subject to a pending indemnification claim would be paid to the exchange agent for payment to the Reflect stockholders pursuant to the Merger Agreement. The Secured Promissory Note is secured by a first-lien security interest in certain contracts of Reflect, including obligations arising out of those certain contracts. The Company has the right to offset amounts payable under the Secured Promissory Note upon a final, non-appealable decision of a court that entitles the Company or its affiliates to any damages for indemnification under the Merger Agreement, or the Stockholders’ Representative’s agreement in writing to such damages.

 

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 $104, and the annual interest rate on the outstanding principal increased from 0.59% to 4.60%, which will accrue and is payable in full on the new maturity date.

 

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 $4,767 senior secured term loan and $2,418 secured convertible loan, with an aggregate of $7,185 in outstanding principal and accrued and unpaid interest under such loans, were consolidated into a term loan (the “Consolidation Term Loan”). The Consolidation Term Loan has an interest rate of 10.0%, with 75.0% warrant coverage (or 898,165 warrants). On the first day of each month, commencing March 1, 2022 through February 1, 2025, the Borrowers will make interest-only payments on the Consolidation Term Loan. Commencing on September 1, 2023, and on the first day of each month thereafter until the Maturity Date, the Borrowers will make a payment on the Consolidation Term Loan, in an equal monthly installment of principal sufficient to fully amortize the Consolidation Term Loan in eighteen equal installments. 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 during the nine month period ending September 30, 2022, primarily associated with the write-off of pre-existing debt discounts.

 

In addition to refinancing the existing debt with Slipstream, the Company issued to Slipstream a $10,000, 36-month senior secured term loan (the “Acquisition Term Loan”) resulting in $10,000 in gross proceeds, or $9,950 in net proceeds. The Acquisition Term Loan matures on February 17, 2025 (the “Maturity Date”) and has an interest rate of 8.0%, with 50.0% warrant coverage (or 833,334 warrants). On the first day of each month, commencing March 1, 2022 through February 1, 2025, the Borrowers will make interest-only payments on the Acquisition Term Loan. No principal payments on the Acquisition Term Loan are payable until the Maturity Date.

 

19

 

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 1,731,499 shares of Company common stock (the “Lender Warrant”). The Lender Warrant has a five-year term, an initial exercise price of $6.00 per share, subject to adjustments in the Lender Warrant, and was not exercisable until August 17, 2022. The warrants were assessed in accordance with ASC 470 and ASC 815 Derivatives and were deemed to represent bifurcated derivative instruments that should be recorded as liabilities in the Condensed Consolidated Balance Sheets. The Company performed a Black-Scholes valuation of the warrants as of the issuance date, resulting in a fair value of $2.4387 per warrant. In recording the warrant liability, the Company recorded a debt discount associated with each of the Acquisition and Consolidation Term Loans in an amount of $2,032 and $2,190, respectively. These amounts are being amortized straight-line through interest expense over the life of the loans, resulting in incremental interest expense of $363 and $1,077 for the three and nine months ended September 30, 2023, respectively. The Company has deemed straight-line amortization to be materially consistent with the effective interest method.

 

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 had 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 $2,000 term loan ("Term Loan (2022)"), the net proceeds of which were used by the Company to accelerate an active software development project with potential to expand SaaS revenues associated with an existing customer. The Term Loan (2022) has an annual interest rate of 12.5% and matures on September 1, 2023. Commencing on February 1, 2023, the Borrowers will make monthly installment payments of approximately $270 until the maturity date, consisting of principal and interest sufficient to fully amortize the Term Loan (2022) through the maturity date. At September 30, 2023, the Term Loan 2022 has been repaid in full to the Borrowers. 

 

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 $3,200 as settlement for an alleged breach of contract related to hardware failures of equipment installations performed by Allure between November 2017 and August 2018. On March 10, 2023, the Company, the supplier and the Allure customer reached a Settlement Agreement and Release of Claims ("Settlement Agreement"). Pursuant to the Settlement Agreement, the Company is obligated to pay $733; however, its insurer agreed to pay $700 of that amount.  Thus, the Company paid $33 of the settlement amount in April 2023. 

 

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.

 

20

 
 

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.

 

For the three and nine months ended September 30, 2023, we reported tax (benefit) liability of (15) and 73, respectively. As of September 30, 2023, the net deferred tax liabilities totaled 72 after valuation allowance, compared to net tax liabilities of $28 at  December 31, 2022.

 

 

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

  5,824,027  $6.56   4.21 

Warrants expired

  (68,508)  10.40   - 

Balance September 30, 2023

  5,755,519  $6.51   3.51 

 

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) 438,334 shares (the “Shares”) of the Company’s common stock, par value $0.01 per share (the “Common Stock”) and accompanying warrants to purchase an aggregate of 438,334 shares of Common Stock, and (ii) pre-funded warrants to purchase up to an aggregate of 1,950,502 shares of Common Stock (the “Pre-Funded Warrants”) and accompanying warrants to purchase an aggregate of 1,950,502 shares of Common Stock. The accompanying warrants to purchase Common Stock are referred to herein collectively as the “Common Stock Warrants.” Under the Securities Purchase Agreement, each Share and accompanying warrants to purchase Common Stock were sold together at a combined price of $4.605, and each Pre-Funded Warrant and accompanying warrants to purchase Common Stock were sold together at a combined price of $4.6047, for gross proceeds of approximately $11,000, before deducting placement agent fees and estimated offering expenses payable by the Company. During the six months ended June 30, 2022, each of the Pre-Funded Warrants were exercised. The Common Stock Warrants expire five years from the date of issuance. The Company evaluated the Pre-Funded Warrants and concluded that they met the criteria to be classified within stockholders’ equity, with proceeds recorded as common stock and additional paid-in-capital. The Company evaluated the Common Stock Warrants and concluded they do not meet the criteria to be classified within stockholders’ equity. The Common Stock Warrants include provisions which could result in a different settlement value for the Common Stock Warrants depending on the registration status of the underlying shares. Because these conditions were not an input into the pricing of a fixed-for-fixed option on the Company’s ordinary shares, the Common Stock Warrants are not considered to be indexed to the Company’s own stock. The Company recorded the Common Stock Warrants as liabilities on the Condensed Consolidated Balance Sheets at fair value, with subsequent changes in their respective fair values recognized in the Condensed Consolidated Statements of Operations at each reporting date. At the date of issuance, the Company performed a Black-Scholes valuation of the Common Stock Warrants, resulting in a fair value of $3.2781 per Common Stock Warrant. At June 30, 2022, the Company reassessed the fair value of the Common Stock Warrants via Black Scholes valuation methodology and determined that the fair value of the Common Stock Warrants was $1.2057 per Common Stock Warrant, resulting in the Company recording a gain on the fair value of the Common Stock Warrants of $4,950 in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2022.

