UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20222023
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 001-33169
Creative Realities, Inc.
(Exact Name of Registrant as Specified in its Charter)
Minnesota | 41-1967918 | |
State or Other Jurisdiction of | I.R.S. Employer | |
Incorporation or Organization | Identification No. | |
13100 Magisterial Drive, Suite 100, Louisville KY | 40223 | |
Address of Principal Executive Offices | Zip Code |
(502) 791-8800 | ||
Registrant’s Telephone Number, Including Area Code |
(502) 791-8800
Registrant’s Telephone Number, Including Area Code
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.01 per share | CREX | The Nasdaq Stock Market LLC | ||
Warrants to purchase Common Stock | CREXW | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
APPLICABLE ONLY TO CORPORATE ISSUERS
As of November 14, 2022,August 4, 2023, the registrant had 21,799,1267,409,027 shares of common stock outstanding.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CREATIVE REALITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
June 30, | December 31, | |||||||
2023 | 2022 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 3,264 | $ | 1,633 | ||||
Accounts receivable, net | 6,496 | 8,263 | ||||||
Work-in-process and inventories, net | 1,148 | 2,267 | ||||||
Prepaid expenses and other current assets | 784 | 1,819 | ||||||
Total current assets | $ | 11,692 | $ | 13,982 | ||||
Property and equipment, net | 453 | 201 | ||||||
Operating lease right-of-use assets | 1,356 | 1,584 | ||||||
Intangibles, net | 23,936 | 23,752 | ||||||
Goodwill | 26,453 | 26,453 | ||||||
Other assets | 44 | 43 | ||||||
TOTAL ASSETS | $ | 63,934 | $ | 66,015 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 2,892 | $ | 3,757 | ||||
Accrued expenses | 3,217 | 3,828 | ||||||
Deferred revenues | 2,827 | 1,223 | ||||||
Customer deposits | 3,985 | 2,478 | ||||||
Current maturities of operating leases | 645 | 711 | ||||||
Short-term portion of Secured Promissory Note | 833 | 1,248 | ||||||
Short-term portion of related party Consolidation Term Loan, net of $747 and $745 discount, respectively | 3,245 | 1,251 | ||||||
Short-term related party Term Loan (2022) | 119 | 2,000 | ||||||
Total current liabilities | 17,763 | 16,496 | ||||||
Long-term Secured Promissory Note | - | 208 | ||||||
Long-term related party Acquisition Term Loan, net of $1,139 and $1,484 discount, respectively | 8,861 | 8,516 | ||||||
Long-term related party Consolidation Term Loan, net of $469 and $840 discount, respectively | 2,724 | 4,349 | ||||||
Long-term obligations under operating leases | 711 | 873 | ||||||
Contingent acquisition consideration, at fair value | 9,881 | 9,789 | ||||||
Other liabilities | 136 | 205 | ||||||
TOTAL LIABILITIES | 40,076 | 40,436 | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock, $0.01 par value, 66,666 shares authorized; 7,409 and 7,266 shares issued and outstanding, respectively | 74 | 72 | ||||||
Additional paid-in capital | 76,618 | 75,916 | ||||||
Accumulated deficit | (52,834 | ) | (50,409 | ) | ||||
Total shareholders’ equity | 23,858 | 25,579 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 63,934 | $ | 66,015 |
September 30, | December 31, | |||||||
2022 | 2021 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 819 | $ | 2,883 | ||||
Accounts receivable, net of allowance of $809 and $620, respectively | 7,186 | 3,006 | ||||||
Unbilled receivables | 219 | 369 | ||||||
Work-in-process and inventories, net | 3,108 | 1,880 | ||||||
Prepaid expenses and other current assets | 1,618 | 1,634 | ||||||
Total current assets | $ | 12,950 | $ | 9,772 | ||||
Operating lease right-of-use assets | 1,703 | 654 | ||||||
Property and equipment, net | 193 | 75 | ||||||
Intangibles, net | 23,754 | 4,850 | ||||||
Goodwill | 26,094 | 7,525 | ||||||
Other assets | 19 | 5 | ||||||
TOTAL ASSETS | $ | 64,713 | $ | 22,881 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Short-term seller note payable | $ | 1,777 | $ | - | ||||
Short-term portion of Related Party Consolidation Term Loan | 399 | |||||||
Accounts payable | 3,040 | 2,517 | ||||||
Accrued expenses | 3,029 | 2,110 | ||||||
Deferred revenues | 2,704 | 426 | ||||||
Customer deposits | 1,783 | 1,525 | ||||||
Current maturities of operating leases | 705 | 281 | ||||||
Total current liabilities | 13,437 | 6,859 | ||||||
Long-term Related Party Acquisition Term Loan, net of $1,660 and $0 discount, respectively | 8,340 | - | ||||||
Long-term Related Party Consolidation Term Loan, net of $1,773 and $143 discount, respectively | 5,013 | 4,624 | ||||||
Long-term related party convertible loans payable, at fair value | - | 2,251 | ||||||
Contingent acquisition consideration, at fair value | 10,494 | - | ||||||
Long-term obligations under operating leases | 1,018 | 373 | ||||||
Other liabilities | 9 | 45 | ||||||
TOTAL LIABILITIES | 38,311 | 14,152 | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock, $0.01 par value, 200,000 shares authorized; 21,751 and 12,009 shares issued and outstanding, respectively | 217 | 120 | ||||||
Additional paid-in capital | 75,260 | 60,863 | ||||||
Accumulated deficit | (49,075 | ) | (52,254 | ) | ||||
Total shareholders’ equity | 26,402 | 8,729 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 64,713 | $ | 22,881 |
See accompanying notes to condensed consolidated financial statements
CREATIVE REALITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Sales | ||||||||||||||||
Hardware | $ | 3,437 | $ | 5,667 | $ | 7,759 | $ | 12,126 | ||||||||
Services and other | 5,759 | 5,256 | 11,381 | 9,554 | ||||||||||||
Total sales | 9,196 | 10,923 | 19,140 | 21,680 | ||||||||||||
Cost of sales | ||||||||||||||||
Hardware | 2,724 | 4,610 | 5,930 | 9,992 | ||||||||||||
Services and other | 2,174 | 1,651 | 3,823 | 3,134 | ||||||||||||
Total cost of sales | 4,898 | 6,261 | 9,753 | 13,126 | ||||||||||||
Gross profit | 4,298 | 4,662 | 9,387 | 8,554 | ||||||||||||
Operating expenses: | ||||||||||||||||
Sales and marketing expenses | 1,229 | 1,147 | 2,365 | 1,854 | ||||||||||||
Research and development expenses | 377 | 418 | 743 | 659 | ||||||||||||
General and administrative expenses | 2,595 | 2,562 | 5,493 | 5,422 | ||||||||||||
Depreciation and amortization expense | 797 | 468 | 1,576 | 1,175 | ||||||||||||
Deal and transaction expenses | - | 37 | - | 428 | ||||||||||||
Total operating expenses | 4,998 | 4,632 | 10,177 | 9,538 | ||||||||||||
Operating income/(loss) | (700 | ) | 30 | (790 | ) | (984 | ) | |||||||||
Other income (expenses): | ||||||||||||||||
Interest expense, including amortization of debt discount | (787 | ) | (750 | ) | (1,590 | ) | (1,199 | ) | ||||||||
Change in fair value of warrant liability | - | 2,433 | - | 7,902 | ||||||||||||
Change in fair value of equity guarantee | (16 | ) | (73 | ) | (92 | ) | (73 | ) | ||||||||
Loss on debt waiver consent | - | - | - | (1,212 | ) | |||||||||||
Loss on warrant amendment | - | (345 | ) | - | (345 | ) | ||||||||||
Gain/(loss) on settlement of obligations | - | 21 | - | (274 | ) | |||||||||||
Other income (expense) | 123 | (1 | ) | 135 | 5 | |||||||||||
Total other income (expense) | (680 | ) | 1,285 | (1,547 | ) | 4,804 | ||||||||||
Net (loss) income before income taxes | (1,380 | ) | 1,315 | (2,337 | ) | 3,820 | ||||||||||
Provision for income taxes | (45 | ) | (53 | ) | (88 | ) | (56 | ) | ||||||||
Net (loss) income | $ | (1,425 | ) | $ | 1,262 | $ | (2,425 | ) | $ | 3,764 | ||||||
Basic (loss) earnings per common share | $ | (0.19 | ) | $ | 0.17 | $ | (0.33 | ) | $ | 0.62 | ||||||
Diluted (loss) earnings per common share | $ | (0.19 | ) | $ | 0.17 | $ | (0.33 | ) | $ | 0.62 | ||||||
Weighted average shares outstanding - basic | 7,406 | 7,234 | 7,379 | 6,060 | ||||||||||||
Weighted average shares outstanding - diluted | 7,406 | 7,234 | 7,379 | 6,060 |
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Sales | ||||||||||||||||
Hardware | $ | 5,015 | $ | 2,215 | $ | 17,141 | $ | 6,327 | ||||||||
Services and other | 6,165 | 2,538 | 15,719 | 6,707 | ||||||||||||
Total sales | 11,180 | 4,753 | 32,860 | 13,034 | ||||||||||||
Cost of sales | ||||||||||||||||
Hardware | 3,811 | 1,588 | 13,803 | 4,372 | ||||||||||||
Services and other | 2,855 | 818 | 5,989 | 2,206 | ||||||||||||
Total cost of sales | 6,666 | 2,406 | 19,792 | 6,578 | ||||||||||||
Gross profit | 4,514 | 2,347 | 13,068 | 6,456 | ||||||||||||
Operating expenses: | ||||||||||||||||
Sales and marketing expenses | 718 | 330 | 2,572 | 834 | ||||||||||||
Research and development expenses | 238 | 226 | 897 | 455 | ||||||||||||
General and administrative expenses | 2,789 | 1,848 | 8,105 | 5,623 | ||||||||||||
Bad debt (recovery)/expense | 58 | - | 164 | (463 | ) | |||||||||||
Depreciation and amortization expense | 885 | 347 | 2,060 | 1,035 | ||||||||||||
Deal and transaction expenses | 110 | - | 538 | - | ||||||||||||
Total operating expenses | 4,798 | 2,751 | 14,336 | 7,484 | ||||||||||||
Operating loss | (284 | ) | (404 | ) | (1,268 | ) | (1,028 | ) | ||||||||
Other income/(expenses): | ||||||||||||||||
Interest expense | (757 | ) | (186 | ) | (1,956 | ) | (617 | ) | ||||||||
Change in fair value of warrant liability | - | - | 7,902 | - | ||||||||||||
Change in fair value of equity guarantee | 442 | - | 369 | - | ||||||||||||
Gain/(loss) on settlement of obligations | 37 | 256 | (237 | ) | 3,449 | |||||||||||
Loss on debt waiver consent | - | - | (1,212 | ) | - | |||||||||||
Loss on warrant amendment | - | - | (345 | ) | - | |||||||||||
Change in fair value of Convertible Loan | - | - | - | 166 | ||||||||||||
Other expense | (2 | ) | (8 | ) | 3 | (7 | ) | |||||||||
Total other income/(expense) | (280 | ) | 62 | 4,524 | 2,991 | |||||||||||
Income/(loss) before income taxes | (564 | ) | (342 | ) | 3,256 | 1,963 | ||||||||||
Benefit/(provision) for income taxes | 10 | (1 | ) | (46 | ) | (9 | ) | |||||||||
Net income/(loss) | $ | (554 | ) | $ | (343 | ) | $ | 3,210 | $ | 1,954 | ||||||
Basic earnings/(loss) per common share | $ | (0.03 | ) | $ | (0.03 | ) | $ | 0.17 | $ | 0.17 | ||||||
Diluted earnings/(loss) per common share | $ | (0.03 | ) | $ | (0.03 | ) | $ | 0.17 | $ | 0.17 | ||||||
Weighted average shares outstanding - basic | 21,750 | 11,897 | 19,383 | 11,692 | ||||||||||||
Weighted average shares outstanding - diluted | 21,750 | 11,897 | 19,383 | 11,692 |
See accompanying notes to condensed consolidated financial statements.
CREATIVE REALITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2022 | 2021 | |||||||
Operating Activities: | ||||||||
Net income | $ | 3,210 | $ | 1,954 | ||||
Adjustments to reconcile net income to net cash used in operating activities | ||||||||
Depreciation and amortization | 2,060 | 1,035 | ||||||
Amortization of debt discount | 904 | 130 | ||||||
Stock-based compensation | 1,487 | 1,252 | ||||||
Shares issued for services | 100 | 85 | ||||||
Gain on forgiveness of Paycheck Protection Program | - | (1,552 | ) | |||||
Gain on settlement of Seller Note | - | (1,538 | ) | |||||
Change in fair value of Convertible Loan | - | (166 | ) | |||||
Allowance for doubtful accounts | 105 | (274 | ) | |||||
Increase in notes due to in-kind interest | - | 467 | ||||||
Loss on debt waiver consent | 1,212 | - | ||||||
Loss on warrant amendment | 345 | - | ||||||
Loss/(Gain) on settlement of obligations | 237 | (359 | ) | |||||
Gain on change in fair value of contingent consideration | (369 | ) | - | |||||
Gain on change in fair value of warrants | (7,902 | ) | - | |||||
Changes to operating assets and liabilities: | ||||||||
Accounts receivable and unbilled receivables | (2,835 | ) | (154 | ) | ||||
Inventories | (1,032 | ) | 399 | |||||
Prepaid expenses and other current assets | 682 | (1,010 | ) | |||||
Operating lease right-of-use assets, net | (556 | ) | 219 | |||||
Other assets | 22 | - | ||||||
Accounts payable | (227 | ) | (94 | ) | ||||
Deferred revenue | 1,019 | 6 | ||||||
Accrued expenses | 533 | (181 | ) | |||||
Deposits | (585 | ) | (402 | ) | ||||
Operating liabilities, net | (36 | ) | - | |||||
Operating lease liabilities, non-current | 576 | (184 | ) | |||||
Net cash used in operating activities | (1,050 | ) | (367 | ) | ||||
Investing activities | ||||||||
Acquisition of business, net of cash acquired | (17,186 | ) | - | |||||
Purchases of property and equipment | (123 | ) | (10 | ) | ||||
Capitalization of labor for software development | (2,959 | ) | (422 | ) | ||||
Net cash used in investing activities | (20,268 | ) | (432 | ) | ||||
Financing activities | ||||||||
Principal payments on finance leases | - | (4 | ) | |||||
Proceeds from sale of common stock in PIPE, net of offering expenses | 1,814 | - | ||||||
Proceeds from sale & exercise of pre-funded warrants in PIPE, net of offering expenses | 8,295 | - | ||||||
Proceeds from Acquisition Loan, net of offering expenses | 9,868 | - | ||||||
Repayment of Seller Note | (723 | ) | (100 | ) | ||||
Proceeds from sale of shares via registered direct offering, net | - | 1,849 | ||||||
Net cash provided by financing activities | 19,254 | 1,745 | ||||||
Increase/(decrease) in Cash and Cash Equivalents | (2,064 | ) | 946 | |||||
Cash and Cash Equivalents, beginning of period | 2,883 | 1,826 | ||||||
Cash and Cash Equivalents, end of period | $ | 819 | $ | 2,772 |
See accompanying notes to condensed consolidated financial statements.
CREATIVE REALITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYCASH FLOWS
(in thousands, except shares)In thousands)
(Unaudited)
Six Months Ended | ||||||||
June 30, | ||||||||
2023 | 2022 | |||||||
Operating Activities: | ||||||||
Net (loss) income | $ | (2,425 | ) | $ | 3,764 | |||
Adjustments to reconcile net (loss) income to net cash provided by operating activities | ||||||||
Depreciation and amortization | 1,576 | 1,175 | ||||||
Amortization of debt discount | 714 | 541 | ||||||
Amortization of stock-based compensation | 493 | 1,014 | ||||||
Loss on debt waiver consent | - | 1,212 | ||||||
Loss on warrant amendment | - | 345 | ||||||
Change on change in fair value of warrants | - | 274 | ||||||
Bad debt expense | 309 | 106 | ||||||
Gain on change in fair value of warrants | - | (7,902 | ) | |||||
Loss on change in fair value of contingent consideration | 92 | 73 | ||||||
Deferred income taxes | 46 | - | ||||||
Changes to operating assets and liabilities: | ||||||||
Accounts receivable | 1,458 | (4,035 | ) | |||||
Work-in-process and inventories | 1,119 | (562 | ) | |||||
Prepaid expenses and other current assets | 1,035 | (811 | ) | |||||
Accounts payable | (585 | ) | 2,487 | |||||
Accrued expenses | (559 | ) | 229 | |||||
Deferred revenues | 1,604 | 1,178 | ||||||
Customer deposits | 1,507 | 809 | ||||||
Other | (40 | ) | 40 | |||||
Net cash provided by (used in) operating activities | 6,344 | (63 | ) | |||||
Investing activities | ||||||||
Acquisition of business, net of cash acquired | - | (17,186 | ) | |||||
Purchases of property and equipment | (219 | ) | (32 | ) | ||||
Capitalization of labor for software development | (1,984 | ) | (2,328 | ) | ||||
Net cash used in investing activities | (2,203 | ) | (19,546 | ) | ||||
Financing activities | ||||||||
Principal payments on finance leases | (6 | ) | - | |||||
Proceeds from sale of common stock in PIPE, net of offering expenses | - | 1,814 | ||||||
Proceeds from sale & exercise of pre-funded warrants in PIPE, net of offering expenses | - | 8,295 | ||||||
Proceeds from Acquisition Loan, net of offering expenses | - | 9,868 | ||||||
Repayment of Term Loan (2022) | (1,881 | ) | - | |||||
Repayment of Secured Promissory Note | (623 | ) | (411 | ) | ||||
Net cash (used in) provided by financing activities | (2,510 | ) | 19,566 | |||||
Increase (decrease) in Cash and Cash Equivalents | 1,631 | (43 | ) | |||||
Cash and Cash Equivalents, beginning of period | 1,633 | 2,883 | ||||||
Cash and Cash Equivalents, end of period | $ | 3,264 | $ | 2,840 |
Additional | ||||||||||||||||||||
Common Stock | paid in | Accumulated | ||||||||||||||||||
Shares | Amount | capital | Deficit | Total | ||||||||||||||||
Three months ended September 30, 2022 | ||||||||||||||||||||
Balance as of June 30, 2022 | 21,743,852 | $ | 217 | $ | 74,741 | $ | (48,521 | ) | $ | 26,437 | ||||||||||
Stock-based compensation | - | - | 514 | - | 514 | |||||||||||||||
Stock-based compensation issued to vendors | 7,687 | - | 5 | - | 5 | |||||||||||||||
Net loss | - | - | - | (554 | ) | (554 | ) | |||||||||||||
Balance as of September 30, 2022 | 21,751,539 | $ | 217 | $ | 75,260 | $ | (49,075 | ) | $ | 26,402 |
Additional | ||||||||||||||||||||
Common Stock | paid in | Accumulated | ||||||||||||||||||
Nine months ended September 30, 2022 | Shares | Amount | capital | Deficit | Total | |||||||||||||||
Balance as of December 31, 2021 | 12,008,519 | $ | 120 | $ | 60,863 | $ | (52,254 | ) | $ | 8,729 | ||||||||||
Stock-based compensation | - | - | 1,406 | - | 1,406 | |||||||||||||||
Stock-based compensation issued to vendors | 76,514 | - | 70 | - | 70 | |||||||||||||||
Shares issued and warrants exercised in private investment in public entity (“PIPE”) | 7,166,505 | 72 | 2,206 | - | 2,278 | |||||||||||||||
Shares issued in Reflect Systems, Inc. Merger | 2,500,001 | 25 | 4,975 | - | 5,000 | |||||||||||||||
Warrant repricing events | - | - | 31 | (31 | ) | - | ||||||||||||||
Warrant amendment | - | - | 5,709 | - | 5,709 | |||||||||||||||
Net income | - | - | - | 3,210 | 3,210 | |||||||||||||||
Balance as of September 30, 2022 | 21,751,539 | $ | 217 | $ | 75,260 | $ | (49,075 | ) | $ | 26,402 |
Additional | ||||||||||||||||||||
Common Stock | paid in | Accumulated | ||||||||||||||||||
Shares | Amount | capital | (Deficit) | Total | ||||||||||||||||
Three months ended September 30, 2021 | ||||||||||||||||||||
Balance as of June 30, 2021 | 11,876,679 | $ | 118 | $ | 59,777 | $ | (50,189 | ) | $ | 9,706 | ||||||||||
Stock-based compensation | - | - | 331 | - | 331 | |||||||||||||||
Stock-based compensation issued to vendors | 31,257 | - | 45 | - | 45 | |||||||||||||||
Shares issued to directors as compensation | 11,524 | 1 | 25 | - | 26 | |||||||||||||||
Net loss | - | - | - | (343 | ) | (343 | ) | |||||||||||||
Balance as of September 30, 2021 | 11,919,460 | $ | 119 | $ | 60,178 | $ | (50,532 | ) | $ | 9,765 |
Additional | ||||||||||||||||||||
Common Stock | paid in | Accumulated | ||||||||||||||||||
Shares | Amount | capital | (Deficit) | Total | ||||||||||||||||
Nine months ended September 30, 2021 | ||||||||||||||||||||
Balance as of December 31, 2020 | 10,924,287 | $ | 109 | $ | 56,712 | $ | (52,486 | ) | $ | 4,335 | ||||||||||
Stock-based compensation | - | - | 1,177 | - | 1,177 | |||||||||||||||
Stock-based compensation issued to vendors | 53,461 | 1 | 84 | - | 85 | |||||||||||||||
Shares issued to directors as compensation | 44,568 | - | 75 | - | 75 | |||||||||||||||
Conversion of Disbursed Escrow Loan | 97,144 | 1 | 263 | - | 264 | |||||||||||||||
Gain on Extinguishment of Special Loan | - | - | 26 | - | 26 | |||||||||||||||
Sales of Shares via registered direct offering, net of offering cost | 800,000 | 8 | 1,841 | - | 1,849 | |||||||||||||||
Net income | - | - | - | 1,954 | 1,954 | |||||||||||||||
Balance as of September 30, 2021 | 11,919,460 | $ | 119 | $ | 60,178 | $ | (50,532 | ) | $ | 9,765 |
See accompanying notes to condensed consolidated financial statements.
