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Creative Realities(CREX) - 2020 Q2 - Quarterly Report

PART 1. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis. Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and shareholders' equity, along with detailed notes explaining the company's accounting policies, financial condition, and specific transactions for the periods ended June 30, 2020 and 2019. Condensed Consolidated Balance Sheets This section presents the company's financial position, including assets, liabilities, and shareholders' equity, as of June 30, 2020, and December 31, 2019. Condensed Consolidated Balance Sheets (in thousands) | Item | June 30, 2020 | December 31, 2019 | Change (2020 vs 2019) | | :---------------------------------- | :------------ | :---------------- | :-------------------- | | Total Assets | $21,786 | $33,976 | -$12,190 | | Total Current Assets | $7,031 | $7,982 | -$951 | | Goodwill | $7,525 | $18,171 | -$10,646 | | Total Liabilities | $18,630 | $15,468 | +$3,162 | | Total Current Liabilities | $16,242 | $10,431 | +$5,811 | | Total Shareholders' Equity | $3,156 | $18,508 | -$15,352 | - Total assets decreased significantly by $12,190 thousand, primarily driven by a $10,646 thousand reduction in goodwill due to impairment6 - Total liabilities increased by $3,162 thousand, with current liabilities seeing a substantial increase of $5,811 thousand, indicating a shift towards shorter-term obligations6 - Shareholders' equity decreased by $15,352 thousand, largely due to the accumulated deficit increasing from $(35,642) thousand to $(51,284) thousand6 Condensed Consolidated Statements of Operations This section details the company's revenues, expenses, and net income or loss for the three and six months ended June 30, 2020, and 2019. Condensed Consolidated Statements of Operations (in thousands, except per share amounts) | Item | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | Change (YoY) | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | Change (YoY) | | :-------------------------------------- | :--------------------------- | :--------------------------- | :----------- | :--------------------------- | :--------------------------- | :----------- | | Total Sales | $3,656 | $9,314 | -60.7% | $7,360 | $18,798 | -60.9% | | Gross Profit | $1,817 | $4,228 | -57.0% | $3,424 | $7,909 | -56.7% | | Operating Income/(Loss) | $(1,644) | $495 | -432.1% | $(14,645) | $530 | -2863.2% | | Net Income/(Loss) | $(2,459) | $417 | -690.2% | $(15,642) | $233 | -6813.3% | | Basic EPS | $(0.25) | $0.04 | -725.0% | $(1.59) | $0.02 | -8050.0% | | Diluted EPS | $(0.25) | $0.04 | -725.0% | $(1.59) | $0.02 | -8050.0% | - Total sales decreased by approximately 61% for both the three and six months ended June 30, 2020, primarily due to the non-recurrence of significant software license revenue from 2019 and reduced demand from the COVID-19 pandemic8176187 - The company reported substantial net losses of $(2,459) thousand and $(15,642) thousand for the three and six months ended June 30, 2020, respectively, a significant decline from net incomes in the prior year periods, largely impacted by a goodwill impairment charge of $10,646 thousand891186 Condensed Consolidated Statements of Cash Flows This section outlines the company's cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2020, and 2019. Condensed Consolidated Statements of Cash Flows (in thousands) | Activity | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | Change (YoY) | | :-------------------------------- | :--------------------------- | :--------------------------- | :----------- | | Net Cash Used in Operating Activities | $(2,915) | $(736) | -296.0% | | Net Cash Used in Investing Activities | $(408) | $(172) | -137.2% | | Net Cash Provided by Financing Activities | $1,659 | $14 | +11750.0% | | Increase/(Decrease) in Cash and Cash Equivalents | $(1,664) | $(894) | -86.1% | | Cash and Cash Equivalents, End of Period | $870 | $1,824 | -52.3% | - Net cash used in operating activities increased significantly to $(2,915) thousand for the six months ended June 30, 2020, primarily due to the net loss and increased inventory, partially offset by non-cash charges and improved collections12215 - Net cash provided by financing activities saw a substantial increase to $1,659 thousand, driven by a $1,552 thousand Paycheck Protection Program loan and warrant exercises12218 Consolidated Statements of Shareholders' Equity This section presents changes in the company's shareholders' equity, including common stock, additional paid-in capital, and accumulated deficit, for the six months ended June 30, 2020. Consolidated Statements of Shareholders' Equity (in thousands, except shares) | Item | Balance as of Dec 31, 2019 | 6 Months Ended June 30, 2020 | Balance as of June 30, 2020 | | :-------------------------------- | :------------------------- | :--------------------------- | :-------------------------- | | Common