Exhibit 99.1
Reflect Systems, Inc.
Financial Statements
December 31, 2021 and 2020
Reflect Systems, Inc.
Table of Contents
December 31, 2021 and 2020
Page | ||
Independent Auditors’ Report | 1 | |
Financial Statements | ||
Balance Sheets | 3 | |
Statements of Operations | 4 | |
Statements of Changes in Stockholders’ Deficit | 5 | |
Statements of Cash Flows | 6 | |
Notes to Financial Statements | 7 |
i
To the Stockholders and Board of Directors of
Reflect Systems, Inc.
Report on the Audit of the Financial Statements
Opinion
We have audited the financial statements of Reflect Systems, Inc. (the Company) which comprise the balance sheets as of December 31, 2021 and 2020, and the related statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended, and the related notes to the financial statements.
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
1
In performing an audit in accordance with GAAS, we:
● | Exercise professional judgment and maintain professional skepticism throughout the audit. |
● | Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. |
● | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed. |
● | Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. |
● | Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. |
We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings and certain internal control–related matters that we identified during the audit.
/s/ Baker Tilly US, LLP
Plano, Texas
May 16, 2022
2
Balance Sheets
December 31, 2021 and 2020
2021 | 2020 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 4,098,371 | $ | 2,726,431 | ||||
Accounts receivable | 1,124,513 | 3,609,113 | ||||||
Work-in-progress | 195,139 | 6,111 | ||||||
Prepaid expenses and other current assets | 76,785 | 169,560 | ||||||
Total current assets | 5,494,808 | 6,511,215 | ||||||
Property and equipment, net | 280,135 | 419,932 | ||||||
Capitalized software development, net | 2,665,907 | 2,944,452 | ||||||
Deferred income tax asset, net | 3,274,759 | 3,105,207 | ||||||
Other assets | 35,816 | 35,816 | ||||||
Total assets | $ | 11,751,425 | $ | 13,016,622 | ||||
Liabilities and Stockholders’ Deficit | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 551,572 | $ | 632,679 | ||||
Accrued liabilities | 262,647 | 368,578 | ||||||
Contract liabilities | 2,028,558 | 3,069,591 | ||||||
Deferred rent and tenant allowance, current portion | 111,848 | 104,173 | ||||||
Note payable, current portion | 500,000 | 500,000 | ||||||
Total current liabilities | 3,454,625 | 4,675,021 | ||||||
Deferred rent and tenant allowance, net of current portion | 119,523 | 231,371 | ||||||
Note payable, net of current portion | 583,333 | 1,083,333 | ||||||
Total liabilities | 4,157,481 | 5,989,725 | ||||||
Temporary Stockholders’ Equity | ||||||||
Series A preferred stock, $0.001 par value, 3,000,000 shares authorized, issued and outstanding $4,600,200 liquidation preference | 2,303,000 | 2,303,000 | ||||||
Series B preferred stock, $0.001 par value, 2,472,443 shares authorized, issued and outstanding $4,089,421 liquidation preference | 2,047,182 | 2,047,182 | ||||||
Series C preferred stock, $0.001 par value, 10,400,000 shares authorized, 3,727,613 issued and outstanding $6,709,703 liquidation preference | 3,358,579 | 3,358,579 | ||||||
Series C-1 preferred stock, $0.001 par value, 8,000,000 shares authorized, issued and outstanding $12,000,000 liquidation preference | 6,008,000 | 6,008,000 | ||||||
Series D preferred stock, $0.001 par value, 4,000,000 shares authorized, issued and outstanding $4,000,000 liquidation preference | 2,004,000 | 2,004,000 | ||||||
Total temporary stockholders’ equity | 15,720,761 | 15,720,761 | ||||||
Stockholders’ Deficit | ||||||||
Common stock, $0.001 par value, 35,000,0000 shares authorized; 6,258,505 issued and outstanding | 6,259 | 6,259 | ||||||
Additional paid-in capital | 1,567,119 | 1,567,119 | ||||||
Accumulated deficit | (9,700,195 | ) | (10,267,242 | ) | ||||
Total stockholders’ deficit | (8,126,817 | ) | (8,693,864 | ) | ||||
Total liabilities and stockholders’ deficit | $ | 11,751,425 | $ | 13,016,622 |
See notes to financial statements
3
Statements of Operations
Years Ended December 31, 2021 and 2020
2021 | 2020 | |||||||
Revenues | ||||||||
Services | $ | 10,222,779 | $ | 10,061,939 | ||||
Hardware | 2,020,252 | 1,962,971 | ||||||
