Creative Realities(CREX) - 2024 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited financial statements show reduced net loss, negative working capital, and going concern doubt due to debt maturities Condensed Consolidated Balance Sheets Balance sheets show decreased assets and liabilities, with long-term debt reclassified to current, resulting in negative working capital Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $16,317 | $18,610 | | Total Assets | $68,206 | $70,777 | | Total Current Liabilities | $38,735 | $20,197 | | Total Liabilities | $39,357 | $41,946 | | Total Shareholders' Equity | $28,849 | $28,831 | - The company reported negative working capital of $22.4 million as of March 31, 2024, primarily due to the reclassification of long-term debt and contingent consideration to current liabilities ahead of their February 2025 maturity[9][27] Condensed Consolidated Statements of Operations Total sales increased 24% to $12.3 million, significantly reducing net loss to $109 thousand, aided by a gain on contingent consideration Statement of Operations Summary (in thousands, except per share data) | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Total Sales | $12,285 | $9,944 | | Gross Profit | $5,764 | $5,089 | | Operating Loss | $(76) | $(90) | | Net Loss | $(109) | $(1,000) | | Diluted Loss Per Share | $(0.01) | $(0.14) | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities decreased to $1.9 million, with net cash used in investing and financing activities, ending with $2.9 million cash Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,938 | $3,868 | | Net cash used in investing activities | $(830) | $(1,034) | | Net cash used in financing activities | $(1,119) | $(562) | | Cash and Cash Equivalents, end of period | $2,899 | $3,905 | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, going concern uncertainty due to debt maturities, revenue recognition, and customer concentration - The company's financial statements are prepared under a going concern assumption, but management identified conditions raising substantial doubt, including negative working capital and upcoming debt maturities totaling $10.0 million (Acquisition Term Loan) and $10.6 million (contingent consideration) in February 2025, with insufficient cash to meet these obligations[27] - Management's plans to refinance these obligations are not yet finalized and cannot be deemed probable, thus the substantial doubt about the company's ability to continue as a going concern is not alleviated[28] - On March 27, 2023, the company executed a 1-for-3 reverse stock split, with all share and per-share data retroactively adjusted to reflect this split[22] Disaggregated Revenue by Source (in thousands) | Revenue Source | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Hardware | $4,144 | $4,322 | | Managed Services | $4,774 | $4,072 | | Installation Services | $2,160 | $947 | | Other Services | $1,207 | $603 | | Total Revenue | $12,285 | $9,944 | - The company has significant customer concentration, with four customers accounting for 13%, 12%, 11%, and 10% of revenue for the three months ended March 31, 2024[92] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2024 financial performance, highlighting a 24% sales increase driven by services, and reiterates liquidity challenges and going concern uncertainty due to significant debt maturities Overview Creative Realities provides end-to-end digital signage solutions across various market segments, offering a full portfolio from hardware to recurring SaaS platforms - The company provides end-to-end digital signage solutions for market segments such as Retail, QSRs, Convenience Stores, and Corporate Communications[98][100] - Primary revenue sources include hardware sales, services (design, installation, support, media sales), and recurring subscription licensing (SaaS) revenue from proprietary software platforms like ReflectView and AdLogic[102][103] Results of Operations Q1 2024 sales grew 24% to $12.3 million, driven by a 45% increase in services revenue, leading to a significantly improved net loss despite a lower gross margin Comparison of Results of Operations (in thousands) | Line Item | Q1 2024 | Q1 2023 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Sales | $12,285 | $9,944 | $2,341 | 24% | | Gross Profit | $5,764 | $5,089 | $675 | 13% | | Operating Loss | $(76) | $(90) | $14 | 16% | | Net Loss | $(109) | $(1,000) | $891 | 89% | - The 24% sales increase was primarily driven by a $2.5 million (45%) increase in services and other revenues, with installation services revenue growing 128% due to significant deployment activity, and managed services (SaaS and support) revenue growing 17%[109] - The annual recurring run rate of subscription license revenue grew from $16.3 million at year-end 2023 to $17.7 million as of March 31, 2024[109] - Gross profit margin decreased from 51% to 47% year-over-year, attributed to a shift in revenue mix towards lower-margin installation services, which constituted 18% of total revenue in Q1 2024 versus 10% in Q1 2023[111] Liquidity and Capital Resources The company faces significant liquidity constraints with a $2.9 million cash balance and substantial debt maturities totaling over $20 million in February 2025, raising going concern doubts - Net cash provided by operating activities was $1.9 million for Q1 2024, compared to $3.9 million for Q1 2023[121] - Net cash used in financing activities was $1.1 million in Q1 2024, primarily due to repayments on the Consolidation Term Loan[123] - The company's ability to continue as a going concern is in doubt due to upcoming maturities of its Acquisition Term Loan ($10.0 million), Consolidation Term Loan, and contingent consideration ($10.6 million) on February 17, 2025, with insufficient cash on hand to make these repayments[27][120] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2024, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of March 31, 2024, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[125] - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, internal controls[126] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company reports no material legal proceedings, other than routine litigation incidental to its business - The company reports no material legal proceedings[84][129] Item 1A. Risk Factors The company faces intense competition from rivals with greater resources and from hardware manufacturers bundling basic software, which could impact market share and margins - The company faces intense competition from rivals with significantly greater financial, technical, and marketing resources, which puts it at a competitive disadvantage[131] - A specific competitive threat is noted from hardware manufacturers, such as Samsung, who are including customizable display software in their screens, which could be a sufficient solution for some customers despite being less comprehensive[131] - Failure to invest sufficiently in R&D, sales, and marketing to keep pace with competitors could lead to price reductions, reduced margins, and loss of market share[132]