UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from ___________ to ___________
Commission File Number
(Exact Name of Registrant as Specified in its Charter)
| State or Other Jurisdiction of Incorporation or Organization | I.R.S. Employer Identification No. | |
| Address of Principal Executive Offices | Zip Code |
Registrant’s Telephone Number, Including Area Code
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The | ||||
| 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.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
APPLICABLE ONLY TO CORPORATE ISSUERS
As of November 15, 2021, the registrant had
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CREATIVE REALITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowance of $ | ||||||||
| Unbilled receivables | ||||||||
| Work-in-process and inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | $ | $ | ||||||
| Operating lease right-of-use assets | ||||||||
| Property and equipment, net | ||||||||
| Intangibles, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Short-term seller note payable | $ | $ | ||||||
| Short-term related party convertible loans payable, at fair value | - | |||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Deferred revenues | ||||||||
| Customer deposits | ||||||||
| Current maturities of operating and finance leases | ||||||||
| Total current liabilities | $ | $ | ||||||
| Long-term Payroll Protection Program note payable | ||||||||
| Long-term related party loans payable, net of $ | ||||||||
| Long-term related party convertible loans payable, at fair value | ||||||||
| Long-term obligations under operating leases | ||||||||
| Long-term accrued expenses | ||||||||
| TOTAL LIABILITIES | $ | $ | ||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders’ equity | $ | $ | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements
1
CREATIVE REALITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Sales | ||||||||||||||||
| Hardware | $ | $ | $ | $ | ||||||||||||
| Services and other | ||||||||||||||||
| Total sales | ||||||||||||||||
| Cost of sales | ||||||||||||||||
| Hardware | ||||||||||||||||
| Services and other | ||||||||||||||||
| Total cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing expenses | ||||||||||||||||
| Research and development expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Bad debt (recovery) / expense | ( | ) | ||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||
| Goodwill impairment | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income / (expenses): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on settlement of obligations | ||||||||||||||||
| Change in fair value of Convertible Loan | ( | ) | ||||||||||||||
| Other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income / (expense) | ( | ) | ( | ) | ||||||||||||
| Income/(loss) before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Benefit/(provision) for income taxes | ( | ) | ( | ) | ||||||||||||
| Net income/(loss) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Basic earnings/(loss) per common share | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Diluted earnings/(loss) per common share | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Weighted average shares outstanding - basic | ||||||||||||||||
| Weighted average shares outstanding - diluted | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
2
CREATIVE REALITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Operating Activities: | ||||||||
| Net income/(loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income/(loss) to net cash used in operating activities | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | ||||||||
| Stock-based compensation | ||||||||
| Shares issued for services | ||||||||
| Gain on forgiveness of Paycheck Protection Program | ( | ) | ||||||
| Gain on settlement of Seller Note | ( | ) | ||||||
| Change in fair value of Convertible Loan | ( | ) | ||||||
| Deferred tax benefit | ( | ) | ||||||
| Allowance for doubtful accounts | ( | ) | ||||||
| Increase in notes due to in-kind interest | ||||||||
| Loss on goodwill impairment | ||||||||
| Loss on disposal of assets | ||||||||
| Gain on settlement of obligations | ( | ) | ( | ) | ||||
| Changes to operating assets and liabilities: | ||||||||
| Accounts receivable and unbilled receivables | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Operating lease right-of-use assets, net | ||||||||
| Other assets | ||||||||
| Accounts payable | ( | ) | ||||||
| Deferred revenue | ||||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Deposits | ( | ) | ||||||
| Operating lease liabilities, non-current | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activities | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Capitalization of labor for software development | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Principal payments on finance leases | ( | ) | ( | ) | ||||
| Proceeds from Paycheck Protection Program loan | ||||||||
| Issuance of common stock – warrant exercise | ||||||||
| Repayment of Seller Note | ( | ) | ||||||
| Proceeds from sale of shares via registered direct offering, net | ||||||||
| Net cash provided by financing activities | ||||||||
| Increase/(decrease) in Cash and Cash Equivalents | ( | ) | ||||||
| Cash and Cash Equivalents, beginning of period | ||||||||
| Cash and Cash Equivalents, end of period | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
3
CREATIVE REALITIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except shares)
| Additional | ||||||||||||||||||||
| Common Stock | paid in | Accumulated | ||||||||||||||||||
| Shares | Amount | capital | (Deficit) | Total | ||||||||||||||||
| Three months ended September 30, 2021 | ||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Shares issued for services | ||||||||||||||||||||
| Shares issued to directors as compensation | ||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Net income / (loss) | - | ( | ) | ( | ) | |||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Additional | ||||||||||||||||||||
| Common Stock | paid in | Accumulated | ||||||||||||||||||
| Shares | Amount | capital | (Deficit) | Total | ||||||||||||||||
| Nine months ended September 30, 2021 | ||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Shares issued for services | ||||||||||||||||||||
| Shares issued to directors as compensation | ||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Conversion of Disbursed Escrow Loan | ||||||||||||||||||||
| Gain on Extinguishment of Special Loan | - | |||||||||||||||||||
| Sales of Shares via registered direct offering, net of offering cost | ||||||||||||||||||||
| Net income / (loss) | - | |||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Additional | ||||||||||||||||||||
| Common Stock | paid in | Accumulated | ||||||||||||||||||
| Shares | Amount | capital | (Deficit) | Total | ||||||||||||||||
| Three months ended September 30, 2020 | ||||||||||||||||||||
| Balance as of June 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Shares issued to directors as compensation | ||||||||||||||||||||
| Shares issued through at-the-market offering | ||||||||||||||||||||
| Net income / (loss) | - | ( | ) | ( | ) | |||||||||||||||
| Balance as of September 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Additional | ||||||||||||||||||||
| Common Stock | paid in | Accumulated | ||||||||||||||||||
| Shares | Amount | capital | (Deficit) | Total | ||||||||||||||||
| Nine months ended September 30, 2020 | ||||||||||||||||||||
| Balance as of December 31, 2019 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Shares issued to directors as compensation | ||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Shares issued through at-the-market offering | ||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||
| Net income / (loss) | - | ( | ) | ( | ) | |||||||||||||||
| Balance as of September 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
See accompanying notes to condensed consolidated financial statements.
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CREATIVE REALITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(all currency in thousands, except per share amounts)
(unaudited)
NOTE 1: NATURE OF ORGANIZATION AND OPERATIONS
Unless the context otherwise indicates, references in these Notes to the accompanying condensed consolidated financial statements to “we,” “us,” “our” and “the Company” refer to Creative Realities, Inc. and its subsidiaries.
Nature of the Company’s Business
Creative Realities, Inc. is a Minnesota corporation that provides innovative digital marketing technology and solutions to retail companies, individual retail brands, enterprises and organizations throughout the United States and in certain international markets. The Company has expertise in a broad range of existing and emerging digital marketing technologies, as well as the related media management and distribution software platforms and networks, device management, product management, customized software service layers, systems, experiences, workflows, and integrated solutions. Our technology and solutions include: digital merchandising systems and omni-channel customer engagement systems, interactive digital shopping assistants, advisors and kiosks, and other interactive marketing technologies such as mobile, social media, point-of-sale transactions, beaconing and web-based media that enable our customers to transform how they engage with consumers. We have expertise in a broad range of existing and emerging digital marketing technologies, as well as the following related aspects of our business: content, network management, and connected device software and firmware platforms; customized software service layers; hardware platforms; digital media workflows; and proprietary processes and automation tools.
Our main operations are conducted directly through Creative Realities, Inc., and under our wholly owned subsidiaries Allure Global Solutions, Inc., a Georgia corporation (“Allure”), and Creative Realities Canada, Inc., a Canadian corporation. Our other wholly owned subsidiaries, Creative Realities, LLC, a Delaware limited liability company, and ConeXus World Global, LLC, a Kentucky limited liability company, are effectively dormant.