CREATIVE REALITIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except shares)
(Unaudited)
Additional | ||||||||||||||||||||
Common Stock | paid in | Accumulated | ||||||||||||||||||
Shares | Amount | capital | Deficit | Total | ||||||||||||||||
Three Months Ended June 30, 2023 | ||||||||||||||||||||
Balance as of March 31, 2023 | 7,394,407 | $ | 74 | $ | 76,417 | $ | (51,409 | ) | $ | 25,082 | ||||||||||
Stock-based compensation | - | - | 171 | - | 171 | |||||||||||||||
Stock-based compensation issued to vendors | 14,620 | - | 30 | - | 30 | |||||||||||||||
Net loss | - | - | - | (1,425 | ) | (1,425 | ) | |||||||||||||
Balance as of June 30, 2023 | 7,409,027 | $ | 74 | $ | 76,618 | $ | (52,834 | ) | $ | 23,858 |
Additional | ||||||||||||||||||||
Common Stock | paid in | Accumulated | ||||||||||||||||||
Shares | Amount | capital | Deficit | Total | ||||||||||||||||
Six Months Ended June 30, 2023 | ||||||||||||||||||||
Balance as of December 31, 2022 | 7,266,382 | $ | 72 | $ | 75,916 | $ | (50,409 | ) | $ | 25,579 | ||||||||||
Stock-based compensation | - | - | 414 | - | 414 | |||||||||||||||
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 | |||||||||||||||
Net loss | - | - | - | (2,425 | ) | (2,425 | ) | |||||||||||||
Balance as of June 30, 2023 | 7,409,027 | $ | 74 | $ | 76,618 | $ | (52,834 | ) | $ | 23,858 |
Additional | ||||||||||||||||||||
Common Stock | paid in | Accumulated | ||||||||||||||||||
Shares | Amount | capital | (Deficit) | Total | ||||||||||||||||
Three Months Ended June 30, 2022 | ||||||||||||||||||||
Balance as of March 31, 2022 | 7,225,012 | $ | 72 | $ | 68,771 | $ | (49,783 | ) | $ | 19,060 | ||||||||||
Stock-based compensation | - | - | 341 | - | 341 | |||||||||||||||
Stock-based compensation issued to vendors | 22,943 | - | 65 | - | 65 | |||||||||||||||
Warrant amendment | - | - | 5,709 | - | 5,709 | |||||||||||||||
Net income | - | - | - | 1,262 | 1,262 | |||||||||||||||
Balance as of June 30, 2022 | 7,247,955 | $ | 72 | $ | 74,886 | $ | (48,521 | ) | $ | 26,437 |
Additional | ||||||||||||||||||||
Common Stock | paid in | Accumulated | ||||||||||||||||||
Shares | Amount | capital | (Deficit) | Total | ||||||||||||||||
Six Months Ended June 30, 2022 | ||||||||||||||||||||
Balance as of December 31, 2021 | 4,002,843 | $ | 40 | $ | 60,943 | $ | (52,254 | ) | $ | 8,729 | ||||||||||
Stock-based compensation | - | - | 892 | - | 892 | |||||||||||||||
Shares issued to vendors as compensation | 22,943 | - | 65 | - | 65 | |||||||||||||||
Shares issued and warrants exercised in private investment in public entity ("PIPE") | 2,388,835 | 24 | 2,254 | - | 2,278 | |||||||||||||||
Shares issued in Reflect Systems, Inc. Merger | 833,334 | 8 | 4,992 | - | 5,000 | |||||||||||||||
Warrant repricing events | - | - | 31 | (31 | ) | - | ||||||||||||||
Warrant amendment | - | - | 5,709 | - | 5,709 | |||||||||||||||
Net income | - | - | - | 3,764 | 3,764 | |||||||||||||||
Balance as of June 30, 2022 | 7,247,955 | $ | 72 | $ | 74,886 | $ | (48,521 | ) | $ | 26,437 |
See accompanying notes to condensed consolidated financial statements.
CREATIVE REALITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(all currency in thousands, except shares and per share amounts)
(unaudited)
NOTE 1: NATURE OF ORGANIZATION AND OPERATIONS
Unless the context otherwise indicates, references in these Notes to the accompanying Condensed Consolidated Financial Statements to “we,“we,” “us,“us,” “our”“our” and “the Company”“the Company” refer to Creative Realities, Inc. and its subsidiaries.
Nature of the Company’sCompany’s Business
Creative Realities, Inc. is a Minnesota corporation that provides innovative digital marketing technology and solutions to retail companies, individual retail brands, enterprises and organizations throughout the United States and in certain international markets. The Company has expertise in a broad range of existing and emerging digital marketing technologies, as well as the related media management and distribution software platforms and networks, device management, product management, customized software service layers, systems, experiences, workflows, and integrated solutions. Our technology and solutions include: digital merchandising systems and omni-channel customer engagement systems, interactive digital shopping assistants, advisors and kiosks, and other interactive marketing technologies such as mobile, social media, point-of-sale transactions, beaconing and web-based media that enable our customers to transform how they engage with consumers. We have expertise in a broad range of existing and emerging digital marketing technologies, as well as the following related aspects of our business: content, network management, and connected device software and firmware platforms; customized software service layers; hardware platforms; digital media workflows; and proprietary processes and automation tools.
Our main operations are conducted directly through Creative Realities, Inc., and under our wholly owned subsidiaries Allure Global Solutions, Inc. ("Allure), a Georgia corporation, Creative Realities Canada, Inc., a Canadian corporation, and Reflect Systems, Inc. ("Reflect"), a Delaware corporation.
Acquisition of ReflectReverse stock split
On November 12, 2021, March 23, 2023, the Company and Reflect Systems, Inc., or “Reflect,” entered into an Agreement and Planfiled Articles of Merger (as amended on February 8, 2022,Amendment with the “Merger Agreement”) pursuant to which a direct, wholly owned subsidiarySecretary of Creative Realities, CRI Acquisition Corporation, or “Merger Sub,” would merge with and into Reflect, with Reflect surviving the merger and becoming our wholly owned subsidiary, which transaction is referred to herein as the “Merger.” On February 17, 2022, the parties consummated the Merger.
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 conditionsState of the Merger Agreement, upon the closingState of the Merger, Reflect stockholders as of theMinnesota to effectuate, effective time of the Merger collectively received from the Company, in the aggregate, the following Merger consideration: (i) $16,166 in cash, (ii) 2,333,334 shares of commonMarch 27, 2023, a 1-for-3 reverse stock of Creative Realities (valued based on an issuance price of $2 per share) (the “CREX Shares”), (iii) the Secured Promissory Note (as described below), and (iv) supplemental cash payments (the “Guaranteed Consideration”), if any, payable on or after February 17, 2025 (subject to the Extension Option described below, the “Guarantee Date”), in an amount by which the value of the CREX Shares on such anniversary is less than $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 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, 2022. The “Extension Threshold Price” means the average closing price per share of Creative Realities common stock as reported on the Nasdaq Capital Market (or NYSE) in the fifteen (15) consecutive trading day period ending February 2, 2025. If the Extension Threshold Price is less than 80% of the Guaranteed Price, then the Guaranteed Price will be increased by $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 and financings are described below.
Retention Bonus Plan
On February 17, 2022, in connection with the closing of the Merger (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% will be paid on February 17, 2023 (the one-year anniversary of Closing) and 25% will be paid on February 17, 2024 (the two-year anniversary of the Closing). The future cash payments due on the one-year and two-year anniversaries of the Closing have been 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 will be 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 $2.00 per share, and the shares to be issued after the Closing will be determined based on dividing the value of shares issuable on such date divided by the trailing 10-day volume weighted average price (VWAP)split of the shares as of such date as reported on the Nasdaq Capital Market.
Upon the resignation of a participant’s employment for “good reason,” or termination of the employment of a participant without “cause,” each as defined in the Retention Bonus Plan, the participant will be fully vested and will receive all cash and shares allocated to such participant under the Retention Bonus Plan. Any amounts unpaid by reason of a lapse in continuous employment or otherwise will be reallocated among the remaining Retention Bonus Plan participants.
Equity Financing
On February 3, 2022, the Company entered into a securities purchase agreement (the “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) 1,315,000 shares (the “Shares”) of the Company’sCompany's common stock, par value $0.01 per share. All share (the “Common Stock”) and accompanying warrantsper share information (including share and per share information related to purchase an aggregateshare-based compensation) has been retroactively adjusted to reflect the reverse stock split within this Quarterly Report on Form 10-Q.
As a result of 1,315,000the reverse stock split, effective 12:01 am on March 27, 2023, every three shares of Common Stock,common stock then-issued and (ii) pre-funded warrants to purchaseoutstanding 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 an aggregatethe nearest whole share of 5,851,505common stock. In connection with the reverse stock split, the total number of shares of Common Stock (the “Pre-Funded Warrants”) and accompanying warrantscommon stock authorized for issuance was reduced from 200,000,000 shares to purchase an aggregate66,666,666 shares in proportion to the reverse stock split.
Effective as of 5,851,505the same time as the reverse stock split, the number of shares of Common Stock (collectively,common stock available for issuance under the “Private Placement”). 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 StockCompany's equity compensation plans were sold together at a combined price of $1.535, and each Pre-Funded Warrant and accompanying warrants to purchase Common Stock were sold together at a combined price of $1.5349, for gross proceeds of approximately $11,000 before deducting placement agent fees and offering expenses payable by the Company. Net proceedsreduced in proportion to the Company were $10,160.reverse stock split. The remainingreverse 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 foror share-based performance criteria, if any, applicable to such awards. Similarly, the Pre-Funded Warrant was $0.0001. Collectively, we refernumber of shares of common stock issuable upon exercise of outstanding warrants were reduced in proportion to this transaction throughout this filingthe reverse stock split, and the exercise prices of outstanding warrants were proportionately increased.
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 “Equity Financing”. The net proceeds from the Private Placement were used to fund, in part, payment of the closing cash considerationCompany has evaluated whether there are certain conditions and events, considered in the Merger.aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the Condensed Consolidated Financial Statements are issued.
Effective At June 30, 2022, 2023, the Company amendedhas an accumulated deficit of $52,834, negative working capital of $6,071, including current debt obligations of $4,197, and cash of $3,264. For the terms of Common Stock Warrants to remove the holder’s option to exercise such warrants on a cashless basis utilizing the VWAP of the Company’s common stock on the trading day immediately preceding the date of a notice of cashless exercise in certain circumstances, and removes the condition to exercising such warrants that the Company’s shareholders approve the exercise thereof (which has already been obtained). The amendments to the Common Stock Warrants also extend the term of such warrants for an additional one year, The foregoing amendments to the warrants caused such warrants to be accounted for as equity instruments on the Company’s financial statements.
Debt Financing
On February 17, 2022, six months ended June 30, 2023, the Company incurred an operating loss of $790 and its subsidiaries (collectively, the “Borrowers”) refinanced their current debt facilities with Slipstream Communications, LLC (“Slipstream”),generated positive net cash flows from operations of $6,344. In addition, pursuant to athe Second Amended and Restated Credit and Security Agreement (the “Credit Agreement”"Credit Agreement"), made between the Company and raised $10,000 in gross proceeds with a maturity dateSlipstream Communications ("Slipstream") the Company is required to make monthly repayments of February 1, 2025. The Credit Agreement also provides thatprincipal on the Company’s outstanding loans from Slipstream, consisting of its pre-existing $4,767 senior secured term loan and $2,418 secured convertible loan, with an aggregate of $7,185 in outstanding principal and accrued and unpaid interest under such loans, were consolidated into a Consolidation Term Loan with a maturity date of Februarybeginning on September 1, 2025. Collectively, we refer to this transaction throughout this filing as the “Debt Financing”. The net proceeds from the Debt Financing were used to fund, in part, payment of the closing cash consideration in the Merger, 2023 and the cash payable under the terms of the Retention Bonus Plan at the Closing.
On February 17, 2022, in connection with the Closing of the Merger, the Company issued to the representative of Reflect stockholders, RSI Exit Corporation (“Stockholders’ Representative”), a $2,500 Note and Security Agreement (the “Secured Promissory Note”). The Secured Promissory Note accrues interest at 0.59% (the applicable federal rate on the date of issuance of the Secured Promissory Note) and requires the Company and Reflect to collectively pay equal monthly principal installments of $104 on the fifteenth (15th)first day of each month commencingthereafter until the Maturity Date on March 15, 2022. Any remaining or unpaid principal is due and payable on February 17, 2023. 2025. The Secured Promissory Note represents consideration inmonthly principal payment beginning on September 1, 2023 is approximately $399, or total principal repayments for the Merger and is included as part of the purchase price.
See Note 9 Loans Payable twelve months subsequent to the reporting date of these Condensed Consolidated Financial Statements for an additional discussion of the Company’s debt obligations and further discussion of the Company’s refinancing activities subsequent to December 31, 2021.
Liquidity and Financial Condition
The accompanying Condensed Consolidated Financial Statements have been prepared on the basis of the realization of assets and the satisfaction of liabilities and commitments in the normal course of business and do not include any adjustments to the recoverability and classifications of recorded assets and liabilities as$4,389. As a result of uncertainties.
For the three months ended September 30, 2022 and 2021, we incurred net lossesprincipal debt service payments required to be paid on account of $(554) and $(343), respectively. For the nine months ended September 30, 2022 and 2021, we recognized net income of $3,210 and $1,954, respectively. As of September 30, 2022, we had cash and cash equivalents of $819 and a working capital deficit of $487.
Management believes that, based on (i) securing incremental debt of $2,000 on October 31, 2022 (see Note 9 Loans Payable,Consolidation Term Loan, (2022)the Company does not currently have cash on hand or committed available liquidity to repay all of its outstanding debt due within one year after the Condensed Consolidated Financial Statements for a description of such transaction),date that these financial statements are issued. These conditions and (ii) our operational forecast through 2023, that we canevents raise substantial doubt about the Company's ability to continue as a going concern through at least November 14, 2023.under the technical framework within ASU 205-40.
In response to these conditions, management plans to either refinance or recapitalize the debt. However, given our history of net lossesthese plans have not been finalized and cash used in operating activities, we obtainedare not completely within the Company's control, and therefore cannot be deemed probable under ASU 205-40. We have been unable to obtain a continuedcontinuing support letter from Slipstream through November 14, 2023.beyond the period ending May 31, 2024. Obtaining a continuing support letter from Slipstream beyond one year of the date our financial statements were issued was a factor that previously alleviated the substantial doubt about our ability to continue as a going concern. As a result, the Company has concluded that management's plans do not alleviate substantial doubt about the Company's ability to continue as a going concern.
The Condensed Consolidated Financial Statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of the accompanying Condensed Consolidated Financial Statements follows:
1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the applicable instructions to Form 10-Q10-Q and Article 10 of Regulation S-XS-X and include all of the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”) for interim financial reporting. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes for the year ended December 31, 2021,2022, included in the Company’s Annual Report on Form 10-K10-K filed with the Securities and Exchange Commission on March 22, 2022.30, 2023.
The results of operations for the interim periods are not necessarily indicative of results of operations for a full year. Management believes the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, including normal recurring items, considered necessary for a fair statement of results for the interim periods presented.
2. Recently Issued and Adopted Accounting Pronouncements
Credit Losses. In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No.2016-13,Financial Instruments—Credit Losses, which requires entities to estimate expected lifetime credit losses on financial assets and provide expanded disclosures. The ASU replaced the incurred loss methodology with one that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We adopted ASU No.2016-13 on January 1, 2023. The adoption of this guidance did not have a material impact on the Company's Condensed Consolidated Financial Statements, as the Company's primary financial assets are its trade accounts receivable, which are short-term financings under industry standard credit and trade terms.
Debt. In August 2020, the FASB issued Accounting Standards Update No.2020-06,Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity(ASU 2020-06), which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. This guidance will be effective for us in the first quarter of 2024 on a full or modified retrospective basis, with early adoption permitted. We do not intend to early adopt this standard, nor do we expect the adoption of this guidance to have a material impact on our Consolidated Financial Statements.
2.
3. Revenue Recognition
We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) ASC 606, Revenue from Contracts with Customers, applying the five-stepfive-step model.
If an arrangement involves multiple performance obligations, the items are analyzed to determine the separate units of accounting, whether the items have value on a standalone basis and whether there is objective and reliable evidence of their standalone selling price. The total contract transaction price is allocated to the identified performance obligations based upon the relative standalone selling prices of the performance obligations. The standalone selling price is based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost plus margin approach. See Note 4 Revenue Recognition for additional detail and discussion of the Company’s performance obligations.
The Company estimates the amount of total contract consideration it expects to receive for variable arrangements by determining the most likely amount it expects to earn from the arrangement based on the expected quantities of services it expects to provide and the contractual pricing based on those quantities. The Company only includes some or a portion of variable consideration in the transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company considers the sensitivity of the estimate, its relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to the overall arrangement. The Company receives variable consideration in very few instances.
Revenue is recognized when a customer obtains control of promised goods or services under the terms of a contract and is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. The Company does not have any material extended payment terms as payment is due at or shortly after the time of the sale, ranging between thirty and ninety days. Observable prices are used to determine the standalone selling price of separate performance obligations or a cost plus margin approach when one is not available. Sales, value-added and other taxes collected concurrently with revenue producing activities are excluded from revenue.
The Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced to the clients. A contract liability is recognized as deferred revenue when the Company invoices clients in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the related performance obligation.
The Company uses the practical expedient for recording an immediate expense for incremental costs of obtaining contracts, including certain design/engineering services, commissions, incentives and payroll taxes, as these incremental and recoverable costs have terms that do not exceed one year.
4. Allowance for Credit Losses
The allowance for credit losses is the Company's best estimate of the amount of expected lifetime credit losses in the Company's accounts receivable. The Company regularly reviews the adequacy of its allowance for credit losses. The Company estimates losses over the contractual life using assumptions to capture the risk of loss, even if remote, based principally on how long a receivable has been outstanding. Account balances are charged off against the allowance for credit losses after all reasonable means of collection have been exhausted and the potential for recovery is considered remote. Other factors considered include historical write-off experience, current economic conditions, customer credit, and past transaction history with the customer. The allowance for credit losses is included in accounts receivable, net in the accompanying Condensed Consolidated Balance Sheets.
The Company had the following activity for its allowance for credit losses from December 31, 2022 to June 30, 2023:
Balance as of December 31, 2022 | $ | 984 | ||
Amounts accrued | 309 | |||
Write-offs charged against the allowance | (179 | ) | ||
Balance as of June 30, 2023 | $ | 1,114 |
3.
5. Inventories
Inventories are stated at the lower of cost or net realizable value, determined by the first-in, first-outfirst-in, first-out (FIFO) method, and consist of the following:
September 30, | December 31, | June 30, | December 31, | |||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Raw materials, including those on consignment, net of reserve of $883 and $502, respectively | $ | 2,757 | $ | 1,583 | ||||||||||||
Raw materials, net of reserve | $ | 551 | $ | 1,671 | ||||||||||||
Work-in-process | 351 | 297 | 597 | 596 | ||||||||||||
Total inventories | $ | 3,108 | $ | 1,880 | $ | 1,148 | $ | 2,267 |
The reserve for obsolete inventory at June 30, 2023 and December 31, 2022 was $1,895 and $1,777, respectively, of which $1,707 related to Safe Space Solutions. The Company is no longer actively promoting the sale of our Safe Space Solutions or purchasing inventory to support such solutions.
