NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
amounts)
All currency is rounded to the nearest thousands except share
and per share amounts
NOTE 1: NATURE OF ORGANIZATION AND OPERATIONS
Unless the context otherwise indicates,
references in these Notes to the accompanying Consolidated Financial Statements to “we,” “us,” “our”
and “the Company” refer to Creative Realities, Inc. and its subsidiaries.
Nature of the Company’s Business
Creative Realities, Inc. is a Minnesota
corporation that provides innovative digital marketing technology and solutions to retail companies, individual retail brands,
enterprises and organizations throughout the United States and in certain international markets. The Company has expertise in a
broad range of existing and emerging digital marketing technologies, as well as the related media management and distribution software
platforms and networks, device management, product management, customized software service layers, systems, experiences, workflows,
and integrated solutions. Our technology and solutions include: digital merchandising systems and omni-channel customer engagement
systems, interactive digital shopping assistants, advisors and kiosks, and other interactive marketing technologies such as mobile,
social media, point-of-sale transactions, beaconing and web-based media that enable our customers to transform how they engage
with consumers. We have expertise in a broad range of existing and emerging digital marketing technologies, as well as the following
related aspects of our business: content, network management, and connected device software and firmware platforms; customized
software service layers; hardware platforms; digital media workflows; and proprietary processes and automation tools.
Our main operations are conducted directly
through Creative Realities, Inc., and under our wholly owned subsidiaries Allure Global Solutions, Inc., a Georgia corporation,
and Creative Realities Canada, Inc., a Canadian corporation. Our other wholly owned subsidiaries, Creative Realities, LLC, a Delaware
limited liability company, and ConeXus World Global, LLC, a Kentucky limited liability company, are effectively dormant.
Liquidity and Financial Condition
The accompanying Consolidated Financial
Statements have been prepared on the basis of the realization of assets and the satisfaction of liabilities and commitments in
the normal course of business and do not include any adjustments to the recoverability and classifications of recorded assets and
liabilities as a result of uncertainties.
We produced net income for the year ended
December 31, 2019 but incurred a net loss for the year ended December 31, 2020 and have negative cash flows from operating activities
for both periods. As of December 31, 2020, we had cash and cash equivalents of $1,826 and a working capital deficit of $306.
On January 11, 2021, Creative Realities,
Inc. 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 Air,
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. Accounting for the forgiveness will be recognized in the first quarter of 2021.
On February 18, 2021, the Company entered
into a securities purchase agreement with an institutional investor which provided for the issuance and sale by the Company of
800,000 shares of the Company’s common stock (the “Shares”), in a registered direct offering (the “Offering”)
at a purchase price of $2.50 per Share, for gross proceeds of $2,000. The net proceeds from the Offering after paying estimated
offering expenses were approximately $1,835, which the Company intends to use for general corporate purposes. The closing of the
Offering occurred on February 22, 2021.
On March 7, 2021, the Company and Slipstream
entered into an agreement to refinance the Company’s Loan and Security Agreement, including (1) the extension of all maturity
dates therein to March 31, 2023, (2) the conversion of the Disbursed Escrow Promissory Note into equity, (3) access to an additional
$1,000 via a multi-advance line of credit facility, and (4) the removal of the three times liquidation preference with respect
to the Company’s Secured Convertible Special Loan Promissory Note.
Management believes that, based on (i) the
forgiveness of our PPP Loan, (ii) the execution of a registered direct offering and remaining availability for incremental offerings
under our previously registered Form S-3, (iii) the refinancing of our debt, including extension of the maturity date on our term
and convertible loans, as well as access to incremental borrowings under the new multi-advance line of credit, and (iv) our operational
forecast through 2021, we can continue as a going concern through at least March 31, 2022. However, given our net losses, cash
used in operating activities and working capital deficit, we obtained a continued support letter from Slipstream through March
31, 2022. 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.
See Note 8 Loans Payable to the Consolidated
Financial Statements for an additional discussion of the Company’s debt obligations and further discussion of the Company’s
refinancing activities subsequent to the year-end date.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting
policies consistently applied in the preparation of the accompanying Consolidated Financial Statements follows:
1. Basis of Presentation
The accompanying Consolidated Financial
Statements have been prepared in accordance with the instructions to Form 10-K and Article 8 of Regulation S-X and include all
of the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”)
for annual financial reporting.
The Consolidated Financial Statements include
the accounts of Creative Realities, Inc., our wholly owned subsidiaries Allure, ConeXus World Global LLC, Creative Realities (Canada),
Inc., and Creative Realities, LLC. All intercompany balances and transactions have been eliminated in consolidation, as applicable.
2. Revenue Recognition
We recognize revenue in accordance with
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue
from Contracts with Customers, applying the five-step model.
If an arrangement involves multiple performance
obligations, the items are analyzed to determine the separate units of accounting, whether the items have value on a standalone
basis and whether there is objective and reliable evidence of their standalone selling price. The total contract transaction price
is allocated to the identified performance obligations based upon the relative standalone selling prices of the performance obligations.
The standalone selling price is based on an observable price for services sold to other comparable customers, when available, or
an estimated selling price using a cost plus margin approach.
The Company estimates the amount of total
contract consideration it expects to receive for variable arrangements by determining the most likely amount it expects to earn
from the arrangement based on the expected quantities of services it expects to provide and the contractual pricing based on those
quantities. The Company only includes some or a portion of variable consideration in the transaction price when it is probable
that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with
the variable consideration is subsequently resolved. The Company considers the sensitivity of the estimate, its relationship and
experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the
variable consideration to the overall arrangement. The Company receives variable consideration in very few instances.
Revenue is recognized when a customer obtains
control of promised goods or services under the terms of a contract and is measured as the amount of consideration the Company
expects to receive in exchange for transferring goods or providing services. The Company does not have any material extended payment
terms as payment is due at or shortly after the time of the sale, typically ranging between thirty and ninety days. Observable
prices are used to determine the standalone selling price of separate performance obligations or a cost plus margin approach when
one is not available. Sales, value-added and other taxes collected concurrently with revenue producing activities are excluded
from revenue.
The Company recognizes contract assets or
unbilled receivables related to revenue recognized for services completed but not yet invoiced to the clients. Unbilled receivables
are recorded as accounts receivable when the Company has an unconditional right to contract consideration. A contract liability
is recognized as deferred revenue when the Company invoices clients in advance of performing the related services under the terms
of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the related performance obligation.
The Company uses the practical expedient
for recording an immediate expense for incremental costs of obtaining contracts, including certain design/engineering services,
commissions, incentives and payroll taxes, as these incremental and recoverable costs have terms that do not exceed one year.
3. Inventories
Inventories are stated at the lower of cost
or market (net realizable value), determined by the first-in, first-out (FIFO) method, and consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials, net of reserve of $104 and $134, respectively
|
|
$
|
1,920
|
|
|
$
|
200
|
|
Inventory on consignment with distributors
|
|
|
208
|
|
|
|
-
|
|
Work-in-process
|
|
|
223
|
|
|
|
179
|
|
Total inventories
|
|
$
|
2,351
|
|
|
$
|
379
|
|
4. Impairment of Long-Lived Assets
We review the carrying value of all long-lived
assets, including property and equipment, for impairment in accordance with ASC 360, Accounting for the Impairment or Disposal
of Long-Lived Assets. Under ASC 360, impairment losses are recorded whenever events or changes in circumstances indicate the
carrying value of an asset may not be recoverable.
If the impairment tests indicate that the
carrying value of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment loss
would be recognized. The impairment loss is determined as the amount by which the carrying value of such asset exceeds its fair
value. We generally measure fair value by considering sale prices for similar assets or by discounting estimated future cash flows
from such assets using an appropriate discount rate. Assets to be disposed of are carried at the lower of their carrying value
or fair value less costs to sell. Considerable management judgment is necessary to estimate the fair value of assets, and accordingly,
actual results could vary significantly from such estimates.
5. Basic and Diluted Income/(Loss) per Common Share
Basic and diluted income/(loss) per common
share for all periods presented is computed using the weighted average number of common shares outstanding. Basic weighted average
shares outstanding includes only outstanding common shares. Diluted weighted average shares outstanding includes outstanding common
shares and potential dilutive common shares outstanding in accordance with the treasury stock method. Shares reserved for outstanding
stock options, including stock options with performance restricted vesting, and warrants totaling approximately 7,040,709 and 5,046,888
at December 31, 2020 and 2019, respectively were excluded from the computation of income/(loss) per share as all options and warrants
were anti-dilutive due to the net loss in 2020 and no options or warrants were in the money for 2019. In calculating diluted earnings
per share for the years ended December 31, 2020 and 2019, in accordance with ASC 260 Earnings per share, we excluded the
dilutive effect of the potential issuance of common stock upon an assumed conversion of the Special Loan.
