The consolidated balance sheets of Allure
Global Solutions, Inc. as of March 31, 2018 and 2017, and the related statements of operations, changes in stockholder’s
equity, and cash flows for each of the years each then ended, have been audited by Aprio, LLP, independent auditors, as stated
in their report which is incorporated herein. Such financial statements have been incorporated herein in reliance on the report
of such firm given upon their authority as experts in accounting and auditing.
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 OPERATIONS AND LIQUIDITY
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. We
have 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. We believe we are one of the world’s leading interactive marketing technology companies that focuses on the retail
shopper experience by helping retailers and brands use the latest technologies to create better shopping experiences.
Our
main operations are conducted directly through Creative Realities, Inc., and under our wholly owned subsidiaries Creative Realities,
LLC, a Delaware limited liability company, Wireless Ronin Technologies Canada, Inc., and ConeXus World Global, LLC, a Kentucky
limited liability company.
Liquidity
We have incurred net losses and negative cash
flows from operating activities for the years ended December 31, 2017 and 2016. As of December 31, 2017, we had cash and cash
equivalents of $1,003 and a working capital deficit of $(3,801). On November 13, 2017, Slipstream Communications, LLC, a related
party, extended the maturity date of our term loan to August 17, 2019 and extended the maturity date of our promissory notes on
a rolling quarter addition basis which is now April 15, 2019. While management believes that due to the extension of our debt
maturity date, our current cash balance and our operational forecast for 2018, we can continue as a going concern through at least
March 31, 2019, given our net losses and working capital deficit, we obtained a continued support letter from Slipstream Communications,
LLC through March 31, 2019. 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.
The
consolidated financial statements do not include any adjustments to the recoverability and classifications of recorded assets
and liabilities as a result of the above uncertainty.
Major
Acquisitions
Acquisition
of ConeXus World Global
There were no acquisitions completed
during the years-ended December 31, 2017 and 2016. On October 15, 2015, we completed the acquisition of ConeXus World Global,
LLC for 2,080,000 shares of Series A-1 Convertible Preferred Stock, and the conversion of $823 of ConeXus World Global debt into
(i) 87,976 shares of our common stock, and (ii) $150 in principal amount of our convertible debt.
In accordance with the terms of the
agreement and plan of merger and reorganization, an additional 416,000 shares of Series A-1 Convertible Preferred Stock and 133,334
shares of common stock were to be issued upon the reorganization of the capital structure of a Belgian affiliate of ConeXus (the
“Holdback Shares”). Since the passage of the March 31, 2016 date targeted for the completion of the reorganization
of the Belgian affiliate, the parties have determined that the value of the Belgian affiliate was de minimis.
An agreement was reached on September
1, 2017 by Creative Realities, Inc. and the prior shareholders of ConeXus to recognize the value obtained by Creative Realities,
Inc. as a result of the merger and to settle the Holdback Shares to the prior shareholders of ConeXus. Creative Realities,
Inc. has waived the contingency relating to the issuance of the Holdback Shares and issued to the shareholders 187,713 shares
of common stock. 106,602 of these shares were issued to Rick Mills, a majority shareholder of ConeXus, a related party, and the
CEO of Creative Realities, Inc. Since the measurement period for the business combination has expired, the issuance of the shares
is recognized as a charge to operations during the year ended December 31, 2017 of $1.9 million.
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.
Principles of Consolidation
The
consolidated financial statements include the accounts of Creative Realities, Inc., our wholly owned subsidiaries ConeXus World
Global LLC, Creative Realities, LLC and Wireless Ronin Technologies Canada, Inc. All inter-company balances and transactions have
been eliminated in consolidation, as applicable.
2.
Foreign Currency
For
the Company’s Canadian operations, the local currency has been determined to be the functional currency. The results of
its non-U.S. dollar based operations are translated to U.S. dollars at the average exchange rates during the period. Assets and
liabilities are translated at the rate of exchange prevailing on the balance sheet date. Equity is translated at the prevailing
rate of exchange at the date of the equity transaction. The effects of converting non-functional currency assets and liabilities
into the functional currency are recorded as general and administrative expenses in the consolidated statements of operations.
Translation adjustments which were considered immaterial to date, have been recorded as general and administrative expenses in
the consolidated statements of operations.
3.
Revenue Recognition
We
recognize revenue primarily from these sources:
|
●
|
Hardware:
System
hardware sales
|
|
|
|
|
●
|
Services
and Other:
Professional
and implementation services
|
|
|
Software
design and development services
|
|
|
Software
and software license sales
|
|
|
Maintenance
and support services
|
We
recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 910, Contractors-Construction, ASC 605,
Revenue Recognition
, ASC 605-25,
Accounting for
Revenue Arrangements with Multiple Deliverables
and ASC subtopic 985-605,
Software
. In the event of a multiple-element
arrangement, we evaluate each element of the transaction to determine if it represents a separate unit of accounting, taking into
account all factors following the guidelines set forth in FASB ASC 985-605-25-5:
|
(v)
|
persuasive
evidence of an arrangement exists;
|
|
|
|
|
(vi)
|
delivery
has occurred, which is when product title transfers to the customer, or services have been rendered;
|
|
(vii)
|
customer
payments are fixed or determinable and free of contingencies and significant uncertainties; and
|
|
|
|
|
(viii)
|
collection
is reasonably assured. If it is determined that collection of a fee is not reasonably assured, we defer the revenue and recognize
it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment. Revenues are reported
on a gross basis.
|
We
enter into arrangements with customers that may include a combination of software products, system hardware, maintenance and support,
or installation and training services. We allocate the total arrangement fee among the various elements of the arrangement based
on the relative fair value of each of the undelivered elements determined by vendor-specific objective evidence (VSOE). In software
arrangements for which we do not have VSOE of fair value for all elements, revenue is deferred until the earlier of when VSOE
is determined for the undelivered elements (residual method) or when all elements for which we do not have VSOE of fair value
have been delivered. We have determined VSOE of fair value for each of our products and services.
The
VSOE for maintenance and support services is based upon the renewal rate for continued service arrangements. The VSOE for installation
and training services is established based upon pricing for the services. The VSOE for software and licenses is based on the normal
pricing and discounting for the product when sold separately.
Each
element of our multiple-element arrangements qualifies for separate accounting. Nevertheless, when a sale includes both software
and maintenance, we defer revenue under the residual method of accounting. Under this method, the undelivered maintenance and
support fees included in the price of software is amortized ratably over the period the services are provided. We defer maintenance
and support fees based upon the customer’s renewal rate for these services.
System
hardware sales
Included
in “hardware” are system hardware sales whereby revenue is recognized generally upon shipment of the product or customer
acceptance depending upon contractual arrangements with the customer. Shipping charges billed to customers are included in sales
and the related shipping costs are included in cost of sales. Total hardware sales were $5,400 and $3,031 for the years ended
December 31, 2017 and 2016, respectively.
Services
and Other
Included
in “services and other” revenue is professional and implementation services, software design and development services,
software and software license sales and maintenance and support services revenue. Total services and other revenue was $12,298
and $10,642 for the years ended December 31, 2017 and 2016, respectively.
Professional
and implementation services
Professional
services revenue is derived primarily from consulting services related to the design and development of various marketing experiences,
and content development and management. The majority of professional services and accompanying agreements qualify for separate
accounting.
Implementation
services revenue is derived from implementation, maintenance and support contracts, content development, software development
and training.
