Workflow
Creative Realities(CREX) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the company's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and shareholders' equity, along with detailed notes explaining significant accounting policies, business combinations, debt, and other financial disclosures Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands): | Metric | June 30, 2019 (unaudited) | December 31, 2018 | | :------------------------------------- | :------------------------ | :---------------- | | Total Assets | $35,877 | $37,728 | | Total Liabilities | $18,290 | $20,907 | | Total Shareholders' Equity | $17,587 | $16,821 | | Cash and cash equivalents | $1,824 | $2,718 | | Working capital deficit | $3,930 | N/A | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands, except per share amounts): | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Sales | $9,314 | $7,179 | $18,798 | $11,245 | | Total Cost of Sales | $5,086 | $4,089 | $10,889 | $6,646 | | Gross Profit | $4,228 | $3,090 | $7,909 | $4,599 | | Operating Income/(Loss) | $495 | ($7) | $530 | ($1,826) | | Net Income/(Loss) | $417 | ($612) | $233 | ($2,850) | | Basic Earnings/(Loss) Per Common Share | $0.04 | ($0.27) | $0.02 | ($1.12) | - For the three months ended June 30, 2019, total sales increased by 30% and gross profit increased by 37% compared to the same period in 2018. The company reported net income of $417 thousand, a significant improvement from a net loss of ($612) thousand in the prior year10186187188 - For the six months ended June 30, 2019, total sales increased by 67% and gross profit increased by 72% compared to the same period in 2018. The company reported net income of $233 thousand, a significant improvement from a net loss of ($2,850) thousand in the prior year10200202203 Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands): | Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :------------------------------------- | :----------------------------- | :----------------------------- | | Net Income/(Loss) | $233 | ($2,850) | | Net Cash Provided by Operating Activities | $736 | $2,565 | | Net Cash Used in Investing Activities | ($798) | ($95) | | Net Cash Provided by/(Used in) Financing Activities | ($172) | $2,100 | | Cash and Cash Equivalents at End of Period | $1,824 | $5,461 | Consolidated Statements of Shareholders' Equity Consolidated Statements of Shareholders' Equity (in thousands, except shares): | Metric | June 30, 2019 | | :------------------------------------- | :------------ | | Total Shareholders' Equity (March 31, 2019) | $16,849 | | Net Income (Three months ended June 30, 2019) | $417 | | Total Shareholders' Equity (June 30, 2019) | $17,587 | | Total Shareholders' Equity (December 31, 2018) | $16,821 | | Net Income (Six months ended June 30, 2019) | $233 | | Shares Issued for Services (Six months ended June 30, 2019) | 17,960 | | Stock-based Compensation (Six months ended June 30, 2019) | $82 | Notes to Condensed Consolidated Financial Statements NOTE 1: Nature of Organization and Operations Creative Realities, Inc. provides digital marketing technology and solutions, expanding its operations and customer base through the Allure Global Solutions acquisition. Despite historical net losses and a working capital deficit, management believes the company can continue as a going concern through August 2020 due to loan extensions and operational forecasts - The company provides innovative digital marketing technology and solutions to retail companies, brands, enterprises, and organizations across the United States and in certain international markets21 - The acquisition of Allure Global Solutions, Inc. on November 20, 2018, expanded operations, geographical footprint, and customer base, while enhancing existing product offerings2230 - The company incurred net losses for the years ended December 31, 2018 and 2017, and had negative cash flows from operating activities as of December 31, 2018. As of June 30, 2019, cash and cash equivalents were $1,824 thousand and working capital deficit was $3,930 thousand25 - Management believes the company can continue as a going concern through at least August 15, 2020, based on the extension of term and revolving loans and operational forecasts, supported by a continued support letter from Slipstream2728 NOTE 2: Summary of Significant Accounting Policies This note outlines the company's key accounting policies, including the adoption of ASC 606 for revenue recognition and ASU 2016-02 for leases, which led to the recognition of right-of-use assets and lease liabilities. It also covers policies for inventories, impairment, EPS, income taxes, goodwill, business combinations, and the impact of a 1-for-30 reverse stock split in October 2018 - The company adopted ASC 606, Revenue from Contracts with Customers, effective January 1, 2018, using the modified retrospective