6. Income Taxes
Deferred income taxes are recognized in
the financial statements for the tax consequences in future years of differences between the tax basis of assets and liabilities
and their financial reporting amounts based on enacted tax laws and statutory tax rates. Temporary differences arise from net operating
losses, differences in basis of intangibles, stock-based compensation, reserves for uncollectible accounts receivable and inventory,
differences in depreciation methods, and accrued expenses. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. The Company accounts for uncertain tax positions utilizing an established recognition
threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. We had no uncertain tax positions as of December 31, 2020 and December 31, 2019.
7. Goodwill and Definite-Lived Intangible
Assets
We follow the provisions of ASC 350, Goodwill
and Other Intangible Assets. Pursuant to ASC 350, goodwill acquired in a purchase business combination is not amortized, but instead
tested for impairment at least annually. The Company uses an annual measurement date of September 30 (see Note 7 Intangible
Assets and Goodwill).
8. Use of Estimates
The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Our significant estimates include: the allowance for doubtful accounts, valuation allowances
related to deferred taxes, the fair value of acquired assets and liabilities, the fair value of liabilities reliant upon the appraised
fair value of the Company, valuation of stock-based compensation awards and other assumptions and estimates used to evaluate the
recoverability of long-lived assets, goodwill and other intangible assets and the related amortization methods and periods. Actual
results could differ from those estimates.
9. Property and Equipment
Property and equipment are carried at cost,
less accumulated depreciation and amortization. Depreciation is provided for in amounts sufficient to relate the cost of depreciable
assets to operations over the estimated service lives, principally using straight-line methods. Leasehold improvements are amortized
over the shorter of the life of the improvement or the lease term, using the straight-line method.
Property and equipment consist of the following
at December 31, 2020 and 2019:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Equipment
|
|
$
|
81
|
|
|
$
|
83
|
|
Leasehold improvements
|
|
|
135
|
|
|
|
136
|
|
Purchased and developed software
|
|
|
3,167
|
|
|
|
2,563
|
|
Furniture and fixtures
|
|
|
119
|
|
|
|
102
|
|
Other depreciable assets
|
|
|
56
|
|
|
|
65
|
|
Total property and equipment
|
|
|
3,558
|
|
|
|
2,949
|
|
Less: accumulated depreciation and amortization
|
|
|
(2,218
|
)
|
|
|
(1,396
|
)
|
Net property and equipment
|
|
$
|
1,340
|
|
|
$
|
1,553
|
|
The estimated useful lives used to compute
depreciation and amortization are as follows:
Asset class
|
|
Useful life assigned
|
Equipment
|
|
3 – 5 years
|
Furniture and fixtures
|
|
5 years
|
Purchased and developed software
|
|
3 years
|
Leasehold improvements
|
|
Shorter of 5 years or term of lease
|
Depreciation expense was $837 and $564 for
the years ended December 31, 2020 and 2019, respectively.
12. Research and Development and Software Development Costs
Research and development expenses consist
primarily of development personnel and non-employee contractor costs related to the development of new products and services, enhancement
of existing products and services, quality assurance and testing. The Company capitalizes its costs incurred for additional functionality
to its internal software. We capitalized approximately $603 and $805 for the years ended December 31, 2020 and 2019, respectively.
These software development costs include both enhancements and upgrades of our client-based systems including functionality of
our internal information systems to aid in our productivity, profitability and customer relationship management. We are amortizing
these costs over 3 years once the new projects are completed and placed in service. These costs are included in property and equipment,
net on the Consolidated Balance Sheets.
13. Leases
We account for leases in accordance with
ASU No. 2016-02, Leases (Topic 842), as amended.
We determine if an arrangement is a lease
at inception. Right of use (“ROU”) assets and liabilities are recognized at commencement date based on the present
value of remaining lease payments over the lease term. For this purpose, we consider only payments that are fixed and determinable
at the time of commencement. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based
on the information available at commencement date in determining the present value of lease payments. Our incremental borrowing
rate is a hypothetical rate based on our understanding of what our credit rating would be. The ROU asset also includes any lease
payments made prior to commencement and is recorded net of any lease incentives received. Our lease terms may include options to
extend or terminate the lease when it is reasonably certain that we will exercise such options.
Operating leases are included in operating
lease right-of-use assets, current maturities of operating leases, and long-term obligations under operating leases on our Consolidated
Balance Sheets. Finance leases are included in property and equipment, net, current maturities of financing leases, and long-term
obligations under financing leases on our Consolidated Balance Sheets.
NOTE 3: RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
Recently adopted
On January 1, 2020, we adopted ASU 2018-15 Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which provide guidance
on evaluating the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance
for determining when the arrangement includes a software license. The adoption of this guidance had no material impact on our Consolidated
Financial Statements.
On January 1, 2020, we adopted ASU No. 2018-13, Changes
to Disclosure Requirements for Fair Value Measurements (Topic 820), which improved the effectiveness of disclosure requirements
for recurring and nonrecurring fair value measurements. The standard removed, modified, and added certain disclosure requirements.
The adoption of this guidance had no material impact on our Consolidated Financial Statements.
Not yet adopted
In December 2019, the FASB issued ASU No.
2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting
for income taxes. This guidance will be effective for us in the first quarter of 2021 on a prospective basis, and early adoption
is permitted. We continue evaluating the impact of the guidance but anticipate it will have no material effect on our Consolidated
Financial Statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial
Instruments—Credit Losses. The main objective is to provide financial statement users with more decision-useful information
about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at
each reporting date. The amendments in this update replace the incurred loss methodology with a methodology that reflects expected
credit losses and requires consideration of a broader range of reasonable and supportable information to calculate credit loss
estimates. For trade receivables and loans, entities will be required to estimate lifetime expected credit losses. The amendments
are effective for public business entities that qualify as smaller reporting companies for fiscal years and interim periods beginning
after December 15, 2022. We are currently evaluating the disclosure requirements related to adopting this guidance.
In August 2020, the FASB issued ASU No.
2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts
in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU
2020-06), which simplifies the accounting for convertible instruments by reducing the number of accounting models available
for convertible debt instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share
for convertible instruments and requires the use of the if-converted method. This guidance will be effective for us in the
first quarter of 2022 on a full or modified retrospective basis, with early adoption permitted. We do not expect the
adoption of this guidance to have a material impact on our Consolidated Financial Statements.
NOTE 4: REVENUE RECOGNITION
The Company applies ASC 606 for revenue
recognition. The following table disaggregates the Company’s revenue by major source for the years ended December 31, 2020
and 2019:
(in thousands)
|
|
Year
Ended
December 31,
2020
|
|
|
Year
Ended
December 31,
2019
|
|
Hardware
|
|
$
|
8,991
|
|
|
$
|
8,229
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
Installation Services
|
|
|
2,537
|
|
|
|
7,500
|
|
Software Development Services
|
|
|
549
|
|
|
|
9,303
|
|
Managed Services
|
|
|
5,380
|
|
|
|
6,566
|
|
Total Services
|
|
|
8,466
|
|
|
|
23,369
|
|
|
|
|
|
|
|
|
|
|
Total Hardware and Services
|
|
$
|
17,457
|
|
|
$
|
31,598
|
|
System hardware sales
System hardware revenue is recognized generally
upon shipment of the product or customer acceptance depending upon contractual arrangements with the customer in instances in which
the sale of hardware is the sole performance obligation. Shipping charges billed to customers are included in hardware sales and
the related shipping costs are included in hardware cost of sales. The cost of freight and shipping to the customer is recognized
in cost of sales at the time of transfer of control to the customer. System hardware revenues are classified as “Hardware”
within our disaggregated revenue.
Installation services
The Company performs outsourced installation
services for customers and recognizes revenue upon completion of the installations. Installation services also includes engineering
services performed as part of an installation project.
When system hardware sales include installation
services to be performed by the Company, the goods and services in the contract are not distinct, so the arrangement is accounted
for as a single performance obligation. Our customers control the work-in-process and can make changes to the design specifications
over the contract term. Revenues are recognized over time as the installation services are completed based on the relative portion
of labor hours completed as a percentage of the budgeted hours for the installation. Installation services revenues are classified
as “Installation Services” within our disaggregated revenue.
Software design and development services
Software and software license sales are
revenue when a fixed fee order has been received and delivery has occurred to the customer. Revenue is recognized generally upon
customer acceptance (point-in-time) of the software product and verification that it meets the required specifications. Software
is delivered to customers electronically. Software design and development revenues are classified as “Software Development
Services” within our disaggregated revenue.
Software as a service
Software as a service includes revenue from
software licensing and delivery in which software is licensed on a subscription basis and is centrally hosted. These services often
include software updates which provide customers with rights to unspecified software product upgrades and maintenance releases
and patches released during the term of the support period. Contracts for these services are generally 12-36 months in length.
We account for revenue from these services in accordance with ASC 985-20-15-5 and recognize revenue ratably over the performance
period. Software as a service revenue are classified as “Managed Services” within our disaggregated revenue.
