CREATIVE REALITIES, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)
(All currencies are rounded to the nearest thousand, except per share and per share amounts.)
The following discussion should be read in conjunction with the financial statements and related for the years ended
December 31, 2021and 2020, which are included elsewhere in this Annual Report on Form 10-K. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other factors. These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue," and similar expressions or variations. Actual results could differ materially because of the factors discussed in "Risk Factors" elsewhere in this Annual Report on Form 10-K, and other factors that we have not identified. Overview Creative Realities, Inc.("Creative Realities", or the "Company") transforms environments through digital solutions by providing innovative digital signage solutions for key market segments and use cases, including: ? Retail
? Entertainment and sports venues
? Restaurants, including quick-service restaurants (“QSR”)
? Convenience Stores ? Financial Services ? Automotive
? Medical and healthcare facilities
? Mixed Use Developments
? Corporate communications, employee experience
? Digital Out-of-Home (DOOH) Ad Networks
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
? Improved productivity and employee satisfaction
? Increased revenue and profitability
? Improved guest experience
? Increased customer/guest engagement
? Improved patient outcomes 25 Through a combination of organically grown platforms and a series of strategic acquisitions, including our recent acquisition of
Reflect Systems, Inc.in February 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 vendors, our customers appreciate the following competitive advantages:
? Scope of Solutions – Creative Realities is one of the few
companies in the industry capable of providing the full
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
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
technicians available to service clients quickly nationwide. We
meet tight schedules even in exceptionally large deployments and
ensure quality and consistency.
? Internal Creative Resources – We help our clients reuse existing content
for digital signage experiences or the creation of new content, an activity for which
the company has won several design awards in recent years. In each case,
our services can be essential in helping clients develop effective content
? 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-wide projects. It also gives us purchasing power to source
products and services for our customers, allowing us to provide cost
efficient, reliable and powerful solutions for small and medium-sized businesses
clients. ? Ad management platform - Our customers are increasingly interested in monetizing their digital signage networks through advertising content.
However, effectively planning advertising content in digital signage
playlists to achieve campaign goals can be difficult and laborious
to treat. AdLogic, our in-house independent content management platform,
automates this process, allowing network owners to generate more revenue with
? Media Sales – Few, if any, digital signage solution providers can offer
selling media as a service to their customers. We have in-house media sales expertise
to elevate conversations with interested customers to better understand
network monetization. We believe that this significant differentiation in sales
process provides an additional revenue stream to Creative Realities over
to our competitors.
? Market Sector Expertise – Creative Realities has in-house experts in key
market segments such as automotive, retail, fast food (QSR),
convenience stores and digital outdoor advertising (DOOH). Our expertise
in these business sectors enables our teams to make a significant contribution
conversations and propose tailor-made solutions with prospects and customers to
their unique business goals. These experts build relationships with industry
and create thought leadership that drives the flow of leads and new opportunities for
? Logistics – Implementing a large digital signage project can be a logistical
nightmare that can block an initiative even before it is deployed. 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
company IT services. Creative Realities helps simplify and enhance the ending
user support relying on our own
support is required, it can be sent from the NOC, leveraging our management
labor pool to resolve customer issues quickly and effectively.
? Integrations and app development – The future of digital signage is
not still images and videos on a screen. Interactive apps and
integrations with other data sources will dominate the future. social networks
media streams to enterprise 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 vendors sell a
media player or align with a single operating system. We use a
range of media players including Windows, Android and BrightSign to provide
customers the flexibility they need to select the right hardware for any
application knowing that the entire network can always be served by a single
signaling platform, reducing complexity and improving the productivity of their
The company’s three main sources of income are:
? Hardware sales from resale of digital signage hardware from original equipment
manufacturers such as Samsung and BrightSign.
