Creative Realities, Inc. (NASDAQ: CREX, CREXW) has announced its financial results for the three- and six-months ended June 30, 2022.
Rick Mills, Chief Executive Officer, commented “I am pleased to report that the Company generated record revenue of $10.9 million for the second quarter of 2022, a $7.6 million, or 233%, improvement over the same period in 2021. Importantly, this represents a $4.7 million increase over the pro forma combination of Creative Realities and Reflect Systems in 2021, indicative of both organic and strategic growth through the merger of the companies. The Company’s run-rate on annual recurring revenue is also at a record level of $14.5 million, again well exceeding the $12.0 million for the combined companies at the end of 2021 and the $13.5 million run-rate reported as of the first quarter of this year. EBITDA and Adjusted EBITDA for the second quarter amounted to $2.8 million and $0.9 million, respectively. We believe these results aptly evidence the strength of the platform created by the combination of Creative Realities and Reflect Systems and demonstrate the Company’s ability to drive value for our shareholders. Our current client base continues to expand and the pipeline for clients appears robust.”
Mr. Mills continued, “Our primary focus continues to be expanding the number of devices managed via our digital signage software platforms generated SaaS revenue, thereby increasing the value of our Company through our growing annual recurring services revenue. As we grow the software subscription base and continue to integrate Creative Realities and Reflect, we expect to further enhance our profit margins over operating leverage and improve financial results.”
“With the expansion of our SaaS revenue and the momentum within our pipeline, we reiterate our expected target to generate revenue in excess of $43 million during 2022, which would amount to an organic growth rate in excess of 40% on a pro forma combined company basis, as compared to 2021. We are ahead of schedule on delivering the goal of 25% growth in our annual recurring revenue on a pro forma, combined company basis in 2022.”
Mr. Mills concluded, “The results for the first and second quarters of 2022 demonstrate sustained organic and inorganic revenue growth. We believe we have reached an inflection point where our incremental revenue growth will have a profound effect on profit. We remain engaged and excited about the platform that we have created and our prospects for ongoing value creation. Creative Realities is uniquely positioned to service enterprise customers with our end-to-end offering and to drive profitability through our increased scale.”
Second Quarter 2022 Financial Overview
All results herein represent the financial results of Creative Realities, Inc. and include financial results for Reflect Systems, Inc., a wholly owned subsidiary of Creative Realities following their merger on February 17, 2022.
Key Highlights:
- Year-over-year revenue growth of $7.7 million, or 233%
- Annual Recurring Revenue run-rate exceeds $14.5 million – 7.4% growth since March 31, 2022
Revenue, gross profit, and gross margin:
- Revenues for the three months ended June 30, 2022 were $10.9 million, representing an increase of $7.6 million, or 233%, as compared to the same period in 2021 driven in part by the merger with Reflect Systems on February 17, 2022, and the Company’s successful sales activities as a combined company post-merger. During the three months ended June 30, 2021, the pro forma combined results of Creative Realities and Reflect Systems produced $6.3 million in revenues. The current year combined company results for the three months ended June 30, 2022 represent an increase of $4.7 million, or 74%, over the pro forma combined results for the same period in 2021.
- Revenues for the six months ended June 30, 2022 were $21.7 million, representing an increase of $13.4 million, or 162%, as compared to the same period in 2021 driven in part by the merger with Reflect Systems on February 17, 2022, and the Company’s successful sales activities as a combined company post-merger. During the six months ended June 30, 2021, the pro forma combined results of Creative Realities and Reflect Systems produced $13.7 million in revenues. The current year combined company results for the six months ended June 30, 2022 represent an increase of $8.0 million, or 58%, over the pro forma combined results for the same period in 2021. Effectively, the organic growth rate for the combined company through six months ended June 30, 2022 is 58%. This is in-line with our previously stated expectations to produce organic growth of 40% for the full year 2022.
- Hardware revenues were $5.7 million in the three months ended June 30, 2022, representing an increase of $4.4 million, or 337%, as compared to the prior year, driven by the merger with Reflect and continued growth in large scale LED deployments in the quarter by multiple customers.