Maintenance and support services
The Company sells support services which
include access to technical support personnel for software and hardware troubleshooting. The Company offers a hosting service through
our network operations center, or NOC, allowing the ability to monitor and support its customers’ networks 7 days a week,
24 hours a day. These contracts are generally 12-36 months in length. Revenue is recognized over the term of the agreement in proportion
to the costs incurred in fulfilling performance obligations under the contract. Maintenance and Support revenues are classified
as “Managed Services” within our disaggregated revenue.
Maintenance and support fees are based on
the level of service provided to end customers, which can range from monitoring the health of a customer’s network to supporting
a sophisticated web-portal to managing the end-to-end hardware and software of a digital marketing system. These agreements are
renewable by the customer. Rates for maintenance and support, including subsequent renewal rates, are typically established based
upon a fee per location, per device, or a specified percentage of net software license fees as set forth in the arrangement. These
contracts are generally 12-36 months in length. Revenue is recognized ratably and evenly over the service period.
The Company also performs time and materials-based
maintenance and repair work for customers. Revenue is recognized at a point in time when the performance obligation has been fully
satisfied.
NOTE 5: FAIR VALUE MEASUREMENT
We measure certain financial assets, including
cash equivalents, at fair value on a recurring basis. In accordance with ASC 820-10-30, fair value is a market-based measurement
that should be determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis
for considering such assumptions, ASC 820-10-35 establishes a three-level hierarchy that prioritizes the inputs used in measuring
fair value. The three hierarchy levels are defined as follows:
Level 1 — Valuations based on unadjusted
quoted prices in active markets for identical assets.
Level 2 — Valuations based on observable
inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets
that are not active; or other inputs that are observable, either directly or indirectly.
Level 3 — Valuations based on inputs
that are unobservable and involve management judgment and the reporting entity’s own assumptions about market participants
and pricing.
The Company previously recorded warrant
liabilities that were measured at fair value on a recurring basis using a binomial option pricing model. All of the Company’s
outstanding warrants classified as liabilities expired during 2019.
As part of the Allure Acquisition, the Purchase
Agreement contemplated additional consideration of $2,000 to be paid by us to Christie Digital Systems, USA (“Seller”)
in the event that acquiree revenue exceeds $13,000, as defined in the underlying agreement, for any of the trailing twelve-month
periods measured as of December 31, 2019, March 31, 2020, June 30, 2020, September 30, 2020 and December 31, 2020. The fair value
of the earnout liability was determined to be $250 at the time of acquisition. As part of our finalization of opening balance sheet
accounting at the close of the measurement period in November 2019, we recorded an adjustment to reflect the earnout liability
to $0. The liability was deemed to be Level 3 as the valuation is based on revenue projections and estimates developed by management
as informed by historical results. The liability was confirmed to be $0 at December 31, 2020 as metrics were not achieved for additional
consideration through the year-end date.
As discussed in Note 7 Intangible Assets,
Including Goodwill, the calculation of the weighted average cost of capital and management’s forecast of future financial
performance utilized within our discounted cash flow model for the impairment of goodwill contains inputs which are unobservable
and involve management judgment and are considered Level 3 estimates.
As discussed in Note 8 Loans Payable,
the Special Loan is reported at fair value. This liability is deemed to be a Level 3 valuation. Certain unobservable inputs into
the calculation of the fair value of this liability include an estimate of the fair value of the Company at a future date using
a discounted cash flow model, discount rate assumptions, and an estimation of the likelihood of conversion of the Special Loan.
As of December 31, 2020, we updated our fair value analysis of the Special Loan, which was originally evaluated at March 31, 2020
utilizing the assistance of a third-party valuation specialist, resulting in recognition of a loss of $93 during the year ended
December 31, 2020 from the change in fair value of the liability and a corresponding increase/decrease in the debt balance recorded
in the Consolidated Balance Sheet.
NOTE 6: SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Supplemental disclosure information for cash flow
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
140
|
|
|
$
|
403
|
|
Income taxes, net
|
|
$
|
19
|
|
|
$
|
25
|
|
NOTE 7: INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
Intangible assets consisted
of the following at December 31, 2020 and December 31, 2019:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Technology platform
|
|
$
|
4,635
|
|
|
|
3,400
|
|
|
$
|
4,635
|
|
|
|
3,147
|
|
Customer relationships
|
|
|
5,330
|
|
|
|
2,870
|
|
|
|
5,330
|
|
|
|
2,679
|
|
Trademarks and trade names
|
|
|
1,020
|
|
|
|
925
|
|
|
|
1,020
|
|
|
|
752
|
|
|
|
|
10,985
|
|
|
|
7,195
|
|
|
|
10,985
|
|
|
|
6,578
|
|
Accumulated amortization
|
|
|
7,195
|
|
|
|
|
|
|
|
6,578
|
|
|
|
|
|
Net book value of amortizable intangible assets
|
|
$
|
3,790
|
|
|
|
|
|
|
$
|
4,407
|
|
|
|
|
|
For the years ended December 31, 2020 and
2019, amortization of intangible assets charged to operations was $617 and $654, respectively.
Estimated amortization is as follows:
Year ending December 31,
|
|
Estimated Future Amortization
|
|
2021
|
|
$
|
544
|
|
2022
|
|
|
444
|
|
2023
|
|
|
444
|
|
2024
|
|
|
444
|
|
Thereafter
|
|
|
1,914
|
|
Intangible assets include the following
and are being amortized over their estimated useful lives as follows:
Acquired Intangible Asset:
|
|
Amortization
Period:
(years)
|
|
Technology platform and patents
|
|
|
7
|
|
Trademark
|
|
|
3
|
|
Customer relationships
|
|
|
15
|
|
Goodwill
The following is a rollforward of the Company’s
goodwill since December 31, 2019:
|
|
Total
|
|
Balance as of January 1, 2020
|
|
$
|
18,171
|
|
Goodwill impairment
|
|
|
(10,646
|
)
|
Balance as of December 31, 2020
|
|
$
|
7,525
|
|
Goodwill represents the excess of the purchase
price over the fair value of net assets acquired. Goodwill is subject to an impairment review at a reporting unit level, on an
annual basis as of the end of September of each fiscal year, or when an event occurs, or circumstances change that would indicate
potential impairment. The Company has only one reporting unit, and therefore the entire goodwill is allocated to that reporting
unit.
Interim Impairment Assessment –
March 31, 2020
Despite the excess fair value identified
in our 2019 annual impairment assessment, 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 first quarter. Therefore, we qualitatively assessed whether it was more likely than not
that the goodwill was impaired as of March 31, 2020. We reviewed our previous forecasts and assumptions based on our current
projections that are 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, (5) changes to the regulatory environment and (6) 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
and that a quantitative interim impairment assessment of our goodwill was necessary as of March 31, 2020.
As a result of the adoption of ASU 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment the impairment test consists
solely of comparing the carrying value of the reporting unit with its fair value and recording impairment, if identified.
The fair value of the reporting unit was estimated
via the income approach. Under the income approach, fair value is determined based on the present value of estimated future cash
flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include
an estimate of long-term future growth rates based on our most recent views of the long-term outlook for our industry. Actual results
may differ from those assumed in our forecasts. We derive our discount rates using a capital asset pricing model and by analyzing
published rates relevant to our business to estimate the cost of equity financing. We use discount rates that are commensurate
with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. We utilized a discount
rate of 14.5% in our valuation completed as of March 31, 2020.
While our outlook for the digital signage
industry over the long term remains strong, we have experienced rapid and immediate deterioration in our short term business as
a result of the COVID-19 pandemic, generating increased uncertainty across our customer base in many of our key vertical markets.
The elective and forced closures of businesses across the United States has resulted in reduced demand for our services, which
primarily assist business in engaging with their end customers in a physical space through digital technology. The elimination
and minimization of public gatherings has materially impacted demand for products and services in our movie theater, sports arena
and large entertainment markets. These conditions resulted in downward revisions of our internal forecasts on current and future
projected earnings and cash flows, leading to an implied fair value of goodwill substantially below the carrying value. Therefore,
during the three months ended March 31, 2020, we recorded a non-cash impairment loss of $10,646. We recorded the estimated
impairment losses in the caption “Goodwill impairment” in our Consolidated Statement of Operations.
Annual Impairment Assessment –
September 30, 2020
The Company assessed the carrying value
of goodwill at the reporting unit level based on an estimate of the fair value of the respective reporting unit. Fair value of
the reporting unit was estimated 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, specifically, the Company gave significant consideration to actual historic financial results, including revenue
growth rates in the preceding three years. Based on the Company’s assessment, we determined that the fair value of our reporting
unit exceeds its carrying value, and accordingly, the goodwill associated with the reporting unit is not considered to be impaired
at September 30, 2020.
