CREATIVE REALITIES, INC. The following discussion contains various forward-looking statements within the meaning of Section 21E of the Exchange Act. Although we believe that, in making any such statement, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. When used in the following discussion, the words "anticipates," "believes," "expects," "intends," "plans," "estimates," "projects," should," "may," "propose," and similar expressions (or the negative versions of such words or expressions), as they relate to us or our management, are intended to identify such forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated, and many of which are beyond our control. Factors that could cause actual results to differ materially from those anticipated are set forth under the caption "Risk Factors" in the Company's Form 10-K for the year endedDecember 31, 2021 as filed with theSecurities and Exchange Commission onMarch 22, 2022 . Our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking statements. Accordingly, we cannot be certain that any of the events anticipated by forward-looking statements will occur or, if any of them do occur, what impact they will have on us. We caution you to keep in mind the cautions and risks described in this document and to refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of the document in which they appear. We do not undertake to update any forward-looking statement. Overview
? Retail
? Entertainment and Sports Venues
? Restaurants, including quick-serve restaurants ("QSR")
? Convenience Stores ? Financial Services ? Automotive
? Medical and Healthcare Facilities
? Mixed Use Developments
? Corporate Communications, Employee Experience
? Digital out of Home (DOOH) Advertising Networks
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We serve market-leading companies, so there is a good chance that if you leave
your home today to shop, work, eat or play, you will encounter one or more of
our digital signage experiences. Our solutions are increasingly visible because
we help our enterprise customers achieve a range of business objectives
including:
? Increased brand awareness
? Improved customer support
? Enhanced employee productivity and satisfaction
? Increased revenue and profitability
? Improved guest experience
? Increased customer/guest engagement
? Improved patient outcomes Through a combination of organically grown platforms and a series of strategic acquisitions, including our recent acquisition ofReflect Systems, Inc. inFebruary 2022 , the Company assist clients to design, deploy, manage, and monetize their digital signage networks. The Company sources leads and opportunities for its solutions through its digital and content marketing initiatives, close relationships with key industry partners, specifically equipment manufacturers, and the direct efforts of its in-house industry sales experts. Client engagements focus on consultative conversations that ensure the Company's solutions are positioned to help clients achieve their business objectives in the most cost-effective manner possible.
When comparing Creative Realities to other digital signage providers, our customers value the following competitive advantages:
? Breadth of solutions - Creative Realities is one of only a few companies in
the industry capable of providing the full portfolio of products and services
required to implement and run an effective digital signage network. We
leverage a 'single vendor' approach, providing clients with a one-stop-shop
for sourcing digital signage solutions from design through day two services.
? Managed labor pool - Unlike most companies in our industry, we have a curated
labor pool including thousands of qualified and vetted field technicians
available to service clients quickly nationwide. We can meet tight schedules
even in exceptionally large deployments and still ensure quality and
consistency.
? In-house creative resources - We assist clients in repurposing existingcontent for digital signage experiences or creating new content, an activity
for which the Company has won several design awards in recent years. In each
instance, our services can be essential in helping clients develop an
effective content program.
? Network scalability and reliability - Our software as a service ("SaaS")
content management platforms power some of the largest and most complex
digital signage networks in
enterprise scale projects. This also provides us purchasing power to source
products and services for our customers, enabling us to deliver cost
effective, reliable and powerful solutions to small and medium size business
clients.
? Ad management platform - Our customers are increasingly interested in
monetizing their digital signage networks through advertising content.However, efficiently scheduling advertising content into digital signage
playlists to meet campaign objectives can be a challenging and labor-intensive
process. AdLogic, our home-grown, content management-agnostic platform,
automates this process, allowing network owners to capture more revenue with
less expense.
? Media sales - Few, if any other digital signage solution providers, can offer
their clients media sales as a service. We have in-house media sales expertise
to elevate conversations with clients interested in better understanding
network monetization. We believe this meaningful differentiation in the sales
process provides an additional revenue stream to Creative Realities compared
to our competitors.