? Services revenue from helping customers design, deploy, and manage their
signaling network, including:
o Hardware system design/engineering
o Hardware installation o Content development o Content scheduling
o Post-deployment network and field support
o Media sales, following our acquisition of Reflect
? Recurring subscription licenses and support revenue from our digital signage
software platforms, which are typically sold through a SaaS model. These include:
o ReflectView, the Company's core digital signage platform for most applications, scalable and cost effective from 10 to 100,000+ devices
o Reflect Xperience, a web interface that allows customers to give content
plan access to local users via the web or mobile devices, while
maintaining centralized programming control
o Reflect AdLogic, the company’s ad management platform for digital signage
networks, which presently delivers approximately 50 million ads daily
o Reflect Clarity, the company’s menu board solution, which has become a marketplace
leader for a range of restaurant and convenience store applications o Reflect Zero Touch, which allows customers to turn any screen into an
interactive experience by allowing customers to engage using their mobile device
o iShowroomProX, an omnichannel digital sales support platform for
original equipment manufacturers in the transport sector, which
integrates with dozens of key data services, including dealer inventory at
o OSx+, a digital VIN-level checklist used to facilitate tracking and delivery
new vehicles in the transport sector, bringing a measurable increase
customer satisfaction scores and connected vehicle registrations and subscriptions
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. 28 Recent Developments Acquisition of Reflect
November 12, 2021, the Company and Reflect Systems, Inc., or "Reflect," entered into an Agreement and Plan of Merger (as amended on February 8, 2022, the "Merger Agreement)" pursuant to which a direct, wholly owned subsidiary of Creative Realities, CRI Acquisition Corporation, or "Merger Sub," would merge with and into Reflect, with Reflect surviving as a wholly owned subsidiary of Creative Realities, , which transaction is referred to herein as the "Merger." On February 17, 2022, the parties consummated the Merger. Reflect provides digital signage solutions, including software, strategic and media services to a wide range of companies across the retail, financial, hospitality and entertainment, healthcare, and employee communications industries in North America. Reflect offers digital signage platforms, including ReflectView, a platform used by companies to power hundreds of thousands of active digital displays. Through its strategic services, Reflect assists its customers with designing, deploying and optimizing their digital signage networks, and through its media services, Reflect assists customers with monetizing their digital advertising networks. Subject to the terms and conditions of the Merger Agreement, upon the closing of the Merger, Reflect stockholders as of the effective time of the Merger collectively received from the Company, in the aggregate, the following Merger consideration: (i) $16,166payable in cash, (ii) 2,333,334 shares of common stock of Creative Realities (valued based on an issuance price of $2per share) (the "CREX Shares"), (iii) the Secured Promissory Note (as described below), and (iv) supplemental cash payments (the "Guaranteed Consideration"), if any, payable on or after the three-year anniversary of the effective time of the Merger (subject to the Extension Option described below, the "Guarantee Date"), in an amount by which the value of the CREX Shares on such anniversary is less than $6.40per share, or if certain customers of Reflect collectively achieve over 85,000 billable devices online at any time on or before December 31, 2022, is less than $7.20per share (such applicable amount, the "Guaranteed Price"), multiplied by the amount of CREX Shares held by the Reflect stockholders on the Guarantee Date (subject to the Extension Option described below), subject to the terms of the Merger Agreement. Creative Realities may exercise an extension option (the "Extension Option") to extend the Guarantee Date from the three-year anniversary of the Closing Date to six (6) months thereafter if (i) the Extension Threshold Price is greater than or equal to 70% of the Guaranteed Price described above, and (ii) Creative Realities provides written notice of its election to exercise the Extension Option at least ten (10) days prior to the three-year anniversary of the Closing. The "Extension Threshold Price" means the average closing price per share of Creative Realities Shares as reported on the Nasdaq Capital Market (or NYSE) in the fifteen (15) consecutive trading day period ending fifteen (15) days prior to the three-year anniversary of the Closing Date. If the Extension Threshold Price is less than 80% of the Guaranteed Price, then the Guaranteed Price will be increased by $1.00per share.
In connection with the Merger, the Company adopted a retention bonus plan and raised capital to, among other things, pay the cash portion of the Merger Consideration, all of which is summarized below.