Given the proximity in time to the most recent
goodwill impairment, which marked the Company’s goodwill balance down to fair value, the Company anticipated its analysis
would result in a thin margin in the percentage of excess fair value over carrying value as of the assessment date. Through the
analysis performed as of September 30, 2020, the excess fair value over carrying value was approximately 7%. Based on the Company’s
assessment, we determined that the fair value of our reporting unit exceeds its carrying value, and accordingly, the goodwill associated
with the reporting unit is not considered to be impaired at September 30, 2020.
The Company recognizes that any changes
in our projected 2021 and future results could potentially have a material impact on our assessment of goodwill impairment. The
Company will continue to monitor the actual performance of its operations against expectations and assess further indicators of
possible impairment. The valuation of goodwill and intangible assets is subject to a high degree of judgment, uncertainty and complexity.
Should any indicators of impairment occur in subsequent periods, the Company will be required to perform an analysis in order to
determine whether goodwill is impaired.
NOTE 8: LOANS PAYABLE
The outstanding debt with detachable warrants,
as applicable, are shown in the table below. Further discussion of the notes follows.
As of December 31, 2020
|
|
Debt Type
|
|
Issuance
Date
|
|
Principal
|
|
|
Maturity
Date
|
|
|
Warrants
|
|
|
Interest Rate Information
|
|
A
|
|
6/30/2018
|
|
$
|
264
|
|
|
N/A
|
|
|
|
-
|
|
|
0.0% interest
|
|
B
|
|
1/16/2018
|
|
|
1,085
|
|
|
3/31/2023
|
|
|
|
61,729
|
|
|
10.0% interest
|
(1)
|
C
|
|
8/17/2016
|
|
|
3,255
|
|
|
3/31/2023
|
|
|
|
588,236
|
|
|
10.0% interest
|
(1)
|
D
|
|
11/19/2018
|
|
|
1,637
|
|
|
2/15/2020
|
|
|
|
-
|
|
|
3.5% interest
|
|
E
|
|
12/30/2019
|
|
|
2,177
|
|
|
3/31/2023
|
|
|
|
-
|
|
|
10.0% interest
|
(2)
|
F
|
|
4/27/2020
|
|
|
1,552
|
|
|
4/27/2022
|
(3)
|
|
|
-
|
|
|
1.0%
interest
|
(3)
|
|
|
Total debt, gross
|
|
|
9,970
|
|
|
|
|
|
|
649,965
|
|
|
|
|
|
|
Fair value (E)
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt, gross
|
|
|
10,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt discount
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt, net
|
|
$
|
9,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(1,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term debt
|
|
|
8,258
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
Debt Type
|
|
Issuance
Date
|
|
Principal
|
|
|
Maturity
Date
|
|
Warrants
|
|
|
Interest Rate Information
|
A
|
|
6/30/2018
|
|
$
|
264
|
|
|
6/30/2021
|
|
|
-
|
|
|
0.0% interest
|
B
|
|
1/16/2018
|
|
|
1,000
|
|
|
6/30/2021
|
|
|
61,729
|
|
|
8.0% interest
|
C
|
|
8/17/2016
|
|
|
3,000
|
|
|
6/30/2021
|
|
|
588,236
|
|
|
8.0% interest
|
D
|
|
11/19/2018
|
|
|
1,637
|
|
|
2/15/2020
|
|
|
-
|
|
|
3.5% interest
|
E
|
|
12/30/2019
|
|
|
2,000
|
|
|
6/30/2021
|
|
|
-
|
|
|
8.0% interest
|
|
|
|
|
$
|
7,901
|
|
|
|
|
|
649,965
|
|
|
|
|
|
Debt discount
|
|
|
(507
|
)
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
7,394
|
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(3,637
|
)
|
|
|
|
|
|
|
|
|
|
|
Long term debt
|
|
|
3,757
|
|
|
|
|
|
|
|
|
|
A – Secured Disbursed Escrow Promissory Note with related
party
B – Secured Revolving Promissory Note with related party
C – Term Loan with related party
D – Amended and Restated Seller Note from acquisition
of Allure
E – Secured Convertible Special Loan Promissory Note,
at fair value
F – Paycheck Protection Program Loan from Small Business
Administration
(1)
|
8.0% cash interest per annum through March 31, 2020. 10.0% paid-in-kind interest (“PIK”) interest per annum from April 1, 2020 through December 31, 2020. 8.0% cash interest per annum January 1, 2021 through the maturity date.
|
(2)
|
8.0% cash interest per annum, comprised of 6.0% cash, 2.0% PIK through March 31, 2020. 10.0% PIK interest per annum through September 30, 2020. In an event of default, the interest rate increases by 6.0% to 16.0%. Debt is automatically convertible to a new class of senior preferred stock of the Company at the earlier of an event of default or November 30, 2020. The principal, including PIK interest, as of December 31, 2020 is $2,177; however, fair value accounting for the convertible debt instrument results in an additional $93 of debt recorded on the Consolidated Balance Sheet as of December 31, 2020 related to this instrument.
|
|
|
(3)
|
1,0% cash interest per annum. Payments are deferred for six months from the date of the Promissory Note and the Company can apply for forgiveness of the Promissory Note after 60 days.
|
SBA Paycheck Protection Program Loan
On April 27, 2020, the Company entered into
a Promissory Note with Old National Bank (the “Promissory Note”), which provided for an unsecured loan of $1,552 pursuant
to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the
“CARES Act”). The Promissory Note has a term of two years with a 1% per annum interest rate. While the Promissory Note
currently has a two-year term, the amended law permits the Company to request a five-year maturity from Old National Bank. Payments
are deferred for six months from the date of the Promissory Note and the Company can apply for forgiveness of the Promissory Note
after 60 days. On January 11, 2021, Creative Realities, Inc. 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 Air, 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. Accounting for the forgiveness will be recognized
in the first quarter of 2021.
Amended and Restated Loan and Security
Agreement
On March 7, 2021, the Company and its subsidiaries
(collectively, the “Borrowers”) refinanced their current debt facilities with Slipstream Communications, LLC (“Slipstream”),
pursuant to an Amended and Restated Credit and Security Agreement (the “Credit Agreement”). The debt facilities continue
to be fully secured by all assets of the Borrowers. The maturity date (“Maturity Date”) on the outstanding debt and
new debt is extended to March 31, 2023. The Credit Agreement (i) provides a $1,000 of availability under a line of credit (the
“Line of Credit”), (ii) consolidates our existing term and revolving line of credit facilities into a new term loan
(the “New Term Loan”) having an aggregate principal balance of approximately $4,550 (including a 3.0% issuance fee
capitalized into the principal balance), (iii) increases the outstanding special convertible term loan (the “Convertible
Loan”) to approximately $2,280 (including a 3.0% issuance fee capitalized into the principal balance), and (iv) extinguishes
the outstanding obligations owed with respect to a $264 existing disbursed escrow loan in exchange for shares of the Company’s
common stock (the “Disbursed Escrow Conversion Shares”), valued at $2.718 per share (the trailing 10-day VWAP as reported
on the Nasdaq Capital Market as of the date of execution of the Credit Agreement). The Line of Credit and Convertible Loan accrue
interest at 10% per year, and the New Term Loan accrues interest at 8% per year.
The New Term Loan requires no principal
payments until the Maturity Date, and interest payments are payable on the first day of each month until the Maturity Date. All
interest payments owed prior to October 1, 2021 are payable as PIK payments, or increases to the principal balance only.
The Line of Credit and Convertible Loan
require payments of accrued interest payable on the first day of each month through April 1, 2022. All such interest payments made
prior to October 1, 2021 are payable as PIK payments, or increases to the principal balances under the Line of Credit and Convertible
Loan only. No principal payments are owed under the Line of Credit or Convertible Loan until April 1, 2022, at which time all principal
and interest on each of the Line of Credit and Convertible Loan will be paid in monthly installments until the Maturity Date to
fully amortize outstanding principal by the Maturity Date.
All payments of interest (other than PIK
payments) and principal on the Line of Credit and Convertible Loan may be paid, in the Borrowers’ sole discretion, in shares
of the Company’s Common Stock (the “Payment Shares,” and together with the Disbursed Escrow Conversion Shares,
the “Shares”). The Payment Shares will be valued on a per-Share basis at 70% of the VWAP of the Company’s shares
of common stock as reported on the Nasdaq Capital Market for the 10 trading days immediately prior to the date such payment is
due; provided that the Payment Shares shall not be valued below $0.50 per Share (the “Share Price”).