Liquidity and Financial Condition
The accompanying Condensed Consolidated Financial Statements have been prepared on the basis of the realization of assets and the satisfaction of liabilities and commitments in the normal course of business and do not include any adjustments to the recoverability and classifications of recorded assets and liabilities as a result of uncertainties.
For the three months ended September 30, 2021 and
2020 we incurred net losses of $
On January 11, 2021, we
received a notice from Old National Bank regarding forgiveness of the loan in the principal amount of $
On February 18, 2021,
the Company entered into a securities purchase agreement with an institutional investor which provided for the issuance and sale by the
Company of
5
On March 7, 2021, the Company and Slipstream entered into an agreement to refinance the Company’s Loan and Security Agreement, including (1) the extension of all maturity dates therein to March 31, 2023, (2) the conversion of the Disbursed Escrow Promissory Note into equity, (3) access to an additional $1,000 via a multi-advance line of credit facility, and (4) the removal of the three times liquidation preference with respect to the Company’s Secured Convertible Special Loan Promissory Note.
On May 13, 2021, the Company and Christie Digital
Systems, Inc. (“Seller”) entered into a settlement agreement with respect to the Amended and Restated Seller Note wherein
neither party admitted liability, and the Company agreed to pay, and Seller agreed to accept, $
Management believes that, based on (i) the forgiveness of our PPP Loan, (ii) the execution of the Offering and remaining availability for incremental offerings under our previously registered Form S-3 registration statement (including our current at-the-market offering), (iii) the refinancing of our debt, including extension of the maturity date on our term and convertible loans, as well as access to incremental borrowings under the new multi-advance line of credit, (iv) the settlement of the Seller Note, and (v) our operational forecast through 2022, we can continue as a going concern through at least November 15, 2022. However, given our history of net losses and cash used in operating activities, we obtained a continued support letter from Slipstream through November 15, 2022. We can provide no assurance that our ongoing operational efforts will be successful, which could have a material adverse effect on our results of operations and cash flows.
See Note 8 Loans Payable to the Consolidated Financial Statements for an additional discussion of the Company’s debt obligations and further discussion of the Company’s refinancing activities during the three and nine months ended September 30, 2021.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of the accompanying Condensed Consolidated Financial Statements follows:
1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the applicable instructions to Form 10-Q and Regulation S-X and include all of the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”) for interim financial reporting. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes for the year ended December 31, 2020, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2021.
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. Revenue Recognition
We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, applying the five-step model.
6
If an arrangement involves multiple performance obligations, the items are analyzed to determine the separate units of accounting, whether the items have value on a standalone basis and whether there is objective and reliable evidence of their standalone selling price. The total contract transaction price is allocated to the identified performance obligations based upon the relative standalone selling prices of the performance obligations. The standalone selling price is based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost plus margin approach.
The Company estimates the amount of total contract consideration it expects to receive for variable arrangements by determining the most likely amount it expects to earn from the arrangement based on the expected quantities of services it expects to provide and the contractual pricing based on those quantities. The Company only includes some or a portion of variable consideration in the transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company considers the sensitivity of the estimate, its relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to the overall arrangement. The Company receives variable consideration in very few instances.
Revenue is recognized when a customer obtains control of promised goods or services under the terms of a contract and is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. The Company does not have any material extended payment terms as payment is due at or shortly after the time of the sale, typically 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. Unbilled receivables are recorded as accounts receivable when the Company has an unconditional right to contract consideration. 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.
3. Inventories
Inventories are stated at the lower of cost or net realizable value, determined by the first-in, first-out (FIFO) method, and consist of the following:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Raw materials, net of reserve of $ | $ | $ | ||||||
| Inventory on consignment with distributors | ||||||||
| Work-in-process | ||||||||
| Total inventories | $ | $ | ||||||
4. Impairment of Long-Lived Assets
We review the carrying value of all long-lived assets, including property and equipment, for impairment in accordance with ASC 360, Accounting for the Impairment or Disposal of Long-Lived Assets. Under ASC 360, impairment losses are recorded whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We evaluated whether there were any triggering events for consideration of impairment of long-lived assets as of September 30, 2021 and concluded there were none.
7
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. Basic and Diluted Income/(Loss) per Common Share
Basic and diluted income/(loss) 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
In calculating diluted earnings per share for the three and nine months ended September 30, 2021 and 2020, in accordance with ASC 260, Earnings per share, we excluded the dilutive effect of the potential issuance of common stock upon an assumed conversion of the Convertible Loan as we have the intent and ability to settle the debt in cash.
6. 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 net operating losses, differences in basis of intangibles, stock-based compensation, reserves for uncollectible accounts receivable and inventory, differences in depreciation methods, and accrued expenses. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company accounts for uncertain tax positions utilizing an established recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We had no uncertain tax positions as of September 30, 2021 and December 31, 2020.
7. Goodwill
We follow the provisions of ASC 350, Goodwill and Other Intangible Assets. Pursuant to ASC 350, goodwill acquired in a purchase business combination is not amortized, but instead tested for impairment at least annually. The Company uses a measurement date of September 30 (see Note 7 Intangible Assets and Goodwill). For quarters that do not coincide with the measurement date, we evaluate whether there are any triggering events for consideration of impairment of goodwill.
8. 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: the allowance for doubtful accounts, 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.
8
9. Leases
We account for leases in accordance with ASC 842, Leases, 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. 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. Finance leases are included in property and equipment, net, current maturities of finance leases, and long-term obligations under financing leases on our condensed consolidated balance sheets.
NOTE 3: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently adopted
None.
Not yet adopted
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 expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses. The main objective is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments 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 losses and requires consideration of a broader range of reasonable and supportable information to calculate credit loss 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.
9
NOTE 4: REVENUE RECOGNITION
The Company applies ASC 606 for revenue recognition. The following table disaggregates the Company’s revenue by major source for the three and nine months ended September 30, 2021 and 2020:
| (in thousands) | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | ||||||||||||
| Hardware | $ | $ | $ | $ | ||||||||||||
| Services: | ||||||||||||||||
| Installation Services | ||||||||||||||||
| Software Development Services | ||||||||||||||||
| Managed Services | ||||||||||||||||
| Total Services | ||||||||||||||||
| Total Hardware and Services | $ | $ | $ | $ | ||||||||||||
System hardware sales
System hardware revenue is recognized generally upon shipment of the product or customer acceptance depending upon contractual arrangements with the customer in instances in which the sale of hardware is the sole performance obligation. Shipping charges billed to customers are included in hardware sales and the related shipping costs are included in hardware cost of sales. The cost of freight and shipping to the customer is recognized in cost of sales at the time of transfer of control to the customer. System hardware revenues are classified as “Hardware” within our disaggregated revenue.
Installation services
The Company performs outsourced installation services for customers and recognizes revenue upon completion of the installations. Installation services also includes engineering services performed as part of an installation project.
When system hardware sales include installation services to be performed by the Company, the goods and services in the contract are not distinct, so the arrangement is accounted for as a single performance obligation. Our customers control the work-in-process and can make changes to the design specifications over the contract term. Revenues are recognized over time as the installation services are completed based on the relative portion of labor hours completed as a percentage of the budgeted hours for the installation. Installation services revenues are classified as “Installation Services” within our disaggregated revenue.
The aggregate amount of the transaction price allocated to installation service performance obligations that are partially unsatisfied as of September 30, 2021 and 2020 were $35 and $0.
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. These services often include software updates which provide customers with rights to unspecified software product upgrades and maintenance releases and patches released during the term of the support period. Contracts for these services are generally 12-36 months in length. We account for revenue from these services in accordance with ASC 985-20-15-5 and recognize revenue ratably over the performance period. Software as a service revenues are classified as “Managed Services” within our disaggregated revenue.
