Creative Realities(CREX) - 2025 Q2 - Quarterly Report

FORM 10-Q Filing Information Registrant Information Creative Realities, Inc. is a Minnesota corporation, classified as a non-accelerated filer and a smaller reporting company, with 10,518,932 common shares outstanding as of August 12, 2025 - Creative Realities, Inc. is a non-accelerated filer and a smaller reporting company Common Stock Outstanding | Date | Shares Outstanding | | :------------- | :----------------- | | August 12, 2025 | 10,518,932 | PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents Creative Realities, Inc.'s unaudited condensed consolidated financial statements for the period ended June 30, 2025, detailing financial position, operations, cash flows, equity, and significant accounting policies Condensed Consolidated Balance Sheets As of June 30, 2025, total assets decreased to $63,653 thousand, total liabilities decreased to $34,210 thousand, and shareholders' equity increased Condensed Consolidated Balance Sheet Key Data (thousands of dollars) | Metric | June 30, 2025 (Unaudited) | December 31, 2024 | | :------------------------- | :----------------------- | :------------- | | Assets | | | | Cash and Cash Equivalents | 569 | 1,037 | | Accounts Receivable, Net | 10,569 | 10,605 | | Inventory, Net | 1,055 | 1,995 | | Total Current Assets | 13,114 | 14,496 | | Goodwill | 26,453 | 26,453 | | Other Intangible Assets, Net | 21,692 | 22,841 | | Total Assets | 63,653 | 65,210 | | Liabilities and Shareholders' Equity | | | | Accounts Payable | 6,169 | 6,354 | | Deferred Revenue | 1,856 | 1,137 | | Current Contingent Consideration, at Fair Value | - | 12,815 | | Total Current Liabilities | 13,030 | 26,163 | | Revolving Credit Facility | 16,093 | 13,044 | | Long-Term Debt | 3,409 | - | | Total Liabilities | 34,210 | 39,750 | | Total Shareholders' Equity | 29,443 | 25,460 | - As of June 30, 2025, cash and cash equivalents were $569 thousand, a 45.1% decrease from $1,037 thousand on December 31, 2024[8] - As of June 30, 2025, total liabilities were $34,210 thousand, a 13.9% decrease from $39,750 thousand on December 31, 2024[8] Condensed Consolidated Statements of Operations For the three and six months ended June 30, 2025, sales and gross profit declined, operating loss worsened, but net income for the six-month period turned positive due to a contingent consideration settlement gain Condensed Consolidated Statements of Operations Key Data (thousands of dollars, except per share amounts) | Metric | Q2 2025 | Q2 2024 | Change (QoQ) | YTD 2025 | YTD 2024 | Change (YoY) | | :------------------------- | :------- | :------- | :--------- | :-------- | :-------- | :--------- | | Sales | 13,030 | 13,115 | -0.6% | 22,764 | 25,400 | -10.4% | | Hardware Sales | 7,073 | 5,024 | +40.8% | 10,467 | 9,168 | +14.2% | | Service and Other Sales | 5,957 | 8,091 | -26.4% | 12,297 | 16,232 | -24.3% | | Cost of Sales | 8,013 | 6,327 | +26.6% | 13,294 | 12,848 | +3.5% | | Gross Profit | 5,017 | 6,788 | -26.1% | 9,470 | 12,552 | -24.5% | | Operating (Loss) Income | (1,331) | 592 | -324.8% | (2,053) | 516 | -498.6% | | Gain on Contingent Consideration Settlement | - | - | N/A | (4,775) | - | N/A | | Net (Loss) Income | (1,817) | (615) | -195.4% | 1,551 | (724) | +314.4% | | Basic (Loss) Earnings Per Share | (0.17) | (0.06) | -183.3% | 0.15 | (0.07) | +314.3% | - Q2 2025 sales decreased by 1% year-over-year, primarily due to a 26% decline in service and other revenue, despite a 41% increase in hardware revenue[10][119] - Net income for H1 2025 was $1,551 thousand, compared to a net loss of $724 thousand in H1 2024, driven by a $4,775 thousand contingent consideration settlement gain[10][125] Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2025, net cash from operating activities significantly decreased, investing outflows slightly reduced, and financing activities shifted to net inflows due to revolving credit line borrowings and contingent consideration settlement Condensed Consolidated Statements of Cash Flows Key Data (thousands