4.
6. Impairment of Long-Lived Assets
We review the carrying value of all long-lived assets, including property and equipment, for impairment annually as of September 30 in accordance with ASC 360, Accounting for the Impairment or Disposal of Long-Lived Assets. Under ASC 360, impairment losses are recorded whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We evaluated whether there was any impairment of long-lived assets as of September 30, 2022 and concluded there was none.
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.
5.
7. Basic and Diluted Income/(Loss)/Earnings per Common Share
Basic and diluted income/(loss)/earnings per common share for all periods presented is computed using the weighted average number of common shares outstanding. Basic weighted average shares outstanding includes only outstanding common shares. Diluted weighted average shares outstanding includes outstanding common shares and potential dilutive common shares outstanding in accordance with the treasury stock method.
Shares reserved for outstanding stock options, including stock options with performance restricted vesting, and warrants totaling approximately 22,276,8077,391,651 and 7,490,962 at SeptemberJune 30, 2023 and 2022, respectively, were excluded from the computation of income(loss)/earnings per share as the strike price on the options and warrants were higher than the Company’sCompany's market price and therefore anti-dilutive.
Shares reserved for outstanding stock options, including stock options with performance restricted vesting, and warrants totaling approximately 6,776,771 at September 30, 2021 were excluded from the computation of income/(loss) per share as the strike price on the options and warrants were higher than the Company’s market price and therefore anti-dilutive. Diluted weighted average shares outstanding for the three and nine-months ended September 30, 2021 included 8,333 options which were both exercisable and in-the-money as of September 30, 2021. Those options were included in the calculation of diluted earnings per share as of the beginning of the calculation period.
6.
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 SeptemberJune 30, 20222023 and December 31, 2021.2022.
7.
9. Goodwill and Intangible Assets
We follow the provisions of ASC 350,Goodwill and Other Intangible Assets.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 any indefinite-lived intangible assets, or as indicators of impairment are identified (see Note 8 Intangible Assets and Goodwill).identified.
Definite-lived intangible assets are amortized straight-line in accordance with their identified useful lives.
8.
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: warrant liability valuation, contingent purchase consideration valuation, the allowance for doubtful accounts,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.
9. Leases
We account for leases in accordance with Accountings Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), as amended.
We determine if an arrangement is a lease at inception. Right of use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, we consider only payments that are fixed and determinable at the time of commencement. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our incremental borrowing rate is a hypothetical rate based on our understanding of what our credit rating would be and corresponding market rates at the time of lease inception. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.
Operating leases are included in operating lease right-of-use assets, current maturities of operating leases, and long-term obligations under operating leases on our condensed consolidated balance sheets.
10.11. Business Combinations
Accounting for acquisitions requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. Refer to Note 5, Business Combination for a discussion of the accounting for the Merger.
11.12. Contingent Consideration
The Company has contingent consideration arrangements related to certain acquisitions to potentially pay additional cash amounts in future periods based on the lack of achievement of certain share price performance goals of our common stock. Such contingent consideration arrangements are recorded at fair value and are classified as liabilities on the acquisition date and are remeasured at each reporting period in accordance with ASC 805-30-35-1805-30-35-1 using a Monte Carlo simulation model.
NOTE 3: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS FAIR VALUE MEASUREMENT
Recently adoptedWe 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:
On January Level 1 2022, we adopted early Accounting Standards Update (“ASU”) No. 2021-08, Business Combinations (Topic 805): Accounting — Valuations based on unadjusted quoted prices in active markets for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08), which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606). The adoption of this new standard did not have a material impact on our condensed consolidated financial statements.identical assets.
Not yet adoptedLevel 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.
In August 2020,Level 3 — Valuations based on inputs that are unobservable and involve management judgment and the FASB issued Accounting Standards Update No. 2020-06, Debt—Debt with Conversionreporting entity’s own assumptions about market participants 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 usepricing.
The calculation of the if-converted method. This guidance will be effective for us infair value of the first quarter of 2024contingent 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 full or modified retrospective basis, with early adoption permitted. We do not intend to early adopt this standard, nor do we expectdiscounted cash flow model which utilizes inputs including the adoptioncalculation of this guidance to have a material impact on our consolidatedthe weighted average cost of capital and management’s forecast of future financial statements.performance which are unobservable and involve management judgment and are considered Level 3 estimates.
In June 2016,The calculation of the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses. The main objective is to provideweighted average cost of capital and management’s forecast of future financial statement users with more decision-useful information aboutperformance utilized within our discounted cash flow model for the expected credit losses on financial instrumentsimpairment of goodwill contains inputs which are unobservable and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this update replace the incurred loss methodology with a methodology that reflects expected credit lossesinvolve management judgment and requires consideration of a broader range of reasonable and supportable information to calculate credit lossare considered Level 3 estimates. For trade receivables and loans, entities will be required to estimate lifetime expected credit losses. The amendments are effective for public business entities that qualify as smaller reporting companies for fiscal years and interim periods beginning after December 15, 2022. We are currently evaluating the disclosure requirements related to adopting this guidance.
The calculation of the fair value of the warrant liability contains valuation inputs which are based on observable inputs (other than Level 1 prices) and are considered Level 2 estimates. The liability warrants were converted to equity warrants effective June 30, 2022.
NOTE 4: REVENUE RECOGNITION
The Company applies ASC 606 for revenue recognition. The following table disaggregates the Company’s revenue by major source for the three and ninesix months ended SeptemberJune 30, 2022 2023 and 2021:2022:
Three Months | Three Months | Six Months | Six Months | |||||||||||||||||||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
(in thousands) | Three Months Ended September 30, 2022 | Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||
Hardware | $ | 5,015 | $ | 2,215 | $ | 17,141 | $ | 6,327 | $ | 3,437 | $ | 5,667 | $ | 7,759 | $ | 12,126 | ||||||||||||||||
Services: | ||||||||||||||||||||||||||||||||
Installation Services | 1,472 | 985 | 3,714 | 2,057 | 1,168 | 903 | 2,115 | 2,242 | ||||||||||||||||||||||||
Software Development Services | 105 | 109 | 405 | 476 | 289 | 109 | 820 | 300 | ||||||||||||||||||||||||
Media | 688 | - | 1,165 | - | ||||||||||||||||||||||||||||
Managed Services | 3,900 | 1,444 | 10,435 | 4,174 | 3,835 | 3,832 | 7,907 | 6,535 | ||||||||||||||||||||||||
Media Sales | 467 | 412 | 539 | 477 | ||||||||||||||||||||||||||||
Total Services | 6,165 | 2,538 | 15,719 | 6,707 | 5,759 | 5,256 | 11,381 | 9,554 | ||||||||||||||||||||||||
Total Hardware and Services | $ | 11,180 | $ | 4,753 | $ | 32,860 | $ | 13,034 | $ | 9,196 | $ | 10,923 | $ | 19,140 | $ | 21,680 |
System hardware sales
System hardware revenue is recognized generally upon shipment of the product or customer acceptance depending upon contractual arrangements with the customer in instances in which the sale of hardware is the sole performance obligation. Shipping charges billed to customers are included in hardware sales and the related shipping costs are included in hardware cost of sales. The cost of freight and shipping to the customer is recognized in cost of sales at the time of transfer of control to the customer. System hardware revenues are classified as “Hardware” within our disaggregated revenue.
Installation services
The Company performs outsourced installation services for customers and recognizes revenue upon completion of the installations. Installation services also includes engineering services performed as part of an installation project.
When system hardware sales include installation services to be performed by the Company, the goods and services in the contract are not distinct, so the arrangement is accounted for as a single performance obligation. Our customers control the work-in-process and can make changes to the design specifications over the contract term. Revenues are recognized over time as the installation services are completed based on the relative portion of labor hours completed as a percentage of the budgeted hours for the installation. Installation services revenues are classified as “Installation Services” within our disaggregated revenue.
The aggregate amount of the transaction price allocated to installation service performance obligations that are partially unsatisfied as of September 30, 2022 and 2021 were $0 and $35.
Software design and development services
Software and software license sales are recognized as revenue when a fixed fee order has been received and delivery has occurred to the customer. Revenue is recognized generally upon customer acceptance (point-in-time) of the software product and verification that it meets the required specifications. Software is delivered to customers electronically. Software design and development revenues are classified as “Software Development Services” within our disaggregated revenue.
Software as a service
Software as a service includes revenue from software licensing and delivery in which software is licensed on a subscription basis and is centrally hosted.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 985-20-15-5985-20-15-5 and recognize revenue ratably over the performance period. Software as a service revenuesrevenue are classified as “Managed Services” within our disaggregated revenue.
Maintenance and support services
The Company sells maintenance and support services which include access to technical support personnel for software and hardware troubleshooting and monitoring of the health oftroubleshooting. The Company offers a customer’s network, access to a sophisticated web-portal for managing the end-to-end hardware and software digital ecosystem, and hosting support servicesservice through our network operations center, or NOC. These services provide either physical or automated remote monitoring whichNOC, allowing the ability to monitor and support customerits customers’ networks 7 days a week, 24 hours a day.
These contracts are generally 12-36 months in length and generally automatically renew for additional 12-month periods unless cancelled by the customer. Rates for maintenance and support contracts are typically established based upon a fee per location or fee per device structure, with total fees subject to the number of services selected.length. Revenue is recognized ratably and evenly over the term of the agreement.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.
Media sales
Media revenues are derived from selling (i) sponsorship packages, including mobile takeover or physical presence, or (ii) advertising space to customers on digital displays or other outdoor structures, each within physical venues. We generally do not own the physical structures on which we display advertising for our customers but instead sell advertising or sponsorship opportunities on behalf of our media network owners to our brand customers. Media revenue services are recognized either on a straight-line basis over the available hours of advertising during the contracted period, or at the time of an event in the case of sponsorships.
Our media revenue contracts with customers range from four weeks to three years and billing commences at the beginning of the contract term, with payment generally due within ninety (90) days of billing. For the majority of our contracts, transaction prices are explicitly stated. Any contracts with transaction prices that contain multiple performance obligations are allocated primarily based on a relative standalone selling price basis. Any deferred revenues primarily consist of revenues paid in advance of being earned.
On a contract-by-contract basis, we evaluate whether we should be considered the principal (i.e., report revenues on a gross basis) or an agent (i.e., report revenues on a net basis). We are considered the principal in our arrangements and report revenues on a gross basis, wherein the amounts billed to customers are recorded as revenues and amounts paid to network owners are recorded as expenses. We are considered the principal because we control the advertising space before and after the contract term, are primarily responsible to our customers, and have discretion in pricing. For revenues generated through the use of a subcontracted advertising agency, commissions are calculated based on a stated percentage of gross advertising revenue and reported in the Consolidated Statement of Operations within Sales and Marketing expenses.
NOTE 5: BUSINESS COMBINATION
On November 12, 2021, the Company and Reflect, entered into an Agreement and Plan of Merger (as amended on as amended on February 8, 2022 and February 11, 2023, the “Merger Agreement”Agreement") pursuant to which a direct, wholly owned subsidiary of the Company,Creative Realities, CRI Acquisition Corporation, or “Merger Sub,” would merge with and into Reflect, with Reflect surviving the merger and becoming our wholly owned subsidiary, which transaction is referred to herein as the “Merger.” On February 17, 2022, the parties consummated the Merger.Merger (the "Closing").
Reflect provides digital signage solutions, including software, strategic and media services to a wide range of companies across the retail, financial, hospitality and entertainment, healthcare, and employee communications industries in North America. Reflect offers digital signage platforms, including ReflectView, a platform used by companies to power hundreds of thousands of active digital displays. Through its strategic services, Reflect assists its customers with designing, deploying and optimizing their digital signage networks, and through its media services, Reflect assists customers with monetizing their digital advertising networks.
Subject to the terms and conditions of the Merger Agreement, uponat the closing of the Merger,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 payable in cash, (ii) 2,333,334777,778 shares of common stock of Creative Realities (valued based on an issuance price of $2$6 per share) (the “CREX Shares”), (iii) the Secured Promissory Note (as described below), and (iv) supplemental cash payments (the “Guaranteed Consideration”), if any, payable on or after February 17, 2025 (subject(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$19.20 per share, or if certain customers of Reflect collectively achieve over 85,000 billable devices online at any time on or before December 31, 2022, is less than $7.20$21.60 per share (such applicable amount, the “Guaranteed Price”), multiplied by the amount of CREX Shares held by the Reflect stockholders on the Guarantee Date (subject to the Extension Option described below). At or before December 31, 2022, the condition of certain customers of Reflect collectively to achieve over 85,000 billable devices online was not met. Accordingly, the contingent cash payment amount was reduced at December 31, 2022 from $21.60 per share to $19.20 per share, a reduction of $2.40 per share.
The Company may exercise an extension option (the “Extension Option”) to extend the Guarantee Date by six (6) (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 Sharescommon stock as reported on the Nasdaq Capital Market (or NYSE) in the fifteen (15) (15) consecutive trading day period ending February 2, 2025. If the Extension Threshold Price is less than 80% of the Guaranteed Price, then the Guaranteed Price will be increased by $1.00$3.00 per share.
In connection with the Merger, the Company adopted a Retention Bonus Plan and raised capital to, among other things, pay the cash portion of the Merger consideration. The Retention Bonus Plan is described below.
Retention Bonus Plan
On February 17,2022, in connection with the closing of the Merger (the “Closing”),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 $1,333$1,334 in cash, which was paid 50% at the Closing, and subject to continuous employment with Reflect or Creative Realities, will be25% was paid 25% on February 17, 2023 (the one-year(the one-year anniversary of Closing) and 25% will be paid on February 17, 2024 (the two-year(the two-year anniversary of the Closing). TheIn connection with the closing of the Merger, the future cash payments due on the one-yearone-year and two-yeartwo-year anniversaries of the Closing have beenwere 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 will bewas issued on February 17, 2023 (the one-year(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(the two-year anniversary of the Closing). The shares issued on the Closing were valued at $2.00$6.00 per share,share. The shares issued on the one-year anniversary were valued at $2.22 based on the value of shares issuable divided by the trailing 10-day volume weighted average price ("VWAP") of the shares as of February 17, 2023 as reported on the Nasdaq Capital Market. The Company issued 62,475 shares to key members of Reflect's management team pursuant to the Retention Bonus Plan. Certain participants made an election to have stock withheld to cover applicable withholding taxes. In such cases, the Company reduced the stock award issued to the employee and settled the employees tax liability by remitting cash to the applicable taxing authorities. The shares to be issued afteron the Closingtwo-year anniversary will be determined based on dividing the value of shares issuable on such date divided by the trailing 10-day volume weighted average price (VWAP)10-day VWAP of the shares as of such date February 17, 2024 as reported on the Nasdaq Capital Market.
Upon the resignation of a participant’s employment for “good reason,” or termination of the employment of a participant without “cause,” each as defined in the Retention Bonus Plan, the participant will be fully vested and will receive all cash and shares allocated to such participant under the Retention Bonus Plan. Any amounts unpaid by reason of a lapse in continuous employment or otherwise will be reallocated among the remaining Retention Bonus Plan participants.
Secured Promissory NotePurchase price
On February 17, 2022, pursuant to the terms of the Merger, the Company issued to Stockholders’ Representative a $2,500 Note and Security Agreement (the “Secured Promissory Note”).
The Secured Promissory Note accrues interest at 0.59% (the applicable federal rate at the time of issuance of the Secured Promissory Note) and requires the Company and Reflect to collectively pay equal monthly principal installments of $104 on the fifteenth (15th) day of each month, commencing on March 15, 2022. Any remaining or unpaid principal shall be due and payable on February 17, 2023. All payments under the Secured Promissory Note will be paid to the escrow agent in the Merger Agreement to be placed into the escrow account to secure the former Reflect stockholders’ indemnification obligations until released on February 17, 2023 (the one-year anniversary of the closing of the Merger), at which time any remaining proceeds not subject to a pending indemnification claim will be paid to the exchange agent for payment to the former Reflect stockholders. The obligations of the Company and Reflect set forth in the Secured Promissory Note are secured by a first-lien security interest in various contracts of Reflect, together with all accounts arising under such contracts, supporting obligations related to the accounts arising under such contracts, all related books and records, and products and proceeds of the foregoing. Slipstream subordinated its security interest in such collateral, and the recourse for any breach of the Secured Promissory Note by the Company or Reflect will be against such collateral.
The preliminary purchase price of Reflect consisted of the following items:
(in thousands) | Consideration | Consideration | |||||
Cash consideration for Reflect stock | $ | 16,664 | (1) | $ | 16,664 | (1) | |
Cash consideration for Retention Bonus Plan | 1,334 | (2) | 1,334 | (2) | |||
Common stock issued to Reflect stockholders | 4,667 | (3) | 4,667 | (3) | |||
Common stock issued to Retention Bonus Plan | 333 | (4) | 333 | (4) | |||
Secured Promissory Note | 2,500 | (5) | 2,500 | (5) | |||
Earnout liability | 10,862 | (6) | 10,862 | (6) | |||
Total consideration | 36,360 | 36,360 | |||||
Vendor deposit with the Company | (818 | )(7) | (818) | (7) | |||
Cash acquired | (812 | )(8) | (812) | (8) | |||
Net consideration transferred | $ | 34,730 | $ | 34,730 |
(1) | Cash consideration for outstanding shares of Reflect capital stock per Merger Agreement. |
(2) | Cash consideration utilized to fund the Retention Bonus Plan per Merger Agreement. |
(3) | Company common stock issued in exchange for outstanding shares of Reflect capital stock per Merger Agreement. |
(4) | Company common stock issued to fund initial issuances under the Retention Bonus Plan per Merger Agreement. |
(5) | The Secured Promissory Note |
(6) | Represents an estimate of the fair value of the Guaranteed Consideration as of the Merger, which, if any, is payable on or after February 17, 2025 |
(7) | Prior to the Merger, Reflect had engaged the Company on a project and paid the Company a deposit of $818. These amounts reduced consideration paid by the Company in accordance with ASC 805. |
(8) | Represents the Reflect cash balance acquired at Closing. |
The Company incurred $16$37 and $444$428 of direct transaction costs related to the Reflect Merger for the three and ninesix months ended SeptemberJune 30, 2022, respectively. These costs are included in deal and transaction expense in the accompanying Condensed Consolidated Statement of Operations.
The Company accounted for the Merger using the acquisition method of accounting. The preliminaryfinal allocation of the purchase price is based on estimates of the fair value of assets acquired and liabilities assumed as of February 17, 2022. The Company is continuing to obtain information to determine2022, which included the acquired assets and liabilities, including tax assets, liabilities and other attributes. The components of the preliminary purchase price allocation, inclusive of measurement period adjustments recorded by the Company during the nine months ended September 30, 2022, are as follows:following:
(in thousands) | Total | Total | ||||||
Accounts receivable | $ | 1,300 | $ | 1,359 | ||||
Inventory | 196 | 190 | ||||||
Prepaid expenses & other current assets | 666 | 666 | ||||||
Property and equipment | 96 | 96 | ||||||
Operating right of use assets | 493 | 555 | ||||||
Other assets | 36 | 36 | ||||||
Identified intangible assets: | ||||||||
Definite-lived trade names | 960 | 960 | ||||||
Definite-lived Developed technology | 5,130 | 5,130 | ||||||
Definite-lived Customer relationships | 11,040 | 11,040 | ||||||
Definite-lived Noncompete agreements | 30 | 30 | ||||||
Goodwill | 18,569 | 18,935 | ||||||
Accounts payable | (96 | ) | (104 | ) | ||||
Accrued expenses | (277 | ) | (483 | ) | ||||
Customer deposits | (1,661 | ) | (1,661 | ) | ||||
Deferred revenues | (1,259 | ) | (1,259 | ) | ||||
Current maturities of operating leases | (277 | ) | (277 | ) | ||||
Long-term obligations under operating leases | (216 | ) | (278 | ) | ||||
Other liabilities | (205 | ) | ||||||
Net consideration transferred | $ | 34,730 | $ | 34,730 |
The Company engaged a third party-party valuation specialist to assist in the identification and calculation of the fair value of those separately identifiable intangible assets and recorded those assets based on an initial draft valuation report. The Company remains in process of reviewing the valuation report and finalizing its opening balance sheet accounting.assets.