The Credit Agreement limits the Company’s
ability to issue Shares as follows (the “Exchange Limitations”): (1) The total number of Shares that may be issued
under the Credit Agreement will be limited to 19.99% of the Company’s outstanding shares of common stock on the date the
Credit Agreement is signed (the “Exchange Cap”), unless stockholder approval is obtained to issue shares in excess
of the Exchange Cap; (2) if Slipstream and its affiliates (the “Slipstream Group”) beneficially own the largest ownership
position of shares of Company common stock immediately prior to the proposed issuance of Payment Shares and such shares are less
than 19.99% of the then-issued and outstanding shares of Company common stock, the issuance of such Payment Shares will not cause
the Slipstream Group to beneficially own in excess of 19.99% of the issued and outstanding shares of Company common stock after
such issuance unless stockholder approval is obtained for ownership in excess of 19.99%; and (3) if the Slipstream Group does not
beneficially own the largest ownership position of shares of Company common stock immediately prior to the proposed issuance of
Payment Shares, the Company may not issue Payment Shares to the extent that such issuance would result in Slipstream Group beneficially
owning more than 19.99% of the then issued and outstanding shares of Company common stock unless (A) such ownership would not be
the largest ownership position in the Company, or (B) stockholder approval is obtained for ownership in excess of 19.99%.
Accounting for the Credit Agreement is anticipated
to be accounted for as a debt extinguishment in the first quarter of 2021. Entry into the Credit Agreement prior to the filing
of this report resulted in the reclassification of approximately $6,706, net of debt discount, from current maturities to long
term debt.
Loan and Security Agreement History
On August 17, 2016, the Company entered
into a Loan and Security Agreement with Slipstream (“Loan and Security Agreement”). Since the initial entry into the
Loan and Security Agreement in 2016, the Company has entered into several financing arrangements with varying interest rates, maturity
dates, and number of associated detachable warrants, each entered within the structure of the Loan and Security Agreement. The
debt instruments outstanding under the Loan and Security Agreement as of December 31, 2020 include the Term Loan, Secured Revolving
Promissory Note, Secured Disbursed Escrow Promissory Note, and the Special Loan.
The Loan and Security Agreement contains
certain customary restrictions including, but not limited to, restrictions on mergers and consolidations with other entities, cancellation
of any debt or incurring new debt (subject to certain exceptions), and other customary restrictions. Obligations under the loan
and security agreement are secured by a grant of collateral security in all of the tangible assets of Creative Realities, Inc.
and each of its wholly owned subsidiaries.
Ninth, Tenth, Eleventh, Twelfth, and
Thirteenth Amendment; Modification of Conversion Date of Special Loan under Loan and Security Agreement
On February 28, 2021, January 31, 2021,
December 31, 2020, November 30, 2020, and September 29, 2020, the Company entered into several amendments to Loan and Security
Agreement with its subsidiaries and Slipstream to amend the automatic conversion date of the Special Loan. Each amendment extended
the automatic conversion date of the Special Loan, which was ultimately Amended and Restated in full on March 7, 2021 as discussed
further above. The Company paid no fees in exchange for these extensions.
Eighth Amendment; Modification of Interest
Rates under Loan and Security Agreement
On April 1, 2020, the Company entered into
an Eighth Amendment to Loan and Security Agreement (the “Eighth Amendment”) with its subsidiaries and Slipstream to
amend the terms of the payments and interest accruing on the Company’s Term Loan, Secured Revolving Promissory Note, and
Special Loan. The Eighth Amendment increased the interest rates of these loans from 8% to 10%, effective April 1, 2020. Until January
1, 2021, rather than cash payments of accrued interest under the term and revolving loans, interest will be paid by the issuance
of and treated as additional principal thereunder. Commencing January 2, 2021, such interest will be payable in cash. Interest
on the special loan will no longer be paid in cash, but by the issuance of and treated as additional principal thereunder.
Upon entry into the Eighth Amendment, the
Company completed an analysis of the changes in the Loan and Security Agreement within ASC 470 Debt, concluding that the
changes represent a modification to the existing debt that was not a troubled debt restructuring and will account for the modified
terms prospectively as yield adjustments, based on the revised terms.
Seventh Amendment; Entry into Secured
Convertible Special Loan Promissory Note
On December 30, 2019, we entered into the
Special Loan as part of the Seventh Amendment under which we obtained $2,000, with interest thereon at 8% per annum payable 6%
in cash and 2% via the issuance of SLPIK interest, provided however that upon occurrence of an event of default the interest rate
shall automatically be increased by 6% per annum payable in cash. The entry into the Seventh Amendment adjusted the interest rate
on the Company’s Term Loan and Revolving Loan to 8% per annum, provided, however, at all times when the aggregate outstanding
principal amount of the Term Loan and the Revolving Loan exceeds $4,100 then the Loan Rate shall be 10%, of which eight percent
8% shall be payable in cash and 2% shall be paid by the issuance of and treated as additional PIK.
Upon the earlier to occur of an Event of
Default or October 1, 2020, if any of the principal amount of the Special Loan is then outstanding, the principal and accrued but
unpaid interest of the Special Loan and the outstanding SLPIK shall be automatically converted into shares of a new series of Senior
Convertible Preferred Stock of the Company (“New Preferred”) having an Appraised Value equal to three times the then
outstanding principal amount and accrued but unpaid interest of the Special Loan and the outstanding SLPIK and having the following
terms and conditions, as reasonably determined by the Company and Slipstream, the New Preferred shall:
|
●
|
be the most senior equity security of the Company, including with respect to the payment of dividends and other distributions;
|
|
●
|
be on substantially the same terms and conditions as the Company’s Series A-1 6% Convertible Preferred Stock as set forth in its Certificate of Designation immediately before the same was cancelled pursuant to a Certificate of Cancellation dated as of March 13, 2019;
|
|
●
|
not be subject to a right of redemption upon the part of a holder thereof;
|
|
●
|
accrue and pay quarterly dividends at the rate of twelve percent (12%) per annum which shall be payable in cash;
|
|
●
|
have a Stated Value that is an amount mutually agreed by the Company and the Slipstream at the time of issuance;
|
|
●
|
Conversion Price shall be an amount equal to 80% of the average for the 30-day period ending two days prior to the required conversion date of the daily average of the range of the Company’s common stock (calculated pursuant to information on The Wall Street Journal Online Edition), subject to appropriate adjustments; and
|
|
●
|
neither section 6(e) of the Series A-1 Certificate of Designation nor any similar provision shall apply to the New Preferred.
|
In entering the Seventh Amendment and Special
Loan, pursuant to ASC 825-10-25-1, Fair Value Option, we made an irrevocable election to report the Special Loan at fair
value, with changes in fair value recorded through the Company’s Consolidated Statements of Operations in each reporting
period. For the year ended December 31, 2020, our fair value analysis of the Special Loan resulted in recognition of a $93 loss from the change
in fair value of the liability
Sixth Amendment; Extension of Maturity
Dates
On November 6, 2019, Slipstream extended
the maturity date of our term loan and revolver loan to June 30, 2021 through the Sixth Amendment to the Loan and Security Agreement,
aligning the maturity date of our Term Loan and Secured Revolving Promissory Note with the Secured Disbursed Escrow Promissory
Note.
Secured Disbursed Escrow Promissory
Note
The Fourth Amendment to the Loan and Security
Agreement included entry into a Secured Disbursed Escrow Promissory Note between the Company and Slipstream, and, effective June
30, 2018 we drew $264 in conjunction with our exit from a previously leased operating facility. The principal amount of the Secured
Disbursed Escrow Promissory Note bears no interest. Upon entry into the Restated Agreement on March 7, 2021, this note was converted
into Company common stock, which will be recorded during the first quarter of 2021.
Amended and Restated Seller Note
from acquisition of Allure
The Amended and Restated Seller Note represents
a note payable due from Allure to Seller, under a pre-existing Seller Note which was amended and restated to a reduced amount of
$900 through the Stock Purchase Agreement. At the closing date, the estimated net working capital deficit of Allure was $801 in
excess of the target net working capital as defined in the Stock Purchase Agreement. As of the balance sheet date, Allure also
had accounts payable to Seller for outsourced services of $2,204. We agreed with the Seller to settle the estimated net working
capital deficit through a reduction in the accounts payable to Seller as of the acquisition date and to further amend the Seller
Note to include the remaining $1,403 accounts payable due from Allure to Seller, resulting in a Seller Note of $2,303. That debt
is represented by our issuance to the Seller of a promissory note accruing interest at 3.5% per annum. The promissory note requires
us to make quarterly payments of interest only through February 19, 2020, on which date the promissory note matured and all remaining
amounts owing thereunder became due.
The promissory note is convertible into
shares of Creative Realities common stock, at the seller’s option on or after the 180th day after issuance, at an initial
conversion price of $8.40 per share, subject to customary equitable adjustments. Conversion of all amounts owing under the promissory
note will be mandatory if the 30-day volume-weighted average price of our common stock exceeds 200% of the common stock trading
price at the closing of the acquisition. We granted the seller customary registration rights for the shares of our common stock
issuable upon conversion of the promissory note.