31
? Market sector expertise - Creative Realities has in-house experts in key
market segments such as automotive, retail, quick-serve restaurants (QSR),
convenience stores, and Digital Out of Home (DOOH) advertising. Our expertise
in these business segments enables our teams to provide meaningful business
conversations and offer tailored solutions with prospects and customers to
their unique business objectives. These experts build industry relationships
and create thought leadership that drives lead flow and new opportunities for
our business.
? Logistics - Implementing a large digital signage project can be a logistics
nightmare that can stall an initiative even before deployment. Our expertise
in logistics improves deployment efficiency, reduces delays and problems, and
saves customers time and money.
? Technical support - Digital signage networks present unique challenges for
corporate IT departments. Creative Realities helps simplify and improve end
user support by leveraging our own
support is required, it can be dispatched from the NOC, leveraging our managed
labor pool to resolve customer issues quickly and effectively.
? Integrations and Application Development - The future of digital signage is
not still images and videos on a screen. Interactive applications and
integrations with other data sources will dominate the future. From social
media feeds to corporate data stores to Point of Sale ("POS") systems, our
proven ability to build scalable applications and integrations is a key
advantage clients can leverage to deliver more compelling and engaging
experiences for their customers.
? Hardware support - A number of digital signage providers sell a proprietary
media player or align themselves with just one operating system. We utilize a
range of media players including Windows, Android and BrightSign to provide
clients the flexibility they need to select the appropriate hardware for any
application knowing the entire network can still be served by a single digital
signage platform, reducing complexity and improving the productivity of their
teams.
The three primary sources of revenue for the Company are:
? Hardware sales from reselling digital signage hardware from original equipment
manufacturers such as Samsung and BrightSign.
? Services revenue from helping customers design, deploy and manage their
digital signage network, including:
? Hardware system design/engineering
? Hardware installation
? Content development
? Content scheduling
? Post-deployment network and field support
? Media sales, as a result of our acquisition of Reflect
? Recurring subscription licensing and support revenue from our digital signage
software platforms, which are generally sold via a SaaS model. These include:
? ReflectView, the Company's core digital signage platform for most
applications, scalable and cost effective from 10 to 100,000+ devices
? Reflect Xperience, a web-based interface that allows customers to give content
scheduling access to local users via the web or mobile devices, while still
maintaining centralized programming control
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? Reflect AdLogic, the Company's ad management platform for digital signage
networks, which presently delivers approximately 50 million ads daily
? Reflect Clarity, the Company's menu board solution, which has become a market
leader for a range of restaurant and convenience store applications
? Reflect Zero Touch, which allows customers to turn any screen into aninteractive experience by allowing guests to engage using their mobile device
? iShowroomProX, an omni-channel digital sales support platform targeted at
original equipment manufacturers in the transportation sector, which
integrates with dozens of key data services including dealer inventory at the
VIN
level
? OSx+, a digital VIN-level checklist used to assist in the tracking anddelivery of new vehicles in the transportation sector, providing measurable
lift in customer satisfaction scores and connected vehicle enrollments and
subscription activations.
While hardware sales and support services revenues can fluctuate more
significantly year over year based on new, large-scale network deployments, the
Company expects to see continuous growth in recurring SaaS revenue for the
foreseeable future as digital signage adoption/utilization continues to expand
across the vertical markets we serve.
Recent Developments
Please see Note 5 Business Combinations, Note 9 Loans Payable, Note 12 Warrants,
and Note 13 Stock-based Compensation to the Company's Condensed Consolidated
Financial Statements contained in this Report for a description of recent
developments of the Company that occurred during the three months ended June 30,
2022 .
Our Sources of Revenue
We generate revenue through digital signage solution sales, which include system
hardware, professional and implementation services, software design and
development, software licensing, deployment, maintenance and support services,
and media sales.
We currently market and sell our technology and solutions primarily through our
sales and business development personnel, but we also utilize agents, strategic
partners, and lead generators who provide us with access to additional sales,
business development and licensing opportunities.
