CREATIVE REALITIES, INC. The following discussion contains various forward-looking statements within the meaning of Section 21E of the Exchange Act of 1934, as amended. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statements 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 and Form 10-Q for the quarter endedMarch 31, 2021 , as filed with theSecurities and Exchange Commission onMarch 10, 2021 andMay 17, 2021 , respectively. 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 this report. 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 a variety of strategic 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 primarily 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;
? 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;
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? 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 have experienced an intense curtail in current customer demand, our long-term outlook for the digital signage industry remains strong. We are seeing the digital signage industry experiencing continued consolidation, and believe that those companies able to scale and enhance profitability will emerge as the enterprise-level providers within our industry after the COVID-19 pandemic
and consolidations. 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
semiconductor chip shortages in the industry, such suppliers expect delays and
potentially increased costs for the Company to obtain digital displays necessary
to fulfill 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 by the end
of the calendar year, the Company is unable to confirm 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.
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Safe Space Solutions
On April 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 and six months ended June 30, 2021 , the Company
generated revenue of $419 and $1,438 , respectively, from our Safe Space
Solutions products and services (inclusive of the portion of revenue recognized
during the three and six months ended June 30, 2021 related to annual contracts
sold in prior periods). During the three and six months ended June 30, 2020 , the
Company generated revenue of $529 and $529 , respectively, from of our Safe Space
Solutions products and services (inclusive of the portion of revenue recognized
during the three and six months ended June 30, 2020 related to annual contracts
sold in prior periods).
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.
Settlement of Seller Note
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. 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 primarily 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.
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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. Results of Operations
Note: All dollar amounts reported in Results of Operations are in thousands, except 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
2021 2020 %
Sales $ 3,277 $ 3,656 $ (379 ) -10 %
Cost of sales 1,402 1,839 (437 ) -24 %
Gross profit 1,875 1,817 58 3 %
Sales and marketing expenses 169 371 (202 ) -54 %Research and development expenses 58 245 (187 ) -76 % General and administrative expenses 1,666 1,960 (294 ) -15 % Bad debt expense 49 505 (456 ) -90 % Depreciation and amortization expense 344 380
(36 ) -9 %
Total operating expenses 2,286 3,461 (1,175 ) -34 %
Operating (loss) (411 ) (1,644 ) 1,233 -75 %
Other income/(expenses):
Interest expense (182 ) (260 ) 78 -30 %Change in fair value of Convertible Loan - (551 )
551 -100 %
Gain on settlement of debt 1,628 1 1,627 162,700 %
Other income/(expense) (3 ) (1 ) (2 ) 200 %
Total other income/(expense) 1,443 (811 ) 2,254 278 %Net income/(loss) before income taxes 1,032 (2,455 )
3,487 -142 % Provision from income taxes (7 ) (4 ) (3 ) 75 % Net income/(loss)$ 1,025 $ (2,459 ) 3,484 -142 % 25 Sales Sales decreased by$379 , or 10%, during the three months endedJune 30, 2021 as compared to the same period in 2020 primarily driven by a reduction of$305 in hardware sales resulting from limited supply chain availability of semiconductor chips delaying the delivery of digital displays and media players to the Company. The supply disruption for digital displays prevented the Company from delivery of hardware and execution of installation activities during the quarter. As ofJune 30, 2021 , the Company had customer purchase orders for equipment and installation activities in excess of$1,800 which were delayed as a result of product availability. The Company expects to experience continued disruptions and delays related to fulfillment of inventory purchases from vendors throughout the remainder of 2021, which may impact our results for the remainder of 2021. We expect a full recovery in the timely availability of equipment during the first half of 2022. During the three months endedJune 30, 2021 and 2020, of our Safe Space Solutions products and services (inclusive of the portion of revenue recognized during the three months endedJune 30, 2021 related to annual contracts sold in prior periods), were$419 and$529 , respectively. Gross Profit Gross profit increased$58 , or 3% during the three months endedJune 30, 2021 as compared to the same period in 2020 driven by the decrease in sales but offset by an increase in gross profit margin. Gross profit margin increased to 57.2% in 2021 from 49.7% during the same period in 2020. The increase in gross profit margin is the result of a decrease in hardware revenue as a percentage of total revenue, which generates lower gross profit than services revenue. High gross profit margin from services revenues were driven by headcount reductions in personnel servicing customers as a result of cost reductions executed throughout 2020.
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$202 , or 54%, in 2021 compared to 2020. The decrease was driven by$182 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the six months endedJune 30, 2021 . The remaining reduction was the 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 the COVID-19 pandemic. We anticipate our sales personnel will maintain a reduced level of travel costs as compared to 2019 during the extended COVID-19 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 generally include personnel and development tools costs associated with the continued development of the Company's content management systems and other related application development. Research and development decreased by$187 , or 76%, in 2021 compared to 2020. The decrease was driven by$147 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the three months endedJune 30, 2021 . The remaining reduction was the result of reduced personnel costs.
