10-K/A
Minnesota | 41-1967918 | |
State or other jurisdiction of | I.R.S. Employer | |
13100 Magisterial Drive, Suite 100, LouisvilleKY | 40223 | |
Address of principal executive offices | Zip Code |
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 |
Large accelerated filer ☐ | Accelerated filer ☐ | ||
Non-accelerated filer ☒ | Smaller reporting company ☒ | ||
Emerging growth company ☐ |
Portions of the registrant's definitive proxy statement for its 2024 annual shareholders’ meeting to be filed with the Securities and Exchange Commission are incorporated by reference into Part III, Items 10-14 of this Annual Report on Form 10-K.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS;
RISK FACTOR SUMMARY
The information in this Annual Report on Form 10-K ("Report") contains various forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. Forward-looking statements may include, but are not limited to, statements about:
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When used in this Report, the words “anticipates,” “believes,” “expects,” “intends,” “plans,” “estimates,” “projects,” should,” “may,” “propose,” and similar expressions (or the negative versions of such words or expressions), are intended to identify such forward-looking statements.
We caution you that these forward-looking statements are subject to numerous risks and uncertainties, most of which are difficult to predict and many of which are beyond our control. Should one or more of the risks or uncertainties described in this Report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
All forward-looking statements, expressed or implied, included in this Report are expressly qualified in their entirety by this cautionary note. This cautionary note should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Report.
A summary of the principal risk factors that make investing in our securities risky and might cause our actual results to differ is set forth below. The following is only a summary of the principal risks that may materially adversely affect our business, financial condition, results of operations and cash flows. This summary should be read in conjunction with the more complete discussion of the risk factors we face, which are set forth in the section entitled “Risk Factors” in this Report.
Risks Related to our Business and our Industry
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Risks Related to our Securities and our Company
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General Risk Factors
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EXPLANATORY NOTE
All currency is rounded to the nearest thousand, except share and per share amounts. On March 27, 2023, the Company effectuated a l-for-3 reverse stock split of its outstanding common stock. This Report and the Consolidated Financial Statements and Notes to Consolidated Financial Statements herein, give retroactive effect to the reverse stock split for all periods presented. The shares of common stock retained a par value of $0.01 per share.
Our Company
Creative Realities, Inc. (“Creative Realities”, the “Company”, “we”, “us” or “our”) provides innovative digital signageis filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to amend our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “Original 10-K”), originally filed with the U.S. Securities and media solutionsExchange Commission (“SEC”) on March 21, 2024 (“Original Filing Date”), solely to enhance communicationsinclude the information required by Items 10 through 14 of Part III of Form 10-K. This information was previously omitted from the Original 10-K in reliance on General Instruction G(3) to Form 10-K, which permits the information in the above referenced items to be incorporated in the Original Form 10-K by reference to our definitive proxy statement if such proxy statement is filed no later than 120 days after our fiscal year-end. We are filing this Amendment to include the Part III information in the Original Form 10-K because we will not file a wide-ranging varietydefinitive proxy statement containing such information within 120 days after the end of out-of-home environments, key market segmentsthe fiscal year covered by the Original 10-K.
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We serve market-leading companies, so therethe principal financial officer as required by Section 302 of the Sarbanes-Oxley Act of 2002. Accordingly, Item 15 of Part IV is a good chance that if you leave your home todayamended to shop, work, eatinclude the currently dated certifications as exhibits. Because no financial statements have been included in this Amendment and this Amendment does not contain or play, you will encounter one or moreamend any disclosure with respect to Items 307 and 308 of Regulation S-K, paragraphs 3, 4 and 5 of the certifications have been omitted. In addition, because no financial statements are included in this Amendment, new certifications of our digital signage experiences. Our solutionsprincipal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are increasingly viable because we help our enterprise customers achieve a wide range of business objectives including:
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Through a combination of organically grown platforms and a series of strategic acquisitions, including our acquisition of Reflect Systems, Inc., a Delaware corporation (“Reflect”), in February 2022, the Company assists customers 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, equipment manufacturers, and the direct efforts of its in-house industry sales experts. Customer engagements focus on consultative conversations that ensure the Company’s solutions are positioned to help customers achieve their business objectives in the most cost-effective manner possible.
When comparing Creative Realities to other digital signage competitors, our customers value the following competitive advantages:
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Name |
| Positions | ||
| David Bell | 80 | Director | ||
| Donald A. Harris | 71 | Director | ||
| Richard Mills | 68 | Chief Executive Officer and | ||
| Stephen Nesbit | 73 | Director | ||
| Will Logan | 40 | Chief Financial Officer |
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While hardwarelargest companies in the industry — Bozell Worldwide, True North Communications and The Interpublic Group of Companies, Inc. Mr. Bell has previously led Slipstream Communications, LLC which is an international company providing strategic branding, digital marketing, and public relations services and served as a Senior Advisor to Google Inc. from 2006 to 2009. Mr. Bell previously served as an Operating Advisor at Pegasus Capital Advisors. He was a Senior Advisor to AOL from 2008 to 2016 and has also served on the boards of multiple publicly traded companies, including Lighting Science Group Corporation and Point Blank Solutions, Inc., and Primedia, Inc., and served as President and CEO of The Interpublic Group of Companies Inc. from 2003 to 2005. Mr. Bell served as an independent director on the Board of Directors of Time, Inc. from June 2014 to January 2018.
We believe that
Another component of our business strategy, given the evolving dynamics of the industry in which we operate, is to acquire and integrate other operatingfirst Digital Place Based Advertising companies in the industry before its sale to Anschutz Investments where the company changed its name to National Cinemedia (NASDAQ: NCMI). He began his career at IBM in conjunction with pursuingthe Data Processing Division holding various field and HQ management positions. Mr. Nesbit also held management and executive positions at Wang Labs and BBN Communications Inc., the communications company that was the original architect of the Internet. Mr. Nesbit holds an undergraduate degree from the University of Notre Dame and earned an MBA from the Indiana University Kelly Graduate School of Business.
Business Strategy
We believe that our existing business model is highly scalable and can be expanded successfully as we continue to grow organically, seek to acquire and integrate other companies in our target markets, strengthen our operational practices and procedures, further streamline our administrative office functions, and continue to capitalize on various marketing programs and activities.
Industry Background
We believe certain digital marketing technology industry trendsboard who are creating the opportunity for retailers, brands, venue-operators, enterprises, non-profits and other organizations to create innovative shopping, marketing, and informational experiences for their customers and other stakeholders in various venues worldwide. These trends include: (i) the expectations of technology-savvy consumers; (ii) addressing on-line competitors by improving physical experiences; (iii) a decline in the cost of hardware configurations (primarily flat panel displays) and software media players; (iv) the continued evolution of mobile, social, software and hardware technologies, applications and tools; (v) increasing sophistication of social networking platforms; (vi) increasingly complex customer requirements related to their specific digital marketing technology and solution objectives; and (vii) customer expectations of satisfactory consumer experiences with reduced installation and operating costs.
As a result, a growing number of retailers, brands, venue-operators, and other organizations have identified the need and opportunity to implement increasingly agile, automated, targeted and cost-effective and “sales-lifting” digital marketing, and interactive experiences to market to their customers. These experiences include creating unique and customized experiences for targeted, timely offerings and relevant promotions; improving engagement resulting in increased sales; and increasing shopping basket size. We believe our customers consider capitalizing on these industry trends to be increasingly critical to any successful “store of the future” retail and brand sales environment, especially where sales staff turnover is high, training outcomes are inconsistent and product knowledge is low.
Companies are implementing various digital marketing technology solutions, which: are implemented in multiple forms and types of configurations and locations; attempt to achieve any of a broad range of individual or combination of objectives; contain various levels of targeting; have the ability to instantly manage single or multiple locations remotely from a customer’s desktop or other connected device at each location; and are built to deliver or contain a standard or customized customer experience unique to and within the customer’s environment. Examples of such solutions include:
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| • | reviewing and approving the compensation of all of our other executive officers; | |
| • | reviewing our executive compensation policies and plans; | |
| • | implementing and administering our incentive compensation equity-based remuneration plans; | |
| • | assisting management in complying with | |
| • | if required, producing a report on executive compensation to be included in our annual proxy statement; | |
| • | reviewing, evaluating, and recommending changes, if appropriate, to the remuneration for directors; and | |
| • | reviewing and reassessing, on an annual basis, the adequacy of |
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| • | monitoring the independence of our independent auditor; | |
| • | verifying the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law; | |
| • | inquiring and discussing with management our compliance with applicable laws and regulations; | |
| • | pre-approving all audit services and permitted non-audit services to be performed by our independent auditor, including | |
| • | appointing or replacing the independent auditor; | |
| • | determining the compensation and | |
| • | establishing procedures for the receipt, retention and | |
| • | reviewing and reassessing on an annual basis the adequacy of |
Our Markets
We currently market and sell our marketing technology solutions through our direct sales force, inside sales team, and word-of-mouth referrals from existing customers. Select strategic partnerships and lead generation programs also drive business to the Company through targeted business development initiatives. We market to companies that seek digital marketing solutions across multiple connected devices and who specifically seek or could benefit from enhancements to the customer experience offered in their stores, venues, brands or organizations.
Our digital marketing technology solutions apply in a wide variety of industries. The industries in which we primarily sell our solutions are established and include automotive, retail, DOOH including advertising networks and retail media networks, foodservice/QSR, financial services, gaming, and sports and entertainment venues. A number of participants in these industries have only recently started considering or expanding the adoption of these types of technologies, solutions, and experiences as part of their overall marketing strategies.
Seasonality
A portion of our customer activity is influenced by seasonal effects related to traditional end of calendar year peak retail sales periods, traditional spring stadium/venue opening seasons, and certain other factors that arise from our target customer base. Nevertheless, our revenues can be materially affected by the launch of new markets, the timing of production rollouts, and other factors, any of which have the ability to reduce or outweigh certain seasonal effects.
Effect of General Economic Conditions on our Business
We believe that demand for our services will increase in the future in part because of new construction and remodeling activities of pre-existing retail, convenience store, stadium, and event venues. While we do see reductions in retail footprints across the U.S., we see a continued focus on integration of digital into the retail marketplace and a focus on digital refreshes within the retail space to stay relevant in an evolving e-commerce marketplace. Recent general economic improvements generally make it easier for our customers to justify decisions to invest in digital marketing technology solutions. A change in the macroeconomic trend in the U.S. could have a negative impact on our customers’ ability and/or willingness to advance their digital initiatives.
Effect of Supply Chain Constraints
A key component of our business includes the sale of digital media players, digital displays, and mounts supplied by third-party manufacturing partners. While the disruptions we experienced throughout 2021 and the first half of 2022 with respect to semiconductors have mostly subsided, we are still exposed to potential disruptions and delays related to fulfillment of inventory purchases from vendors as a result of increased lead times post-COVID-19 pandemic, which represent the key components to our digital signage solutions, because of a global shortage of semiconductor chips. In instances in which inventory was available, we experienced delays in the transportation of these goods from manufacturers to the Company, and in delivery of our solutions to our customers.
Regulation
Competition
While we believe there is presently no direct competitor4 (and amendments thereto, if any) filed electronically with the comprehensive offering of technologies, solutions, and services we provide to our customers, there are multiple individual competitors who offer subsets of our product and service offerings. These include digital signage software companies such as Stratacache and Poppulo; marketing services companies such as Sapient Nitro; or digital signage systems integrators such as SageNet. Some of these competitors may have significantly greater financial, technical, and marketing resources than we do and may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements. We believe that our holistic sales and business development capabilities, network operations / field service management capabilities, our comprehensive offering of digital signage technology and solutions, brand awareness, and proprietary processes are the primary factors providing our competitive advantage.
Major Customers
No customer accounted for more than 10% of revenue forSEC during the year ended December 31, 2023. We had three customers2023 and Forms 5 (and amendments thereto, if any) filed electronically with the SEC with respect to such year, or written representations that accounted for 44%no Forms 5 were required, we believe that none of revenue forour officers, directors and greater than ten percent beneficial owners failed to file on a timely basis all Section 16(a) filing requirements during the fiscal year ended December 31, 2022.
We had two and three customers that in the aggregate accounted for 50% and 49% of accounts receivable as of December 31, 2023 and 2022, respectively.
Decisions by one or more of these key customers to not renew, terminate, or substantially reduce their use of our products, technology, services, and platform could substantially slow our revenue growth and lead to a decline in revenue. Our business plan assumes continued growth in revenue, and it is unlikely that we will become profitable without a continued increase in revenue.
Territories
We sell products and services primarily throughout North America, with limited software licensing agreements operating in other international jurisdictions.
Human Capital
We have a workforce comprised of approximately 152 employees as of March 20, 2024. We do not have any employees that operate under collective-bargaining agreements.
Our principal offices are located at 13100 Magisterial Drive, Ste 100, Louisville, Kentucky 40223, and our telephone number at that office is (502) 791-8800. We have additional offices in the Dallas, TX, Atlanta, GA, and Windsor, Ontario (Canada) metro areas.
Corporate Organization
We originally incorporated and organized as a Minnesota corporation under the name “Wireless Ronin Technologies, Inc.” in March 2003 and focused on our expertise in digital media marketing solutions, including digital signage, interactive kiosks, mobile, social media, and web-based media solutions. We acquired the interactive marketing technology business that we currently operate in a 2014 merger with Creative Realities, LLC. Shortly after that merger, we changed our corporate name from “Wireless Ronin Technologies, Inc.” to “Creative Realities, Inc.” On October 15, 2015, we acquired the systems integration and marketing technology business of ConeXus World Global, LLC. On November 20, 2018, we acquired Allure, an enterprise software development company. On February 17, 2022, we acquired Reflect.
Our business involves a high degree
RISKS RELATED TO OUR BUSINESS AND OUR INDUSTRY
We have generally incurred losses, and may never become or remain profitable.
We have incurred historical net losses, and we have had negative cash flows from operations. While we have been able to achieve net income in 2021named executive officers for 2023 and 2022 we incurred a net loss(table and footnotes in 2023 and it is uncertain whether we will be able to sustain or increase our profitability in successive periods.
We have formulated our business plans and strategies based on certain assumptions regarding the acceptance of our business model and the marketing of our products and services. Nevertheless, our assessments regarding market size, market share, market acceptance of our products and services and a variety of other factors may prove incorrect. Our future success will depend upon many factors, including factors beyond our control and those that cannot be predicted at this time.
Our digital marketing business is evolving in a rapidly changing market, and we cannot ensure the long-term successful operation of our business or the execution of our business plan.whole dollars)
Digital marketing technology and solutions are evolving and the markets in which we compete are rapidly changing. As a result, our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by growing companies in new and rapidly evolving markets. We may be unable to accomplish any of the following, which would materially impact our ability to implement our business plan:
Non-Equity | ||||||||||||||||||||||||||||||
Stock | Option | Incentive Plan | All Other | |||||||||||||||||||||||||||
Salary | Bonus | Awards | Awards | Compensation | Compensation | Total | ||||||||||||||||||||||||
Name and Principal Position(a) | Years | ($)(b) | ($)(c) | ($) | ($)(d) | ($)(e) | ($) | ($) | ||||||||||||||||||||||
| Richard Mills | 2023 | 450,000 | — | — | — | — | — | 450,000 | ||||||||||||||||||||||
| Chief Executive Officer and Director | 2022 | 431,544 | — | — | 253,119 | 112,500 | — | 797,163 | ||||||||||||||||||||||
| Will Logan | 2023 | 350,000 | — | — | — | — | — | 350,000 | ||||||||||||||||||||||
| Chief Financial Officer | 2022 | 334,462 | 75,000 | — | 151,872 | 52,500 | — | 613,834 | ||||||||||||||||||||||
| (a) | Mr. Mills joined the Company effective October 15, 2015. Mr. Logan joined the Company effective November 6, 2017. |
| (b) | Effective November 12, 2021, Mr. Mills and Mr. Logan’s employment agreements were amended to provide that their annual base salaries adjusted automatically upon the closing of the Company’s acquisition of Reflect Systems, Inc. (the "Merger") to $450,000 and $350,000 annually, respectively. The Merger closed on February 17, 2022 resulting in actual salaries for Mr. Mills and Mr. Logan during 2022 of $431,544, and $334,462, respectively. |
| (c) | Mr. Logan and the Company entered into an employment agreement on November 12, 2021. The employment agreement awarded a $75,000 cash bonus upon the closing of the Merger. |
| (d) | On June 15, 2022, Messrs. Mills and Logan received ten-year options to purchase 333,334 and 200,000 shares of common stock, respectively (the “New Options”). The New Options are eligible to vest at any time on or prior to February 17, 2025 if the trailing 10-trading day volume-weighted average price ("VWAP") of the Company’s common stock, as reported on the Nasdaq Capital Market, exceeds the share price targets below, subject to such executive serving the Company as a director, officer, employee or consultant at such time. |
Guaranteed | Total | |||||||||||||||||||||||||||
Executive | Share Price Targets | Price | Shares | |||||||||||||||||||||||||
| $ | 6.00 | $ | 9.00 | $ | 12.00 | $ | 15.00 | $ | 18.00 | |||||||||||||||||||
| Mills’ Shares Vested | 16,667 | 33,334 | 50,000 | 66,667 | 83,333 | 83,333 | 333,334 | |||||||||||||||||||||
| Logan’s Shares Vested | 10,000 | 20,000 | 30,000 | 40,000 | 50,000 | 50,000 | 200,000 | |||||||||||||||||||||
| Percentage of Shares Vested | 5 | % | 10 | % | 15 | % | 20 | % | 25 | % | 25 | % | ||||||||||||||||
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The “Guaranteed Price” has the meaning ascribed to such term in the Agreement and The exercise price of the |
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Our business strategy may be unsuccessful and we may be unable to address the risks we face in a cost-effective manner, if at all. If we are unable to successfully accomplish these tasks, our business will be harmed.