Our Expenses
Our expenses are primarily comprised of three categories: sales and marketing,
research and development, and general and administrative. Sales and marketing
expenses include salaries and benefits for our sales, business development
solution management and marketing personnel, and commissions paid on sales. This
category also includes amounts spent on marketing networking events, promotional
materials, hardware and software to prospective new customers, including those
expenses incurred in trade shows and product demonstrations, and other related
expenses. Our research and development expenses represent the salaries and
benefits of those individuals who develop and maintain our proprietary software
platforms and other software applications we design and sell to our customers.
Our general and administrative expenses consist of corporate overhead, including
administrative salaries, real property lease payments, salaries and benefits for
our corporate officers and other expenses such as legal and accounting fees.
33
Critical Accounting Policies and Estimates
The Company's significant accounting policies are described in Note 2 Summary of Significant Accounting Policies of the Company's Condensed Consolidated Financial Statements included elsewhere in this Report. The Company's Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted inthe United States . Certain accounting policies involve significant judgments, assumptions, and estimates by management that could have a material impact on the carrying value of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Our actual results could
differ from those estimates. Results of Operations
Note: All dollar amounts reported in Results of Operations are in thousands, except share and per-share information.
Three Months Ended
The tables presented below compare our results of operations and present the results for each period and the change in those results from one period to another in both dollars and percentage change.
For the three months
ended June 30, Change
2022 2021 %
Sales $ 10,923 $ 3,277 $ 7,646 233 %
Cost of sales 6,261 1,402 4,859 347 %
Gross profit 4,662 1,875 2,787 149 %
Sales and marketing expenses 1,147 169 978 579 %Research and development expenses 418 58 360 621 % General and administrative expenses 2,562 1,715 847 49 % Depreciation and amortization expense 468 344 124 36 % Deal and transaction expense 37 -
37 100 %
Total operating expenses 4,632 2,286 2,346 103 %
Operating (loss) 30 (411 ) 441 -107 %
Other income/(expenses):
Interest expense (750 ) (182 ) (568 ) 312 %Change in Fair Value of Warrant Liability 2,433 - 2,433 100 % Change in Fair Value of Equity Guarantee (73 ) -
(73 ) 100 % Loss on warrant amendment (345 ) - (345 ) 100 % Gain on settlement of debt 21 1,628 (1,607 ) -99 % Other income/(expense) (1 ) (3 ) 2 -67 % Total other income/(expense) 1,285 1,443 (158 ) -11 %
Net income/(loss) before income taxes 1,315 1,032
283 27 % Provision from income taxes (53 ) (7 ) (46 ) 657 % Net income/(loss)$ 1,262 $ 1,025 237 23 % Sales Sales were$10,923 , representing an increase of$7,646 , or 233%, as compared to the same period in 2021, driven in part by the acquisition of Reflect onFebruary 17, 2022 , and the Company's successful sales activities as a combined company post-Merger. While the addition of Reflect revenue is contributing to the growth in revenue, the combined company grew revenues approximately 74% organically during the three months endedJune 30, 2022 , as compared to the pro forma combined results during the three months endedJune 30, 2021 . Hardware revenues were$5,667 in 2022, an increase of$4,371 , or 337%, as compared to the prior year, driven by continued large scale LED deployments continued in the quarter by multiple customers. Services and other revenues were$5,256 in the three months endedJune 30, 2022 , an increase of$3,275 , or 165%, with the inclusion of Reflect's operations in the Company's consolidated results for such period. Managed services revenue, which includes both software-as-a-service ("SaaS") and help desk technical subscription services, were$3,832 in the three months endedJune 30, 2022 as compared to$1,391 in the same period in 2021, driven by the addition of Reflect's SaaS subscription revenue in the current year. This represents a year-over-year growth rate of 175% in our higher margin, typically subscription-based, managed services revenue. 