method3966 Inventories (in thousands): | Category | June 30, 2019 | December 31, 2018 | | :--------------- | :------------ | :---------------- | | Raw materials | $128 | $220 | | Work-in-process | $640 | $159 | | Total | $768 | $379 | - A 1-for-30 reverse stock split of outstanding common stock was effectuated on October 17, 2018, with financial statements and notes adjusted for all periods presented48 - On January 1, 2019, the company adopted ASU No. 2016-02, Leases (Topic 842), recognizing total Right-of-Use (ROU) assets and corresponding liabilities of $2,319 thousand on the condensed consolidated balance sheets5154 NOTE 3: Recently Issued Accounting Pronouncements This note details recently adopted accounting pronouncements, including ASU 2016-02 (Leases), ASU 2018-16 (Derivatives and Hedging), SEC Release No. 33-10532 (Disclosure Update and Simplification), and ASU 2017-04 (Goodwill Impairment). It also lists pronouncements not yet adopted, such as ASU 2018-15 (Cloud Computing), ASU 2018-13 (Fair Value Measurement), and ASU 2016-13 (Credit Losses), which are currently being evaluated for their impact - The company adopted ASU No. 2016-02, Leases (Topic 842), on January 1, 2019, which requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets57 - ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, was adopted on January 1, 2019, removing the second step of the goodwill impairment test. No impact on condensed consolidated financial statements resulted from this adoption61 - The company is currently evaluating the impact of ASU 2018-15 (Cloud Computing), ASU 2018-13 (Fair Value Measurement), and ASU 2016-13 (Financial Instruments—Credit Losses), all effective for fiscal years beginning after December 15, 2019626364 NOTE 4: Revenue Recognition The company recognizes revenue under ASC 606, identifying contracts, performance obligations, and allocating transaction prices. Revenue is generated from hardware sales, professional implementation, software design and development, Software as a Service (SaaS), and maintenance and support services, with detailed disaggregation provided for the three and six months ended June 30, 2019 - Revenue is recognized when a customer obtains control of promised goods or services, measured as the consideration expected in exchange for transferring goods or providing services69 - Key revenue sources include system hardware sales, professional implementation and installation services, software design and development services, Software as a Service (SaaS), and maintenance and support services74 Disaggregated Revenue by Major Source (in thousands): | Category | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :----------------------------- | | Hardware | $1,654 | $3,295 | | Installation Services | $1,791 | $4,163 | | Software Development Services | $4,259 | $8,235 | | Managed Services | $1,610 | $3,105 | | Total Hardware and Services | $9,314 | $18,798 | NOTE 5: Business Combination This note details the Allure Global Solutions acquisition on November 20, 2018, with a total purchase price of $8,450 thousand. The preliminary purchase price allocation was updated following a working capital settlement in May 2019, resulting in a net consideration transferred of $8,047 thousand and the recognition of $3,253 thousand in goodwill, attributed to strategic and synergistic benefits - The Allure Global Solutions acquisition was completed on November 20, 2018, with an initial total purchase price of $8,450 thousand88 - A settlement agreement on May 10, 2019, finalized net working capital, resulting in a net cash payment of $210 thousand from the Seller and a reduction of $666 thousand in accounts receivable and the Amended and Restated Seller Note8993 Revised Preliminary Purchase Price Allocation (in thousands): | Asset/Liability Category | Total | | :------------------------------------- | :---- | | Accounts receivable | $1,543 | | Identified intangible assets (Total) | $4,980 | | Goodwill | $3,253 | | Accounts payable | ($331) | | Deferred revenues | ($276) | | Net Consideration Transferred | $8,047 | - Goodwill of $3,253 thousand was recognized, reflecting expected strategic and synergistic benefits such as a comprehensive customer portfolio, complementary product offerings, enhanced national footprint, and value creation97103 NOTE 6: Fair Value Measurement This note describes the company's use of a three-level fair value hierarchy for measuring financial assets and liabilities. It specifically highlights the warrant liabilities, which decreased from $21 thousand to $0, and the earnout liability of $250 thousand, both classified as Level 3 due to reliance on unobservable inputs and management judgment - The company uses a three-level hierarchy (Level 1, 2, 3) to prioritize inputs for fair value measurements, with Level 3 valuations based on unobservable inputs and management