General and Administrative Expenses
Total general and administrative expenses decreased by$294 , or 15%, in 2021 compared to 2020. The decrease was driven by$508 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the six months endedJune 30, 2021 . Excluding the consideration of those tax credits recorded in the period, total general and administrative expenses increased$214 , or 11%, during the six months endedJune 30, 2021 as compared to the same period in 2020 driven primarily by an increase of$237 in non-cash stock compensation expenses from employee stock option awards with time and performance-based vesting. 26 Bad Debt Expenses related to the Company's allowance for bad debts decreased by$456 , or 90%, in 2021 compared to 2020. The 2020 increase was the result of recording a reserve of$502 related to a customer bankruptcy filing during the three months endedJune 30, 2020 . The Company ultimately recovered$555 from this customer during 2021.
Depreciation and Amortization Expenses
Depreciation and amortization expenses decreased by
Interest Expense; Change in fair value of Convertible Loan
See Note 8 Loans Payable to the Condensed Consolidated Financial Statements for a discussion of the Company's debt and related interest expense obligations.
As of
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
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
2021 2020 %
Sales $ 8,281 $ 7,360 $ 921 13 %
Cost of sales 4,172 3,936 236 6 %
Gross profit 4,109 3,424 685 20 %
Sales and marketing expenses 504 798 (294 ) -37 %Research and development expenses 229 558 (329 ) -59 % General and administrative expenses 3,775 4,473 (698 ) -16 % Bad debt expense/(recovery) (463 ) 848 (1,311 ) -155 % Depreciation and amortization expense 688 746
(58 ) -8 % Goodwill impairment - 10,646 (10,646 ) -100 % Total operating expenses 4,733 18,069 (13,336 ) -74 % Operating (loss) (624 ) (14,645 ) 14,021 -96 % Other income/(expenses): Interest expense (431 ) (487 ) 56 -11 %
Change in fair value of Convertible Loan 166 (702 )
868 -124 % Gain on settlement of debt 3,193 41 3,152 7,688 % Other income/(expense) 1 - 1 100 % Total other income/(expense) 2,929 (1,148 ) 4,077 -355 % Net income/(loss) before income taxes 2,305 (15,793 ) 18,098 -115 % Provision from income taxes (8 ) 151 (159 ) -105 % Net income/(loss)$ 2,297 $ (15,642 ) 17,939 -115 % 27 Sales Sales increased by$921 , or 13%, in the six months endedJune 30, 2021 as compared to the same period in 2020 driven by sales of$1,438 during the six months endedJune 30, 2021 of our Safe Space Solutions products and services (inclusive of the portion of revenue recognized during the six months endedJune 30, 2021 related to annual contracts sold in prior periods), which launched inApril 2020 . Safe Space Solutions products had no sales in the three months endedMarch 31, 2020 and$529 during the three months endedJune 30, 2020 . The increase in sales during the period were constrained from further growth due to limited supply chain availability of semiconductor chips delaying the delivery of digital displays and media players to the Company. The supply disruption for digital displays prevented the Company from delivery of hardware and execution of installation activities during the quarter. As ofJune 30, 2021 , the Company had customer purchase orders for equipment and installation activities in excess of$1,800 which were delayed as a result of product availability. The Company expects to experience continued disruptions and delays related to fulfillment of inventory purchases from vendors throughout the remainder of 2021, which may impact our results for the remainder of 2021. We expect a full recovery in the timely availability of equipment during the first half of 2022. Gross Profit Gross profit increased$685 , or 20%, during the six months endedJune 30, 2021 as compared to the same period in 2020, driven by both an increase in sales, which contributed$428 of incremental gross profit on a constant gross profit margin basis, and an increase in gross profit margin, which contributed$257 of incremental gross profit. Gross profit margin increased to 49.6% from 46.5% driven primarily by increased hardware margins of 32.3% in the six months endedJune 30, 2021 as compared to 23.2% for the comparable period in 2020. The increases in hardware margin in the current year were driven by increased purchasing power with distributors as our purchases of digital displays have increased, driving a total increase in hardware revenue of$1,144 , or 39%.
