CREATIVE REALITIES, INC. 10-K

ITEM 5 MARKET FOR REGISTRANT ’ S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES   (All currency is rounded to the nearest thousands, except share and per share amounts.)   Market Information   Our common stock is listed for trading on the Nasdaq Capital Markets (“Nasdaq”) under the symbol “CREX”. The transfer agent and registrar for our common stock is Computershare Limited, 401 2nd Avenue North, Minneapolis, Minnesota 55401.    Shareholders   As of March 29, 2023, we had 395 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.   Dividend Policy   We have never declared or paid cash dividends on our common stock. We currently intend to retain future earnings, if any, to operate and expand our business and to finance the development and expansion of our business. We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, earnings, capital requirements, contractual restrictions and other factors deemed relevant by our Board of Directors.   Holders of our common stock are entitled to share pro rata in dividends and distributions with respect to the common stock when, as and if declared by our Board of Directors out of funds legally available therefor. Our future dividend policy is subject to the sole discretion of our Board of Directors and will depend upon a number of factors, including future earnings, capital requirements and our financial condition.   Recent Sales of Unregistered Securities   None.   Securities Authorized for Issuance Under Equity Compensation Plans   Information about our equity compensation plans is set forth in Item 12 of Part III of this Annual Report, which is incorporated herein by reference.   ITEM 6 [RESERVED]   Not applicable.   21 Table of Contents     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, 2022 and 2021, 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.   You should review the "Cautionary Note Regarding Forward-Looking Statements; Risk Factor Summary", and "Risk Factors" sections of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis.   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   22 Table of Contents   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   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:     ● Breadth of solutions  – Creative Realities is one of only a few companies in the industry capable of providing the full portfolio of 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 signage 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 field technicians available to service clients quickly nationwide. We can meet tight schedules even in exceptionally large deployments and still ensure quality and consistency.     ● In-house creative resources  – We assist clients in repurposing existing content for digital signage experiences or creating new content, an activity for which the Company has won several design awards in recent years. In each instance, our services can be essential in helping clients develop an effective content program.     ● 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 North America evidencing our ability to manage enterprise scale projects. This also provides us purchasing power to source products and services for our customers, enabling us to deliver cost effective, reliable and powerful solutions to small and medium size business clients.     ● Ad management platform  – Our customers are increasingly interested in monetizing their digital signage networks through advertising content. However, efficiently scheduling advertising content into digital signage playlists to meet campaign objectives can be a challenging and labor-intensive process. AdLogic, our home-grown, content management-agnostic platform, automates this process, allowing network owners to capture more revenue with less expense.   23 Table of Contents     ● Media sales  – Few, if any other digital signage solution providers, can offer their clients media sales as a service. We have in-house media sales expertise to elevate conversations with clients interested in better understanding network monetization. We believe this meaningful differentiation in the sales process provides an additional revenue stream to Creative Realities compared to our competitors.     ● Market sector expertise  – Creative Realities has in-house experts in key market segments such as automotive, retail, quick-serve restaurants (QSR), convenience stores, and Digital Out of Home (DOOH) advertising. Our expertise in these business segments enables our teams to provide meaningful business conversations and offer tailored solutions with prospects and customers to their unique business objectives. These experts build industry relationships and create thought leadership that drives lead flow and new opportunities for our business.     ● Logistics  – Implementing a large digital signage project can be a logistics nightmare that can stall an initiative even before deployment. 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 corporate IT departments. Creative Realities helps simplify and improve end user support by leveraging our own Network Operations Center (“NOC”) in Louisville, Kentucky. The NOC resolves many issues remotely and when field support is required, it can be dispatched from the NOC, leveraging our managed labor pool to resolve customer issues quickly and effectively.     ● Integrations and Application Development  – The future of digital signage is not still images and videos on a screen. Interactive applications and integrations with other data sources will dominate the future. From social media feeds to corporate 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 providers sell a proprietary media player or align themselves with just one operating system. We utilize a range of media players including Windows, Android and BrightSign to provide clients the flexibility they need to select the appropriate hardware for any application knowing the entire network can still be served by a single digital signage platform, reducing complexity and improving the productivity of their teams.   