10
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 of a customer’s network, access to a sophisticated web-portal for managing the end-to-end hardware and software digital ecosystem, and hosting support services through our network operations center, or NOC. These services provide either physical or automated remote monitoring which support customer 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. Revenue is recognized ratably and evenly over the term of the agreement. Maintenance and Support revenues are classified as “Managed Services” within our disaggregated revenue.
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.
NOTE 5: 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 7 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 8 Loans Payable,
the Convertible Loan is 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. We utilized a discounted
cash flow analysis in updating our fair value analysis of the Convertible Loan, resulting in recognition of a $
11
NOTE 6: SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Supplemental Cash Flow Information | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes, net | $ | $ | ||||||
NOTE 7: INTANGIBLE ASSETS, INCLUDING GOODWILL
Intangible Assets
Intangible assets consisted of the following at September 30, 2021 and December 31, 2020:
| September 30, | December 31, | |||||||||||||||
| 2021 | 2020 | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
| Amount | Amortization | Amount | Amortization | |||||||||||||
| Technology platform | $ | $ | ||||||||||||||
| Customer relationships | ||||||||||||||||
| Trademarks and trade names | ||||||||||||||||
| Accumulated amortization | ||||||||||||||||
| Net book value of amortizable intangible assets | $ | $ | ||||||||||||||
For the three months ended September 30, 2021 and
2020, amortization of intangible assets charged to operations was $
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is subject to an impairment review at a reporting unit level, on an annual basis as of the end of September of each fiscal year, or when an event occurs, or circumstances change that would indicate potential impairment. The Company has only one reporting unit, and therefore the entire goodwill is allocated to that reporting unit. There were no indicators of impairment as of or during the three and nine months ended September 30, 2021.
Interim Impairment Assessment – March 31, 2020
Despite the excess fair value identified in our
2019 annual impairment assessment, we determined that the reduced cash flow projections and the significant decline in our market capitalization
as a result of the COVID-19 pandemic during the three months ended March 31, 2020 indicated that an impairment loss may have been incurred
during the first quarter. As a result of our qualitative assessment, we concluded that indicators of impairment were present and that
a quantitative interim impairment assessment of our goodwill was necessary, resulting in us recording a non-cash impairment loss of $
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NOTE 8: LOANS PAYABLE
The outstanding debt with detachable warrants, as applicable, are shown in the table below. Further discussion of the debt follows.
| As of September 30, 2021 | ||||||||||||||
| Debt Type | Issuance Date | Principal | Maturity Date | Warrants | Interest Rate Information | |||||||||
| Total debt, gross | ||||||||||||||
| Fair value (H) | ( | ) | ||||||||||||
| Total debt, gross | ||||||||||||||
| Debt discount | ( | ) | ||||||||||||
| Total debt, net | $ | |||||||||||||
| Less current maturities | ||||||||||||||
| Long term debt | $ | |||||||||||||
| As of December 31, 2020 | ||||||||||||||
| Debt Type | Issuance Date | Principal | Maturity Date | Warrants | Interest Rate Information | |||||||||
| $ | N/A | |||||||||||||
| Total debt, gross | ||||||||||||||
| Fair value (E) | ||||||||||||||
| Total debt, gross | ||||||||||||||
| Debt discount | ( | ) | ||||||||||||
| Total debt, net | $ | |||||||||||||
| Less current maturities | ( | ) | ||||||||||||
| Long term debt | $ | |||||||||||||
A – Secured Disbursed Escrow Promissory Note with related party
B – Secured Revolving Promissory Note with related party
C – Term Loan with related party
D – Amended and Restated Seller Note from acquisition of Allure
E – Secured Convertible Special Loan Promissory Note, at fair value
F – Paycheck Protection Program Loan from Small Business Administration
G – New Term Loan with related party
H – Convertible Loan with related party, at fair value
| (1) | Interest is paid-in-kind (“PIK”) through October 2021, at which point interest becomes payable in cash. |
SBA Paycheck Protection Program Loan
On April 27, 2020,
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 $
13
Amended and Restated Loan and Security Agreement
On March 7, 2021, the Company refinanced its
current debt facilities with Slipstream Communications, LLC (“Slipstream”), pursuant to an Amended and Restated Credit and
Security Agreement (the “Credit Agreement”). The debt facilities continue to be fully secured by all assets of the Company.
The maturity date (“Maturity Date”) on the outstanding debt and new debt was extended to March 31, 2023. The Credit Agreement
The New Term Loan requires no principal payments until the Maturity Date, and interest payments are payable on the first day of each month until the Maturity Date. All interest payments owed prior to October 1, 2021 are payable as PIK payments, or increases to the principal balance of the New Term Loan only.
The Line of Credit and Convertible Loan require payments of accrued interest payable on the first day of each month through April 1, 2022. All such interest payments made prior to October 1, 2021 are payable as PIK payments, or increases to the principal balances under the Line of Credit and Convertible Loan only. No principal payments are owed under the Line of Credit or Convertible Loan until April 1, 2022, at which time all principal and interest on each of the Line of Credit and Convertible Loan will be paid in monthly installments until the Maturity Date to fully amortize outstanding principal by the Maturity Date.
All payments of interest (other than PIK payments)
and principal on the Line of Credit and Convertible Loan may be paid, in the Company’s sole discretion, in shares of the Company’s
Common Stock (the “Payment Shares,” and together with the Disbursed Escrow Conversion Shares, the “Shares”). The
Payment Shares will be valued on a per-Share basis at
We evaluated the instruments within the Credit Agreement separately for purposes of concluding on whether the amendment represented a modification or extinguishment in accordance with ASC 470 Debt.
The Convertible Loan was deemed to have had a substantive conversion feature both added and removed via the Credit Agreement, one which the holder is reasonably willing and able to exercise their rights under the agreement, resulting in extinguishment accounting for the Convertible Loan during the three months ended March 31, 2021. Pursuant to ASC 825-10-25-1, Fair Value Option, we made an irrevocable election to report the Convertible Loan at fair value, with changes in fair value recorded through the Company’s Condensed Consolidated Statement of Operations in each reporting period.
14
We evaluated the Credit Agreement
in accordance with ASC 470 Debt. The New Term Loan was accounted for as a modification, resulting in recording of $
Loan and Security Agreement History
Ninth, Tenth, Eleventh, Twelfth, and Thirteenth Amendment; Modification of Conversion Date of Special Loan under Loan and Security Agreement
On February 28, 2021, January 31, 2021, December 31, 2020, November 30, 2020, and September 29, 2020, the Company entered into amendments to Loan and Security Agreement with its subsidiaries and Slipstream to amend the automatic conversion date of the Special Loan. Each amendment extended the automatic conversion date of the Special Loan. The Company paid no fees in exchange for these extensions.
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
$
Amended and Restated Seller Note from acquisition of Allure
The Amended and Restated Seller Note represented a note payable due from Allure to Seller, under a pre-existing Seller Note which was amended and restated to a reduced amount of $1,637 through the Stock Purchase Agreement and a subsequent net working capital adjustment. That debt accrued interest at 3.5% per annum, and required us to make quarterly payments of interest only through February 19, 2020, on which date the promissory note matured and all remaining amounts owing thereunder became due.
On February 20, 2020, Creative Realities, Inc. and Allure made a demand for arbitration against Seller for (1) breach of contract, (2) indemnification, and (3) fraudulent misrepresentation under the Allure Purchase Agreement.