of dollars) | Metric | H1 2025 | H1 2024 | | :------------------------- | :----------- | :----------- | | Net Cash from Operating Activities | 773 | 4,206 | | Net Cash from Investing Activities | (1,264) | (1,495) | | Net Cash from Financing Activities | 23 | (1,535) | | Net Increase (Decrease) in Cash and Cash Equivalents | (468) | 1,176 | | Cash and Cash Equivalents, End of Period | 569 | 4,086 | - Net cash from operating activities for H1 2025 was $773 thousand, a significant decrease from $4,206 thousand in H1 2024, primarily due to contingent liability settlement gains and depreciation and amortization expenses[13][142] - Net cash from financing activities for H1 2025 was a $23 thousand inflow, compared to a $1,535 thousand outflow in H1 2024, mainly due to $3,049 thousand in net revolving credit line borrowings, partially offset by $3,000 thousand paid to former Reflect shareholders[13][144] Consolidated Statements of Shareholders' Equity As of June 30, 2025, total shareholders' equity increased to $29,443 thousand from $25,460 thousand on December 31, 2024, driven by additional paid-in capital and reduced accumulated deficit from H1 net income Consolidated Statements of Shareholders' Equity Key Data (thousands of dollars, except shares) | Metric | June 30, 2025 | December 31, 2024 | | :----------------------- | :------------ | :------------- | | Common Stock Amount | 105 | 104 | | Additional Paid-in Capital | 84,641 | 82,210 | | Accumulated Deficit | (55,303) | (56,854) | | Total Shareholders' Equity | 29,443 | 25,460 | - Additional paid-in capital increased by $2,431 thousand in H1 2025, including $1,040 thousand from warrant issuance and $1,251 thousand from stock-based compensation[15] - As of June 30, 2025, the accumulated deficit decreased to $55,303 thousand from $56,854 thousand on December 31, 2024, reflecting H1 2025 net income[15] Note 1: Nature of Organization and Operations Creative Realities, Inc., a Minnesota corporation, provides digital marketing technology and solutions across the US and internationally, facing significant going concern doubts due to accumulated deficit and reliance on external financing - The company offers innovative digital marketing technology and solutions, including digital merchandising, omnichannel customer engagement, interactive shopping assistants, and kiosks[18] - As of June 30, 2025, the company had an accumulated deficit of $55,303 thousand and positive working capital of $84 thousand, but still faces substantial doubt about its ability to continue as a going concern[21][22] - The company relies on improved cash flow, revenue growth, or external financing to meet working capital needs and maturing debt obligations[21][22] Note 2: Summary of Significant Accounting Policies This note outlines the company's significant accounting policies for preparing condensed consolidated financial statements, covering GAAP basis, consolidation, recent accounting pronouncements, revenue recognition, and asset valuation - The company's financial statements are prepared in accordance with GAAP and Form 10-Q instructions, consolidating Creative Realities, Inc. and its wholly-owned subsidiaries[24][25] - FASB issued ASU 2023-09 (Income Tax Disclosures) and ASU 2024-03 (Expense Disaggregation), which the company is currently evaluating for financial statement impact[27][28] - The company recognizes revenue using a five-step model under ASC 606, based on contract terms and when customers obtain control of promised goods or services[30][33] Allowance for Credit Losses Activity (thousands of dollars) | Metric | June 30, 2025 | June 30, 2024 | | :------------------- | :------------ | :------------ | | Beginning Balance | 699 | 701 | | Provision Amount | 57 | 130 | | Write-offs | (126) | - | | Ending Balance | 630 | 831 | Inventory Composition (thousands of dollars) | Metric | June 30, 2025 | December 31, 2024 | | :----------- | :------------ | :------------- | | Raw Materials | 667 | 1,465 | | Work-in-Process | 388 | 530 | | Total Inventory | 1,055 | 