Total revenue | 12,243,031 | 12,024,910 | ||||||
Cost of Revenues | ||||||||
Services | 3,040,246 | 2,841,390 | ||||||
Hardware | 1,503,957 | 1,798,893 | ||||||
Total cost of revenues | 4,544,203 | 4,640,283 | ||||||
Gross profit | 7,698,828 | 7,384,627 | ||||||
Operating Expenses | ||||||||
Salaries and wages | 5,521,322 | 5,825,078 | ||||||
Contract labor and other employee expenses | 349,403 | 239,511 | ||||||
Selling expenses | 578,764 | 549,612 | ||||||
Depreciation | 146,518 | 155,223 | ||||||
Rent expense | 352,639 | 330,731 | ||||||
Other operating expenses | 1,273,529 | 530,131 | ||||||
Total operating expenses | 8,222,175 | 7,630,286 | ||||||
Loss from operations | (523,347 | ) | (245,659 | ) | ||||
Other Income (Expense) | ||||||||
Interest income | 642 | 2,585 | ||||||
Interest expense | (73,439 | ) | (95,852 | ) | ||||
Forgiveness on Paycheck Protection Program loan | 998,393 | 1,062,400 | ||||||
Total other income | 925,596 | 969,133 | ||||||
Net income before income tax benefit | 402,249 | 723,474 | ||||||
Income Tax Benefit | 164,798 | 135,887 | ||||||
Net income | $ | 567,047 | $ | 859,361 |
See notes to financial statements
4
Statements of Changes in Stockholders’ Deficit
Years Ended December 31, 2021 and 2020
Additional | Total | |||||||||||||||||||
Common Stock | Paid- In | Accumulated | Stockholders’ | |||||||||||||||||
Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
Balance, January 1, 2020 | 6,258,505 | $ | 6,259 | $ | 1,555,548 | $ | (11,126,603 | ) | $ | (9,564,796 | ) | |||||||||
Stock-based compensation | - | - | 11,571 | - | 11,571 | |||||||||||||||
Net income | - | - | - | 859,361 | 859,361 | |||||||||||||||
Balance, December 31, 2020 | 6,258,505 | 6,259 | 1,567,119 | (10,267,242 | ) | (8,693,864 | ) | |||||||||||||
Net income | - | - | - | 567,047 | 567,047 | |||||||||||||||
Balance, December 31, 2021 | 6,258,505 | $ | 6,259 | $ | 1,567,119 | $ | (9,700,195 | ) | $ | (8,126,817 | ) |
See notes to financial statements
5
Statements of Cash Flows
Years Ended December 31, 2021 and 2020
2021 | 2020 | |||||||
Cash Flows From Operating Activities | ||||||||
Net income | $ | 567,047 | $ | 859,361 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation expense | 146,518 | 155,223 | ||||||
Capitalized software amortization expense | 1,123,446 | 1,080,154 | ||||||
Forgiveness on Paycheck Protection Program loan | (998,393 | ) | (1,062,400 | ) | ||||
Stock-based compensation expense | - | 11,571 | ||||||
Deferred income taxes | (169,552 | ) | (153,517 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 2,484,600 | (446,922 | ) | |||||
Work-in-progress | (189,028 | ) | 677,439 | |||||
Prepaid expenses and other current assets | 92,775 | 78,065 | ||||||
Accounts payable | (81,107 | ) | (904,917 | ) | ||||
Accrued liabilities | (105,931 | ) | (450,351 | ) | ||||
Contract liabilities | (1,041,033 | ) | 279,912 | |||||
Deferred rent and tenant allowance | (104,173 | ) | (96,498 | ) | ||||
Net cash provided by operating activities | 1,725,169 | 27,120 | ||||||
Cash Flows From Investing Activities | ||||||||
Purchases of property and equipment | (6,721 | ) | (8,361 | ) | ||||
Software development costs | (844,901 | ) | (1,002,764 | ) | ||||
Net cash used in investing activities | (851,622 | ) | (1,011,125 | ) | ||||
Cash Flows From Financing Activities | ||||||||
Proceeds from Paycheck Protection Program loan | 998,393 | 1,062,400 | ||||||
Payments on note payable | (500,000 | ) | (416,667 | ) | ||||
Net cash provided by financing activities | 498,393 | 645,733 | ||||||
Net increase (decrease) in cash and cash equivalents | 1,371,940 | (338,272 | ) | |||||
Cash and Cash Equivalents, Beginning | 2,726,431 | 3,064,703 | ||||||
Cash and Cash Equivalents, Ending | $ | 4,098,371 | $ | 2,726,431 | ||||
Noncash Transaction | ||||||||
Forgiveness on Paycheck Protection Program loan | $ | 998,393 | $ | 1,062,400 | ||||
Supplemental Information | ||||||||
Cash paid for taxes | $ | 72,333 | $ | 14,752 | ||||
Cash paid for interest | $ | 64,225 | $ | 86,638 |
See notes to financial statements
6
Notes to Financial Statements
December 31, 2021 and 2020
1. | Organization and Nature of Operations |
Reflect Systems, Inc. (the Company) was incorporated under the laws of the State of Delaware on September 7, 2001. The Company began operations on September 11, 2001.