judgment107108 Change in Level 3 Fair Value of Warrant Liability (in thousands): | Metric | Amount | | :------------------------------------- | :----- | | Warrant liability as of December 31, 2018 | $21 | | Decrease in fair value of warrant liability | ($21) | | Ending warrant liability as of June 30, 2019 | $0 | - The earnout liability of $250 thousand, related to the Allure Acquisition, is classified as Level 3, based on management's revenue projections and estimates109 NOTE 7: Supplemental Cash Flow Statement Information This note provides supplemental cash flow details, including non-cash investing and financing activities and cash payments for interest and income taxes for the six months ended June 30, 2019 and 2018 Supplemental Cash Flow Information (in thousands): | Category | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :------------------------------------- | :----------------------------- | :----------------------------- | | Issuance of common stock upon conversion of preferred stock | $0 | $125 | | Issuance of warrants with term loan extensions / revolver draws | $0 | $809 | | Right of offset settlement of Amended and Restated Seller Note | $498 | $0 | | Cash paid for Interest | $181 | $359 | | Cash paid for Income taxes, net | $0 | $0 | NOTE 8: Intangible Assets and Goodwill This note details the company's intangible assets and goodwill. As of June 30, 2019, net book value of amortizable intangible assets was $4,757 thousand, with amortization expense decreasing compared to the prior year. Goodwill decreased to $18,242 thousand due to adjustments from the preliminary purchase price allocation of the Allure Acquisition Intangible Assets (in thousands): | Asset Type | Gross Carrying Amount (June 30, 2019) | Accumulated Amortization (June 30, 2019) | Net Book Value (June 30, 2019) | | :--------------------- | :------------------------------------ | :--------------------------------------- | :----------------------------- | | Technology platform | $4,635 | $3,021 | | | Customer relationships | $5,330 | $2,583 | | | Trademarks and trade names | $1,020 | $624 | | | Total | $10,985 | $6,228 | $4,757 | - Amortization of intangible assets charged to operations was $147 thousand for the three months ended June 30, 2019, and $303 thousand for the six months ended June 30, 2019, representing a decrease from the prior year periods112 Goodwill Rollforward (in thousands): | Metric | Total | | :----------------------------------------------------------------------------------- | :------ | | Balance as of January 1, 2019 | $18,900 | | Adjustments due to adjustments to preliminary purchase price allocation (Note 5) | ($658) | | Balance as of June 30, 2019 | $18,242 | NOTE 9: Loans Payable This note details the company's outstanding debt, totaling $5,901 thousand in principal as of June 30, 2019, primarily consisting of term and revolving loans from a related party (Slipstream) and an Amended and Restated Seller Note from the Allure Acquisition. The cash interest rate on related party loans increased to 10% from July 1, 2019, and the Seller Note is convertible into common stock Outstanding Debt (in thousands, except warrants): | Debt Type | Principal | Maturity Date | Warrants | Interest Rate Information | | :------------------------------------- | :-------- | :------------ | :------- | :------------------------ | | Secured Disbursed Escrow Promissory Note | $264 | 6/30/2021 | - | 0.0% interest | | Revolving Loan | $1,000 | 8/16/2020 | 61,729 | 8.0% interest | | Term Loan | $3,000 | 8/16/2020 | 588,236 | 8.0% interest | | Amended and Restated Seller Note | $1,637 | 2/15/2020 | - | 3.5% interest | | Total Debt Principal | $5,901| | 649,965 | | | Debt discount | ($717) | | | | | Total Debt (Net) | $5,184| | | | | Long term debt | $3,547 | | | | - The maturity date of the term loan and revolving loan with Slipstream (a related party) was extended to August 16, 2020. The cash portion of the interest rate for these loans increased from 8.0% to 10.0% per annum effective July 1, 2019124218 - The Amended and Restated Seller Note, with an outstanding principal balance of $1,637 thousand as of June 30, 2019, is convertible into shares of Creative Realities common stock at the seller's option or mandatorily under certain conditions128130 NOTE 10: Commitments and Contingencies This note covers the company's commitments and contingencies, including a gain on lease termination in 2018, gains from settlement of other obligations in 2019, ongoing litigation, and termination benefits accrued and paid following the Allure Acquisition - The company recognized a gain on settlement of $39 thousand in the three months ended June 30, 2018, from exiting a previously leased operating facility132198 - Gains on settlement of obligations were $6 thousand for the three months ended June 30, 2019, and $13 thousand for the six months