These
services are bid either on a fixed-fee basis, time-and-materials basis or both. For time-and-materials contracts, we recognize
revenue as services are performed. For fixed-fee contracts, we recognize revenue upon completion of specific contractual milestones,
by using the percentage-of-completion method.
Software
design and development services
Software
design and development services includes revenue from contracts for technology integration consulting services where we design/redesign,
build and implement new or enhanced systems applications and related processes for clients recognized on the percentage-of-completion
method. The percentage-of-completion accounting involves calculating the percentage of services provided during the reporting
period compared to the total estimated services to be provided over the duration of the contract. Estimated revenues from applying
the percentage-of-completion method include estimated incentives for which achievement of defined goals is deemed probable. Contract
costs include all direct material, labor, subcontractors, certain indirect costs, such as indirect labor, equipment costs, supplies,
tools and depreciation costs. Selling, general and administrative costs are charged to expense as incurred. This method is followed
where reasonably dependable estimates of revenues and costs can be made. We measure progress for completion based on either the
hours worked as a percentage of the total number of hours of the project or by delivery and customer acceptance of specific milestones
as outlined per the terms of the agreement with the customer. Estimates of total contract revenue and costs are continuously monitored
during the term of the contract, and recorded revenue and costs are subject to revision as the contract progresses. Such revisions
may result in increases or decreases to revenue and income and are reflected in the financial statements in the periods in which
they are first identified. If estimates indicate that a contract loss will occur, a loss provision is recorded in the period in
which the loss first becomes probable and reasonably estimable. Contract losses are determined to be the amount by which the estimated
direct and indirect costs of the contract exceed the estimated total revenue that will be generated by the contract and are included
in cost of sales and classified in accrued expenses in the balance sheet. Our presentation of revenue recognized on a contract
completion basis has been consistently applied for all periods presented.
Software
and software license sales
Software
and software license sales are revenue when a fixed fee order has been received and delivery has occurred to the customer. We
assess whether the fee is fixed or determinable and free of contingencies based upon signed agreements received from the customer
confirming terms of the transaction. Software is delivered to customers electronically or on a CD-ROM, and license files are delivered
electronically.
Maintenance
and support services
Maintenance
and support services revenue consists of software updates and various forms of support services. Software updates provide customers
with rights to unspecified software product upgrades and maintenance releases and patches released during the term of the support
period. Support includes access to technical support personnel for software and hardware issues. We also offer 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. This revenue is recognized ratably over the term of the contract, which is typically one to three years.
Maintenance and support is 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. Support agreement fees are based on the level of service provided to its 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.
Costs
and estimated earnings recognized in excess of billings on uncompleted contracts are recorded as unbilled services and are included
in work-in-process on the balance sheet. Billings in excess of costs and estimated earnings on uncompleted contracts are recorded
as deferred revenues until revenue recognition criteria are met. Unbilled receivables are a normal part of our business as some
receivables are invoiced in the month following shipment or completion of services. Our policy is to present any taxes imposed
on revenue-producing transactions on a net basis.
4.
Cash and Cash Equivalents
Cash equivalents consist of liquid investments
with original maturities of three months or less when purchased. As of December 31, 2017, the Company had substantially all cash
deposited with commercial banks. The balances are insured by the Federal Deposit Insurance Corporation up to $250.
5.
Accounts Receivable and Allowance for Doubtful Accounts
Our unsecured accounts receivable are customer
obligations due under normal trade terms, carried at their face value less an allowance for doubtful accounts. Approximately 51%
or $3,017 of our accounts receivable at December 31, 2017 is from a related party (see Note 8). We entered into a factoring arrangement
with Allied Affiliated Funding for our accounts receivable with recourse on October 15, 2015 which concluded on August 17, 2016.
During that period, the majority of our receivables were factored. We determine our allowance for doubtful accounts based on the
evaluation of the aging of our accounts receivable and on a customer-by-customer analysis of our high-risk customers. Our reserves
contemplate our historical loss rate on receivables, specific customer situations and the economic environments in which we operate.
We determine past-due accounts receivable on a customer-by-customer basis. Accounts receivable are written off after all reasonable
collection efforts have failed.
6.
Work-In-Process and Inventories
Our
work-in-process and inventories are recorded using the lower of cost or market on a first-in, first-out (FIFO) method. Inventory
is net of an allowance for obsolescence of $10 and $10 as of December 31, 2017 and 2016, respectively.
7.
Fair Value of Financial Instruments
Fair
value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The fair value hierarchy gives the highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Inputs are broadly defined
as assumptions market participants would use in pricing an asset or liability.
FASB ASC 820-10,
Fair Value Measurements
and Disclosures
, requires disclosure of the estimated fair value of an entity’s financial instruments. Such disclosures,
which pertain to our financial instruments, do not purport to represent our aggregate net fair value. The carrying value of cash
and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short
maturity of those instruments. The fair value of the warrant liabilities is calculated using a Black-Scholes model, which approximates
a binomial model due to probability factors used to determine the fair value. The calculation of this liability is based on Level
3 inputs. See Notes 3 and 11 for further discussion on the valuation of warrant liabilities.
8.
Impairment of Long-Lived Assets
We
review the carrying value of all long-lived assets, including property and equipment, for impairment in accordance with FASB ASC
360-10-05-4,
Accounting for the Impairment or Disposal of Long-Lived Assets
. Under FASB ASC 360-10-05-4, 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 by 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. There were no
impairment losses for long-lived assets recorded for the years ended December 31, 2017 and 2016.
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 consists of the following at December 31, 2017 and 2016:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
1,700
|
|
|
$
|
1,644
|
|
Leasehold improvements
|
|
|
680
|
|
|
|
673
|
|
Purchased and developed software
|
|
|
1,516
|
|
|
|
1,007
|
|
Furniture and fixtures
|
|
|
439
|
|
|
|
438
|
|
Other depreciable assets
|
|
|
27
|
|
|
|
27
|
|
Total property and equipment
|
|
|
4,362
|
|
|
|
3,789
|
|
Less: accumulated depreciation and amortization
|
|
|
(3,226
|
)
|
|
|
(2,877
|
)
|
Net property and equipment
|
|
$
|
1,136
|
|
|
$
|
912
|
|
The
estimated useful lives used to compute depreciation and amortization are as follows:
Equipment
|
|
3 – 5 years
|
Furniture and fixtures
|
|
5 years
|
Purchased and developed software
|
|
5 years
|
Leasehold improvements
|
|
Shorter of 5 years or term of lease
|
Depreciation expense was $345 and $272 for
the years ended December 31, 2017 and 2016, respectively.
10.
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. Effective April 2015, the Company began capitalizing its costs
for additional functionality to its internal software. We capitalized approximately $524 and $270 for the years ended December
31, 2017 and 2016, 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 5 years once the new projects are finished and placed in service. These costs are
included in property and equipment, net on the consolidated balance sheets.
11.
Basic and Diluted Loss per Common Share
Basic and diluted loss per common share
for all periods presented is computed using the weighted average number of common shares outstanding. Basic weighted average shares
outstanding include only outstanding common shares. Diluted net loss per common share is computed by dividing net loss by the
weighted average common and potential dilutive common shares outstanding computed in accordance with the treasury stock method.