The Company completed its valuation procedures by asset utilizing the following approaches:
● | Customer relationship asset was estimated using the income approach through a discounted cash flow analysis wherein the cash flows will be based on estimates used to price the Merger. Discount rates were benchmarked with reference to the implied rate of return from the Company’s pricing model and the weighted average cost of capital. |
● | Trade name asset represents the |
● | 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 preliminary valuation and amortization period of identifiable intangible assets:
(in thousands) | Preliminary Valuation | Amortization Period | Valuation | Amortization Period (in years) | |||||||||||
Identifiable definite-lived intangible assets: | |||||||||||||||
Trade names | $ | 960 | 5 years | $ | 960 | 5 | |||||||||
Developed technology | 5,130 | 10 years | 5,130 | 10 | |||||||||||
Noncompete | 30 | 2 years | 30 | 2 | |||||||||||
Customer relationships | 11,040 | 10 years | 11,040 | 10 | |||||||||||
Total | $ | 17,160 | $ | 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 preliminary estimated fair value of the tangible net assets and identifiable intangible assets acquired was recorded as goodwill and is subject to change upon final valuation.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.
The following unaudited pro forma information presents the combined financial results for the Company and Reflect as if the Merger had been completed at the beginning of the Company’s prior year, January 1, 2021.
(in thousands, except earnings per common share) | 2021 | |||
Net sales | $ | 30,680 | ||
Net income | $ | 799 | ||
Earnings per common share | $ | 0.06 |
The information above does not include the pro forma adjustments that would be required under Regulation S-X for pro forma financial information and does not reflect future events that may occur after December 31, 2021 or any operating efficiencies or inefficiencies that may result from the Merger and related financings. Therefore, the information is not necessarily indicative of results that would have been achieved had the businesses been combined during the periods presented or the results that the Company will experience going forward. We have not included disaggregated information for Reflect on a standalone basis in the current year for either revenue or net income as the integration activities undertaken by the Company have prevented this information from being useful to financial statement readers.
Reflect Systems, Inc. (in thousands) | Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 | ||||||
Net sales | $ | 2,966 | $ | 8,392 | ||||
Net income/(loss) | $ | 947 | $ | 825 |
NOTE 6: 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.
As discussed in Note 5 Business Combinations, the calculation of the fair value of the Guaranteed 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.
As discussed in Note 8 Intangible Assets, Including Goodwill, 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.
As discussed in Note 9 Loans Payable, the Convertible Loan was reported at fair value. This liability is deemed to be a Level 3 valuation. Certain unobservable inputs into the calculation of the fair value of this liability include an estimate of the fair value of the Company at a future date using a discounted cash flow model, discount rate assumptions, and an estimation of the likelihood of conversion of the Convertible Loan. The Convertible Loan was refinanced into the Consolidation Term Loan in February 2022.
As discussed in Note 12 Warrants, the calculation of the fair value of the warranty liability contains valuation inputs which are based on observable inputs (other than Level 1 prices) and are considered Level 2 estimates. The liability warrants were converted to equity warrants effective June 30, 2022.
NOTE 7: SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
Six Months Ended | ||||||||
June 30, | ||||||||
2023 | 2022 | |||||||
Supplemental non-cash investing activities | ||||||||
Capitalized software in accounts payable | $ | 264 | $ | - | ||||
Property and equipment in accounts payable | $ | 23 | $ | - | ||||
Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 89 | $ | - | ||||
Supplemental non-cash financing activities | ||||||||
Conversion of liability warrant to equity warrants | $ | - | $ | 5,709 | ||||
Supplemental disclosure information for cash flow | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 1,040 | $ | 656 | ||||
Operating leases | $ | 377 | $ | 252 | ||||
Income taxes, net | $ | 44 | $ | 44 |
Nine Months Ended | ||||||||
September 30, | ||||||||
2022 | 2021 | |||||||
Supplemental Cash Flow Information | ||||||||
Investing activities not yet paid in cash: | ||||||||
Capitalized software in accounts payable | $ | 998 | $ | - | ||||
Cash paid during the period for: | ||||||||
Interest | $ | 835 | $ | - | ||||
Income taxes, net | $ | 19 | $ | 23 |
NOTE 8:7: INTANGIBLE ASSETS, INCLUDING GOODWILL
Intangible Assets
Intangible assets consisted of the following at SeptemberJune 30, 20222023 and December 31, 2021: 2022:
June 30, | December 31, | |||||||||||||||||||||||||||||||
September 30, 2022 | December 31, 2021 | 2023 | 2022 | |||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | Carrying | Accumulated | Carrying | Accumulated | |||||||||||||||||||||||||
Amount | Amortization | Amount | Amortization | Amount | Amortization | Amount | Amortization | |||||||||||||||||||||||||
Technology platform | $ | 9,765 | $ | 4,162 | $ | 4,635 | $ | 3,652 | $ | 9,765 | $ | 4,737 | $ | 9,765 | $ | 4,354 | ||||||||||||||||
Purchased and developed software | 4,415 | 3,199 | 3,488 | 2,713 | 5,336 | 3,748 | 4,682 | 3,375 | ||||||||||||||||||||||||
In-Process internally developed software platform | 3,600 | - | 824 | - | 5,112 | - | 4,074 | - | ||||||||||||||||||||||||
Customer relationships | 15,000 | 2,525 | 3,960 | 1,692 | 15,000 | 3,497 | 15,000 | 2,849 | ||||||||||||||||||||||||
Trademarks and trade names | 1,600 | 904 | 1,600 | 808 | ||||||||||||||||||||||||||||
Non-compete | 30 | 10 | - | - | 30 | 21 | 30 | 13 | ||||||||||||||||||||||||
Trademarks and trade names | 1,600 | 760 | 640 | 640 | ||||||||||||||||||||||||||||
34,410 | 10,656 | 13,547 | 8,697 | 36,843 | 12,907 | 35,151 | 11,399 | |||||||||||||||||||||||||
Accumulated amortization | 10,656 | 8,697 | 12,907 | 11,399 | ||||||||||||||||||||||||||||
Net book value of amortizable intangible assets | $ | 23,754 | $ | 4,850 | $ | 23,936 | $ | 23,752 |
On February 17, 2022, the Company added intangible assets as a result of accounting for the Merger in accordance with ASC 805 Business Combinations, as outlined in Note 5 Business Combinations.
For the three months ended SeptemberJune 30, 2022 2023 and 2021,2022, amortization of intangible assets charged to operations was $848$755 and $139,$431, respectively. For the ninesix months ended SeptemberJune 30, 2022 2023 and 20212022 amortization of intangible assets charged to operations was $1,959$1,508 and $418,$1,111, respectively.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is subject to an impairment review at a reporting unit level, on an annual basis as of the end of at September of30th each fiscal year, or when an event occurs, or circumstances change that would indicate potential impairment. Following the Merger, the Company evaluated its reporting units in accordance with ASC 280 Segment Reporting and concluded that theThe Company has only one reporting unit. Therefore,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)(1) a market approach, leveraging recent industry merger and acquisition activity as well as comparable public company information, and (2)(2) a discounted cash flow analyses consisting of various assumptions, including expectations of future cash flows based on projections or forecasts derived from analysis of business prospects and economic or market trends that may occur, specifically, the Company gave significant consideration to actual historic financial results, including revenue growth rates in the current and preceding three years, further informed by known backlog and customer acquisitions. Based on the Company’s assessment, we determined that the fair value of our reporting unit exceeds its carrying value, and accordingly, the goodwill associated with the reporting unit is not considered to be impaired at September 30, 2022.
At December 31, 2022, we concluded the decline in our market value represented an interim indicator of potential impairment. Based on a quantitative assessment of our fair value performed at December 31, 2022, using the same approach as our annual impairment performed at September 30, described above, we concluded that the carrying value of our goodwill did not exceed the reporting unit fair value. No indicators of impairment were identified as of June 30, 2023. The Company recognizes that any differences between our actual and projected future results, or changes in our actual fourth quarter 2022 or projected 2023future results, could potentially have a material impact on our assessment of goodwill impairment. The Company will continue to monitor the actual performance of its operations against expectations and assess further indicators of possible impairment. The valuation of goodwill and intangible assets is subject to a high degree of judgment, uncertainty and complexity. Should any indicators of impairment occur in subsequent periods, the Company will be required to perform an analysis in order to determine whether goodwill is impaired.
While our overall business performance has been consistent with our expectations, both before and after the acquisition of Reflect, we believe a significant portion of the decline in our market price relates primarily to several macroeconomic factors including: (1) market wide recessionary fears, (2) rapid inflation fears, which often have an outsized, direct negative impact on the share price of high-growth companies with limited or negative cash flow from operations, (3) a lack of comprehension by the markets of the recent Merger with Reflect and related financing transaction, and (4) the sale of over 7,000,000 shares of our common stock into the market by a new investor, resulting in significant negative volume and price pressure on the 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, 2022. Should our market price remain at this level for an extended period of time, however there could be potential future impairment.
Based on the relatively recent decline in our share price and market capitalization, along with improving Company fundamentals following our Merger with Reflect and a share price that was substantially higher upon announcing that Merger mere months ago, we believe our implied fair value continues to exceed our total carrying value. There were no other indications of impairment as of September 30, 2022.
NOTE 9:8: LOANS PAYABLE
The outstanding debt with detachable warrants, as applicable, are shown in the table below. Further discussion of the debt follows.
As of September 30, 2022 | ||||||||||||||||||||||||||
As of June 30, 2023 | As of June 30, 2023 | |||||||||||||||||||||||||
Issuance | Maturity | |||||||||||||||||||||||||
Debt Type | Issuance Date | Principal | Maturity Date | Warrants | Interest Rate Information | Date | Principal | Date | Warrants | Interest Rate Information | ||||||||||||||||
A | 2/17/2022 | $ | 10,000 | 2/15/2025 | 2,500,000 | 8.0% interest(1) | 2/17/2022 | $ | 10,000 | 2/15/2025 | 833,334 | 8.0% interest(1) | ||||||||||||||
B | 2/17/2022 | 1,777 | 2/17/2023 | - | 0.59% interest(2) | 2/17/2022 | 833 | 2/17/2024 | - | 4.6% interest(2) | ||||||||||||||||
C | 2/17/2022 | 7,185 | 2/15/2025 | 2,694,495 | 10.0% interest(3) | 2/17/2022 | 7,185 | 2/15/2025 | 898,165 | 10.0% interest(3) | ||||||||||||||||
D | 10/31/2022 | 119 | 9/1/2023 | - | 12.5% interest(4) | |||||||||||||||||||||
Total debt, gross | 18,962 | 5,194,495 | Total debt, gross | 18,137 | 1,731,499 | |||||||||||||||||||||
Debt discount | (3,433 | ) | Debt discount | (2,355 | ) | |||||||||||||||||||||
Total debt, net | $ | 15,529 | Total debt, net | $ | 15,782 | |||||||||||||||||||||
Less current maturities | (2,176 | ) | Less current maturities | (4,197 | ) | |||||||||||||||||||||
Long term debt | $ | 13,353 | Long term debt | $ | 11,585 |
As of December 31, 2021 | ||||||||||||||||||||||||||
As of December 31, 2022 | As of December 31, 2022 | |||||||||||||||||||||||||
Issuance | Maturity | |||||||||||||||||||||||||
Debt Type | Issuance Date | Principal | Maturity Date | Warrants | Interest Rate Information | Date | Principal | Date | Warrants | Interest Rate Information | ||||||||||||||||
A | 2/17/2022 | $ | 10,000 | 2/15/2025 | 833,334 | 8.0% interest(1) | ||||||||||||||||||||
B | 2/17/2022 | 1,456 | 2/17/2024 | - | 0.59% interest(2) | |||||||||||||||||||||
C | 2/17/2022 | 7,185 | 2/15/2025 | 898,165 | 10.0% interest(3) | |||||||||||||||||||||
D | 8/17/2016 | $ | 4,767 | 2/17/2025 | 588,236 | 8.0% interest(4) | 10/31/2022 | 2,000 | 9/1/2023 | - | 12.5% interest(4) | |||||||||||||||
E | 12/30/2019 | 2,418 | 2/17/2025 | - | 10.0% interest(4) | |||||||||||||||||||||
Total debt, gross | 7,185 | 588,236 | Total debt, gross | 20,641 | 1,731,499 | |||||||||||||||||||||
Fair value (B) | (166 | ) | Debt discount | (3,069 | ) | |||||||||||||||||||||
Total debt, gross | $ | 7,019 | Total debt, net | $ | 17,572 | |||||||||||||||||||||
Debt discount | (144 | ) | Less current maturities | (4,499 | ) | |||||||||||||||||||||
Total debt, net | $ | 6,875 | Long term debt | $ | 13,073 | |||||||||||||||||||||
Less current maturities | - | |||||||||||||||||||||||||
Long term debt | $ | 6,875 |
A – Acquisition Term Loan with related party
B – Reflect Seller Secured Promissory Note
C – Consolidation Term Loan with related party
D – Term Loan (2022) with related party
E – Secured Convertible Special Loan Promissory Note, at fair value
(1) | 8.0% cash interest per annum through maturity at February 15, 2025. |
(2) | Annual interest rate on the outstanding principal increased from 0.59% to 4.60% per annum effective February 17, 2023 through maturity at February 17, 2024. Annual interest rate was 0.59% cash interest per annum (the applicable federal rate) through |
(3) | 10.0% cash interest per annum through maturity date at February 15, 2025. |
(4) | 12.5% cash interest per annum through |
SBA Paycheck Protection Program Loan
On April 27, 2020, the Company entered into a Promissory Note with Old National Bank (the “Promissory Note”), which provided for an unsecured loan of $1,552 (the “PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”). The Promissory Note had a term of two years with a 1% per annum interest rate.
On January 11, 2021, the Company received a notice from Old National Bank that the full principal amount of the PPP Loan and the accrued interest have been forgiven, resulting in a gain of $1,552 during the nine months ended September 30, 2021.
Secured Promissory Note
On February 17, 2022, in connection with the closing of the Merger,Closing, the Company issued to RSI Exit Corporation (“Stockholders’ Representative”), the representative of Reflect stockholders, a $2,500 Note and Security Agreement (the “Secured Promissory Note”).
The Secured Promissory Note accruesaccrued interest at 0.59% per annum (the applicable federal rate on the date of issuance of the Secured Promissory Note) and requiresrequired the Company and Reflect to collectively pay equal monthly principal installments of $104 on the fifteenth (15th) (15th) day of each month, commencing on March 15, 2022. Any remaining or unpaid principal shall bewas due and payable on February 17, 2023. All payments under the Secured Promissory Note will beare paid to the escrow agent in the Merger Agreement to be placed into the escrow account to secure the Reflect stockholders’ indemnification obligations until released on February 17, 2023 (the one-year(the one-year anniversary of the closing of the Merger)Closing), at which time any remaining proceeds not subject to a pending indemnification claim willwould be paid to the exchange agent for payment to the Reflect Stockholders.stockholders pursuant to the Merger Agreement. The Secured Promissory Note is secured by a first-lienfirst-lien security interest in certain contracts of Reflect, including obligations arising out of those certain contracts..contracts. The Company has the right to offset amounts payable under the Secured Promissory Note upon a final, non-appealable decision of a court that entitles the Company or its affiliates to any damages for indemnification under the Merger Agreement, or the Stockholders’ Representative’s agreement in writing to such damages.
On February 11, 2023, the Company and the Stockholders’ Representative executed an amendment (the “Note Amendment”) to the Secured Promissory Note. The Note Amendment eliminates the balloon payment, extending the maturity date for a one-year period, to February 17, 2024. During the extended period, the Company will continue to make monthly principal payments of $104, and the annual interest rate on the outstanding principal increased from 0.59% to 4.60%, which will accrue and is payable in full on the new maturity date.
Second Amended and Restated Loan and Security Agreement
On February 17, 2022, the Company and its subsidiaries (collectively, the “Borrowers”) refinanced their debt facilities with Slipstream, Communications, LLC (“Slipstream”), pursuant to a Second Amended and Restated Credit and Security Agreement (the “Credit Agreement”). The Borrowers include Reflect, Systems, Inc. (“Reflect”), which became a wholly owned subsidiary of the Company as a result of the closing of the MergerClosing on February 17, 2022. The debt facilities continue to be fully secured by all assets of the Borrowers.
The Credit Agreement also provides that the Company’s outstanding loans from Slipstream at December 31, 2021, consisting of its pre-existing $4,767 senior secured term loan and $2,418 secured convertible loan, with an aggregate of $7,185 in outstanding principal and accrued and unpaid interest under such loans, were consolidated into a term loan (the “Consolidation Term Loan”). The Consolidation Term Loan has an interest rate of 10.0%, with 75.0% warrant coverage (or 2,694,495898,165 warrants). On the first day of each month, commencing March 1, 2022 through February 1, 2025, the Borrowers will make interest-only payments on the Consolidation Term Loan (estimated to be $60 per monthly payment).Loan. Commencing on September 1, 2023, and on the first day of each month thereafter until the Maturity Date, the Borrowers will make a payment on the Consolidation Term Loan, in an equal monthly installment of principal sufficient to fully amortize the Consolidation Term Loan in eighteen equal installments (estimated to be $399 per monthly installment).installments. The Company assessed the combination of the pre-existing senior secured term loan and secured convertible loan in accordance with ASC 470 Debtand determined the transaction should be accounted for as an extinguishment, in part as the Consolidation Term Loan eliminated a substantiveconversion feature. In aggregate the Company recorded a loss on extinguishment of $295 during the six month period ending June 30, 2022, primarily associated with the write-off of pre-existing debt discounts.
In addition to refinancing the existing debt with Slipstream, the Company issued to Slipstream a $10,000, 36-month36-month senior secured term loan (the “Acquisition Term Loan”) resulting in $10,000 in gross proceeds, or $9,950 in net proceeds. The Acquisition Term Loan matures on February 17, 2025 (the(the “Maturity Date”) and has an interest rate of 8.0%, with 50.0% warrant coverage (or 2,500,000833,334 warrants). On the first day of each month, commencing March 1, 2022 through February 1, 2025, the Borrowers will make interest-only payments on the Acquisition Loan (estimated to be $67 per monthly payment). Term Loan. No principal payments on the Acquisition Term Loan are payable until the Maturity Date.
In connection with the Acquisition Term Loan and Consolidation Term Loan warrant coverage, the Company issued to Slipstream a warrant to purchase an aggregate of 5,194,4951,731,499 shares of Company common stock (the “Lender Warrant”). The Lender Warrant has a five-yearfive-year term, an initial exercise price of $2.00$6.00 per share, subject to adjustments in the Lender Warrant, and is was not exercisable until August 17, 2022. The warrants were assessed in accordance with ASC 470 and ASC 815 Derivatives and were deemed to represent bifurcated derivative instruments that should be recorded as liabilities in the Condensed Consolidated Balance Sheets. The Company performed a Black-Scholes valuation of the warrants as of the issuance date, resulting in a fair value of $0.8129$2.4387 per warrant. In recording the warrant liability, the Company recorded a debt discount associated with each of the Acquisition and Consolidation Term Loans in an amount of $2,032 and $2,190, respectively. These amounts are being amortized straight-line through interest expense over the life of the loans, resulting in incremental interest expense of $363$358 and $904 during$714 for the three and ninesix months ended SeptemberJune 30, 2022, 2023, respectively. The Company has deemed straight-line amortization to be materially consistent with the effective interest method.
In certain circumstances, upon a fundamental transaction of the Company (e.g., a disposal or sale of all or the greater part of the assets or undertaking of the Company, an amalgamation or merger with another company, or implementation of a scheme of arrangement), the holder of the Lender Warrant will have the right to require the Company to repurchase the Lender Warrant at its fair value using a Black Scholes option pricing formula; provided that such holder may not require the Company or its successor entity to repurchase the Lender Warrant for the Black Scholes value in connection with a fundamental transaction that is not approved by the Company’s Board of Directors, and therefore not within the Company’s control.
Effective June 30, 2022, the Company amended the terms of the Lender Warrant to remove the holder’s option to exercise such warrant on a cashless basis utilizing the volume weighted average price (“VWAP”)VWAP of the Company’s common stock on the trading day immediately preceding the date of a notice of cashless exercise in certain circumstances, and remove the condition to exercising such warrant that the Company’s shareholders approve the exercise thereof (which hashad already been obtained). The amendments to the Lender Warrant also extend the term of such warrants for an additional one year, such that the Lender Warrant will expire on February 17, 2028. The foregoing amendments to the Lender Warrant caused such warrants to be accounted for as equity instruments onin the Company’s financial statements.Consolidated Financial Statements.