Our Sources of Revenue   The three primary sources of revenue for the company are:     ● Hardware sales from reselling digital signage hardware from original equipment manufacturers such as Samsung and BrightSign.   24 Table of Contents     ● Services revenue from helping customers design, deploy and manage their digital signage 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, as a result of our acquisition of Reflect     ● Recurring subscription licensing and support revenue from our digital signage software platforms, which are generally sold via 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-based interface that allows customers to give content scheduling access to local users via the web or mobile devices, while still 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 market 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 guests to engage using their mobile device     o iShowroomProX , an omni-channel digital sales support platform targeted at original equipment manufacturers in the transportation sector, which integrates with dozens of key data services including dealer inventory at the VIN level     o OSx+ , a digital VIN-level checklist used to assist in the tracking and delivery of new vehicles in the transportation sector, providing measurable lift in customer satisfaction scores and connected vehicle enrollments and subscription 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.   25 Table of Contents   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.     Recent Developments   Reverse stock split   On March 23, 2023, the Company filed Articles of Amendment with the Secretary of State of the State of Minnesota to effectuate, effective March 27, 2023, a one-for-three stock split of the shares of the Company's common stock, par value $0.01 per share.   As a result of the reverse stock split, effective 12:01 am on March 27, 2023, every three shares of common stock then-issued and outstanding automatically combined into one share of common stock, with no change in par value per share.  No fractional shares were outstanding following the reverse stock split and any fractional shares resulting from the reverse split were rounded up to the nearest whole share of common stock.  In connection with the reverse stock split, the total number of shares of common stock authorized for issuance was reduced from 200,000,000 shares to 66,666,666 shares in proportion to the reverse stock split.   Effective as of the same time as the reverse stock split, the number of shares of common stock available for issuance under the Company's equity compensation plans were reduced in proportion to the reverse stock split.  The reverse stock split also resulted in the number of shares of shares of common stock issuable upon exercise of outstanding warrants, or the exercise or vesting of equity awards, in proportion to the reverse stock split and caused a proportionate increase in exercise price or share-based performance criteria, where applicable.   Rejection of unsolicited offer   On February 2, 2023, we received an unsolicited proposal from Pegasus Capital Advisors, L.P., on behalf of itself and certain of its affiliates, including Slipstream (collectively, “Pegasus”), to acquire all of the outstanding shares of common stock of the Company that are not owned by Pegasus for a purchase price of $0.83 per share (or, as a result of our recent reverse stock split, $2.49 per share) in cash. Pegasus is the beneficial owner of our common stock owned of record by Slipstream. The Special Committee of the Company’s Board of Directors (the “Special Committee”) has concluded that such proposal undervalues the Company based on the Special Committee’s views of the intrinsic value of the Company’s existing business and current and future prospects, and is not in the best interests of the Company’s existing shareholders. Consequently, the Special Committee has advised Pegasus that it has rejected the proposal.   Pegasus may or may not determine to revise its proposal. The Special Committee remains available to evaluate and respond to a revised proposal by Pegasus. There can be no assurance that any revised proposal or definitive offer will be made or accepted, that any agreement will be executed, or that any transaction will be consummated.   Please see Note 8 Loans Payable ,  Note 10  Business Combinations , Note 12 Warrants , and Note 13 Stock-based Compensation to the Company’s Consolidated Financial Statements contained in this Report for a description of other recent developments of the Company that occurred during, and subsequent to, the year ended December 31, 2022.   26 Table of Contents   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.   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.   27 Table of Contents   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.   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.   No impairment was recorded as a result of our annual assessment completed as of September 30, 2022.  At December 31, 2022, we concluded the decline in our market value represented an interim indicator of potential impairment.  Based on a quantitative assessment of our fair value performed at December 31, 2022, using the same approach as our annual impairment performed at September 30, described above, we concluded that the carrying value of our goodwill did not exceed the reporting unit fair value.  There was no impairment during the year-ended December 31, 2022.      