34 Gross Profit Gross profit increased by$2,787 , or 149% during the three months endedJune 30, 2022 as compared to the same period in 2021 driven by an increase in revenue but offset by a reduction in gross profit margin. Gross profit margin decreased to 42.7% from 57.2% driven by a shift in revenue mix to 52% hardware during the three months endedJune 30, 2022 related to several material customer hardware rollouts active during the first half of the year. We expect this contraction in gross profit margin to be less severe as we move into the second half of 2022 and beyond. The gross profit margin increased in three months endedJune 30, 2022 to 42.7% from 36.2% in the three months endedMarch 31, 2022 , which experienced significant short-term significant pressure driven by a single, large-scale/hardware-heavy deployment. We believe the gross profit margin for the three months endedJune 30, 2022 to be more representative of our normalized gross profit margins. Sales and Marketing Expenses Sales and marketing expenses generally include the salaries, taxes, and benefits of our sales and marketing personnel, as well as trade show activities, travel, and other related sales and marketing costs. Sales and marketing expenses increased by$978 , or 579%, driven primarily by (i) the inclusion in the prior year of a benefit of$182 related Employee Retention Credits ("ERC") related to the retention and payment of salaries to sales personnel throughout 2020 and the six months endedJune 30, 2021 , (ii) the acquisition of Reflect via the Merger onFebruary 17, 2022 , and (iii) the Company's enhanced investments into sales and marketing activities post-COVID. Immediately following the Merger, the Company integrated the sales and marketing functions and did not disaggregate expenses between the two legacy companies. Following the Merger and through integration activities, the Company adopted certain tools, technology, and processes - particularly with respect to lead generation and brand marketing - that were undercapitalized historically by the Company. Additionally, the Company engaged an investor relations firm and has increased investor relations activities, including conferences and presentations. As a result, we expect the sales and marketing expenses of the Company for the three months endedJune 30, 2022 to adequately reflect the pace for spend in these areas in future reporting periods.
Research and Development Expenses
Research and development expenses increased$360 , or 621% in 2022, driven primarily by (i) the inclusion in the prior year of a benefit of$147 related ERC, and (ii) the acquisition of Reflect via the Merger onFebruary 17, 2022 . Through the Merger, we acquired a fully staffed, experienced software development team and elected to keep that team in-tact, particularly given employment market conditions with respect to talented software engineers. We have integrated the pre-existing CRI development team with the acquired team and have experienced enhanced speed to market on new feature and functionality development activities from increasing this resource pool. We expect this elevated level of expense during the three months endedJune 30, 2022 to continue into the future as we develop our current and future product set.
General and Administrative Expenses
General and administrative expenses increased$847 , or 49%, driven primarily by (i) the inclusion in the prior year of a benefit of$508 related ERC, and (ii) increased headcount and operations as a result of the acquisition of Reflect onFebruary 17, 2022 . While the Company anticipates carrying higher G&A expenses moving forward as a result of the acquisition, the integration activities include several projects (including but not limited to consolidation of CMS tools, cloud hosting environments, IT tools, and rightsizing leases for office space) that we expect will be realized by the end of 2022. The Company also reinstituted its 401k matching program for employees in the fourth quarter of 2021, which represents an increase of$42 versus the prior year. 35
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased by$124 , or 36%, in the three months endedJune 30, 2022 compared to the same period in 2021. This was driven by the addition of$17,160 in amortizing intangible assets as a result of the Merger. The increase would have been$305 , or 88%, but was partially offset by a reduction in amortization expense recorded as a period expense in the three months endedJune 30, 2022 resulting from a measurement period adjustment reducing acquired intangible assets by$4,340 . Interest Expense
See Note 9 Loans Payable to the Condensed Consolidated Financial Statements for a discussion of the Company's debt and related interest expense obligations.