Loan and Security Agreement History
Ninth, Tenth, Eleventh, Twelfth, and Thirteenth Amendment; Modification of Conversion Date of Special Loan under Loan and Security Agreement
Prior to the execution of the Credit Agreement, Borrower and Slipstream were parties to a Loan and Security Agreement. On March 7, 2021, On February 28, 2021, January 31, 2021, December 31, 2020, November 30, 2020, and September 29, 2020, the parties entered into several amendments to the Loan and Security Agreement to amend the automatic conversion date of the Special Loan and, later, to eliminate the conversion feature. Each amendment extended the automatic conversion date of the Special Loan. The Company paid no fees in exchange for these extensions, with the exception of the March 7, 2021 extension which resulted in the Company recording of $133 of incremental debt discount, a net gain of $26 via the extinguishment of the Special Loan, and expense of $69 of costs incurred with third parties as a result of extinguishment of the Special Loan, modification of the New Term Loan, and extinguishment of the Disbursed Escrow Loan.
Secured Disbursed Escrow Promissory Note
The Fourth Amendment to the Loan and Security Agreement included entry into a Secured Disbursed Escrow Promissory Note between the Company and Slipstream, and, effective June 30, 2018, we drew $264 in conjunction with our exit from a previously leased operating facility. The principal amount of the Secured Disbursed Escrow Promissory Note bore no interest. Upon entry into an amendment to the Loan and Security Agreement on March 7, 2021, this note was converted into Disbursed Escrow Conversion Shares, with elimination of the debt recorded as an equity issuance within the Statement of Shareholders Equity during the nine months ended September 30, 2021.
Term Loan (2022)
On October 31, 2022, the Borrowers and Slipstream amended the Credit Agreement to provide the Borrowers with a $2,000 term loan ("Term Loan (2022)"), the net proceeds of which are beingwere used by the Company to accelerate an active software development project with potential to expand SaaS revenues associated with an existing customer.
The term loanTerm Loan (2022) has an annual interest rate of 12.5% and matures on September 1, 2023. Commencing on February 1, 2023, the Borrowers will make monthly installment payments of approximately $270 until the maturity date, consisting of principal and interest sufficient to fully amortize the term loanTerm Loan (2022) through the maturity date.
NOTE 10:9: COMMITMENTS AND CONTINGENCIES
Litigation
On August 2, 2019, the Company filed suit in Jefferson Circuit Court, Kentucky, against a supplier of the Company’s wholly owned subsidiary, Allure, Global Solutions, Inc. (“Allure”) for breach of contract, breach of warranty, and negligence with respect to equipment installations performed by such supplier for an Allure customer. Due to delays on account of the COVID-19 pandemic, this case remains in the early stages of litigation, and, as a result, the outcome of each case is unclear, so the Company is unable to reasonably estimate the possible recovery, or range of recovery, if any.
On October 10, 2019, the Allure customer that is the basis of our claim above sent a demand to the Company for payment of $3,200 as settlement for an alleged breach of contract related to hardware failures of equipment installations performed by Allure between November 2017 and August 2018. The suits filed byOn March 10, 2023, the Company, the supplier and againstthe Allure have been adjoined incustomer reached a Settlement Agreement and Release of Claims ("Settlement Agreement"). Pursuant to the Jefferson Circuit Court, Kentucky in January 2020. An attemptSettlement Agreement, the Company is obligated to mediatepay $733; however, its insurer agreed to pay $700 of that amount. Thus, the litigation is in process asCompany paid $33 of the filing date of this Report.settlement amount in April 2023.
The Company has notified its insurance company on notice of potential claims and continues to evaluate both the claim made by the customer and potential avenues for recovery against third parties should the customer prevail.
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.
Settlement of obligations
There were no individually material settlements during the nine months ended September 30, 2022.
During the nine months ended September 30, 2021, (i) the full principal amount of the PPP Loan and the accrued interest of $1,552 were forgiven and recorded as a gain on settlement, (ii) the Company settled repayment obligations tied to an Amended and Restated Seller Note (the “Seller Note”) and related accrued interest for $100, recording a gain on settlement of $1,624, representing $1,538 related to the Seller Note and $86 of related interest thereon, and (iii) the statute of limitations passed related to the remaining liability on a lease abandoned by the Company in 2015, resulting in a gain of $256.
NOTE 11:10: INCOME TAXES
Our deferred tax assets are primarily related to net federal and state operating loss carryforwards (NOLs). We have substantial NOLs that are limited in usage by IRC Section 382. IRC Section 382 generally imposes an annual limitation on the amount of NOLs that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership within a statutory testing period. We have performed a preliminary analysis of the annual NOL carryforwards and limitations that are available to be used against taxable income. Based on the history of losses of the Company, there continues to be a full valuation allowance against the net deferred tax assets of the Company with a definite life.
As of SeptemberFor the three and six months ended June 30, 2022, 2023, we reported tax liability of $0.$45 and $88, respectively. As of SeptemberJune 30, 2022,2023, the net deferred tax assetsliabilities totaled $0$75 after valuation allowance, consistent with compared to net tax liabilities of $28 at December 31, 2021.2022.
NOTE 12:11: WARRANTS
A summary of outstanding warrants is included below:
Warrants (Equity) | ||||||||||||
Amount | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | ||||||||||
Balance December 31, 2021 | 4,103,211 | $ | 4.48 | 1.73 | ||||||||
Warrants issued | 5,851,505 | 1.535 | 5.00 | |||||||||
Warrants exercised | (5,851,505 | ) | 1.535 | 4.86 | ||||||||
Warrants expired | (196,079 | ) | 3.48 | - | ||||||||
Warrants reclassified | 13,761,000 | 1.63 | 4.36 | |||||||||
Balance September 30, 2022 | 17,668,132 | $ | 2.20 | 3.62 |
Warrants | ||||||||||||
Weighted | ||||||||||||
Weighted | Average | |||||||||||
Average | Remaining | |||||||||||
Exercise | Contractual | |||||||||||
Amount | Price | Life | ||||||||||
Balance December 31, 2022 | 5,824,027 | $ | 6.56 | 4.21 | ||||||||
Warrants expired | (68,508 | ) | 10.40 | - | ||||||||
Balance June 30, 2023 | 5,755,519 | $ | 6.51 | 3.76 |
Warrants (Liability) | ||||||||||||
Amount | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | ||||||||||
Balance December 31, 2021 | - | $ | - | - | ||||||||
Warrants issued | 13,761,000 | 1.63 | 5.00 | |||||||||
Warrants expired | - | - | - | |||||||||
Warrants reclassified | (13,761,000 | ) | 1.63 | (5.00 | ) | |||||||
Balance September 30, 2022 | - | $ | - | - |
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) 1,315,000438,334 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 1,315,000438,334 shares of Common Stock, and (ii) pre-funded warrants to purchase up to an aggregate of 5,851,5051,950,502 shares of Common Stock (the “Pre-Funded Warrants”) and accompanying warrants to purchase an aggregate of 5,851,5051,950,502 shares of Common Stock (collectively, the “Private Placement”). 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 $1.535,$4.605, and each Pre-Funded Warrant and accompanying warrants to purchase Common Stock were sold together at a combined price of $1.5349,$4.6047, for gross proceeds of approximately $11,000, before deducting placement agent fees and estimated offering expenses payable by the Company. During the threesix months ended March 31,June 30, 2022, each of the Pre-Funded Warrants were exercised. The Common Stock Warrants expired 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 WarrantWarrants and concluded they did do not meet the criteria to be classified within stockholders’ equity. The Common Stock Warrant includedWarrants include provisions which could result in a different settlement value for the Common Stock WarrantWarrants 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 these warrants as liabilities on the Condensed Consolidated Balance Sheets at fair value, with subsequent changes in their respective fair values recognized in the Condensed Consolidated Statements of Operations at each reporting date. At the date of issuance, the Company performed a Black-Scholes valuation of the warrants, resulting in a fair value of $3.2781 per warrant. At June 30,2022, the Company reassessed the fair value of these warrants via Black Scholes valuation methodology and determined that the fair value of these warrants was $1.2057 per warrant, resulting in the Company recording a gain on the fair value of these warrants of $1,287 and $4,950 in the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2022.
On February 17,2022, in connection with the Credit Agreement with Slipstream, the Company issued to Slipstream 1,731,499 warrants with an exercise price of $6.00 per share which expire five years from the date of issuance (the “Lender Warrant”). These warrants are not exercisable until 180 days after the issuance date. The common shares underlying these warrants have not yet been registered for resale under the Securities Act of 1933, which provides Slipstream with an option for cashless exercise once the warrant becomes exercisable until such time as such registration occurs. The Lender Warrants expire five years from the date of issuance. The Company evaluated the Lender Warrant was and concluded that it does not meet the criteria to be classified within stockholders’ equity. The Lender Warrant includes provisions which could result in a different settlement value, for the Lender Warrant depending on the registration status of the underlying shares. Because these conditions are not an input into the pricing of a fixed-for-fixed option on the Company’s ordinary shares, the Lender Warrant is not considered to be indexed to the Company’s own stock. The Company recorded these warrants as liabilities on the consolidated balance sheets at fair value, with subsequent changes in their respective fair values recognized in the consolidated statementsCondensed Consolidated Statements of operationsOperations at each reporting date. At the date of issuance, the Company performed a Black-Scholes valuation of the warrants, resulting in a fair value of $1.0927 per warrant. At June 30, 2022, the Company reassessed the fair value of these warrants via Black Scholes valuation methodology and determined that the fair value of these warrants was $0.4019 per warrant, resulting in the Company recording a gain on the fair value of these warrants of $4,951 in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2022, respectively.
On February 17, 2022, in connection with the Credit Agreement with Slipstream, the Company issued to Slipstream 5,194,495 warrants with an exercise price of $2.00 per share, which expire five years from the date of issuance (the “Lender Warrant”). These warrants are not exercisable until 180 days after the issuance date. The common shares underlying these warrants have not yet been registered for resale under the Securities Act of 1933, which provides Slipstream with an option for cashless exercise once the warrant becomes exercisable until such time as such registration occurs. The Lender Warrant expired five years from the date of issuance. The Company evaluated the Lender Warrant and concluded that it did not meet the criteria to be classified within stockholders’ equity. The Lender Warrant included provisions that could result in a different settlement value for the Lender Warrant 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 Lender Warrant was not considered to be indexed to the Company’s own stock. The Company recorded these 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 warrants, resulting in a fair value of $0.8129$2.4387 per warrant. In recording the warrant liability, the Company recorded an increase in debt discount in the Condensed Consolidated Balance Sheet associated with the issuance of the warrants of $4,223, which is being amortized through interest expense in the Condensed Consolidated Statement of Operations over the life of the Acquisition Term Loan and Consolidation Term Loans. At June 30, 2022, the Company reassessed the fair value of these warrants via Black Scholes valuation methodology and determined that the fair value of these warrants was $0.3699$1.1097 per warrant, resulting in the Company recording a gain on the fair value of these warrants of $894 and $2,302 in the Condensed Consolidated Statement of Operations for the ninethree and six months ended SeptemberJune 30, 2022, respectively.2022.
On February 17,2022, in connection with obtaining a waiver of certain restrictions in investment documents between an investor and the Company in order to consummate the financing contemplated by the Credit Agreement, the Company paid consideration to such investor in the form of a warrant (the “Purchaser Warrant”) to purchase 1,400,000466,667 shares of Company common stock in an at-the-market offering under Nasdaq rules. The number of shares of Company common stock subject to the Purchaser Warrant is equal to the waiver fee ($175) divided by $0.125$0.375 per share. The exercise price of the Purchaser Warrant is $1.41$4.23 per share, and the Purchaser Warrant is not exercisable until August 17,2022. The Purchaser Warrant expired expires five years from the date of issuance. The Company evaluated the Purchaser Warrant and concluded that it did does not meet the criteria to be classified within stockholders’ equity. The Purchaser Warrant includedincludes provisions which could result in a different settlement value, for the Purchaser Warrant 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 Warrant was is not considered to be indexed to the Company’s own stock. The Company recorded these warrants as liabilities on the consolidated balance sheetsCondensed Consolidated Balance Sheets at fair value, with subsequent changes in their respective fair values recognized in the consolidated statementsCondensed Consolidated Statements of operationsOperations at each reporting date. At the date of issuance, the Company performed a Black-Scholes valuation of the Purchaser Warrant, resulting in a fair value of $0.8656$2.5968 per warrant. In recording the warrant liability, the Company recorded an expense in the Condensed Consolidated Statement of Operations associated with the issuance of the Purchaser Warrant of $1,211. At June 30, 2022, the Company reassessed the fair value of the Purchase Warrant via Black Scholes valuation methodology and determined that the fair value of the Purchaser Warrant was $0.4017$1.2051 per warrant, resulting in the Company recording a gain on the fair value of the Purchaser Warrant of $252 and $650 in the Condensed Consolidated Statement of Operations for the ninethree and six months ended SeptemberJune 30, 2022, respectively.2022.
Effective June 30, 2022, the Company amended the terms of the Common Stock Warrant (7,166,505(2,388,836 warrants), Lender Warrant (5,194,495(1,731,499 warrants) and Purchaser Warrant (1,400,000(466,667 warrants). The amendments to such warrants removes the holder’s option to determine the value of such warrants utilizing the volume weighted average price (“VWAP”)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 hashad already been obtained). The amendments to the warrants also extend the term of such warrants for an additional one year, such that the Common Stock Warrant will expire on February 3, 2028, and the Lender Warrant and Purchaser Warrant 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 Condensed Consolidated Statement of Operations for the nine months ended September 30, 2022. The foregoing amendments to the warrants resulted in such warrants to be accounted for as equity instruments on the Company’s financial statementsCondensed Consolidated Financial Statements as of June 30, 2022. 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 as of June 30, 2022. These amounts are reflected as additional paid-in-capital in the Condensed Consolidated Balance Sheet as of September 30,December 31, 2022.
NOTE 13:12: STOCK-BASED COMPENSATION
A summary of outstanding options is included below:
Time Vesting Options | Weighted | Weighted | ||||||||||||||||||||||||||||||||||||||
Average | Weighted | Weighted | Average | Weighted | Weighted | |||||||||||||||||||||||||||||||||||
Remaining | Average | Average | Remaining | Average | Average | |||||||||||||||||||||||||||||||||||
Range of Exercise | Number | Contractual | Exercise | Options | Exercise | Number | Contractual | Exercise | Options | Exercise | ||||||||||||||||||||||||||||||
Prices between | Outstanding | Life | Price | Exercisable | Price | Outstanding | Life | Price | Exercisable | Price | ||||||||||||||||||||||||||||||
$0.01 - $1.00 | - | - | $ | - | - | $ | - | |||||||||||||||||||||||||||||||||
$1.01 - $2.00 | 25,000 | 7.11 | $ | 1.88 | 16,667 | $ | 1.88 | |||||||||||||||||||||||||||||||||
$2.01+ | 1,963,675 | 7.22 | 4.29 | 1,320,342 | $ | 3.81 | ||||||||||||||||||||||||||||||||||
$4.01 - $8.00 | 566,673 | 7.14 | $ | 7.42 | 538,340 | $ | 7.46 | |||||||||||||||||||||||||||||||||
$8.01+ | 96,125 | 2.53 | 25.22 | 96,125 | $ | 25.22 | ||||||||||||||||||||||||||||||||||
1,988,675 | 7.22 | $ | 3.34 | 1,337,009 | 662,798 | 6.47 | $ | 10.00 | 634,465 |
Performance Vesting Options | Weighted | Weighted | ||||||||||||||||||||||||||||||||||||||
Average | Weighted | Weighted | Average | Weighted | Weighted | |||||||||||||||||||||||||||||||||||
Remaining | Average | Average | Remaining | Average | Average | |||||||||||||||||||||||||||||||||||
Range of Exercise | Number | Contractual | Exercise | Options | Exercise | Number | Contractual | Exercise | Options | Exercise | ||||||||||||||||||||||||||||||
Prices between | Outstanding | Life | Price | Exercisable | Price | Outstanding | Life | Price | Exercisable | Price | ||||||||||||||||||||||||||||||
$0.01 - $1.00 | - | - | $ | - | - | $ | - | |||||||||||||||||||||||||||||||||
$1.01 - $2.00 | - | - | $ | - | - | $ | - | |||||||||||||||||||||||||||||||||
$2.01+ | 720,000 | 7.67 | 2.53 | 240,000 | $ | 2.53 | ||||||||||||||||||||||||||||||||||
$4.01 - $8.00 | 240,000 | 6.93 | $ | 7.59 | 240,000 | $ | 7.59 | |||||||||||||||||||||||||||||||||
720,000 | 7.67 | $ | 2.53 | 240,000 | 240,000 | 6.93 | $ | 7.59 | 240,000 |
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 | 1.64 | $ | 3.00 | - | $ | - | |||||||||||||
733,334 | 1.64 | $ | 3.00 | - |
Performance Vesting | ||||||||||||||||||||||||
Market Vesting Options | Time Vesting Options | Options | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||
Options | Exercise | Options | Exercise | Options | Exercise | |||||||||||||||||||
Date/Activity | Outstanding | Price | Outstanding | Price | Outstanding | Price | ||||||||||||||||||
Balance, December 31, 2022 | 633,334 | 3.00 | 662,910 | $ | 10.02 | 240,000 | $ | 7.59 | ||||||||||||||||
Granted | 100,000 | 3.00 | - | - | - | - | ||||||||||||||||||
Forfeited or expired | - | - | (112 | ) | 162.00 | - | - | |||||||||||||||||
Balance, June 30, 2023 | 733,334 | 3.00 | 662,798 | 10.00 | 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 - $1.00 | 1,900,000 | 2.39 | $ | 1.00 | - | $ | - | |||||||||||||
$1.01 - $2.00 | - | - | $ | - | - | $ | - | |||||||||||||
$2.01+ | - | - | - | - | $ | - | ||||||||||||||
1,900,000 | 2.39 | $ | 1.00 | - |
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, 2021 | - | - | 2,068,809 | $ | 3.48 | 800,000 | $ | 2.53 | ||||||||||||||||
Granted | 1,900,000 | 1.00 | - | - | - | - | ||||||||||||||||||
Exercised | - | - | - | - | - | - | ||||||||||||||||||
Forfeited or expired | - | - | (80,134 | ) | 2.79 | (80,000 | ) | 2.53 | ||||||||||||||||
Balance, September 30, 2022 | 1,900,000 | 1.00 | 1,988,675 | 3.34 | 720,000 | $ | 2.53 |
The weighted average remaining contractual life for options exercisable is 7.06.53 years as of SeptemberJune 30, 2022.2023.
Valuation Information for Stock-Based Compensation
For purposes of determining estimated fair value under FASB ASC 718-10,718-10, 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-yearten-year options to purchase 480,000160,000 and 240,00080,000 shares of common stock (the “Performance Options”), respectively, which vest in equal installments over a three-yearthree-year period (2020-2022)(2020-2022), subject to satisfying the Company revenue targettargets and EBITDA (earnings before interest, taxes, depreciation and amortization) targets for the applicable year. In each of calendar years 2020,2021 and 2022, one-thirdone-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 includesinclude 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) iswas eliminated, and the remaining shares that are available for vesting under the Performance Options (320,000(106,667 unvested shares for Mr. Mills and 160,00053,334 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) | excludes any impact on EBITDA of: |
(a) the accounting treatment (including any “mark-to-market accounting”) of the Company’s warrants or the “Guaranteed Consideration”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.
(iii)(ii) includes deductions related to any cash or stock bonuses paid or payable to any employees of the Company for services provided in calendar year 2022 (even if such bonuses are actually paid after calendar year 2022)2022), including bonuses paid pursuant to the terms of the 2022 Cash Bonus Plan (as described below) (collectively, the “EBITDA Calculations”).
The unvested portion of the Performance Options as of December 31, 2022 vested in full effective March 30, 2023 upon confirmation by the Board of Directors of achievement of the performance metrics for the year ended December 31, 2022.
The exercise price of the foregoing options is $2.53$7.59 per share, the closing price of the Company’s common stock on the date of issuance. 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. The fair value of the options on the grant date was $1.87 and was determined using the Black-Scholes model. These values were calculated using the same weighted average assumptions as the time vesting options issued. Performance against the identified EBITDA target is assessed quarterly by the Company in order to determine whether any compensation expense should be recorded.
During the three and nine months ended September 30, 2022, the Company deemed it probable that the Company would achieve the EBITDA target for calendar year 2022 and recorded compensation expense in the Condensed Consolidated Statement of Operations with respect to these awards of $225 and $624, respectively, net of a benefit of $50 recorded for forfeiture of awards for the nine months ended September 30, 2022. The remaining awards have not yet vested and are subject to actual results for the full calendar year 2022. Should this target not be achieved, amounts recorded as expense in the Condensed Consolidated Statement of Operations would be reversed.