On May 13, 2021, the Company and Seller entered
into a settlement agreement wherein neither party admitted liability, and the Company agreed to pay, and Seller agreed to accept, $
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 $
15
NOTE 9: COMMITMENTS AND CONTINGENCIES
Litigation
On August 2, 2019, the Company filed suit in Jefferson Circuit Court, Kentucky, against a supplier of Allure for breach of contract, breach of warranty, and negligence with respect to equipment installations performed by such supplier for an Allure customer.
On October 10, 2019, the Allure customer that is
the basis of our claim above sent a demand to the Company for payment of $
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, as of November 15, 2021, and there were no other such proceedings pending during the period covered by this Report.
Settlement of obligations
During the nine months ended September 30, 2021,
(i) the full principal amount of the PPP Loan and the accrued interest of $
During the three and nine months ended September
30, 2020, the Company settled and/or wrote off other obligations of $
NOTE 10: RELATED PARTY TRANSACTIONS
In addition to the financing transactions with Slipstream, a related party, discussed in Note 8 Loans Payable, we have the following related party transactions.
33 Degrees Convenience Connect, Inc., a related
party that is approximately
Accounts receivable due from 33 Degrees was $
NOTE 11: 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.
16
For the three and nine-months ended September 30,
2021, we reported tax expense of $
NOTE 12: WARRANTS
A summary of outstanding warrants is included below:
| Warrants (Equity) | ||||||||||||
| Amount | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | ||||||||||
| Balance January 1, 2021 | $ | |||||||||||
| Warrants issued | ||||||||||||
| Warrants expired | ( | ) | ||||||||||
| Balance September 30, 2021 | $ | |||||||||||
NOTE 13: STOCK-BASED COMPENSATION
A summary of outstanding options is included below:
| Time Vesting Options | Weighted | |||||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||||||
| Remaining | Average | Average | ||||||||||||||||||
| Range of Exercise | Number | Contractual | Exercise | Options | Exercise | |||||||||||||||
| Prices between | Outstanding | Life | Price | Exercisable | Price | |||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| $ | $ | |||||||||||||||||||
| $ | ||||||||||||||||||||
| Performance Vesting Options | Weighted | |||||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||||||
| Remaining | Average | Average | ||||||||||||||||||
| Range of Exercise | Number | Contractual | Exercise | Options | Exercise | |||||||||||||||
| Prices between | Outstanding | Life | Price | Exercisable | Price | |||||||||||||||
| $ | $ | $ | ||||||||||||||||||
| $ | ||||||||||||||||||||
| Time Vesting Options | Performance Vesting Options | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Options | Exercise | Options | Exercise | |||||||||||||
| Date/Activity | Outstanding | Price | Outstanding | Price | ||||||||||||
| Balance, December 31, 2020 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ||||||||||||||||
| Forfeited or expired | ||||||||||||||||
| Balance, September 30, 2021 | $ | |||||||||||||||
The weighted average remaining contractual life
for options exercisable is
17
Valuation Information for Stock-Based Compensation
For purposes of determining estimated fair value under FASB ASC 718-10, Stock Compensation, the Company computed the estimated fair values of stock options using the Black-Scholes model.
On June 1, 2020
Of the
| Risk-free interest rate | % | |||
| Expected term | ||||
| Expected price volatility | % | |||
| Dividend yield | % |
The remaining
These performance options include a catch-up provision, where any options that did not vest during a prior year due to the Company’s failure to meet a prior revenue or EBITDA target may vest in a subsequent vesting year if the revenue or EBITDA target, as applicable, is met in the future year. The revenue and EBITDA targets for the following three years are as follows:
| Calendar Year | Revenue Target | EBITDA Target | ||
| 2020 | $ |
$ | ||
| 2021 | $ |
$ | ||
| 2022 | $ |
$ |
The exercise price of the foregoing options is
$
During the three months ended March 31, 2021, the
Company deemed it probable that the Company would achieve the EBITDA target for Calendar Year 2021 and recorded catch-up compensation
expense in the Consolidated Statement of Operations with respect to these awards of $
18
Stock Compensation Expense Information
ASC 718-10, Stock Compensation, requires
measurement and recognition of compensation expense for all stock-based payments including warrants, stock options, restricted stock grants
and stock bonuses based on estimated fair values. Under the Amended and Restated 2006 Equity Incentive Plan, the Company reserved
In October 2014, the Company’s shareholders
approved the 2014 Stock Incentive Plan, under which
Employee Awards
Compensation expense recognized for the issuance
of stock options, inclusive of performance-restricted stock options, for the three and nine months ended September 30, 2021 of $
As of September 30, 2021, there was approximately
$
Non-Employee Awards
During the three and nine months ended September
30, 2021, the Company engaged certain consultants to perform services in exchange for Company common stock. Shares issued for services
were calculated based on the ten (10) day volume weighted average price (“VWAP”) for the last ten (10) days during the month
of service provided. The Company recorded $
NOTE 14: SIGNIFICANT CUSTOMERS/VENDORS
Significant Customers
We had
We had
19
Significant Vendors
We had
NOTE 15: LEASES
We have entered into various non-cancelable operating
lease agreements for certain of our offices and office equipment.
The components of lease costs, lease term and discount rate are as follows:
| (in thousands) | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | ||||||
| Finance lease cost | ||||||||
| Amortization of right-of-use assets | $ | $ | ||||||
| Interest | ||||||||
| Operating lease cost | ||||||||
| Total lease cost | $ | $ | ||||||
| Weighted Average Remaining Lease Term | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted Average Discount Rate | ||||||||
| Operating leases | % | % | ||||||
| Finance leases | % | |||||||
The following is a schedule, by years, of maturities of lease liabilities as of September 30, 2021:
| (in thousands) | Operating Leases | |||
| The remainder of 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Thereafter | ||||
| Total undiscounted cash flows | ||||
| Less imputed interest | $ | ( | ) | |
| Present value of lease liabilities | $ | |||
Supplemental cash flow information related to leases are as follows:
| (in thousands) | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | ||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases, net | $ | $ | ||||||
| Operating cash flows from finance leases | ||||||||
| Financing cash flows from finance leases | ( | ) | ||||||
NOTE 16: EMPLOYEE RETENTION CREDITS
The CARES Act provides an employee retention credit (“ERC”) that is a refundable tax credit against certain employer taxes. On December 27, 2020, Congress enacted the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which amended and extended ERC availability under Section 2301 of the CARES Act. Before the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, businesses who were provided SBA PPP Loans under the CARES Act were ineligible for the ERC. Following enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, such businesses became retroactively eligible for the ERC.
20
As a result of the foregoing legislation, the Company
is eligible to claim a refundable tax credit against the employer share of Social Security taxes equal to seventy percent (
As a result of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the Company is now eligible to make ERC claims for each quarter in 2020 and 2021, subject to the other eligibility requirements.
The ERC was extended and expanded in March 2021
through December 31, 2021, as part of the American Rescue Plan Act of 2021 (“ARPA”).
The Company qualified for the ERC beginning on March 13, 2020 (the earliest eligibility date) through September 30, 2021 (the most recent assessment date).
During the three months ended September 30, 2021,
the Company recorded an ERC totaling $
During the three months ended September 30, 2021,
the $
The Company would qualify for an ERC for each remaining
quarter during 2021 in which the Company experiences a “significant decline in gross receipts,” defined as quarterly gross
receipts that are less than eighty percent (
NOTE 17: SUBSEQUENT EVENTS
On November 12, 2021, the Company and Reflect Systems, Inc., a Delaware corporation (“RSI”), entered into an Agreement and Plan of Merger (the "Merger Agreement") providing for the merger of RSI with a wholly owned subsidiary of the Company in exchange for the consideration described below (the “Merger”). RSI 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 the North America.