Shares reserved for outstanding stock options and warrants totaling approximately 1.6 and 1.2 million at December 31, 2017 and
2016, respectively, were excluded from the computation of loss per share as well as the potential common shares issuable upon
conversion of convertible preferred stock and convertible promissory notes as their effect was antidilutive due to our net loss.
Net loss attributable to common shareholders for the year ended December 31, 2017 and December 31, 2016 is after dividends on
convertible preferred stock of $246 and $463, respectively.
12.
Deferred Income Taxes
The
calculation of our income tax provision involves dealing with uncertainties in the application of complex tax regulations.
We recognize tax liabilities for uncertain income tax positions based on management’s estimate of whether it is more likely
than not that additional taxes will be required. We had no uncertain tax positions as of December 31, 2017 and 2016. 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 (other than goodwill), 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. In the event of
any future tax assessments, we have elected to record the income taxes and any related interest and penalties as income tax expense
on our statement of operations.
13.
Accounting for Stock-Based Compensation
The
Company accounts for stock-based compensation in accordance with ASC 718-10 that requires the 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 value. For purposes of determining estimated fair value under FASB ASC 718-10-30, the Company computes the estimated fair
values of stock options using the Black-Scholes option pricing model. Stock-based compensation expense to employees of $284
and $273 was charged to expense during the years ended December 31, 2017 and 2016, respectively.
14.
Goodwill and Definite-Lived Intangible Assets
We follow the provisions of FASB ASC 350,
Goodwill
and Other Intangible Assets
. Pursuant to FASB ASC 350, goodwill acquired in a purchase business combination is not amortized,
but instead tested for impairment at least annually. The Company used a measurement date of September 30 (see Note 5). There was
no impairment loss recognized during the year ended December 31, 2017. An impairment loss was recognized during the year ended
December 31, 2016.
15.
Use of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted accounting principles 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, recognition of revenue under fixed price contracts, deferred tax assets,
deferred revenue, depreciable lives and methods for property and equipment and definite lived intangible assets, valuation of
warrants and other stock-based compensation, as well as valuations and purchase price allocations related to business combinations,
expected future cash flows including growth rates, discount rates and terminal values 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.
16.
Change in authorized shares
On February 11, 2016, the Company filed
an S-1 Registration Statement registering 675,632 shares of common stock issuable upon conversion of its secured notes and upon
exercise of the warrants. This S-1 was effective June 1, 2016.
17.
Recently Issued Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09,
Revenue From Contracts With Customers (Topic 606),
that outlines a single comprehensive model for entities
to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance,
including industry-specific guidance. This ASU is based on the core principle that an entity should recognize revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to
understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including
qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets
recognized from the costs to obtain or fulfill a contract.
The Company adopted the new revenue guidance
effective January 1, 2018 using the modified retrospective method of adoption. Based on the Company’s initial assessment
any adjustments for transition are not expected to be material. The Company conducted a risk assessment and had developed a transition
plan that enabled the Company to meet the implementation requirement. Revenue streams and performance obligations evaluated include
those outlined in the
Revenue
section of Note 1 above. The Company’s contracts rarely include forms of variable consideration.
Based on the evaluation of the Company’s current contracts and the related revenue streams and performance obligations,
the allocation of revenue between hardware, services and other will have insignificant changes as compared with current GAAP.
However, for certain sales transactions, the timing of revenue recognition for hardware and certain services sales may occur earlier,
with the remaining service and other sales, occurring later than under current GAAP. The largest impacts as a result of the new
standard are the new required qualitative and quantitative disclosures.
In July 2017, the FASB issued Accounting
Standards Update No. 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities From Equity (Topic 480), Derivatives
and Hedging (Topic 815) Part I. Accounting for Certain Financial Instruments With Down Round Features, Part II Replacement of
the Indefinite Deferral for Mandatorily Redeemable Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a
Scope Exception
. This update provides guidance that changes the classification analysis of certain equity-linked financial
instruments with down-round features. These instruments are no longer accounted for as derivative liabilities at fair value as
a result of the existence of a down round feature. The Company early adopted this ASU in 2017 and has applied the guidance in
this ASU retrospectively to all prior periods. As a result of adopting this ASU, the Company no longer recognizes a liability
related to 549,421 warrants, which were only classified as liabilities as a result of having down round features. The debt discount
for those warrants has been recalculated to reflect the relative fair value of the warrants and the debt. In addition, the Company
determined that the impact to the income/(loss) per share as a result of the down round features was not material. The impact
to the financial statements for the year ended December 31, 2016 and the balance sheet as of December 31, 2016 is as follows:
|
|
Year ended
|
|
|
|
December 31, 2016
|
|
|
|
As previously reported
|
|
|
As adjusted
|
|
Operating income/(loss)
|
|
|
(4,557
|
)
|
|
|
(4,557
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,908
|
)
|
|
|
(1,636
|
)
|
Change in fair value of warrant liability
|
|
|
(982
|
)
|
|
|
(42
|
)
|
Gain on settlement of debt
|
|
|
1,008
|
|
|
|
1,008
|
|
Other income/(expense)
|
|
|
164
|
|
|
|
164
|
|
Total other income/(expense)
|
|
|
(1,718
|
)
|
|
|
(506
|
)
|
Income/(loss) before income taxes
|
|
|
(6,275
|
)
|
|
|
(5,063
|
)
|
Benefit/(provision) from income taxes
|
|
|
365
|
|
|
|
365
|
|
Net loss
|
|
|
(5,910
|
)
|
|
|
(4,698
|
)
|
Dividends on preferred stock
|
|
|
463
|
|
|
|
463
|
|
Net loss attributable to common shareholders
|
|
|
(6,373
|
)
|
|
|
(5,161
|
)
|
Net loss per common share - basic and diluted
|
|
|
(2.66
|
)
|
|
|
(2.11
|
)
|
Net loss attributable to common shareholders
|
|
|
(2.87
|
)
|
|
|
(2.32
|
)
|
Weighted average shares outstanding - basic and diluted
|
|
|
2,222
|
|
|
|
2,222
|
|
|
|
December 31, 2016
|
|
|
|
As previously reported
|
|
|
As adjusted
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Loans payable, net
|
|
$
|
7,635
|
|
|
$
|
7,627
|
|
Total current liabilities
|
|
|
14,374
|
|
|
|
14,481
|
|
Warrant liability
|
|
|
3,316
|
|
|
|
705
|
|
TOTAL LIABILITIES
|
|
|
18,518
|
|
|
|
16,014
|
|
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
21,834
|
|
|
|
23,739
|
|
Accumulated deficit
|
|
|
(20,524
|
)
|
|
|
(19,281
|
)
|
Total shareholders’ equity
|
|
|
1,976
|
|
|
|
4,480
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
24,419
|
|
|
$
|
24,419
|
|
In
January 2017, the FASB issued ASU 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment
. This update eliminates the requirement that an entity perform a two-step test to determine the amount, if any,
of goodwill impairment. In Step 1, an entity compares the fair value of a reporting unit with its carrying amount, including goodwill.