Our success and longevity depend on our ability to generate profits from future operations and obtain sufficient capital through financing transactions to refinance our debt obligations, pay any contingent consideration owed to former Reflect stockholders, and meet our other business obligations.
| (e) | Effective June 15, 2022, the Board approved the 2022 Cash Bonus Plan providing that Messrs. Mills and Logan were eligible to receive a cash bonus of a percentage of their annual base salaries based on the Company’s annual EBITDA results for the calendar year 2022, as set forth below: |
Executive | 2022 EBITDA Target | |||||||||||||||||||
| $ | 3,600,000 | $ | 4,600,000 | $ | 5,600,000 | $ | 6,600,000 | $ | 7,600,000 | |||||||||||
| Mills Bonus Payment | $ | 112,500 | $ | 180,000 | $ | 225,000 | $ | 450,000 | $ | 675,000 | ||||||||||
| Logan Bonus Payment | $ | 52,500 | $ | 87,500 | $ | 140,000 | $ | 210,000 | $ | 350,000 | ||||||||||
Base | ||||||||||||||||||||||||
Executive | Salary | Bonus as a Percentage of Annual Base Salary | ||||||||||||||||||||||
| Mills | $ | 450,000 | 25 | % | 40 | % | 50 | % | 100 | % | 150 | % | ||||||||||||
| Logan | $ | 350,000 | 15 | % | 25 | % | 40 | % | 60 | % | 100 | % | ||||||||||||
At December 31, 2023, the Company has an accumulated deficitemployment agreements of $53,346, negative working capitalRichard Mills, Chief Executive Officer of $1,587, including current debt obligations of $3,690, and cash of $2,910. For the year ended December 31, 2023, the Company generated operating income of $1,346 and generated positive net cash flows from operations of $5,167. Pursuant to the Second Amended and Restated Credit and Security Agreement (the "Credit Agreement") between the Company, and Slipstream,Will Logan, Chief Financial Officer of the Company, is required and beganpayments to make monthly repayments of principalbe made upon a change in control are discussed below.
one year. The merger agreement in which we acquired Reflect requires us to pay to former Reflect stockholders additional contingent cash consideration after February 17, 2025 (subject to a six-month extension under certain circumstances), if the closing price of our shares of common stock on such date is less than $6.40 per share (the "Guaranteed Price"). The actual amount of such contingent consideration cannot be determined until such time, but our financial statements reflect $11,208 as the amount of such payment as of December 31, 2023, which include an increase in the Guaranteed Price to reflect the Company’s 1-for-3 reverse stock split that occurred on March 23, 2023. See “Note 5 Business Combinations”also contains other customary restrictive and other covenants relating to the Company’s Consolidated Financial Statements contained in this Report for a descriptionconfidentiality of our obligationsinformation, the ownership of inventions and other matters. On June 15, 2022, the Board approved an amendment to pay the contingent consideration.
We do not anticipate that we will have adequate funds from our operations to satisfy these obligations in February 2025. In response to these conditions, the Company plans to evaluate its available options for refinancing, via recapitalization, debt financing or equity financing, its upcoming obligations associated with the Acquisition Term Loan, Consolidation Term Loan, and contingent consideration. However, these plans have not been finalized, are subject to market conditions, and are not within the Company’s control, and therefore cannot be deemed probable. As a result, the Company has concluded that management's plans do not alleviate substantial doubt about the Company's ability to continuecertain aspects of Mr. Logan’s compensation as a going concern.
Any equity financings will likely be dilutive to shareholders and may be completed at a discount to the then-current market price of our securities. Debt financing, if available, may involve restrictive covenants on our operations or pertaining to future financing arrangements. Nevertheless, we may not successfully complete any future equity or debt financing. Adequate funds for our operations, whether from financial markets, collaborative or other arrangements, may not be available when needed or on terms attractive to us. If adequate funds are not available, our plans to operate our business may be adversely affected and we could be required to curtail our activities significantly and/or cease operating.
We do not have sufficient capital to engage in material research and development, which may harm our long-term growth.
In light of our limited resources in general, we have limited material investments in research and development over the past several years. This conserves capital in the short term. In the long term, as a result of our failure to invest in research and development, our technology and product offerings may not keep pace with the market, and we may lose any current existing competitive advantage. Over the long term, this may harm our revenues growth and our ability to become profitable.
Although we are focusing on increasing our revenues from SaaS services to our customers, our overall revenues in any quarter depend substantially upon contracts signed and the related shipment and installation or delivery of hardware and software products in that quarter. It is therefore difficult for us to accurately predict revenues and this difficulty also will affect the Company. It is difficult to forecast the timing of large individual hardware and software sales with a high degree of certainty due to the extended length of the sales cycle and the generally more complex contractual terms that may be associated with our products that could result in the deferral of some or all of the revenue to future periods.
Accordingly, large individual sales have sometimes occurred in quarters subsequent to when we anticipated or not at all. If we receive any significant cancellation or deferral of customer orders, or it is unable to conclude license negotiations by the end of a fiscal quarter, our operating results may be lower than anticipated. In addition, any weakening or uncertainty in the economy may make it more difficult for the Company to predict quarterly results in the future, and could negatively impact our business, financial condition, and results of operations for an indefinite period of time.
There has been, and we expect that there will continue to be, significant consolidation in our industry. Our failure or inability to either lead or participate in that consolidation would have a severe adverse impact on our access to financing, customers, technology, and human resources.
Our industry is currently composed of a large number of relatively small businesses; no single business dominates or provides integrated solutions and product offerings incorporating much of the available industry technology. We believe that substantial consolidation is occurring in our industry and will continue to do so in the near future. We believe that our prior acquisitions of Allure and Reflect illustrate acquisition opportunities that exist in our industry. If we are not active participants in consolidation, either as a consolidator or as a target, we may be left out of this process, with product offerings of limited value compared with those of our consolidated competitors. Moreover, even if we lead the consolidation process, we may incur unknown liabilities in such consolidations, fail to fully integrate the operations, personnel, or technology from such consolidations, and the market may not validate the decisions we make in that process.
Unpredictability in financing markets could impair our ability to grow our business through acquisitions.
We anticipate that opportunities to acquire similar businesses will materially depend on, among other things, the availability of financing options for us with acceptable terms. Poor credit and other market conditions or uncertainty in financial markets could adversely affect our ability to obtain such financing, and as a result, materially limit our ability to grow through acquisitions.
Our success depends on our interactive marketing technologies achieving and maintaining widespread acceptance in our targeted markets.
Our success will depend to a large extent on market acceptance of our interactive marketing technologies among our current and prospective customers. Our prospective customers may still not use our solutions for a number of other reasons, including preference for static advertising, lack of familiarity with our technology, preference for competing technologies or perceived lack of reliability. We believe that the acceptance of our interactive marketing technologies by prospective customers will depend primarily on the following factors:
Option Awards(a) |
Stock Awards | ||||||||
Market | |||||||||
Number | value | ||||||||
Number of | Number of | of shares | of shares | ||||||
Securities | Securities | or units of | or units of | ||||||
Underlying | Underlying | Option | stock | stock | |||||
Unexercised | Unexercised | Exercise | Option | that has | that have | ||||
Options (#) | Options (#) | Price | Expiration | not vested | not vested | ||||
Name | Exercisable | Non-Exercisable | ($) | Date | (#) | ($) | |||
| Richard Mills | 160,000(a) | —(a) | 7.59 | 6/1/2030 | — | — | |||
| 160,000(b) | —(b) | 7.59 | 6/1/2030 | — | — | ||||
| —(c) | 333,334(c) | 3.00 | 2/17/2025 | — | — | ||||
| Will Logan | 6,389(d) | —(d) | 26.10 | 11/6/2027 | — | — | |||
| 5,556(e) | —(e) | 22.50 | 9/20/2028 | — | — | ||||
| 80,000(a) | —(a) | 7.59 | 6/1/2030 | — | — | ||||
| 80,000(b) | —(b) | 7.59 | 6/1/2030 | — | — | ||||
| —(c) | 200,000(c) | 3.00 | 2/17/2025 | ||||||
| (a) | These stock options vested in three equal installments on June 1 annually, beginning in 2021 and ending in 2023. |
| (b) | These stock options (the “Performance Options”) become vested in increments of 16.67 percent of the total shares purchasable under this issuance subject to satisfying Company revenue target and earnings before interest, taxes, depreciation and amortization (“EBITDA”) target for the applicable year. In each of calendar years 2020, 2021 and 2022, one-third of the total shares may vest (if the revenue and EBITDA targets are met), and the shares that are subject to vesting each year are allocated equally to each of the revenue and EBITDA targets for such year, with each target and vesting being independently achieved without regard for the other. These Performance Options include a catch-up provision, where any options that did not vest during a prior year due to the Company’s failure to meet a prior revenue or EBITDA target may vest in a subsequent vesting year if the revenue or EBITDA target, as applicable, is met in the future year. The revenue and EBITDA targets for the subject years are as follows: |
Calendar Year | Revenue Target (millions) | EBITDA Target (millions) | ||||||
| 2021 | $ | 35 | $ | 3.1 | ||||
| 2022 | $ | 38 | $ | 3.5 | ||||
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The executives met the foregoing EBITDA target for calendar year 2021. 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 ($38 million) is eliminated, and the remaining shares that are available for vesting under the Performance Options (106,667 unvested shares for Mr. Mills and 53,334 for Mr. Logan) (including the unvested portions of shares based on the satisfaction of the revenue targets for 2020 and 2021 by virtue of the catch-up provisions in the Performance Options) will fully vest upon the achievement of the updated EBITDA target for calendar year 2022 of $3.6 million. |
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Our interactive technologies are complex and must meet stringent user requirements. Some undetected errors or defects may only become apparent as new functions are added to our technologies and products. The need to repair or replace products with design or manufacturing defects could temporarily delay the sale of new products and adversely affect our reputation. Delays, costs, and damage to our reputation due to product defects could harm our business.
Our financial condition and potential for continued net losses may negatively impact our relationships with customers, prospective customers and third-party suppliers.
Our financial condition and potential for continued net losses may cause current and prospective customers to defer placing orders with us, to require terms
Because we do not have long-term purchase commitments from our customers, the failure to obtain anticipated orders or the deferral or cancellation of commitments could have adverse effects on our business.
Our business is characterized by short-term purchase orders, contracts that do not require that purchases be made by our customers, and monthly subscription contracts (SaaS) that may be terminated with minimal notice. This makes forecasting our sales difficult. The failure to obtain anticipated orders and deferrals or cancellations of purchase commitments or SaaS services because of changes in customer requirements, or otherwise, could have a material adverse effect on our business, financial condition, and results of operations. We have experienced such challengesEBITDA set forth in the past and may experience such challengesPerformance Options shall be calculated in a form consistent with the future.
Our continued growth and financial performance could be adversely affected by the loss of several key customers.
No customer accounted for more than 10% of revenue for the year ended December 31, 2023. We had three customers that accounted for 44% of revenue for the years ended December 31, 2022.
Decisions by one or more of these key customers to not renew, terminate, or substantially reduce their use of our products, technology, services, and platform could substantially slow our revenue growth and lead to a decline in revenue. Our business plan assumes continued growth in revenue, and it is unlikely that we will become profitable without a continued increase in revenue.
Most of our contracts are terminable by our customers with limited notice and without penalty payments, and early terminations could have a material adverse effect on our business, financial condition, and results of operations.
Most of our contracts are terminable by our customers following limited notice and without early termination payments or liquidated damages due from them. In addition, each stage of a project often represents a separate contractual commitment, at the end of which the customers may elect to delay or not to proceed to the next stage of the project. We cannot assure you that one or more of our customers will not terminate a material contract or materially reduce the scope of a large project. The delay, cancellation or significant reduction in the scope of a large project or a number of projects could have a material adverse effect on our business, financial condition and results of operations.
It is common for our current and prospective customers to evaluate our products over an extended period of time, most especially during economic downturns that affect our customers’ businesses, as we saw during the COVID-19 pandemic. The lengthy and variable sales cycle makes it difficult to predict our operating results.
It is difficult for us to forecast the timing and recognition of revenue from sales of our products and services because our actual and prospective customers often take significant time to evaluate our products before committing to a purchase. Even after making their first purchases of our products and services (or "pilot program" purchases), existing customers may not make significant purchases of those products and services for a long period of time following their initial purchases, if at all. The period between initial customer contact and a purchase by a customer may be years with potentially an even longer period separating initial purchases and any significant purchases thereafter. During the evaluation period, prospective customers may decide not to purchase or may scale down proposed orders of our products for various reasons, including:
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Our prospective customers routinely require education regarding the use and benefit
| (iii) | 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 above) (collectively, the “EBITDA Calculations”). |
| The unvested portion of the Performance Options as of December 31, 2022 vested in full effective as of March 30, 2023 upon confirmation by the Board of Directors of achievement of the performance metrics for the year ended December 31, 2022. |
| (c) | Messrs. Mills and Logan received ten-year options to purchase 333,334 and 200,000 shares of common stock, respectively (the “New Options”). The New Options are eligible to vest at any time on or prior to February 17, 2025 if the trailing 10-trading day VWAP of the Company’s common stock, as reported on the Nasdaq Capital Market, exceeds the share price targets below, subject to such executive serving the Company as a director, officer, employee or consultant at such time: |
Guaranteed | Total | |||||||||||||||||||||||||||
Executive | Share Price Targets | Price | Shares | |||||||||||||||||||||||||
| $ | 6.00 | $ | 9.00 | $ | 12.00 | $ | 15.00 | $ | 18.00 | |||||||||||||||||||
| Mills’ Shares Vested | 16,667 | 33,334 | 50,000 | 66,667 | 83,333 | 83,333 | 333,334 | |||||||||||||||||||||
| Logan’s Shares Vested | 10,000 | 20,000 | 30,000 | 40,000 | 50,000 | 50,000 | 200,000 | |||||||||||||||||||||
| Percentage of Shares Vested | 5 | % | 10 | % | 15 | % | 20 | % | 25 | % | 25 | % | ||||||||||||||||
| (d) | These stock options become exercisable in increments of 25 percent of the total shares purchasable under this issuance on November 6 annually, beginning in 2018 and ending in 2021. |
| (e) | These stock options become exercisable in increments of 25 percent of the total shares purchasable under this issuance on September 20 annually, beginning in 2019 and ending in 2022. |
| • | Annual grant of shares of unrestricted common stock of the Company, issuable on November 17, 2021, 2022 and 2023, having an annual value of $24,000, with the per-share price to be determined based upon the closing price of the Company’s common stock as reported on Nasdaq on such issuance date. No shares were issued on November 17, 2023 as the Company’s ability to issue shares under the 2014 Stock Incentive Plan expired. |
| • | An option issuable to each non-executive director to purchase 60,000 shares of Company common stock (or in the case of Dennis McGill, prior Chairman of the Company Board, 75,000 shares), which vest in three equal installments on November 17, 2021, 2022 and 2023, subject to continuing service as a director as of such vesting date. The exercise price of such options is $2.21, the closing price of the Company’s common stock as reported on Nasdaq on the date of adoption of such plan. |
Our industry is characterized by frequent technological change. If we are unableThe table below sets forth the compensation paid to adapt our products and services and develop new products and services to keep up with these rapid changes, we will not be able to obtain, or maintain, market share.The market for our products and services is characterized by rapidly changing technology, evolving industry standards, changes in customer needs, heavy competition, and frequent new product and service introductions. If we fail to develop new products and services or modify or improve existing products and services in response to these changes in technology, customer demands, or industry standards, our products and services could become less competitive or obsolete.We must respond to changing technology and industry standards in a timely and cost-effective manner. We may not be successful in using new technologies, developing new products and services or enhancing existing products and services in a timely and cost-effective manner. Furthermore, even if we successfully adapt our products and services, these new technologies or enhancements may not achieve sufficient market acceptance.We operate in an intensely competitive industry, and our competitors are developing products and solutions that incorporate AI and ML. We may not be as successful as our competitors in incorporating AI and ML into our products and solutions.Our competitors may be larger, more diversified, better funded, and have access to more advanced technology, including AI and ML. These competitive advantages may enable our competition to innovate their products and solutions faster or better than we can, or to provide increased competition on quality and price, which could adversely affect our business and profitability. Burgeoning interest in AI and ML may increase competition and disrupt the Company’s business model. AI and ML may lower barriers to entry in our industry and the Company may be unable to effectively compete with the products or services offered by new competitors. Changes to the products and services we offer related to AI and ML may affect customer expectations, requirements, or tastes in ways that the Company cannot adequately anticipate or adapt to, causing its business to lose revenues.Issues relating to the use of new and evolving technologies in our offerings, such as AI and ML, may result in increased regulation and costs to comply with such regulations.We are exploring manners to integrate AI and ML into many of our offerings. We may need to increase our operational, research and development and compliance costs, or divert resources from other research and development efforts, to address potential issues related to AI and ML in a quickly evolving social, legal, and regulatory environment. As with many cutting-edge innovations, AI and ML present new risks and challenges, and existing laws and regulations may apply to us in new ways, the nature and extent of which are difficult to predict. Potential government regulation related to AI, including relating to ethics and social responsibility, may also increase the burden and cost of compliance and research and development.We use developed and licensed software technology, and we could face claims of infringement by others in the industry. Such claims are costly and add uncertainty to our operational results.A portion of our business involves our ownership and licensing of software. This market space is characterized by frequent intellectual property claims and litigation. We could be subject to claims of infringement of third-party intellectual-property rights resulting in significant expense and the potential loss of our own intellectual property rights. From time to time, third parties may assert copyright, trademark, patent, or other intellectual property rights to technologies that are important to our business. Any litigation to determine the validity of these claims, including claims arising through our contractual indemnification of our business partners, regardless of their merit or resolution, would likely be costly and time consuming and divert the efforts and attention of our management and technical personnel. If any such litigation resulted in an adverse ruling, we could be required to: Director Compensation (table and footnotes in whole dollars) Fees Nonqualified earned Non-equity deferred or paid Stock incentive plan compensation All other in cash awards Option awards compensation earnings compensation Total Name ($)(a) ($)(b) ($) ($) ($) ($) ($) Dennis McGill — 24,000 — — — — 24,000 David Bell — 24,000 — — — — 24,000 Donald A. Harris 12,000 24,000 — — — — 36,000 Stephen Nesbit 17,524 24,000 — — — — 41,524 ●pay substantial damages;
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Summary | Summary | |||||||||||
Compensation | Compensation | Compensation | Compensation | Value of Initial Fixed $100 | ||||||||
Table Total for | Actually | Table Total for | Actually Paid to | Investment Based On: | Net Income(6) | |||||||
PEO(1) | Paid to PEO(2) | Non-PEO NEO(3) | Non-PEO NEO(4) | Total Shareholder Return(5) | (in thousands) | |||||||
Year | ($) | ($) | ($) | ($) | ($) | ($) | ||||||
(a) | (b) | (c) | (d) | (e) | (f) | (g) | ||||||
| 2023 | 450,000 | 498,678 | 350,000 | 373,292 | 61 | (2,937) | ||||||
| 2022 | 797,163 | 80,977 | 613,834 | 230,168 | 45 | 1,876 | ||||||
| 2021 | 378,652 | 570,873 | 254,585 | 350,948 | 109 | 232 | ||||||
| (1) |
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Our proprietary platform architectures and data tracking technology underlying certain of our services are complex and may contain unknown errors in design or implementation that could result in system performance failures or inability to scale.