Retention Bonus Plan On
February 17, 2022, in connection with the closing of the Merger, the Company adopted a Retention Bonus Plan, pursuant to which the Company is required to pay to key members of Reflect's management team an aggregate of $1,333in cash, which was paid 50% at the closing of the Merger (the "Closing"), and subject to continuous employment with Reflect or Creative Realities, 25% on the one-year anniversary of Closing and 25% on the two-year anniversary of the Closing. The future cash payments due on the one-year and two-year anniversaries of the Closing have been deposited into an escrow agreement. The Retention Bonus Plan also requires the Company to issue Common Stock having an aggregate value of $667to the plan participants as follows: 50% of the value of such shares were issued at the Closing, and subject to continuous employment with Reflect or Creative Realities, 25% of the value of such shares will be issued on the one-year anniversary of Closing and the remaining 25% of the value of such shares will be issued on the two-year anniversary of the Closing. The shares issued on the Closing were valued at $2.00per share, and the shares to be issued after the Closing will be determined based on dividing the value of shares issuable on such date divided by the trailing 10-day volume weighed average price (VWAP) of the shares as of such date as reported on the Nasdaq Capital Market. Upon the resignation of a participant's employment for "good reason," or termination of the employment of a participant without "cause," each as defined in the Retention Bonus Plan, the participant will be fully vested and will receive all cash and shares allocated to such participant under the Retention Bonus Plan. Any amounts unpaid by reason of a lapse in continuous employment or otherwise will be reallocated among the remaining Retention Bonus Plan participants. 29 Equity Financing On February 3, 2022, the Company entered into a securities purchase agreement (the "Securities Purchase Agreement") with a purchaser (the "Purchaser"), pursuant to which the Company agreed to issue and sell to the Purchaser, in a private placement priced at-the-market under Nasdaq rules, (i) 1,315,000 shares (the "Shares") of the Company's common stock, par value $0.01per share (the "Common Stock") and accompanying warrants to purchase an aggregate of 1,315,000 shares of Common Stock, and (ii) pre-funded warrants to purchase up to an aggregate of 5,851,505 shares of Common Stock (the "Pre-Funded Warrants") and accompanying warrants to purchase an aggregate of 5,851,505 shares of Common Stock (collectively, the "Private Placement"). The accompanying warrants to purchase Common Stock are referred to herein collectively as the "Common Stock Warrants." Under the Securities Purchase Agreement, each Share and accompanying warrants to purchase Common Stock were sold together at a combined price of $1.535, and each Pre-Funded Warrant and accompanying warrants to purchase Common Stock were sold together at a combined price of $1.5349, for gross proceeds of approximately $11,000before deducting placement agent fees and estimated offering expenses payable by the Company. The net proceeds from the Private Placement were used to fund, in part, payment of the closing cash consideration in the Merger.
Each pre-funded warrant has an exercise price of
February 17, 2022, in connection with obtaining a waiver of certain restrictions in the Securities Purchase Agreement in order to consummate the financing contemplated by the Credit Agreement (defined below), the Company paid consideration to such investor in the form of a warrant (the "Purchaser Warrant") to purchase 1,400,000 shares of Company common stock. The number of shares of Company common stock subject to the Purchaser Warrant is equal to the waiver fee ( $175) divided by $0.125per share. The exercise price of the Purchaser Warrant is $1.41per share, and the Purchaser Warrant is not exercisable until August 17, 2022. The Purchaser Warrant expires five years
from the date of issuance. Debt Financing On
February 17, 2022, the Company and its subsidiaries (collectively, the "Borrowers") refinanced their current debt facilities with Slipstream, pursuant to a Second Amended and Restated Credit and Security Agreement (the "Credit Agreement"). The Borrowers include Reflect, which became a wholly owned subsidiary of the Company as a result of the closing of the Merger. The debt facilities continue to be fully secured by all assets of the Borrowers. The Company raised $10,000in gross proceeds, or $9,950in net proceeds, from entry into a new, 36-month senior secured term loan (the "Acquisition Loan") with Slipstream as part of the Credit Agreement, which matures on February 17, 2025(the "Maturity Date"). The Acquisition Loan has an interest rate of 8.0%, with 50.0% warrant coverage (or 2,500,000 warrants). On the first day of each month, commencing March 1, 2022through February 1, 2025, the Borrowers will make interest-only payments on the Acquisition Loan (estimated to be $67per monthly payment). No principal payments on the Acquisition Loan are payable until the Maturity Date. The Credit Agreement also provides that the Company's outstanding loans from Slipstream, consisting of its pre-existing $4,767senior secured term loan and $2,418secured convertible loan, with an aggregate of $7,185in outstanding principal and accrued and unpaid interest under such loans, were consolidated into a term loan (the "Consolidation Term Loan"). The Consolidation Term Loan has an interest rate of 10.0%, with 75.0% warrant coverage (or 2,694,495 warrants). On the first day of each month, commencing March 1, 2022through February 1, 2025, the Borrowers will make interest-only payments on the Consolidation Term Loan (estimated to be $60per monthly payment). Commencing on September 1, 2023, and on the first day of each month thereafter until the Maturity Date, the Borrowers will make a payment on the Consolidation Term Loan, in an equal monthly installment of principal sufficient to fully amortize the Consolidation Term Loan in eighteen equal installments (estimated to be $399per monthly installment).
