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, 2020 as filed with theSecurities and Exchange Commission onMarch 10, 2021 . 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. OverviewCreative Realities, Inc. is aMinnesota corporation that provides innovative digital marketing technology solutions to a broad range of companies, individual brands, enterprises, and organizations throughoutthe United States and in certain international markets. We have expertise in a broad range of existing and emerging digital marketing technologies across approximately fifteen (15) vertical markets, as well as the related media management and distribution software platforms and networks, device and content management, product management, customized software service layers, systems, experiences, workflows, and integrated solutions. Our technology and solutions include: digital merchandising systems and omni-channel customer engagement systems; content creation, production and scheduling programs and systems; a comprehensive series of recurring maintenance, support, and field service offerings; interactive digital shopping assistants, advisors and kiosks; and, other interactive marketing technologies such as mobile, social media, point-of-sale transactions, beaconing and web-based media that enable our customers to transform how they engage with consumers. Our main operations are conducted directly throughCreative Realities, Inc. , and under our wholly owned subsidiariesAllure Global Solutions, Inc. , aGeorgia corporation ("Allure"), andCreative Realities Canada, Inc. , a Canadian corporation. Our other wholly owned subsidiaries,Creative Realities, LLC , aDelaware limited liability company, andConeXus World Global, LLC , aKentucky limited liability company, are effectively dormant..
We generate revenue in our business by:
? consulting with our customers to determine the technologies and
solutions required to achieve their specific goals, strategies and
objectives;
? designing our customers' digital marketing experiences, content and
interfaces;
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? engineering the systems architecture delivering the digital marketing
experiences we design - both software and hardware - andintegrating
those systems into a customized, reliable and effective digital
marketing experience;
? managing the efficient, timely and cost-effective deployment of our
digital marketing technology solutions for our customers;
? delivering and updating the content of our digital marketing technology
solutions using a suite of advanced media, content and network
management software products; and
? maintaining our customers' digital marketing technology solutions by:
providing content production and related services; creating additional
software-based features and functionality; hosting thesolutions;
monitoring solution service levels; and responding to and/or managing
remote or onsite field service maintenance, troubleshooting and support
calls.
These activities generate revenue through: bundled-solution sales; consulting
services, experience design, content development and production, software
development, engineering, implementation, and field services; software license
fees; and maintenance and support services related to our software, managedsystems and solutions. Recent Developments COVID-19 Pandemic
InJanuary 2020 , an outbreak of a new strain of coronavirus, COVID-19, was identified inWuhan, China . Through the first quarter of 2020, the disease became widespread around the world, and onMarch 11, 2020 , theWorld Health Organization declared a pandemic. Thereafter, state and local authorities inthe United States and worldwide have forced many businesses to temporarily reduce or cease operations to slow the spread of the COVID-19 pandemic. As a result of the COVID-19 pandemic, we have experienced rapid and immediate deterioration in our business in each of our key vertical markets. The elective and forced closures of, and implementation of social distancing policies on, businesses acrossthe United States has resulted in materially reduced demand for our services by our customers, as our customers purchase our products and services to engage with their end customers in a physical space through digital technology, particularly in our theater, sports arena and large entertainment markets. The reduced demand has resulted in customer orders being delayed. These conditions have resulted in downward revisions of our internal forecasts on current and future projected earnings and cash flows, resulting in a non-cash impairment loss of$10,646 recorded during the first quarter of 2020 and reduced liquidity as described below. While we are experiencing an intense curtail in current customer demand, our long-term outlook for the digital signage industry remains strong. We believe that the digital signage industry will experience rapid consolidation, adding scale and enhancing profitability to those companies that emerge as the enterprise-level providers within our industry after the COVID-19 pandemic and consolidations. We believe that one byproduct of the COVID-19 pandemic may be the acceleration of industry consolidation as smaller providers may be unwilling or unable to continue business over the course of 2021. Given the uncertainty around the extent and timing of the potential future spread or mitigation of the COVID-19 pandemic and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results of operations, cash flows, or financial condition at this time. Semiconductor Chip Shortage