ended June 30, 2019133197210 - The company accrued $386 thousand for one-time termination benefits related to severance in December 2018. $211 thousand was paid during the six months ended June 30, 2019, with $144 thousand remaining as a liability135 - The company is involved in various legal proceedings but believes their aggregate outcome will not have a material adverse effect on its business, financial condition, liquidity, or operating results134 NOTE 11: Related Party Transactions This note details transactions with related parties, including financing arrangements with Slipstream Communications, LLC, and sales and accounts receivable with 33 Degrees Convenience Connect, Inc. Sales to 33 Degrees decreased in 2019, while accounts receivable from them remained significant - The company has financing transactions with Slipstream Communications, LLC, a related party, including term and revolving loans with warrants137140142 Sales to 33 Degrees Convenience Connect, Inc. (Related Party): | Period | Sales ($ thousands) | % of Consolidated Revenue | | :------------------------------------- | :------------------ | :------------------------ | | Three months ended June 30, 2019 | $275 | 3.0% | | Six months ended June 30, 2019 | $470 | 2.5% | | Three months ended June 30, 2018 | $618 | 8.6% | | Six months ended June 30, 2018 | $1,035 | 9.2% | - Accounts receivable due from 33 Degrees was $872 thousand (13.0% of consolidated accounts receivable) at June 30, 2019, and $1,933 thousand (30.0%) at December 31, 2018139 - A payment agreement with 33 Degrees for $2,567 thousand of aged accounts receivable, bearing 12% simple interest, matures on December 31, 2019, with $867 thousand remaining as of June 30, 2019138 NOTE 12: Income Taxes This note explains that the company's deferred tax assets are primarily from net operating loss (NOL) carryforwards, which are subject to IRC Section 382 limitations. A full valuation allowance is maintained against net deferred tax assets due to a history of losses, though a tax benefit was reported for the three and six months ended June 30, 2019 - Deferred tax assets are primarily related to net federal and state operating loss carryforwards (NOLs), with usage limited by IRC Section 382144 - A full valuation allowance is established against the net deferred tax assets with a definite life due to the company's history of losses144 - The company reported a tax benefit of $107 thousand for the three months ended June 30, 2019, and $86 thousand for the six months ended June 30, 2019145 NOTE 13: Convertible Preferred Stock This note details the conversion of all Series A Convertible Preferred Stock into common stock on November 5, 2018, contingent on a successful public offering. Following the conversion and issuance of additional common shares as incentives, the preferred stock class was eliminated from the company's Articles of Incorporation in March 2019 - On November 5, 2018, holders of Series A Convertible Preferred Stock agreed to convert the entire class into common stock at an exchange ratio of $7.65 per share, contingent on a successful public offering147 - The company issued 723,561 common shares at the stated conversion rate and an additional 1,123,367 common shares as a one-time incentive for lock-up agreements148 - Effective March 18, 2019, the Series A Convertible Preferred Stock and Series A-1 Convertible Preferred Stock classes were eliminated from the company's Articles of Incorporation, with no shares outstanding as of December 31, 2018148149 NOTE 14: Warrants This note provides details on warrants issued in connection with revolving loans from Slipstream, including their fair values and valuation methodology using the Black Scholes option pricing model. It also summarizes outstanding liability and equity warrants as of June 30, 2019 - Warrants were issued in connection with revolving loans from Slipstream, including 61,729 shares (fair value $266 thousand) on January 16, 2018, and 143,791 shares (fair value $543 thousand) on April 27, 2018152153 - The fair value of warrants is calculated using a probability weighted Black Scholes option pricing model154 Summary of Outstanding Warrants (June 30, 2019): | Category | Amount (Warrants) | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | | :--------------- | :---------------- | :------------------------------ | :-------------------------------------------------- | | Equity Warrants | 4,815,047 | $4.90 | 3.84 | | Liability Warrants | 216,255 | $7.34 | 0.14 | NOTE 15: Stock-Based Compensation This note outlines the company's stock-based compensation, including outstanding stock options and the recognition of compensation expense. Total stock-based compensation expense for the three and six months ended June 30, 2019, was $291 thousand and $333 thousand, respectively, with a significant portion attributed to the vesting of