Reflect offers digital signage platforms, including
ReflectView, which delivers content to more than
If the Merger is consummated, each outstanding Reflect
share will be converted into the right to receive a portion of (i) $
At the closing of the Merger
21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements
The following discussion contains various forward-looking statements within the meaning of Section 21E of the Exchange Act of 1934, as amended. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. 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, our management or the Merger, are intended to identify such forward-looking statements.
For example, forward-looking statements include any statements regarding the strategies, prospects, plans, expectations or objectives of management of Creative Realities or Reflect for future operations of the combined company, the risk that the conditions to the closing of the proposed Merger are not satisfied, including the failure to timely or at all obtain approval of the Creative Realities Proposals and Reflect Proposal; uncertainties as to the timing of the consummation of the proposed Merger and the ability of each of Creative Realities and Reflect to consummate the proposed Merger; risks related to Creative Realities’ ability to correctly estimate its operating expenses and expenses associated with the proposed Merger, including any debt expenses related to any debt financing obtained in advanced of the closing of the proposed Merger; Creative Realities’ ability to obtaining any financing necessary to pay the $18,666,667 cash portion of the Merger consideration and fund the $1,333,333 cash portion of the Reflect Retention Plan at the closing of the Merger, including the terms of any debt or equity financing; risks related to the changes in market price of the Creative Realities shares of common stock; competitive responses to the proposed Merger; unexpected costs, charges or expenses resulting from the proposed Merger; the effect of the COVID-19 pandemic and the steps taken by governments and customers of Creative Realities and Reflect to address the pandemic, including business closures; potential adverse reactions or changes to business relationships resulting from the announcement or completion of the proposed Merger; and legislative, regulatory, political and economic developments. The foregoing review of important factors that could cause actual events to differ from expectations should not be construed as exhaustive and should be read in conjunction with statements that are included herein and elsewhere.
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, 2020, Form 10-Q for the quarter ended March 31, 2021, and preliminary joint proxy statement/prospectus included in the Form S-4 registration statement, as filed with the Securities and Exchange Commission on March 10, 2021 May 17, 2021, and November 12, 2021 respectively.
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 this report. We do not undertake to update any forward-looking statement.
Overview
Creative Realities, Inc. is a Minnesota corporation that provides innovative digital marketing technology solutions to a broad range of companies, individual brands, enterprises, and organizations throughout the United States and in certain international markets. We have expertise in a broad range of existing and emerging digital marketing technologies across a variety of strategic vertical markets, as well as the related media management and distribution software platforms and networks, device and content 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; content creation, production and scheduling programs and systems; a comprehensive series of recurring maintenance, support, and field service offerings; 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.
Our main operations are conducted directly through Creative Realities, Inc., and under our wholly owned subsidiaries Allure Global Solutions, Inc., a Georgia corporation (“Allure”), and Creative Realities Canada, Inc., a Canadian corporation. Our other wholly owned subsidiaries, Creative Realities, LLC, a Delaware limited liability company, and ConeXus World Global, LLC, a Kentucky limited liability company, are effectively dormant.
We primarily generate revenue in our business by:
| ● | consulting with our customers to determine the technologies and solutions required to achieve their specific goals, strategies and objectives; |
| ● | designing our customers’ digital marketing experiences, content and interfaces; |
| ● | engineering the systems architecture delivering the digital marketing experiences we design – both software and hardware – and integrating those systems into a customized, reliable and effective digital marketing experience; |
| ● | managing the efficient, timely and cost-effective deployment of our digital marketing technology solutions for our customers; |
| ● | delivering and updating the content of our digital marketing technology solutions using a suite of advanced media, content and network management software products; and |
22
| ● | maintaining our customers’ digital marketing technology solutions by: providing content production and related services; creating additional software-based features and functionality; hosting the solutions; monitoring solution service levels; and responding to and/or managing remote or onsite field service maintenance, troubleshooting and support calls. |
These activities generate revenue through: bundled-solution sales; consulting services, experience design, content development and production, software development, engineering, implementation, and field services; software license fees; and maintenance and support services related to our software, managed systems and solutions.
Recent Developments
Entry into Merger Agreement
On November 12, 2021, Creative Realities and Reflect Systems, Inc., or “Reflect,” entered into an Agreement and Plan of Merger, or the “Merger Agreement,” pursuant to which a direct, wholly owned subsidiary of Creative Realities, CRI Acquisition Corporation, or “Merger Sub,” will merge with and into Reflect, with Reflect surviving as a wholly owned subsidiary of Creative Realities, and the surviving company of the merger, which transaction is referred to herein as 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 conditions of the Merger Agreement, upon the closing of the Merger, Reflect stockholders as of the effective time of the Merger collectively will receive from Creative Realities, in the aggregate the following Merger consideration: (i) $18,666,667 payable in cash, (ii) 2,333,334 shares of common stock of Creative Realities (valued based on an issuance price of $2 per share) (the “CREX Shares”), and (iii) supplemental cash payments (the “Guaranteed Consideration”), if any, payable on or after the three-year anniversary of the effective time of the Merger (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), subject to the terms of the Merger Agreement.
Creative Realities may exercise an extension option (the “Extension Option”) to extend the Guarantee Date from the three-year anniversary of the Closing Date to six (6) months thereafter if (i) the Extension Threshold Price is greater than or equal to 70% of the Guaranteed Price described above, and (ii) Creative Realities provides written notice of its election to exercise the Extension Option at least 10 days prior to the three-year anniversary of the Closing. The “Extension Threshold Price” means the average closing price per share of Creative Realities Shares as reported on the Nasdaq Capital Market (or NYSE) in the fifteen (15) consecutive trading day period ending fifteen (15) days prior to the three-year anniversary of the Closing Date. 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.
Under the terms of the Merger Agreement, Creative Realities will adopt a retention bonus plan for key Reflect employees that will continue their services after the effective time of the Merger in substantially the form attached as Exhibit C to the Merger Agreement (the “Retention Bonus Plan”), pursuant to which key members of Reflect’s management team will be eligible to receive an aggregate of $1,333,333 in cash, which will be paid 50% at the closing of the Merger, and subject to continuous employment with Reflect, 25% on the one-year anniversary of the closing of the Merger and 25% on the two-year anniversary of the closing of the Merger. The future cash payments due on the one-year and two-year anniversaries of the closing of the Merger will be deposited into a “rabbi” trust at the closing of the Merger. The Reflect Retention Plan also will require Creative Realities to issue Creative Realities Shares having an aggregate value of $666,667 to the plan participants as follows: 50% of the value of such shares will be issued at the closing of the Merger at the issuance price of $2.00 per share. Subject to continuous employment with Reflect, 25% of the value of such shares will be issued on the one-year anniversary of the closing of the Merger and the remaining 25% of the value of such shares will be issued on the two-year anniversary of the closing of the Merger. The shares to be issued on the one and two year anniversaries of the Merger will be determined based on dividing the value of shares issuable on such date by the trailing 10-day volume weighed average price (VWAP) of the shares as of the such vesting date as reported on the Nasdaq Capital Market.
The Merger Agreement contains customary closing conditions. Among these conditions, the Merger Agreement requires that the stockholders of Reflect approve the Merger and other related proposals (the “Reflect Proposals”), and that the shareholders of Creative Realities approve the issuance of the CREX Shares Consideration, and the terms of the Retention Bonus Plan and other related proposals (the “Creative Realities Proposals”). The parties intend to seek stockholder approvals of the Creative Realities Proposals and Reflect Proposal via a joint proxy statement/prospectus on Form S-4 (the “Proxy Statement”) with the Securities Exchange Commission (the “SEC”), which will include audited annual and unaudited interim historical financial information for the operations comprising the business of Reflect, together with pro forma financial information, and such other information as required by applicable SEC rules.