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$294 , or 37%, in 2021 compared to 2020. The decrease was driven by$182 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the six months endedJune 30, 2021 . The remaining reduction was the 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 the COVID-19 pandemic. We anticipate our sales personnel will maintain a reduced level of travel costs as compared to 2019 during the extended COVID-19 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 generally include personnel and development tools costs associated with the continued development of the Company's content management systems and other related application development. Research and development decreased by$329 , or 59%, in 2021 compared to 2020. The decrease was driven by$147 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the six months endedJune 30, 2021 . The remaining reduction was the result of reduced personnel costs following the reduction of personnel and salary reductions implemented throughout 2020. 28
General and Administrative Expenses
Total general and administrative expenses decreased by$698 , or 16%, in 2021 compared to 2020. The decrease was driven by$508 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the six months endedJune 30, 2021 . Excluding the consideration of those Employee Retention Credits recorded in the period, total general and administrative expenses decreased$190 , or 4%, during the six months endedJune 30, 2021 as compared to the same period in 2020 because of reductions of (a)$335 in personnel costs, including salaries, benefits, and travel-related expenses, (b)$209 in rent expense following closure, downsizing, or restructuring of four leases during 2020, and (c) reductions in legal expenses of$152 following settlement of the Amended and Restated Seller Note, partially offset by an increase in stock compensation amortization expense of$726 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$1,311 , or 155%, for the six months endedJune 30, 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 .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.
Depreciation and Amortization Expenses
Depreciation and amortization expenses decreased by$58 , or 8%, in 2021 compared to 2020. This decrease was the result of a trade name asset becoming fully amortized during 2020, while no amortization was recorded during the six months endedJune 30, 2021 .
Interest Expense; Change in fair value of Convertible Loan
See Note 8 Loans Payable to the Condensed Consolidated Financial Statements for a discussion of the Company's debt and related interest expense obligations.
As of
Gain on Settlement of Debt 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 three months endedMarch 31, 2021 . 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 . 29
Summary Unaudited Quarterly Financial Information
The following represents unaudited financial information derived from the Company's quarterly financial statements:
Quarters Ended
June 30, March 31, December 31, September 30, June 30,
Quarters ended 2021 2021 2020 2020 2020
Net sales $ 3,277 $ 5,004 $ 4,990 $ 5,107 $ 3,656
Cost of sales 1,402 2,770 2,737 2,663 1,839
Gross profit 1,875 2,234 2,253 2,444 1,817
Operating expenses, excluding
depreciation and amortization 1,942 2,103 2,886 2,489 3,081
Depreciation/amortization 344 344 351 377 380
Operating income (loss) (411 ) (213 ) (1,002 ) (422 ) (1,644 )
Other expenses/(income) 1,443 (1,486 ) (379 ) 164 811
Income tax expense/(benefit) 7 1 (6 ) (1 ) 4 Net income (loss) 1,025$ 1,272 $ (617 ) $ (585 ) (2,459 )
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 the Company in evaluating our results of
operations on an ongoing basis. We believe that earnings before interest, taxes,
depreciation, and amortization ("EBITDA") is a performance measure and not a
liquidity measure, and therefore a reconciliation between net loss/income and
EBITDA and Adjusted EBITDA, which is calculated by removing the impact of
non-recurring and primarily non-cash transactions from EBITDA, has been
provided. Neither EBITDA nor Adjusted EBITDA should 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, neither EBITDA nor Adjusted EBITDA takes 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 2021 2021 2020 2020 2020
GAAP net income (loss) $ 1,025 $ 1,272 $ (617 ) $ (585 ) $ (2,459 )
Interest expense:Amortization of debt discount 29 72
85 85 84 Other interest, net 153 177 186 179 176 Depreciation/amortization: Amortization of intangible assets 139 140 139 161 158 Amortization of finance lease assets - 4 3 5 5 Amortization of share-based awards 329 512 250 248 100 Depreciation of property, equipment & software 205 200 209 212 216
Income tax expense/(benefit) 7 1 (6 ) (1 ) 4 EBITDA$ 1,887 2,378 249 $ 304$ (1,716 )
Adjustments
Change in fair value of Special Loan - (166 ) (609 ) - 551 Gain on settlement of obligations (1,628 ) (1,565 ) (54 ) (114 ) (1 ) Loss on disposal of assets - - - 13 - Loss on lease termination - - 18 - - Stock-based compensation - Director grants 27 27 27 25 19 Adjusted EBITDA$ 286 674 (369 ) $ 228$ (1,147 )
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 flows used in operating activities were$363 and$2,915 for the six months endedJune 30, 2021 2020, respectively. We produced net income during the six months endedJune 30, 2021 of$2,297 , which was primarily reduced via addback of the gain on forgiveness of the Company's PPP Loan in the amount of$1,552 and gain on the settlement of obligations in the amount of$1,624 , representing$1,538 related to the Seller Note and$86 of related interest thereon, during the three months endedJune 30, 2021 . 30 Investing Activities