- Services and other revenues were $5.3 million in the three months ended June 30, 2022, an increase of $3.3 million, or 165%. Managed services revenue, which includes both software-as-a-service (“SaaS”) and help desk technical subscription services, were $3.8 million in the three months ended June 30, 2022 as compared to $1.4 million in the same period in 2021, driven by the merger with Reflect and the continued expansion in our SaaS software subscription base. This represents a year-over-year growth rate of 175% in our higher margin, typically subscription-based, managed services revenue.
- Gross profit increased by $2.8 million, or 147% during the three months ended June 30, 2022 as compared to the same period in 2021 driven by an increase in revenue in part as a result of the merger with Reflect, but offset by a reduction in gross profit margin. Gross profit margin decreased to 42.7% from 57.2% driven primarily by a shift in revenue mix to 52% hardware during the three months ended June 30, 2022 from 40% hardware during the three months ended June 30, 2021 related to several material customer hardware rollouts active during the first half of 2022. We expect gross profit margin to stabilize as we move into the second half of 2022 and beyond, as was the case from first quarter to second quarter 2022. The gross profit margin increased for the three months ended June 30, 2022 to 42.7% from 36.2% in the three months ended March 31, 2022, which experienced significant short-term significant pressure driven by a single, large-scale/hardware-heavy deployment. We continue to view the long tail of hardware revenue as a leading indicator of future SaaS and other services revenue. We believe the gross profit margin for the three months ended June 30, 2022 to be more representative of our normalized gross profit margins.
Operating 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 $1.0 million, or 597%, driven primarily by (i) the inclusion in the prior year of a benefit of $0.2 million related Employee Retention Credits (“ERC”) that did not recur in the current year, (ii) the merger with Reflect on February 17, 2022, and (iii) the Company’s enhanced investments into sales and marketing activities post-COVID-19 pandemic as related limitations on such activities have eased. Excluding the impact of the ERC, the increase was $0.8 million, or 371%. Immediately following the merger with Reflect, the Company integrated the sales and marketing functions 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 were underutilized 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 three months ended June 30, 2022 to adequately reflect the pace for expenses in these areas in future periods.
- Research and development expenses increased $0.4 million, or 621% in 2022, driven primarily by (i) the inclusion in the prior year of a benefit of $0.1 million related to ERC, which did not recur in the current year, and (ii) the merger with Reflect on February 17, 2022. Excluding the impact of the ERC, the increase was $0.2 million, or 367%. Through the merger with Reflect, 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 level of expense during the three months ended June 30, 2022 to be representative of our future operations as we continue to develop and enhance our current and future product set.
- General and administrative expenses increased $0.8 million thousand, or 49%, driven primarily by (i) the inclusion in the prior year of a benefit of $0.5 million related ERC which did not recur in the current year, and (ii) increased headcount and operations as a result of the merger with Reflect on February 17, 2022. Excluding the impact of the ERC, the increase was $0.3 million, or 19.8%. While the Company anticipates carrying higher general and administrative expenses moving forward as compared to its history as a result of the merger with Reflect, our integration activities include numerous projects targeted at controlling further expansion of these expenses from the level realized in the three months ended June 30, 2022.
Operating loss, net income, and EBITDA:
- Operating income was $30 thousand during the three months ended June 30, 2022, inclusive of $0.4 million in non-cash charges for both amortization of intangible assets and non-cash employee and director stock compensation.
- Net income was $1.2 million during the three months ended June 30, 2022, which included:
- $2.4 million gain on marking outstanding liability warrants to fair value (prior to their conversion to equity warrants)
- $0.3 million charge related to the amendment of outstanding warrants through extension of useful life; and
- $0.8 million of interest expense.
- EBITDA was $2.8 million and Adjusted EBITDA was $0.9 million for the three months ended June 30, 20222. Adjusted EBITDA margin was 8.3% during this period.
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