Shares Outstanding | 9,774,546 | +79,977 | 9,854,623 | | Common Stock Amount | $98 | $0 | $98 | | Additional Paid-in Capital | $54,052 | +$290 | $54,342 | | Accumulated Deficit | $(35,642) | $(15,642) | $(51,284) | | Total Shareholders' Equity | $18,508 | $(15,352) | $3,156 | - Total shareholders' equity decreased significantly by $15,352 thousand from December 31, 2019, to June 30, 2020, primarily due to a net loss of $(15,642) thousand14 - Additional paid-in capital increased by $290 thousand, driven by stock-based compensation, shares issued to directors, and warrant exercises14 Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements. NOTE 1: Nature of Organization and Operations This note describes the company's core business in digital marketing technology, the impact of the COVID-19 pandemic on its operations and financial condition, and recent efforts to secure liquidity through capital markets and government programs. - Creative Realities, Inc. provides digital marketing technology and solutions to retail companies and organizations, with expertise in various digital marketing technologies and related software platforms18 - The company experienced rapid and immediate deterioration in its short-term business due to the COVID-19 pandemic, leading to reduced demand, delayed projects, and slowed cash flows, particularly in theater, sports arena, and large entertainment markets24158202 - To address liquidity concerns, the company implemented cost-cutting measures, launched a new AI-integrated non-contact temperature inspection kiosk (Thermal Mirror), secured a $1,552 thousand Paycheck Protection Program loan, and entered into a sales agreement with Roth Capital Partners for up to $8,000 thousand in common stock sales25262831160162165204205208 NOTE 2: Summary of Significant Accounting Policies This note outlines the significant accounting policies applied in preparing the condensed consolidated financial statements, including revenue recognition, inventory valuation, impairment of long-lived assets, income taxes, goodwill, use of estimates, and lease accounting. - Revenue is recognized in accordance with ASC 606, applying a five-step model, allocating transaction price to performance obligations based on standalone selling prices, and recognizing revenue when control of goods or services is transferred424446 - Inventories are stated at the lower of cost or market (net realizable value) using the first-in, first-out (FIFO) method, consisting of raw materials, inventory on consignment, and work-in-process4950 - The company accounts for leases under ASU No. 2016-02 (Topic 842), recognizing Right-of-Use (ROU) assets and liabilities at commencement based on the present value of remaining lease payments, using the incremental borrowing rate5758 NOTE 3: Recently Issued Accounting Pronouncements This note details the recently adopted and not yet adopted accounting pronouncements, including ASU 2018-15 and ASU 2018-13, which had no material impact, and ASU 2019-12 and ASU 2016-13, which are currently being evaluated for future impact. - The company adopted ASU 2018-15 (Cloud Computing Arrangement Costs) and ASU 2018-13 (Fair Value Measurement Disclosures) on January 1, 2020, with no material impact on its financial statements6162 - The company is currently evaluating the impact of ASU 2019-12 (Simplifying Income Taxes), effective in Q1 2021, and ASU No. 2016-13 (Financial Instruments—Credit Losses), effective after December 15, 20226364 NOTE 4: Revenue Recognition (Detailed) This note disaggregates the company's revenue by major source, including hardware sales, installation services, software development, software as a service, and maintenance and support services, detailing their recognition methods. Revenue by Major Source (in thousands) | Revenue Source | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :-------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Hardware | $1,601 | $1,654 | $2,968 | $3,295 | | Installation Services | $463 | $1,791 | $1,332 | $4,163 | | Software Development Services | $37 | $4,259 | $179 | $8,235 | | Managed Services | $1,555 | $1,610 | $2,881 | $3,105 | | Total Sales | $3,656 | $9,314 | $7,360 | $18,798 | - Software Development Services revenue experienced a drastic decline, from $4,259 thousand to $37 thousand for the three months ended June 30, 2020, and from $8,235 thousand to $179 thousand for the six months ended June 30, 202065 - Installation Services revenue also significantly decreased, from $1,791 thousand to $463 thousand for the three months, and from $4,163 thousand to $1,332 thousand for the six months ended June 30, 202065 NOTE 5: Fair Value Measurement This note explains the company's fair value measurement hierarchy (Level 1, 2, 3) and its application to financial assets and liabilities, specifically detailing the valuation of warrant