The Company develops, manufactures, licenses, and supports a suite of software products that provide enterprises and retailers the ability to create, manage and distribute bandwidth-intensive applications, including streaming media and digital signage content, across LAN/WAN, internet and satellite-based networks. The Company also provides maintenance, digital media advertising, professional training and product support services as well as resells third-party hardware and internet-based communication and information services.
Effective January 12, 2016, the Company formed a subsidiary, Reflect Acquisition, LLC, a Texas limited liability company. For the years ended December 31, 2021 and 2020, Reflect Acquisition, LLC has had no activity.
2. | Significant Accounting Policies |
Basis of Presentation
The accompanying audited financial statements for the years ended December 31, 2021 and 2020 have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).
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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, and a credit agreement. The carrying amounts of these instruments approximate their respective fair values because of their short-term maturities or the underlying terms of these instruments. The estimated fair value of the credit agreement also approximates carrying value because the terms are comparable to similar lending arrangements in the marketplace.
7
Reflect Systems, Inc.
Notes to Financial Statements
December 31, 2021 and 2020
Recent Accounting Pronouncements
During February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). ASU No. 2016-02 requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. During 2018, the FASB also issued ASU No. 2018-01, Land Easement Practical Expedient, which permits an entity to elect an optional transition practical expedient to not evaluate land easements that existed or expired before the entity’s adoption of Topic 842 and that were not previously accounted for under ASC 840; ASU 2018-10, Codification Improvements to Topic 842, Leases, which addresses narrow aspects of the guidance originally issued in ASU No. 2016-02; ASU 2018-11, Targeted Improvements, which provides entities with an additional (and optional) transition method whereby an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption and also provides lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component; and ASU No. 2018-20, Narrow-Scope Improvements for Lessors, which addresses sales and other similar taxes collected from lessees, certain lessor costs, and the recognition of variable payments for contracts with lease and nonlease components. During 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements, which deferred the effective date for certain entities and, during 2020, issued ASU No. 2020-05, Effective Dates for Certain Entities, which deferred the effective date of ASU No. 2016-02 for those entities that had not yet issued their financial statements at the time of ASU No. 2020-05’s issuance. Topic 842 (as amended) is effective for annual periods beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is currently assessing the effect that Topic 842 (as amended) will have on its results of operations, financial position and cash flows.
During June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. During November 2018, April 2019, May 2019, November 2019 and March 2020, respectively, the FASB also issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses; ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses; ASU No. 2019-05 Targeted Transition Relief; ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses; and ASU No. 2020-03 Codification Improvements to Financial Instruments. ASU No. 2018-19 clarifies the effective date for nonpublic entities and that receivables arising from operating leases are not within the scope of Subtopic 326-20, ASU Nos. 2019-04 and 2019-05 amend the transition guidance provided in ASU No. 2016-13, and ASU Nos. 2019-11 and 2020-03 amend ASU No. 2016-13 to clarify, correct errors in, or improve the guidance. ASU No. 2016-13 (as amended) is effective for annual periods and interim periods within those annual periods beginning after December 15, 2022. Early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company is currently assessing the effect that ASU No. 2016-13 (as amended) will have on its results of operations, financial position and cash flows.
During December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. ASU No. 2019-12 simplifies the accounting for income taxes by removing the following exceptions: (a) exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items; (b) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (c) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (d) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The ASU also makes the following amendments to the guidance: (a) requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a nonincome-based tax; (b) requiring that an entity evaluate when a step-up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; (c) specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements, however, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority; (d) requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date; and (e) and making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. ASU No. 2019-12 is effective for fiscal years beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. Early adoption is permitted. The Company is currently assessing the effect that ASU No. 2019-12 will have on its results of operation, financial position and cash flows.
8
Reflect Systems, Inc.
Notes to Financial Statements
December 31, 2021 and 2020
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash or cash equivalents. The Company maintains cash deposits with federally insured financial institutions that may, at times, exceed federally insured limits. The Company has not incurred any losses from such accounts, and management considers the risk to be minimal.
Accounts Receivable
Accounts receivable represents the uncollected portion of amounts recorded as revenues or contract liabilities. Management performs periodic analyses to evaluate all outstanding accounts receivable to estimate an allowance for doubtful accounts that may not be collectible, based on the best facts available to management. Management considers historical collection patterns, accounts receivable aging trends and specific identification of disputed invoices in its analyses. After all reasonable attempts to collect a receivable have failed, the receivable is written off against the allowance for doubtful accounts. As of December 31, 2021 and 2020, the Company did not record any bad debt expense. As of December 31, 2021 and 2020, there was no allowance for doubtful accounts.