On February 20, 2020, the Company and Allure
filed a demand for arbitration against Seller for (1) breach of contract, (2) indemnification, and (3) fraudulent misrepresentation
under the Allure Purchase Agreement. This demand included a claim for the right to offset the amounts owing under the Amended and
Restated Seller Note due February 20, 2020. We have not paid, nor do we intend to pay, the Amended and Restated Seller Note, which
is now past its maturity date, without resolution of our demand for arbitration. On February 27, 2020, Seller sent the Company
a notice of breach for failure to pay the Amended and Restated Seller Note on the maturity date of February 20, 2020 and demanding
immediate payment. The Company continues to accrue interest on the Amended and Restated Seller Note and have included $67 in accrued
expenses in the Consolidated Financial Statements as of December 31, 2020. See Note 9 Commitments and Contingencies for
further discussion.
NOTE 9: COMMITMENTS AND CONTINGENCIES
Litigation
On August 2, 2019, the Company filed suit
in Jefferson Circuit Court, Kentucky, against a supplier of Allure for breach of contract, breach of warranty, and negligence with
respect to equipment installations performed by such supplier for an Allure customer. This case remains in the early stages of
litigation, in part due to delays resulting from the COVID-19 pandemic, and, as a result, the outcome of each case is unclear,
so the Company is unable to reasonably estimate the possible recovery, or range of recovery, if any.
On October 10, 2019, the Allure customer
that is the basis of our claim above sent a demand to the Company for payment of $3,200 as settlement for an alleged breach of
contract related to hardware failures of equipment installations performed by Allure between November 2017 and August 2018. The
suits filed by and against Allure have been adjoined in the Jefferson Circuit Court, Kentucky in January 2020. This suit remains
in the early stages of litigation and, as a result, the outcome of the suit and the allocation of liability, if any, remain unclear,
so the Company is unable to reasonably estimate the possible liability, recovery, or range of magnitude for either the liability
or recover, if any, at the time of this filing.
The Company has notified its insurance company
on notice of potential claims and continues to evaluate both the claim made by the customer and potential avenues for recovery
against third parties should the customer prevail.
On February 20, 2020, the Company and Allure
filed a demand for arbitration against Seller for breach of contract, indemnification, and fraudulent misrepresentation under the
Allure Purchase Agreement. This demand included a claim for the right to offset the amounts owing under the Amended and Restated
Seller Note due February 20, 2020. We have not paid the Amended and Restated Seller Note which is now past its maturity date. On
February 27, 2020, Seller sent the Company a notice of breach for failure to pay the Amended and Restated Seller Note on the maturity
date of February 20, 2020 and demanding immediate payment. In December 2020, the parties entered a pre-arbitration mediation process
in an effort to settle the litigation, which remains ongoing as of the date of this report. We continue to assert the offset right
under the Purchase Agreement and Amended and Reseller Note.
Except as noted above, the Company is not
party to any other material legal proceedings, other than ordinary routine litigation incidental to the business, and there were
no other such proceedings pending during the period covered by this Report.
Settlement of obligations
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.
During the year ended December 31, 2019,
the Company settled and/or wrote off obligations of $3,178 for $1,132 cash payment and recognized a gain of $2,046. $1,619 of this
gain related to settlement of legacy sales commissions due to a third party vendor which were settled with a cash payment of $1,100
during the three-months ended December 31, 2019. The remaining settlements related to legacy accounts payable deemed to no longer
be legal obligations to vendors.
Employee-related Expenses
We implemented cost-control measures in
light of the effect of the COVID-19 pandemic on our business, including employment compensation reductions designed to achieve
preliminary cost savings. On March 19, 2020, the Company’s Board of Directors approved a six-month reduction of the salaries
of our Chief Executive Officer and Chief Financial Officer by twenty percent (20%), thereby reducing the salaries payable to such
officers in 2020 to $297,000 and $224,100, respectively. The reduction of the salaries of our Chief Executive Officer and
Chief Financial Officer remain active as of the date of this report.
On March 20, 2020, we completed a reduction-in-force
and accrued one-time termination benefits related to severance to the affected employees of $135, the total of which was paid during
the three months ended June 30, 2020. Pursuant to certain employee-related actions taken in 2018, the Company made cash payments
of approximately $555 during the year ended December 31, 2019 that were previously accrued.
Lease termination
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 2019.
NOTE 10: RELATED PARTY TRANSACTIONS
In addition to the financing transactions
with Slipstream, a related party, discussed in Note 8 Loans Payable, we have the following related party transactions.
On August 14, 2018, we entered into a payment
agreement with 33 Degrees Convenience Connect, Inc., a related party that is approximately 17.5% owned by a member of our senior
management (“33 Degrees”) outlining terms for repayment of $2,567 of aged accounts receivable as of that date. The
payment agreement stipulated a simple interest rate of 12% on aged accounts receivable to be paid on the tenth day of each month
through the maturity date of December 31, 2019. As of December 31, 2019, 33 Degrees paid the note in full.
Following repayment of the note, 33 Degrees
has continued to purchase additional hardware and services from the Company under normal payment terms.
For the years ended December 31, 2020 and
2019, we had sales of $1,058 (6.1% of consolidated sales) and $1,103 (3.5% of consolidated sales), respectively, with 33 Degrees.
Accounts receivable due from 33 Degrees was $40, or 1.2%, and $1, or 0% of consolidated accounts receivable at December 31, 2020
and December 31, 2019, respectively.
NOTE 11: INCOME TAXES
Income tax benefit/(expense) consisted of
the following:
|
|
Year ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Tax provision summary:
|
|
|
|
|
|
|
State income tax
|
|
$
|
(17
|
)
|
|
$
|
(46
|
)
|
Deferred tax benefit/(expense) - federal
|
|
|
150
|
|
|
|
(17
|
)
|
Deferred tax benefit/(expense) – state
|
|
|
25
|
|
|
|
(30
|
)
|
Tax benefit/(expense)
|
|
$
|
158
|
|
|
$
|
(93
|
)
|
The income tax benefit includes federal
and state income taxes currently payable and those deferred or prepaid because of temporary differences between financial statement
and tax bases of assets and liabilities. The Company records income taxes under the liability method. Under this method, deferred
income taxes are recognized for the estimated future tax effects of differences between the tax bases of assets and liabilities
and their financial reporting amounts based on enacted tax laws.
A reconciliation of the statutory income
tax rate to the effective income tax rates as a percentage of income before income taxes is as follows:
|
|
2020
|
|
|
2019
|
|
Federal statutory rate
|
|
|
21.00
|
%
|
|
|
21.00
|
%
|
State taxes, net of federal benefit
|
|
|
1.53
|
%
|
|
|
9.85
|
%
|
Foreign rate differential
|
|
|
0.51
|
%
|
|
|
-9.69
|
%
|
Discrete items, Transaction items, and Other
|
|
|
-7.00
|
%
|
|
|
44.85
|
%
|
Changes in valuation allowance
|
|
|
-15.11
|
%
|
|
|
-57.76
|
%
|
Effective tax rate
|
|
|
0.93
|
%
|
|
|
8.25
|
%
|
The net deferred tax assets and liabilities
recognized in the accompanying Consolidated Balance Sheets, determined using the income tax rate applicable to each period, consist
of the following:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
Reserves
|
|
$
|
318
|
|
|
$
|
175
|
|
Property and equipment
|
|
|
(40
|
)
|
|
|
(83
|
)
|
Accrued expenses
|
|
|
326
|
|
|
|
265
|
|
Right-of-use Asset
|
|
|
(147
|
)
|
|
|
(414
|
)
|
Right-of-use Liability
|
|
|
149
|
|
|
|
419
|
|
IRC 163(j) Interest Deduction
|
|
|
18
|
|
|
|
17
|
|
Non-qualified stock options
|
|
|
675
|
|
|
|
528
|
|
R&D credits
|
|
|
1,801
|
|
|
|
1,801
|
|
Net foreign carryforwards
|
|
|
3,106
|
|
|
|
2,768
|
|
US net operating loss and credit carryforwards
|
|
|
35,566
|
|
|
|
34,754
|
|
Intangibles
|
|
|
(13
|
)
|
|
|
(1,128
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net
|
|
|
41,759
|
|
|
|
39,102
|
|
Valuation allowance
|
|
|
(41,759
|
)
|
|
|
(39,277
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
-
|
|
|
$
|
(175
|
)
|
As of December 31, 2020, the Corporation
had no reserves recorded as a liability for unrecognized tax benefits for U.S. federal and state tax jurisdictions. There were
no unrecognized tax benefits as of December 31, 2020 that, if recognized, would affect the tax rate. It is the Corporation’s
policy to accrue interest and penalties related to liabilities for income tax contingencies in the provision for income taxes.
As of December 31, 2020, the Corporation had no accrued interest or penalties related to uncertain tax positions.
Our deferred tax assets are primarily related
to net federal and state operating loss carryforwards (NOLs). As of December 31, 2020, the Company has federal and state net operating
loss carryforwards expiring between 2020 and 2039, $7,924 of which has an indefinite carryforward period. The federal statute
of limitations remains open for tax years 2017 through 2019 and state tax jurisdictions generally have statutes of limitations
open for tax years 2016 through 2019.