If the carrying amount of the reporting unit exceeds its fair value, the entity performs Step 2 and compares the implied fair
value of goodwill with the carrying amount of that goodwill for that reporting unit. An impairment charge equal to the amount
by which the carrying amount of goodwill for the reporting unit exceeds the implied fair value of that goodwill is recorded, limited
to the amount of goodwill allocated to that reporting unit. To address concerns over the cost and complexity of the two-step goodwill
impairment test, the amendments in this ASU remove the second step of the test. An entity will apply a one-step quantitative test
and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not
to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative
assessment of goodwill impairment. This guidance is effective for public business entities for fiscal years beginning after December
15, 2019, and for interim periods within those fiscal years, early adoption is permitted.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
,
which provides guidance on the classification of certain cash receipts and cash payments in the statement of cash flows, including
those related to debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination,
proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, and distributions
received from equity method investees. This guidance is effective for public business entities for fiscal years beginning after
December 15, 2017, and for interim periods within those fiscal years. The guidance must be adopted on a retrospective basis and
must be applied to all periods presented, but may be applied prospectively if retrospective application would be impracticable.
The Company does not expect the adoption of this ASU to have a material impact on our consolidated financial statements, including.
our consolidated statement of cash flows.
In
June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial
Instruments
, which provides guidance with respect to measuring credit losses on financial instruments, including trade receivables.
This guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit
loss on financial instruments. The credit loss estimate can now reflect an entity’s current estimate of all future expected
credit losses. Under the previous guidance, an entity only considered past events and current conditions. The guidance is effective
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company does not
expect the adoption of this ASU to have a material impact on our consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
, that requires lessees to recognize most leases on the balance
sheet and provides for expanded disclosures on key information about leasing arrangements. This ASU is effective for interim and
annual periods beginning after December 15, 2018, which means it will become effective for the Company on January 1, 2019 although
early adoption is permitted. In transition, the Company is required to recognize and measure leases at the beginning of the earliest
period presented using a modified retrospective approach. The Company is currently evaluating this ASU to determine the impact
it will have on the Company’s Consolidated Financial Statements. We are currently evaluating the impact of adopting this
guidance on our consolidated financial statements.
18. Reclassification:
Certain prior year amounts
have been reclassified to conform to the current year presentation.
NOTE
3: FAIR VALUE MEASUREMENT
We
measure certain financial assets, including cash equivalents, at fair value on a recurring basis. In accordance with FASB 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, FASB 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
following table presents information about the Company’s warrant liabilities that are measured at fair value on a recurring
basis and indicates the fair value hierarchy of the valuation techniques the Company used to determine such fair value. In general,
fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities.
Fair values determined by Level 2 inputs use data points that are observable such as quoted prices, interest rates and yield curves.
Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where
there is little, if any, market activity for the asset or liability:
|
|
|
|
|
Quote Prices
In Active
Markets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant Other Unobservable Inputs
|
|
Description
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Warrant liability at December 31, 2016
|
|
$
|
3,316
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
3,316
|
|
Reclassification of warrants from liabilities to equity per ASU 2017-11
|
|
$
|
(2,611
|
)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
(2,611
|
)
|
Revised warrant liability at December 31, 2016
|
|
$
|
705
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
705
|
|
Warrant liability at December 31, 2017
|
|
$
|
858
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
858
|
|
The
change in level 3 fair value is as follows:
Warrant liability December 31, 2016
|
|
$
|
705
|
|
New warrant liabilities
|
|
|
-
|
|
Increase in fair value of warrant liability
|
|
|
153
|
|
Ending warrant liability as of December 31, 2017
|
|
$
|
858
|
|
NOTE
4: OTHER FINANCIAL STATEMENT INFORMATION
The
following table provides details of selected financial statement items:
Inventories
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Finished goods
|
|
$
|
719
|
|
|
$
|
138
|
|
Work-in-process
|
|
|
132
|
|
|
|
447
|
|
Total inventories
|
|
$
|
851
|
|
|
$
|
585
|
|
Supplemental
Cash Flow Information:
|
|
2017
|
|
|
2016
|
|
Cash paid for interest
|
|
$
|
640
|
|
|
$
|
363
|
|
Cash paid for taxes
|
|
$
|
5
|
|
|
$
|
11
|
|
Non-cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
Noncash preferred stock dividends
|
|
$
|
246
|
|
|
$
|
463
|
|
Issuance of notes in exchange for accounts payable
|
|
$
|
-
|
|
|
$
|
288
|
|
Issuance of stock upon conversion of preferred stock
|
|
$
|
2,246
|
|
|
$
|
307
|
|
Issuance of warrants with term loan extensions
|
|
$
|
2,218
|
|
|
|
361
|
|
Issuance of stock in exchange for accounts payable
|
|
$
|
-
|
|
|
$
|
86
|
|
NOTE
5: GOODWILL AND OTHER INTANGIBLE ASSETS
Other
intangible assets consisted of the following at December 31, 2017 and 2016 (in thousands):
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Technology platform
|
|
|
2,865
|
|
|
|
2,568
|
|
|
|
4,190
|
|
|
|
2,433
|
|
Customer relationships
|
|
|
2,460
|
|
|
|
2,093
|
|
|
|
2,460
|
|
|
|
1,404
|
|
Trademarks and trade names
|
|
|
680
|
|
|
|
469
|
|
|
|
680
|
|
|
|
393
|
|
|
|
|
6,005
|
|
|
|
5,130
|
|
|
|
7,330
|
|
|
|
4,230
|
|
Accumulated amortization
|
|
|
5,130
|
|
|
|
|
|
|
|
4,230
|
|
|
|
|
|
Impairment loss on technology platform
|
|
|
-
|
|
|
|
|
|
|
|
1,065
|
|
|
|
|
|
Net book value of amortizable intangible assets
|
|
|
875
|
|
|
|
|
|
|
|
2,035
|
|
|
|
|
|
For
the years ended December 31, 2017 and 2016, amortization of intangible assets charged to operations was $1,160 and $1,731, respectively. For
the years ended December 31, 2017 and 2016 we wrote-off fully amortized intangible assets of $260 and $0, respectively.
Estimated
amortization is as follows:
Year ending December 31, 2017
|
|
|
|
2018
|
|
$
|
739
|
|
2019
|
|
|
76
|
|
2020
|
|
|
60
|
|
The
Company has made comprehensive upgrades to its technology platform. Due to these upgrades, the Company evaluated the recoverability
of the carrying amount of the original technology platform intangible asset at September 30, 2016. Based upon this evaluation,
the Company determined that the technology platform intangible asset was impaired as its value was not recoverable and exceeded
its fair value. The Company recognized an impairment loss of $1,065 in 2016.
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.
The
Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads
to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If,
after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value
of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The Company
performed its annual goodwill impairment test at September 30, 2017.
Utilizing
the two-step impairment test, the Company first 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 for purchase orders expected to be completed in the fourth quarter of 2017 and orders already received or actively
being negotiated for fiscal 2018. We also used these same expectations in a number of valuation models in addition to discounted
cash flows, including, leveraged buy-out, trading comps and market capitalization, and ultimately determined an estimated fair
value of our reporting unit based on weighted average calculations from these models. 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, 2017.
The Company updated its goodwill analysis as
of December 31, 2017 using our actual fourth quarter 2017 results and updated projected 2018 results noting no impairment exists.
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 perform an analysis in order to determine whether goodwill
is impaired.
NOTE
6: LOANS PAYABLE
At
the end of December 2016 and the beginning of January 2017, Slipstream Communications, LLC, a related party, see Note 8: Related
Party Transactions, purchased all of our outstanding debt from the original debtholders. The terms of the debt have remained the
same. The outstanding debt with detachable warrants are shown in the table below. Further discussion of the notes follows.