liabilities, earnout liabilities, and the Special Loan. - The company uses a three-level hierarchy for fair value measurements, with Level 3 valuations based on unobservable inputs and management judgment777883 - The fair value of warrant liabilities decreased to $0 as of June 30, 2019, as all outstanding warrants classified as liabilities expired79 - A $551 thousand and $702 thousand loss was recognized for the three and six months ended June 30, 2020, respectively, from the change in fair value of the Special Loan, which is a Level 3 liability81 NOTE 6: Supplemental Cash Flow Statement Information This note provides supplemental cash flow information, including non-cash investing and financing activities and cash paid for interest and income taxes. Supplemental Cash Flow Information (in thousands) | Item | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :------------------------------------------------ | :--------------------------- | :--------------------------- | | Cash paid for Interest | $0 | $181 | | Cash paid for Income taxes, net | $2 | $0 | | Right of offset settlement of Amended and Restated Seller Note | $0 | $498 | - Cash paid for interest decreased significantly from $181 thousand in 2019 to $0 in 2020 for the six-month period, reflecting changes in loan payment terms82 NOTE 7: Intangible Assets, Including Goodwill This note details the company's intangible assets and goodwill, including their carrying amounts, amortization, and the significant goodwill impairment loss recognized due to the COVID-19 pandemic's impact on cash flow projections. Intangible Assets (in thousands) | Item | June 30, 2020 Net Book Value | December 31, 2019 Net Book Value | | :---------------------------------- | :--------------------------- | :--------------------------- | | Technology platform | $1,362 | $1,488 | | Customer relationships | $2,555 | $2,651 | | Trademarks and trade names | $173 | $268 | | Total Net Book Value | $4,090 | $4,407 | Goodwill (in thousands) | Item | Amount | | :---------------------------------- | :------- | | Balance as of December 31, 2019 | $18,171 | | Adjustments due to impairment loss | $(10,646) | | Balance as of June 30, 2020 | $7,525 | - A non-cash goodwill impairment loss of $10,646 thousand was recorded during the three months ended March 31, 2020, due to reduced cash flow projections and a significant decline in market capitalization resulting from the COVID-19 pandemic8791 - The fair value of the reporting unit was estimated using the income approach with a discount rate of 15.3% as of March 31, 202090 NOTE 8: Loans Payable This note provides a detailed breakdown of the company's various loan obligations, including the Paycheck Protection Program loan, the Loan and Security Agreement with Slipstream, and amendments that modified interest rates and conversion terms, as well as the disputed Amended and Restated Seller Note. Outstanding Debt (in thousands) | Debt Type | Principal (June 30, 2020) | Maturity Date | Interest Rate | | :------------------------------------------------ | :------------------------ | :------------ | :------------ | | Secured Disbursed Escrow Promissory Note | $264 | 6/30/2021 | 0.0% | | Secured Revolving Promissory Note | $1,032 | 6/30/2021 | 10.0% | | Term Loan | $3,096 | 6/30/2021 | 10.0% | | Amended and Restated Seller Note | $1,637 | 2/15/2020 | 3.5% | | Secured Convertible Special Loan Promissory Note | $2,773 | 6/30/2021 (Mandatory conversion by 10/1/2020) | 10.0% | | Paycheck Protection Program Loan | $1,552 | 4/27/2022 | 1.0% | | Total Debt, Gross | $10,354 | | | - The company received a $1,552 thousand unsecured loan under the Paycheck Protection Program (PPP) on April 27, 2020, with a 1% interest rate and potential for forgiveness31100 - The Eighth Amendment to the Loan and Security Agreement, effective April 1, 2020, increased interest rates on Term, Revolving, and Special Loans from 8% to 10%, with interest on term and revolving loans payable in-kind until January 1, 2021, and special loan interest payable in-kind indefinitely37103 - The Amended and Restated Seller Note of $1,637 thousand, due February 20, 2020, remains unpaid due to an arbitration demand filed by the company against the seller for breach of contract and fraudulent misrepresentation95114118 NOTE 9: Commitments and Contingencies This note outlines the company's legal proceedings, including lawsuits against a supplier and by a customer related to equipment installations, and details employee-related cost-cutting measures implemented in response to the COVID-19 pandemic. - The company is involved in litigation, including a suit filed against a supplier for breach of contract and a demand from an Allure customer for $3,200 thousand related to alleged hardware failures, with outcomes currently unclear115116 - In response to COVID-19, the company implemented cost-control measures, including a 20% salary reduction