The Merger Agreement contains customary representations, warranties, covenants, escrow and indemnification provisions. At closing of the Merger, $2.5 million of the cash Merger consideration will be deposited into a one-year escrow account as the sole remedy to secure the indemnification obligations of Reflect stockholders; provided that claims related to breaches of certain representations, warranties and covenants will not be limited by the escrow account and will be limited by the Merger consideration paid to such stockholders. Losses must exceed $200,000 before Reflect stockholders would be liable for any indemnification obligations, in which event Reflect stockholders would be responsible for the amount of all losses above such amount. Creative Realities may offset from the Guaranteed Consideration the amount of losses that Creative Realities is finally determined to be entitled under the indemnification provisions of the Merger Agreement.
An additional $250,000 of the cash Merger consideration will be deposited into an escrow account to secure any required payments by the Reflect stockholders as part of the post-closing purchase price adjustments for closing date net working capital set forth in the Merger Agreement.
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The Merger Agreement contains certain termination rights for both Creative Realities and Reflect, including rights to terminate the Merger Agreement in the event of a breach by the other party (which right includes the right to recover out-of-pocket costs incurred by the non-breaching party) and limited rights permitting Creative Realities to terminate the Merger Agreement upon the failure to obtain sufficient financing to fund the cash portion of the Merger consideration, and certain adverse developments in the Reflect’s business.
We expect the merger to close in the first quarter of 2022.
For a discussion of the factors that may cause Creative Realities’, Reflect’s and the combined company’s actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied in such forward-looking statements, and for a discussion of risk associated with the ability of Creative Realities and Reflect to complete the Merger and the effect of the Merger on the business of Creative Realities, Reflect and the combined company, see “Risk Factors” set forth in the preliminary Proxy Statement filed with the SEC on November 12, 2021. Readers are also urged to carefully review and consider the various disclosures we make in amendments to the Proxy Statement filed with the SEC and that we will mail to our shareholders. In addition, additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in reports filed with the SEC by Creative Realities. There can be no assurance that the proposed Merger will be completed, or if it is completed, that it will be consummated within the anticipated time period or that the expected benefits of the proposed Merger will be realized.
COVID-19 Pandemic
In January 2020, an outbreak of a new strain of coronavirus, COVID-19, was identified in Wuhan, China. Through the first quarter of 2020, the disease became widespread around the world, and on March 11, 2020, the World Health Organization declared a pandemic. Thereafter, state and local authorities in the United States and worldwide have forced many businesses to temporarily reduce or cease operations to slow the spread of the COVID-19 pandemic.
As a result of the COVID-19 pandemic, we experienced rapid and immediate deterioration in our business in each of our key vertical markets. The elective and forced closures of, and implementation of social distancing policies on, businesses across the United States resulted in materially reduced demand and customer budgets for our services throughout 2020 and into 2021, as our customers purchase our products and services to engage with their end customers in a physical space through digital technology, particularly in our theater, sports arena and large entertainment markets. Those conditions resulted in downward revisions of our internal forecasts on current and future projected earnings and cash flows, resulting in a non-cash impairment loss of $10,646 recorded during the first quarter of 2020 and reduced liquidity as described below.
While we have experienced an intense curtail in demand, our long-term outlook for the digital signage industry remains strong and we believe that the COIVD-19 pandemic has accelerated the long-term adoption of digital solutions.
Semiconductor Chip Shortage
The Company’s suppliers of digital displays, the primary hardware component in the Company’s digital systems, have informed the Company that, due to semiconductor chip shortages in the industry, such suppliers expect delays and potentially increased costs for the Company to obtain digital displays necessary to fulfill and install the Company’s digital solutions. Historically, such digital displays have been readily available for purchase and delivery, to be purchased by the Company from distributors from such distributor’s existing inventory. Such delays will likely result in a longer sales cycles and prolonged periods in which the Company will be able to recognize revenues compared to historical time periods. The increased costs for such displays may also reduce the margins in which the Company has received on account of the purchase and installation of such displays as part the Company’s digital signage product offerings. Although we believe that such shortage will be alleviated during the first half of 2022, the Company is unable to confirm how long such delays may exist, the effect such delays and increased demand may have on the cost to procure such digital screens, or the adverse impacts on our financial results.
Our Sources of Revenue
We primarily generate revenue through digital marketing solution sales, which include system hardware, professional and implementation services, software design and development, software licensing, deployment, and maintenance and support services.
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.
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Critical Accounting Policies and Estimates
The Company’s significant accounting policies are described in Note 2 Summary of Significant Accounting Policies of the Company’s Condensed Consolidated Financial Statements included elsewhere in this filing. 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 per-share information.
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
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 | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Sales | $ | 4,753 | $ | 5,107 | $ | (354 | ) | -7 | % | |||||||
| Cost of sales | 2,406 | 2,663 | (257 | ) | -10 | % | ||||||||||
| Gross profit | 2,347 | 2,444 | (97 | ) | -4 | % | ||||||||||
| Sales and marketing expenses | 330 | 411 | (81 | ) | -20 | % | ||||||||||
| Research and development expenses | 226 | 229 | (3 | ) | -1 | % | ||||||||||
| General and administrative expenses | 1,848 | 1,849 | (1 | ) | 0 | % | ||||||||||
| Depreciation and amortization expense | 347 | 377 | (30 | ) | -8 | % | ||||||||||
| Total operating expenses | 2,751 | 2,866 | (115 | ) | -4 | % | ||||||||||
| Operating (loss) | (404 | ) | (422 | ) | 18 | -4 | % | |||||||||
| Other income/(expenses): | ||||||||||||||||
| Interest expense | (186 | ) | (265 | ) | 79 | -30 | % | |||||||||
| Gain on settlement of debt | 256 | 114 | 142 | -125 | % | |||||||||||
| Other income/(expense) | (8 | ) | (13 | ) | 5 | -38 | % | |||||||||
| Total other income/(expense) | 62 | (164 | ) | 226 | -138 | % | ||||||||||
| Net income/(loss) before income taxes | (342 | ) | (586 | ) | 244 | -42 | % | |||||||||
| Provision from income taxes | (1 | ) | 1 | (2 | ) | -200 | % | |||||||||
| Net income/(loss) | $ | (343 | ) | $ | (585 | ) | 242 | -41 | % | |||||||
Sales
Sales decreased by $354, or 7%, during the three months ended September 30, 2021 as compared to the same period in 2020 primarily driven by a reduction of $635 in hardware sales resulting from limited supply chain availability of semiconductor chips delaying the delivery of digital displays and media players to the Company, combined with a reduction in Safe Space Solutions hardware in 2021 following wide distribution of the COVID-19 vaccine. These reductions were partially offset by an increase in installation activity related to a continued customer rollout of previously purchased hardware. The supply disruption for digital displays prevented the Company from delivery of hardware and execution of installation activities during the quarter. As of September 30, 2021, the Company had customer purchase orders for equipment and installation activities in excess of $1,200 which were delayed as a result of product availability. The Company expects to experience continued disruptions and delays related to fulfillment of inventory purchases from vendors throughout the remainder of 2021, which may impact our results for the remainder of 2021. We expect a full recovery in the timely availability of equipment during the first half of 2022. During the three months ended September 30, 2021 and 2020, of our Safe Space Solutions products and services (inclusive of the portion of revenue recognized during the three months ended September 30, 2021 related to annual contracts sold in prior periods), were $182 and $2,067, respectively.
Gross Profit
Gross profit decreased $97, or 4% during the three months ended September 30, 2021 as compared to the same period in 2020 driven by the decrease in sales but offset by an increase in gross profit margin. Gross profit margin increased to 49.4% in 2021 from 47.9% during the same period in 2020 as a result of an increase in managed services as a percentage of total revenue during the period and headcount reductions in personnel servicing customers as a result of cost reductions executed throughout 2020.