As part of the Warrant Coverage of the Acquisition Loan and the Consolidation Term Loan, the Company issued to Slipstream a warrant to purchase an aggregate of 5,194,495 common shares of the Company (the “Warrant loan from the lender”). The lender has a term of five years, an initial strike price of
30 Secured Promissory Note On
February 17, 2022, pursuant to the terms of the Merger, the Company issued to RSI Exit Corporation("Stockholders' Representative"), the representative of Reflect stockholders, a $2,500Note and Security Agreement (the "Secured Promissory Note"). The Secured Promissory Note accrues interest at 0.59% (the applicable federal rate) and requires the Company and Reflect to pay equal monthly principal installments of $104on the fifteenth (15th) day of each month, commencing on March 17, 2022. Any remaining or unpaid principal shall be due and payable on February 15, 2023. All payments under the Secured Promissory Note will be paid to the escrow agent in the Merger Agreement to be placed into the escrow account to secure the Reflect stockholders' indemnification obligations until released on the one-year anniversary of the closing of the Merger, at which time any remaining proceeds not subject to a pending indemnification claim will be paid to the exchange agent for payment to the Reflect Stockholders. The obligations of the Company and Reflect set forth in the Secured Promissory Note are secured by a first-lien security interest in various contracts of Reflect, together with all accounts arising under such contracts, supporting obligations related to the accounts arising under such contracts, all related books and records, and products and proceeds of the foregoing. Slipstream subordinated its security interest in such collateral, and the recourse for any breach of the Secured Promissory Note by the Company or Reflect will be against such collateral.
Our Sources of Revenue
We generate revenue through sales of digital signage solutions, which include system hardware, professional and implementation services, software design and development, software licensing, deployment, and support services. maintenance and support.
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.
Significant Accounting Policies and Estimates
Our management is responsible for our financial statements and has evaluated the accounting policies to be used in their preparation. Our management believes these policies are reasonable and appropriate. The Company's significant accounting policies are described in Note 2 Summary of Significant Accounting Policies of the Company's Consolidated Financial Statements included within Part II, ITEM 8 of this Annual Report. The following discussion identifies those accounting policies that we believe are critical in the preparation of our financial statements, the judgments and uncertainties affecting the application of those policies and the possibility that materially different amounts will be reported under different conditions or using different assumptions. 31 The preparation of financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our actual results could differ from
those estimates. Revenue Recognition We recognized revenue in accordance with
Financial Accounting Standards Board("FASB") Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"). Under ASC 606, we account for revenue using the following steps: ? Identify the contract, or contracts, with a customer ? Identify the performance obligations in the contract ? Determine the transaction price
? Allocate the transaction price to the identified performance obligations
? Recognize revenue when, or as, we satisfy our performance obligations See Note 2 Summary of Significant Accounting Policies and Note 4 Revenue Recognition in our Consolidated Financial Statements, included in Part II, ITEM 8 of this Annual Report, for a complete discussion of our revenue recognition policies.
