Creative Realities(CREX) - 2022 Q2 - Quarterly Report

PART 1. FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited condensed consolidated financial statements for Creative Realities, Inc. as of June 30, 2022, with detailed notes on accounting policies and the Reflect acquisition Condensed Consolidated Balance Sheets - Total assets increased significantly to $68.5 million as of June 30, 2022, from $22.9 million at December 31, 2021, primarily due to the acquisition of Reflect, which added substantial goodwill and intangible assets[6] Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $17,193 | $9,772 | | Goodwill | $26,094 | $7,525 | | Intangibles, net | $23,227 | $4,850 | | TOTAL ASSETS | $68,517 | $22,881 | | Total Current Liabilities | $16,544 | $6,859 | | TOTAL LIABILITIES | $42,080 | $14,152 | | Total Shareholders' Equity | $26,437 | $8,729 | Condensed Consolidated Statements of Operations - The company reported significant revenue growth for both the three and six months ended June 30, 2022, largely driven by the Reflect acquisition. Net income also increased, benefiting from a large non-cash gain on the change in fair value of warrant liability[9] Statement of Operations Summary (in thousands) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total Sales | $10,923 | $3,277 | $21,680 | $8,281 | | Gross Profit | $4,662 | $1,875 | $8,554 | $4,109 | | Operating Income/(Loss) | $30 | $(411) | $(984) | $(624) | | Net Income | $1,262 | $1,025 | $3,764 | $2,297 | | Diluted EPS | $0.06 | $0.09 | $0.21 | $0.20 | Condensed Consolidated Statements of Cash Flows - For the six months ended June 30, 2022, cash used in investing activities surged to $19.5 million due to the acquisition of Reflect. This was funded by $19.6 million in cash provided by financing activities from new debt and equity issuances. Operating cash flow was a small use of $63 thousand[12] Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | $(63) | $(363) | | Net cash used in investing activities | $(19,546) | $(204) | | Net cash provided by financing activities | $19,566 | $1,745 | | Increase/(decrease) in Cash | $(43) | $1,178 | | Cash and Cash Equivalents, end of period | $2,840 | $3,004 | Notes to Condensed Consolidated Financial Statements Note 1: Nature of Organization and Operations - On February 17, 2022, the Company completed its merger with Reflect Systems, Inc., a provider of digital signage solutions. The transaction was financed through a combination of equity and debt[20] - To fund the Reflect merger, the company raised approximately $11.0 million in gross proceeds from an Equity Financing (private placement) and $10.0 million in gross proceeds from a new Debt Financing agreement with Slipstream Communications, LLC[29][31] - Management believes the company can continue as a going concern through at least August 15, 2023, based on debt refinancing, operational forecasts, and a continued support letter from its lender, Slipstream[36] Note 4: Revenue Recognition - The company's revenue is disaggregated into Hardware and various Services categories, including Installation, Software Development, Media, and Managed Services. Managed Services, which includes recurring software licensing and support, is a significant component of service revenue[67][75][77] Disaggregated Revenue (in thousands) | Revenue Source | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Hardware | $5,667 | $1,296 | $12,126 | $4,112 | | Services | $5,256 | $1,981 | $9,554 | $4,169 | | Managed Services | $3,832 | $1,391 | $6,535 | $2,730 | | Total Revenue | $10,923 | $3,277 | $21,680 | $8,281 | Note 5: Business Combination - The company acquired Reflect Systems, Inc. on February 17, 2022. The total consideration was approximately $36.4 million, consisting of cash, common stock, a secured promissory note, and a contingent earnout liability[81][90] Preliminary Purchase Price Allocation for Reflect Acquisition (in thousands) | Assets Acquired / Liabilities Assumed | Fair Value | | :--- | :--- | | Identified intangible assets | $17,160 | | Goodwill | $18,569 | | Net tangible assets acquired | $(1,369) | | Total | $34,360 | - The acquisition added significant definite-lived intangible assets, including customer relationships ($11.0 million), developed technology ($5.1 million), and trade names ($1.0 million), which will be amortized over 2 to 10 years[105] Note 8: Intangible Assets, Including Goodwill - Net book value of amortizable intangible assets increased to $23.2 million at June 30, 2022, from $4.9 million at year-end 2021, due to the Reflect acquisition[118] - A significant decline in the company's market capitalization below its book value as of June 30, 2022, was deemed an indicator of potential impairment for goodwill. However, management concluded no impairment was necessary at the time, attributing the stock price decline to macroeconomic factors and specific investor selling pressure rather than a decline in the underlying business value[121][123] Note 9: Loans Payable - On February 17, 2022, the