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, 2022, 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.   28 Table of Contents   Year Ended December 31, 2022 Compared to Year Ended December 31, 2021   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       2022     2021               % Sales   $ 43,350     $ 18,437     $ 24,913       135 % Cost of sales     25,611       10,080       15,531       154 % Gross profit     17,739       8,357       9,382       112 % Sales and marketing expenses     3,651       1,153       2,498       217 % Research and development expenses     1,251       550       701       127 % General and administrative expenses     11,892       7,321       4,571       62 % Depreciation and amortization expense     2,833       1,364       1,469       108 % Deal and transaction     592       518       74       14 % Total operating expenses     20,219       10,906       9,313       85 % Operating loss     (2,480 )     (2,549 )     69       -3 % Other income/(expenses):                                 Interest expense     (2,743 )     (805 )     (1,938 )     241 % Change in fair value of warrant liability     7,902       -       7,902       100 % Change in fair value of equity guarantee     1,074       -       1,074       100 % Change in fair value of Convertible Loan     -       166       (166 )     -100 % Loss on debt waiver consent     (1,212 )     -       (1,212 )     100 % Loss on warrant amendment     (345 )     -       (345 )     100 % Gain/(loss) on settlement of debt     (237 )     3,449       (3,686 )     -107 % Other expense     (4 )     (7 )     3       -43 % Total other income/(expense)     4,435       2,803       1,632       58 % Net income before income taxes     1,955       254       1,701       670 % Income tax expense     (79 )     (22 )     (57 )     259 % Net income   $ 1,876     $ 232     $ 1,644       709 %   29 Table of Contents   Sales   Sales increased by $24,913, or 135%, in 2022 as compared to 2021 driven in part by the acquisition of Reflect Systems, Inc. ("Reflect") via merger (the "Merger") on February 17, 2022, and the Company's successful sales activities as a combined company post-Merger.   Hardware revenues were $19,895 in 2022, an increase of $10,445 or 111%, as compared to the prior year.  The increase was driven by large scale LED deployments during the year by multiple customers and the acquisition of Reflect.  Services and other revenues were $23,455 in 2022, an increase of $14,468, driven by the acquisition of Reflect and the Company's successful sales activities post-Merger.  Managed services revenue, which includes both SaaS and help desk technical subscription services were $14,320 for the year ended December 31, 2022 as compared to $5,596 for the year ended December 31, 2021.  The increase is driven by the addition of Reflect's SaaS subscription revenue in the current year.  This represents a year-over-year growth rate of 156% in our higher margin, typically subscription-based, managed service revenue.     Gross Profit   Gross profit increased $9,382 to $17,739 in 2022 from $8,357 in 2021, or 112%, through a combination of a 135% increase in revenue offset partially by a 4.4% reduction in gross margin percentage.  Gross margin decreased to 40.9% from 45.3% driven by (i) revenue mix during 2022 related to several material customer hardware rollouts in the year that had a lower gross profit margin than our software services and (ii) a $1,249 increase in our inventory reserve related to Safe Space Solutions. We are no longer actively promoting the sale of our Safe Space Solutions or purchasing inventory to support such solutions. We expect the contraction in gross margin to be less severe as we move beyond 2022.   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 increased by $2,498, or 217%, for the year ended December 31, 2022 as compared to the same period in 2021 driven primarily by (i) the inclusion in the prior year of a benefit of $232 related Employee Retention Credits (“ERC”) related to the retention and payment of salaries to sales personnel throughout 2020 and the nine months ended September 30, 2021, (ii) the acquisition of Reflect via the Merger on February 17, 2022, and (iii) the Company’s enhanced investments into sales and marketing activities post-COVID-19 pandemic. Immediately following the Merger, the Company integrated the sales and marketing functions of the Company and Reflect and did not disaggregate expenses between the two legacy companies. Following the Merger and through integration activities, the Company adopted certain tools, technology, and processes – particularly with respect to lead generation and brand marketing – that the Company believes were undercapitalized historically by the Company. Additionally, the Company engaged an investor relations firm and has increased investor relations activities, including conferences and presentations. As a result, we expect the sales and marketing expenses of the Company for the year ended December 31, 2022 to adequately reflect the pace for spend in these areas in future reporting periods.   Research and Development Expenses   Research and development expenses generally include personnel and development tools costs associated with the continued development of the Company’s content management systems and other related application development. Research and development expenses increased by $701, or 127%, for the year ended December 31, 2022 as compared to the same period in 2021 driven primarily by (i) the inclusion in the prior year of a benefit of $196 related ERC, and (ii) the acquisition of Reflect via the Merger on February 17, 2022. Through the Merger, we acquired a fully staffed, experienced software development team and elected to keep that team in-tact, particularly given employment market conditions with respect to talented software engineers. We have integrated the pre-existing CRI development team with the acquired team and have experienced enhanced speed to market on new feature and functionality development activities from increasing this resource pool. We expect this elevated level of expense during the year ended December 31, 2022 to continue into the future as we develop our current and future product set.   