Allowance for doubtful accounts
We have not made any material changes in the accounting methodology we use to measure the estimated liability for doubtful accounts during the past two fiscal years. The Company's methodology for calculating the allowance for doubtful accounts consists of (1) reserving for specific receivables which (a) are known to be facing serious financial problems, (b) have a trade dispute with the Company, or (c) are significantly aged and/or unresponsive, and (2) a general reserve for unaged accounts receivable based on a percentage of revenue each period. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to establish the liability for doubtful accounts. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
Goodwill Goodwillis evaluated for impairment annually as of September 30and whenever events or circumstances make it more likely than not that impairment may have occurred. We have no other indefinite-lived intangible assets. We test goodwill for impairment by comparing the book value to the fair value at the reporting unit level. We have only one reporting unit, and therefore the entire goodwill is allocated to that reporting unit. The fair value of the reporting unit is determined by using a discounted cash flow analyses consisting of various assumptions, including expectations of future cash flows based on projections or forecasts derived from analysis of business prospects and economic or market trends that may occur. We use these same expectations in other valuation models throughout the business. In addition to the discounted cash flow analysis, we utilize a leveraged buy-out model, trading comps and market capitalization to ultimately determine an estimated fair value of our reporting unit based on weighted average calculations from these models. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. If the carrying amount exceeds the fair value, further analysis is performed to measure the impairment loss. 32 In addition, our market capitalization could fluctuate from time to time. Such fluctuation may be an indicator of possible impairment of goodwill if our market capitalization falls below its book value. If this situation occurs, we perform the required detailed analysis to determine if there is impairment. During the first quarter of 2020, we determined that the reduced cash flow projections and the significant decline in our market capitalization as a result of the COVID-19 pandemic during the three months ended March 31, 2020indicated that an impairment loss may have been incurred during the period. We qualitatively assessed and concluded that it was more likely than not that goodwill was impaired as of March 31, 2020. We reviewed our previous forecasts and assumptions based on our updated projections that were subject to various risks and uncertainties, including: (1) forecasted revenues, expenses and cash flows, including the duration and extent of impact to our business and our alliance partners from the COVID-19 pandemic, (2) current discount rates, (3) the reduction in our market capitalization, (4) changes to the regulatory environment and (5) the nature and amount of government support that will be provided. As a result of this qualitative assessment, we concluded that indicators of impairment were present. The subsequent quantitative interim impairment assessment of our goodwill as of March 31, 2020resulted in recording an impairment of $10,646as of March 31, 2020.
No further impairment was recorded during the remainder of 2020, nor following our annual assessment performed as of
We have not made any material changes in our reporting units or the accounting methodology we used to assess impairment of goodwill since
September 30, 2021. The valuation of goodwill is subject to a high degree of judgment, uncertainty and complexity. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for impairment losses on goodwill. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material. Income Taxes Accounting for income taxes requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. These deferred taxes are measured by applying the provisions of tax laws in effect at the balance sheet date, including the impact of the Tax Cuts and Jobs Act (the "Tax Act") enacted on December 22, 2017.
We recognize in profit or loss the effect of a change in tax rates on deferred tax assets and liabilities during the period that includes the effective date.
December 31, 2021, a full valuation allowance is recorded against our deferred tax. The valuation allowance is based, in part, on our estimate of future taxable income, the expected utilization of federal and state tax loss carryforwards, and credits and the expiration dates of such tax loss carryforwards. Significant assumptions are used in developing the analysis of future taxable income for purposes of determining the valuation allowance for deferred tax assets which, in our opinion, are reasonable under the circumstances.
Impact of recently issued accounting pronouncements
Refer to Note 3 Recently Issued Accounting Pronouncements in our Consolidated Financial Statements included in Part II, ITEM 8 of this Annual Report, for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference. Results of Operations
Note: All dollar amounts shown in results of operations are in thousands, except per share information.