Issuance of New Options
On June 15, 2022, Messrs. Mills and Logan received ten-yearten-year options to purchase 1,000,000333,334 and 600,000200,000 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-trading10-trading day volume-weighted average price (“VWAP”)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 Target | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share Price Targets | Guaranteed | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Executive | $2.00 | $3.00 | $4.00 | $5.00 | $6.00 | Guaranteed Price | Total Shares | $6.00 | $9.00 | $12.00 | $15.00 | $18.00 | Price | Shares | ||||||||||||||||||||||||||||||||||||||||||
Mills Shares Vested | 50,000 | 100,000 | 150,000 | 200,000 | 250,000 | 250,000 | 1,000,000 | 16,667 | 33,334 | 50,000 | 66,667 | 83,333 | 83,333 | 333,334 | ||||||||||||||||||||||||||||||||||||||||||
Logan Shares Vested | 30,000 | 60,000 | 90,000 | 120,000 | 150,000 | 150,000 | 600,000 | 10,000 | 20,000 | 30,000 | 40,000 | 50,000 | 50,000 | 200,000 | ||||||||||||||||||||||||||||||||||||||||||
Percentage of Shares Vested | 5 | % | 10 | % | 15 | % | 20 | % | 25 | % | 25 | % | 5 | % | 10 | % | 15 | % | 20 | % | 25 | % | 25 | % |
The “Guaranteed Price” has the meaning ascribed to such term in the Merger Agreement, which currently means $6.40$19.20 per share, or $7.20 per share if, and only if, certain customers set forth in the Merger Agreement collectively achieve over 85,000 billable devices online at any time on or before December 31, 2022.share.
The exercise price of the New Options is $1.00$3.00 per share, which exceedsexceeded the closing price of the Company’s common stock on the date of issuance. issuance (as adjusted by the Company's 1-for-3 reverse stock split in March 2023). The New Options are issued from the Company’s 2014 Stock Incentive Plan, as amended. An additional 300,000100,000 options with identical market vesting restrictions were issued to non-executives during the nine months ended September 30, 2022.non-executives.
The fair value of the options on the grant date varied between $0.21$0.63 and $0.37$1.11 per award as determined using the Monte Carlo model. These values were calculated using the following weighted average assumptions:
Risk-free interest rate | 3.30 | % | |||
Expected term (in years) | 2.68 | ||||
Expected price volatility | 123.53 | % | |||
Dividend yield | 0 | % |
At SeptemberJune 30, 2022, 2023, the Company evaluated the probability of achieving the share price targets in each tranche based, in part, on work performed by the Company’s third party valuation specialist in conjunction with evaluating the equity guarantee contingent liability. As a result of that evaluation of probability, during the three and nine months ended Septembersix month period ending June 30, 2022 2023 the Company recorded $3$4 and $4$7 of compensation expense, respectively. These awards have not yet vested and are subject to actual share price performance through February 2025. Should any target not be achieved, any amounts recorded as expense in the Condensed Consolidated Statement of Operations related to that tranche would be reversed.
Stock Compensation Expense Information
ASC 718-10,718-10, 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 1,720,000573,334 shares for purchase by the Company’s employees and under the Amended and Restated 2006 Non-Employee Director Stock Option Plan the Company reserved 700,000233,334 shares for purchase by the Company’s employees. There are 12,0013,890 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-301-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 inclusive of stock options subject to both performance and market conditions for vesting,employees for the three and ninesix months ended SeptemberJune 30, 2022 2023 of $538$152 and $1,487,$377, respectively, was included in general and administrative expense in the Condensed Consolidated Financial Statements. Compensation expense recognized for the issuance of stock options inclusive of stock options subject to both performance and market conditions for vesting,employees for the three and ninesix months ended SeptemberJune 30, 2021 2022 of $331$398 and $1,177,$948, respectively, was included in general and administrative expense in the Condensed Consolidated Financial Statements. Amounts recorded include stock compensation expense for awards granted to directors of the Company in exchange for services at fair value.Statements
As of SeptemberAt June 30, 2022,2023, there was approximately $685, $477, and $225 of total unrecognized compensation expense related to unvested share-based employee awards with time vesting, market, and performance vesting criteria, respectively. As of September 30, 2021, there was approximately $1,609 and $1,078$498 of total unrecognized compensation expense related to unvested share-based awards with time vesting and performance vesting criteria respectively. Generally, expense related to the time vesting options will be recognized over the next two- and one-half years and will be adjusted for any future forfeitures as they occur.employees. Compensation expense related to performance vesting options will be recognized if it becomes probable that the Company will achieve the identified performance metrics.
Non-Employee Awards
Compensation expense recognized for the issuance of stock options to our Board of Directors, for the three and six month period ended June 30, 2023 of $43 and $86, was included in general and administrative expense in the Condensed Consolidated Financial Statements. Compensation expense recognized for the issuance of stock options to our Board of Directors, for the three and six month period ended June 30, 2022 of $356 and $895, was included in general and administrative expenses in the Condensed Consolidated Financial Statements.
At June 30, 2023, there was approximately $65 of total unrecognized compensation expense related to unvested share-based awards with time vesting criteria for non-employee directors. Generally, expense related to the time vesting options will be recognized over the next year and will be adjusted for any future forfeitures as they occur.
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) (10) day volume weighted average price (“VWAP”)VWAP for the last ten (10) (10) days during the month of service provided.
During the three and ninesix months ended SeptemberJune 30, 2022,2023, the Company issued or accrued shares issuable in exchange for services in the amount of $30 and $100,$55, respectively. During the three and ninesix months ended SeptemberJune 30, 2021, 2022, the Company issued or accrued shares issuable in exchange for services in the amount of $30$45 and $70, respectively.
NOTE 14:13: SIGNIFICANT CUSTOMERS/VENDORS
Significant Customers
We had two (2) and two (2) customers that in the aggregate accounted for 27.5% and 41.1%28.3% of accounts receivable asat June 30, 2023 and three customers that in the aggregate accounted for 49.2% of September 30, 2022 and accounts receivable at December 31, 2021, respectively.2022.
We had two (2) and two (2) customerthree customers that in the aggregate accounted for 36.1% and 45.9%33.5% of revenue for the three months ended SeptemberJune 30, 2022, and 2021, respectively. We had three (3) and2023, compared to two (2) customercustomers that in the aggregate accounted for 49.2% and 40.1%37.5% of revenue for the ninethree months ended SeptemberJune 30, 2022 and 2021, respectively.2022.
We had two customers that in the aggregate accounted for 29.7% of revenue for the six months ended June 30, 2023, compared to three customers that in the aggregate accounted for 54.3% of revenue for the six months ended June 30, 2022.
Significant Vendors
We had two (2) and three (3) vendorsone vendor that in the aggregate accounted for 46.2% and 69.1%36.1% of outstanding accounts payable at SeptemberJune 30, 20222023, and one vendor that accounted for 30.1% of outstanding accounts payable at December 31, 2021, respectively.
2022.
NOTE 15: LEASES
We have entered into various non-cancelable operating lease agreements for certain of our offices and office equipment. Our leases have original lease periods expiring between 2022 and 2027. Many leases 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 components of lease costs, lease term and discount rate are as follows:
(in thousands) | Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | ||||||
Finance lease cost | ||||||||
Amortization of right-of-use assets | $ | - | $ | 4 | ||||
Interest | - | - | ||||||
Operating lease cost | 256 | 236 | ||||||
Total lease cost | $ | 256 | $ | 240 | ||||
Weighted Average Remaining Lease Term | ||||||||
Operating leases | 3.3 years | 3.1 years | ||||||
Weighted Average Discount Rate | ||||||||
Operating leases | 10.0 | % | 10.0 | % |
The following is a schedule, by years, of maturities of lease liabilities as of September 30, 2022:
(in thousands) | Operating Leases | |||
The remainder of 2022 | $ | 184 | ||
2023 | 756 | |||
2024 | 459 | |||
2025 | 456 | |||
Thereafter | 198 | |||
Total undiscounted cash flows | 2,053 | |||
Less imputed interest | $ | (217 | ) | |
Present value of lease liabilities | $ | 1,836 |
Supplemental cash flow information related to leases are as follows:
(in thousands) | Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | ||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases, net | $ | 256 | $ | 184 | ||||
Operating cash flows from finance leases | - | 4 | ||||||
Financing cash flows from finance leases | - | (4 | ) |
Item 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements
The following discussion contains various forward-looking statements within the meaning of Section 21E of the Exchange Act. Although we believe that, in making any such statement, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. When used in the following discussion, the words “anticipates,” “believes,” “expects,” “intends,” “plans,” “estimates,” “projects,” should,” “may,” “propose,” and similar expressions (or the negative versions of such words or expressions), as they relate to us or our management, are intended to identify such forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated, and many of which are beyond our control. Factors that could cause actual results to differ materially from those anticipated are set forth under the caption “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 20212022 as filed with the Securities and Exchange Commission on March 22, 2022.30, 2023.
Our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking statements. Accordingly, we cannot be certain that any of the events anticipated by forward-looking statements will occur or, if any of them do occur, what impact they will have on us. We caution you to keep in mind the cautions and risks described in this document and to refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of the document in which they appear. We do not undertake to update any forward-looking statement.
Overview
Creative Realities, Inc. (“Creative Realities,” “we,” “us,” or the “Company”) transforms environments through digital solutions by providing innovative digital signage solutions for key market segments and use cases, including:
● | Retail |
● | Entertainment and Sports Venues |
● | Restaurants, including quick-serve restaurants (“QSR”) |
● | Convenience Stores |
● | Financial Services |
● | Automotive |
● | Medical and Healthcare Facilities |
● | Mixed Use Developments |
● | Corporate Communications, Employee Experience |
● | Digital out of Home (DOOH) Advertising Networks |
We serve market-leading companies, so there is a good chance that if you leave your home today to shop, work, eat or play, you will encounter one or more of our digital signage experiences. Our solutions are increasingly visible because we help our enterprise customers achieve a range of business objectives including:
● | Increased brand awareness |
● | Improved customer support |
● | Enhanced employee productivity and satisfaction |
● | Increased revenue and profitability |
● | Improved guest experience |
● | Increased customer/guest engagement |
Through a combination of organically grown platforms and a series of strategic acquisitions, including our recent acquisition of Reflect Systems, Inc. in February 2022, the Company assistassists clients to design, deploy, manage, and monetize their digital signage networks. The Company sources leads and opportunities for its solutions through its digital and content marketing initiatives, close relationships with key industry partners, specifically equipment manufacturers, and the direct efforts of its in-house industry sales experts. Client engagements focus on consultative conversations that ensure the Company’s solutions are positioned to help clients achieve their business objectives in the most cost-effective manner possible.
When comparing Creative Realities to other digital signage providers, our customers value the following competitive advantages:
● | Breadth of solutions – Creative Realities is one of only a few companies in the industry capable of providing the full portfolio of productsand services required to implement and run an effective digital signage network. We leverage a ‘single vendor’ approach, providing clients with a one-stop-shop for sourcing digital signage solutions from design through day two services. |
● | ||
Managed labor pool– Unlike most companies in our industry, we have a curated labor pool including thousands of qualified and vetted fieldtechnicians available to service clients quickly nationwide. We can meet tight schedules even in exceptionally large deployments and still ensure quality and consistency. |
● | ||
In-house creative resources – We assist clients in repurposing existing content for digital signage experiences or creating new content, anactivity for which the Company has won several design awards in recent years. In each instance, our services can be essential in helping clients develop an effective content program. |
● | ||
Network scalability and reliability– Our software as a service (“SaaS”) content management platforms power some of the largest and mostcomplex digital signage networks in North America evidencing our ability to manage enterprise scale projects. This also provides us purchasing power to source products and services for our customers, enabling us to deliver cost effective, reliable and powerful solutions to small and medium size business clients. |
● | ||
Ad management platform – Our customers are increasingly interested in monetizing their digital signage networks through advertisingcontent. However, efficiently scheduling advertising content into digital signage playlists to meet campaign objectives can be a challenging and labor-intensive process. AdLogic, our home-grown, content management-agnostic platform, automates this process, allowing network owners to capture more revenue with less expense. |
● | Media sales– Few, if any other digital signage solution providers, can offer their clients media sales as a service. We have in-house mediasales expertise to elevate conversations with clients interested in better understanding network monetization. We believe this meaningful differentiation in the sales process provides an additional revenue stream to Creative Realities compared to our competitors. |
● | Market sector expertise – Creative Realities has in-house experts in key market segments such as automotive, retail, quick-serve restaurants(QSR), convenience stores, and Digital Out of Home (DOOH) advertising. Our expertise in these business segments enables our teams to provide meaningful business conversations and offer tailored solutions with prospects and customers to their unique business objectives. These experts build industry relationships and create thought leadership that drives lead flow and new opportunities for our business. |
● | Logistics– Implementing a large digital signage project can be a logistics nightmare that can stall an initiative even before deployment. Ourexpertise in logistics improves deployment efficiency, reduces delays and problems, and saves customers time and money. |
● | ||
Technical support– Digital signage networks present unique challenges for corporate IT departments. Creative Realities helps simplify andimprove end user support by leveraging our own Network Operations Center (“NOC”) in Louisville, Kentucky. The NOC resolves many issues remotely and when field support is required, it can be dispatched from the NOC, leveraging our managed labor pool to resolve customer issues quickly and effectively. |
● | ||
Integrations and Application Development– The future of digital signage is not still images and videos on a screen. Interactive applicationsand integrations with other data sources will dominate the future. From social media feeds to corporate data stores to Point of Sale (“POS”) systems, our proven ability to build scalable applications and integrations is a key advantage clients can leverage to deliver more compelling and engaging experiences for their customers. |
● | ||
Hardware support– A number of digital signage providers sell a proprietary media player or align themselves with just one operatingsystem. We utilize a range of media players including Windows, Android and BrightSign to provide clients the flexibility they need to select the appropriate hardware for any application knowing the entire network can still be served by a single digital signage platform, reducing complexity and improving the productivity of their teams. |
The three primary sources of revenue for the Company are:
● | Hardware sales from reselling digital signage hardware from original equipment manufacturers such as Samsung and BrightSign. |
● | Services revenue from helping customers design, deploy and manage their digital signage network, including: |
o | Hardware system design/engineering |
o | Hardware installation |
o | Content development |
o | Content scheduling |
o | Post-deployment network and field support |
o | Media sales |
● | Recurring subscription licensing and support revenue from our digital signage software platforms, which are generally sold via a SaaS model. These include: |
o | ReflectView, the Company’s core digital signage platform for most applications, scalable and cost effective from 10 to 100,000+ devices |
o | Reflect Xperience, a web-based interface that allows customers to give content scheduling access to local users via the web or mobile devices, while still maintaining centralized programming control |
o | Reflect AdLogic, the Company’s ad management platform for digital signage networks, which presently delivers approximately 50 million ads daily |
o | Reflect Clarity, the Company’s menu board solution, which has become a market leader for a range of restaurant and convenience store applications |
o | Reflect Zero Touch, which allows customers to turn any screen into an interactive experience by allowing guests to engage using their mobile device |
o | iShowroomProX, an omni-channel digital sales support platform targeted at original equipment manufacturers in the transportation sector, which integrates with dozens of key data services including dealer inventory at |
o | OSx+, a digital VIN-level checklist used to assist in the tracking and delivery of new vehicles in the transportation sector, providing measurable lift in customer satisfaction scores and connected vehicle enrollments and subscription activations. |
While hardware sales and support services revenues can fluctuate more significantly year over year based on new, large-scale network deployments, the Company expects to see continuous growth in recurring SaaS revenue for the foreseeable future as digital signage adoption/utilization continues to expand across the vertical markets we serve.
Recent Developments
Please see Note 5 Business Combinations, Note 9 Loans Payable, Note 12 Warrants, and Note 13 Stock-based Compensation to the Company’s Condensed Consolidated Financial Statements contained in this Report for a description of recent developments of the Company that occurred during, and subsequent to, the three and nine months ended September 30, 2022.
Our Sources of Revenue
We generate revenue through digital signage solution sales, which include system hardware, professional and implementation services, software design and development, software licensing, deployment, maintenance and support services, and media sales.
We currently market and sell our technology and solutions primarily through our sales and business development personnel, but we also utilize agents, strategic partners, and lead generators who provide us with access to additional sales, business development and licensing opportunities.
Our Expenses
Our expenses are primarily comprised of three categories: sales and marketing, research and development, and general and administrative. Sales and marketing expenses include salaries and benefits for our sales, business development solution management and marketing personnel, and commissions paid on sales. This category also includes amounts spent on marketing networking events, promotional materials, hardware and software to prospective new customers, including those expenses incurred in trade shows and product demonstrations, and other related expenses. Our research and development expenses represent the salaries and benefits of those individuals who develop and maintain our proprietary software platforms and other software applications we design and sell to our customers. Our general and administrative expenses consist of corporate overhead, including administrative salaries, real property lease payments, salaries and benefits for our corporate officers and other expenses such as legal and accounting fees.
Recent Developments
Reverse stock split
On March 23, 2023, the Company filed Articles of Amendment with the Secretary of State of the State of Minnesota to effectuate, effective March 27, 2023, a 1-for-3 stock split of the shares of the Company's common stock, par value $0.01 per share.
As a result of the reverse stock split, effective 12:01 am on March 27, 2023, every three shares of common stock then-issued and outstanding automatically combined into one share of common stock, with no change in par value per share. No fractional shares were outstanding following the reverse stock split and any fractional shares resulting from the reverse split were rounded up to the nearest whole share of common stock. In connection with the reverse stock split, the total number of shares of common stock authorized for issuance was reduced from 200,000,000 shares to 66,666,666 shares in proportion to the reverse stock split.
Effective as of the same time as the reverse stock split, the number of shares of common stock available for issuance under the Company's equity compensation plans were reduced in proportion to the reverse stock split. The reverse stock split also resulted in the number of shares of shares of common stock issuable upon exercise of outstanding warrants, or the exercise or vesting of equity awards, in proportion to the reverse stock split and caused a proportionate increase in exercise price or share-based performance criteria, where applicable.
Rejection of unsolicited offer
On February 2, 2023, we received an unsolicited proposal from Pegasus Capital Advisors, L.P., on behalf of itself and certain of its affiliates, including Slipstream (collectively, “Pegasus”), to acquire all of the outstanding shares of common stock of the Company that are not owned by Pegasus for a purchase price of $0.83 per share (or, as a result of our recent reverse stock split, $2.49 per share) in cash. Pegasus is the beneficial owner of our common stock owned of record by Slipstream. The Special Committee of the Company’s Board of Directors (the “Special Committee”) has concluded that such proposal undervalues the Company based on the Special Committee’s views of the intrinsic value of the Company’s existing business and current and future prospects, and is not in the best interests of the Company’s existing shareholders. Consequently, the Special Committee has advised Pegasus that it has rejected the proposal.
On May 1, 2023, we received a subsequent unsolicited proposal from Pegasus to acquire all of the outstanding shares of common stock of the Company that are not owned by Pegasus for a purchase price of $2.85 per share in cash. The Special Committee has concluded that such proposal undervalues the Company based on the Special Committee’s views of the intrinsic value of the Company’s existing business and current and future prospects, and is not in the best interests of the Company’s existing shareholders. Consequently, the Special Committee has advised Pegasus that it has rejected the proposal.
Please see Note 5 Business Combinations, Note 8 Loans Payable, Note 11 Warrants, and Note 12 Stock-based Compensation to the Company’s Condensed Consolidated Financial Statements contained in this Report for a description of recent developments of the Company that occurred during, and subsequent to, the three and six months ended June 30, 2023.
Critical Accounting Policies and Estimates
The Company’s significant accounting policies are described in Note 2 Summary of Significant Accounting Policiesof the Company’s Condensed Consolidated Financial Statements included elsewhere in this Report. The Company’s Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States. Certain accounting policies involve significant judgments, assumptions, and estimates by management that could have a material impact on the carrying value of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Our actual results could differ from those estimates.
Results of Operations
Note: All dollar amounts reported in Results of Operations are in thousands, except share and per-share information.
Three Months Ended SeptemberJune 30, 20222023 Compared to Three Months Ended SeptemberJune 30, 20212022
The tables presented below compare our results of operations and present the results for each period and the change in those results from one period to another in both dollars and percentage change.