The Company's suppliers of digital displays, the primary hardware component in the Company's digital systems, have informed the Company that, due to component shortages in the industry, such suppliers expect delays and potentially increased costs for the Company to obtain digital displays necessary to fulfil and install the Company's digital solutions. Historically, such digital displays have been readily available for purchase and delivery, to be purchased by the Company from distributors from such distributor's existing inventory. Such delays will likely result in a longer sales cycles and prolonged periods in which the Company will be able to recognize revenues compared to historical time periods. The increased costs for such displays may also reduce the margins in which the Company has received on account of the purchase and installation of such displays as part the Company's digital signage product offerings. Although we believe that such shortage will be alleviated in the future, the Company is not aware of how long such delays may exist, the effect such delays and increased demand may have on the cost to procure such digital screens, or the adverse impacts on our financial results. Safe Space Solutions OnApril 28, 2020 , we announced the joint launch of an AI-integrated non-contact temperature inspection kiosk known as the Thermal Mirror with our partner,InReality, LLC ("InReality"), for use by businesses as COVID-19 related workplace restrictions are reduced or eliminated. Although we have experience in providing customers digital integration solutions, our launch of the Thermal Mirror involves the development, marketing and sale of a new product to new customers involving a joint effort with InReality. The product also uses hardware and technologies that have not been used with our other customers. Throughout the course of the remainder of 2020 and thus far through 2021, the Company and InReality have continued to develop incremental use cases and have launched a suite of Safe Space Solutions products addressing this market, each of which operate consistently with our primary business model in that they represent a sale of hardware and a SaaS-based subscription license services contract. During the three months endedMarch 31, 2021 , the Company generated revenue of$1,019 from of our Safe Space Solutions products and services (inclusive of the portion of revenue recognized during the three months endedMarch 31, 2021 related to annual contracts sold in prior periods). There was no revenue related to these products and services during the three months endedMarch 31, 2020 . 22 Although these products and our launch have been successful, the Company retains some level of risk related to the ultimate recovery of our initial investment into the inventory acquired to launch and support these products. Registered Direct Offering OnFebruary 18, 2021 , the Company entered into a securities purchase agreement with an institutional investor which provided for the issuance and sale by the Company of 800,000 shares of the Company's common stock, in a registered direct offering at a purchase price of$2.50 per share, for gross proceeds of$2,000 . See Note 1 Nature of Organization to the Condensed Consolidated Financial Statements for additional details with respect to the transaction and related accounting.
Amended and Restated Credit Agreement
OnMarch 7, 2021 , the Company refinanced their current debt facilities with Slipstream, pursuant to the Credit Agreement. See Note 8 Loans Payable to the Condensed Consolidated Financial Statements for additional details with respect to the transaction and related accounting. Our Sources of Revenue
We generate revenue through digital marketing solution sales, which include system hardware, professional and implementation services, software design and development, software licensing, deployment, and maintenance and support services.
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 generatorswho 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 individualswho 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.
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 filing. 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.
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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 March 31, Change
2021 2020 Dollars %
Sales $ 5,004 $ 3,704 $ 1,300 35 %
Cost of sales 2,770 2,097 673 32 %
Gross profit 2,234 1,607 627 39 %
Sales and marketing expenses 335 427 (92 ) -22 %Research and development expenses 171 313 (142 ) -45 % General and administrative expenses 2,109 2,512 (403 ) -16 % Bad debt (recovery)/expense (512 ) 344 (856 ) -249 % Depreciation and amortization expense 344 366
(22 ) -6 % Loss on goodwill impairment - 10,646 (10,646 ) 100 % Total operating expenses 2,447 14,608 (12,161 ) -83 % Operating income/(loss) (213 ) (13,001 ) 12,788 -98 % Other income/(expenses): Interest expense (249 ) (227 ) (22 ) 10 %
Change in fair value of Convertible Loan 166 (151 ) 317 -210 % Gain on settlement of obligations 1,565 40
1,525 3813 % Other income/(expense) 4 1 3 300 % Total other income/(expense) 1,486 (337 ) 1,823 -541 %
Net income/(loss) before income taxes 1,273 (13,338 ) 14,611 -110 % Income tax (expense)/benefit (1 ) 155
(156 ) -101 % Net income/(loss)$ 1,272 $ (13,183 ) $ 14,455 -110 % Sales
Sales increased by$1,300 , or 35%, in the three months endedMarch 31, 2021 as compared to the same period in 2020, driven by sales of$1,019 during the three months endedMarch 31, 2021 of our Safe Space Solutions products and services (inclusive of the portion of revenue recognized during the three months endedMarch 31, 2021 related to annual contracts sold in prior periods), which launched inApril 2020 . There were no sales of Safe Space Solutions in the corresponding prior period. During the three months endedMarch 31, 2021 , the expansion of a relationship with a pre-existing customer added approximately$1,162 as compared to the same period in 2020, partially offset by lower installation revenues in the period due to continued closures in certain market verticals, including movie theaters and sports venues. Gross Profit Gross profit increased$627 , or 39%, from$1,607 during the three months endedMarch 31, 2020 to$2,234 for the three months endedMarch 31, 2021 . Of the increase,$564 , or 90% of the increase, was directly attributable to the increase in sales period over period, with the remaining increase the result of gross margin percent period-over-period to 44.6% from 43.4% as a result of increase in recurring revenues as a percent of total revenue. 24
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 decreased by$92 , or 22%, in 2021 compared to 2020. The decrease was a result of reduced personnel costs, combined with reduced spend on trade show activity and related travel costs following the cancellation of several key industry events as a result of COVID-19. We anticipate our sales personnel will maintain a reduced level of travel costs as compared to 2019 during the extended pandemic period and utilize virtual meeting technology more commonly moving forward, but that these costs will increase as compared to 2020 during the second half of 2021.