performance restricted stock units (PRSUs) Summary of Outstanding Options (June 30, 2019): | Metric | Amount (Options) | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | | :------------------------------------- | :--------------- | :------------------------------ | :-------------------------------------------------- | | Balance, June 30, 2019 | 288,860 | $8.59 | 6.53 | Stock-Based Compensation Expense (in thousands): | Category | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :------------------------------------- | :------------------------------- | :----------------------------- | | General and administrative expense | $291 | $333 | | Total Stock-Based Compensation Expense | $291 | $333 | - During the three months ended June 30, 2019, the company recorded $250 thousand in non-cash, non-recurring compensation expense due to the vesting of previously issued performance restricted stock units (PRSUs) granted to the CEO165 - As of June 30, 2019, there was approximately $196 thousand of total unrecognized compensation expense related to unvested share-based awards, expected to be recognized over the next three years163 NOTE 16: Significant Customers This note highlights the concentration of the company's accounts receivable and revenue from a limited number of significant customers, including related parties. As of June 30, 2019, four customers accounted for 51% of accounts receivable, and two customers accounted for 51% of revenue for the three months ended June 30, 2019 - As of June 30, 2019, four customers, including 33 Degrees, accounted for 51% of accounts receivable166 - For the three months ended June 30, 2019, two customers, including related parties, accounted for 51% of revenue167 - For the six months ended June 30, 2019, two customers accounted for 41% of revenue167 NOTE 17: Leases This note provides details on the company's operating and finance lease agreements, including lease costs, weighted average remaining lease terms, and discount rates. It also presents a schedule of lease liability maturities and supplemental cash flow information related to leases Components of Lease Costs (in thousands): | Category | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :------------------------------------- | :------------------------------- | :----------------------------- | | Finance lease cost (Amortization) | $8 | $16 | | Finance lease cost (Interest) | $1 | $3 | | Operating lease cost | $197 | $393 | | Total Lease Cost | $206 | $412 | Weighted Averages (June 30, 2019): | Metric | Operating Leases | Finance Leases | | :------------------------------------- | :--------------- | :------------- | | Remaining Lease Term (Years) | 3.83 | 1.4 | | Discount Rate | 10.0% | 13.5% | Present Value of Lease Liabilities (in thousands, June 30, 2019): | Category | Amount | | :--------------- | :----- | | Operating Leases | $2,127 | | Finance Leases | $38 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, including an overview of its business, revenue sources, expenses, critical accounting policies, and a detailed comparison of financial performance for the three and six months ended June 30, 2019, against prior periods. It also includes non-GAAP financial measures and a discussion of liquidity and capital resources Forward-Looking Statements - The discussion contains forward-looking statements subject to numerous risks and uncertainties that could cause actual outcomes to differ materially from projections172173 - The company cautions against attributing undue certainty to forward-looking statements and does not undertake to update them173 Overview - Creative Realities, Inc. provides innovative digital marketing technology solutions across 18 vertical markets, including digital merchandising systems, content creation, and interactive technologies174 - Revenue is generated through consulting, design, engineering, deployment management, content delivery, and maintenance/support services, leading to bundled-solution sales, software license fees, and service revenues176178 Our Sources of Revenue - The company generates revenue from digital marketing solution sales, including system hardware, professional and implementation services, software design and development, software licensing, deployment, and maintenance and support services179 - Sales and marketing efforts are primarily conducted through internal personnel, supplemented by agents, strategic partners, and lead generators180 Our Expenses - Expenses are categorized into sales and marketing (salaries, commissions, events), research and development (salaries for software development), and general and administrative (corporate overhead, administrative salaries, lease payments, legal/accounting fees)181 Critical Accounting Policies and Estimates - The company's financial statements are prepared in conformity with GAAP, and certain accounting policies