For the three months ended September 30, | Change | |||||||||||||||
2022 | 2021 | $ | % | |||||||||||||
Sales | $ | 11,180 | $ | 4,753 | $ | 6,427 | 135 | % | ||||||||
Cost of sales | 6,666 | 2,406 | 4,260 | 177 | % | |||||||||||
Gross profit | 4,514 | 2,347 | 2,167 | 92 | % | |||||||||||
Sales and marketing expenses | 718 | 330 | 388 | 118 | % | |||||||||||
Research and development expenses | 238 | 226 | 12 | 5 | % | |||||||||||
General and administrative expenses | 2,847 | 1,848 | 999 | 54 | % | |||||||||||
Depreciation and amortization expense | 885 | 347 | 538 | 155 | % | |||||||||||
Deal and transaction expense | 110 | - | 110 | 100 | % | |||||||||||
Total operating expenses | 4,798 | 2,751 | 2,047 | 74 | % | |||||||||||
Operating loss | (284 | ) | (404 | ) | 120 | -30 | % | |||||||||
Other income/(expenses): | ||||||||||||||||
Interest expense | (757 | ) | (186 | ) | (571 | ) | 307 | % | ||||||||
Gain on settlement of debt | 37 | 256 | (219 | ) | -86 | % | ||||||||||
Change in fair value of equity guarantee | 442 | - | 442 | 100 | % | |||||||||||
Other income/(expense) | (2 | ) | (8 | ) | 6 | -75 | % | |||||||||
Total other income/(expense) | (280 | ) | 62 | (342 | ) | -552 | % | |||||||||
Net (loss) before income taxes | (564 | ) | (342 | ) | (222 | ) | 65 | % | ||||||||
Benefit/(provision) for income taxes | 10 | (1 | ) | 11 | -1,100 | % | ||||||||||
Net loss | $ | (554 | ) | $ | (343 | ) | (211 | ) | 62 | % |
For the three months | ||||||||||||||||
ended June 30, | Change | |||||||||||||||
2023 | 2022 | $ | % | |||||||||||||
Sales | $ | 9,196 | $ | 10,923 | $ | (1,727 | ) | 16 | % | |||||||
Cost of sales | 4,898 | 6,261 | $ | (1,363 | ) | 22 | % | |||||||||
Gross profit | 4,298 | 4,662 | (364 | ) | 8 | % | ||||||||||
Sales and marketing expenses | 1,229 | 1,147 | 82 | 7 | % | |||||||||||
Research and development expenses | 377 | 418 | (41 | ) | 10 | % | ||||||||||
General and administrative expenses | 2,595 | 2,562 | 33 | 1 | % | |||||||||||
Depreciation and amortization expense | 797 | 468 | 329 | 70 | % | |||||||||||
Deal and transaction expense | - | 37 | (37 | ) | 100 | % | ||||||||||
Total operating expenses | 4,998 | 4,632 | 366 | 8 | % | |||||||||||
Operating (loss) income | (700 | ) | 30 | (730 | ) | 2433 | % | |||||||||
Other income/(expenses): | ||||||||||||||||
Interest expense | (787 | ) | (750 | ) | (37 | ) | 5 | % | ||||||||
Change in fair value of warrant liability | - | 2,433 | (2,433 | ) | 100 | % | ||||||||||
Change in fair value of equity guarantee | (16 | ) | (73 | ) | 57 | 100 | % | |||||||||
Loss on warrant amendment | - | (345 | ) | 345 | 100 | % | ||||||||||
Gain on settlement of obligations | - | 21 | (21 | ) | 100 | % | ||||||||||
Other income/(expense) | 123 | (1 | ) | 124 | 12400 | % | ||||||||||
Total other income/(expenses) | (680 | ) | 1,285 | (1,965 | ) | 153 | % | |||||||||
Net (loss) income before income taxes | (1,380 | ) | 1,315 | (2,695 | ) | 205 | % | |||||||||
Provision for income taxes | (45 | ) | (53 | ) | 8 | 15 | % | |||||||||
Net (loss) income | $ | (1,425 | ) | $ | 1,262 | (2,687 | ) | 213 | % |
Sales
Sales were $11,180,$9,196, representing an increasea decrease of $6,427,$1,727, or 135%16%, as compared to the same period in 2021, driven in part by the acquisition of Reflect via the Merger on February 17, 2022, and the Company’s successful sales activities as a combined company post-Merger. While the addition of Reflect revenue is contributing to the growth in revenue, the combined company grew revenues approximately $3,463, or 45%, organically during the three months ended September 30, 2022, as compared to the pro forma combined results during the three months ended September 30, 2021.
2022. Hardware revenues were $5,015 in 2022, an increase$3,437 for the three month period ended June 30, 2023, a decrease of $2,800,$2,230, or 126%39%, as compared to the prior year,year. Hardware revenues generated during the three month period ended June 30, 2022 were driven by continuedtwo customers which refreshed their digital hardware throughout their entire geographic footprint. These refresh activities are cyclical in nature and no current customer executed a similar large scale LED deployments continuedrefresh during the three months ended June 30, 2023. Those refresh activities represented $2,418 in incremental hardware revenue during the quarter by multiple customers.three months ended June 30, 2022. Services and other revenues were $6,165 in$5,759 for the three monthsmonth period ended SeptemberJune 30, 2022,2023, an increase of $3,627,$503, or 143%10%, with the inclusion of Reflect’s operationsdriven primarily by increases in the Company’s consolidated results for such period. Managed services revenue, which includes both software-as-a-service (“SaaS”) and help desk technical subscription services, were $3,900 in the three months ended September 30, 2022 as compared to $1,444 in the same period in 2021, driven by the addition of Reflect’s SaaS subscription revenue in the current year. This represents a year-over-year growth rate of 170% in our higher margin, typically subscription-based, managedinstallation services revenue.
Gross Profit
Gross profit increaseddecreased by $2,167,$364, or 92%8% during the three months ended SeptemberJune 30, 20222023 as compared to the same period in 20212022 driven by an increase in revenue but offset by a reduction in gross profit margin. installation services revenue.
Gross profit margin decreasedincreased to 40.4%47% during the three months ended June 30, 2023, from 49.4%43% in the same period in 2022 driven by less(1) favorable revenue mix during the three months ended SeptemberJune 30, 2022 related2023 as managed services, which includes higher margin SaaS and other services revenues, increased to several material customer hardware rollouts during the year that had a lower gross profit margin than our software services. We expect this contraction42% of total revenue as compared to 35% of total revenues in gross profit margin to be less severe as we move beyond 2022. We believe the gross profit margin for the three months ended SeptemberJune 30, 2021 to be more representative of our normalized, long-term gross profit margins.
2022, and (2) margin expansion in hardware, partially offset by reduced revenue in the current year.
Sales and Marketing Expenses
Sales and marketing expenses generally include the salaries, taxes, and benefits of our sales and marketing personnel, as well as trade show activities, travel, and other related sales and marketing costs. Sales and marketing expenses increased by $388,$82, or 118%7%, driven primarily by (i) the acquisition of Reflect via the Merger on February 17, 2022, and (ii) the Company’s enhanced investments into sales and marketing activities post-COVID-19 pandemic. Immediately following the Merger, the Company integrated the sales and marketing functions and did not disaggregate expenses between the two legacy companies.activities. Following the Merger, and through integration activities, the Company adopted certain tools, technology, and processes – particularly with respect to lead generation and brand marketing – that were historically undercapitalized historically by the Company. Additionally,Company and have since accelerated new customer acquisition. Through completion of the Merger, the Company engaged an investor relations firmalso 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 has increased investor relations activities, including conferencesthird-party sales agents - the salaries and presentations. As a result, wecommissions of which are included within Sales and Marketing Expense within the Condensed Consolidated Statement of Operations. We expect the sales and marketing expenses of the Company for the three months ended SeptemberJune 30, 20222023 to adequately reflect the pace fornormal spend in these areas in future reporting periods.
Research and Development Expenses
Research and development expenses generally include personnel and development tools costs associated with the continued development of the Company’s content management systems and other related application development. The Company capitalizes certain of these expenses and amortizes those costs through the Condensed Consolidated Statement of Operations on a straight-line basis over the economic useful life of the software feature or functionality. Research and development increasedexpenses decreased by $12,$41, or 5%10%, infor the three monthsmonth period ended SeptemberJune 30, 20222023 as compared to the same period in 2021. The prior year included a benefit of $49 related ERC, resulting in a net reduction in research and development expenses year over year for the three months ended September 30, 2022. Through the Merger, we acquired a fully staffed, experienced software development team and elected to keep that team in-tact, particularly given employment market conditions with respect to talented software engineers. We have integrated the pre-existing CRI development team with the acquired team and have experienced enhanced speed to market on new feature and functionality development activities from increasing this resource pool. The Company’s gross spending on research and development activities has increased in the current year as a result, however, the capitalized portion of those activities has also increased specifically related to the increased investment into development and enhancement of specific products, features, and functionality associated with our customer acquisition strategy in key vertical markets. We expect2022 driven primarily by an elevated level of expense throughoutcapitalized activity during the remainder of 2022 and 2023 as we develop our current and future product set.
quarter associated with a customer-facing opportunity.
General and Administrative Expenses
General and administrative expenses increased $999,were effectively flat, increasing $33, or 54%, driven primarily by (i)1%. Compared to the inclusion in the prior year of a benefit of $186 related to ERC, and (ii) increased headcount and operations as a result of the acquisition of Reflect via the Merger on February 17, 2022. Whilethree months ended June 30, 2022, the Company anticipates carrying higher generalexperienced decreases of (1) $203 in stock compensation expense as outstanding performance awards were fully expensed as of December 31, 2022, and administrative(2) reductions in certain expenses moving forward as a resultfollowing completion of integration activities/projects completed during 2022 following the acquisition and subsequent expansion in organic revenues, the Company continues to execute integration activitiesMerger (including but not limited to consolidation of CMS tools, cloud hosting environments, IT tools,tools) that materialized through the balance of 2022. These decreases were offset by increases of $278 in increased personnel costs as a result of higher headcount following the Merger and rightsizing leases for office space) that we expect will be realized by the end of 2022 and into 2023. The Company also reinstituted its 401k matching program for employeesscaled up operations in the fourth quarter of 2021, which representsresponse to an increase of $52 versus the prior year, and launched several investor relations initiatives, increasing spend $81 in the three months ended September 30, 2022 versus the prior year.customer acquisitions.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased $538,$329, or 155%70%, in the three months ended SeptemberJune 30, 20222023 compared to the same period in 2021. This was2022, driven by incremental amortization expense generated from the addition of $17,160 in amortizing intangible assets on February 17, 2022, as a result of the Merger.Merger, and a measurement period adjustment recorded during the three months ended June 30, 2022 which artificially reduced the total depreciation and amortization expense. The Company current expects depreciation and amortization expense to be approximately $800 per quarter for the remainder of 2023.
Interest Expense
See Note 98 Loans Payableto the Condensed Consolidated Financial Statements for a discussion of the Company’s debt and related interest expense obligations.
Changes in Fair Value of Equity Guarantee
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. The change in the period represents the mark-to-market adjustment as of the balance sheet date.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
The tables presented below compare our results of operations and present the results for each period and the change in those results from one period to another in both dollars and percentage change.
For the Nine Months Ended September 30, | Change | |||||||||||||||
2022 | 2021 | $ | % | |||||||||||||
Sales | $ | 32,860 | $ | 13,034 | $ | 19,826 | 152 | % | ||||||||
Cost of sales | 19,792 | 6,578 | 13,214 | 201 | % | |||||||||||
Gross profit | 13,068 | 6,456 | 6,612 | 102 | % | |||||||||||
Sales and marketing expenses | 2,572 | 834 | 1,738 | 208 | % | |||||||||||
Research and development expenses | 897 | 455 | 442 | 97 | % | |||||||||||
General and administrative expenses | 8,105 | 5,623 | 2,482 | 44 | % | |||||||||||
Bad debt (recovery)/expense | 164 | (463 | ) | 627 | -135 | % | ||||||||||
Depreciation and amortization expense | 2,060 | 1,035 | 1,025 | 99 | % | |||||||||||
Deal and transaction expenses | 538 | - | 538 | 100 | % | |||||||||||
Total operating expenses | 14,336 | 7,484 | 6,852 | 92 | % | |||||||||||
Operating loss | (1,268 | ) | (1,028 | ) | (240 | ) | 23 | % | ||||||||
Other income/(expenses): | ||||||||||||||||
Interest expense | (1,956 | ) | (617 | ) | (1,339 | ) | 217 | % | ||||||||
Change in fair value of warrant liability | 7,902 | - | 7,902 | 100 | % | |||||||||||
Change in fair value of equity guarantee | 369 | - | 369 | 100 | % | |||||||||||
Change in fair value of Convertible Loan | - | 166 | (166 | ) | 100 | % | ||||||||||
Loss on debt waiver consent | (345 | ) | - | (345 | ) | -100 | % | |||||||||
Loss on warrant amendment | (1,212 | ) | - | (1,212 | ) | -100 | % | |||||||||
Gain/(loss) on settlement of debt | (237 | ) | 3,449 | (3,686 | ) | -107 | % | |||||||||
Other income/(expense) | 3 | (7 | ) | 10 | -143 | % | ||||||||||
Total other income | 4,524 | 2,991 | 1,533 | 51 | % | |||||||||||
Net income before income taxes | 3,256 | 1,963 | 1,293 | 66 | % | |||||||||||
Provision from income taxes | (46 | ) | (9 | ) | (37 | ) | 411 | % | ||||||||
Net income | $ | 3,210 | $ | 1,954 | 1,256 | 64 | % |
Sales
Sales were $32,860, representing an increase of $19,826, or 152%, as compared to the same period in 2021 driven in part by the acquisition of Reflect via the Merger on February 17, 2022, and the Company’s successful sales activities as a combined company post-Merger. While the addition of Reflect revenue is contributing to the growth in revenue, the combined company has grown revenues approximately $11,435, or 53%, organically during the nine months ended September 30, 2022, as compared to the pro forma combined results during the nine months ended September 30, 2021.
Hardware revenues were $17,141 in 2022, an increase of $10,814, or 171%, as compared to the prior year, driven by large scale LED deployments by multiple customers. Services and other revenues were $15,719 in the nine months ended September 30, 2022, an increase of $9,012, or 134%, with the inclusion of Reflect’s operations in the Company’s consolidated results for such period. Managed services revenue, which includes both software-as-a-service (“SaaS”) and help desk technical subscription services, were $10,435 in the nine months ended September 30, 2022 as compared to $4,174 in the same period in 2021, driven by the addition of Reflect’s SaaS subscription revenue in the current year. This represents a year-over-year growth rate of 150% in our higher margin, typically subscription-based, managed services revenue.
Gross Profit
Gross profit increased by $6,612, or 102% during the nine months ended September 30, 2022 as compared to the same period in 2021 driven by an increase in revenue but offset by a reduction in gross profit margin. Gross profit margin decreased to 39.8% from 49.5% driven by revenue mix during the three months ended September 30, 2022 related to several material customer hardware rollouts active during the first half of the year that had a lower gross profit margin than our software services. We expect this contraction in gross profit margin to be less severe as we move beyond 2022.
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 $1,738, or 208%, driven primarily by (i) the inclusion in the prior year of a benefit of $232 related Employee Retention Credits (“ERC”) related to the retention and payment of salaries to sales personnel throughout 2020 and the six months ended June 30, 2021, (ii) the acquisition of Reflect via the Merger on February 17, 2022, and (iii) the Company’s enhanced investments into sales and marketing activities post-COVID-19 pandemic. Immediately following the Merger, the Company integrated the sales and marketing functions and did not disaggregate expenses between the two legacy companies. Following the Merger and through integration activities, the Company adopted certain tools, technology, and processes – particularly with respect to lead generation and brand marketing – that were undercapitalized historically by the Company. Additionally, the Company engaged an investor relations firm and has increased investor relations activities, including conferences and presentations. As a result, we expect the sales and marketing expenses of the Company for the nine months ended September 30, 2022 to adequately reflect the pace for spend in these areas in future reporting periods.
Research and Development Expenses
Research and development expenses generally include personnel and development tools costs associated with the continued development of the Company’s content management systems and other related application development. Research and development increased by $442, or 97%, in the nine months ended September 30, 2022 as compared to the same period in 2021, driven primarily by (i) the inclusion in the prior year of a benefit of $196 related ERC, and (ii) the acquisition of Reflect via the Merger on February 17, 2022. Through the Merger, we acquired a fully staffed, experienced software development team and elected to keep that team in-tact, particularly given employment market conditions with respect to talented software engineers. We have integrated the pre-existing CRI development team with the acquired team and have experienced enhanced speed to market on new feature and functionality development activities from increasing this resource pool. We expect this elevated level of expense during the nine months ended September 30, 2022 to continue into the future as we develop our current and future product set.
General and Administrative Expenses
General and administrative expenses – excluding bad debt expense – increased $2,482, or 44%, driven primarily by (i) the inclusion in the prior year of a benefit of $694 related ERC, and (ii) increased headcount and operations as a result of the acquisition of Reflect on February 17, 2022. While the Company anticipates carrying higher G&A expenses moving forward as a result of the acquisition and subsequent expansion in organic revenues, the Company continues to execute integration activities (including but not limited to consolidation of CMS tools, cloud hosting environments, IT tools, and rightsizing leases for office space) that we expect will be realized by the end of 2022 and into 2023. The Company also reinstituted its 401k matching program for employees in the fourth quarter of 2021, which represents an increase of $120 versus the prior year, and launched several investor relations initiatives, increasing spend $300 for the nine months ended September 30, 2022 versus the prior year.
Bad Debt
Expenses related to the Company’s allowance for bad debts increased by $627, or (135%) for the nine months ended September 30, 2022 compared to 2021. This increase was primarily driven by a prior period cash recovery of $555 related to a customer bankruptcy for which the Company previously recorded a reserve. The bad debt expense recorded for the nine months ended September 30, 2022 is representative of the Company’s actual history with uncollectable accounts receivable.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased by $1,025, or 99%, in 2022 compared to 2021. This was driven by the addition of $17,160 in amortizing intangible assets as a result of the Merger.
Interest Expense; Change in fair value of Convertible Loan
See Note 9 Loans Payable to the Condensed Consolidated Financial Statements for a discussion of the Company’s debt and related interest expense obligations.
As of September 30, 2021, we updated our fair value analysis of the Convertible Loan, resulting in recognition of a $166 during the nine months ended September 30, 2021.
Changes in Fair Value of Warrant Liability
During the nine monthsthree month period ended SeptemberJune 30, 2022, the Company recorded a gain of $7,902$2,433 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, and were subsequently re-assessedwith changes in fair value recognized at March 31, 2022 and June 30, 2022, resulting in the gain.each period end.
Loss on Warrant Amendment
Effective June 30, 2022, the Company amended the terms of certain warrants previously issued to its creditor and an investor, which removed the holder’s option to exercise such warrants on a cashless basis utilizing the VWAP of the Company’s common stock on the trading day immediately preceding the date of a notice of cashless exercise in certain circumstances, and removed the condition to exercising such warrants that the Company’s shareholders approve the exercise thereof (which hashad already been obtained). The amendments to the warrants extended the term of such warrants for an additional one year. As a result of the extension in term provided in exchange for the amendment, the Company reassessed the fair value of those warrants, resulting in the Company recording a loss on the fair value of these warrants of $345. The foregoing amendments to the warrants resulted in such warrants to be accounted for as equity instruments on the Company’s financial statementsCondensed Consolidated Financial Statements as of June 30, 2022. As such, following recording
Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
The tables presented below compare our results of operations and present the gainsresults for each period and lossesthe change in those results from one period to another in both dollars and percentage change.
For the Six Months | ||||||||||||||||
Ended June 30, | Change | |||||||||||||||
2023 | 2022 | $ | % | |||||||||||||
Sales | $ | 19,140 | $ | 21,680 | $ | (2,540 | ) | 12 | % | |||||||
Cost of sales | 9,753 | 13,126 | (3,373 | ) | 26 | % | ||||||||||
Gross profit | 9,387 | 8,554 | 833 | 10 | % | |||||||||||
Sales and marketing expenses | 2,365 | 1,854 | 511 | 28 | % | |||||||||||
Research and development expenses | 743 | 659 | 84 | 13 | % | |||||||||||
General and administrative expenses | 5,493 | 5,422 | 71 | 1 | % | |||||||||||
Depreciation and amortization expense | 1,576 | 1,175 | 401 | 34 | % | |||||||||||
Deal and transaction expenses | - | 428 | (428 | ) | 100 | % | ||||||||||
Total operating expenses | 10,177 | 9,538 | 639 | 7 | % | |||||||||||
Operating loss | (790 | ) | (984 | ) | 194 | 20 | % | |||||||||
Other income/(expenses): | ||||||||||||||||
Interest expense | (1,590 | ) | (1,199 | ) | (391 | ) | 33 | % | ||||||||
Change in fair value of warrant liability | - | 7,902 | (7,902 | ) | 100 | % | ||||||||||
Change in fair value of equity guarantee | (92 | ) | (73 | ) | (19 | ) | 26 | % | ||||||||
Loss on debt waiver consent | - | (1,212 | ) | 1,212 | 100 | % | ||||||||||
Loss on warrant amendment | - | (345 | ) | 345 | 100 | % | ||||||||||
Loss on settlement of debt | - | (274 | ) | 274 | 100 | % | ||||||||||
Other income | 135 | 5 | 130 | 2600 | % | |||||||||||
Total other income/(expenses) | (1,547 | ) | 4,804 | (6,351 | ) | 132 | % | |||||||||
Net (loss) income before income taxes | (2,337 | ) | 3,820 | (6,157 | ) | 161 | % | |||||||||
Provision from income taxes | (88 | ) | (56 | ) | (32 | ) | 57 | % | ||||||||
Net (loss) income | $ | (2,425 | ) | $ | 3,764 | (6,189 | ) | 164 | % |
Sales
Sales were $19,140, representing a decrease of $2,540, or 12%, as compared to the same period in 2022. Hardware revenues were $7,759 for the six month period ended June 30, 2023 as compared to $12,126 for the six month period ended June 30, 2022, a decrease of $4,367, or 36%. Hardware revenues generated during the six month period ended June 30, 2023 were driven by two customers which refreshed their digital hardware throughout their entire geographic footprint . These refresh activities are cyclical in nature and no current customer executed a similar large scale refresh during the six months ended June 30, 2023. Those refresh activities represented $4,418 in incremental hardware revenue during the six months ended June 30, 2022.