The platform architecture, data tracking technology, and integration layers underlying our proprietary platforms, our contract administration, procurement, timekeeping, content and network management, network services, device management, virtualized services, software automation and other tools, and back-end services are complex and include specially developed software and code. This software and code are developed internally, licensed from third parties, or integrated by in-house personnel and third parties. Any of the system architecture, system administration, integration layers, software, or code may contain errors, or may be implemented or interpreted incorrectly, particularly when they are first introduced or when new versions or enhancements to our tools and services are released. Consequently, our systems could experience performance failure, or we may be unable to scale our systems, which may:
| (2) |
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Summary | ||||||||
Compensation | Reported | Equity | Compensation | |||||
Table Total | Value of Equity | Awards | Actually Paid to | |||||
for PEO | Awards(a) | Adjustments(b) | PEO | |||||
Year | ($) | ($) | ($) | ($) | ||||
| 2023 | 450,000 | — | 48,678 | 498,678 | ||||
| 2022 | 797,163 | 253,119 | (463,067) | 80,977 | ||||
| 2021 | 378,652 | — | 192,221 | 570,873 |
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Our business may be adversely affected by malicious applications that interfere with, or exploit security flaws in, our products and services.
Our business may be adversely affected by malicious applications that make changes to our customers’ computer systems and interfere with the operation and use of our products or products that impact our business. These applications may attempt to interfere with our ability to communicate with our customers’ devices. The interference may occur without disclosure to or consent from our customers, resulting in a negative experience that our customers may associate with our products and services. These applications may be difficult or impossible to uninstall or disable, may reinstall themselves and may circumvent other applications’ efforts to block or remove them. The ability to provide customers with a superior interactive marketing technology experience is critical to our success. If our efforts to combat these malicious applications fail, or if our products and services have actual or perceived vulnerabilities, there may be claims based on such failure or our reputation may be harmed, which would damage our business and financial condition.
We compete with other companies that have more resources, which puts us at a competitive disadvantage.
The market for interactive marketing technologies is highly competitive and we expect competition to increase in the future. Many competitors have significantly greater financial, technical, and marketing resources than us. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer preferences or requirements. They may also devote greater resources to the development, promotion and sale of their products and services than us.
We expect competitors to continue to improve the performance of their current products, services, and technologies and to introduce new products, services, and technologies as well. Successful new product and service introductions or enhancements by our competitors could reduce sales and the market acceptance of our products and services, cause intense price competition, or make our products and services obsolete. To be competitive, we must continue to invest significant resources in research and development, sales and marketing and customer support. If we do not have sufficient resources to make these investments or are unable to make the technological advances necessary to be competitive, our competitive position will suffer. Increased competition could result in price reductions, fewer customer orders, reduced margins, and loss of market share. Our failure to compete successfully against current or future competitors could adversely affect our business and financial condition.
Fair Value of | ||||||||||||||
Year over | Fair Value | Dividends or other | ||||||||||||
Year over | Year Change in | at the End | Earnings Paid on | |||||||||||
Year Change in | Fair Value as of | Fair Value of | of the Prior Year | Stock or Option | ||||||||||
Fair Value of | Vesting Date of | Equity Awards | of Equity Awards | Awards not | ||||||||||
Year End | Outstanding | Equity Awards | Granted in | that Failed to | Otherwise Reflected | Total | ||||||||
Fair Value | and Unvested | Granted | Prior Years | Meet Vesting | in Fair Value | Equity | ||||||||
of Equity | Equity | and Vested | that Vested | Conditions | or Total | Award | ||||||||
Awards | Awards | in the Year | in the Year | in the Year | Compensation | Adjustments | ||||||||
Year | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||
| 2023 | — | (10,465) | — | 59,143 | — | — | 48,678 | |||||||
| 2022 | 22,311 | (321,138) | — | (164,240) | — | — | (463,067) | |||||||
| 2021 | — | 51,500 | — | 140,721 | — | — | 192,221 |
| (3) | The dollar amounts reported in column (d) represent the amounts reported for the NEO (excluding our PEO) in the “Total” column of the Summary Compensation Table in each applicable year. The NEO (excluding our PEO) included for purposes of calculating the amounts in each applicable year was Will Logan, our Chief Financial Officer. |
Our future success depends on key personnel and our ability to attract and retain additional personnel.
Our key personnel include:
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Table Total | Reported | Equity | Actually Paid | |||||
for Non-PEO | Value of | Awards | to Non-PEO | |||||
NEO | Equity Awards(a) | Adjustments(b) | NEO | |||||
Year | ($) | ($) | ($) | ($) | ||||
| 2023 | 350,000 | — | 23,292 | 373,292 | ||||
| 2022 | 613,834 | 151,872 | (231,794) | 230,168 | ||||
| 2021 | 254,585 | — | 96,363 | 350,948 |
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If we fail to retain our key personnel or to attract, retain, and motivate other qualified employees, our ability to maintain and develop our business may be adversely affected. Our future success depends significantly on the continued service of our key technical, sales, and senior management personnel and their ability to execute our growth strategy. The loss of the services of our key employees could harm our business. We may be unable to retain our employees or to attract, assimilate and retain other highly qualified employees who could migrate to other employers who offer competitive or superior compensation packages.
We risk losing directors, officers, and employees, or paying more cash compensation, if our shareholders do not approve our 2023 Stock Incentive Plan.
Our ability to issue incentive awards under our 2014 Stock Incentive Plan expired in 2023. Nasdaq’s listing rules require us to obtain our shareholder’s approval of a stock incentive plan before we may issue any shares under the plan or any option issued under the plan may be exercised. On November 8, 2023, our Board of Directors adopted a 2023 stock incentive plan (the “2023 Plan”), and we intend to seek shareholder approval of such plan at our 2024 annual shareholder meeting.
As a company with limited capital resources, we have historically relied upon our ability to issue incentives from our stock incentive plans to our directors, officers and employees in lieu of cash-based compensation. Currently, we may only issue options under the 2023 Plan that cannot be exercised unless shareholder approval of the 2023 Plan is obtained in advance of the exercise of any option. We cannot issue restricted stock awards or stock awards, which we have issued in the past to incentivize our directors, officers and employees and to mitigate the cash compensation that would otherwise be payable to such persons. This limited use of the 2023 Plan limits the value of these incentives, and will require us to use cash in place of incentives under the 2023 Plan until shareholder approval is obtained, or we risk losing the services of our officers, directors and employees.
We cannot guarantee that we will be able to obtain shareholder approval of the 2023 Plan. Our shareholders failed to approve at our 2023 annual shareholder meeting a 2023 equity incentive plan that authorized the issuance of up to 1,500,000 shares under such plan.
We are subject to cyber security risks and interruptions or failures in our information technology systems and those of third party partners with whom our applications are integrated, and will likely need to expend additional resources to enhance our protection from such risks. Notwithstanding our efforts, a cyber incident could occur and result in information theft, data corruption, operational disruption, and/or financial loss.
We depend on digital technologies to process and record financial and operating data and rely on sophisticated information technology systems and infrastructure to support our business, including process control technology. At the same time, cyber incidents, including deliberate attacks, have increased. Our technologies, systems and networks and those of our vendors, suppliers, and other business partners may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary and other information, or other disruption of business operations. In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. Our systems for protecting against cyber security risks may not be sufficient. As the sophistication of cyber incidents continues to evolve, we will likely be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents. Additionally, any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures, usage errors by employees, computer viruses, cyber-attacks, or other security breaches or similar events. The failure of any of our information technology systems may cause disruptions in our operations, which could adversely affect our revenues and profitability.
Additionally, we engage third-party service providers to assist us in providing products and services for our customers. Those third-party services providers also subject to the foregoing risks to their systems. We do not have a process to oversee and identify risks from cyber security threats associated with our use of such third-party service providers, and any such incidents occurring on their system could similarly affect us, our revenues and profitability.
Fair | Value of | |||||||||||||
Year Over | Value as of | Year over Year | Fair Value | Dividends or other | ||||||||||
Year | Vesting Date | Change in | at the End of the | Earnings Paid on | ||||||||||
Change in | of Equity | Fair Value of | Prior Year of | Stock or Option | ||||||||||
Year End | Fair Value of | Awards | Equity Awards | Equity Awards that | Awards not | Total | ||||||||
Fair Value | Outstanding and | Granted | Granted in Prior | Failed to Meet | Otherwise Reflected | Equity | ||||||||
of Equity | Unvested | and Vested | Years that Vested | Vesting Conditions | in Fair Value or | Award | ||||||||
Awards | Equity Awards | in the Year | in the Year | in the Year | Total Compensation | Adjustments | ||||||||
Year | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||
| 2023 | — | (6,279) | — | 29,571 | — | — | 23,292 | |||||||
| 2022 | 13,386 | (160,905) | — | (84,275) | — | — | (231,794) | |||||||
| 2021 | — | 25,750 | — | 70,613 | — | — | 96,363 |
| (5) | Cumulative total shareholder return (Cumulative TSR) is calculated by dividing the sum of the cumulative amount of dividends for the measurement period, assuming dividend reinvestment, and the difference between the Company’s share price at the end and the beginning of the measurement period by the Company’s share price at the beginning of the measurement period. |
| (6) | The dollar amounts reported represent the amount of net income reflected in the Company’s audited financial statements for the applicable year. |
Effective information security internal controls are necessary for us to protect our sensitive information from illegal activities and unauthorized disclosure in addition to denial of service attacks and corruption of our data. In addition, we rely on the information security internal controls maintained by our outsourced service provider. Breaches of our information management system could also adversely affect our business reputation. Finally, significant information system disruptions could adversely affect our ability to effectively manage operations or reliably report results.
Because our technology, products, platform, and services are complex and are deployed in and across complex environments, they may have errors or defects that could seriously harm our business.
Our technology, proprietary platforms, products, and services are highly complex and are designed to operate in and across data centers, large and complex networks, and other elementsAnalysis of the digital media workflow that we do not own or control. On an ongoing basis, we need to perform proactive maintenance services on our platform and related software services to correct errors and defects. Information Presented in the Pay versus Performance Table
We may have insufficient network or server capacity, which could result in interruptions in our services and loss of revenues.
Our operations are dependent in part upon: network capacity provided by third-party telecommunications networks; data center services provider owned and leased infrastructure and capacity; our dedicated and virtualized server capacity located at its data center services provider partner and a geo-redundant micro-data center location; and our own infrastructure and equipment. Collectively, this infrastructure, equipment, and capacity must be sufficiently robust to handle all of our customers’ web-traffic, particularly inPEO, the event of unexpected surges in high-definition video traffic and network services incidents. We (and our service providers) may not be adequately prepared for unexpected increases in bandwidth and related infrastructure demands from our customers. In addition, the bandwidth we have contracted to purchase may become unavailable for a variety of reasons, including payment disputes, outages, or such service providers going out of business. Any failure of these service providers or our own infrastructure to provide the capacity we require, due to financial or other reasons, may result in a reduction in, or interruption of, serviceCompensation Actually Paid to our customers, leading to an immediate decline in revenueNon-PEO NEO, and possible additional decline in revenue as a result of subsequent customer losses.
Our business operations are susceptible to interruptions caused by events beyond our control.
Our business operations are susceptible to interruptions caused by events beyond our control. For example, the COVID-19 pandemic resulted in authorities implementing numerous preventative measures to contain or mitigateCompany’s cumulative TSR over the outbreak of the virus, such as travel bans and restrictions, limitations on business activity, quarantines, and shelter-in-place orders. These measures caused business slowdowns and shutdowns in certain affected areas, both regionally and worldwide, which significantly adversely impacted our business and results of operations. We are vulnerable to potential problems when events beyond our control arise, including, among others:
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Our competitors are constantly evolving, andInsider Trading Policy, we may be unable to compete successfully against existing or future competitorsgenerally follow the same principles set forth in the Insider Trading Policy when granting equity awards, including options, to our business.
The market in which we operate is increasingly competitive. Our current competitors generally include general digital signage companies, specialized digital signage operators targeting certain vertical markets (e.g., financial services, retail, or food services), content management software companies, or integratorsofficers, directors and vertical solution providers who develop single implementations of content distribution, digital marketing technology, and related services. These competitors, including future new competitors who may emerge, may be ableother employees with access to develop comparable or superior solution capabilities, software platform, technology stack, and/or series of services that provide a similar or more robust set of features and functionality than our technology, products and services. If this occurs, we may be unable to grow as necessary to make our business profitable. In addition, our existing and potential future competitors may be able to use their extensive resources to:
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If we are unable to compete effectively in our various markets, or if competitive pressures place downward pressure on the prices at which we offer our products and services, our business, financial condition and results of operations may suffer.
RISKS RELATED TO OUR SECURITIES AND OUR COMPANY
Our largest shareholder and senior lenderpossesses significant voting power with respect to our common stock, which will limit your influence on our management and affairs, and may discourage parties from initiating potential merger, takeover, or other change-of-control transactions.
As of March 20, 2024, our largest shareholder and investor, Slipstream is the holder of all of our outstanding debt instruments, including two term loans, and has beneficial ownership of approximately 26% of our common stock (on an as-converted, fully diluted basis including conversion of outstanding warrants, and assuming no other convertible securities, options and warrants are converted or exercised by other parties).