The tables presented below compare our results of operations from one period to another, and present the results for each period and the change in those results from one period to another in both dollars and percentage change. Year Ended December 31, Change 2021 2020 % Sales
$ 18,437 $ 17,457 $ 9806 % Cost of sales 10,080 9,336 744 8 % Gross profit 8,357 8,121 236 3 %
Sales and marketing expenses 1,153 1,676 (523 ) -31 % Research and development expenses 550 1,083 (533 ) -49 % General and administrative expenses 7,598 8,465 (867 ) -10 % Bad debt (277 ) 828 (1,105 ) -133 % Depreciation and amortization expense 1,364 1,474
(110 ) -7 % Lease termination expense - 18 (18 ) -100 % Loss on disposal of assets - 13 (13 ) -100 % Goodwill impairment - 10,646 (10,646 ) -100 % Deal and transaction 518 - 518 100 % Total operating expenses 10,906 24,203 (13,297 ) -55 % Operating loss (2,549 ) (16,082 ) 13,533 -84 % Other income/(expenses): Interest expense (805 ) (1,023 ) 218 -21 % Gain on settlement of debt 3,449 209 3,240 1,550 %
Gain/(loss) on fair value of debt 166 (93 )
259 -278 % Other income/(expense) (7 ) (13 ) 6 -46 % Total other income/(expense) 2,803 (920 ) 3,723 -405 %
Net income/(loss) before income taxes 254 (17,002 )
17,256 -101 % Income tax benefit/(expense) (22 ) 158 (180 ) -114 % Net income/(loss)
$ 232 $ (16,844 ) $ 17,076101 % 34 Sales Sales increased by $980, or 6%, in 2021 as compared to 2020 driven by an increase of $459in hardware sales as compared to the same period in 2020, despite a decrease of $2,135in the sale of our Safe Space Solutions products year-over-year, which launched in April 2020. Core digital signage sales (inclusive of hardware, installation, and services) expanded by $3,115in 2021 despite constraints and headwinds 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 year. As of December 31, 2021, the Company had customer purchase orders for equipment and installation activities in excess of $1,000which 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 during 2022, but we expect a full recovery in the timely availability of equipment no later than the end of the second quarter of 2022. Gross Profit
Gross profit increased
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
$523, or 31%, for the year ended December 31, 2021as compared to the same period in 2020 driven by (1) a current year Employee Retention Credit of $232related to the retention and payment of salaries to sales personnel throughout 2020 and 2021, which was all recorded when filed in 2021, (2) reduction of $105in sales lead generation tools, and (3) the result of reduced personnel costs, partially offset by an increase of $47on trade show activity and related travel costs following a return to participation in industry trade shows and events after the elimination of such costs in 2020 as a result of
the COVID-19 pandemic.
Research and development costs
Research and development expenses decreased by
$533, or 49%, for the year ended December 31, 2021as compared to the same period in 2020 as the result of (1) a current year Employee Retention Credit of $196related to the retention and payment of salaries to development personnel throughout 2020 and 2021, which was all recorded when filed in 2021, (2) a reduction in personnel costs during the period following reduced headcount and salary reductions in March 2020through salary reinstatements in October 2021, and (3) an increase in capitalization of development activities for new features/functionality.
General and administrative expenses
Total general and administrative expenses decreased by
$867, or 10%, in 2021 compared to 2020. The decrease was driven by $694of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and 2021, each of which were recorded in 2021 when the tax credits were filed. Excluding the consideration of those Employee Retention Credits recorded in the period, total general and administrative expenses decreased $173, or 2%, during 2021 as compared to 2020. The comparable year-over-year expenses included reductions of (a) $262in non-ERC-related personnel costs, including salaries, benefits, and travel-related expenses, (b) $334in rent expense following closure, downsizing, or restructuring of four leases during 2020, and (c) reductions in legal expenses of $366following settlement of the Amended and Restated Seller Note, partially offset by an increase in stock compensation amortization expense of $1,213related to incremental employee and directors' awards granted during 2020, which are being amortized over a nineteen (19) month remaining vesting period, and 2021, which are being amortized over twelve (12) and (24) month vesting periods, 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 in March 2020. 35 Bad Debt Expenses related to the Company's allowance for bad debts decreased by $1,105, or 133%, in 2021 as compared to 2020. This decrease was primarily driven by a cash recovery of $555in 2021 related to a customer bankruptcy for which the Company previously recorded a reserve beginning in second quarter 2020. The remaining reduction was the result of reduced credits and cancellations in 2021 as compared to the prior year in which the COVID-19 pandemic resulted in material customer closures.