involve significant management judgments, assumptions, and estimates that could materially impact reported amounts182 Results of Operations Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018 For the three months ended June 30, 2019, sales increased by 30% to $9,314 thousand, driven by new and legacy Allure customers. Gross profit rose 37% to $4,228 thousand, with gross margin improving to 45% due to product mix. Operating income significantly improved to $495 thousand from a prior-year loss, and net income reached $417 thousand, reversing a prior-year net loss Financial Performance (Three Months Ended June 30, in thousands): | Metric | 2019 | 2018 | Change (Dollars) | Change (%) | | :------------------------------------- | :--- | :--- | :--------------- | :--------- | | Sales | $9,314 | $7,179 | $2,135 | 30% | | Gross Profit | $4,228 | $3,090 | $1,138 | 37% | | Operating Income/(Loss) | $495 | ($7) | $502 | 7,171% | | Net Income/(Loss) | $417 | ($612) | $1,029 | 168% | - Sales increase was driven by $1,328 thousand from new customers and $1,160 thousand from legacy Allure customers, partially offset by a $344 thousand reduction in sales to related parties187 - Gross profit margin increased to 45% in Q2 2019 from 43% in Q2 2018, primarily due to a product mix that was 82% services, including software development services188 - General and administrative expenses increased by $483 thousand (25%), primarily due to a $189 thousand increase in non-recurring stock-based compensation (including $250 thousand from PRSU vesting), $110 thousand in amortized retention bonus, and $154 thousand in increased rent expense191192 Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018 For the six months ended June 30, 2019, sales surged by 67% to $18,798 thousand, fueled by new and legacy Allure customers. Gross profit increased by 72% to $7,909 thousand, with gross margin improving to 42% due to a higher proportion of services revenue. Operating income turned positive at $530 thousand, and net income reached $233 thousand, a substantial recovery from a significant net loss in the prior year Financial Performance (Six Months Ended June 30, in thousands): | Metric | 2019 | 2018 | Change (Dollars) | Change (%) | | :------------------------------------- | :--- | :--- | :--------------- | :--------- | | Sales | $18,798 | $11,245 | $7,553 | 67% | | Gross Profit | $7,909 | $4,599 | $3,310 | 72% | | Operating Income/(Loss) | $530 | ($1,826) | $2,356 | 129% | | Net Income/(Loss) | $233 | ($2,850) | $3,083 | 108% | - Sales increase was driven by $3,605 thousand from new customers, $2,442 thousand from legacy Allure customers, and growth in the pre-existing customer base, partially offset by a $566 thousand reduction in sales to related parties202 - Gross profit margin increased to 42% in H1 2019 from 41% in H1 2018, primarily due to an increase in services revenue as a percentage of total revenue (from 64% to 83%)203 - General and administrative expenses increased by $1,070 thousand (29%), primarily due to increased stock-based compensation ($166 thousand), amortized retention bonus ($165 thousand), increased rent ($273 thousand), cloud migration costs ($130 thousand), and additional employment-related costs ($154 thousand)206 - Depreciation and amortization expenses decreased by $57 thousand (9%) due to reduced amortization expense related to intangible assets (longer amortization periods for newly acquired assets), partially offset by increased depreciation of property and equipment from the Allure Acquisition207 Summary Quarterly Financial Information Summary Quarterly Financial Information (in thousands): | Metric | June 30, 2019 | March 31, 2019 | December 31, 2018 | September 30, 2018 | June 30, 2018 | | :------------------------------------- | :------------ | :------------- | :---------------- | :----------------- | :------------ | | Net Sales | $9,314 | $9,484 | $5,229 | $6,001 | $7,179 | | Gross Profit | $4,228 | $3,681 | $1,883 | $3,741 | $3,090 | | Operating Income/(Loss) | $495 | $35 | ($2,148) | ($508) | ($7) | | Net Income/(Loss) | $417 | ($184) | ($6,892) | ($878) | ($612) | Supplemental Operating Results on a Non-GAAP Basis - The company provides non-GAAP financial measures, EBITDA and Adjusted EBITDA, as useful information for investors to gauge results of operations on an ongoing basis, noting they should not be considered alternatives to GAAP measures214 EBITDA and Adjusted EBITDA (in thousands): | Metric | June 30, 2019 | March 31, 2019 | December 31, 2018 | September 30, 2018 | June 30, 2018 | | :------------------------------------- | :------------ | :------------- | :---------------- | :----------------- | :------------ | | GAAP Net Income/(Loss) | $417 | ($184) | ($6,892) | ($878) | ($612) | | EBITDA | $831 | $327 | ($6,310) | $12 | $362 | | Adjusted EBITDA | $1,094 | $363 | ($742) | $921 | $430 | Liquidity