Slipstream has significant influence on our management and affairs, including the election and removal ofmaterial nonpublic information. Generally our Board of Directors and all other matters requiring shareholder approval, including the future merger, consolidation or sale of all or substantially all of our assets. This stockholder position, especially in light of Pegasus' prior proposals described below, may discourage others from initiating any potential merger, takeover, or other change-of-control transaction that may otherwise be beneficial to our shareholders. Furthermore, this concentrated ownership will limit the practical effect of your participation in Company matters, through shareholder votes and otherwise.
On February 2, 2023 and May 1, 2023, we received unsolicited proposals 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 areCompensation Committee does not owned by Pegasus for purchase prices of $0.83 per share in cash (or, as a result of our 1-for-3 reverse stock split effectuated in March 2023, $2.49 per share), and $2.85 per share in cash, respectively. 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”) concluded that each proposal undervalued 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 was not in the best interests of the Company’s existing shareholders. Consequently, the Special Committee advised Pegasus that it rejected each proposal, and since such time, Pegasus has not made any subsequent acquisition proposal.
Our Articles of Incorporation grant our Board of Directors the power to issue additional shares of common and preferred stock and to designate other classes of preferred stock, all without shareholder approval.
Our authorized capital consists of 116,666,666 shares of capital stock, 50,000,000 of which is undesignated preferred stock. Pursuant to authority granted by our Articles of Incorporation, our Board of Directors, without any action by our shareholders, may designate and issue shares in such classes or series (including other classes or series of preferred stock) as it deems appropriate and establish the rights, preferences and privilegesapprove grants of such shares, including dividends, liquidationawards during a blackout period and voting rights, provideddoes not take material nonpublic information into account when determining the timing and terms of such designation is consistent with Minnesota law. The rights of holders of other classes or series of stock that may be issued could be superior to the rights of holders of our common shares. The designation and issuance of shares of capital stock having preferential rights could adversely affect other rights appurtenant to shares of our common stock. Furthermore, any issuances of additional stock (common or preferred) will dilute the percentage of ownership interest of then-current holders of our capital stock and may dilute our book value per share.
We have never paid dividends on our capital stock andan award. Further, we do not anticipate paying dividends inhave a policy or practice of timing the foreseeable future.
We have never paid dividends on anydisclosure of our capital stock and currently intend to retain any future earnings to fund the growth of our business. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend on our financial condition, operating results, capital requirements, general business conditions, and other factors that our Board of Directors may deem relevant. As a result, capital appreciation, if any, of our common stock will be the sole source of gainmaterial nonpublic information for the foreseeable future.
We do not have significant tangible assets that could be sold upon liquidation.
We have nominal tangible assets. As a result, if we become insolvent or otherwise must dissolve, there will be no tangible assets to liquidate and no corresponding proceeds to disburse to our shareholders. If we become insolvent or otherwise must dissolve, shareholders will likely not receive any cash proceeds on accountpurpose of their shares.
We can provide no assurance that our securities will continue to meet Nasdaq listing requirements. If we fail to comply with the continuing listing standards of the Nasdaq, our securities could be delisted.
In 2022, the bid price of the Company’s common stock closed for 30 consecutive trading days below the $1.00 per share minimum required for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). Although the Company cured such noncompliance as a result of its 1-for-3 reverse stock split in March 2023, the trading price of the Company’s common stock has been subject to large movement in the past, especially in light of historically low trading volumes. We cannot be certain that the Company will be able to comply with the Minimum Bid Price Requirement and the other continued listing requirements of Nasdaq in the future, in which case the Company’s common stock may be delisted from the Nasdaq Capital Market. In the event our common stock is delisted from The Nasdaq Capital Market and we are also unable to maintain listing on another alternate exchange, trading in our common stock could thereafter be conducted in FINRA’s OTC Bulletin Board or in the over-the-counter markets in the so-called “pink sheets.” In such event, the liquidity of our common stock would likely be further impaired, not only in the number of shares which could be bought and sold, but also through delays in the timing of the transactions, and there would likely be a reduction in our coverage by security analysts and the news media, thereby resulting in lower prices for our common stock than might otherwise prevail.
Significant issuances of our common stock, or the perception that significant issuances may occur in the future, could adversely affect the market price for our common stock.
Significant actual or perceived potential future issuance of our common stock could adversely affect the market price of our common stock. Generally, issuances of substantial amounts of common stock in the public market, and the availability of shares for future sale, could adversely affect the prevailing market price of our common stock, and could cause the market price of our common stock to remain low for a substantial amount of time.
We cannot foresee the impact of potential securities issuances of common shares on the market for our common stock, but it is possible that the market for our shares may be adversely affected, perhaps significantly. It is also unclear whether or not the market for our common stock could absorb a large number of attempted sales in a short period of time, regardless of the price at which they might be offered.
Sales of a substantial number of shares of our common stock in the public market by certain of our stockholders could cause our stock price to fall.
Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that sales may have on the prevailing market price of our common stock.
There may not be an active market for shares of our common stock.
In general, there has been minimal trading volume in our common stock. Small trading volumes would likely make it difficult for our shareholders to sell their shares as and when they choose. Furthermore, small trading volumes are generally understood to depress market prices. As a result, you may not always be able to resell shares of our common stock publicly at the time and prices that you feel are fair or appropriate.
GENERAL RISK FACTORS
Because of our limited internal resources, we may not have in place various processes and protections common to more mature companies and may be more susceptible to adverse events.
We have limited internal resources. As a result, we may not have in place systems, processes, and protections that many of our competitors have or that may be essential to protect against various risks. For example, we have in place only limited resources and processes addressing human resources, timekeeping, data protection, business continuity, personnel redundancy, and knowledge institutionalization concerns. As a result, we are at risk that one or more adverse events in these and other areas may materially harm our business, financial condition, and results of operations.
General global market and economic conditions may have an adverse impact on our operating performance and results of operations.
Our business has been and could continue to be affected by general global economic and market conditions. Any downturn in the United States and worldwide economy could have a negative effect on our operating results, including a decrease in revenue and operating cash flow. To the extent our customers are unable to profitably leverage various forms of digital marketing technology and solutions, and/or the content we create, deliver and publish on their behalf, they may reduce or eliminate their purchase of our products and services. Such reductions in traffic would lead to a reduction in our revenues. Additionally, in a down-cycle economic environment, we may experience the negative effects of increased competitive pricing pressure, customer loss, slowdown in commerce over the Internet, and corresponding decrease in traffic delivered over our network and failures by our customers to pay amounts owed to us on a timely basis or at all. Suppliers on which we rely for equipment, field services, servers, bandwidth, co-location, and other services could also be negatively impacted by economic conditions that, in turn, could have a negative impact on our operations or revenues. Flat or worsening economic conditions may harm our operating results and financial condition.
In addition, our business could be adversely affected by the effects of a widespread outbreak of contagious disease, including another outbreak of COVID-19 or another illness. A significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products, our ability to collect against existing trade receivables and our operating results. Specifically, such event may cause us, our customers or suppliers to temporarily suspend operations in the affected city or country, and customers may suspend or terminate capital improvements including in-store digital deployments or refresh projects, all of which may have a material adverse effect on our business.
ITEM 1B UNRESOLVED STAFF COMMENTS
Not applicable.
Cybersecurity Risk Management and Strategy
We have developed and implemented cybersecurity risk management processes intended to protect the confidentiality, integrity, and availability of our critical systems and information. While everyone at our company plays a part in managing cybersecurity risks, primary cybersecurity oversight responsibility is shared by our Board of Directors and senior management. Our cybersecurity risk management program is integrated into our overall enterprise risk management program.
Our cybersecurity risk management program includes:
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Over the past fiscal year, we have not identified risks from known cybersecurity threats, including as a result of any prior cybersecurity incidents we have experienced from time to time, that have materially affected or are reasonably likely to materially affect us, including our operations, business strategy, operating results, or financial condition. We will continue to monitor and assess our cybersecurity risk management program as well as invest in and seek to improve such systems and processes as appropriate. If we were to experience a material cybersecurity incident in the future, such incident may have a material adverse effect on our operations, business strategy, operating results, and financial condition. For more information regarding cybersecurity risks that we face and potential related impacts on our business, see the section titled “Risk Factors” in Part I, Item 1A of this Report.
Board Governance
Our full Board of Directors oversees our risk management, including our information technology and cybersecurity policies, procedures, and risk assessments. Our management reports to our Board of Directors on information security matters as necessary, regarding any significant cybersecurity incidents, as well as any incidents with lesser impact potential.
One of the key functions of our Board of Directors is informed oversight of our various processes for managing risk. An overall review of risk is inherent in our Board of Directors ongoing consideration of our long-term strategies, transactions and other matters presented to and discussed by the Board of Directors. This includes a discussion of the likelihood and potential magnitude of various risks, including cybersecurity risks, and any actions management has taken to limit, monitor or control those risks. The Board of Directors receives briefings from management periodically on our cyber risk management program and presentations on cybersecurity topics as part of the Board of Directors’ continuing education on topics that impact public companies.
(All currency is rounded to the nearest thousands, except share and per share amounts.)
Our headquarters is located at 13100 Magisterial Drive, Suite 100, Louisville, KY 40223. There, we have approximately 17,500 square-feet of office space, including approximately 6,500 square-feet of warehouse space, which we believe is sufficient for our projected near-term future growth. The lease was modified and extended during 2022 and the monthly lease amount is currently $27 and escalates 1% annually through the end of the lease term in December 2025.
We also lease office space of approximately 6,000 square feet to support our Canadian operations at a facility located at 4600 Rhodes Drives, Unit 3 & 4, Windsor, Ontario under a lease that expires November 30, 2025 and with a monthly rental, inclusive of CAMs and related taxes, of $7 per month.
We also lease office space of approximately 4,500 square feet to support our Atlanta operations at a facility known as Northridge Center II, located at 365 Northridge Road, Atlanta, GA 30350. This property lease began in July 2022 and expires in December 2027 with a monthly rental of $9, escalating 3% annually.
We also lease office space of approximately 15,350 square feet to support the Reflect operations at a facility located at 2221 Lakeside Blvd, Richardson, TX 75082 under a lease that expires March 31, 2024 and with a monthly rental, inclusive of CAMs, utilities and related taxes, of $40 per month. Commencing April 1, 2024, we will begin leasing approximately 3,300 square feet to support the Reflect operations at a facility located at 5345 Towne Square Drive, Plano, Texas under a lease that expires on May 31, 2027 and with a monthly base rental of $9, plus utilities.
Our corporate phone number is (502) 791-8800.
Information regarding legal proceedings can be found in Note 9 Commitments and Contingencies to the Company’s Consolidated Financial Statements included in this Report.
Not applicable.
ITEM 5MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(All currency is rounded to the nearest thousands, except share and per share amounts.)
Market Information
Our common stock is listed for trading on the Nasdaq Capital Market under the symbol “CREX”. The transfer agent and registrar for our common stock is Computershare Limited, 401 2nd Avenue North, Minneapolis, Minnesota 55401.
Shareholders
As of March 20, 2024, we had 378 holders of record of our common stock.
Dividend Policy
We have never declared or paid cash dividends on our common stock. We currently intend to retain future earnings, if any, to operate and expand our business and to finance the development and expansion of our business. We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, earnings, capital requirements, contractual restrictions, and other factors deemed relevant by our Board of Directors.
Holders of our common stock are entitled to share pro rata in dividends and distributions with respect to the common stock when, as and if declared by our Board of Directors out of funds legally available for distribution.
Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance Under Equity Compensation Plans
Information about our equity compensation plans is set forth in Item 12 of Part III of this Report, which is incorporated herein by reference.
Not applicable.
ITEM 7MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(All currency is rounded to the nearest thousands, except share and per share amounts.)
The following discussion should be read in conjunction with the financial statements and related notes for the years ended December 31, 2023 and 2022, which are included elsewhere in this Report. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other factors. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations.
You should review the "Cautionary Note Regarding Forward-Looking Statements; Risk Factor Summary", and "Risk Factors" sections of this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis.
Overview
The Company transforms environments through digital solutions by providing innovative digital signage solutions for key market segments and use cases, including:
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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:
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Through a combination of organically grown platforms and a series of strategic acquisitions, including our acquisition of Reflect in February 2022, the Company assists customers 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. Customer engagements focus on consultative conversations that ensure the Company’s solutions are positioned to help customers achieve their business objectives in the most cost-effective manner possible.
When comparing us to other digital signage providers, our customers value the following competitive advantages:
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Our Sources of Revenue
The three primary sources of revenue for the Company are:
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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
Public Offering
On August 17, 2023, the Company conducted a 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.
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 offers
On February 2, 2023 and May 1, 2023, we received unsolicited proposals from Pegasus, to acquire all of the outstanding shares of common stock of the Company that are not owned by Pegasus for purchase prices of $0.83 per share in cash (or, as a result of our 1-for-3 reverse stock split effectuated in March 2023, $2.49 per share), and $2.85 per share in cash, respectively. Pegasus is the beneficial owner of our common stock owned of record by Slipstream. The Special Committee concluded that each proposal undervalued 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 was not in the best interests of the Company’s existing shareholders. Consequently, the Special Committee advised Pegasus that it rejected each proposal, and since such time, Pegasus has not made any subsequent acquisition proposal.
Please see Note 5 Business Combinations, Note 8 Loans Payable, Note 11 Warrants, and Note 12 Stock-based Compensation to the Company’s Consolidated Financial Statements contained in this Report for a description of other recent developments of the Company that occurred during, and subsequent to, the year ended December 31, 2023.
Critical Accounting Policies and Estimates
Our management is responsible for our financial statements and has evaluated the accounting policies to be used in their preparation. Our management believes these policies are reasonable and appropriate. The Company’s significant accounting policies are described in Note 2 Summary of Significant Accounting Policies of the Company’s Consolidated Financial Statements included within Part II, ITEM 8 of this Report. The following discussion identifies those accounting policies that we believe are critical in the preparation of our financial statements, the judgments and uncertainties affecting the application of those policies and the possibility that materially different amounts will be reported under different conditions or using different assumptions.
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our actual results could differ from those estimates.
Revenue Recognition
We recognized revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, we account for revenue using the following steps:
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See Note 2 Summary of Significant Accounting Policies and Note 4 Revenue Recognitionin our Consolidated Financial Statements, included in Part II, ITEM 8 of this Report, for a complete discussion of our revenue recognition policies.
Goodwill
Goodwill is evaluated for impairment annually as of September 30 and whenever events or circumstances make it more likely than not that impairment may have occurred. We have no other indefinite-lived intangible assets. We test goodwill for impairment by comparing the book value to the fair value at the reporting unit level. We have only one reporting unit, and therefore the entire goodwill is allocated to that reporting unit. The fair value of the reporting unit is determined by using 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. We use these same expectations in other valuation models throughout our business. In addition to the discounted cash flow analysis, we utilize a leveraged buy-out model, trading comparables and market capitalization to ultimately determine an estimated fair value of our reporting unit based on weighted average calculations from these models. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. If the carrying amount exceeds the fair value, further analysis is performed to measure the impairment loss.
In addition, our market capitalization could fluctuate from time to time. Such fluctuation may be an indicator of possible impairment of goodwill if our market capitalization falls below its book value. If this situation occurs, we perform the required detailed analysis to determine if there is impairment.
No impairment was recorded as a result of our annual assessment completed as of September 30, 2023.
The valuation of goodwill is subject to a high degree of judgment, uncertainty and complexity. We believe the future estimates and assumptions used to test for impairment losses on goodwill are reasonable. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.
Income Taxes
Accounting for income taxes requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. These deferred taxes are measured by applying the provisions of tax laws in effect at the balance sheet date, including the impact of the Tax Cuts and Jobs Act enacted on December 22, 2017 (the “Tax Act”).
We recognize in income the effect of a change in tax rates on deferred tax assets and liabilities in the period that includes the enactment date.
As of December 31, 2023, a full valuation allowance is recorded against our deferred tax. The valuation allowance is based, in part, on our estimate of future taxable income, the expected utilization of federal and state tax loss carryforwards, and credits and the expiration dates of such tax loss carryforwards. Significant assumptions are used in developing the analysis of future taxable income for purposes of determining the valuation allowance for deferred tax assets which, in our opinion, are reasonable under the circumstances.
Impact of Recently Issued Accounting Pronouncements
Refer to Note 2 Summary of Significant Accounting Policiesin our Consolidated Financial Statements included in Part II, ITEM 8 of this Report, for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference.
Results of Operations
Note: All dollar amounts reported in Results of Operations are in thousands, except per-share information.
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
The tables presented below compare our results of operations from one period to another, and present the results for each period and the change in those results from one period to another in both dollars and percentage change.