Depreciation and amortization
Depreciation and amortization expenses decreased by
$110, or 7%, 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 2021. Depreciation was consistent in both periods. Lease Termination Expense On December 31, 2020, we exited our office facilities located in Dallas, TX.In ceasing use of these facilities, we recorded a one-time non-cash charge of $18. There were no such lease terminations during 2021. Goodwillimpairment See Note 7 Intangible Assets, Including Goodwill to the Consolidated Financial Statements for a discussion of the Company's interim impairment test and the non-cash impairment charge recorded in 2020. Interest Expense
Refer to Note 8 Loans payable to the consolidated financial statements for a discussion of the Company’s debt and related interest expense.
Gain on settlement of obligations
During 2021, (i) the full principal amount of the PPP Loan and the accrued interest of
$1,552were forgiven and recorded as a gain on settlement, (ii) the Company settled the Amended and Restated Seller Note and related accrued interest for $100, recording a gain on settlement of $1,624, representing $1,538related to the Amended and Restated Seller Note and $86of related interest thereon, and (iii) the statute of limitations passed related to the remaining liability on a lease abandoned by the Company in 2015, resulting in a gain
$256. During the year ended December 31, 2020, the Company settled and/or wrote off obligations of $348for aggregate cash payments of $139and recognized a gain of $209related to legacy accounts payable deemed to no longer be legal obligations to vendors. 36
Additional 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 that are included elsewhere in this Annual Report. Quarters Ended Year Ended December 31, September 30, June 30 March 31, Quarters ended 2021 2021 2021 2021 2021 GAAP net income (loss)
$ 232 $ (1,722 )$ (343 ) $ 1,025 $ 1,272Interest expense: Amortization of debt discount 159 29 29 29 72 Other interest, net 648 160 158 153 177
Depreciation and amortization:
Amortization of intangible assets 1,251 302
320 317 312 Amortization of finance lease assets 4 - - - 4 Amortization of employee share-based awards 1,494 324 329 329 512 Depreciation of property and equipment 109 27 27 27 28 Income tax expense/(benefit) 22 13 1 7 1 EBITDA
$ 3,919(867 ) $ 521 1,887 2,378 Adjustments Change in fair value of Special Loan (166 ) - - - (166 ) Gain on settlement of obligations (3,449 ) -
(256 ) (1,628 ) (1,565 ) Deal and transaction costs 518 518 - - - Stock-based compensation - Director grants 399 318 27 27 27 Adjusted EBITDA
$ 1,221(31 ) $ 292 286 674 Quarters Ended Year Ended December 31, September 30, June 30 March 31, Quarters ended 2020 2020 2020 2020 2020 GAAP net loss $ (16,844 )$ (617 ) $ (585 ) $ (2,459 ) $ (13,183 )Interest expense: Amortization of debt discount 339 85 85 84 85 Other interest, net 683 186 179 176 142 Depreciation/amortization:
Amortization of intangible assets 1,330 319 340 344 327 Amortization of finance lease assets 20 3 5 5 7 Amortization of share-based awards 617 250
248 100 19 Depreciation of property and equipment 124 29 33 30 32 Income tax expense/(benefit) (158 ) (6 ) (1 ) 4 (155 ) EBITDA
$ (13,889 )249 $ 304 $ (1,716 ) $ (12,726 )Adjustments Change in fair value of Special Loan 93 (609 ) - 551 151 Gain on settlement of obligations (209 ) (54 )
(114 ) (1 ) (40 ) Loss on disposal of assets 13 - 13 - - Loss on lease termination 18 18 - - - Loss on goodwill impairment 10,646 - - - 10,646 Stock-based compensation - Director grants 102 27 25 19 31 Adjusted EBITDA
$ (3,226 )(369 ) $ 228 $ (1,147 ) $ (1,938 )37
Cash and capital resources
We produced net income and positive cash flows from operating activities for the year ended
December 31, 2021but incurred a net loss and had negative cash flows from operating activities for the year ended December 31, 2020. As of December 31, 2021, we had cash and cash equivalents of $2,883and a working capital