and Capital Resources - The company has incurred net losses and negative cash flows from operating activities in prior years, with a working capital deficit of $3,930 thousand as of June 30, 2019217 - Cash and cash equivalents stood at $1,824 thousand as of June 30, 2019217 - The maturity date of the term loan and revolving loan was extended to August 16, 2020, with an intent to refinance with an unrelated third party in the first half of 2019. The cash interest rate increased to 10.0% per annum effective July 1, 2019218 Operating Activities - Cash flows provided by operating activities were $2,565 thousand for the six months ended June 30, 2018, and $5,320 thousand for the six months ended June 30, 2017, primarily driven by the recognition of deferred revenue220 Investing Activities - Net cash used in investing activities was ($207) thousand for the six months ended June 30, 2018, primarily for the acquisition of capital assets related to software costs221 - No material commitments for capital expenditures were present as of June 30, 2018, nor were significant expenditures anticipated for the remainder of 2018221 Financing Activities - Net cash provided by financing activities was $2,100 thousand for the six months ended June 30, 2018, compared to ($286) thousand in 2017, primarily due to the issuance of debt in 2018222 Contractual Obligations - The company has no material commitments for capital expenditures and does not anticipate any significant capital expenditures for the remainder of 2019223 Off-Balance Sheet Arrangements - The company did not engage in any off-balance sheet arrangements during the six months ended June 30, 2019224 Item 4. Controls and Procedures Management's evaluation concluded that the company's disclosure controls and procedures were not effective as of June 30, 2019, due to a material weakness in the financial statement close process. Remedial actions are underway, including increased headcount, process documentation, and internal control testing, with an expectation to eliminate the weakness in 2019 Evaluation of Disclosure Controls and Procedures - Management concluded that the company's disclosure controls and procedures were not effective as of June 30, 2019226 - A material weakness exists due to a deficient process to close monthly consolidated financial statements and prepare comprehensive and timely account analysis226 Planned Ongoing/Remedial Actions - Remedial actions include adding headcount in accounting and finance, creating a financial statement close checklist, documenting and adhering to a close process timeline, and performing a Sarbanes-Oxley Section 404a self-assessment of internal controls228 - Testing of identified internal controls began in Q2 2019 and is expected to continue through the remainder of 2019, with management believing these actions will eliminate the material weakness during 2019228229 Changes in Internal Control over Financial Reporting - There were no changes in internal control over financial reporting during the quarter ended June 30, 2019, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting230 PART II. OTHER INFORMATION Item 1. Legal Proceedings As of August 8, 2019, the company was not involved in any material legal proceedings beyond routine litigation incidental to its business - As of August 8, 2019, the company was not party to any material legal proceedings, other than ordinary routine litigation incidental to the business233 Item 1A. Risk Factors As a smaller reporting company, the company refers readers to the 'Risk Factors' section in its Annual Report on Form 10-K filed on March 28, 2019, for a comprehensive discussion of potential risks that could materially and adversely affect its prospects - The company refers readers to the 'Risk Factors' section in its Annual Report on Form 10-K filed on March 28, 2019, for a discussion of risks and uncertainties that could materially and adversely affect its prospects234 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds for the period - None234 Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities for the period - None234 Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable234 Item 5. Other Information The company reported no other information for the period - None234 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the Chief Executive Officer and Chief Financial Officer, and various XBRL taxonomy documents - Exhibits include Chief Executive Officer and Chief Financial Officer Certifications (31.1, 31.2, 32.1, 32.2) and XBRL Instance, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, and Presentation Linkbase documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)235 SIGNATURES - The report was duly signed on August 8, 2019, by Richard Mills, Chief Executive Officer, and Will Logan, Chief Financial Officer, on behalf of Creative Realities, Inc.238239