Year Ended December 31, | Change | |||||||||||||||
2023 | 2022 | % | ||||||||||||||
Sales | $ | 45,166 | $ | 43,350 | $ | 1,816 | 4 | % | ||||||||
Cost of sales | 22,983 | 25,611 | (2,628 | ) | 10 | % | ||||||||||
Gross profit | 22,183 | 17,739 | 4,444 | 25 | % | |||||||||||
Sales and marketing expenses | 5,247 | 3,651 | 1,596 | 44 | % | |||||||||||
Research and development expenses | 1,574 | 1,251 | 323 | 26 | % | |||||||||||
General and administrative expenses | 10,795 | 11,892 | (1,097 | ) | 9 | % | ||||||||||
Depreciation and amortization expense | 3,221 | 2,833 | 388 | 14 | % | |||||||||||
Deal and transaction | - | 592 | (592 | ) | 100 | % | ||||||||||
Total operating expenses | 20,837 | 20,219 | 618 | 3 | % | |||||||||||
Operating income (loss) | 1,346 | (2,480 | ) | 3,826 | 154 | % | ||||||||||
Other expense (income): | ||||||||||||||||
Interest expense | 2,992 | 2,743 | 249 | 9 | % | |||||||||||
Change in fair value of contingent consideration | 1,419 | (1,074 | ) | 2,493 | 232 | % | ||||||||||
Change in fair value of warrant liability | - | (7,902 | ) | 7,902 | 100 | % | ||||||||||
Loss on debt waiver consent | - | 1,212 | (1,212 | ) | 100 | % | ||||||||||
Loss on warrant amendment | - | 345 | (345 | ) | 100 | % | ||||||||||
Loss on settlement of debt | - | 237 | (237 | ) | 100 | % | ||||||||||
Other expense (income) | (211 | ) | 4 | (215 | ) | 5375 | % | |||||||||
Total other expense (income) | 4,200 | (4,435 | ) | 8,635 | 195 | % | ||||||||||
Net (loss) income before income taxes | (2,854 | ) | 1,955 | (4,809 | ) | 246 | % | |||||||||
Income tax expense | (83 | ) | (79 | ) | (4 | ) | 5 | % | ||||||||
Net (loss) income | $ | (2,937 | ) | $ | 1,876 | $ | (4,813 | ) | 257 | % | ||||||
Sales
Sales increased by $1,816, or 4%. Hardware revenues were $20,303, an increase of $408 or 2%. While hardware revenues were effectively flat year over year, the composition in each year was substantially different, with the current year comprised of lower customer concentration (including no customer greater than 19% of hardware revenues) and an increasing number of customers making consistent, repeated purchases of similar solutions on a regular cadence. The prior year included a single customer that represented 43% of hardware revenues.. Services and other revenues were $24,863, an increase of $1,408 or 6%, driven by managed services revenue. Managed services revenue, which includes both SaaS and help desk technical subscription services increased to $15,916 from $14,320. The increase is driven by increasing software subscription revenue, with the annual recurring run rate of our subscription license revenue growing from $14,826 as of December 31, 2022 to $16,336 as of December 31, 2023. This represents a year-over-year growth rate of approximately 11% in our higher margin, typically subscription-based, managed service revenue.
Gross Profit
Gross profit increased $4,444 to $22,183 from $17,739, or 25%, through a combination of a 4% increase in revenue and an 8% increase in gross margin percentage. Gross margin increased to 49% from 41% driven by expanding margins in our services revenue and entry into a material, long-term media sales contract for which revenue is recognized on a net basis 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 $1,596, or 44%, driven primarily by the Company’s enhanced investments into sales and marketing activities. Following our acquisition of Reflect via merger (the "Merger"), the Company adopted certain tools, technology, and processes – particularly with respect to lead generation and brand marketing – that were historically undercapitalized by the Company and have since accelerated new customer acquisition. Through completion of the Merger, the Company also acquired a media sales business unit that serves to monetize customer networks via the direct sale of advertising 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 Consolidated Statement of Operations.
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. The Company capitalizes certain of these expenses and amortizes those costs through the Consolidated Statement of Operations on a straight-line basis over the economic useful life of the software feature or functionality. Research and development expenses increased by $323, or 26%, driven primarily by incremental headcount added via completion of the Merger on February 17, 2022, and a higher rate of bug and maintenance work as compared to capitalized activities during the year. 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 integrated the development teams which has enhanced speed to market on new feature and functionality development activities.
General and Administrative Expenses
General and administrative expenses decreased $1,097, or 9% driven by a decrease of $1,553 in stock compensation expense as outstanding performance awards were fully expensed as of December 31, 2022. This decrease was partially offset by increased personnel costs as a result of higher headcount following the Merger and scaled up operations in response to an increase in customer acquisition and associated planned deployments.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased by $388, or 14%. This was driven by a full year of amortization on the $17,160 in amortizing intangible assets acquired as a result of the Merger. Depreciation was consistent in both periods.
Interest Expense
See Note 8 Loans Payableto the Consolidated Financial Statements for a discussion of the Company’s debt and related interest expense obligations.
Change in Fair Value of Contingent Consideration
The Company has a contingent consideration arrangement 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 date.
Changes in Fair Value of Warrant Liability; Loss on Warrant Amendment
During the year ended December 31, 2022, the Company recorded a gain of $7,902 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.See Note 11 Warrants to the Consolidated Financial Statements for a discussion of the Company's warrant activity.
Loss on Debt Waiver
During 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, the Company paid consideration to such investor in the form of a purchaser warrant to purchase 466,667 shares of Company common stock (the “Purchaser Warrant”). 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 on February 17, 2028. On 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 Consolidated Statement of Operations associated with the issuance of the Purchaser Warrant of $1,212. No such transactions occurred in the current year.
Loss on Warrant Amendment
Effective June 30, 2022, the Company amended the terms of certain of its outstanding warrants. The amendments to such warrants removed the holder’s option to determine the value of such warrants utilizing the volume weighted average price (“VWAP”) of the Company’s common stock on the trading day immediately preceding the date of a notice in a cashless exercise, and removed 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 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, the Company reassessed the fair value of each of the affected warrants, resulting in the Company recording a loss on the fair value of these warrants of $345.
Loss on Settlement of Obligations
On February 17, 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 of debt, 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.
Supplemental Operating Results on a Non-GAAP Basis
The following non-GAAP data, which adjusts for the categories of expenses described below, is a non-GAAP financial measure. Our management believes that this non-GAAP financial measure is useful information for investors, shareholders and other stakeholders of our Company in gauging our results of operations on an ongoing basis. We believe that earnings before interest, depreciation, and amortization (“EBITDA”) is a performance measure and not a liquidity measure, and therefore a reconciliation between net (loss) income, a GAAP financial measure, and EBITDA and Adjusted EBITDA has been provided. EBITDA should not be considered as an alternative to net (loss) income as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of cash flows, in each case as determined in accordance with GAAP, or as a measure of liquidity. In addition, EBITDA does not take into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows. We do not intend the presentation of these non-GAAP measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP. These non-GAAP measures should be read only in conjunction with our Consolidated Financial Statements prepared in accordance with GAAP that are included elsewhere in this Report.
Quarters Ended | ||||||||||||||||||||
Year Ended | December 31, | September 30, | June 30, | March 31, | ||||||||||||||||
Quarters ended | 2023 | 2023 | 2023 | 2023 | 2023 | |||||||||||||||
GAAP net (loss) income | $ | (2,937 | ) | $ | 1,419 | $ | (1,931 | ) | $ | (1,425 | ) | $ | (1,000 | ) | ||||||
Interest expense: | ||||||||||||||||||||
Amortization of debt discount | 1,443 | 366 | 363 | 358 | 356 | |||||||||||||||
Other interest, net | 1,549 | 302 | 371 | 429 | 447 | |||||||||||||||
Depreciation/amortization: | ||||||||||||||||||||
Amortization of intangible assets | 3,055 | 781 | 766 | 754 | 754 | |||||||||||||||
Amortization of employee share-based awards | 383 | 4 | 3 | 151 | 225 | |||||||||||||||
Depreciation of property and equipment | 166 | 48 | 50 | 43 | 25 | |||||||||||||||
Income tax expense (benefit) | 83 | 10 | (15 | ) | 45 | 43 | ||||||||||||||
EBITDA | $ | 3,742 | $ | 2,930 | $ | (393 | ) | $ | 355 | $ | 850 | |||||||||
Adjustments | ||||||||||||||||||||
Loss (Gain) on fair value of contingent consideration | 1,419 | (42 | ) | 1,369 | 16 | 76 | ||||||||||||||
Stock-based compensation – Director grants | 150 | 21 | 43 | 43 | 43 | |||||||||||||||
Other expense (income) | (211 | ) | (79 | ) | 3 | (123 | ) | (12 | ) | |||||||||||
Adjusted EBITDA | $ | 5,100 | $ | 2,830 | $ | 1,022 | $ | 291 | $ | 957 | ||||||||||
Quarters Ended | ||||||||||||||||||||
Year Ended | December 31, | September 30, | June 30, | March 31, | ||||||||||||||||
Quarters ended | 2022 | 2022 | 2022 | 2022 | 2022 | |||||||||||||||
GAAP net income (loss) | $ | 1,876 | $ | (1,334 | ) | $ | (554 | ) | $ | 1,262 | $ | 2,502 | ||||||||
Interest expense: | ||||||||||||||||||||
Amortization of debt discount | 1,268 | 364 | 363 | 360 | 181 | |||||||||||||||
Other interest, net | 1,475 | 423 | 394 | 390 | 268 | |||||||||||||||
Depreciation/amortization: | ||||||||||||||||||||
Amortization of intangible assets | 2,702 | 743 | 848 | 431 | 680 | |||||||||||||||
Amortization of employee share-based awards | 1,689 | 448 | 456 | 316 | 469 | |||||||||||||||
Depreciation of property and equipment | 131 | 30 | 37 | 37 | 27 | |||||||||||||||
Income tax expense (benefit) | 79 | 33 | (10 | ) | 53 | 3 | ||||||||||||||
EBITDA | $ | 9,220 | $ | 707 | $ | 1,534 | $ | 2,849 | $ | 4,130 | ||||||||||
Adjustments | ||||||||||||||||||||
Gain on fair value of warrant liability | (7,902 | ) | - | - | (2,433 | ) | (5,469 | ) | ||||||||||||
Loss (gain) on settlement of obligations | 237 | - | (37 | ) | (21 | ) | 295 | |||||||||||||
Loss on debt waiver consent | 1,212 | - | - | - | 1,212 | |||||||||||||||
Loss on warrant amendment | 345 | - | - | 345 | - | |||||||||||||||
(Gain) loss on fair value of contingent consideration | (1,074 | ) | (705 | ) | (442 | ) | 73 | - | ||||||||||||
Disposal of Safe Space Solutions inventory | 909 | 909 | - | - | - | |||||||||||||||
Deal and transaction costs | 592 | 54 | 110 | 37 | 391 | |||||||||||||||
Other income | 4 | 7 | 2 | 1 | (6 | ) | ||||||||||||||
Stock-based compensation – Director grants | 302 | 56 | 82 | 82 | 82 | |||||||||||||||
Adjusted EBITDA | $ | 3,845 | $ | 1,028 | $ | 1,249 | $ | 933 | $ | 635 | ||||||||||
Liquidity and Capital Resources
See Note 1 Nature of Organization and Operations to the accompanying Consolidated Financial Statements for a detailed discussion of liquidity and financial resources.
Operating Activities
The cash flows provided by (used in) operating activities were $5,167 and $(708) for the years ended December 31, 2023 and 2022, respectively. The Company generated a net loss of $2,937, which included depreciation and amortization expense (inclusive of amortization of debt discount) of $4,664 and a loss on the change in fair value of contingent consideration of $1,419. The Company generated a $1,261 increase in cash provided by changes in operating assets and liabilities, primarily due to increases in accounts payable, and customer deposits, a decrease in prepaid expenses and other current assets, partially offset by an increase to accounts receivable.
Investing Activities
Net cash used in investing activities during the year ended December 31, 2023 was $4,027 as compared to $21,475 for 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 December 31, 2023; however, we anticipate a reduction in capital expenditures entering 2024 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 provided by financing activities during the year ended December 31, 2023 was $137 compared to net cash provided by financing activities of $20,933 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 providednet cash of $10,109 and $9,868, respectively. Net cash provided by financing activities during the year ended December 31, 2023, is primarily the result of a common stock offering completed in August 2023, generating cash of $5,454, net of offering expenses, offset by repayments made on the Consolidation Term Loan, Term Loan (2022), and Secured Promissory Note of $2,040, $2,000 and $1,254, respectively.
Off-Balance Sheet Arrangements
During the year ended December 31, 2023, we did not engage in any off-balance sheet arrangements set forth in Item 303(a) (4) of Regulation S-K.
ITEM 7AQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on Page F-1.
ITEM 9CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9ACONTROLS 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 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 December 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 SEC 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.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our internal control over financial reporting as of December 31, 2023 based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment and those criteria, management believes that we maintained effective internal control over financial reporting as of December 31, 2023.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Rule 10b5-1 Trading Plans
During the quarter ended December 31, 2023, none of the officers (as defined in Exchange Act Rule 16a-1(f)) or directors of the Company adopted or terminated a “Rule 10b5-1 trading arrangement,” (as defined in Item 408(a) of Regulation S-K) intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c) or any non-Rule 10b5-1 trading arrangement.
Earnings Release
On March 21, 2024, the Company issued a press release announcing its financial condition and results of operations for the three months and year ended December 31, 2023. A copy of the press release is furnished as Exhibit 99.1 and is incorporated by reference into this Item 9B in lieu of separately furnishing such press release under Item 2.02 of Form 8-K. This disclosure, including Exhibit 99.1 hereto, shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any of the Company’s filings under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.
Not applicable.
ITEM 10DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated herein by reference to our definitive proxy statement for our 2024 Annual Meeting of Shareholders (the "Proxy Statement"), which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act.