General and Administrative Expenses   General and administrative expenses increased $4,571, or 62%, driven primarily by (i) the inclusion in the prior year of a benefit of $694 related ERC, (ii) a prior period cash recovery of $555 related to a customer bankruptcy for which the Company previously recorded a reserve, and (iii) increased headcount and operations as a result of the acquisition of Reflect on February 17, 2022. While the Company anticipates carrying higher general and administrative expenses moving forward as a result of the acquisition and subsequent expansion in organic revenues, the Company continues to execute integration activities (including but not limited to consolidation of CMS tools, cloud hosting environments, IT tools, and rightsizing leases for office space) that we expect will be realized by the end of 2022 and into 2023.   30 Table of Contents   Depreciation and Amortization Expenses   Depreciation and amortization expenses increased by $1,469, or 108%, in 2022 compared to 2021. This was driven by the addition of $17,160 in amortizing intangible assets as a result of the Merger. Depreciation was consistent in both periods.    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.   Changes in Fair Value of Warrant Liability   During the year ended December 31, 2022, the Company recorded a gain of $7,902 as the result of assessing the fair value of warrant liabilities associated with the Company’s issuance of warrants in its debt and equity offerings completed in February 2022 to finance the Merger. These warrants were initially assessed at fair value through Black Scholes calculation, with changes in fair value recognized at each period end.   Change in Fair Value of Equity Guarantee   The Company has contingent consideration arrangements related to certain acquisitions to potentially pay additional cash amounts in future periods based on the lack of achievement of certain share price performance goals of our common stock. Such contingent consideration arrangements are recorded at fair value and are classified as liabilities on the acquisition date and are remeasured at each reporting period in accordance with ASC 805-30-35-1 using a Monte Carlo simulation model. The change in the period represents the mark-to-market adjustment as of the balance sheet date.   Change in fair value of Convertible Loan   The Company updated its fair value analysis of the Convertible Loan, resulting in a change in fair value of the Convertible Loan of $166, recognized during the year ended December 31, 2021.   31 Table of Contents   Loss on Debt Waiver   On February 17, 2022, in connection with obtaining a waiver of certain restrictions in investment documents between an investor and the Company in order to consummate the financing contemplated by the Company's credit agreement with Slipstream Communications, the Company paid consideration to such investor in the form of a warrant (the “Purchaser Warrant”) to purchase 466,667 shares of Company common stock in an at-the-market offering under Nasdaq rules. The number of shares of Company common stock subject to the Purchaser Warrant was equal to the waiver fee ($175) divided by $0.375 per share. The exercise price of the Purchaser Warrant is $4.23 per share, and the Purchaser Warrant became exercisable on August 17, 2022. The Purchaser Warrant expires five years from the date of issuance. At the date of issuance, the Company performed a Black-Scholes valuation of the Purchaser Warrant, resulting in a fair value of $2.5968 per warrant. In recording the warrant liability, the Company recorded an expense in the Consolidated Statement of Operations associated with the issuance of the Purchaser Warrant of $1,212.   Loss on Warrant Amendment   Effective June 30, 2022, the Company amended the terms of certain of its outstanding warrants. The amendments to such warrants removed the holder’s option to determine the value of such warrants utilizing the volume weighted average price (“VWAP”) of the Company’s common stock on the trading day immediately preceding the date of a notice in a cashless exercise, and removed the condition to exercising such warrants that the Company’s shareholders approve the exercise thereof (which had already been obtained). The amendments to the warrants also extended the term of such warrants for an additional one year. As a result of the extension in term provided in exchange for the amendment, the Company reassessed the fair value of each of the affected warrants, resulting in the Company recording a loss on the fair value of these warrants of $345.   Gain/Loss on Settlement of Obligations   On February 17, 2022, the Company refinanced its debt facilities with Slipstream. The Company assessed the combination of the pre-existing senior secured term loan and secured convertible loan in accordance with ASC 470  Debt  and determined the transaction should be accounted for as an extinguishment, in part as the Consolidation Term Loan eliminated a substantive conversion feature. In aggregate the Company recorded a loss on extinguishment of $295, primarily associated with the write-off of pre-existing debt discounts.   