Research and Development Expenses
Research and development expenses decreased by$142 , or 45%, in 2021 compared to 2020 as the result of a reduction in personnel costs during the period and a reallocation of certain internal resources away from research and development activities into revenue generating services and support activities.
General and Administrative Expenses
Total general and administrative expenses decreased by$403 , or 16%, exclusive of the effects of bad debt expenses during the three months endedMarch 31, 2021 as compared to the same period in the prior year because of reductions of (a)$552 in personnel costs, including salaries, benefits, and travel-related expenses, and (b)$117 in rent expense following closure, downsizing, or restructuring of four leases during 2020, partially offset by an increase in stock compensation amortization expense of$233 related to incremental employee and directors' awards granted during 2020 which are being amortized over a nineteen (19) month remaining vesting period based on the grant date fair value calculated using the Black Scholes method. Personnel costs were reduced following completion of a reduction-in-force and salary reductions for remaining personnel inMarch 2020 . Bad Debt Expenses related to the Company's allowance for bad debts decreased by$856 , or 249%, in 2021 compared to 2020. This decrease was primarily driven by a cash recovery of$555 related to a customer bankruptcy for which the Company previously recorded a reserve during the three months endedJune 30, 2020 .
Depreciation and Amortization Expenses
Depreciation and amortization expenses decreased by
Goodwill impairment See Note 7 Intangible Assets, Including Goodwill to the Condensed Consolidated Financial Statements for a discussion of the Company's interim impairment test and the non-cash impairment charge recorded. Interest Expense
See Note 8 Loans Payable to the Condensed Consolidated Financial Statements for a discussion of the Company's debt and related interest expense obligations.
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Change in fair value of convertible loans
As of
Summary Unaudited Quarterly Financial Information
The following represents unaudited financial information derived from the Company's quarterly financial statements:
Quarters Ended
March 31, December 31, September 30, June 30, March 31,
Quarters ended 2021 2020 2020 2020 2020
Net sales $ 5,004 $ 4,990 $ 5,107 $ 3,656 $ 3,704
Cost of sales 2,770 2,737 2,663 1,839 2,097
Gross profit 2,234 2,253 2,444 1,817 1,607
Operating expenses, excluding
depreciation and amortization 2,103 2,886 2,489 3,081 3,596
Goodwill impairment - - - - 10,646
Loss on lease termination - 18 - - -
Depreciation/amortization 344 351 377 380 366
Operating income (loss) (213 ) (1,002 ) (422 ) (1,644 ) (13,001 )
Other expenses/(income) (1,486 ) (379 ) 164 811 337
Income tax expense/(benefit) 1 (6 )
(1 ) 4 (155 )
Net income (loss) 1,272 $ (617 ) $ (585 ) (2,459 ) (13,183 )
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.