$2,913. Equity Financing As described more fully in the Recent Developments section above, on February 3, 2022, the Company entered into the Securities Purchase Agreement pursuant to which the Company agreed to issue and sell 1,315,000 shares of the Company's common stock and Common Stock Warrants to a Purchaser in a Private Placement transaction for gross proceeds of $11,000before deducting placement agent fees and estimated offering expenses payable by the Company. The net proceeds from the Private Placement were used to fund, in part, payment of the closing cash consideration in the Merger. Debt Financing On February 17, 2022, the Company and its subsidiaries (collectively, the "Borrowers") refinanced their current debt facilities with Slipstream, pursuant to the Credit Agreement, and raised $10,000in gross proceeds with a maturity date of February 1, 2025. The Credit Agreement also provides that the Company's outstanding loans from Slipstream, consisting of its pre-existing $4,767senior secured term loan and $2,418secured convertible loan, with an aggregate of $7,185in outstanding principal and accrued and unpaid interest under such loans, were consolidated into a Consolidation Term Loan with a maturity date of February 1, 2025. On February 17, 2022, in connection with the closing of the acquisition of Reflect, the Company issued to RSI Exit Corporation("Stockholders' Representative"), the representative of Reflect stockholders, a $2,500Note and Security Agreement (the "Secured Promissory Note"). The Secured Promissory Note accrues interest at 0.59% (the applicable federal rate) and requires the Company and Reflect to pay equal monthly principal installments of $104on the fifteenth (15th) day of each month, commencing on March 17, 2022, for twelve months with any remaining or unpaid principal due and payable on February 15, 2023. Management believes that, based on (i) the execution of the Equity Financing, (ii) the refinancing of our debt as part of the Debt Financing, including extension of the maturity date on our term loans, and (iii) our operational forecast through 2022 following completion of the Reflect Acquisition, that we can continue as a going concern through at least March 31, 2023. However, given our historical net losses and cash used in operating activities, we obtained a continued support letter from Slipstream through March 31, 2023. 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.
38 See Note 8 Loans Payable to the Consolidated Financial Statements and the Recent Developments section earlier in Item 7 for an additional discussion of the Company's debt obligations and further discussion of the Company's refinancing activities subsequent to
December 31, 2021. Operating Activities The cash flows provided by / (used in) operating activities were $471and $(3,530)for the years ended December 31, 2021and 2020, respectively. Removing the effect of non-cash items, cash provided by operations in 2021 was $1,723, driven by an (1) increase in net customer/vendor deposits of $901related to upfront cash collections/payments for large-scale projects, (2) increase in net accounts receivable and payables of $196related to the timing of collections and payments for ongoing hardware and installation sales and purchases, and (3) a decrease in inventory of $471as Safe Space Solutions inventory purchased in the prior year was sold in 2021, partially offset by a $338decrease in deferred revenue. Investing Activities Net cash used in investing activities during the year ended December 31, 2021was $1,159as compared to $657for the same period in 2020. Uses of cash in the current and prior period relate primarily to internal and external costs associated with software development. We currently do not have any material commitments for capital expenditures as of December 31, 2021; however, we anticipate an increase in our capital expenditures of approximately $430in excess of our historical trends through the first half of 2022 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 years ended December 31, 2021and 2020 was $1,745and $3,479, respectively. The current year results were driven by completion of the Company's registered direct offering, while the prior year results were driven by our receipt of a PPP Loan of $1,552and proceeds from our at-the-market offering of $1,831, partially offset by no
debt proceeds during the year.
Off-balance sheet arrangements
During the year ended
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