company refinanced its debt, resulting in a new $10.0 million Acquisition Loan and a consolidated $7.2 million Consolidation Term Loan, both maturing in February 2025. The company also issued a $2.5 million Secured Promissory Note related to the Reflect acquisition, due February 2023[132][134][130] Outstanding Debt as of June 30, 2022 (in thousands) | Debt Type | Principal | Maturity Date | | :--- | :--- | :--- | | Acquisition Loan | $10,000 | 2/15/2025 | | Reflect Seller Secured Promissory Note | $2,089 | 2/17/2023 | | Consolidation Term Loan | $7,185 | 2/15/2025 | | Total Debt, Gross | $19,274 | | Note 12: Warrants - In Q1 2022, the company issued 13,761,000 warrants classified as liabilities in connection with financing activities. These warrants were initially recorded at fair value, with subsequent changes recognized in the statement of operations[152][155][156] - Effective June 30, 2022, the company amended the terms of these liability warrants. The amendments resulted in the warrants being reclassified from liability to equity. This led to a final gain on fair value change of $2.4 million and a loss on amendment of $345 thousand in Q2 2022, with the remaining $5.7 million liability reclassified to additional paid-in-capital[158][159] Note 14: Significant Customers/Vendors - The company has significant customer concentration. For the six months ended June 30, 2022, three customers accounted for 54.3% of total revenue[182] - As of June 30, 2022, one customer accounted for 25.7% of accounts receivable[181] - Vendor concentration is also present, with two vendors accounting for 48.3% of accounts payable at June 30, 2022[183] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results, highlighting revenue growth from the Reflect acquisition, impacts on margins, expenses, liquidity, and Adjusted EBITDA Results of Operations - Three Months Ended June 30, 2022 vs 2021 - Total sales for Q2 2022 increased by 233% to $10.9 million from $3.3 million in Q2 2021, driven by the Reflect acquisition and 74% organic growth compared to pro forma combined results[219] - Gross profit margin decreased to 42.7% from 57.2% year-over-year due to a higher mix of hardware sales (52% of revenue), but improved from 36.2% in Q1 2022[222] - Operating expenses increased by 103% to $4.6 million, driven by the inclusion of Reflect's operations, increased investment in sales and marketing, and the absence of Employee Retention Credits (ERC) that benefited the prior year[218][223][224] - Net income was $1.3 million, compared to $1.0 million in the prior year, largely due to a $2.4 million non-cash gain on the change in fair value of warrant liability[218][229] Results of Operations - Six Months Ended June 30, 2022 vs 2021 - Total sales for the first six months of 2022 grew 162% to $21.7 million from $8.3 million in the prior-year period, reflecting the Reflect acquisition and 58% organic growth[235] - Managed services revenue, a key recurring revenue stream, grew 139% year-over-year to $6.5 million for the six-month period[236] - Gross profit margin for the six-month period decreased to 39.5% from 49.6% due to a higher mix of hardware sales[238] - Net income for the six months was $3.8 million, compared to $2.3 million in the prior year, primarily driven by a $7.9 million non-cash gain on the change in fair value of warrant liability[234][246] Liquidity and Capital Resources - As of June 30, 2022, the company had cash and cash equivalents of $2.8 million and a working capital surplus of $0.6 million[35] - For the first six months of 2022, net cash used in operating activities was minimal at $63 thousand. Net cash used in investing activities was $19.5 million, primarily for the Reflect acquisition. Net cash provided by financing activities was $19.6 million from debt and equity raises to fund the acquisition[257][259][261] Adjusted EBITDA Reconciliation (in thousands) | Quarter | Q2 2022 | Q1 2022 | Q4 2021 | Q3 2021 | Q2 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | | GAAP Net Income (Loss) | $1,262 | $2,502 | $(1,722) | $(343) | $1,025 | | Adjusted EBITDA | $933 | $635 | $(31) | $292 | $286 | Item 4. Controls and Procedures - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[264] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[265] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section reports no new material legal proceedings - The company reports no new material legal proceedings[267] Item 1A. Risk Factors Creative Realities, as a smaller reporting company, refers to its Form 10-K for a discussion of risk factors - The company, as a smaller reporting company, refers to its Form 10-K filed on March 22, 2022, for a discussion of risk factors[268] Item 6. Exhibits Lists exhibits filed with the Form 10-Q, including officer certifications, a press release, and stock option agreements - A list of filed exhibits is provided, including officer certifications (31.1, 31.2, 32.1, 32.2), a press release dated August 15, 2022 (99.1), and various stock option agreements[271]