Changes in Fair Value of Warrant Liability; Loss on Warrant Amendment
During the three months endedJune 30, 2022 , the Company recorded a gain of$2,433 as the result of assessing the fair value of warrant liabilities associated with the Company's issuance of warrants (the Common Stock Warrant, Lender Warrant and Purchaser Warrant) in its debt and equity offerings completed inFebruary 2022 to finance the Merger. These warrants were initially assessed at fair value through Black Scholes calculation and were subsequently re-assessed atJune 30, 2022 , resulting in the gain. EffectiveJune 30, 2022 , the Company amended the terms of such warrants, which removed the holder's option to exercise such warrants on a cashless basis utilizing the VWAP of the Company's common stock on the trading day immediately preceding the date of a notice of cashless exercise in certain circumstances, and removed the condition to exercising such warrants that the Company's shareholders approve the exercise thereof (which has already been obtained). The amendments to the warrants extended the term of such warrants for an additional one year. As a result of the extension in term provided in exchange for the amendment, the Company reassessed the fair value of those warrants, resulting in the Company recording a loss on the fair value of these warrants of$345 . The foregoing amendments to the warrants resulted in such warrants to be accounted for as equity instruments on the Company's financial statements as ofJune 30, 2022 . As such, following recording the gains and losses with respect to these warrant amendments, the Company reclassified the warrant liability of$5,709 from noncurrent liabilities to additional paid-in-capital as ofJune 30, 2022 .
Gain on Settlement of Debt
OnMay 13, 2021 , the Company and Seller entered into a settlement agreement wherein neither party admitted liability, and the Company agreed to pay, and Seller agreed to accept,$100 as settlement in full for the outstanding balance of principal and accrued interest under the Amended and Restated Seller Note and a mutual release of all claims related to the Amended and Restated Seller Note and sale transaction under the Allure Purchase Agreement and all related agreements. As a result of this settlement, the full principal amount of the Amended and Restated Seller Note and the accrued interest have been eliminated, resulting in a gain in the Condensed Consolidated Financial statements of$1,624 , representing$1,538 related to the Amended and Restated Seller Note and$86 of related interest thereon, during the three months endedJune 30, 2021 . 36
Six Months Ended
The tables presented below compare our results of operations and present the results for each period and the change in those results from one period to another in both dollars and percentage change.
For the six months
ended June 30, Change
2022 2021 %
Sales $ 21,680 $ 8,281 $ 13,399 162 %
Cost of sales 13,126 4,172 8,954 215 %
Gross profit 8,554 4,109 4,445 108 %
Sales and marketing expenses 1,854 504 1,350 268 %Research and development expenses 659 229 430 188 % General and administrative expenses 5,316 3,775 1,541 41 % Bad debt expense/(recovery) 106 (463 ) 569 -123 % Depreciation and amortization expense 1,175 688 487 71 % Deal and transaction expenses 428 -
428 100 % Total operating expenses 9,538 4,733 4,805 102 % Operating loss (984 ) (624 ) (360 ) 58 % Other income/(expenses): Interest expense (1,199 ) (431 ) (768 ) 178 % Change in Fair Value of Warrant Liability 7,902 - 7,902 100 % Change in Fair Value of Equity Guarantee (73 ) -
(73 ) 100 % Loss on debt waiver consent (1,212 ) - (1,212 ) 100 % Loss on warrant amendment (345 ) - (345 ) 100 %
Change in fair value of Convertible Loan - 166 (166 ) -100 % Gain/(loss) on restructuring/settlement of debt (274 ) 3,193 (3,467 ) -109 % Other income/(expense) 5 1 4 400 % Total other income/(expense) 4,804 2,929 1,875 64 %
Net income/(loss) before income taxes 3,820 2,305