 

21

 

On February 17, 2022, in connection with the Credit Agreement with Slipstream, the Company issued to Slipstream the Lender Warrants. The Lender Warrants are not exercisable until 180 days after the issuance date. The common shares underlying the Lender Warrants have not yet been registered for resale under the Securities Act of 1933, which provides Slipstream with an option for cashless exercise once the Lender Warrants becomes exercisable until such time as such registration occurs. The Lender Warrants expire five years from the date of issuance. The Company evaluated the Lender Warrants and concluded that they do not meet the criteria to be classified within stockholders’ equity. The Lender Warrants include provisions which could result in a different settlement value, for the Lender Warrants depending on the registration status of the underlying shares. Because these conditions are not an input into the pricing of a fixed-for-fixed option on the Company’s ordinary shares, the Lender Warrants are not considered to be indexed to the Company’s own stock. The Company recorded the Lender Warrants as liabilities on the consolidated balance sheets at fair value, with subsequent changes in their respective fair values recognized in the Condensed Consolidated Statements of Operations at each reporting date. At the date of issuance, the Company performed a Black-Scholes valuation of the Lender Warrants, resulting in a fair value of $2.4387 per Lender Warrant. In recording the Lender Warrants liability, the Company recorded an increase in debt discount in the Condensed Consolidated Balance Sheet associated with the issuance of the Lender  Warrants of $4,223, which is being amortized through interest expense in the Condensed Consolidated Statement of Operations over the life of the Acquisition Term Loan and Consolidation Term Loans. At June 30, 2022, the Company reassessed the fair value of the Lender Warrants via Black Scholes valuation methodology and determined that the fair value of the Lender Warrants was $1.1097 per Lender Warrant, resulting in the Company recording a gain on the fair value of the Lender Warrants of $2,302 in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2022.

 

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 Warrants”) 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 Warrants is equal to the waiver fee ($175) divided by $0.375 per share. The exercise price of the Purchaser Warrants is $4.23 per share, and the Purchaser Warrants are not exercisable until August 17, 2022. The Purchaser Warrants expire five years from the date of issuance. The Company evaluated the Purchaser Warrants and concluded that they do not meet the criteria to be classified within stockholders’ equity. The Purchaser Warrants include provisions which could result in a different settlement value, for the Purchaser Warrants depending on the registration status of the underlying shares. Because these conditions were not an input into the pricing of a fixed-for-fixed option on the Company’s ordinary shares, the Purchaser Warrants are not considered to be indexed to the Company’s own stock. The Company recorded the Purchaser Warrants as liabilities on the Condensed Consolidated Balance Sheets at fair value, with subsequent changes in their respective fair values recognized in the Condensed Consolidated Statements of Operations at each reporting date. At the date of issuance, the Company performed a Black-Scholes valuation of the Purchaser Warrants, resulting in a fair value of $2.5968 per Purchaser Warrant. In recording the Purchaser Warrants liability, the Company recorded an expense in the Condensed Consolidated Statement of Operations associated with the issuance of the Purchaser Warrants of $1,211. At June 30, 2022, the Company reassessed the fair value of the Purchaser Warrants via Black Scholes valuation methodology and determined that the fair value of the Purchaser Warrants was $1.2051 per Purchaser Warrant, resulting in the Company recording a gain on the fair value of the Purchaser Warrants of $650 in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2022.

 

Effective June 30, 2022, the Company amended the terms of the Common Stock Warrants (2,388,836 warrants), Lender Warrants (1,731,499 warrants) and Purchaser Warrants (466,667 warrants). The amendments to such warrants removes the holder’s option to determine the value of such warrants utilizing the VWAP of the Company’s common stock on the trading day immediately preceding the date of a notice in a cashless exercise, and removes the condition to exercising such warrants that the Company’s shareholders approve the exercise thereof (which had already been obtained). The amendments to the warrants also extend the term of such warrants for an additional one year, such that the Common Stock Warrants will expire on February 3, 2028, and the Lender Warrants and Purchaser Warrants will expire on February 17, 2028.

 

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.

  

22

 
 

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

  566,673   6.89  $7.42   538,340  $7.46 

$8.01+

  96,125   2.28   25.22   96,125  $25.22 
   662,798   6.22  $10.00   634,465     

 

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

  240,000   6.67  $7.59   240,000  $7.59 
   240,000   6.67  $7.59   240,000     

 

Market Vesting Options

     

Weighted

             
      

Average

  

Weighted

      

Weighted

 
      

Remaining

  

Average

      

Average

 

Range of Exercise

 

Number

  

Contractual

  

Exercise

  

Options

  

Exercise