Issuance Date
|
|
Original Principal
|
|
|
Additional Principal
|
|
|
Total Principal
|
|
|
Maturity Date
|
|
Warrants
|
|
|
|
8/17/2016
|
|
|
3,000
|
|
|
|
-
|
|
|
|
3,000
|
|
|
8/17/2019
|
|
|
588,237
|
|
|
8.0% interest
|
6/29/2016
|
|
|
50
|
|
|
|
2
|
|
|
|
52
|
|
|
4/10/2019
|
|
|
2,977
|
|
|
14% interest*
|
6/13/2016
|
|
|
200
|
|
|
|
19
|
|
|
|
219
|
|
|
4/10/2019
|
|
|
11,905
|
|
|
14% interest*
|
6/13/2016
|
|
|
250
|
|
|
|
14
|
|
|
|
264
|
|
|
4/10/2019
|
|
|
14,881
|
|
|
14% interest*
|
5/3/2016
|
|
|
500
|
|
|
|
17
|
|
|
|
517
|
|
|
4/10/2019
|
|
|
29,762
|
|
|
14% interest*
|
12/28/2015
|
|
|
150
|
|
|
|
6
|
|
|
|
156
|
|
|
4/10/2019
|
|
|
8,929
|
|
|
14% interest*
|
12/28/2015
|
|
|
500
|
|
|
|
20
|
|
|
|
520
|
|
|
4/10/2019
|
|
|
29,762
|
|
|
14% interest*
|
12/28/2015
|
|
|
600
|
|
|
|
24
|
|
|
|
624
|
|
|
4/10/2019
|
|
|
35,715
|
|
|
14% interest*
|
10/26/2015
|
|
|
300
|
|
|
|
13
|
|
|
|
313
|
|
|
4/10/2019
|
|
|
17,858
|
|
|
14% interest*
|
10/15/2015
|
|
|
150
|
|
|
|
7
|
|
|
|
157
|
|
|
4/10/2019
|
|
|
8,929
|
|
|
14% interest*
|
10/15/2015
|
|
|
500
|
|
|
|
23
|
|
|
|
523
|
|
|
4/10/2019
|
|
|
29,762
|
|
|
14% interest*
|
6/23/2015
|
|
|
400
|
|
|
|
21
|
|
|
|
421
|
|
|
4/10/2019
|
|
|
21,334
|
|
|
14% interest*
|
6/23/2015
|
|
|
119
|
|
|
|
31
|
|
|
|
150
|
|
|
4/10/2019
|
|
|
31,176
|
|
|
Refinanced May 20, 2015 debt, 14% interest *
|
5/20/2015
|
|
|
465
|
|
|
|
-
|
|
|
|
465
|
|
|
4/10/2019
|
|
|
25,410
|
|
|
14% cash interest
|
|
|
$
|
7,184
|
|
|
$
|
197
|
|
|
$
|
7,381
|
|
|
|
|
|
856,637
|
|
|
|
Debt discount
|
|
|
|
|
|
|
|
|
|
|
(1,916
|
)
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
7,184
|
|
|
|
|
|
|
$
|
5,465
|
|
|
|
|
|
|
|
|
|
*
|
12% cash, 2% added to principal
|
Obligations under the secured convertible promissory
notes are secured by a grant of collateral security in all of the tangible assets of the co-makers pursuant to the terms of an
amended and restated security agreement.
Included in accrued expenses is unpaid interest
of $295 on outstanding debt.
Term
Notes
On December 12, 2016, we entered into
a $1.0 million secured revolving promissory note pursuant to the August 17, 2016 Loan and Security Agreement with Slipstream Communications,
LLC, a related party, addressed below (see Note 8), wherein we borrowed $786 with interest thereon at 8% per annum, maturing on
February 1, 2017. In connection with the loan, we issued the lender a five-year warrant to purchase up to 51,416 shares of common
stock at a per-share price of $8.40 (subject to adjustment), all pursuant to a securities purchase agreement. In connection with
the secured revolving promissory note, we incurred fees aggregating $37. The fair value of the warrants on the issuance date was
$136. This note was repaid on January 12, 2017.
On August 17, 2016, we entered into a
Loan and Security Agreement with Slipstream Communications, LLC, a related party (see Note 8), under which we obtained a $3.0
million term loan, with interest thereon at 8% per annum, maturing on August 17, 2017 (with a one-year option for us to extend
that maturity, so long as we are not then in default and we deliver additional warrants to the lender). The term loan 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. In connection
with this loan, we issued the lender a five-year warrant to purchase up to 196,079 shares of common stock shares of Creative Realities’
common stock at a per-share price of $8.40 (subject to adjustment), all pursuant to a securities purchase agreement. The proceeds
from the loan were used to (i) satisfy the obligations owed to Allied Affiliated Lending, L.P. under the Factoring Agreement,
(ii) pay off certain obligations under settlement arrangements in effect as of the date hereof (see Note 8), and (iii) obtain
working capital. The Loan and Security Agreement permits the lender to make additional advances of up to an additional $1.0 million.
In connection with this financing transaction, we terminated the Factoring Agreement with Allied Affiliated Lending. Our principal
subsidiaries — Creative Realities, Inc., Creative Realities, LLC, Conexus World Global, LLC, and Broadcast International,
Inc. — were also parties to the securities purchase agreement and are co-makers of the secured convertible promissory notes.
In connection with the term loan, we incurred fees aggregating $20. The fair value of the warrants on the issuance date was $361.
On August 10, 2017, Slipstream Communications,
LLC extended the maturity date of the 8% senior notes to August 17, 2018. In exchange for the extension of the maturity date of
the 8% senior notes, Creative Realities provided 196,079 five-year warrants to purchase Company common shares. The fair value
of the warrants was $1,240, which is accounted for as an additional debt discount and amortized over the remaining life of the
loan.
On November 13, 2017, Slipstream Communications,
LLC extended the maturity dates for the term loan to August 17, 2019. In exchange for the extension of the maturity date of the
8% senior notes, Creative Realities provided 196,079 five-year warrants to purchase Company common shares. The fair value of the
warrants was $976, which is accounted for as an additional debt discount and amortized over the remaining life of the loan.
See
Note 11 for the Black Scholes inputs used to calculate the fair value of the warrants.
Convertible
Promissory Notes
In
December 2016 and January 2017, Slipstream Communications, LLC purchased all of our outstanding convertible promissory notes from
the original debtholders. The terms of the notes have remained the same. Further discussion of the notes follows.
The
convertible promissory notes were issued in a private placement exempt from registration under the Securities Act of 1933. Our
principal subsidiaries — Creative Realities, LLC, Wireless Ronin Technologies Canada, Inc., and Conexus World Global, LLC
— were also parties to the Securities Purchase Agreement and are co-makers of the secured convertible promissory notes.
Obligations under the secured convertible promissory notes are secured by a grant of collateral security in all of the personal
property of the co-makers pursuant to the terms of a security agreement. The secured convertible promissory notes bear interest
at the rate of 14% per annum. Of this amount, 12% per annum is payable monthly in cash, and the remaining 2% per annum is payable
in the form an additional principal through increases in the principal amount of the note. Upon the consummation of a change in
control transaction of the company or a default, interest on the secured convertible promissory note will increase to the rate
of 17% per annum. On August 10, 2017, Slipstream Communications, LLC extended the maturity date of the convertible notes to October
15, 2018. On November 13, 2017, Slipstream Communications, LLC elected to extend the maturity date of the convertible promissory
notes on a rolling quarter addition basis to January 15, 2019, which is now April 10, 2019.