Property and Equipment
Property and equipment are reported at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the asset. Leasehold improvements are amortized using the straight-line method, over the shorter of the estimated useful life of the improvement or the remaining term of the lease. Useful lives of property and equipment is as follows:
Useful Lives | |||
Computer equipment | 3 years | ||
Office furniture and fixtures | 5 years |
Additions and major repairs or replacements of property and equipment that increase the life of an asset, are capitalized over the asset’s estimated remaining useful life. Maintenance, repairs and minor replacements are charged to expense as incurred. Cost and the related accumulated depreciation on assets retired or otherwise disposed of are removed from the accounts, and related gains or losses are included in operating expenses.
Software Development Costs
The Company capitalizes the costs incurred to develop software for internal use during the application development stage. Costs incurred during the preliminary project planning stage, along with post-implementation stages, are expensed as incurred. Capitalized costs are amortized using the straight-line method over the estimated useful life of the developed product, typically five years. Amortization expense is included in cost of revenues in the accompanying statements of operations.
Long-Lived Assets
Long-lived assets, including property and equipment and capitalized software development, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Recoverability of these assets is generally measured by a comparison of the carrying value of the asset to the estimated future undiscounted cash flows expected to be generated by the related asset. Any impairment is recognized in the period that such determination is made for the amount by which the carrying value exceeds the fair value of the asset. There were no impairment charges recorded for the years ended December 31, 2021 and 2020.
9
Reflect Systems, Inc.
Notes to Financial Statements
December 31, 2021 and 2020
Revenue Recognition
The Company provides customers channel access to a digital product content database and access to tools by which to create, store, manage and distribute their product’s digital content for consumers via either Software-as-a-Service (SaaS) or an on-premise software license. The Company also provides software maintenance, digital media advertising, professional training and product support services. Additionally, the Company resells third-party hardware and internet-based communication and information services. The Company accounts for revenue from contracts with customers, which comprises 100 percent of its revenue, through the following steps:
1. | Identification of the contract with a customer |
2. | Identification of the performance obligations in the contract |
3. | Determination of the transaction price |
4. | Allocation of the transaction price to the performance obligations in the contract |
5. | Recognition of revenue when, or as, the Company satisfies a performance obligation |
Generally, SaaS and maintenance and support services are invoiced annually or bi-annually in advance of the services being provided to the customer. On-premise software licenses are invoiced upon the delivery of the license to the customer which can occur either upon shipment of the media device containing the software or at the time the download link for the software is transmitted to the customer. Nonrecurring professional services and third-party services are generally invoiced monthly in arrears after services have been provided to the customer. Sales of third-party hardware (which includes digital signage equipment) often requires the customer to prepay all or a portion of the amount due in advance. Upon the delivery of the hardware, the customer is invoiced for the net amount due after application of the advance payment. Invoiced amounts are due between thirty and forty-five days from the invoice date.
The Company’s contract consideration is generally variable based on a fixed per item charge applied to a variable quantity of units. Variable consideration received for the Company’s services is generally recognized over time in accordance with the “right to invoice” practical expedient and therefore is not subject to revenue constraint evaluation.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or providing services. Revenue is recognized when the Company satisfies its performance obligations under the contract by transferring the promised product or service to its customer.
The Company’s contracts generally do not include any material significant financing components.
Performance Obligations
The Company typically satisfies its performance obligations for SaaS, maintenance and support, nonrecurring professional and third-party services over time as the services are provided to the customer and the customer receives and consumes the benefits of the services.
The Company satisfies its performance obligations with respect to the provision of on-premise software licenses and third-party hardware at the point in time when the customer obtains control of the license or hardware upon delivery.
The Company has established a contract liability for payments received in advance of providing SaaS and maintenance and support services, on-premise software licenses and third-party hardware to customers. This is classified as contract liabilities in the accompanying balance sheets.
10
Reflect Systems, Inc.
Notes to Financial Statements
December 31, 2021 and 2020
Practical Expedients
As part of the adoption of Topic 606 on January 1, 2020, the Company has elected the following practical expedients provided for in the standard.
1. | The Company has elected to not adjust the promised amount of consideration for the effect of a significant financing component if it expects, at contract inception, that the period between the Company’s transfer of a promised good or service to a customer and the customer’s payment for that good or service will be one year or less. |
2. | The Company is excluding from its transaction price all sales and similar taxes collected from its customers. |
3. | The Company has elected to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. |
4. | The Company has elected to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations. |
5. | The portfolio approach has been elected, when applicable, by the Company as it expects any effects of adoption would not be materially different in application at the portfolio level compared with the application at an individual contract level. |
6. | The Company has elected the “right to invoice” expedient which states that for performance obligations satisfied over time, if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date, the entity may recognize revenue in the amount to which the entity has a right to invoice. |
7. | The Company has elected not to disclose information about its remaining performance obligations for any contract that has an original expected duration of one year or less. |
Disaggregation of Revenue From Contracts With Customers
The following table disaggregates the Company’s revenue based on the timing of the transfer of products and services to customers for the years ending December 31 2021 and 2020:
Year Ended December 31, 2021 | ||||||||
Amount | Percentage | |||||||
Revenue recognized over time | $ | 9,812,563 | 80.1 | % | ||||
Revenue recognized at a point in time | 2,430,468 | 19.9 | ||||||
Total revenue | $ | 12,243,031 | 100.0 | % |
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Reflect Systems, Inc.