for its CEO and CFO for six months and a reduction-in-force resulting in $135 thousand in one-time termination benefits paid during Q2 2020120122 NOTE 10: Related Party Transactions This note discloses transactions with 33 Degrees Convenience Connect, Inc., a related party, including sales of hardware and services and outstanding accounts receivable. Sales to 33 Degrees (Related Party) (in thousands) | Period | Sales to 33 Degrees | % of Consolidated Revenue | | :--------------------------- | :------------------ | :------------------------ | | 3 Months Ended June 30, 2020 | $291 | 8.0% | | 3 Months Ended June 30, 2019 | $275 | 3.0% | | 6 Months Ended June 30, 2020 | $791 | 10.7% | | 6 Months Ended June 30, 2019 | $470 | 2.5% | Accounts Receivable from 33 Degrees (in thousands) | Date | Accounts Receivable | % of Consolidated Accounts Receivable | | :--------------------------- | :------------------ | :------------------------------------ | | June 30, 2020 | $28 | 0.8% | | December 31, 2019 | $1 | 0.0% | - Sales to 33 Degrees, a related party, increased significantly as a percentage of consolidated revenue, reaching 8.0% for the three months and 10.7% for the six months ended June 30, 2020125 NOTE 11: Income Taxes This note discusses the company's deferred tax assets, primarily related to net operating loss (NOL) carryforwards, and the application of a full valuation allowance due to a history of losses and the impact of goodwill impairment. - The company has substantial net operating loss (NOL) carryforwards, but their usage is limited by IRC Section 382127 - A full valuation allowance is maintained against the net deferred tax assets due to the company's history of losses127 - The net deferred tax assets totaled $0 as of June 30, 2020, after a valuation allowance, a reduction from $175 thousand at December 31, 2019, primarily due to the goodwill impairment adjusting the deferred tax impact128 NOTE 12: Warrants This note provides a summary of the company's outstanding equity warrants, including their number, weighted average exercise price, and remaining contractual life. Summary of Outstanding Equity Warrants | Item | Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | | :-------------------------- | :----------------- | :------------------------------ | :---------------------------------------- | | Balance January 1, 2020 | 4,733,028 | $4.83 | 3.41 years | | Warrants issued | (27,600) | $4.38 | - | | Warrants expired | (89,238) | $9.49 | - | | Balance June 30, 2020 | 4,616,190 | $4.74 | 2.97 years | - The number of outstanding warrants decreased from 4,733,028 at January 1, 2020, to 4,616,190 at June 30, 2020, due to expirations and exercises129 NOTE 13: Stock-Based Compensation This note details the company's stock-based compensation plans, including the granting of time-vesting and performance-vesting options, their valuation using the Black-Scholes model, and the associated compensation expense recognized. Summary of Outstanding Options (June 30, 2020) | Option Type | Number Outstanding | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | | :-------------------------- | :----------------- | :------------------------------ | :---------------------------------------- | | Time Vesting Options | 1,893,809 | $3.44 | 9.25 years | | Performance Vesting Options | 800,000 | $2.53 | 9.93 years | Stock-Based Compensation Expense (in thousands) | Period | Amount | | :--------------------------- | :----- | | 3 Months Ended June 30, 2020 | $19 | | 6 Months Ended June 30, 2020 | $119 | | 3 Months Ended June 30, 2019 | $41 | | 6 Months Ended June 30, 2019 | $83 | - On June 1, 2020, the company granted 2,380,000 options, including 1,580,000 time-vesting options and 800,000 performance-vesting options, with an exercise price of $2.53 and a fair value of $1.87 per option, valued using the Black-Scholes model134135137138 - As of June 30, 2020, there was $3,014 thousand of unrecognized compensation expense for time-vesting awards and $1,499 thousand for performance-vesting awards, with performance-based expense recognized only if targets are probable141 NOTE 14: Significant Customers/Vendors This note highlights the company's concentration risk by identifying significant customers and vendors that account for a material portion of accounts receivable, revenue, and accounts payable. Significant Customers (Revenue Concentration) | Period | Number of Customers | % of Revenue | | :--------------------------- | :------------------ | :----------- | | 3 Months Ended June 30, 2020 | 2 | 27% | | 3 Months Ended June 30, 2019 | 2 | 51% | | 6 Months Ended June 30, 2020 | 2 | 22% | | 6 Months Ended June 30, 2019 | 2 | 41% | Significant Vendors (Accounts Payable Concentration) | Date | Number of Vendors | % of Outstanding Accounts Payable | | :--------------------------- | :------------------ | :-------------------------------- | | June 30, 2020 | 1 | 