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 decreased by $81, or 20%, in 2021 compared to 2020. The decrease was driven by $50 of Employee Retention Credits related to the retention and payment of salaries to sales personnel during the period. The remaining reduction was the result of reduced commissions and bonuses.
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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 decreased by $3, or 1%, in 2021 compared to 2020. The decrease was driven by $49 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the three months ended September 30, 2021, partially offset by increased headcount as we began re-investment into our content management platforms.
General and Administrative Expenses
Total general and administrative expenses were flat for the three months ended September 30, 2021 as compared to the same period in 2020. There was a decrease of $186 from Employee Retention Credits related to the retention and payment of salaries to sales personnel during the period, offset by $95 in expenses related to one-time deal and transaction expenses and an increase of $83 in non-cash stock compensation expenses from employee stock option awards with time and performance-based vesting.
Depreciation and Amortization Expenses
Depreciation and amortization expenses decreased by $30, or 8%, in 2021 compared to 2020. This decrease was the result of a trade name asset becoming fully amortized during 2020, while no amortization was recorded during the three months ended September 30, 2021.
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.
Gain on Settlement of Debt
During the three months ended September 30, 2021 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.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
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 | |||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||
| Sales | $ | 13,034 | $ | 12,467 | $ | 567 | 5 | % | ||||||||
| Cost of sales | 6,578 | 6,599 | (21 | ) | 0 | % | ||||||||||
| Gross profit | 6,456 | 5,868 | 588 | 10 | % | |||||||||||
| Sales and marketing expenses | 834 | 1,209 | (375 | ) | -31 | % | ||||||||||
| Research and development expenses | 455 | 787 | (332 | ) | -42 | % | ||||||||||
| General and administrative expenses | 5,623 | 6,340 | (717 | ) | -11 | % | ||||||||||
Bad debt (recovery) / expense | (463 | ) | 830 | (1,293 | ) | -156 | % | |||||||||
| Depreciation and amortization expense | 1,035 | 1,123 | (88 | ) | -8 | % | ||||||||||
| Goodwill impairment | - | 10,646 | (10,646 | ) | -100 | % | ||||||||||
| Total operating expenses | 7,484 | 20,935 | (13,451 | ) | -64 | % | ||||||||||
| Operating (loss) | (1,028 | ) | (15,067 | ) | 14,039 | -93 | % | |||||||||
| Other income / (expenses): | ||||||||||||||||
| Interest expense | (617 | ) | (752 | ) | 135 | -18 | % | |||||||||
| Change in fair value of Convertible Loan | 166 | (702 | ) | 868 | -124 | % | ||||||||||
| Gain on settlement of debt | 3,449 | 155 | 3,294 | 2,125 | % | |||||||||||
| Loss on disposal of assets | - | (13 | ) | 13 | -100 | % | ||||||||||
| Other income/(expense) | (7 | ) | (13 | ) | 6 | -46 | % | |||||||||
| Total other income/(expense) | 2,991 | (1,312 | ) | 4,303 | -328 | % | ||||||||||
| Net income/(loss) before income taxes | 1,963 | (16,379 | ) | 18,342 | -112 | % | ||||||||||
| Provision from income taxes | (9 | ) | 152 | (161 | ) | -106 | % | |||||||||
| Net income/(loss) | $ | 1,954 | $ | (16,227 | ) | 18,181 | -112 | % | ||||||||
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Sales
Sales increased by $567, or 5%, in the nine months ended September 30, 2021 as compared to the same period in 2020 driven by an increase of $509 in hardware sales as compared to the same period in 2020, despite a decrease of $1,385 in the sale of our Safe Space Solutions products, which launched in April 2020. Core digital signage sales expanded by $976 in the period despite constraints from further growth due to limited supply chain availability of semiconductor chips delaying the delivery of digital displays and media players to the Company. The supply disruption for digital displays prevented the Company from delivery of hardware and execution of installation activities during the quarter. As of September 30, 2021, the Company had customer purchase orders for equipment and installation activities in excess of $1,200 which were delayed as a result of product availability. The Company expects to experience continued disruptions and delays related to fulfillment of inventory purchases from vendors throughout the remainder of 2021, which may impact our results for the remainder of 2021. We expect a full recovery in the timely availability of equipment during the first half of 2022.
Gross Profit
Gross profit increased $588, or 10%, during the nine months ended September 30, 2021 as compared to the same period in 2020, driven by both an increase in sales, which contributed $322 of incremental gross profit on a constant gross profit margin basis, and an increase in gross profit margin, which contributed $266 of incremental gross profit. Gross profit margin increased to 49.5% from 47.1% driven primarily by increased hardware margins driven by increased purchasing power with distributors as our purchases of digital displays have increased.
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 decreased by $375, or 31%, in 2021 compared to 2020. The decrease was driven by $232 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the nine months ended September 30, 2021. The remaining reduction was the result of reduced personnel costs, partially offset by an increase of $78 on trade show activity and related travel costs following a return to participation in industry trade shows and events after the elimination of such costs in 2020 as a result of the COVID-19 pandemic.
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 decreased by $332, or 44%, in 2021 compared to 2020. The decrease was driven by $196 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the nine months ended September 30, 2021. The remaining reduction was the result of reduced personnel costs following the reduction of personnel and salary reductions implemented throughout 2020.
General and Administrative Expenses
Total general and administrative expenses decreased by $717, or 11%, in 2021 compared to 2020. The decrease was driven by $694 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the nine months ended September 30, 2021. Excluding the consideration of those Employee Retention Credits recorded in the period, total general and administrative expenses decreased $23, or 0%, during the nine months ended September 30, 2021 as compared to the same period in 2020. The comparable year-over-year expenses included reductions of (a) $157 in non-ERC-related personnel costs, including salaries, benefits, and travel-related expenses, (b) $280 in rent expense following closure, downsizing, or restructuring of four leases during 2020, and (c) reductions in legal expenses of $255 following settlement of the Amended and Restated Seller Note, partially offset by an increase in stock compensation amortization expense of $849 related to incremental employee and directors’ awards granted during 2020 which are being amortized over a nineteen (19) month remaining vesting period based on the grant date fair value calculated using the Black Scholes method. Personnel costs were reduced following completion of a reduction-in-force and salary reductions for remaining personnel in March 2020.
Bad Debt
Expenses related to the Company’s allowance for bad debts decreased by $1,293, or 156%, for the nine months ended September 30, 2021 compared to 2020. This decrease was primarily driven by a cash recovery of $555 related to a customer bankruptcy for which the Company previously recorded a reserve during the three months ended June 30, 2020.
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Goodwill impairment
See Note 7 Intangible Assets, Including Goodwill to the Condensed Consolidated Financial Statements for a discussion of the Company’s interim impairment test and the non-cash impairment charge recorded.
Depreciation and Amortization Expenses
Depreciation and amortization expenses decreased by $88, or 8%, in 2021 compared to 2020. This decrease was the result of a trade name asset becoming fully amortized during 2020, while no amortization was recorded during the nine months ended September 30, 2021.
Interest Expense; Change in fair value of Convertible Loan
See Note 8 Loans Payable to the Condensed Consolidated Financial Statements for a discussion of the Company’s debt and related interest expense obligations.
We updated our fair value analysis of the Convertible Loan quarterly, resulting in recognition of a $166 gain and a $702 loss during the nine months ended September 30, 2021 and 2020, respectively. See Note 8 Loans Payable to the Condensed Consolidated Financial Statements for a discussion of the Company’s Convertible Loan.
Gain on Settlement of Debt
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 three months ended March 31, 2021.
On May 13, 2021, the Company and 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 Amended and Restated Seller Note and a mutual release of all claims related to the Amended and Restated Seller Note and sale transaction under the Allure Purchase Agreement and all related agreements.
