ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(All
currency is rounded to the nearest thousands, except 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, 2021 and
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-serve restaurants (“QSR”)
● Convenience Stores
● Financial Services
● Automotive
● Medical and Healthcare Facilities
● Mixed Use Developments
● Corporate Communications, Employee Experience
● Digital out of Home (DOOH) Advertising Networks
We serve market-leading companies, so there is
a good chance that if you leave your home today to shop, work, eat or play, you will encounter one or more of our digital signage experiences.
Our solutions are increasingly visible because we help our enterprise customers achieve a range of business objectives including:
● Increased brand awareness
● Improved customer support
● Enhanced employee productivity and satisfaction
● Increased revenue and profitability
● Improved guest experience
● Increased customer/guest engagement
● Improved patient outcomes
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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 providers, our customers value the following competitive advantages:
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27
The three primary sources of revenue for the company
are:
o Hardware system design/engineering
o Hardware installation
o Content development
o Content scheduling
o Post-deployment network and field support
o Media sales, as a result of our acquisition of Reflect
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.
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Recent
Developments
Acquisition
of Reflect
On 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) $16,166 payable in cash,
(ii) 2,333,334 shares of common stock of Creative Realities (valued based on an issuance price of $2 per 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 $6.40 per
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 $7.20 per 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 $1.00 per 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 $1,333 in 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 $667 to 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 $2.00 per 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.
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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 $0.01
per 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 $11,000 before 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 $0.0001 per share, is exercisable immediately until the Pre-Funded Warrant is exercised in
full. The Common Stock Warrants expire five years from the date of issuance, have an exercise price of $1.41 per share and are exercisable
immediately.
On 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 $0.125 per share. The exercise price of the Purchaser Warrant is $1.41 per 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 $10,000 in gross proceeds, or
$9,950 in 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, 2022 through February
1, 2025, the Borrowers will make interest-only payments on the Acquisition Loan (estimated to be $67 per 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 $4,767 senior secured term loan and $2,418 secured convertible loan,
with an aggregate of $7,185 in 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, 2022 through February 1, 2025, the Borrowers will make interest-only
payments on the Consolidation Term Loan (estimated to be $60 per 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 $399
per monthly installment).
In connection with the Acquisition Loan and Consolidation Term Loan
warrant coverage, the Company issued to Slipstream a warrant to purchase an aggregate of 5,194,495 shares of Company common stock (the
“Lender Warrant”). The Lender Warrant has a five-year term, an initial exercise price of $2.00 per share, subject to adjustments
in the Lender Warrant, and is not exercisable until August 17, 2022.
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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 $2,500 Note 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 $104 on 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 digital signage 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 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.
Critical
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.
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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
Goodwill
is evaluated for impairment annually as of September 30 and 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.
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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, 2020 indicated 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, 2020 resulted in recording an impairment of $10,646 as of March 31, 2020.
No additional impairment was recorded during the
remainder of 2020, nor as a result of our annual assessment completed as of September 30, 2021, and no indicators of impairment were identified
as of December 31, 2021.
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 income the effect of a change in tax rates on deferred tax assets and liabilities in the period that includes the enactment
date.
As
of 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 reported in Results of Operations are in thousands, except per-share information.
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Year
Ended December 31, 2021 Compared to Year Ended December 31, 2020
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
Depreciation and amortization expense 1,364 1,474 (110 ) -7 %
Lease termination expense - 18 (18 ) -100 %
Loss on disposal of assets - 13 (13 ) -100 %
Other income/(expenses):
Other income/(expense) (7 ) (13 ) 6 -46 %
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Sales
Sales
increased by $980, or 6%, in 2021 as compared to 2020 driven by an increase of $459 in hardware sales as compared to the same period
in 2020, despite a decrease of $2,135 in 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 $3,115 in 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 $1,000
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 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 $236 in absolute dollars to $8,357 in 2021 from $8,121 in 2020, or 3% through a combination of a 6% increase in revenue
and a 1.2% reduction in gross margin percentage, driven by an increase in revenue from hardware revenue, which typically is a lower margin
revenue stream than our services, as a percentage of total revenue in 2021 as compared to the prior year.
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, 2021 as compared to the same period in 2020 driven by (1) a current year Employee Retention Credit of $232 related
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 $105 in sales lead generation tools, and (3) the result of reduced personnel costs, partially offset by an increase of $47
on 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 Expenses
Research
and development expenses decreased by $533, or 49%, for the year ended December 31, 2021 as compared to the same period in 2020 as the
result of (1) a current year Employee Retention Credit of $196 related 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 2020 through 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 $694 of 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) $262 in non-ERC-related
personnel costs, including salaries, benefits, and travel-related expenses, (b) $334 in rent expense following closure, downsizing, or
restructuring of four leases during 2020, and (c) reductions in legal expenses of $366 following settlement of the Amended and Restated
Seller Note, partially offset by an increase in stock compensation amortization expense of $1,213 related 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.
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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 $555 in 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 Expenses
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.
Goodwill
impairment
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
See
Note 8 Loans Payable to the Consolidated Financial Statements for a discussion of the Company’s debt and related interest
expense obligations.
Gain
on Settlement of Obligations
During
2021, (i) the full principal amount of the PPP Loan and the accrued interest of $1,552 were 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 $1,538 related to the Amended and Restated Seller Note and $86 of 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 of $256.
During
the year ended December 31, 2020, the Company settled and/or wrote off obligations of $348 for aggregate cash payments of $139 and recognized
a gain of $209 related to legacy accounts payable deemed to no longer be legal obligations to vendors.
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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 that are included elsewhere in this Annual Report.