The information required by this Item is incorporated by reference from the Proxy Statement.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
| • | each director of the Company; |
| • | each named executive (as defined in our Annual Report on Form 10-K for the year ended December 31, 2023); |
| • | all current directors and officers of the Company as a group; and |
| • | each person or entity known by the Company to beneficially own more than 5% of our common stock. |
Common | ||||||||
Shares | Percentage of | |||||||
Beneficially | Common | |||||||
Name and Address | Owned(1) | Shares(1) | ||||||
Slipstream Funding, LLC(2) | ||||||||
| c/o Pegasus Capital Advisors, L.P. | ||||||||
| 750 E Main St., Suite 600 | ||||||||
| Stamford, CT 06902 | 317,455 | 3.0 | % | |||||
Slipstream Communications, LLC(3) | ||||||||
| c/o Pegasus Capital Advisors, L.P. | ||||||||
| 750 E Main St., Suite 600 | ||||||||
| Stamford, CT 0690 | 3,474,440 | 29.0 | % | |||||
Stephen Nesbit(4) | 50,897 | * | ||||||
Donald A. Harris(5) | 152,105 | 1.5 | % | |||||
Dennis McGill(6) | 53,781 | * | ||||||
David Bell(7) | 50,897 | * | ||||||
Richard Mills(8) | 969,260 | 8.7 | % | |||||
Will Logan(9) | 386,468 | 3.6 | % | |||||
All current executive officers and directors as a group (5 persons)(10) | 1,609,627 | 14.7 | % | |||||
| (1) | Beneficial ownership is determined in accordance with the rules of the SEC, and includes general voting power and/or investment power with respect to securities. Shares of common stock issuable upon exercise of options or warrants that are currently exercisable or exercisable within 60 days of April 22, 2024, and shares of common stock issuable upon conversion of other securities currently convertible or convertible within 60 days, are deemed outstanding for computing the beneficial ownership percentage of the person holding such securities but are not deemed outstanding for computing the beneficial ownership percentage of any other person. Under applicable SEC rules, each person’s beneficial ownership is calculated by dividing the total number of shares with respect to which they possess beneficial ownership by the total number of outstanding shares of the Company. In any case where an individual has beneficial ownership over securities that are not outstanding, but are issuable upon the exercise of options or warrants or similar rights within the next 60 days, that same number of shares is added to the denominator in the calculation described above. Because the calculation of each person’s beneficial ownership set forth in the “Percentage of Common Shares” column of the table may include shares that are not presently outstanding, the sum total of the percentages set forth in such column may exceed 100%. |
| (2) | Investment and voting power over shares held by Slipstream Funding, LLC is held by Slipstream Communications, LLC, its sole member, and may deemed to be directly or indirectly controlled by Craig Cogut, Chairman and Chief Executive Officer of Pegasus Capital Advisors, LLC. See table footnote 3 for further information regarding Slipstream Communications, LLC. |
| (3) | Investment and voting power over shares held by Slipstream Communications, LLC may be deemed to be directly or indirectly controlled by Craig Cogut, Chairman and Chief Executive Officer of Pegasus Capital Advisors, LLC. Slipstream Communications, LLC (“Slipstream Communications”) is the sole member of Slipstream Funding, LLC (“Slipstream Funding”). BCOM Holdings, LP (“BCOM Holdings”) is the managing member of Slipstream Communications. BCOM GP LLC (“BCOM GP”) is the general partner of BCOM Holdings. Business Services Holdings, LLC (“Business Services Holdings”) is the sole member of BCOM GP. PP IV BSH, LLC (“PP IV BSH”), Pegasus Investors IV, L.P. (“Pegasus Investors”) and Pegasus Partners IV (AIV), L.P. (“Pegasus Partners (AIV)”) are the members of Business Services Holdings. Pegasus Partners IV, L.P. (“Pegasus Partners”) is the sole member of PP IV BSH. Pegasus Investors IV, L.P. (“Pegasus Investors”) is the general partner of each of Pegasus Partners (AIV) and Pegasus Partners and Pegasus Investors IV GP, L.L.C. (“Pegasus Investors GP”) is the general partner of Pegasus Investors. Pegasus Investors GP is wholly owned by Pegasus Capital, LLC (“Pegasus Capital”). Pegasus Capital may be deemed to be directly or indirectly controlled by Craig Cogut. The share figure includes the 317,455 shares of common stock issued to and held by Slipstream Funding, LLC in connection with the merger transaction with Creative Realities, LLC. Share figure also includes 1,731,499 common shares purchasable upon exercise of outstanding warrants issued to and held by Slipstream Communications, LLC. |
| (4) | Mr. Nesbit is a director of the Company. Share figure includes 20,000 shares purchasable upon the exercise of outstanding options. |
| (5) | Mr. Harris is a director of the Company. Share figure includes 20,000 shares purchasable upon the exercise of outstanding options. |
| (6) | Mr. McGill served as a director of the Company and Chairman of the Board until his resignation on November 8, 2023. Share figure includes 25,001 shares purchasable upon the exercise of outstanding options. |
| (7) | Mr. Bell is a director of the Company. Share figure includes 20,000 shares purchasable upon the exercise of outstanding options. |
| (8) | Mr. Mills is a director of the Company, Chairman of the Board and Chief Executive Officer. Share figure includes 320,000 shares purchasable upon the exercise of outstanding options and 333,334 shares purchasable upon the exercise of outstanding performance-restricted options upon which vesting requires achievement of certain targeted share trading prices. |
| (9) | Mr. Logan is the Chief Financial Officer of the Company. Share figure includes 171,945 shares purchasable upon the exercise of outstanding options and 200,000 shares purchasable upon the exercise of outstanding performance-restricted options upon which vesting requires achievement of certain targeted share trading prices. |
| (10) | Includes Messrs. Mills, Bell, Harris, Nesbit and Logan. |
Number of | |||||||||
Securities | |||||||||
Remaining | |||||||||
Number of | Available for | ||||||||
Securities to be | Weighted- | Issuance Under | |||||||
Issued Upon | Average | Equity | |||||||
Exercise of | Exercise Price of | Compensation | |||||||
Outstanding | Outstanding | Plans (excluding | |||||||
Options, | Options, | securities | |||||||
Warrants and | Warrants and | reflected in | |||||||
Rights | Rights | column (a)) | |||||||
| (a) | (b) | (c) | |||||||
Equity compensation plans approved by shareholders | 1,636,132 | (1) | 6.51 | None | |||||
Equity compensation plans not approved by shareholders | 1,500,000 | (2) | N/A | None | |||||
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Issuance Under Equity Compensation Plans (excluding securities reflected in column (a)) | ||||||||||
| Equity compensation plans approved by stockholders | 1,636,132 | (1) | $ | 6.51 | None | |||||||
| Equity compensation plans not approved by stockholders | 1,500,000 | (2) | N/A | None | ||||||||
(1) | Shares reflected are issuable upon exercise of outstanding stock options issued under the 2006 Amended and Restated Equity Incentive Plan or the 2014 Stock Incentive Plan. The Company's ability to issue new awards under its 2014 Stock Incentive Plan expired in 2023. |
(2) | On November 8, 2023, our Board of Directors adopted the 2023 Plan that authorizes the issuance of up to 1,500,000 shares under such plan. The Company intends to seek shareholder approval of such plan at our 2024 annual shareholder meeting. At this time, no awards have been issued under the 2023 Plan. |
All other information required by this Item is incorporated by reference from the Proxy Statement.
ITEM13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference from the Proxy Statement.
ITEM 14PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference from the Proxy Statement.
ITEM 15EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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None.
Pursuant to the requirements of Section 13 or 15(d) 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.
March 21, 2024.
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In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Creative Realities, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Creative Realities, Inc. and subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of operations, shareholders' equity, and cash flows, for each of the two years(All currency in the period ended December 31, 2023, and the related notesthis Item 13 is rounded to the financial statements (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company is experiencing difficulty in generating sufficient cash flow to service its debt and contingent consideration obligations, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill – Refer to Notes 2 and 7 to the Financial Statements
Critical Audit Matter Description
The Company operates as a single reportable segment, operating segment and reporting unit. The Company’s evaluation of goodwill for impairment involves comparing the book value of the reporting unit to its estimated fair value. The Company’s determination of estimated fair value of the reporting unit is based on a discounted cash flow model and market approach. The Company used the discounted cash flow model to estimate fair value which requires management to make significant estimates and assumptions related to the valuation of the reporting unit, including assumptions regarding discount rates and forecasts of future revenue and EBITDA margins. The market approach requires management to make assumptions regarding guideline public company transactions and estimated market multiples. Changes in these assumptions could have a significant impact on either the fair value of the reporting unit, the amount of any goodwill impairment charge, or both.
The Company’s annual impairment assessment date is September 30. Accordingly, management performed an impairment assessment as of September 30, 2023. The estimated fair value of the reporting unit exceeded the carrying value as of September 30, 2023 and, therefore, no impairment was recognized.
We identified the valuation of goodwill as a critical audit matter because of the significant estimates and assumptions management made to estimate the fair value of the reporting unit and the highly sensitive nature of Company’s operations to changes in demand. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve internal fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the significant estimates and assumptions included in the discounted cash flow model, including projected revenues, gross profit, EBITDA, working capital as a percentage of revenue, and capital expenditures, and the selection of the long-term growth rate and discount rate for the reporting unit included the following, among others:
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/s/ Deloitte & Touche LLP
Louisville, Kentucky
March 21, 2024
We have served as the Company’s auditor since 2020.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, | December 31, | |||||||
2023 | 2022 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 2,910 | $ | 1,633 | ||||
Accounts receivable, net | 12,468 | 8,263 | ||||||
Inventories, net | 2,567 | 2,267 | ||||||
Prepaid expenses and other current assets | 665 | 1,819 | ||||||
Total Current Assets | 18,610 | 13,982 | ||||||
Property and equipment, net | 499 | 201 | ||||||
Goodwill | 26,453 | 26,453 | ||||||
Other intangible assets, net | 24,062 | 23,752 | ||||||
Operating lease right-of-use assets | 1,041 | 1,584 | ||||||
Other non-current assets | 112 | 43 | ||||||
Total Assets | $ | 70,777 | $ | 66,015 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 7,876 | $ | 3,757 | ||||
Accrued expenses and other current liabilities | 3,761 | 3,828 | ||||||
Deferred revenues | 1,132 | 1,223 | ||||||
Customer deposits | 3,233 | 2,478 | ||||||
Current maturities of operating leases | 505 | 711 | ||||||
Short-term portion of Secured Promissory Note | - | 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 | 20,197 | 16,496 | ||||||
Long-term Secured Promissory Note | - | 208 | ||||||
Long-term related party Acquisition Term Loan, net of $787 and $1,484 discount, respectively | 9,213 | 8,516 | ||||||
Long-term related party Consolidation Term Loan, net of $94 and $840 discount, respectively | 616 | 4,349 | ||||||
Long-term obligations under operating leases | 536 | 873 | ||||||
Contingent consideration, at fair value | 11,208 | 9,789 | ||||||
Other non-current liabilities | 176 | 205 | ||||||
Total Liabilities | 41,946 | 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 | 82,073 | 75,916 | ||||||
Accumulated deficit | (53,346 | ) | (50,409 | ) | ||||
Total Shareholders' Equity | 28,831 | 25,579 | ||||||
Total Liabilities and Shareholders' Equity | $ | 70,777 | $ | 66,015 | ||||
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
For the Years Ended | ||||||||
December 31, | ||||||||
2023 | 2022 | |||||||
Sales | ||||||||
Hardware | $ | 20,303 | $ | 19,895 | ||||
Services and other | 24,863 | 23,455 | ||||||
Total sales | 45,166 | 43,350 | ||||||
Cost of sales | ||||||||
Hardware | 15,280 | 16,613 | ||||||
Services and other | 7,703 | 8,998 | ||||||
Total cost of sales | 22,983 | 25,611 | ||||||
Gross profit | 22,183 | 17,739 | ||||||
Operating expenses: | ||||||||
Sales and marketing | 5,247 | 3,651 | ||||||
Research and development | 1,574 | 1,251 | ||||||
General and administrative | 10,795 | 11,892 | ||||||
Depreciation and amortization | 3,221 | 2,833 | ||||||
Deal and transaction costs | - | 592 | ||||||
Total operating expenses | 20,837 | 20,219 | ||||||
Operating income (loss) | 1,346 | (2,480 | ) | |||||
Other expense (income): | ||||||||
Interest expense, including amortization of debt discount | 2,992 | 2,743 | ||||||
Change in fair value of contingent consideration | 1,419 | (1,074 | ) | |||||
Change in fair value of warrant liability | - | (7,902 | ) | |||||
Loss on debt waiver consent | - | 1,212 | ||||||
Loss on warrant amendment | - | 345 | ||||||
Loss on settlement of obligations | - | 237 | ||||||
Other expenses (income), net | (211 | ) | 4 | |||||
Total other expense (income) | 4,200 | (4,435 | ) | |||||
Net (loss) income before income taxes | (2,854 | ) | 1,955 | |||||
Income tax expense | (83 | ) | (79 | ) | ||||
Net (loss) income | $ | (2,937 | ) | $ | 1,876 | |||
Net (loss) income per common share - basic | $ | (0.35 | ) | $ | 0.28 | |||
Net (loss) income per common share - diluted | $ | (0.35 | ) | $ | 0.28 | |||
Weighted average shares outstanding - basic | 8,479 | 6,664 | ||||||
Weighted average shares outstanding - diluted | 8,479 | 6,664 | ||||||
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the years ended December 31, 2023 and 2022
(in thousands, except shares)
Additional | ||||||||||||||||||||
Common Stock | paid in | Accumulated | ||||||||||||||||||
Year ended December 31, 2023 | Shares | Amount | capital | (Deficit) | Total | |||||||||||||||
Balance as of December 31, 2022 | 7,266,382 | $ | 72 | $ | 75,916 | $ | (50,409 | ) | $ | 25,579 | ||||||||||
Stock-based compensation | - | - | 445 | - | 445 | |||||||||||||||
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 | - | - | - | (2,937 | ) | (2,937 | ) | |||||||||||||
Balance as of December 31, 2023 | 10,409,027 | $ | 104 | $ | 82,073 | $ | (53,346 | ) | $ | 28,831 | ||||||||||
Additional | ||||||||||||||||||||
Common Stock | paid in | Accumulated | ||||||||||||||||||
Year ended December 31, 2022 | Shares | Amount | capital | (Deficit) | Total | |||||||||||||||
Balance as of December 31, 2021 | 4,002,843 | $ | 40 | $ | 60,943 | $ | (52,254 | ) | $ | 8,729 | ||||||||||
Stock-based compensation | - | - | 1,887 | - | 1,887 | |||||||||||||||
Shares issued to vendors as compensation | 41,369 | - | 100 | - | 100 | |||||||||||||||
Shares issued and warrants exercised in private investment in public entity ("PIPE") | 2,388,836 | 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 | - | - | - | 1,876 | 1,876 | |||||||||||||||
Balance as of December 31, 2022 | 7,266,382 | $ | 72 | $ | 75,916 | $ | (50,409 | ) | $ | 25,579 | ||||||||||
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended | ||||||||
December 31, | ||||||||
2023 | 2022 | |||||||
Operating Activities: | ||||||||
Net (loss) income | $ | (2,937 | ) | $ | 1,876 | |||
Adjustments to reconcile net (loss) income to be used in operating activities: | ||||||||
Depreciation and amortization | 3,221 | 2,833 | ||||||
Amortization of debt discount | 1,443 | 1,268 | ||||||
Amortization of stock-based compensation | 563 | 2,116 | ||||||
Bad debt expense | 153 | 398 | ||||||
Loss (gain) on change in fair value of contingent consideration | 1,419 | (1,074 | ) | |||||
Deferred income taxes | 44 | - | ||||||
Gain on change in fair value of warrants | - | (7,902 | ) | |||||
Loss on debt waiver consent | - | 1,212 | ||||||
Loss on warrant amendment | - | 345 | ||||||
Loss on settlement of obligations | - | 237 | ||||||
Changes to operating assets and liabilities: | ||||||||
Accounts receivable | (4,358 | ) | (3,927 | ) | ||||
Inventories, net | (300 | ) | (197 | ) | ||||
Prepaid expenses and other current assets | 952 | 480 | ||||||
Accounts payable | 4,486 | 914 | ||||||
Accrued expenses and other current liabilities | (47 | ) | 1,112 | |||||
Deferred revenue | (91 | ) | (462 | ) | ||||
Customer deposits | 755 | 110 | ||||||
Other, net | (136 | ) | (47 | ) | ||||
Net cash provided by (used in) operating activities | 5,167 | (708 | ) | |||||
Investing activities | ||||||||
Acquisition of business, net of cash acquired | - | (17,186 | ) | |||||
Purchases of property and equipment | (306 | ) | (149 | ) | ||||
Capitalization of internal and external labor for software development | (3,721 | ) | (4,140 | ) | ||||
Net cash used in investing activities | (4,027 | ) | (21,475 | ) | ||||
Financing activities | ||||||||
Proceeds from sale of common stock, net of offering expenses | 5,454 | - | ||||||
Proceeds from Acquisition Term Loan, net of offering expenses | - | 9,868 | ||||||
Proceeds from sale & exercise of pre-funded warrants in PIPE, net of offering expenses | - | 8,295 | ||||||
Proceeds from Term Loan (2022) | - | 2,000 | ||||||
Proceeds from sale of common stock in PIPE, net of offering expenses | - | 1,814 | ||||||
Repayment of Consolidated Term Loan | (2,040 | ) | ||||||
Repayment of Term Loan (2022) | (2,000 | ) | - | |||||
Repayment of Secured Promissory Note | (1,254 | ) | (1,044 | ) | ||||
Principal payments on finance leases | (23 | ) | - | |||||
Net cash provided by financing activities | 137 | 20,933 | ||||||
Increase (decrease) in Cash and Cash Equivalents | 1,277 | (1,250 | ) | |||||
Cash and Cash Equivalents, beginning of year | 1,633 | 2,883 | ||||||
Cash and Cash Equivalents, end of year | $ | 2,910 | $ | 1,633 | ||||
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands,nearest thousand, except share and per share amounts)
NOTE 1: NATURE OF ORGANIZATION AND OPERATIONS
Unless the context otherwise indicates, references in these Notes to the accompanying 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., a Georgia corporation, Creative Realities Canada, Inc., a Canadian corporation, and Reflect Systems, Inc. ("Reflect"amounts.), 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 Report.
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 completed a 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.
Liquidity and Financial Condition
In accordance with Accounting Standards Update (“ASU”) No.2014-15,Disclosure of Uncertainties about an Entity’s 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 Consolidated Financial Statements are issued.
At December 31, 2023, the Company has an accumulated deficit of $53,346, negative working capital of $1,587, including current debt obligations of $3,690, and cash of $2,910. For the year ended December 31, 2023, the Company generated operating income of $1,346 and generated positive net cash flows from operations of $5,167. Pursuant to the Second Amended and Restated Credit and Security Agreement (the "Credit Agreement") 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 $4,037 during the twelve months subsequent to the reporting date of these Consolidated Financial Statements. In addition, the Company is required to repay the principal balance on the Acquisition Term Loan of $10,000 at maturity and resolve the contingent consideration, currently estimated for accounting purposes at $11,208, each of which mature on February 17, 2025. The Company does not have sufficient cash on hand or liquidity to make these principal repayments. The conditions and events raise substantial doubt about the Company's ability to continue as a going concern under the technical framework within ASU 205-40.
In response to these conditions, the Company plans to evaluate its available options for refinancing, via recapitalization, debt financing or equity financing, its upcoming obligations associated with the Acquisition Term Loan, Consolidation Term Loan, and contingent consideration. However, these plans have not been finalized, are subject to market conditions, and are not within the Company’s control, and therefore cannot be deemed probable. 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 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 Consolidated Financial Statements follows:
1. Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-K and Article 8 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 annual financial reporting.