Notes to Financial Statements
December 31, 2021 and 2020
Year Ended December 31, 2020 | ||||||||
Amount | Percentage | |||||||
Revenue recognized over time | $ | 8,858,944 | 73.7 | % | ||||
Revenue recognized at a point in time | 3,165,966 | 26.3 | ||||||
Total revenue | $ | 12,024,910 | 100.0 | % |
Neither the type of product or service sold nor the location of sale significantly impacts the nature, amount, timing, or uncertainty of revenue and cash flows.
Stock-Based Compensation
Stock options are accounted for using the grant date fair value method. Under this method, stock-based compensation expense is measured by the estimated fair value of the granted stock options at the date of grant, using the Black-Scholes option pricing model, and recognized over the vesting period with a corresponding increase to additional paid-in capital.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The Company estimates its income taxes in preparing the financial statements. This process involves estimating the actual current tax exposure together with deferred tax assets and liabilities. The Company has not established a valuation allowance to reserve deferred tax assets, as management believes the recovery of deferred tax assets is more likely than not of being recovered from future taxable income prior to expiration.
The Company accounts for uncertainties in income taxes in accordance with ASC 740, Income Taxes. ASC 740 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained upon examination by the taxing authority. The Company accounts for interest and penalties relating to uncertain tax positions in the current Statement of Operations, if necessary. As of December 31, 2021 and 2020, the Company had no uncertain tax positions.
The Company has adopted ASU 2015-17, Balance Sheet Classification of Deferred Taxes, and classified all deferred tax assets and liabilities, along with any related valuation allowance, as noncurrent on the balance sheets.
Advertising and Promotion Costs
Advertising and other marketing costs are expensed when incurred and totaled $578,764 and $520,275 for the years ended December 31, 2021 and 2020, respectively. These costs are included in the statements of operations as selling expenses.
Research and Development
Research and development costs, excluding the capitalized software development, are expensed as incurred. For the years ended December 31, 2021 and 2020, research and development expense was $1,128,766 and $1,004,571, respectively.
12
Reflect Systems, Inc.
Notes to Financial Statements
December 31, 2021 and 2020
Concentrations
As of December 31, 2021, four customers represented 39 percent, 26 percent, 14 percent, and 11 percent of the Company’s accounts receivable. As of December 31, 2020, one customer represented 74 percent of the Company’s accounts receivable. As of December 31, 2021, four vendors represented 36 percent, 17 percent, 17 percent, and 12 percent of the Company’s accounts payable. As of December 31, 2020, one vendor represented 78 percent of the Company’s accounts payable.
For the year ended December 31, 2021, three customers represented 26 percent, 18 percent and 10 percent of the Company’s total revenue. For the year ended December 31, 2020, three customers represented 15 percent, 23 percent and 26 percent of the Company’s total revenue. The Company performs ongoing credit evaluations and does not require collateral. It maintains no reserves for potential losses based on the nature of its clients and historical collection patterns.
3. | Property and Equipment, Net |
Property and equipment consisted of the following at December 31:
2021 | 2020 | |||||||
Computer equipment | $ | 165,437 | $ | 296,350 | ||||
Furniture and fixtures | 18,733 | 18,733 | ||||||
Leasehold improvements | 776,633 | 776,633 | ||||||
960,803 | 1,091,716 | |||||||
Less accumulated depreciation | (680,668 | ) | (671,784 | ) | ||||
Property and equipment, net | $ | 280,135 | $ | 419,932 |
Depreciation expense was $146,518 and $155,223 for the years ended December 31, 2021 and 2020, respectively. For the year ended December 31, 2021, the Company wrote-off $137,634 of fully depreciated property and equipment.
4. | Software Development Costs, Net |
Capitalized software consisted of the following at December 31:
Useful Life | 2021 | 2020 | ||||||||
Capitalized software | 5 years | $ | 7,290,490 | $ | 6,445,589 | |||||
Less accumulated amortization | (4,624,583 | ) | (3,501,137 | ) | ||||||
Capitalized software development, net | $ | 2,665,907 | $ | 2,944,452 |
Amortization expense related to software development costs was $1,123,446 and $1,080,154, for the years ended December 31, 2021 and 2020, respectively.
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Reflect Systems, Inc.
Notes to Financial Statements
December 31, 2021 and 2020
5. | Commitments and Contingencies |
Operating Leases
The Company leases its headquarters along with additional storage space in Richardson, Texas. In addition, the Company leases certain equipment and furniture under an operating lease agreement. These lease agreements expire on various dates through December 31, 2023. Future minimum lease payments required under the related operating lease agreements as of December 31, 2021 are as follows:
Years ending December 31: | ||||
2022 | $ | 291,650 | ||
2023 | 299,325 | |||
Total | $ | 590,975 |
Rent expense for the years ended December 31, 2021 and 2020 was $352,639 and $330,731, respectively.
