Creative Realities, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Creative Realities provides digital signage and marketing technology, including hardware, installation, managed services and subscription software. Amounts below are in thousands of dollars unless otherwise noted.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $12,285 | $9,944 | +24% |
| Gross profit | $5,764 | $5,089 | +13% |
| Gross margin | 47% | 51% | Down 4 percentage points |
| Operating loss | $(76) | $(90) | Improved by $14 |
| Net loss | $(109) | $(1,000) | Improved by $891 |
| Basic and diluted loss per share | $(0.01) | $(0.14) | Improved |
| Operating cash flow | $1,938 | $3,868 | Down $1,930 |
| Cash and cash equivalents at quarter-end | $2,899 | $3,905 | Down $1,006 year over year |
Services and other revenue rose 45% to $8,141, led by installation services (+128%, to $2,160) and managed services (+17%, to $4,774). Hardware revenue declined 4% to $4,144. Management reported subscription-license annual recurring run rate of $17,689 at March 31, 2024, up from $16,336 at December 31, 2023.
Gross margin fell as installation work, described as historically lower margin, increased to 18% of revenue from 10%. Operating expenses rose 13% to $5,840, including increased sales and marketing and research and development spending. The net loss improvement mainly reflected a $604 gain from the fair-value change in contingent consideration, compared with a $76 expense in Q1 2023, as well as lower interest expense ($663 versus $803).
Balance sheet, debt and liquidity
- At March 31, 2024, cash was $2,899, total current assets were $16,317 and current liabilities were $38,735. The company reported negative working capital of $22,418.
- Debt was $14,038 gross principal and $12,770 net of discounts; all net debt was classified as current. The related-party Acquisition Term Loan has $10,000 principal at 8% interest, while the Consolidation Term Loan had $4,038 principal at 10% interest. Both mature in February 2025.
- The company paid $1,109 on the Consolidation Term Loan during the quarter. It expects approximately $3,593 of principal repayments on that loan in the 12 months after March 31, 2024. The Acquisition Term Loan principal is due at maturity.
- Contingent consideration was recorded at $10,603 current at quarter-end and also matures in February 2025, subject to a possible six-month extension under specified conditions. Slipstream, the company’s largest shareholder, holds all outstanding debt and beneficially owns approximately 29% of common stock on the basis described in the filing.
- Operating activities provided $1,938 cash; investing activities used $830, principally including $824 of capitalized software development; financing activities used $1,119. Cash declined $11 during the quarter.
Outlook, risks and notable matters
- Going concern: Management concluded that substantial doubt exists about the company’s ability to continue as a going concern. It says available cash and liquidity are insufficient for the scheduled loan repayments, the $10,000 Acquisition Term Loan maturity and the estimated contingent consideration. Refinancing, recapitalization, debt financing or equity financing options are being evaluated, but plans are not finalized, depend on market conditions and are not within the company’s control; management concluded they do not alleviate the substantial doubt.
- Operating outlook: Management expects continued growth in recurring SaaS revenue. It expects depreciation and amortization expense of approximately $800 per quarter for the remainder of 2024 and anticipates lower capital expenditures as automotive-platform modernization and internationalization are completed.
- Competition: The filing identifies competitors with greater financial, technical and marketing resources, including hardware manufacturers offering basic customizable display software. Management notes the potential for pricing pressure, reduced orders and margins, and loss of market share.
- Concentration and estimates: Four customers represented 13%, 12%, 11% and 10% of Q1 revenue. The contingent-consideration valuation uses Level 3 assumptions and is subject to estimation uncertainty. The company reported no material legal proceedings and no off-balance-sheet arrangements for the quarter.
- Management reported disclosure controls were effective at March 31, 2024, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress and feasibility of refinancing or otherwise addressing the February 2025 debt and contingent-consideration obligations, and any subsequent developments affecting the going-concern assessment.
- Cash generation, working-capital needs and the effect of scheduled monthly principal repayments on liquidity.
- Whether services growth and subscription recurring revenue continue, and whether revenue mix allows gross margins to recover.
- Assumptions and potential changes in the fair value and timing of the contingent consideration obligation.
- Customer and vendor concentration, as well as the competitive and execution risks associated with planned software investment and deployments.