At
any time prior to the maturity date, the holder of a promissory note may convert the outstanding principal and accrued and unpaid
interest into our common stock at its conversion rate. We may not prepay the secured convertible promissory note prior to the
maturity date. The secured convertible promissory note contains other customary terms. See Note 11 for the Black Scholes inputs
used to calculate the fair value of the warrants.
On June 29, 2016, we entered into a secured
convertible promissory note in the principal amount of $50 and an immediately exercisable five-year warrant to purchase up to
2,977 shares of the Company’s common stock at a per-share price of $8.40 (subject to adjustment). The fair value of the
warrants on the issuance date was $6. This note was subsequently purchased by Slipstream Communications, LLC on December 20, 2016.
On June 13, 2016, upon receipt of an
additional $300 of principal, we exchanged two short term demand notes entered into in July 2015 totaling $150 for two secured
convertible promissory notes totaling a principal amount of $450 and immediately exercisable five-year warrants to purchase up
to 26,786 shares of the Company’s common stock at a per-share price of $8.40 (subject to adjustment). This exchange is accounted
for as a modification of the debt. The fair value of the warrants on the issuance date was $57. On December 20, 2016, $200 of
this note was subsequently purchased by Slipstream Communications, LLC, the remaining $250 was already owed to Slipstream Communications,
LLC.
On or about May 3, 2016, we entered into
a secured convertible promissory note in the principal amount of $500 and an immediately exercisable five-year warrant to purchase
up to 29,762 shares of the Company’s common stock at a per-share price of $8.40 (subject to adjustment). In connection with
the secured convertible promissory note, we incurred commissions to a placement agent aggregating $25. The fair value of the warrants
on the issuance date was $89. This note was subsequently purchased by Slipstream Communications, LLC on December 22, 2016.
NOTE
7: COMMITMENTS AND CONTINGENCIES
Structured Settlement Program
During March and December
2017, the Company settled and/or wrote off debt of $1,159 for $288 cash payment and recognized a gain of $872. This debt included
$693 of payables previously recorded by our dissolved subsidiary Broadcast International, Inc, as we had exhausted all efforts
to identify and settle these obligations in the first quarter of 2017.
In August 2016,
the Company settled debt of $90 for $35 cash payment, resulting in a gain on debt settlement of $55. In June 2016, the Company
settled debt of $614 for $123 cash payment and the issuance of 409,347 shares of the Company’s restricted common stock,
fair value at conversion date of $85, and recognized a gain on debt restructuring of $406. In conjunction with this debt settlement,
an additional 26,995 shares of restricted common stock were issued to investors for cash to facilitate the settlement of a portion
of the $614 debt.
In March 2016, the Company
issued 8.00% nonconvertible promissory notes in favor of certain general unsecured creditors in the aggregate principal amount
of $288 to settle an aggregate amount of $839 of accounts payable, accrued expenses and other liabilities. The aggregate amount
of payables, accrued expenses and other liabilities was subsequently revised to $796. In September 2016, the amounts previously
settled with nonconvertible promissory notes were paid in cash of $249 resulting in a gain on the debt settlement of $547. No
gain was previously recorded.
Litigation
In February 2016, a former vendor alleging
our failure to pay outstanding invoices for approximately $335, which is included in accounts payable in the December 31, 2016
accompanying consolidated balance sheet, initiated a breach-of-contract lawsuit against us. Also in February 2016, a former vendor
alleging our failure to pay outstanding invoices for approximately $51, which is included in accounts payable in the December
31, 2016 accompanying consolidated balance sheet, filed a motion for summary judgment against us. During 2017, we negotiated settlement
with the vendor for $45.
The
Company is involved in various legal proceedings incidental to the operations of its business. The Company believes that the outcome
of all such other pending legal proceedings in the aggregate will not have a material adverse effect on its business, financial
condition, liquidity, or operating results.
Leases
Future
minimum lease payments under leases with initial or remaining non-cancelable lease terms in excess of one year as of December
31, 2017 are as follows:
Year ending December 31,
|
|
Lease Obligations
|
|
2018
|
|
$
|
587
|
|
2019
|
|
|
499
|
|
2020
|
|
|
398
|
|
2021
|
|
|
61
|
|
Total future minimum obligations
|
|
$
|
1,545
|
|
Rent
expense totaled $474 and $416 for the years ended December 31, 2017 and 2016, respectively, and is included in General and Administrative
expenses.
Our CEO was awarded 165,052 performance
shares with a grant date to be determined upon certain conditions being satisfied. As December 31, 2017 those conditions had not
been met and were deemed not probable to be achieved resulting in no compensation expense being recorded.
Termination benefits
On August 10, 2017, the
Company announced that it was closing its New Jersey and Minnesota locations. The Company has accrued one-time termination benefits
related to severance to the affected employees of $146 and will recognize the expense over the period the employees are expected
to continue service to the Company.
NOTE
8: RELATED PARTY TRANSACTIONS
As discussed in Note 1, on September 1,
2017, our CEO received 106,602 shares of our common stock valued at $1,119, as part of the issuance of the ConeXus Holdback shares.
During the year-ended December 31, 2017, 181,421 of the 293,564 shares of common stock were issued to the CEO upon conversion of
preferred stock.
For
the years-ended December 31, 2017 and 2016, the Company had sales of $3,390 and $1,344, respectively, with a related party entity
that is 22.5% owned by a member of senior management. Accounts receivable due from the related party was $3,017 and $543 at December
31, 2017 and 2016, respectively.
On November 13, 2017, Slipstream Communications,
LLC, a related party investor, extended the maturity date of the term loan for which we issued to Slipstream Communications a
five-year warrant to purchase up to 196,079 shares of common stock at a per-share price of $8.40 (subject to adjustment). The
fair value of the warrants on the issuance date was $1.0 million.
On August 10, 2017, Slipstream Communications,
LLC, a related party investor, extended the maturity date of the term loan for which we issued to Slipstream Communications a
five-year warrant to purchase up to 196,079 shares of common stock at a per-share price of $8.40 (subject to adjustment). The
fair value of the warrants on the issuance date was $1.2 million.
In December 2016 and January 2017, the
Company’s majority shareholder and investor, Slipstream Communications LLC acquired all of the Company’s outstanding
debt (see Note 6).
On December 12, 2016, we entered into
a $1.0 million secured revolving promissory note pursuant to the August 17, 2016 Loan and Security Agreement with Slipstream Communications,
LLC, a related party investor, with interest thereon at 8% per annum, maturing on February 1, 2017. In connection with the loan,
we issued the lender a five-year warrant to purchase up to 51,416 shares of common stock at a per-share price of $8.40 (subject
to adjustment), all pursuant to a securities purchase agreement. This note was repaid on January 12, 2017.
On August 17, 2016, we entered into a
Loan and Security Agreement with Slipstream Communications, LLC, a related party investor, under which we obtained a $3.0 million
term loan, with interest thereon at 8% per annum, maturing on August 17, 2018 (see Note 6). In connection with the loan, we issued
the lender a five-year warrant to purchase up to 196,079 shares of Creative Realities’ common stock at a per share price
of $8.40 (subject to adjustment).