1,995 | Note 3: Fair Value Measurement The company measures certain financial assets at fair value under ASC 820-10-30 using a three-level hierarchy, with goodwill and identifiable intangible assets valued via discounted cash flow models incorporating unobservable management judgments as Level 3 estimates - Fair value measurements use a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[46][47] - Fair value calculations for identifiable intangible assets and goodwill use discounted cash flow models, with inputs like weighted average cost of capital and future financial performance projections involving management judgment, classified as Level 3 estimates[48][49] Note 4: Revenue Recognition The company recognizes revenue under ASC 606, disaggregating it by major source; hardware sales are recognized upon shipment or customer acceptance, while service revenue is recognized over time or at a point in time based on contract nature and performance obligation completion Revenue Disaggregated by Major Source (thousands of dollars) | Revenue Source | Q2 2025 | Q2 2024 | YTD 2025 | YTD 2024 | | :----------------- | :------- | :------- | :-------- | :-------- | | Hardware | 7,073 | 5,024 | 10,467 | 9,168 | | Services: | | | | | | Managed Services | 4,484 | 4,847 | 8,731 | 9,621 | | Installation Services | 1,239 | 2,038 | 2,834 | 4,198 | | Other Services | 234 | 1,206 | 732 | 2,413 | | Total Services | 5,957| 8,091| 12,297| 16,232| | Total Hardware and Services | 13,030| 13,115| 22,764| 25,400| - Q2 2025 hardware revenue increased by 40.8% year-over-year, while service revenue decreased by 26.4%, primarily due to reduced installation and other service revenue[50] - Managed services (including SaaS subscription services) revenue decreased by 7% year-over-year in Q2 2025, mainly due to a single customer insourcing a portion of their hosted environment, reducing software subscription licenses[50][119] Note 5: Business Combinations On March 14, 2025, the company settled contingent consideration obligations related to the Reflect merger, paying $3,000 thousand cash, issuing $4,000 thousand in subordinated promissory notes, and $1,040 thousand in warrants to former Reflect shareholders, recognizing a $4,775 thousand settlement gain - On March 14, 2025, the company settled contingent consideration obligations from the Reflect merger, terminating and releasing $12,815 thousand in contingent consideration liabilities[64][65] - As settlement consideration, the company paid $3,000 thousand in cash, issued $4,000 thousand in promissory notes, and issued warrants with a fair value of $1,040 thousand[64][65] - The company recognized a $4,775 thousand gain on the settlement of contingent consideration for the six months ended June 30, 2025[65] Note 6: Supplemental Cash Flow Statement Information This note provides supplemental non-cash investing and financing activities for the six months ended June 30, 2025 and 2024, along with cash paid for interest, operating leases, and income taxes Supplemental Non-Cash Investing and Financing Activities (thousands of dollars) | Metric | H1 2025 | H1 2024 | | :------------------------------------- | :----------- | :----------- | | Capitalized Software in Accounts Payable | 65 | 65 | | Property and Equipment in Accounts Payable | 24 | - | | Right-of-Use Assets Obtained from New Operating Lease Liabilities | 1,509 | - | | Term Notes Issued as Partial Settlement of Contingent Consideration | 4,000 | - | | Warrants Issued as Partial Settlement of Contingent Consideration | 1,040 | - | Cash Paid During the Period (thousands of dollars) | Metric | H1 2025 | H1 2024 | | :--------- | :----------- | :----------- | | Interest | 748 | 601 | | Operating Leases | 269 | 306 | | Income Taxes, Net | 53 | 44 | Note 7: Intangible Assets, Including Goodwill This note details the company's intangible asset composition, amortization, and goodwill impairment testing methods; as of June 30, 2025, net intangible assets were $21,692 thousand, with no goodwill impairment found in Q1 2025 