1,515 66 % Provision from income taxes (56 ) (8 ) (48 ) 600 % Net income/(loss)$ 3,764 $ 2,297 1,467 64 % Sales Sales were$21,680 , representing an increase of$13,399 , or 162%, as compared to the same period in 2021 driven in part by the acquisition of Reflect onFebruary 17, 2022 , and the Company's successful sales activities as a combined company post-Merger. While the addition of Reflect revenue is contributing to the growth in revenue, the combined company has grown revenues approximately 58% organically during the six months endedJune 30, 2022 , as compared to the pro forma combined results during the six months endedJune 30, 2021 . Hardware revenues were$12,126 in 2022, an increase of$8,014 , or 195%, as compared to the prior year, driven by large scale LED deployments by multiple customers. Services and other revenues were$9,554 in the six months endedJune 30, 2022 , an increase of$5,385 , or 129%, with the inclusion of Reflect's operations in the Company's consolidated results for such period. Managed services revenue, which includes both software-as-a-service ("SaaS") and help desk technical subscription services, were$6,535 in the six months endedJune 30, 2022 as compared to$2,730 in the same period in 2021, driven by the addition of Reflect's SaaS subscription revenue in the current year. This represents a year-over-year growth rate of 139% in our higher margin, typically subscription-based, managed services revenue. 37 Gross Profit
Gross profit increased by$4,445 , or 108% during the six months endedJune 30, 2022 as compared to the same period in 2021 driven by an increase in revenue but offset by a reduction in gross profit margin. Gross profit margin decreased to 39.5% from 49.6% driven by a shift in revenue mix to 56% hardware during the six months endedJune 30, 2022 related to several material customer hardware rollouts active during the first half of the year. We expect this contraction in gross profit margin to be less severe as we move into the second half of 2022 and beyond. The gross profit margin increased in three months endedJune 30, 2022 to 42.7% from 36.2% in the three months endedMarch 31, 2022 , which experienced significant short-term significant pressure driven by a single, large-scale/hardware-heavy deployment. We expect the gross profit margin for the three months endedJune 30, 2022 to be more representative of our normalized gross profit margins. Sales and Marketing Expenses Sales and marketing expenses generally include the salaries, taxes, and benefits of our sales and marketing personnel, as well as trade show activities, travel, and other related sales and marketing costs. Sales and marketing expenses increased by$1,350 , or 268%, driven primarily by (i) the inclusion in the prior year of a benefit of$182 related Employee Retention Credits ("ERC") related to the retention and payment of salaries to sales personnel throughout 2020 and the six months endedJune 30, 2021 , (ii) the acquisition of Reflect onFebruary 17, 2022 , and (iii) the Company's enhanced investments into sales and marketing activities post-COVID. Immediately following the acquisition of Reflect, the Company integrated the sales and marketing functions and did not disaggregate expenses between the two legacy companies. Following the Merger and through integration activities, the Company adopted certain tools, technology, and processes - particularly with respect to lead generation and brand marketing - that were undercapitalized historically by the Company. Additionally, the Company engaged an Investor Relations firm and has increased investor relations activities, including conferences and presentations. As a result, we expect the sales and marketing expenses of the Company for the six months endedJune 30, 2022 to adequately reflect the pace for spend in these areas in future periods.
Research and Development Expenses
Research and development expenses increased$430 , or 188% in 2022, driven primarily by (i) the inclusion in the prior year of a benefit of$147 related ERC, and (ii) the acquisition of Reflect onFebruary 17, 2022 . Through the acquisition of Reflect, we acquired a fully staffed, experienced software development team and elected to keep that team in-tact, in full, particularly given employment market conditions with respect to talented software engineers. We have integrated the pre-existing CRI development team with the acquired team and have experienced enhanced speed to market on new feature and functionality development activities from increasing this resource pool. We expect this elevated level of expense during the three months endedJune 30, 2022 to continue into the future as we develop our current and future product set.