NOTE
9: INCOME TAXES
Our
gross deferred tax assets are primarily related to net federal and state operating loss carryforwards (NOLs). We have substantial
NOLs that are limited in its 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. We have performed a preliminary analysis of the annual NOL carryforwards and limitations that are
available to be used against taxable income. The estimated federal NOL carryforward after application of the IRC Section 382 limitation
is $19.3 million and foreign NOL carryforward is $7.0 million as of December 31, 2017.
The Tax Cuts and Jobs Act (Tax Act) was enacted
on December 22, 2017 and introduces significant changes to the U.S. income tax law. Effective in 2018, the Tax Act
reduces U.S. statutory tax rates from 35% to 21%. Accordingly, we remeasured our deferred taxes as of December 31, 2017 to reflect
the reduced rate that will apply in future periods when these deferred taxes are settled or realized, resulting in a one-time
$0.2 million net tax benefit in 2017.
Due
to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we have made reasonable
estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. As we
collect and prepare necessary data, and interpret the Tax Act and any additional guidance issued by the Internal Revenue Service,
and other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments may materially
impact our provision for income taxes and effective tax rate in the period in which adjustments are made. The accounting
for the tax effects of the Tax Act will be completed in 2018.
A
summary of the deferred tax assets and liabilities is included below:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
Reserves
|
|
$
|
12
|
|
|
$
|
35
|
|
Property and equipment
|
|
|
80
|
|
|
|
171
|
|
Accrued expenses
|
|
|
619
|
|
|
|
1,034
|
|
Severance
|
|
|
56
|
|
|
|
39
|
|
Non-qualified stock options
|
|
|
268
|
|
|
|
420
|
|
Net foreign carryforwards
|
|
|
1,906
|
|
|
|
1,844
|
|
Net operating loss and credit carryforwards
|
|
|
6,801
|
|
|
|
8,054
|
|
Intangibles
|
|
|
605
|
|
|
|
907
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
10,347
|
|
|
|
12,504
|
|
Valuation allowance
|
|
|
(10,896
|
)
|
|
|
(13,114
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(549
|
)
|
|
$
|
(610
|
)
|
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Tax provision summary
|
|
|
|
|
|
|
State income tax
|
|
$
|
21
|
|
|
$
|
18
|
|
Deferred tax benefit, release of valuation allowance
|
|
|
-
|
|
|
|
(635
|
)
|
Deferred tax benefit - federal
|
|
|
2,382
|
|
|
|
(1,101
|
)
|
Deferred tax benefit - state
|
|
|
(149
|
)
|
|
|
(89
|
)
|
Deferred tax benefit - foreign
|
|
|
(75
|
)
|
|
|
(453
|
)
|
Change in valuation allowance
|
|
|
(2,218
|
)
|
|
|
1,895
|
|
Tax (benefit)/expense
|
|
$
|
(39
|
)
|
|
$
|
(365
|
)
|
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:
|
|
2017
|
|
|
2016
|
|
Federal statutory rate
|
|
|
-34.00
|
%
|
|
|
-34.00
|
%
|
State taxes
|
|
|
-2.44
|
%
|
|
|
-2.75
|
%
|
Foreign rate differential
|
|
|
-0.08
|
%
|
|
|
3.11
|
%
|
Other
|
|
|
3.55
|
%
|
|
|
1.68
|
%
|
Impact of Tax Act
|
|
|
3.10
|
%
|
|
|
0
|
%
|
Changes in valuation allowance
|
|
|
-37.79
|
%
|
|
|
36.72
|
%
|
Effective tax rate
|
|
|
-67.66
|
%
|
|
|
4.80
|
%
|
NOTE
10: CONVERTIBLE PREFERRED STOCK
The
preferred stock entitles its holders to a 6% dividend, payable semi-annually in cash or in kind through the three-year anniversary
of the original issue date, and from and after such three-year anniversary in duly authorized, validly issued, fully paid and
non-assessable shares of common stock. The three-year anniversary of the initial investment date occurred during the second half
of 2017 for $5.2 million of the $5.5 million originally issued Convertible Preferred Stock and therefore dividends on those investments
were paid via issuance of common shares as of the year-end date.
During the years ended December 31, 2017
and 2016 respectfully, the Company issued an aggregate of 245,816 and 452,224 shares of preferred stock in satisfaction of its
semi-annual dividend obligation. During the years ended December 31, 2017 and 2016 respectfully, the Company issued an aggregate
of 23,962 and 0 shares of common stock in satisfaction of its semi-annual dividend obligation.
The preferred stock may be converted
into our common stock at the option of a holder at an initial conversion price as adjusted of $7.65 per share. Subject to certain
conditions, we may call and redeem the preferred stock after three years. From and after the three-year anniversary of the date
of issuance, the Company has the right (but not the obligation), upon at least 30 days prior written notice, to call some or all
of the Series A Preferred Stock for redemption at any time after the common stock has had a closing price on the relevant trading
market, for a period of at least 15 consecutive days, all of which must be after the three-year anniversary date of the purchase
agreement, equal to at least one and one-half times the initial conversion price.
During such time as a majority of the preferred
stock sold remains outstanding, holders will have the right to elect a member to our Board of Directors. The preferred stock has
full-ratchet price protection in the event that we issue common stock below the conversion price, as adjusted, subject to certain
customary exceptions. The warrants issued to purchasers of the preferred stock contain weighted-average price protection in the
event that we issue common stock below the exercise price, as adjusted, again subject to certain customary exceptions. In the
Securities Purchase Agreement, we granted purchasers of the preferred stock certain registration rights pertaining to the common
shares they may receive upon conversion of their preferred stock and upon exercise of their warrants.
In 2017, 385,200 shares of Series A Convertible
Preferred Stock and 1,860,561 shares of Series A-1 Convertible Preferred Stock were converted into 293,564 shares of common stock
at the conversion rate of $7,65 per share.
In 2016, 307,500 shares of Series A Preferred
Stock were converted into 40,197 shares of common stock at the conversion rate of $7.65 per share.
|
|
Number of Convertible Preferred
Series A
|
|
|
Number of Convertible Preferred
Series A-1
|
|
|
Shares of Common Stock
Received
|
|
Q4 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Q3 2017
|
|
|
132,200
|
|
|
|
1,860,561
|
|
|
|
66,426
|
|
Q2 2017
|
|
|
12,750
|
|
|
|
-
|
|
|
|
425
|
|
Q1 2017
|
|
|
240,250
|
|
|
|
-
|
|
|
|
8,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q4 2016
|
|
|
132,000
|
|
|
|
-
|
|
|
|
4,400
|
|
Q3 2016
|
|
|
75,500
|
|
|
|
-
|
|
|
|
2,517
|
|
Q2 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Q1 2016
|
|
|
100,000
|
|
|
|
-
|
|
|
|
3,334
|
|
During the quarter-ended September 30, 2017,
the four holders of Series A-1 Convertible Preferred Stock (substantially similar in terms to the Company’s Convertible
Preferred Stock and issued to the shareholders of Conexus World Global LLC) converted all 1,860,561 shares of Series A-1 Convertible
Preferred Stock into 62,019 shares of common stock. Additionally, certain accredited investors converted 132,200 shares of Series
A Convertible Preferred Stock for 4,407 shares of common stock. During the quarter ended June 30, 2017, accredited investors converted
12,750 shares of Convertible Preferred Stock for 425 shares of common stock. During the quarter ended March 31, 2017, accredited
investors converted 240,250 shares of Convertible Preferred Stock for 8,009 shares of common stock. During the three months ended
December 31, September 30, and March 31, 2016, accredited investors converted 132,000, 75,500, and 100,000 shares of Convertible
Preferred Stock for 4,400, 2,517 and 3,334 shares of common stock, respectively.