quantitative testing Intangible Asset Composition (thousands of dollars) | Intangible Asset Class | Net Carrying Value June 30, 2025 | Net Carrying Value December 31, 2024 | | :--------------- | :---------------------- | :----------------------- | | Technology Platform | 3,676 | 4,099 | | Purchased and Developed Software | 8,791 | 8,774 | | Customer Relationships | 8,913 | 9,560 | | Trademarks and Trade Names | 312 | 408 | | Total | 21,692 | 22,841 | - As of June 30, 2025, goodwill carrying value was $26,453 thousand, consistent with December 31, 2024[8] - In Q1 2025, due to sustained stock price decline and market capitalization below reporting unit carrying value, the company performed a quantitative goodwill impairment test, concluding fair value exceeded carrying value, thus no impairment charge was recorded[73] Note 8: Debt This note details the company's debt, including a revolving credit facility and promissory notes; as of June 30, 2025, net total debt was $19,901 thousand, with the credit facility revised and promissory notes issued at 14% interest as part of a contingent consideration settlement Debt Composition (thousands of dollars) | Debt Instrument | June 30, 2025 | December 31, 2024 | | :----------------- | :------------ | :------------- | | Revolving Credit Facility | 16,093 | 13,044 | | Promissory Notes | 4,000 | - | | Total Debt (Gross) | 20,093 | 13,044 | | Less: Deferred Financing Costs | 192 | 243 | | Total Debt (Net) | 19,901 | 12,801 | | Less: Current Portion | 591 | - | | Total Long-Term Debt (Net) | 19,310 | 12,801 | - The revolving credit facility, executed on May 23, 2024, provides a $22,100 thousand secured revolving credit line maturing May 23, 2025, with $16,093 thousand outstanding and $6,007 thousand available as of June 30, 2025[77][81] - Promissory notes totaling $4,000 thousand were issued on March 14, 2025, bearing a fixed annual interest rate of 14.0%, maturing September 14, 2027, with a final balloon payment of $2,277 thousand due at maturity[83] Note 9: Commitments and Contingencies As of the end of the reporting period, the company was not involved in any material legal proceedings or other significant commitments and contingencies - The company is not involved in any material legal proceedings, only routine litigation incidental to its business[85] Note 10: Income Taxes The company's deferred tax assets, primarily from federal and state NOLs, are fully offset by a valuation allowance due to IRC Section 382 limitations and historical losses; Q2 2025 reported a $26 thousand tax benefit versus a $25 thousand tax expense in Q2 2024 - The company has significant NOLs, but their utilization is limited by IRC Section 382, and a full valuation allowance has been recorded against net deferred tax assets[86] Income Tax Benefit (Expense) (thousands of dollars) | Period | Q2 2025 | Q2 2024 | YTD 2025 | YTD 2024 | | :------------- | :------- | :------- | :-------- | :-------- | | Income Tax Benefit (Expense) | 26 | (25) | (73) | (34) | Note 11: Warrants As of June 30, 2025, the company had 5,364,802 warrants classified as equity instruments with a weighted average exercise price of $4.66; 777,800 settlement warrants were issued to former Reflect shareholders on March 14, 2025, with an exercise price of $3.25 per share and a fair value of $1.34 per share as part of a contingent consideration settlement Warrant Overview | Metric | June 30, 2025 | December 31, 2024 | | :----------------------- | :------------ | :------------- | | Number of Warrants | 5,364,802 | 4,587,002 | | Weighted Average Exercise Price | $4.66 | $4.90 | | Weighted Average Remaining Contractual Term (Years) | 3.06 | 3.11 | - The company issued 777,800 settlement warrants with an exercise price of $3.25 per share and an issuance date fair value of $1.34 per share, estimated using the Black-Scholes option pricing model[89][151] Note 12: Stock-Based Compensation This note summarizes outstanding options under the company's stock-based compensation plans, including time-vesting, performance-