Litigation
The Company may be subject to certain claims and contingent liabilities that arise in the normal course of business. None of these, in the opinion of management, are expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
6. | Debt |
On February 1, 2019, the Company entered into a $2,000,000 Credit Agreement with a maturity of February 1, 2024. The Credit Agreement requires monthly interest payments beginning on March 1, 2019 and monthly principal payments of $41,667, beginning on March 1, 2020. The loan bears interest at a rate of 5.35 percent per annum. At December 31, 2021 and 2020, the balance on the loan was $1,083,333 and $1,583,333, respectively.
Under the Credit Agreement, the Company also entered into a revolving line of credit with a maximum borrowing of $500,000. The Credit Agreement requires monthly interest payments until its maturity. On August 16, 2021, the Company amended its revolving line of credit extending the maturity to July 15, 2022.
The Credit Agreement bears interest at the Prime Rate as published by the Wall Street Journal (3.25 percent at December 31, 2021 and 2020). As of December 31, 2021 and 2020, there was no outstanding balance on the line of credit.
The Credit Agreement is collateralized by substantially all assets of the Company. The Credit Agreement requires the Company to meet certain financial and nonfinancial covenants. At December 31, 2021, the Company was in compliance with its debt covenants.
Future minimum payments required under the credit agreement as of December 31, 2021 are as follows:
Years ending December 31: | ||||
2022 | $ | 500,000 | ||
2023 | 500,000 | |||
2024 | 83,333 | |||
Total | $ | 1,083,333 |
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Reflect Systems, Inc.
Notes to Financial Statements
December 31, 2021 and 2020
7. | Paycheck Protection Program Loan |
On April 29, 2020, the Company received loan proceeds in the amount of $1,062,400 under the Paycheck Protection Program (PPP) which was established as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act and is administered through the Small Business Administration (SBA). The PPP provides loans to qualifying businesses in amounts up to 2.5 times their average monthly payroll expenses and was designed to provide a direct financial incentive for qualifying businesses to keep their workforce employed during the Coronavirus crisis. PPP loans are uncollateralized and guaranteed by the SBA and are forgivable after a “covered period” (eight or twenty-four weeks) as long as the borrower maintains its payroll levels and uses the loan proceeds for eligible expenses, including payroll, benefits, mortgage interest, rent, and utilities. The forgiveness amount will be reduced if the borrower terminates employees or reduces salaries and wages more than 25 percent during the covered period. Any unforgiven portion is payable over 2 years at an interest rate of 1 percent with payments deferred until the SBA remits the borrower’s loan forgiveness amount to the lender, or, if the borrower does not apply for forgiveness, ten months after the end of the covered period. PPP loan terms provide for customary events of default, including payment defaults, breaches of representations and warranties, and insolvency events and may be accelerated upon the occurrence of one or more of these events of default. Additionally, PPP loan terms do not include prepayment penalties.
If any portion of the Company’s PPP loan is not forgiven, the Company will be required to repay that portion, plus interest, with the repayment term beginning at the time the SBA remits the amount forgiven to the Company’s lender. On November 13, 2020, the Company received legal forgiveness on the PPP loan proceeds of $1,062,400.
On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) was enacted, permitting Second Draw PPP loans. In January 2021, the Company applied for and was approved for a second loan draw (PPP 2) pursuant to the Economic Aid Act, administered by the U.S. Small Business Administration. The Company received $998,393 of loan proceeds with an effective date of January 28, 2021, with a maturity of five years and will bear interest at 1 percent per annum. Under the terms of the PPP 2, loan payments will be deferred for the Company if they apply for loan forgiveness until SBA remits the Company’s loan forgiveness amount to the lender. If the Company does not apply for loan forgiveness, payments are deferred seventeen months from the date of PPP 2 issuance. The Company received legal forgiveness of the PPP 2 loan proceeds of $998,393 on July 16, 2021.
The SBA reserves the right to audit any PPP loan, regardless of size. These audits may occur after forgiveness has been granted. In accordance with the CARES Act, all borrowers are required to maintain their PPP loan documentation for six years after the PPP loan was forgiven or repaid in full and to provide that documentation to the SBA upon request.
8. | Stock-Based Compensation |
In 2002, the Company’s board of directors established a long-term incentive plan (the Plan), under which options to purchase shares of common stock are made available for grant to qualified consultants, directors, or employees of the Company. The Plan is authorized to issue up to 3,326,087 shares of the Company’s common stock. The Plan expired in 2012 after the initial 10-year life; however, the Board of Directors continued to grant Board approved options after the Plan’s expiration.