General and Administrative Expenses
General and administrative expenses - excluding bad debt expense - increased$1,541 , or 41%, driven primarily by (i) the inclusion in the prior year of a benefit of$508 related ERC, and (ii) increased headcount and operations as a result of the acquisition of Reflect onFebruary 17, 2022 . While the Company anticipates carrying higher G&A expenses moving forward as a result of the acquisition, the integration activities include several projects (including but not limited to consolidation of CMS tools, cloud hosting environments, IT tools, and rightsizing leases for office space) that we expect will be realized by the end of 2022. The Company also reinstituted its 401k matching program for employees in the fourth quarter of 2021, which represents an increase of$65 versus the prior year, and launched several investor relations initiatives, increasing spend$155 year-to-date in 2022 versus the prior year. 38 Bad Debt Expenses related to the Company's allowance for bad debts increased by$569 , or (123%) for the six months endedJune 30, 2022 compared to 2021. This increase was primarily driven by a prior period cash recovery of$555 related to a customer bankruptcy for which the Company previously recorded a reserve. The bad debt expense recorded for the six months endedJune 30, 2022 is representative of the Company's actual history with uncollectable accounts receivable.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased by
Interest Expense; Change in fair value of Convertible Loan
See Note 9 Loans Payable to the Condensed Consolidated Financial Statements for a discussion of the Company's debt and related interest expense obligations.
As of
Changes in Fair Value of Warrant Liability; Loss on Warrant Amendment
During the six months endedJune 30, 2022 , the Company recorded a gain of$7,902 as the result of assessing the fair value of warrant liabilities associated with the Company's issuance of warrants in its debt and equity offerings completed inFebruary 2022 to finance the Merger. These warrants were initially assessed at fair value through Black Scholes calculation and were subsequently re-assessed atMarch 31, 2022 andJune 30, 2022 , resulting in the gain. EffectiveJune 30, 2022 , the Company amended the terms of certain warrants previously issued to its creditor and an investor, which removed the holder's option to exercise such warrants on a cashless basis utilizing the VWAP of the Company's common stock on the trading day immediately preceding the date of a notice of cashless exercise in certain circumstances, and removed the condition to exercising such warrants that the Company's shareholders approve the exercise thereof (which has already been obtained). The amendments to the warrants extended the term of such warrants for an additional one year. As a result of the extension in term provided in exchange for the amendment, the Company reassessed the fair value of those warrants, resulting in the Company recording a loss on the fair value of these warrants of$345 . The foregoing amendments to the warrants resulted in such warrants to be accounted for as equity instruments on the Company's financial statements as ofJune 30, 2022 . As such, following recording the gains and losses with respect to these warrant amendments, the Company reclassified the warrant liability of$5,709 from noncurrent liabilities to additional paid-in-capital as ofJune 30, 2022 . Gain on Settlement of Debt OnFebruary 17, 2022 , the Company refinanced its debt facilities with Slipstream. The Company assessed the combination of the pre-existing senior secured term loan and secured convertible loan in accordance with ASC 470 Debt and determined the transaction should be accounted for as an extinguishment, in part as the Consolidation Term Loan eliminated a substantive conversion feature. In aggregate the Company recorded a loss on extinguishment of$295 , primarily associated with the write-off of pre-existing debt discounts. OnJanuary 11, 2021 , the Company received a notice fromOld National Bank regarding forgiveness of the loan in the principal amount of$1,552 (the "PPP Loan") that was made pursuant to the Small Business Administration Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act of 2020. According to such notice, the full principal amount of the PPP Loan and the accrued interest have been forgiven, resulting in a gain of$1,552 during the six months endedJune 30, 2021 . 39
OnMay 13, 2021 , the Company and Seller entered into a settlement agreement wherein neither party admitted liability, and the Company agreed to pay, and Seller agreed to accept,$100 as settlement in full for the outstanding balance of principal and accrued interest under the Amended and Restated Seller Note and a mutual release of all claims related to the Amended and Restated Seller Note and sale transaction under the Allure Purchase Agreement and all related agreements. As a result of this settlement, the full principal amount of the Amended and Restated Seller Note and the accrued interest have been eliminated, resulting in a gain in the Condensed Consolidated Financial statements of$1,624 , representing$1,538 related to the Amended and Restated Seller Note and$86 of related interest thereon, during the six months endedJune 30, 2021 .