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Quarters Ended
March 31 December 31, September 30, June 30 March 31,
Quarters ended 2021 2020 2020 2020 2020
GAAP net income (loss) $ 1,272 $ (617 ) $ (585 ) $ (2,459 ) $ (13,183 )
Interest expense:Amortization of debt discount 72 85 85 84 85 Other interest, net 177 186 179 176 142
Depreciation/amortization:
Amortization of intangible assets 140 139 161 158 159 Amortization of finance lease assets 4 3 5 5 7 Amortization of share-based awards 512 250 248 100 19 Depreciation of property, equipment & software 200 209 212 216 200 Income tax expense/(benefit) 1 (6 ) (1 ) 4 (155 ) EBITDA$ 2,378 249 $ 304$ (1,716 ) $ (12,726 ) Adjustments Change in fair value of Special Loan (166 ) (609 ) - 551 151 Gain on settlement of obligations (1,565 ) (54 )
(114 ) (1 ) (40 )
Loss on disposal of assets - - 13 - -
Loss on lease termination - 18 - - -
Loss on goodwill impairment - - - - 10,646
Stock-based compensation -
Director grants 27 27 25 19 31
Adjusted EBITDA $ 674 (369 ) $ 228 $ (1,147 ) $ (1,939 ) Liquidity and Capital Resources
We produced net income for the three months endedMarch 31, 2021 but incurred a net loss for the year endedDecember 31, 2020 and have negative cash flows from operating activities for both periods. As ofMarch 31, 2021 , we had cash and cash equivalents of$3,535 and a working capital surplus of$2,123 . OnJanuary 11, 2021 ,Creative Realities, Inc. 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 three months endedMarch 31, 2021 . OnFebruary 18, 2021 , the Company entered into a securities purchase agreement with an institutional investor which provided for the issuance and sale by the Company of 800,000 shares of the Company's common stock (the "Shares"), in a registered direct offering (the "Offering") at a purchase price of$2.50 per Share, for gross proceeds of$2,000 . The net proceeds from the Offering after paying estimated offering expenses were approximately$1,849 , which the Company intends to use for general corporate purposes. The closing of the Offering occurred onFebruary 22, 2021 . OnMarch 7, 2021 , the Company and Slipstream entered into an agreement to refinance the Company's Loan and Security Agreement, including (1) the extension of all maturity dates therein toMarch 31, 2023 , (2) the conversion of the Disbursed Escrow Promissory Note into equity, (3) access to an additional$1,000 via a multi-advance line of credit facility, and (4) the removal of the three times liquidation preference with respect to the Company's Secured Convertible Special Loan Promissory Note. Management believes that, based on (i) the forgiveness of our PPP Loan, (ii) the execution of a registered direct offering and remaining availability for incremental offerings under our previously registered Form S-3, (iii) the refinancing of our debt, including extension of the maturity date on our term and convertible loans, as well as access to incremental borrowings under the new multi-advance line of credit, and (iv) our operational forecast through 2022, we can continue as a going concern through at leastJune 30, 2022 . However, given our history of net losses and cash used in operating activities, we obtained a continued support letter from Slipstream throughJune 30, 2022 . We can provide no assurance that our ongoing operational efforts will be successful which could have a material adverse effect on our results of operations and cash flows.
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See Note 8 Loans Payable to the Consolidated Financial Statements for an
additional discussion of the Company's debt obligations and further discussion
of the Company's refinancing activities during the three months ended March31, 2021.
The Company's suppliers of digital screens have informed the Company that, due to component shortages in the industry, such suppliers expect delays and increased costs for the Company to obtain digital screens necessary to fulfil and install the Company's digital solutions. Historically, such digital screens have been readily available for purchase and delivery, to be purchased by the Company from distributors from such distributor's existing inventory. Such delays will likely result in a longer sales cycles and prolonged periods in which the Company will be able to recognize revenues compared to historical time periods. The increased costs for such screens may also reduce the margins in which the Company has received on account of the purchase and installation of such screens as part the Company's digital signage product offerings. Although we believe that such shortage will be alleviated in the future, the Company is not aware of how long such delays may exist, the effect such delays and increased demand may have on the cost to procure such digital screens, or the adverse impacts on our financial results. Operating Activities The cash flows used in operating activities were$21 and$117 for the period endedMarch 31, 2021 andMarch 31, 2020 , respectively. We produced net income of income of$1,272 which was offset via addback of the gain on forgiveness of the Company's PPP Loan in the amount of$1,552 . Cash flows from operating activities were driven by increases of$661 and$225 in deferred revenues and inventories, respectively, offset by an increase of$1,491 in accounts receivable due in part to the settlement of a customer bankruptcy during the reporting period. Investing Activities Net cash used in investing activities during the three months endedMarch 31, 2021 was$115 compared to$268 during the same period in 2020. The use of cash in both periods represents payments made for capital assets, primarily related to the capitalization of both internal and external software development. We currently do not have any material commitments for capital expenditures as ofMarch 31, 2021 , nor do we anticipate capital expenditures in excess of our historical trends throughout the balance of the year. Financing Activities Net cash provided by financing activities during the three months endedMarch 31, 2021 was$1,845 compared to net cash used in financing activities of$8 for the same period in 2020. OnFebruary 18, 2021 , the Company entered into a securities purchase agreement with an institutional investor for the issuance and sale of the Company's common stock. The net proceeds from the Offering after paying estimated offering expenses were approximately$1,849 . Contractual Obligations
We have no material commitments for capital expenditures, and we do not anticipate any significant capital expenditures for the remainder of 2021.
Off-Balance Sheet Arrangements
During the three months ended
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