As a result of this settlement, the full principal amount of the Amended and Restated 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 Amended and Restated Seller Note and $86 of related interest thereon, during the three months ended June 30, 2021.
During the three months ended September 30, 2021 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.
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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, 2021 | June 30, 2021 | March 31, 2021 | December 31, 2020 | September 30, 2020 | |||||||||||||||
| Net sales | $ | 4,753 | $ | 3,277 | $ | 5,004 | $ | 4,990 | $ | 5,107 | ||||||||||
| Cost of sales | 2,406 | 1,402 | 2,770 | 2,737 | 2,663 | |||||||||||||||
| Gross profit | 2,347 | 1,875 | 2,234 | 2,253 | 2,444 | |||||||||||||||
| Operating expenses, excluding depreciation and amortization | 2,404 | 1,942 | 2,103 | 2,886 | 2,489 | |||||||||||||||
| Depreciation/amortization | 347 | 344 | 344 | 351 | 377 | |||||||||||||||
| Operating income (loss) | (404 | ) | (411 | ) | (213 | ) | (1,002 | ) | (422 | ) | ||||||||||
| Other expenses/(income) | (62 | ) | 1,443 | (1,486 | ) | (379 | ) | 164 | ||||||||||||
| Income tax expense/(benefit) | 1 | 7 | 1 | (6 | ) | (1 | ) | |||||||||||||
| Net income (loss) | (343 | ) | $ | 1,025 | $ | 1,272 | $ | (617 | ) | $ | (585 | ) | ||||||||
Supplemental Operating Results on a Non-GAAP Basis
The following non-GAAP data, which adjusts for the categories of expenses described below, is a non-GAAP financial measure. Our management believes that this non-GAAP financial measure is useful information for investors, shareholders and other stakeholders of the Company in evaluating our results of operations on an ongoing basis. We believe that earnings before interest, taxes, depreciation, and amortization (“EBITDA”) is a performance measure and not a liquidity measure, and therefore a reconciliation between net loss/income and EBITDA and Adjusted EBITDA, which is calculated by removing the impact of non-recurring and primarily non-cash transactions from EBITDA, has been provided. Neither EBITDA nor Adjusted EBITDA should be considered as an alternative to net loss/income as an indicator of performance, or as an alternative to cash flows from operating activities as an indicator of cash flows, in each case as determined in accordance with GAAP, or as a measure of liquidity. In addition, neither EBITDA nor Adjusted EBITDA takes into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows. We do not intend the presentation of these non-GAAP measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP. These non-GAAP measures should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
| Quarters Ended | ||||||||||||||||||||
| September 30, | June 30, | March 31, | December 31, | September 30, | ||||||||||||||||
| Quarters ended | 2021 | 2021 | 2021 | 2020 | 2020 | |||||||||||||||
| GAAP net income (loss) | $ | (343 | ) | $ | 1,025 | $ | 1,272 | $ | (617 | ) | $ | (585 | ) | |||||||
| Interest expense: | ||||||||||||||||||||
| Amortization of debt discount | 29 | 29 | 72 | 85 | 85 | |||||||||||||||
| Other interest, net | 158 | 153 | 177 | 186 | 179 | |||||||||||||||
| Depreciation/amortization: | ||||||||||||||||||||
| Amortization of intangible assets | 139 | 139 | 140 | 139 | 161 | |||||||||||||||
| Amortization of finance lease assets | - | - | 4 | 3 | 5 | |||||||||||||||
| Amortization of share-based awards | 329 | 329 | 512 | 250 | 248 | |||||||||||||||
| Depreciation of property, equipment & software | 208 | 205 | 200 | 209 | 212 | |||||||||||||||
| Income tax expense/(benefit) | 1 | 7 | 1 | (6 | ) | (1 | ) | |||||||||||||
| EBITDA | $ | 521 | 1,887 | 2,378 | 249 | $ | 304 | |||||||||||||
| Adjustments | ||||||||||||||||||||
| Change in fair value of Special Loan | - | - | (166 | ) | (609 | ) | - | |||||||||||||
| Gain on settlement of obligations | (256 | ) | (1,628 | ) | (1,565 | ) | (54 | ) | (114 | ) | ||||||||||
| Loss on disposal of assets | - | - | - | - | 13 | |||||||||||||||
| Loss on lease termination | - | - | - | 18 | - | |||||||||||||||
| Stock-based compensation – Director grants | 27 | 27 | 27 | 27 | 25 | |||||||||||||||
| Adjusted EBITDA | $ | 292 | 286 | 674 | (369 | ) | $ | 228 | ||||||||||||
Liquidity and Capital Resources
See Note 1 Nature of Organization and Operations to the accompanying Condensed Consolidated Financial Statements for a detailed discussion of liquidity and financial resources.
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Operating Activities
The cash flows used in operating activities were ($367) and ($4,110) for the nine months ended September 30, 2021 and 2020, respectively. We produced net income during the nine months ended September 30, 2021 of $1,954, which was primarily reduced via addback of the gain on forgiveness of the Company’s PPP Loan in the amount of $1,552 and gain on the settlement of obligations in the amount of $1,624, representing $1,538 related to the Seller Note and $86 of related interest thereon, partially offset by an addback for depreciation and amortization, including amortization of debt discount and stock based compensation, of $2,417. The change in cash flows used in operations year-over-year was driven primarily by the current year gains on settlement of the Seller Note and forgiveness of the PPP loan, combined with a reduction in prepaid assets.
Investing Activities
Net cash used in investing activities during the nine months ended September 30, 2021 was $432 compared to $559 during the same period in 2020. The use of cash in both periods represents payments made for capital assets, primarily related to the capitalization of both internal and external software development. We currently do not have any material commitments for capital expenditures as of September 30, 2021; however, we anticipate an increase in our capital expenditures of approximately $430 in excess of our historical trends throughout the balance of 2021 to maintain and enhance the software platform for our customers and to enhance revenue generating activities through the platform.
Financing Activities
Net cash provided by financing activities during the nine months ended September 30, 2021 and 2020 were $1,745 and $2,990, respectively. On February 18, 2021, the Company entered into a securities purchase agreement with an institutional investor for the issuance and sale of the Company’s common stock. The net proceeds from the Offering after paying estimated offering expenses were approximately $1,849. These proceeds were partially offset by the settlement payment of $100 on the Seller Note. The 2020 proceeds were driven by the Company’s receipt of a $1,552 Paycheck Protection Program loan, execution of sales via an at-the-market offering of $1,335, and the exercise of 27,600 warrants.
Off-Balance Sheet Arrangements
During the three and nine months ended September 30, 2021, 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 September 30, 2021, 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 September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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, 2021 and our Quarterly Report on Form 10-Q filed with the SEC on May 17, 2021. Such risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flow, strategies or prospects in a material and adverse manner.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Earnings Release
On November 15, 2021, the Company issued a press release announcing its financial condition and results of operations for the three and nine months ended September 30, 2021. 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.
Item 6. Exhibits
| Exhibit No. | Description | |
| 2.1 | Agreement and Plan of Merger dated November 12, 2021 (incorporated by reference to Exhibit 2.2 of the Company’s registration statement on Form S-4 filed November 12, 2021) | |
| 31.1 | Chief Executive Officer Certification pursuant to Exchange Act Rule 13a-14(a). | |
| 31.2 | Chief Financial Officer Certification pursuant to Exchange Act Rule 13a-14(a). | |
| 32.1 | Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350. | |
| 32.2 | Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350. | |
| 99.1 | Press release dated November 15, 2021 | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema. | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase. | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase. | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase. | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase. | |
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
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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: November 15, 2021 | By | /s/ Richard Mills |
| Richard Mills | ||
| Chief Executive Officer | ||
| By | /s/ Will Logan | |
| Will Logan | ||
| Chief Financial Officer |
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