The vesting of the options is determined by the Company as defined in the option agreements and may be immediately vested in whole or over multiple years. The Company recognizes compensation expense for options granted to employees or directors using the straight-line method over the vesting period. All nonvested stock options issued as of the date of the option holder’s termination will be forfeited, with the exception of certain nonvested stock options granted to executive management that have special vesting provisions upon involuntary termination or resignation. The special provisions call for the accelerated vesting of a portion of the option shares granted to the employee.
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Reflect Systems, Inc.
Notes to Financial Statements
December 31, 2021 and 2020
A summary of option activity for the years ended December 31, 2021 and 2020 is as follows:
Number of Options | Weighted Average Exercise Price | |||||||
Balance at January 1, 2020 | 2,383,000 | $ | 0.30 | |||||
Granted | 175,000 | 0.30 | ||||||
Exercised | - | - | ||||||
Forfeited | (233,000 | ) | 0.30 | |||||
Balance at December 31, 2020 | 2,325,000 | 0.30 | ||||||
Granted | 491,944 | 0.30 | ||||||
Exercised | - | - | ||||||
Forfeited | (152,500 | ) | 0.30 | |||||
Balance at December 31, 2021 | 2,644,444 | $ | 0.30 |
The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model. The Company determined that the grant date fair value of the options for year ended December 31, 2021 was insignificant to the financial statements and therefore recorded no compensation expense. The grant date fair value of the options for year ended December 31, 2020 was $0.02 and the Company recorded $11,571 of stock compensation expense. The Black-Scholes option pricing model used the following weighted average assumptions, along with no dividends, for the years ended December, 2021 and 2021:
Method Inputs | 2021 | 2020 | ||||||
Share price | $ | 0.17 | $ | 0.17 | ||||
Volatility | 50 | % | 50 | % | ||||
Weighted average risk free rate | 1.08%-1.64 | % | 0.62%-1.76 | % | ||||
Expected life (years) | 6 | 6 |
The Company also estimated a forfeiture rate of 14 percent and 15 percent for the years December 31, 2021 and 2020, respectively. The Black-Scholes option-pricing model requires the input of highly subjective assumptions. The Company calculates expected volatility for stock options based upon the volatility of public companies of similar size and industry as the Company believes the expected volatility will approximate historical volatility. The risk-free rate is based on U.S. Treasury rates with a remaining term that approximates the expected life of the option. The Company continues to assess the assumptions and methodologies used to calculate the established fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies, which could materially impact the fair value determinations.
Options outstanding and exercisable as of December 31, 2021 are as follows:
Options Outstanding | ||||||||||||||
Exercise Price | Number of Options | Weighted-Average Remaining Contractual Life | Number of Options Exercisable | |||||||||||
$ | 0.30 | 2,664,494 | 5.34 | 2,599,077 |
Options outstanding and exercisable as of December 31, 2020 are as follows:
Options Outstanding | ||||||||||||||
Exercise Price | Number of Options | Weighted-Average Remaining Contractual Life | Number of Options Exercisable | |||||||||||
$ | 0.30 | 2,325,000 | 7.59 | 2,214,895 |
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Reflect Systems, Inc.
Notes to Financial Statements
December 31, 2021 and 2020
9. | Income Taxes |
The components of the Company’s provision for income taxes for the years ended December 31, 2021 and 2020 were as follows:
2021 | 2020 | |||||||
Current income tax expense: | ||||||||
State income tax expense | $ | (4,754 | ) | $ | (17,630 | ) | ||
Total current income tax expense | (4,754 | ) | (17,630 | ) | ||||
Deferred income tax benefit | ||||||||
Federal income tax benefit | 153,959 | 125,513 | ||||||
State income tax benefit | 15,593 | 28,004 | ||||||
Total deferred income tax benefit | 169,552 | 153,517 | ||||||
Total income tax benefit | $ | 164,798 | $ | 135,887 |
A reconciliation of the statutory income tax rate to the effective income tax rates as a percentage of income before income taxes is as follows:
2021 | 2020 | |||||||
Federal statutory rate | 21.00 | % | 21.00 | % | ||||
State taxes | -3.34 | % | -1.26 | % | ||||
True-ups | -7.20 | % | -8.61 | % | ||||
Permanent differences | -51.43 | % | -29.91 | % | ||||
Effective tax rate | -40.97 | % | -18.78 | % |
The tax effects of temporary differences that give rise to significant portions of the deferred taxes for the years ended December 31, 2021 and 2020 are as follows:
2021 | 2020 | |||||||
Deferred tax assets and liabilities: | ||||||||
Net operating losses | $ | 3,285,693 | $ | 3,195,974 | ||||
Research credits | 510,827 | 484,005 | ||||||
Deferred rent | 50,807 | 75,046 | ||||||
Deferred payroll tax | 20,879 | 42,513 | ||||||
Other | 26,192 | 25,890 | ||||||
Software development | (585,408 | ) | (658,540 | ) | ||||
Property and equipment | (34,231 | ) | (59,681 | ) | ||||
Net deferred tax asset | $ | 3,274,759 | $ | 3,105,207 |
At December 31, 2021 and 2020, the Company had a net operating loss carryforward of $15,436,196 and $15,031,883, respectively. The net operating losses generated in 2017 and earlier are eligible for carryforward for a period of 20 years which will begin expire in 2031. The annual utilization of the net operating losses generated in 2018 and forward, do not have an expiration, but are limited to 80 percent of taxable income in future years.