We have substantial NOLs that are limited in usage by IRC Section
382. IRC Section 382 generally imposes an annual limitation on the amount of NOLs that may be used to offset taxable income when
a corporation has undergone significant changes in stock ownership within a statutory testing period.
The goodwill impairment recorded March 31,
2020 altered the deferred tax impact associated with indefinite lived goodwill from a deferred tax liability to a deferred tax
asset. As the indefinite-lived intangibles can no longer provide a source of income, a full valuation allowance was placed against
the deferred tax assets.
We have performed a preliminary analysis
of the annual NOL carryforwards and limitations that are available to be used against taxable income. Based on the history of losses
of the Company, there continues to be a full valuation allowance against the net deferred tax assets of the Company.
NOTE 12: WARRANTS
A summary of outstanding warrants for the
years ended December 31, 2020 and 2019 is included below:
Year Ended December 31, 2020
|
|
|
Warrants (Equity)
|
|
|
|
Amount
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
Balance January 1, 2020
|
|
|
4,733,028
|
|
|
$
|
4.83
|
|
|
|
3.41
|
|
Warrants issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants exercised
|
|
|
(27,600
|
)
|
|
|
4.38
|
|
|
|
-
|
|
Warrants expired
|
|
|
(278,528
|
)
|
|
|
7.08
|
|
|
|
-
|
|
Balance December 31, 2020
|
|
|
4,426,900
|
|
|
$
|
4.62
|
|
|
|
2.83
|
|
Year Ended December 31, 2019
|
|
|
Warrants (Equity)
|
|
|
|
|
|
Warrants (Liability)
|
|
|
|
|
|
|
Amount
|
|
|
Weighted Average Exercise
Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Amount
|
|
|
Weighted Average Exercise
Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
Balance January 1, 2019
|
|
|
4,815,047
|
|
|
$
|
4.90
|
|
|
|
4.34
|
|
|
|
216,255
|
|
|
$
|
7.34
|
|
|
|
0.64
|
|
Warrants issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants expired
|
|
|
(82,019
|
)
|
|
|
8.25
|
|
|
|
-
|
|
|
|
(216,255
|
)
|
|
|
7.34
|
|
|
|
-
|
|
Balance December 31, 2019
|
|
|
4,733,028
|
|
|
$
|
4.83
|
|
|
|
3.41
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
NOTE 13: STOCK-BASED COMPENSATION
A summary of outstanding options is included
below:
Time Vesting Options
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of Exercise
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
Prices between
|
|
Outstanding
|
|
|
Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
$0.01 - $3.00
|
|
|
1,525,000
|
|
|
|
9.41
|
|
|
$
|
2.52
|
|
|
|
8,333
|
|
|
$
|
1.88
|
|
$3.01 - $7.50
|
|
|
184,830
|
|
|
|
5.34
|
|
|
$
|
6.72
|
|
|
|
168,163
|
|
|
$
|
6.64
|
|
$7.51+
|
|
|
103,979
|
|
|
|
4.44
|
|
|
|
11.74
|
|
|
|
99,187
|
|
|
$
|
11.89
|
|
|
|
|
1,813,809
|
|
|
|
8.71
|
|
|
$
|
3.48
|
|
|
|
275,683
|
|
|
|
|
|
Performance Vesting Options
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of Exercise
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
Prices between
|
|
Outstanding
|
|
|
Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
$0.01 - $3.00
|
|
|
800,000
|
|
|
|
9.42
|
|
|
$
|
2.53
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
800,000
|
|
|
|
9.42
|
|
|
$
|
2.53
|
|
|
|
-
|
|
|
|
|
|
|
|
Time Vesting Options
|
|
|
Performance Vesting Options
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
Date/Activity
|
|
Outstanding
|
|
|
Price
|
|
|
Outstanding
|
|
|
Price
|
|
Balance, December 31, 2019
|
|
|
313,860
|
|
|
$
|
8.06
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
1,580,000
|
|
|
|
2.53
|
|
|
|
800,000
|
|
|
|
2.53
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited or expired
|
|
|
(80,051
|
)
|
|
|
2.76
|
|
|
|
-
|
|
|
|
-
|
|
Balance, December 31, 2020
|
|
|
1,813,809
|
|
|
|
3.48
|
|
|
|
800,000
|
|
|
$
|
2.53
|
|
The weighted average remaining contractual
life for options exercisable is 5.2 years as of December 31, 2020.
Valuation Information for Stock-Based Compensation
For purposes of determining estimated fair
value under FASB ASC 718-10, Stock Compensation, the Company computed the estimated fair values of stock options using the
Black-Scholes model.
On June 1, 2020 the Board of Directors of
the Company granted 10-year options to purchase an aggregate of 2,380,000 shares of its common stock to employees of the Company
subject to shareholder approval of an increase in the reserve of shares authorized for issuance under the Company’s 2014
Stock Incentive Plan (the “Plan”). On July 10, 2020, the Company held a special meeting of the Company’s shareholders
at which the shareholders approved the amendment to the Plan, which increased the reserve of shares authorized for issuance thereunder
to 6,000,000 shares.
Of the 2,380,000 options awarded, 1,580,000
vest over 3 years and have an exercise price of $2.53, the market value of the Company’s common stock on the grant date.
The fair value of the options on the grant date was $1.87 and was determined using the Black-Scholes model. These values were calculated
using the following weighted average assumptions:
Risk-free interest rate
|
|
|
0.66
|
%
|
Expected term
|
|
|
6.25 years
|
|
Expected price volatility
|
|
|
89.18
|
%
|
Dividend yield
|
|
|
0
|
%
|
The remaining 800,000 options awarded vest
in equal installments over a three-year period subject to satisfying the Company revenue target and earnings before interest, taxes,
depreciation and amortization (“EBITDA”) target for the applicable year. In each of calendar years 2020, 2021 and 2022,
one-third of the total shares may vest (if the revenue and EBITDA targets are met), and the shares that are subject to vesting
each year are allocated equally to each of the revenue and EBITDA targets for such year.
These performance options include a catch-up
provision, where any options that did not vest during a prior year due to the Company’s failure to meet a prior revenue or
EBITDA target may vest in a subsequent vesting year if the revenue or EBITDA target, as applicable, is met in the future year.
The revenue and EBITDA targets for the following three years are as follows:
Calendar Year
|
|
Revenue Target
|
|
EBITDA Target
|
2020
|
|
$32 million
|
|
$2.2 million
|
2021
|
|
$35 million
|
|
$3.1 million
|
2022
|
|
$38 million
|
|
$3.5 million
|
The exercise price of the foregoing options
is $2.53 per share, the closing price of the Company’s common stock on the date of issuance. The options were issued from
the Company’s 2014 Stock Incentive Plan. The fair value of the options on the grant date was $1.87 and was determined using
the Black-Scholes model. These values were calculated using the same weighted average assumptions as the time vesting options issued.
Performance against the identified revenue and EBITDA targets will be assessed quarterly by the Company in order to determine whether
any compensation expense should be recorded. As of December 31, 2020, the Company had recorded no compensation expense in the Consolidated
Statement of Operations with respect to these awards.
Stock Compensation Expense Information
ASC 718-10, Stock Compensation, requires
measurement and recognition of compensation expense for all stock-based payments including warrants, stock options, restricted
stock grants and stock bonuses based on estimated fair values. Under the Amended and Restated 2006 Equity Incentive Plan, the Company
reserved 1,720,000 shares for purchase by the Company’s employees and under the Amended and Restated 2006 Non-Employee Director
Stock Option Plan the Company reserved 700,000 shares for purchase by the Company’s employees. There are 12,135 options outstanding
under the 2006 Equity Incentive Plan.
In October 2014, the Company’s shareholders
approved the 2014 Stock Incentive Plan, under which 7,390,355 shares were reserved for purchase by the Company’s employees.
In August 2018, a special meeting of shareholders was held in which the shareholders voted to amend the Company’s 2014 Stock
Incentive Plan to increase the reserve of shares authorized for issuance thereunder, from 7,390,355 shares to 18,000,000 shares.
Following a 1-for-30 reverse stock split, the shares authorized for issuance under the Company’s 2014 Stock Incentive Plan
was reduced to 600,000. On July 10, 2020, the Company’s shareholders approved an amendment to the Company’s 2014 Stock
Incentive Plan to increase the reserve of authorized for issuance thereunder to 6,000,000. There are 2,601,674 options outstanding
under the 2014 Stock Incentive Plan.
Compensation expense recognized for the
issuance of stock options, including those options awarded to our Chairman of the Board, for the years ended December 31, 2020
and 2019 of $718 and $448, respectively, was included in general and administrative expense in the Consolidated Financial Statements.
Amounts recorded include stock compensation expense for awards granted to directors of the Company in exchange for services at
fair value, including $100 and $63, respectively, for the years ended December 31, 2020 and December 31, 2019, respectively.