Net cash used in investing activities during the six months endedJune 30, 2021 was$204 compared to$408 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 ofJune 30, 2021 ; however, we anticipate an increase in our capital expenditures of approximately$900 in excess of our historical trends throughout the balance of 2021 to maintain and enhance the software platform for our customers and to enhance revenue generating activities through the platform. Financing Activities
Net cash provided by financing activities during the six months ended June, 2021 and 2020 were$1,745 and$1,659 , respectively. 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 . These proceeds were partially offset by the settlement payment of$100 on the Seller Note. The 2020 proceeds were driven by the Company's receipt of a$1,552 Paycheck Protection Program loan and the exercise of 27,600 warrants during the three months endedJune 30, 2020 . OnMarch 7, 2021 , the Company refinanced its current debt facilities withSlipstream Communications, LLC ("Slipstream"), pursuant to an Amended and Restated Credit and Security Agreement (the "Credit Agreement"). The debt facilities continue to be fully secured by all assets of the Company. The maturity date ("Maturity Date") on the outstanding debt and new debt was extended toMarch 31, 2023 . The Credit Agreement (i) provides$1,000 of availability under a line of credit (the "Line of Credit"), (ii) consolidates our existing term and revolving line of credit facilities into a new term loan (the "New Term Loan") having an aggregate principal balance of approximately$4,550 (including a 3.0% issuance fee capitalized into the principal balance), (iii) increases the outstanding special convertible term loan (the "Convertible Loan") to approximately$2,280 (including a 3.0% issuance fee capitalized into the principal balance), and (iv) extinguishes the outstanding obligations owed with respect to a$264 existing disbursed escrow loan in exchange for shares of the Company's common stock (the "Disbursed Escrow Conversion Shares"), valued at$2.718 per share (the trailing 10-day VWAP as reported on theNasdaq Capital Market as of the date of execution of the Credit Agreement). The Line of Credit and Convertible Loan accrue interest at 10% per year, and the New Term Loan accrues interest at 8% per year. The New Term Loan requires no principal payments until the Maturity Date, and interest payments are payable on the first day of each month until the Maturity Date. All interest payments owed prior toOctober 1, 2021 are payable as PIK payments, or increases to the principal balance of the New Term Loan only. The Line of Credit and Convertible Loan require payments of accrued interest payable on the first day of each month throughApril 1, 2022 . All such interest payments made prior toOctober 1, 2021 are payable as PIK payments, or increases to the principal balances under the Line of Credit and Convertible Loan only. No principal payments are owed under the Line of Credit or Convertible Loan untilApril 1, 2022 , at which time all principal and interest on each of the Line of Credit and Convertible Loan will be paid in monthly installments until the Maturity Date to fully amortize outstanding principal by the Maturity Date. All payments of interest (other than PIK payments) and principal on the Line of Credit and Convertible Loan may be paid, in the Company's sole discretion, in shares of the Company's Common Stock (the "Payment Shares," and together with the Disbursed Escrow Conversion Shares, the "Shares"). The Payment Shares will be valued on a per-Share basis at 70% of the VWAP of the Company's shares of common stock as reported on the Nasdaq Capital Market for the 10 trading days immediately prior to the date such payment is due; provided that the Payment Shares shall not be valued below$0.50 per Share (the "Share Price"). 31 The Credit Agreement limits the Company's ability to issue Shares as follows (the "Exchange Limitations"): (1) The total number of Shares that may be issued under the Credit Agreement will be limited to 19.99% of the Company's outstanding shares of common stock on the date the Credit Agreement is signed (the "Exchange Cap"), unless stockholder approval is obtained to issue shares in excess of the Exchange Cap; (2) if Slipstream and its affiliates (the "Slipstream Group ") beneficially own the largest ownership position of shares of Company common stock immediately prior to the proposed issuance of Payment Shares and such shares are less than 19.99% of the then-issued and outstanding shares of Company common stock, the issuance of such Payment Shares will not cause theSlipstream Group to beneficially own in excess of 19.99% of the issued and outstanding shares of Company common stock after such issuance unless stockholder approval is obtained for ownership in excess of 19.99%; and (3) if theSlipstream Group does not beneficially own the largest ownership position of shares of Company common stock immediately prior to the proposed issuance of Payment Shares, the Company may not issue Payment Shares to the extent that such issuance would result inSlipstream Group beneficially owning more than 19.99% of the then issued and outstanding shares of Company common stock unless (A) such ownership would not be the largest ownership position in the Company, or (B) stockholder approval is obtained for ownership in excess of 19.99%. OnMay 17, 2021 , the Company's stockholders approved the issuance of Shares in excess of the Exchange Limitations.
Off-Balance Sheet Arrangements
During the three and six months ended
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