22% | | December 31, 2019 | 1 | 50% | - Revenue concentration with two significant customers decreased from 51% to 27% for the three months ended June 30, 2020, and from 41% to 22% for the six months ended June 30, 2020142 - One vendor accounted for 22% of outstanding accounts payable at June 30, 2020, a decrease from 50% at December 31, 2019144 NOTE 15: Leases This note provides details on the company's operating and finance lease agreements, including lease costs, weighted average remaining lease terms, discount rates, and a schedule of lease liability maturities. Lease Costs (in thousands) | Lease Type | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :-------------------------- | :--------------------------- | :--------------------------- | | Finance lease cost | $13 | $19 | | Operating lease cost | $343 | $393 | | Total Lease Cost | $356 | $412 | Weighted Average Lease Terms and Discount Rates (June 30, 2020) | Lease Type | Remaining Lease Term | Discount Rate | | :-------------------------- | :------------------- | :------------ | | Operating leases | 3.0 years | 10.0% | | Finance leases | 1.0 years | 14.0% | Maturities of Lease Liabilities (in thousands, June 30, 2020) | Period | Operating Leases | Finance Leases | | :-------------------------- | :--------------- | :------------- | | Remainder of 2020 | $342 | $9 | | 2021 | $630 | $4 | | 2022 | $377 | $1 | | 2023 | $375 | $0 | | Thereafter | $0 | $0 | | Total Undiscounted Cash Flows | $1,724 | $14 | | Present Value of Lease Liabilities | $1,487 | $13 | - Total lease costs decreased from $412 thousand in the first six months of 2019 to $356 thousand in the same period of 2020147 - The weighted average remaining lease term for operating leases is 3.0 years with a 10.0% discount rate, while finance leases have a 1.0-year term with a 14.0% discount rate as of June 30, 2020147 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, recent developments, detailed analysis of revenue and expenses, and a discussion of liquidity and capital resources, with a focus on the impact of the COVID-19 pandemic. Forward-Looking Statements This section cautions readers that the report contains forward-looking statements subject to risks and uncertainties that may cause actual results to differ. - The discussion contains forward-looking statements subject to numerous risks and uncertainties that could cause actual results to differ materially from projections, as detailed in the company's SEC filings149150 Overview This section provides a general description of the company's business, its digital marketing technology solutions, and its revenue generation model. - Creative Realities, Inc. specializes in innovative digital marketing technology solutions for various industries, offering expertise in digital merchandising, omni-channel customer engagement, content management, and interactive marketing technologies151 - The company generates revenue through bundled-solution sales, consulting, design, software development, engineering, implementation, field services, software license fees, and maintenance and support services156 Recent Developments This section highlights key events and changes impacting the company, including the COVID-19 pandemic's effects and liquidity initiatives. - The COVID-19 pandemic caused a rapid and immediate deterioration in business, leading to reduced demand, delayed customer orders, and a $10,646 thousand non-cash goodwill impairment loss as of March 31, 2020158 - The company jointly launched the AI-integrated Thermal Mirror kiosk with InReality on April 28, 2020, as a new product for businesses adapting to COVID-19 workplace restrictions160 - To enhance liquidity, the company entered into a Sales Agreement with Roth Capital Partners on June 19, 2020, to sell up to $8,000 thousand of common stock through an at-the-market offering, and secured a $1,552 thousand Paycheck Protection Program loan on April 27, 2020162165 Our Sources of Revenue This section describes the various ways the company generates revenue, including hardware sales, services, and software licensing. - Revenue is generated from digital marketing solution sales, including system hardware, professional and implementation services, software design and development, software licensing, deployment, and maintenance and support services168 - The company markets and sells its solutions primarily through its sales and business development personnel, supplemented by agents, strategic partners, and lead generators169 Our Expenses This section categorizes and explains the company's primary operating expenses, such as sales and marketing, research and development, and general and administrative costs. - Expenses are categorized into sales and marketing (salaries, commissions, promotional activities), research and development (salaries for software development), and general and administrative (corporate overhead, administrative salaries, legal, and accounting fees)170 Critical Accounting Policies and Estimates This section discusses the significant accounting policies and estimates that require management judgment and can materially affect the financial statements. - The company's financial statements are prepared in conformity with GAAP, requiring significant judgments, assumptions, and estimates that could materially impact asset and liability carrying values, and reported revenues and expenses171 Results of Operations This section provides a comparative analysis of the company's financial performance for the periods presented, detailing revenue, gross profit, and net income changes. Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019 For the three months ended June 30, 2020, the company experienced a significant decline in sales and gross profit, leading to an operating loss, primarily due to the non-recurrence of a large software license transaction in 2019 and reduced business activity from the COVID-19 pandemic. Financial Performance (3 Months Ended June 30, in thousands) | Item | 2020 | 2019 | Change ($) | Change (%) | | :-------------------------------------- | :--- | :--- | :--------- | :--------- | | Sales | $3,656 | $9,314 | $(5,658) | -61% | | Gross Profit | $1,817 | $4,228 | $(2,411) | -57% | | Operating Income/(Loss) | $(1,644) | $495 | $(2,139) | -432% | | Net Income/(Loss) | $(2,459) | $417 | $(2,876) | -690% | | Sales and Marketing Expenses | $371 | $610 | $(239) | -39% | | Research and Development Expenses | $245 | $394 | $(149) | -38% | | General and Administrative Expenses | $2,465 | $2,421 | $44 | 2% | | Depreciation and Amortization Expense | $380 | $308 | $72 | 23% | | Change in fair value of Special Loan | $(551) | $0 | $(551) | -100% | - Sales decreased by $5,658 thousand (61%) due to the non-recurrence of a $3,797 thousand software license revenue from 2019 and a general reduction in sales and installation activity caused by the COVID-19 pandemic176 - Gross profit decreased by $2,411 thousand (57%), despite an increase in gross profit margin to 49.7% (from 45.4%), driven by higher services revenue margin percentage (73.6% from 50.7%) and a shift in sales mix towards hardware177 - General and administrative expenses increased by $44 thousand (2%), primarily due to a $468 thousand incremental reserve for bad debts, partially offset by a $647 thousand reduction in employee-related expenses from cost-cutting measures180 Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019 For the six months ended June 30, 2020, the company reported a substantial net loss and operating loss, driven by a significant decline in sales, a goodwill impairment charge, and increased bad debt expenses, largely attributable to the COVID-19 pandemic's impact. Financial Performance (6 Months Ended June 30, in thousands) | Item | 2020 | 2019 | Change ($) | Change (%) | | :-------------------------------------- | :--- | :--- | :--------- | :--------- | | Sales | $7,360 | $18,798 | $(11,438) | -61% | | Gross Profit | $3,424 | $7,909 | $(4,485) | -57% | | Operating Income/(Loss) | $(14,645) | $530 | $(15,175) | -2863% | | Net Income/(Loss) | $(15,642) | $233 | $(15,875) | -6813% | | Goodwill Impairment | $10,646 | $0 | $10,646 | 100% | | General and Administrative Expenses | $5,321 | $4,711 | $610 | 13% | | Change in fair value of Special Loan | $(702) | $0 | $(702) | -100% | - Sales decreased by $11,438 thousand (61%) due to the non-recurrence of $5,671 thousand in software license revenue and a $2,083 thousand software development project from 2019, coupled with reduced activity from the COVID-19 pandemic187 - Gross profit decreased by $4,485 thousand (57%), despite an increase in gross profit margin to 46.5% (from 42.1%), driven by improved hardware and services margins and a shift in sales mix188 - General and administrative expenses increased by $610 thousand (13%), primarily due to a $750 thousand incremental reserve for bad debts and $200 thousand in legal/accounting costs, partially offset by $614 thousand in employee-related expense reductions191 Summary Unaudited Quarterly Financial Information This section presents a condensed overview of the company's unaudited financial performance across recent quarters. Unaudited Quarterly Financial Information (in thousands) | Quarter Ended | June 30, 2020 | March 31, 2020 | December 31, 2019 | September 30, 2019 | June 30, 2019 | | :---------------------------------------------------------------------------------------------------------------- | :------------ | :------------- | :---------------- | :----------------- | :------------ | | Net Sales | $3,656 | $3,704 | $6,077 | $6,723 | $9,314 | | Gross Profit | $1,817 | $1,607 | $2,524 | $3,306 | $4,228 | | Operating (Loss)/Income | $(1,644) | $(13,001) | $(726) | $86 | $495 | | Net (Loss)/Income | $(2,459) | $(13,183) | $563 | $242 | $417 | | Goodwill Impairment | $0 | $10,646 | $0 | $0 | $0 | - Net sales consistently declined from $9,314 thousand in Q2 2019 to $3,656 thousand in Q2 2020196 - The company reported significant net losses in Q1 and Q2 2020, with Q1 2020 including a $10,646 thousand goodwill impairment196 Supplemental Operating Results on a Non-GAAP Basis This section provides non-GAAP financial measures, such as EBITDA and Adjusted EBITDA, to offer additional insights into the company's operating performance. Non-GAAP Operating Results (in thousands) | Quarter Ended | June 30, 2020 | March 31, 2020 | December 31, 2019 | September 30, 2019 | June 30, 2019 | | :-------------------------- | :------------ | :------------- | :---------------- | :----------------- | :------------ | | GAAP Net Loss | $(2,459) | $(13,183) | $563 | $242 | $417 | | EBITDA | $(1,716) | $(12,695) | $1,304 | $801 | $871 | | Adjusted EBITDA | $(1,147) | $(1,907) | $(547) | $426 | $1,093 | | Loss on goodwill impairment | $0 | $10,646 | $0 | $0 | $0 | - EBITDA and Adjusted EBITDA turned negative in Q1 and Q2 2020, reflecting the significant GAAP net losses and the impact of the goodwill impairment199 - Adjusted EBITDA for Q2 2020 was $(1,147) thousand, a substantial decrease from $1,093 thousand in Q2 2019199 Liquidity and Capital Resources This section discusses the company's liquidity position, highlighting its history of net losses and negative operating cash flows, the impact of the COVID-19 pandemic, and the measures taken to secure funding, including a PPP loan and an at-the-market equity offering. - As of June 30, 2020, the company had cash and cash equivalents of $870 thousand and a working capital deficit of $9,211 thousand, continuing a history of net losses and negative cash flows from operating activities201 - The COVID-19 pandemic caused rapid business deterioration, leading to reduced demand, delayed projects, slowed cash flows, and downward revisions of internal forecasts202 - Management believes it can continue as a going concern through at least August 15, 2021, based on the $1,552 thousand PPP funding, operational forecasts, access to capital markets via the Roth agreement, and continued support from Slipstream213 Item 4. Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and procedures and any changes in internal control over financial reporting. Evaluation of Disclosure Controls and Procedures This section reports on management's assessment of the effectiveness of the company's disclosure controls and procedures. - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2020221 Changes in Internal Control over Financial Reporting This section discloses any material changes in the company's internal control over financial reporting during the reporting period. - There were no changes in internal control over financial reporting during the quarter ended June 30, 2020, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting222 PART II. OTHER INFORMATION This section includes disclosures on legal proceedings, risk factors, sales of equity securities, defaults, mine safety, and other relevant information. Item 1. Legal Proceedings This section states that there are no material legal proceedings to report under this item. - No material legal proceedings are reported under this item224 Item 1A. Risk Factors This section highlights additional risks, specifically concerning the sufficiency and limitations of funding from the company's at-the-market (ATM) facility due to SEC 'baby shelf rules'. - Funding from the at-the-market (ATM) facility may be insufficient to fund operations or implement strategy226 - The company's ability to sell shares under the ATM facility is limited by SEC 'baby shelf rules' to no more than one-third of its public float in any 12-month period, as its public float remains below $75 million227 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section indicates that there were no unregistered sales of equity securities or use of proceeds to report. - No unregistered sales of equity securities or use of proceeds were reported228 Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities to report. - No defaults upon senior securities were reported229 Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company. - Mine safety disclosures are not applicable230 Item 5. Other Information This section states that there is no other information to report. - No other information was reported231 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO, and XBRL-related documents. - Exhibits include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and XBRL instance and taxonomy documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)233 SIGNATURES This section contains the signatures of the registrant's authorized officers, certifying the filing of the report. - The report is signed by Richard Mills, Chief Executive Officer, and Will Logan, Chief Financial Officer, on August 13, 2020237