The Consolidated Financial Statements include the accounts of Creative Realities, Inc. and our wholly owned subsidiaries Allure Global Solutions, Inc., Creative Realities Canada, Inc., and Reflect Systems, Inc. All intercompany balances and transactions have been eliminated in consolidation, as applicable.
2. Recently Issued and Adopted Accounting Pronouncements
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. 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 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.
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. We do not 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 customer 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 has very few contracts with material extended payment terms as payment is typically due at or shortly after the time of the sale, typically ranging between thirty and ninety days. In those instances where the Company has material extended payment terms (most commonly in multi-year arrangements where the Company acts as an agent to a transaction on behalf of its customers), the Company evaluates and applies constraints to arrive at the revenue recognized in the period in which a contract is entered. 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 customers. A contract liability is recognized as deferred revenue when the Company invoices customers 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 Consolidated Balance Sheets.
The Company had the following activity for its allowance for credit losses from December 31, 2021 to December 31, 2023:
Balance as of December 31, 2021 | $ | 620 | ||
Amounts accrued | 398 | |||
Write-offs charged against the allowance | (34 | ) | ||
Balance as of December 31, 2022 | $ | 984 | ||
Amounts accrued | 153 | |||
Write-offs charged against the allowance | (436 | ) | ||
Balance as of December 31, 2023 | $ | 701 |
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:
December 31, | December 31, | |||||||
2023 | 2022 | |||||||
Raw materials | $ | 2,063 | $ | 1,671 | ||||
Work-in-process | 504 | 596 | ||||||
Total inventories | $ | 2,567 | $ | 2,267 | ||||
The reserve for obsolete inventory at December 31,2023 and 2022 was $160 and $1,777, respectively. The Company disposed of $1,707 related to Safe Space Solutions during the year ended December 31, 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 Income/(Loss) per Common Share
Basic and diluted (loss) income 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 6,223,134 and 7,360,271 at December 31, 2023 and 2022, respectively were excluded from the computation of (loss) income per share as the strike price on the options and warrants were higher than the Company's market price and therefore anti-dilutive.
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 December 31, 2023 and 2022.
9. Goodwill and Definite-Lived 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. Property and Equipment
Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over the estimated service lives, principally using straight-line methods. Leasehold improvements are amortized over the shorter of the life of the improvement or the lease term, using the straight-line method.
Property and equipment consist of the following at December 31, 2023 and 2022:
December 31, | ||||||||
2023 | 2022 | |||||||
Equipment | $ | 334 | $ | 138 | ||||
Leasehold improvements | 298 | 197 | ||||||
Furniture and fixtures | 205 | 199 | ||||||
Other depreciable assets | 135 | 124 | ||||||
Total property and equipment | 972 | 658 | ||||||
Less: accumulated depreciation and amortization | (473 | ) | (457 | ) | ||||
Net property and equipment | $ | 499 | $ | 201 | ||||
The estimated useful lives used to compute depreciation and amortization are as follows:
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Depreciation expense was $166 and $131 for the years ended December 31, 2023 and 2022, respectively. During the year ended December 31, 2023, the Company disposed of certain fully depreciated fixed assets with an acquisition value of $150, no such disposals occurred during the year ended December 31, 2022.
12. Research and Development and Software Development Costs
Research and development expenses consist primarily of development personnel and non-employee contractor costs related to the development of new products and services, enhancement of existing products and services, quality assurance and testing. The Company capitalizes its costs incurred for additional functionality to its internal software. We capitalized approximately $3,366 and $4,444 for the years ended December 31, 2023 and 2022, respectively. These software development costs include both enhancements and upgrades of our customer-based systems including functionality of our internal information systems to aid in our productivity, profitability and customer relationship management. We are amortizing these costs over 3 years once the new projects are completed and placed in service. These costs are included in other intangible assets, net on the Consolidated Balance Sheets.
13. 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 Company previously recorded warrant liabilities that were measured at fair value on a recurring basis using a binomial option pricing model.
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 Company applies ASC 606 for revenue recognition. The following table disaggregates the Company’s revenue by major source for the years ended December 31, 2023 and 2022:
Year | Year | |||||||
Ended | Ended | |||||||
December 31, | December 31, | |||||||
| 2023 | 2022 | ||||||
Hardware | $ | 20,303 | $ | 19,895 | ||||
Services: | ||||||||
Managed Services | 15,916 | 14,320 | ||||||
Installation Services | 4,892 | 5,693 | ||||||
Other Services | 4,055 | 3,442 | ||||||
Total Services | 24,863 | 23,455 | ||||||
Total Hardware and Services | $ | 45,166 | $ | 43,350 | ||||
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.
Software as a service license sales
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 revenue are classified as “Managed Services” within our disaggregated revenue.
Maintenance and support services
The Company sells support services that 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.
Installation services
The Company performs installation services associated with system hardware sales to customers and recognizes revenue upon completion of the installations. Installation services also include engineering and configuration services required to be performed to design and deploy a digital signage system that subsequently becomes an installation project.
When system hardware sales include installation services to be performed by the Company, the goods and services in the contract are, in certain instances, not distinct as the customer contract contemplates an installed solution, inclusive of system hardware. In those instances, the arrangement is accounted for as a single performance obligation. Our customers may control the work-in-process and can make changes to the design specifications over the contract term. In these circumstances, 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. Typically, in large scale deployments that include installation services, the contract terms segregate performance obligations related to hardware sales and installation services by providing for different legal transfer of title and risk of loss. In those circumstances, installation services are deemed to be a separate performance obligation. In each instance, installation services are recognized at the time of completion. Installation services revenues are classified as “Installation Services” within our disaggregated revenue.
Software design and development services
Software design and custom development sales represent fixed fee orders for work on a time and materials basis and are recognized as revenue when the application, feature, or custom software code 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 “Other Services” within our disaggregated revenue.
Media sales
Media revenues are derived from selling (i) promotion and sponsorship packages to monetize customer infrastructure assets, including mobile takeover or physical presence, or (ii) digital advertising inventory to advertisers on digital displays or other outdoor structures, owned or controlled by our customers, each within physical venues. We generally do not own the physical structures on which digital advertising we sell is displayed but instead sell advertising or sponsorship opportunities on behalf of our media network owners to our brands and advertisers.. The Company has concluded that it acts as an agent and reports media revenues on a net basis, with the Company recording its commission, which typically is between thirty percent (30%) and forty percent (40%) of the total media sales contract, as revenue in the consolidated financial statements.
The media sales contracts we facilitate on behalf of our customers range from a single day to eight years. The Company facilitates billing advertisers on behalf of our customers and does not remit the net cash to our customer until the advertiser has paid the Company the fees owed for such advertising. Media revenue services are recognized when the Company has completed its performance obligations under the contract with our customers, which typically has concluded upon facilitating execution of contracts between our customer and a brand/advertiser. The Company applies time-based constraints in accordance with ASC 606 to evaluate the earned portion of the contract to record at execution. Media revenues are classified as “Other Services” within our disaggregated revenue.
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.
Software as a service perpetual license sales
Rarely, the Company sells perpetual licenses to its software products under legacy contractual arrangements (as opposed to subscription licenses). These sales include revenue from the sale of a perpetual license to customers that host their own instances of our software. These services traditionally are accompanied by the sale of maintenance and support services contracts. Perpetual license revenue is classified as "Other Services" within our disaggregated revenue.
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”), and (iii) the Secured Promissory Note (as described below). In addition, the Merger Agreement requires the Company to pay to the Reflect stockholders additional contingent 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 $6.40 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 $7.20 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). The Company has recorded contingent liabilities related to the Guaranteed Consideration to reflect the Company's 1-for-3 reverse stock split that occurred on March 23, 2023. 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 amount of the Company's potential liability related to the contingent consideration was reduced at December 31, 2022 from $21.60 per share to $19.20 per share, a reduction of $2.40 per share.
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. The Merger Agreement provides that if the Extension Threshold Price is less than 80% of the Guaranteed Price, then the Guaranteed Price will be increased by $1.00 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% was 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"(the “Closing”) 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 issued on the two-year anniversary were valued at $3.29 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, 2024 as reported on the Nasdaq Capital Market. The Company issued 37,632 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.
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:
Consideration | ||||
Cash consideration for Reflect stock | $ | 16,664 | (1) | |
Cash consideration for Retention Bonus Plan | 1,334 | (2) | ||
Common stock issued to Reflect shareholders | 4,667 | (3) | ||
Common stock issued to Retention Bonus Plan | 333 | (4) | ||
Secured Promissory Note | 2,500 | (5) | ||
Contingent consideration | 10,862 | (6) | ||
Total consideration | 36,360 | |||
Vendor deposit with the Company | (818 | )(7) | ||
Cash acquired | (812 | )(8) | ||
Net consideration transferred | $ | 34,730 | ||
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The Company incurred $444 of direct transaction costs related to the Reflect Merger for the year ended December 31, 2022. These costs are included in deal and transaction expense in the accompanying Consolidated Statements of Operations.
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:
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:
(1) 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.
(2) 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.
(3) 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:
Amortization | |||||
Valuation | Period | ||||
Identifiable definite-lived intangible assets: | |||||
Trade names | $ | 960 | 5 years | ||
Developed technology | 5,130 | 10 years | |||
Noncompete | 30 | 2 years | |||
Customer relationships | 11,040 | 10 years | |||
Total | $ | 17,160 | |||
The Company estimated the preliminary fair value of the acquired property, plant and equipment using a combination of the cost and market approaches, depending on the component. The preliminary fair value of such property, plant 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
Year Ended | ||||||||
December 31, | ||||||||
2023 | 2022 | |||||||
Supplemental non-cash Investing and Financing activities | ||||||||
Capitalized software in accounts payable | $ | 201 | $ | 556 | ||||
Property and equipment in accounts payable | $ | - | $ | 11 | ||||
Supplemental disclosure information for cash flow | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 1,685 | $ | 1,350 | ||||
Income taxes | $ | 78 | $ | 43 | ||||
NOTE 7: INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
Intangible assets consisted of the following at December 31, 2023 and 2022:
December 31, | December 31, | |||||||||||||||
2023 | 2022 | |||||||||||||||
Gross | Gross | |||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
Amount | Amortization | Amount | Amortization | |||||||||||||
Technology platform | $ | 6,900 | 2,255 | $ | 9,765 | 4,354 | ||||||||||
Purchased and developed software | 5,284 | 3,405 | 4,682 | 3,375 | ||||||||||||
In-Process internally developed software platform | 6,080 | - | 4,074 | - | ||||||||||||
Customer relationships | 13,910 | 3,054 | 15,000 | 2,849 | ||||||||||||
Trademarks and trade names | 1,260 | 660 | 1,600 | 808 | ||||||||||||
Noncompete | 30 | 28 | 30 | 13 | ||||||||||||
Total amortizable intangible assets | 33,464 | 9,402 | 35,151 | 11,399 | ||||||||||||
Accumulated amortization | 9,402 | 11,399 | ||||||||||||||
Net book value of amortizable intangible assets | $ | 24,062 | $ | 23,752 | ||||||||||||
For the years ended December 31, 2023 and 2022, amortization of intangible assets charged to operations was $3,055 and $2,702, respectively. For the year ended December 31, 2023, the Company wrote-off a $340 fully amortized trade name asset, a $1,090 fully amortized customer list asset, a $2,864 fully amortized technology asset, a $758 fully amortized capitalized software and the related accumulated amortization. There was no impact on the Company’s Consolidated Balance Sheet or Consolidated Statement of Operations as a result of these write-offs during the period.
Estimated amortization is as follows:
Estimated Future | ||||
Year ending December 31, | Amortization | |||
2024 | $ | 3,411 | ||
2025 | 3,490 | |||
2026 | 2,850 | |||
2027 | 2,458 | |||
2028 | 2,434 | |||
Thereafter | 9,419 | |||
Total | $ | 24,062 | ||
Intangible assets include the following and are being amortized over their estimated useful lives as follows:
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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.
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 as of our assessment date related 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. Based on the improvement of our share price and market capitalization, along with improving Company fundamentals, we believe our implied fair value continues to exceed our total carrying value as of December 31, 2023.
The Company recognizes that any changes in our 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.
The outstanding debt with detachable warrants, as applicable, are shown in the table below. Further discussion of the notes follows.
As of December 31, 2023 | |||||||||||
Issuance | Maturity | Interest Rate | |||||||||
Debt Type | Date | Principal | Date | Warrants | Information | ||||||
A | 2/17/2022 | $ | 10,000 | 2/15/2025 | 833,334 | 8.0% interest(1) | |||||
B | 2/17/2022 | 5,147 | 2/15/2025 | 898,165 | 10.0% interest(2) | ||||||
Total debt, gross | $ | 15,147 | 1,731,499 | ||||||||
Debt discount | (1,628 | ) | |||||||||
Total debt, net | $ | 13,519 | |||||||||
Less current maturities | (3,690 | ) | |||||||||
Long term debt | $ | 9,829 | |||||||||
As of December 31, 2022 | |||||||||||
Issuance | Maturity | Interest Rate | |||||||||
Debt Type | Date | Principal | Date | Warrants | Information | ||||||
A | 2/17/2022 | $ | 10,000 | 2/15/2025 | 833,334 | 8.0% interest(1) | |||||
B | 2/17/2022 | 7,185 | 2/15/2025 | 898,165 | 10.0% interest(2) | ||||||
C | 2/17/2022 | 1,456 | 2/17/2024 | - | 0.59% 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, gross | $ | 17,572 | |||||||||
Less current maturities | (4,499 | ) | |||||||||
Total debt, net | $ | 13,073 | |||||||||
A – Acquisition Term Loan with related party
B – Consolidation Term Loan with related party
C – Secured Promissory Note
D – Term Loan (2022) with related party
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Secured Promissory Note
On February 17, 2022, in connection with the Closing, the Company issued to RSI Exit Corporation (“Stockholders’ Representative”), the representative of former Reflect stockholders, a $2,500 Note and Security Agreement (the “Secured Promissory Note”).
In connection with the Acquisition Term Loan and Consolidation Term Loan warrant coverage, the Company issued to Slipstream Communications a warrant to purchase an aggregate of 1,731,499 shares of Company common stock (the “Lender Warrant”). The Lender Warrant has a five-yearfive-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 815Derivatives and were deemed to represent bifurcated derivative instruments that should be recorded as liabilities in the 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 $1,443 and $1,268 for the years ended December 31, 2023 and 2022, respectively. The Company has deemed straight-line amortization to be materially consistent with the effective interest method.
2023 | 2022 | |||||||
Audit fees(a) | $ | 743 | $ | 498 | ||||
| Audit related fees | — | — | ||||||
| Tax fees | — | — | ||||||
| All other fees | — | — | ||||||
| $ | 743 | $ | 498 | |||||
| (a) | Audit fees for 2023 and 2022 relate to professional services provided in connection with the audit of our consolidated financial statements, the reviews of our quarterly condensed consolidated financial statements, and audit services provided in connection with other regulatory filings. |
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.
Income tax expense consisted of the following:
Year ended December 31, | ||||||||
2023 | 2022 | |||||||
Tax provision summary: | ||||||||
State income tax | $ | 39 | $ | 51 | ||||
Deferred tax expense - federal | 9 | 30 | ||||||
Deferred tax expense (benefit) – state | 35 | (2 | ) | |||||
Tax expense | $ | 83 | $ | 79 | ||||
The income tax expense includes federal and state income taxes currently payable and those deferred or prepaid because of temporary differences between financial statement and tax bases of assets and liabilities. The Company records income taxes under the liability method. Under this method, deferred income taxes are recognized for the estimated future tax effects of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws.