Services and other revenues were $11,381 for the six month period ended June 30, 2023, an increase of $1,827, or 19%, driven by growth in managed services revenue. Managed services revenue, which includes both SaaS and help desk technical subscription services, as well as non-contracted recurring content management services, were $7,907 in the six months ended June 30, 2023 as compared to $6,535 in the same period in 2022, driven by expansion in the Company's SaaS revenue and the inclusion of Reflect revenue for a full six months in the current year as compared to approximately four and one half months during the six months ended June 30, 2022 as a result of the Merger closing on February 17, 2022. This represents a year-over-year growth rate of 21% in our higher margin, primarily subscription-based, managed services revenue.
Gross Profit
Gross profit increased by $833, or 10% during the six months ended June 30, 2023 as compared to the same period in 2022 driven by improvements in hardware gross margins as a result of a significant deployment with gross margin of approximately 25%.
Gross profit margin increased to 49% during the six months ended June 30, 2023, from 39% in the same period in 2022 driven by (1) favorable revenue mix as managed services revenue, which includes higher margin SaaS and other services revenues, increased to 41% of total revenue for the six months ended June 30, 2023 as compared to 30% of total revenues in the six months ended June 30, 2022 and (2) margin expansion in hardware partially offset by reduced revenue in the current year.
Sales and Marketing Expenses
Sales and marketing expenses generally include the salaries, taxes, and benefits of our sales and marketing personnel, as well as trade show activities, travel, and other related sales and marketing costs. Sales and marketing expenses increased by $511, or 28%, driven primarily by (1) the acquisition of Reflect via the Merger on February 17, 2022, and (2) the Company’s enhanced investments into sales and marketing activities. Following the Merger, the Company adopted certain tools, technology, and processes – particularly with respect to these warrant amendments,lead generation and brand marketing – that were historically undercapitalized by the Company reclassifiedand have since accelerated new customer acquisition. Through completion of the warrant liabilityMerger, the Company also acquired a media sales business unit that serves to monetize customer networks via the direct sale of $5,709 from noncurrent liabilitiesadvertising to additional paid-in-capitalbe displayed on digital advertising networks owned by those customers. This business utilizes internal and third party sales agents - the salaries and commissions of which are included within Sales and Marketing Expense within the Condensed Consolidated Statement of Operations. We expect the sales and marketing expenses of the Company for the six months ended June 30, 2023 to adequately reflect the normal spend in these areas in future reporting periods.
Research and Development Expenses
Research and development expenses generally include personnel and development tools costs associated with the continued development of the Company’s content management systems and other related application development. The Company capitalizes certain of these expenses and amortizes those costs through the Condensed 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 $84, or 13%, for the six month period ended June 30, 2023 as compared to the same period in 2022 driven primarily by incremental headcount added via completion of the Merger on February 17, 2022. Through the Merger, we acquired a fully staffed, experienced software development team and elected to keep that team in-tact, particularly given current competitive employment market conditions with respect to talented software engineers. We integrated the development teams which has enhanced speed to market on new feature and functionality development activities. We expect a continued elevated level of expenditure and capitalized activity through the third quarter of 2023 associated with a customer-facing opportunity, followed by a return to spending levels consistent with the Company’s results for the second quarter of 2022, which adequately reflect the pace for spend in these areas in future reporting periods.
General and Administrative Expenses
General and administrative expenses were effectively flat, increasing $71, or 1%. As compared to the six months ended June 30, 2022, the Company experienced decreases of (1) $456 in stock compensation expense as outstanding performance awards were fully expensed as of December 31, 2022, and (2) reductions in certain expenses following completion of integration activities/projects completed during 2022 following the Reflect Merger (including but not limited to consolidation of CMS tools, cloud hosting environments, IT tools) that materialized through the balance of 2022. These decreases were partially offset by increases of (1) $313 in increased personnel costs as the Company scaled up operations in response to an increase in customer acquisitions, (2) $133 in legal expenses associated with the Company's establishment of a Special Committee of the Board of Directors to consider and respond to an unsolicited proposal of a Company shareholder to acquire certain outstanding shares of common stock of the Company, as well as settlement of two open litigation matters during the period, and (3) other operating costs, each primarily associated with the consolidation of Reflect for six months in 2023, as compared to reporting consolidation of Reflect for only 134 days during the six months ended June 30, 2022 as a result of completion of the Reflect Merger on February 17, 2022.
Depreciation and amortization expenses
Depreciation and amortization expenses increased $401, or 34%, in the six months ended June 30, 2023 compared to the same period in 2022, driven primarily by incremental amortization expense generated from the addition of $17,160 in amortizing intangible assets on February 17, 2022, as a result of the Merger.
Interest expense
See Note 8 Loans Payable to the Condensed Consolidated Financial Statements for a discussion of the Company’s debt and related interest expense obligations.
Changes in fair value of warrant liability; Loss on warrant amendment
During the six month period ended June 30, 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.
Effective June 30, 2022, the Company amended the terms of certain warrants previously issued to its creditor and an investor, which removed the holder’s option to exercise such warrants on a cashless basis utilizing the VWAP of the Company’s common stock on the trading day immediately preceding the date of a notice of cashless exercise in certain circumstances, and removed the condition to exercising such warrants that the Company’s shareholders approve the exercise thereof (which had already been obtained). The amendments to the warrants extended the term of such warrants for an additional one year (collectively, the "Warrant Amendment"). The foregoing amendments to the warrants resulted in such warrants to be accounted for as equity instruments in the Company’s Condensed Consolidated Financial Statements.
Changes in fair value of equity guarantee
The Company has contingent consideration arrangements related to the Merger to potentially pay additional cash amounts in future periods based on the lack of achievement of certain share price performance goals of our common stock. Such contingent consideration arrangements are recorded at fair value and are classified as liabilities on the acquisition date and are remeasured at each reporting period in accordance with ASC 805-30-35-1 using a Monte Carlo simulation model. The change in the period represents the mark-to-market adjustment as of the balance sheet dates.
Loss on Debt Waiverdebt waiver consent
On February 17,During the six months ended June 30, 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,Company's credit agreement with Slipstream, the Company paid consideration to such investor in the form of a warrant (the “Purchaser Warrant”)the Purchaser Warrant to purchase 1,400,000466,667 shares of Company common stock in an at-the-market offering under Nasdaq rules. The number of shares of Company common stock subject to the Purchaser Warrant iswas equal to the waiver fee ($175) divided by $0.125$0.375 per share. The exercise price of the Purchaser Warrant is $1.41$4.23 per share, and the Purchaser Warrant is notbecame exercisable untilon August 17, 2022. The Purchaser Warrant expires fivesix years from the date of issuance.issuance following execution of the Warrant Amendment. At the date of issuance, the Company performed a Black-Scholes valuation of the Purchaser Warrant, resulting in a fair value of $0.8656$2.5968 per warrant. In recording the warrant liability, the Company recorded an expense in the Condensed Consolidated Statement of Operations associated with the issuance of the Purchaser Warrant of $1,211.$1,212 for the six months ended June 30, 20222. No such transactions occurred in the current period.
Loss on Warrant Amendmentextinguishment of debt
EffectiveDuring the six months ended June 30, 2022, the Company amended the terms of the Common Stock Warrant (7,166,505 warrants), Lender Warrant (5,194,495 warrants) and Purchaser Warrant (1,400,000 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, such that the Common Stock Warrant will expire on February 3, 2028, and the Lender Warrant and Purchaser Warrant 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.
Gain on Settlement of Debt
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, in part as the Consolidation Term Loan eliminated a substantive conversion feature. In aggregate the Company recorded a loss on extinguishment of $295, primarily associated with the write-off of pre-existing debt discounts. No such transactions occurred in the current period.
On January 11, 2021, the Company received a notice from Old National Bank regarding forgiveness of the loan in the principal amount of $1,552 (the “PPP Loan”) that was made pursuant to the Small Business Administration Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act of 2020. According to such notice, the full principal amount of the PPP Loan and the accrued interest have been forgiven, resulting in a gain of $1,552 during the nine months ended September 30, 2021.
On May 13, 2021, the Company and seller of Allure (“Seller”) entered into a settlement agreement wherein neither party admitted liability, and the Company agreed to pay, and Seller agreed to accept, $100 as settlement in full for the outstanding balance of principal and accrued interest under the Seller Note and a mutual release of all claims related to the Seller Note and Allure sale transaction under the Purchase Agreement and all related agreements.
As a result of this settlement, the full principal amount of the Seller Note and the accrued interest have been eliminated, resulting in a gain in the Condensed Consolidated Financial statements of $1,624, representing $1,538 related to the Seller Note and $86 of related interest thereon, during the nine months ended September 30, 2021.
Summary Unaudited Quarterly Financial Information
The following represents unaudited financial information derived from the Company’s quarterly financial statements:
Quarters Ended | ||||||||||||||||||||
Quarters ended | September 30 2022 | June 30 2022 | March 31 2022 | December 31 2021 | September 30 2021 | |||||||||||||||
GAAP net income (loss) | $ | (554 | ) | $ | 1,262 | $ | 2,502 | $ | (1,722 | ) | $ | (343 | ) | |||||||
Interest expense: | ||||||||||||||||||||
Amortization of debt discount | 363 | 360 | 181 | 29 | 29 | |||||||||||||||
Other interest, net | 394 | 390 | 268 | 160 | 158 | |||||||||||||||
Depreciation/amortization: | ||||||||||||||||||||
Amortization of intangible assets | 848 | 431 | 680 | 302 | 320 | |||||||||||||||
Amortization of employee share-based awards | 456 | 316 | 469 | 324 | 329 | |||||||||||||||
Depreciation of property, equipment | 37 | 37 | 27 | 27 | 27 | |||||||||||||||
Income tax expense/(benefit) | (10 | ) | 53 | 3 | 13 | 1 | ||||||||||||||
EBITDA | $ | 1,534 | 2,849 | 4,130 | (867 | ) | $ | 521 | ||||||||||||
Adjustments | ||||||||||||||||||||
(Gain)/loss on fair value of warrant liability | - | (2,433 | ) | (5,469 | ) | - | - | |||||||||||||
(Gain)/loss on settlement of obligations | (37 | ) | (21 | ) | 295 | - | (256 | ) | ||||||||||||
(Gain)/loss on debt waiver consent | - | - | 1,212 | - | - | |||||||||||||||
(Gain)/loss on warrant amendment | - | 345 | - | - | - | |||||||||||||||
(Gain)/loss on fair value of equity guarantee | (442 | ) | 73 | - | - | - | ||||||||||||||
Deal and transaction expenses | 110 | 37 | 391 | 518 | - | |||||||||||||||
Other income | 2 | 1 | (6 | ) | - | - | ||||||||||||||
Stock-based compensation – Director grants | 82 | 82 | 82 | 318 | 27 | |||||||||||||||
Adjusted EBITDA | $ | 1,249 | 933 | 635 | (31 | ) | $ | 292 |
Quarters Ended | ||||||||||||||||||||
June 30 | March 31 | December 31 | September 30 | June 30 | ||||||||||||||||
Quarters ended | 2023 | 2023 | 2022 | 2022 | 2022 | |||||||||||||||
GAAP net income (loss) | $ | (1,425 | ) | $ | (1,000 | ) | $ | (1,334 | ) | $ | (554 | ) | $ | 1,262 | ||||||
Interest expense: | ||||||||||||||||||||
Amortization of debt discount | 358 | 356 | 364 | 363 | 360 | |||||||||||||||
Other interest, net | 429 | 447 | 423 | 394 | 390 | |||||||||||||||
Depreciation/amortization: | ||||||||||||||||||||
Amortization of intangible assets | 754 | 754 | 743 | 848 | 431 | |||||||||||||||
Amortization of employee share-based awards | 151 | 225 | 448 | 456 | 316 | |||||||||||||||
Depreciation of property & equipment | 43 | 25 | 30 | 37 | 37 | |||||||||||||||
Income tax expense/(benefit) | 45 | 43 | 33 | (10 | ) | 53 | ||||||||||||||
EBITDA | $ | 355 | $ | 850 | $ | 707 | $ | 1,534 | $ | 2,849 | ||||||||||
Adjustments | ||||||||||||||||||||
Gain on fair value of warrant liability | - | - | - | - | (2,433 | ) | ||||||||||||||
Gain on settlement of obligations | - | - | - | (37 | ) | (21 | ) | |||||||||||||
Loss on warrant amendment | - | - | - | - | 345 | |||||||||||||||
(Gain)/loss on fair value of equity guarantee | 16 | 76 | (705 | ) | (442 | ) | 73 | |||||||||||||
Disposal of Safe Space Solutions inventory | - | - | 909 | - | - | |||||||||||||||
Deal and transaction expenses | - | - | 54 | 110 | 37 | |||||||||||||||
Other (income)/expense | (123 | ) | (12 | ) | 7 | 2 | 1 | |||||||||||||
Stock-based compensation – Director grants | 43 | 43 | 56 | 82 | 82 | |||||||||||||||
Adjusted EBITDA | $ | 291 | 957 | 1,028 | 1,249 | 933 |
Liquidity and Capital Resources
See Note 1 Nature of Organization and Operationsto the accompanying Condensed Consolidated Financial Statements for a detailed discussion of liquidity and financial resources.
Operating Activities
The net cash provided by operating activities during the six months ended June 30, 2023 was $6,344 compared to net cash used in operating activities were $1,050 for the nine months ended September 30, 2022 compared to $367of $63 for the same period in 2021. We produced net income of $3,210. Following the Merger, our business has significantly expanded, particularly with respect to managed services revenue. Other than net income, cash2022. Cash provided by operating activities in the six month period ending June 30, 2023, was driven by growtha reduction in accounts receivable, inventory and prepaid assets of $1,019 of$1,458, $1,119 and $1,035, respectively. In addition, deferred revenue and $533 of accrued expenses, combined with a reduction in prepaid assets of $682, partially offset by an expansion of accounts receivablecustomer deposits increased $1,604 and inventory of $2,835 and $1,032,$1,507 respectively.
Investing Activities
Net cash used in investing activities during the ninesix months ended SeptemberJune 30, 20222023 was $20,268$2,203 compared to $432$19,546 during the same period in 2021.2022. The use of cash in the currentprior year was driven by (1) completion of the Merger and (2) continued investments in our software platforms.Merger. We currently do not have any material commitments for capital expenditures as of SeptemberJune 30, 2022;2023; however, we anticipate continued elevated capital expenditures in excess of historical trends through secondthird quarter of 2023 as we complete the modernization and internationalization of our automotive platform in an effort to capture incremental SaaS-based revenue contracts.
Financing Activities
Net cash used in financing activities during the six months ended June 30, 2023 was $2,510 compared to net cash provided by financing activities during the nine months ended September 30, 2022 was $19,254 compared to $1,745of $19,566 for the same period in 2021.2022. The increasechange is the result of the Company’s completion of the Equity Financingequity and the Debt Financing (each as described in Note 1 Nature of Organization and Operations to the accompanying Condensed Consolidated Financial Statements)debt financing in the periodfirst quarter of 2022 to facilitate the Merger, which providednet cash of $10,109 and $9,868, respectively, reduced by $723 as a result ofrespectively. Net cash used in financing activities during the six month period ended June 30, 2023, primarily represents repayments of principalmade on the Seller Note.Secured Promissory Note and Term Loan (2022) of $623 and $1,881, respectively.
Off-Balance Sheet Arrangements
During the three and ninesix months ended SeptemberJune 30, 2022,2023, we did not engage in any off-balance sheet arrangements set forth in Item 303(a)(4) of Regulation S-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of SeptemberJune 30, 2022,2023, and designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended SeptemberJune 30, 20222023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
As a smaller reporting company, we are not required to provide the information required by this Item; however, the discussion of our business and operations should be read together with the Risk Factors set forth in our Annual Report on Form 10-K filed with the SEC on March 10, 202130, 2023 and subsequent filings made with the SEC. Such risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flow, strategies or prospects in a material and adverse manner. In addition, below is an additional risk factor for which you should be aware:
If we are unable to extend the maturity or replace our existing financing agreements in the future, our plans to operate our business may be adversely affected and we could be required to curtail our activities significantly and/or cease operating.
As of August 4, 2023, our largest shareholder and investor, Slipstream Communications LLC (“Slipstream”) is the holder of 96% of our outstanding debt instruments, including three term loans, and has beneficial ownership of approximately 38% 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). Historically, we have been able to obtain a continuing support letter from Slipstream, a factor that has previously alleviated the substantial doubt about our ability to continue as a going concern.
Pursuant to the Second Amended and Restated Credit and Security Agreement (the "Credit Agreement") made between the Company and Slipstream Communications ("Slipstream") the Company is required to make monthly repayments of principal on the Consolidation Term Loan beginning on September 1, 2023 and on the first day of each month thereafter until the Maturity Date on February 17, 2025. The monthly principal payment beginning on September 1, 2023 is approximately $399, or total principal repayments for the twelve months subsequent to the reporting date of these Condensed Consolidated Financial Statements of $4,389. As a result of the principal debt service payments required to be paid on account of the Consolidation Term Loan, the Company does not currently have cash on hand or committed available liquidity to repay all of its outstanding debt due within one year after the date that these financial statements are issued. These 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, management plans to either refinance or recapitalize the debt should the Company not produce sufficient cash flows to continue to make repayments of principal. However, these plans have not been finalized and are not completely within the Company's control, and therefore cannot be deemed probable under ASU 205-40. We have been unable to obtain a continuing support letter from Slipstream beyond the period ending May 31, 2024. Obtaining a continuing support letter from Slipstream beyond one year of our report date was a factor that previously alleviated the substantial doubt about our ability to continue as a going concern. 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.
If we are unable to extend the maturity or replace our existing financing agreements in the future, our plans to operate our business may be adversely affected and we could be required to curtail our activities significantly and/or cease operating.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Rule 10b5-1 Trading Plans
During the quarter ended June 30, 2023, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement."
Earnings Release
On August 4, 2023, the Company issued a press release announcing its financial condition and results of operations for the three and six months ended June 30, 2023. A copy of the press release is furnished as Exhibit 99.1 and is incorporated by reference into this Item 5 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 Securities Exchange Act of 1934, as amended (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.
On October 31, 2022, the Company and its subsidiaries (collectively, the “Borrowers”) amended their Second Amended and Restated Loan and Security Agreement (the “Credit Agreement”) with their lender, Slipstream Communications, LLC (“Slipstream”). The amendment provides the Borrowers with a $2 million term loan, the net proceeds of which are being used by the Company to accelerate an active software development project with potential to expand SaaS revenues associated with an existing customer by as much as $5 million annually beginning as early as January 2024.
The term loan has an annual interest rate of 12.5% and matures on September 1, 2023. Commencing on February 1, 2023, the Borrowers will make monthly installment payments of approximately $270,000 until the maturity date, consisting of principal and interest sufficient to fully amortize the term loan through the maturity date.
The foregoing descriptions of the amendment and term loan are not complete descriptions thereof and are qualified in their entireties by reference to the full text of the First Amendment to Second Amended and Restated Loan and Security Agreement and Term Note (2022) filed as Exhibits 10.4 and 10.5 to this Quarterly Report on Form 10-Q, which are incorporated herein by reference.
Item 6. Exhibits
* Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Creative Realities, Inc. | ||
Date: August 4, 2023 | By | /s/ Richard Mills |
Richard Mills | ||
Chief Executive Officer | ||
By | /s/ | |
Chief Financial Officer |
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