Supplemental Operating Results on a Non-GAAP Basis
The following non-GAAP data, which adjusts for the categories of expenses
described below, is a non-GAAP financial measure. Our management believes that
this non-GAAP financial measure is useful information for investors,
shareholders and other stakeholders of our company in gauging our results of
operations on an ongoing basis. We believe that EBITDA is a performance measure
and not a liquidity measure, and therefore a reconciliation between net
loss/income and EBITDA and Adjusted EBITDA has been provided. EBITDA should not
be considered as an alternative to net loss/income as an indicator of
performance or as an alternative to cash flows from operating activities as an
indicator of cash flows, in each case as determined in accordance with GAAP, or
as a measure of liquidity. In addition, EBITDA does not take into account
changes in certain assets and liabilities as well as interest and income taxes
that can affect cash flows. We do not intend the presentation of these non-GAAP
measures to be considered in isolation or as a substitute for results prepared
in accordance with GAAP. These non-GAAP measures should be read only in
conjunction with our consolidated financial statements prepared in accordance
with GAAP.
Quarters Ended
June 30 March 31 December 31 September 30 June 30
Quarters ended 2022 2022 2021 2021 2021
GAAP net income (loss) $ 1,262 $ 2,502 $ (1,722 ) $ (343 ) $ 1,025
Interest expense:
Amortization of debt discount 360 181 29 29 29
Other interest, net 390 268 160 158 153
Depreciation/amortization:
Amortization of intangible assets 431 680
302 320 317 Amortization of employee share-based awards 316 469 324 329 329 Depreciation of property, equipment 37 27 27 27 27 Income tax expense/(benefit) 53 3 13 1 7 EBITDA$ 2,849 4,130 (867 ) $ 521 1,887 Adjustments (Gain)/loss on fair value of warrant liability (2,433 ) (5,469 ) - - - (Gain)/loss on settlement of obligations (21 ) 295 - (256 ) (1,628 ) (Gain)/loss on debt waiver consent - 1,212 - - - (Gain)/loss on warrant amendment 345 -
- - - (Gain)/loss on fair value of equity guarantee 73 - - - - Deal and transaction expenses 37 391 518 - - Other income 1 (6 ) - - - Stock-based compensation - Director grants 82 82 318 27 27 Adjusted EBITDA$ 933 635 (31 ) $ 292 286
Liquidity and Capital Resources
See Note 1 Nature of Organization and Operations to the accompanying Condensed Consolidated Financial Statements for a detailed discussion of liquidity and financial resources. Operating Activities The cash used in operating activities were$63 for the six months endedJune 30, 2022 compared to$363 for the same period in 2021. We produced net income of$3,764 . Following the Merger, our business has significantly expanded, particularly with respect to managed services revenue. Other than net income, cash provided by operating activities was driven by growth of$1,178 of deferred revenue and$2,487 of accounts payable, partially offset by an expansion of accounts receivable and inventory of$4,035 and$562 , respectively. Investing Activities
Net cash used in investing activities during the six months endedJune 30, 2022 was$19,546 compared to$204 during the same period in 2021. The use of cash in the current year was driven by (1) completion of the Merger and (2) continued investments in our software platforms. We currently do not have any material commitments for capital expenditures as ofJune 30, 2022 ; however, we anticipate continued elevated capital expenditures in excess of historical trends through as a result of the Merger, which included acquisition of a software development team and various new content management and advertising technology platforms. 40 Financing Activities
Net cash provided by financing activities during the six months endedJune 30, 2022 was$19,566 compared to$1,745 for the same period in 2021. The increase is the result of the Company's completion of the Equity Financing and the Debt Financing (each as described in Note 1 Nature of Organization and Operations to the accompanying Condensed Consolidated Financial Statements) in the period to facilitate the Merger, which provided net cash of$10,109 and$9,868 , respectively. Contractual Obligations
We have no material commitments for capital expenditures, and we do not anticipate any significant capital expenditures for the remainder of 2022.
Off-Balance Sheet Arrangements
During the three months ended
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