A reconciliation of the statutory income tax rate to the effective income tax rates as a percentage of income before income taxes is as follows:
2023 | 2022 | |||||||
Federal statutory rate | 21.00 | % | 21.00 | % | ||||
State taxes, net of federal benefit | 1.28 | % | (2.02 | )% | ||||
Foreign rate differential | 1.05 | % | (2.51 | )% | ||||
Fair value of Warrant Liability/Contingent Consideration | (6.48 | )% | (79.66 | )% | ||||
Discrete items, Transaction items, and Other | (2.13 | )% | (2.37 | )% | ||||
Changes in valuation allowance | (16.53 | )% | 69.60 | % | ||||
Effective tax rate | (1.81 | )% | 4.04 | % | ||||
The net deferred tax assets and liabilities recognized in the accompanying Consolidated Balance Sheets, determined using the income tax rate applicable to each period, consist of the following:
December 31, | ||||||||
2023 | 2022 | |||||||
Deferred tax assets (liabilities): | ||||||||
Reserves | $ | 249 | $ | 472 | ||||
Property and equipment | 57 | 165 | ||||||
Accrued expenses | 514 | 593 | ||||||
Right-of-use Asset | (254 | ) | (253 | ) | ||||
Right-of-use Liability | 254 | 253 | ||||||
IRC 163(j) Interest Carryforward | 704 | 18 | ||||||
Debt issuance costs | 135 | 286 | ||||||
Non-qualified stock options | 1,708 | 1,469 | ||||||
IRC Section 174 | 593 | 196 | ||||||
R&D credits | 2,312 | 2,312 | ||||||
Net foreign carryforwards | 3,753 | 3,664 | ||||||
US net operating loss and contribution carryforwards | 38,010 | 37,953 | ||||||
Intangibles | (3,818 | ) | (3,737 | ) | ||||
Total deferred tax liabilities, net | 44,217 | 43,391 | ||||||
Valuation allowance | (44,290 | ) | (43,419 | ) | ||||
Net deferred tax liabilities | $ | (73 | ) | $ | (28 | ) | ||
As of December 31, 2023, the Company had no reserves recorded as a liability for unrecognized tax benefits for U.S. federal and state tax jurisdictions. There were no unrecognized tax benefits as of December 31, 2023 that, if recognized, would affect the tax rate. It is the Company’s policy to accrue interest and penalties related to liabilities for income tax contingencies in the provision for income taxes. As of December 31, 2023, the Company had no accrued interest or penalties related to uncertain tax positions.
Our deferred tax assets are primarily related to net federal and state operating loss carryforwards (NOLs)
| (a) | See “Index to the Consolidated Financial Statements,” which appears on page F-1 of Original 10-K. |
| (b) |
| (c) | Not applicable. |
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.
A summary of outstanding warrants for the years ended December 31, 2023 and 2022 is included below:
Year Ended December 31, 2023 | ||||||||||||
Warrants (Equity) | ||||||||||||
Weighted | ||||||||||||
Weighted | Average | |||||||||||
Average Exercise | Remaining | |||||||||||
Amount | Price | Contractual Life | ||||||||||
Balance January 1, 2023 | 5,824,027 | $ | 6.56 | 4.21 | ||||||||
Warrants expired | (1,237,025 | ) | 12.70 | - | ||||||||
Balance December 31, 2023 | 4,587,002 | $ | 4.90 | 4.11 | ||||||||
Year Ended December 31, 2022 | ||||||||||||
Warrants (Equity) | ||||||||||||
Weighted | ||||||||||||
Weighted | Average | |||||||||||
Average Exercise | Remaining | |||||||||||
Amount | Price | Contractual Life | ||||||||||
Balance January 1, 2022 | 1,367,737 | $ | 13.44 | 1.73 | ||||||||
Warrants issued | 1,950,502 | 4.60 | 5.00 | |||||||||
Warrants exercised | (1,950,502 | ) | 4.60 | 4.86 | ||||||||
Warrants expired | (130,712 | ) | 10.44 | - | ||||||||
Warrants reclassified | 4,587,002 | 4.90 | 4.73 | |||||||||
Balance December 31, 2022 | 5,824,027 | $ | 6.56 | 4.21 | ||||||||
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. In 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 included 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 Consolidated Balance Sheets at fair value, with subsequent changes in their respective fair values recognized in the 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 Consolidated Statement of Operations for the year ended December 31, 2022.
Exhibit No. | Description | |
| 31.3 | Chief Executive Officer Certification pursuant to Exchange Act Rule 13a-14(a).* | |
| 31.4 | Chief Financial Officer Certification pursuant to Exchange Act Rule 13a-14(a).* | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| * | Filed herewith |
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 were 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 Consolidated Balance Sheets at fair value, with subsequent changes in their respective fair values recognized in the 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 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 Consolidated Statement of Operations for the year ended December 31, 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 extended 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.
As a result of the extension in term provided in exchange for the amendment, the Company reassessed the fair value of each of the Common Stock, Lender and Purchaser Warrants, resulting in the Company recording a loss on the fair value of these warrants of $345 in the Consolidated Statements of Operations for the year ended December 31, 2022. The foregoing amendments to the warrants resulted in such warrants to be accounted for as equity instruments in the Company’s Consolidated Financial Statements. As such, following recording the gains and losses with respect to these warrant amendments, the Company reclassified the warrant liability of $5,709 from noncurrent liabilities to additional paid-in-capital. These amounts are reflected as additional paid-in-capital in the Consolidated Balance Sheet as of December 31, 2022.
The foregoing amendments to the warrants resulted in such warrants to be accounted for as equity instruments on the Company’s 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 Consolidated Balance Sheet as of December 31, 2022.
NOTE 12: STOCK-BASED COMPENSATION
A summary of outstanding options as of December 31, 2023 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 | 6.63 | $ | 7.42 | 566,673 | $ | 7.42 | |||||||||||||
8.01+ | 96,125 | 2.03 | 25.22 | 96,125 | 25.22 | |||||||||||||||
| 662,798 | 5.96 | $ | 10.00 | 662,798 | $ | 10.00 | ||||||||||||||
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 | 6.42 | $ | 7.59 | 240,000 | $ | 7.59 | |||||||||||||
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 | 733,334 | 1.13 | $ | 3.00 | - | $ | - | |||||||||||||
Market Vesting Options | Time Vesting Options | Performance Vesting 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 | 633,334 | 3.00 | 662,910 | 10.02 | 240,000 | $ | 7.59 | |||||||||||||||||
Granted | 100,000 | 3.00 | - | - | - | - | ||||||||||||||||||
Forfeited or expired | - | - | (112 | ) | 162.00 | - | - | |||||||||||||||||
Balance, December 31, 2023 | 733,334 | 3.00 | 662,798 | 10.00 | 240,000 | $ | 7.59 | |||||||||||||||||
The weighted average remaining contractual life for options exercisable is 6.1 years as of December 31, 2023.
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 ten-year options to purchase 160,000 and 80,000 shares of common stock (the “Performance Options”), respectively, which vest in equal installments over a three-year period (2020-2022), subject to satisfying the Company revenue targets and EBITDA (earnings before interest, taxes, depreciation, and amortization) targets for the applicable year. In each of calendar years 2020,2021 and 2022,one-third of the total shares may vest (if the revenue and EBITDA targets are met), and the shares that are subject to vesting each year are allocated equally to each of the revenue and EBITDA targets for such year. The Performance Options include a catch-up provision, where any options that did not vest during a prior year due to the Company’s failure to meet a prior revenue or EBITDA target may vest in a subsequent vesting year if the revenue or EBITDA target, as applicable, is met in the future year.
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 ($38,000) was eliminated, and the remaining shares that are available for vesting under the Performance Options (106,667 unvested shares for Mr. Mills and 53,334 for Mr. Logan) (including the unvested portions of shares based on the satisfaction of the revenue targets for 2020 and 2021 by virtue of the catch-up provisions in the Performance Options) will fully vest upon the achievement of an updated EBITDA target for calendar year 2022 of $3,600.
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) excluded 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) included 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).
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 $7.59 per share, the closing price of the Company’s common stock on the date of issuance (as adjusted by the Company's 1-for-3 reverse stock split in March 2023). The options were issued from the 2014 Stock Incentive Plan.
Issuance of Options
On June 15, 2022, Messrs. Mills and Logan received ten-year options to purchase 333,334 and 200,000 shares of common stock, respectively (the “New Options”). The New Options are eligible to vest at any time on or prior to February 17, 2025 if the trailing 10-trading day VWAP of the Company’s common stock, as reported on the Nasdaq Capital Market, exceeds the share price targets below, subject to such executive serving the Company as a director, officer, employee or consultant at such time:
Share Price Targets | ||||||||||||||||||||||||||||
Guaranteed | Total | |||||||||||||||||||||||||||
Executive | $ | 6.00 | $ | 9.00 | $ | 12.00 | $ | 15.00 | $ | 18.00 | Price | Shares | ||||||||||||||||
Mills Shares Vested | 16,667 | 33,334 | 50,000 | 66,667 | 83,334 | 83,334 | 333,334 | |||||||||||||||||||||
Logan Shares Vested | 10,000 | 20,000 | 30,000 | 40,000 | 50,000 | 50,000 | 200,000 | |||||||||||||||||||||
Percentage of Shares Vested | 5 | % | 10 | % | 15 | % | 20 | % | 25 | % | 25 | % | ||||||||||||||||
The “Guaranteed Price” has the meaning ascribed to such term in the Merger Agreement.
The exercise price of the New Options is $3.00 per share, which exceeded the closing price of the Company’s common stock on the date of issuance (as adjusted by the Company's 1-for-3 reverse stock split in March 2023). The New Options were issued from the Company’s 2014 Stock Incentive Plan, as amended. An additional 100,000 options with identical market vesting restrictions were issued to non-executives.
The fair value of the options on the grant date varied between $0.63 and $1.11 per award as determined using the Monte Carlo model. These values were calculated using the following weighted average assumptions:
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At the grant date, 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 contingent consideration. As a result of that evaluation of probability, during the year-ended December 31, 2023, the Company recorded $13 of compensation expense. These awards have not yet vested and are subject to actual share price performance through February 2025.
On November 17, 2021, Creative Realities’ Board of Directors updated its director compensation plan to compensate non-officer directors resulting in the Company granting 10-year options to purchase an aggregate of 85,000 shares of its common stock to non-employee directors of the Company under the Company’s 2014 Stock Incentive Plan (the “Plan”). One-third of the options vested immediately, with half of the remaining options vesting at each of the first and second anniversaries of the grant date. The options have an exercise price of $6.63, the market value of the Company’s common stock on the grant date. The fair value of the options on the grant date was $5.23 and was determined using the Black-Scholes model. These values were calculated using the following weighted average assumptions:
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On June 1, 2020 the Board of Directors of the Company granted 10-year options to purchase an aggregate of 526,667 shares of its common stock to employees of the Company subject to shareholder approval of an increase in the reserve of shares authorized for issuance under the Company’s 2014 Stock Incentive Plan (the “Plan”). On July 10, 2020, the Company held a special meeting of the Company’s shareholders at which the shareholders approved the amendment to the Plan, which increased the reserve of shares authorized for issuance thereunder to 2,000,000 shares.
The options awarded vest over 3 years and have an exercise price of $7.59, the market value of the Company’s common stock on the grant date. The fair value of the options on the grant date was $5.61 and was determined using the Black-Scholes model. These values were calculated using the following weighted average assumptions:
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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 233,334 shares for purchase by the Company’s employees. There are 3,890 options outstanding under the 2006 Equity Incentive Plan.
In October 2014, the Company’s shareholders approved the 2014 Stock Incentive Plan, under which 7,390,355 shares were reserved for purchase by the Company’s employees. In August 2018, a special meeting of shareholders was held in which the shareholders voted to amend the Company’s 2014 Stock Incentive Plan to increase the reserve of shares authorized for issuance thereunder, from 7,390,355 shares to 18,000,000 shares. Following a 1-for-30 reverse stock split, the shares authorized for issuance under the Company’s 2014 Stock Incentive Plan was reduced to 600,000. On July 10, 2020, the Company’s shareholders approved an amendment to the Company’s 2014 Stock Incentive Plan to increase the reserve of authorized for issuance thereunder to 6,000,000. Following a 1-for-3 reverse stock split, the shares authorized for issuance under the Company's 2014 Stock Incentive Plan was reduced to 2,000,000. There are 1,632,242 options outstanding under the 2014 Stock Incentive Plan.
Employee Awards
Compensation expense recognized for the issuance of stock options to employees for the years ended December 31, 2023 and 2022 of $383 and $1,689, respectively, was included in general and administrative expense in the Consolidated Financial Statements.
At December 31, 2023, there was $0 and $100 of total unrecognized compensation expense related to unvested share-based awards with time vesting and performance vesting criteria for employees, respectively. Expense related to performance vesting options will be recognized over the next 14 months and will be adjusted for any future forfeitures as they occur.
Non-Employee Awards
Compensation expense recognized for the issuance of stock options, including those options awarded to our Board of Directors, for the years ended December 31, 2023 and 2022 of $150 and $198, respectively, was included in general and administrative expense in the Consolidated Financial Statements. At December 31, 2023, unrecognized compensation expense related to unvested share-based awards with time vesting criteria for non-employee directors was $0.
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 volume weighted average price (“VWAP”) for the last ten (10) days during the month of service provided.
During the year ended December 31, 2023 and December 31, 2022, the Company issued shares issuable in exchange for services in the amount of $55 and $100, respectively.
NOTE 13: SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS/VENDORS
Segment Information
We currently operate in one reportable segment, marketing technology solutions. Substantially all property and equipment is located at our offices in the United States, and a data center located in the United States. All material sales for the years ended December 31, 2023 and 2022 were in the United States and Canada.
Significant Customers
No customer accounted for more than 10% of revenue for the year ended December 31, 2023. We had three customers that accounted for 44% of revenue for the years ended December 31, 2022.
We had two and three customers that in the aggregate accounted for 50% and 49% of accounts receivable as of December 31, 2023 and 2022, respectively.
Significant Vendors
We had one vendor that accounted for 38% and 30% of outstanding accounts payable at December 31, 2023 and 2022, respectively.
The Company's lease portfolio is primarily comprised of operating leases for office space and finance leases for computer equipment. At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on whether the contract conveys the right to control the use of identified property or equipment for a period of time in exchange for consideration. Leases are classified as operating or finance leases at the commencement date of the lease. Leases may include one or more options to renew. We do not assume renewals in our determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The following table summarizes the classification of operating and finance lease assets and obligations in the Company's Consolidated Balance Sheet as of December 31, 2023 and 2022:
Year Ended | ||||||||
December 31, | ||||||||
2023 | 2022 | |||||||
Assets | ||||||||
Operating lease assets | Operating lease right-of-use assets | $ | 1,041 | $ | 1,584 | |||
Finance lease assets | Property and equipment, net | 146 | - | |||||
Total leased assets | $ | 1,187 | $ | 1,584 | ||||
Liabilities | ||||||||
Short-term: | ||||||||
Operating lease obligation | Current maturities of operating leases | $ | 505 | $ | 711 | |||
Finance lease obligation | Accrued expenses and other current liabilities | 42 | - | |||||
Long-term | ||||||||
Operating lease obligation | Long-term obligations under operating leases | 536 | 873 | |||||
Finance lease obligation | Other non-current liabilities | 104 | - | |||||
Total lease obligations | $ | 1,187 | $ | 1,584 | ||||
The following table summarizes the classification of lease expense in the Company's Consolidated Statements of Operations for the years ended December 31, 2023 and 2022:
Year Ended | |||||||
December 31, | |||||||
2023 | 2022 | ||||||
Operating lease expense: | |||||||
Operating lease expense | $ | 753 | $ | 579 | |||
Finance lease expense: | |||||||
Amortization of right-of-use assets | 23 | - | |||||
Interest on lease obligations | 5 | - | |||||
Total lease expense | $ | 781 | $ | 579 | |||
The following table provides lease term and discount rate information related to operating leases as of December 31, 2023:
| Creative Realities, Inc. | |||
| /s/ Richard Mills | |||
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| Richard Mills | |||
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The following table sets forth the scheduled maturities of lease obligations as of December 31, 2023:
Operating | Finance | Total | ||||||||||
| Leases | Leases | Leases | ||||||||||
2024 | $ | 536 | $ | 49 | $ | 585 | ||||||
2025 | 451 | 48 | 499 | |||||||||
2026 | 111 | 44 | 155 | |||||||||
2027 | 105 | 19 | 124 | |||||||||
Total undiscounted cash flows | $ | 1,203 | $ | 160 | $ | 1,363 | ||||||
Less imputed interest | (162 | ) | (14 | ) | (176 | ) | ||||||
Present value of lease liabilities | $ | 1,041 | $ | 146 | $ | 1,187 | ||||||
The following table provides supplemental information related to the Company's Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022:
Year Ended | Year Ended | |||||||
December 31, | December 31, | |||||||
| 2023 | 2022 | ||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows paid for operating leases | $ | 753 | $ | 597 | ||||
Operating cash flows paid for finance leases | $ | 5 | $ | - | ||||
Financing cash flows paid for finance leases | $ | 23 | $ | - | ||||
Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 169 | $ | - | ||||
We have a defined contribution 401(k) retirement plans for eligible associates in the United States. Associates may contribute up to 15% of their pretax compensation to the plan subject to IRS limitations. The Company contributes an employer contribution match of 50% of employee wages up to 6%, for an effective match of 3%.
We have a Registered Retirement Savings Plan for eligible associates in Canada. Associates may contribute up to 18% of earned income reported on their tax return in the previous year, subject to legal contribution limits. The Company contributes an employer contribution match of 50% of employee wages up to 6%, for an effective match of 3%.
The Company contributed $253 and $142 to employee retirement plans for the year-ended December 31, 2023 and 2022, respectively.