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Reflect Systems, Inc.
Notes to Financial Statements
December 31, 2021 and 2020
10. | Temporary Stockholders’ Equity |
All preferred shares are entitled to vote with common stock on an as-converted basis. The Board of Directors as of December 31, 2021 and 2020, had authorized the issuance of 27,872,443 shares in five series of preferred stock, each with a par value of $0.001, as set forth below:
Shares Authorized | Shares Issued and Outstanding | Par Value | Issuance Price | Non-cumulative Dividend Rate | Liquidation Preference | Conversion Price | ||||||||||||||||||||||
Series A | 3,000,000 | 3,000,000 | $ | 0.001 | $ | 0.77 | $ | 0.05 | $ | 1.53 | $ | 0.73 | ||||||||||||||||
Series B | 2,472,443 | 2,472,443 | 0.001 | 0.83 | 0.06 | 1.65 | 0.78 | |||||||||||||||||||||
Series C | 10,400,000 | 3,727,613 | 0.001 | 0.90 | 0.06 | 1.80 | 0.85 | |||||||||||||||||||||
Series C-1 | 8,000,000 | 8,000,000 | 0.001 | 0.75 | 0.05 | 1.50 | 0.72 | |||||||||||||||||||||
Series D | 4,000,000 | 4,000,000 | 0.001 | 0.50 | 0.04 | 1.00 | 0.50 | |||||||||||||||||||||
27,872,443 | 21,200,056 |
The preferred stock includes an optional holder redemption feature in which the holders can request redemption of the stock to be paid in three equal installments. The redemption amount is based on the original issue price of the preferred stock and is at the option of the majority preferred stockholders upon written request. As this redemption feature does not meet the definition of unconditional obligation to transfer assets and is not certain to occur until the request occurs in the applicable time period, the preferred stock is not considered mandatorily redeemable stock, but is rather contingently redeemable and therefore classified as temporary equity. Accordingly, all preferred stock with a carrying value of $15,720,761 is classified as temporary equity because the Company cannot control whether or not it will settle the redemption of preferred stock in cash or common stock. No redemption requests have been received as of the balance sheet date but subsequent to December 31, 2021, the Company was acquired (Footnote 12). As a result, no changes have been made to the carrying value of the temporary equity as of December 31, 2021 and 2020, respectively.
Each share of preferred stock is convertible into common stock at the option of the holder based on a conversion price as defined in the Fourth Amended and Restated Certification of Incorporation which may be adjusted based on stock dividends, splits, mergers and reorganizations as well as adjusted if there is a future dilutive issuance of common stock at a price lower than the original issue price of the preferred stock. All preferred stock will automatically convert upon public offering of at least five times the original Series D issue price in which net proceeds are at least $35,000,000 or upon an event specified by vote or written consent of the majority stockholders.
In the event of a voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of the preferred stock are entitled to be paid out of the assets of the corporation available for distribution to its stockholders or out of the consideration payable to the stockholders prior to the payment is made to the holders of common stock. If, however, the assets available for distribution to the holders of preferred stock are not sufficient to permit payment to such stockholders of the full liquidation preference, then all the assets of the Company shall be distributed ratably to the holders of preferred stock as defined in the Fourth Amended and Restated Certificate of Incorporation.
11. | Stockholders’ Deficit |
Common Stock
The Company is authorized to issue 35,000,000 shares of common stock with par value of $0.001 per share. Holders of the common stock are entitled to one vote per share.
18
Reflect Systems, Inc.
Notes to Financial Statements
December 31, 2021 and 2020
12. | Subsequent Events |
The Company has evaluated all material events and transactions that occurred subsequent to December 31, 2021, the balance sheet date, through Date of Report, the date the financial statements were available to be issued and determined there were no other events or transactions which would impact these financial statements for the year ended December 31, 2021, except as noted below:
On November 12, 2021, the Company and Creative Realities, Inc. (a publicly traded company) entered into an Agreement and Plan of Merger (as amended on February 8, 2022, the Merger Agreement). On February 17, 2022, the parties consummated the Merger. Subject to the terms and conditions of the Merger Agreement, upon the closing of the Merger, Reflect stockholders as of the effective time of the Merger collectively received from the Company, in the aggregate, the following Merger consideration: (i) $16,166,000 payable in cash, (ii) 2,333,334 shares of common stock of Creative Realities, Inc. (valued based on an issuance price of $2 per share) (iii) the secured promissory note (as defined in the Merger Agreement) and (iv) supplemental cash payments, the guaranteed consideration (as defined in the Merger Agreement).
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