Quarters Ended
Year Ended December 31, September 30, June 30 March 31,
Interest expense:
Depreciation/amortization:
Amortization of finance lease assets 4 - - - 4
Income tax expense/(benefit) 22 13 1 7 1
Adjustments
Change in fair value of Special Loan (166 ) - - - (166 )
Deal and transaction costs 518 518 - - -
Quarters Ended
Year Ended December 31, September 30, June 30 March 31,
Interest expense:
Depreciation/amortization:
Amortization of finance lease assets 20 3 5 5 7
Income tax expense/(benefit) (158 ) (6 ) (1 ) 4 (155 )
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 - - -
Stock-based compensation – Director grants 102 27 25 19 31
37
Liquidity
and Capital Resources
We
produced net income and positive cash flows from operating activities for the year ended December 31, 2021 but 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 $2,883 and a working capital surplus of $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 $11,000 before 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 $10,000 in 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 $4,767 senior
secured term loan and $2,418 secured convertible loan, with an aggregate of $7,185 in 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 $2,500 Note 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 $104 on 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 $471
and $(3,530) for the years ended December 31, 2021 and 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 $901 related to upfront cash collections/payments for
large-scale projects, (2) increase in net accounts receivable and payables of $196 related to the timing of collections and payments for
ongoing hardware and installation sales and purchases, and (3) a decrease in inventory of $471 as Safe Space Solutions inventory purchased
in the prior year was sold in 2021, partially offset by a $338 decrease in deferred revenue.
Investing
Activities
Net
cash used in investing activities during the year ended December 31, 2021 was $1,159 as compared to $657 for 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 $430 in 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, 2021 and 2020 was $1,745 and $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 $1,552 and 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 December 31, 2021, we did not engage in any off-balance sheet arrangements set forth in Item 303(a) (4) of Regulation S-K.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See
Index to Consolidated Financial Statements on Page F-1.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
39
ITEM 9A CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
An
evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer (principal
executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of our disclosure controls and procedures,
as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act (“Exchange Act”), as of the end of the period
covered by this Annual Report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer,
concluded that our disclosure controls and procedures were effective as of December 31, 2021, and designed to ensure that information
required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those
systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Under
the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of our internal control over financial reporting as of December 31, 2021 based on the framework in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based on our assessment and those criteria, management believes that we maintained effective internal control over financial reporting
as of December 31, 2021.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2021, that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B OTHER INFORMATION
Earnings
Release
On
March 22, 2022, the Company issued a press release announcing its financial condition and results of operations for the three months
and year ended December 31, 2021. A copy of the press release is furnished as Exhibit 99.1 and is incorporated by reference
into this Item 9B in lieu of separately furnishing such press release under Item 2.02 of Form 8-K. This disclosure, including Exhibit
99.1 hereto, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference
into any of the Company’s filings under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth
by specific reference in such filing.
ITEM
9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not
applicable.
40
PART
III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our
Board of Directors consists of Dennis McGill (Chairman), Richard Mills (CEO), David Bell, Donald Harris, and Stephen Nesbit.
The
following table sets forth the name and position of each of our current directors and executive officers.
Name Age Positions
Dennis McGill 73 Director (Chairman)
David Bell 78 Director
Donald A. Harris 69 Director
Richard Mills 66 Chief Executive Officer and Director
Stephen Nesbit 70 Director
Will Logan 37 Chief Financial Officer
The
biographies of the above-identified individuals are set forth below:
Dennis
McGill joined our Board of Directors in November 2019. Over the course of a 45-year career, Mr. McGill has served as a director,
Chief Executive Officer or Chief Financial Officer of various public and private companies. From June 2015 to October 2017, Mr. McGill
served as the President and CEO of ReCommunity Holdings II, Inc., the largest independent recycling processing company in the US, processing
over 1.8 million tons of material annually and employing a team of 1,600 members. Mr. McGill served on the Board of Directors for Lighting
Science Group Corp. (“LSGC”) from March 2015 to July 2017 while the company was publicly traded. Mr. McGill also served as
the LSGC’s Interim Chief Operating Officer from June 2014 to September 2014 and as LSGC’s Interim Chief Financial Officer
from July 2014 to December 2014. Mr. McGill joined Pegasus Capital as an operating advisor in December 2014 and remains in that capacity
today. Since June 2014, Mr. McGill has also served on the board of directors of DGSE Companies, Inc., a company listed on the NYSE MKT
that buys and sells jewelry, diamonds, fine watches, rare coins and currency (“DGSE”). Mr. McGill previously served on the
board of directors of DGSE, ReCommunity Holdings, LP and Fiber Composites, LLC and served as the chairman of DGSE’s audit committee.
From February 2013 to October 2013, Mr. McGill served as executive vice president and Chief Financial Officer of Heartland Automotive
Services, Inc., where he actively participated with the senior management team to develop and roll-out a new business model. From September
2010 to February 2013, Mr. McGill served as executive vice president and Chief Financial Officer of Blockbuster LLC and was responsible
for directing and managing various aspects of the Chapter 11 process. From March 2005 to July 2010, Mr. McGill served as executive vice
president and Chief Financial Officer of Safety-Kleen Systems, Inc., during which time he led the company’s merger and acquisition
efforts and grew the company from $0 to $160 million in EBITDA during his tenure. Mr. McGill holds a Bachelor of Science degree in Finance
and Accounting and Master of Business Administration degree from the University of California, Berkeley and is a Certified Public Accountant
in the state of California.
David
Bell joined our Board of Directors in August 2014 in connection with our acquisition of Creative Realities, LLC. Mr. Bell brings
over 40 years of advertising and marketing industry experience to the board, including serving as CEO of three of the largest companies