On January 11, 2021, the Company received a notice from Old National Bank regarding forgiveness of the loan in the principal amount of $1,552 (the “PPP Loan”) that was made pursuant to the Small Business Administration Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act of 2020. According to such notice, the full principal amount of the PPP Loan and the accrued interest have been forgiven, resulting in a gain of $1,552 during the year ended December 31, 2021.   On May 13, 2021, the Company and seller of Allure (“Seller”) entered into a settlement agreement wherein neither party admitted liability, and the Company agreed to pay, and Seller agreed to accept, $100 as settlement in full for the outstanding balance of principal and accrued interest under the Seller Note and a mutual release of all claims related to the Seller Note and Allure sale transaction under the Purchase Agreement and all related agreements.   As a result of this settlement, the full principal amount of the Seller Note and the accrued interest have been eliminated, resulting in a gain in the Consolidated Financial Statements of $1,624, representing $1,538 related to the Seller Note and $86 of related interest thereon, during the year ended December 31, 2021.   32 Table of Contents   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, a GAAP financial measure, 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   2022     2022     2022     2022     2022   GAAP net income (loss)   $ 1,876     $ (1,334 )   $ (554 )   $ 1,262     $ 2,502   Interest expense:                                         Amortization of debt discount     1,268       364       363       360       181   Other interest, net     1,475       423       394       390       268   Depreciation/amortization:                                         Amortization of intangible assets     2,702       743       848       431       680   Amortization of employee share-based awards     1,689       448       456       316       469   Depreciation of property and equipment     131       30       37       37       27   Income tax expense/(benefit)     79       33       (10 )     53       3   EBITDA   $ 9,220     $ 707     $ 1,534     $ 2,849     $ 4,130   Adjustments                                         Gain on fair value of warrant liability     (7,902 )     -       -       (2,433 )     (5,469 ) (Gain)/loss on settlement of obligations     237       -       (37 )     (21 )     295   Loss on debt waiver consent     1,212       -       -       -       1,212   Loss on warrant amendment     345       -       -       345       -   (Gain)/loss on fair value of equity guarantee     (1,074 )     (705 )     (442 )     73       -   Disposal of Safe Space Solutions inventory     909       909       -       -       -   Deal and transaction costs     592       54       110       37       391   Other income     4       7       2       1       (6 ) Stock-based compensation – Director grants     302       56       82       82       82   Adjusted EBITDA   $ 3,845     $ 1,028     $ 1,249     $ 933     $ 635     33 Table of Contents               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     $ 1,272   Interest expense:                                         Amortization of debt discount     159       29       29       29       72   Other interest, net     648       160       158       153       177   Depreciation/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     34 Table of Contents   Liquidity and Capital Resources   See Note 1  Nature of Organization and Operations  to the accompanying Consolidated Financial Statements for a detailed discussion of liquidity and financial resources.   Operating Activities   The cash flows (used in) / provided by operating activities were $(708) and $471 for the years ended December 31, 2022 and 2021, respectively.  We produced net income of $1,876.  Following the Merger, our revenues have significantly expanded, particularly with respect to managed services revenue.  Other than net income, cash provided by operating activities was driven by an expansion of accounts receivable and inventory of $3,927 and $1,472, partially offset by growth of $914 of accounts payable and $1,112 of accrued expenses, respectively.    Investing Activities   Net cash used in investing activities during the year ended December 31, 2022 was $21,475 as compared to $1,159 for the same period in 2021. The use of cash in the current year was driven by (1) completion of the Merger and (2) continued investments in our software platforms.  We currently do not have any material commitments for capital expenditures as of December 31, 2022; however, we anticipate continued elevated capital expenditures in excess of historical trends through second quarter of 2023 as we complete the modernization and internationalization of our automotive platform in an effort to capture incremental SaaS-based revenue contracts.   Financing Activities   Net cash provided by financing activities during the years ended December 31, 2022 and 2021 was $20,933 and $1,745, respectively. The current year results were primarily driven by completion of the Company’s Equity Financing and Debt Financing (each as described in Note 10 Business Combinations to the accompanying Consolidated Financial Statements) in the period to facilitate the Merger, which provided net cash of $10,109 and $9,868, respectively.  The Company also executed a $2,000 term note ("Term Note (2022)") with Slipstream (as described in Note 8 Loans Payable  to the accompanying Consolidated Financial Statements).  Cash provided by financing activities were reduced by $1,044 as a result of repayments of principal on the Secured Promissory Note (as described in Note 8 Loans Payable to the accompanying Consolidated Financial Statements).    Off-Balance Sheet Arrangements   During the year ended December 31, 2022, 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   35 Table of Contents