At December 31, 2020, there was approximately
$2,365 and $1,499 of total unrecognized compensation expense related to unvested share-based awards with time vesting and performance
vesting criteria, respectively. Generally, expense related to the time vesting options will be recognized over the next two- and
one-half years and will be adjusted for any future forfeitures as they occur. Compensation expense related to performance vesting
options will be recognized if it becomes probable that the Company will achieve the identified performance metrics.
At December 31, 2019, there was approximately
$174 of total unrecognized compensation expense related to unvested share-based awards with time vesting.
On September 20, 2018, the Compensation
Committee of the Board of Directors proposed, and the Board of Directors approved, an aggregate award of 166,667 shares of common
stock to our current CEO in light of performance and growth of certain key customer relationships. Of those shares granted, 133,334
were deemed to be awarded and fully vested as of such date, with the remaining 33,333 shares restricted to vest upon the Company’s
recognition in accordance with GAAP of approximately $6,200 of revenue which was deferred on the Company’s balance sheet.
During 2018, the Company recorded compensation expense for those vested awards based on the grant-date close price of the Company’s
common stock, or $7.50, resulting in a non-cash compensation expense in the period of $1,000. During 2019, the conditions were
met for those remaining shares to vest and the Company recorded compensation expense of $250 based on the grant-date close price
of the Company’s common stock, or $7.50.
NOTE 14: LEASES
We adopted ASU No. 2016-02, Leases (Topic
842), as amended, on January 1, 2019 using the modified retrospective transition approach. We elected the package of practical
expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification, our assessment
on whether a contract was or contains a lease, and our initial direct costs for any leases that existed prior to January 1, 2019.
We also elected to combine our lease and non-lease components. Upon adoption, we recognized total ROU assets of $2,319, with corresponding
liabilities of $2,319 on the Consolidated Balance Sheets. This included $54 of pre-existing finance lease ROU assets
previously reported in computer equipment within property and equipment, net. The ROU assets include adjustments for prepayments
and accrued lease payments. The effect of the adoption resulted in a $171 cumulative effect adjustment to retained earnings on
January 1, 2019.
We have entered into various non-cancelable
operating lease agreements for certain of our offices and office equipment. Our leases have original lease periods expiring between 2021 and 2025.
Many leases include one or more options to renew. We do not assume renewals in our determination of the lease term unless the renewals
are deemed to be reasonably assured at lease commencement. Our lease agreements do not contain any material residual value guarantees
or material restrictive covenants.
The components of lease costs, lease term
and discount rate are as follows:
(in thousands)
|
|
Year Ended
December 31,
2020
|
|
|
Year Ended
December 31,
2019
|
|
Finance lease cost
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
20
|
|
|
$
|
32
|
|
Interest
|
|
|
2
|
|
|
|
5
|
|
Operating lease cost
|
|
|
626
|
|
|
|
736
|
|
Total lease cost
|
|
$
|
648
|
|
|
$
|
773
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
3.8 years
|
|
|
|
3.4 years
|
|
Finance leases
|
|
|
0.9 years
|
|
|
|
1.2 years
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
Finance leases
|
|
|
14.0
|
%
|
|
|
13.6
|
%
|
The following is a schedule, by years, of
maturities of lease liabilities as of December 31, 2020:
(in thousands)
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
2021
|
|
$
|
377
|
|
|
$
|
4
|
|
2022
|
|
|
294
|
|
|
|
-
|
|
2023
|
|
|
291
|
|
|
|
-
|
|
2024
|
|
|
81
|
|
|
|
-
|
|
Thereafter
|
|
|
74
|
|
|
|
-
|
|
Total undiscounted cash flows
|
|
|
1,117
|
|
|
|
4
|
|
Less imputed interest
|
|
|
(178
|
)
|
|
|
-
|
|
Present value of lease liabilities
|
|
|
939
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Lease liabilities, current
|
|
|
355
|
|
|
|
4
|
|
Lease liabilities, non-current
|
|
|
584
|
|
|
|
-
|
|
Present value of lease liabilities
|
|
$
|
939
|
|
|
$
|
4
|
|
Supplemental cash flow information related
to leases are as follows:
(in thousands)
|
|
Year Ended
December 31,
2020
|
|
|
Year Ended
December 31,
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
627
|
|
|
$
|
719
|
|
Operating cash flows from finance leases
|
|
|
2
|
|
|
|
1
|
|
Financing cash flows from finance leases
|
|
|
24
|
|
|
|
31
|
|
NOTE 15: PROFIT-SHARING PLAN
We have a defined contribution 401(k) retirement
plans for eligible associates in the United States. Associates may contribute up to 15% of their pretax compensation to the plan
subject to IRS limitations. Beginning on April 1, 2018, the Company began contributing an employer contribution match of 50% of
employee wages up to 6%, for an effective match of 3%. The Company indefinitely suspended the employer match at the end of March
2020 in response to the uncertainty of the COVID-19 pandemic.
We have a Registered Retirement Savings
Plan for eligible associates in Canada. Associates may contribute up to 18% of earned income reported on their tax return in the
previous year, subject to legal contribution limits. Beginning on April 1, 2018, the Company began contributing an employer contribution
match of 50% of employee wages up to 6%, for an effective match of 3%. The Company indefinitely suspended the employer match at
the end of March 2020 in response to the uncertainty of the COVID-19 pandemic.
The Company contributed $35 and $155 to
employee retirement plans for the year-ended December 31, 2020 and 2019, respectively.
NOTE 16: SEGMENT INFORMATION AND
SIGNIFICANT CUSTOMERS/VENDORS
Segment Information
We currently operate in one reportable segment,
marketing technology solutions. Substantially all property and equipment is located at our offices in the United States, and a
data center located in the United States. All material sales for the years ended December 31, 2020 and 2019 were in the United
States and Canada.
Significant Customers
We had two (2) and one (1) customer(s) that
accounted for 27.8% and 18.5% of revenue for the years ended December 31, 2020 and 2019, respectively.
For the years ended December 31, 2020 and
2019, we had sales of $1,058 (6.1% of consolidated sales) and $1,103 (3.5% of consolidated sales), respectively, with 33 Degrees
Convenience Connect, Inc., a related party that is approximately 17.5% owned by a member of our senior management (“33 Degrees”).
We had two (2) and one (1) customer(s) that
in the aggregate accounted for 42.6% and 14.4% of accounts receivable as of December 31, 2020 and December 31, 2019, respectively.
Accounts receivable due from 33 Degrees was $40 and $1 at December 31, 2020 and 2019, respectively.
Significant Vendors
We had two (2) and one (1) vendor(s) that
accounted for 46.8% and 50% of outstanding accounts payable at December 31, 2020 and December 31, 2019, respectively.
NOTE 17: SUBSEQUENT EVENTS
Payroll Protection Program Loan
On January 11, 2021, Creative Realities,
Inc. 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 Air,
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. Accounting for the forgiveness will be recognized in the first quarter of 2021.
Registered Direct Offering
On February 18, 2021, the Company entered
into a securities purchase agreement (the “Purchase Agreement”) with an institutional investor which provided for the
issuance and sale by the Company of 800,000 shares of the Company’s common stock (the “Shares”), in a registered
direct offering (the “Offering”) at a purchase price of $2.50 per Share, for gross proceeds of $2,000. The net proceeds
from the Offering after paying estimated offering expenses were approximately $1,835, which the Company intends to use for general
corporate purposes. The closing of the Offering occurred on February 22, 2021.
Debt Refinancing
On March 7, 2021, the Company and its subsidiaries
(collectively, the “Borrowers”) refinanced their current debt facilities with Slipstream Communications, LLC (“Slipstream”),
pursuant to an Amended and Restated Credit and Security Agreement (the “Credit Agreement”). The debt facilities continue
to be fully secured by all assets of the Borrowers. The maturity date (“Maturity Date”) on the outstanding debt and
new debt is extended to March 31, 2023. The Credit Agreement (i) provides a $1,000 of availability under a line of credit (the
“Line of Credit”), (ii) consolidates our existing term and revolving line of credit facilities into a new term loan
(the “New Term Loan”) having an aggregate principal balance of approximately $4,550 (including a 3.0% issuance fee
capitalized into the principal balance), (iii) increases the outstanding special convertible term loan (the “Convertible
Loan”) to approximately $2,280 (including a 3.0% issuance fee capitalized into the principal balance), and (iv) extinguishes
the outstanding obligations owed with respect to a $264 existing disbursed escrow loan in exchange for shares of the Company’s
common stock (the “Disbursed Escrow Conversion Shares”), valued at $2.718 per share (the trailing 10-day VWAP as reported
on the Nasdaq Capital Market as of the date of execution of the Credit Agreement). The Line of Credit and Convertible Loan accrue
interest at 10% per year, and the New Term Loan accrues interest at 8% per year. See Note 8 Loans Payable for additional
information with respect to the Credit Agreement.