NOTE
11: WARRANTS
On November 13, 2017, the Company issued
a warrant to purchase 196,079 shares of common stock at the per share price of $8.40 (subject to adjustment) to Slipstream Communications,
LLC in connection with extension of the term loan facility.
On August 10, 2017, the Company issued
a warrant to purchase 196,079 shares of common stock at the per share price of $8.40 (subject to adjustment) to Slipstream Communications,
LLC in connection with extension of the term loan facility.
On August 17, 2016, the Company issued
a warrant to purchase 196,079 shares of common stock at the per share price of $8.40 (subject to adjustment) to Slipstream Communications,
LLC in connection with extension of the term loan facility.
On June 29, 2016, the Company issued
a warrant to purchase 2,977 shares of common stock at the per share price of $8.40 (subject to adjustment) pursuant to a securities
purchase agreement as more fully described in Note 7, Loans Payable.
On June 13, 2016, the Company issued
a warrant to purchase 26,786 shares of common stock at the per share price of $8.40 (subject to adjustment) pursuant to a securities
purchase agreement as more fully described in Note 7, Loans Payable.
On May 3, 2016, the Company issued a
warrant to purchase 29,762 shares common stock at the per share price of $8.40 (subject to adjustment) pursuant to a securities
purchase agreement as more fully described in Note 7, Loans Payable.
On January 15, 2016, the Company issued
a warrant to purchase 8,334 shares of the Company’s common stock at the per share price of $8.40 (subject to adjustment)
in exchange for services rendered related to the issuance of debt on December 28, 2015. The fair value of the warrants on the
issuance date was $20. The warrants were initially recorded as a liability with a discount to the debt issued to amortized over
the life of the debt but were reclassified to equity as a result of retrospective application of the adoption of ASU 2017-11.
Listed
below are the range of inputs used for the probability weighted Black Scholes option pricing model valuations when the warrants
were issued and at December 31, 2017.
Issuance
Date
|
|
Expected Term at
Issuance Date
|
|
Risk
Free Interest Rate at Date of Issuance
|
|
Volatility at Date
of Issuance
|
|
Stock Price at Date
of Issuance
|
8/20/2014
|
|
5.00
|
|
1.50%
|
|
96.00%
|
|
$18.90
|
2/13/2015
|
|
5.00
|
|
1.28%
|
|
100.00%
|
|
$10.20
|
5/22/2015
|
|
5.00
|
|
1.28%
|
|
107.58%
|
|
$8.70
|
10/15/2015
|
|
5.00
|
|
1.71%
|
|
58.48%
|
|
$6.60
|
10/26/2015
|
|
5.00
|
|
1.71%
|
|
60.47%
|
|
$6.30
|
12/21/2015
|
|
5.00
|
|
1.75%
|
|
58.48%
|
|
$6.30
|
12/28/2015
|
|
5.00
|
|
1.75%
|
|
58.48%
|
|
$4.80
|
1/15/2016
|
|
5.00
|
|
1.76%
|
|
58.48%
|
|
$5.10
|
5/3/2016
|
|
5.00
|
|
1.25%
|
|
51.15%
|
|
$6.30
|
6/13/2016
|
|
5.00
|
|
1.14%
|
|
51.12%
|
|
$5.10
|
6/29/2016
|
|
5.00
|
|
1.01%
|
|
48.84%
|
|
$5.10
|
8/17/2016
|
|
5.00
|
|
1.15%
|
|
51.55%
|
|
$4.50
|
11/4/2016
|
|
5.00
|
|
1.66%
|
|
47.48%
|
|
$4.80
|
12/12/2016
|
|
5.00
|
|
1.90%
|
|
48.54%
|
|
$5.70
|
8/19/2017
|
|
5.00
|
|
1.81%
|
|
64.71%
|
|
$10.50
|
11/13/2017
|
|
5.00
|
|
2.08%
|
|
66.24%
|
|
$8.70
|
Remaining Expected Term at
December 31,
2017
|
|
Risk Free Interest Rate at
December 31,
2017
|
|
Volatility at
December 31,
2017
|
|
Stock Price at
December 31,
2017
|
1.64 - 4.87
|
|
1.83%
|
|
72.34%
|
|
$9.60
|
A
summary of outstanding debt and equity warrants is included below:
|
|
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, 2016
|
|
|
431,264
|
|
|
|
1.88
|
|
|
|
3.90
|
|
|
|
216,255
|
|
|
|
10.51
|
|
|
|
3.64
|
|
Warrants issued to financial advisors
|
|
|
16,669
|
|
|
|
8.40
|
|
|
|
4.46
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants issued with promissory notes
|
|
|
59,525
|
|
|
|
8.40
|
|
|
|
4.37
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants issued with term loan
|
|
|
247,495
|
|
|
|
8.40
|
|
|
|
4.70
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants expired
|
|
|
(37,212
|
)
|
|
|
49.82
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, December 31, 2016
|
|
|
717,741
|
|
|
|
17.08
|
|
|
|
3.79
|
|
|
|
216,255
|
|
|
|
10.51
|
|
|
|
2.64
|
|
Warrants issued with term loan
|
|
|
392,158
|
|
|
|
8.40
|
|
|
|
4.75
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants expired
|
|
|
(9,749
|
)
|
|
|
1,400.31
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance December 31, 2017
|
|
|
1,100,150
|
|
|
|
13.99
|
|
|
|
3.55
|
|
|
|
216,255
|
|
|
|
10.51
|
|
|
|
1.64
|
|
NOTE
12: STOCKHOLDERS’ EQUITY
On
August 9, 2017, our Board of Directors authorized a program to repurchase up to 5 million shares of our outstanding common stock
through August 9, 2019. The authorization allows for the repurchases to be conducted through open market or privately negotiated
transactions. Shares acquired under the stock repurchase program are expected to be retired and returned to the status of authorized
but unissued shares of common stock. The stock repurchase program can be suspended, modified or discontinued at any time at our
discretion. During the fourth quarter of 2017, 1,185,968 shares of common stock were repurchased at an aggregate price of
$149 and were immediately cancelled.
On September 1, 2017, the Company issued
to the prior shareholders of ConeXus 187,713 shares of common stock valued at $10.50 per share for a total of $1,971 to settle
the contingency of the Company in the ConeXus merger. 106,602 of these shares were issued to Rick Mills, a majority shareholder
of ConeXus, a related party, and the CEO of Creative Realities, Inc. Since the measurement period for the business combination
has expired, the issuance of the shares is recognized as a charge to operations during the year of $1.9 million.
In May 2017, the Company paid a vendor
for services at a value of $500 with the issuance of 65,360 shares of common stock.
During 2017, accredited investors converted
2,245,511 shares of Convertible Preferred Stock in exchange for 293,564 shares of common stock. During 2016, accredited investors
converted 307,500 shares of Convertible Preferred Stock in exchange for 40,197 shares of common stock. In conjunction with the
structured settlement program, the Company issued 13,645 shares of its restricted common stock to creditors and 26,995 shares
of stock were issued to investors (see Note 8).
A
summary of outstanding options is included below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of Exercise
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
Prices between
|
|
Outstanding
|
|
|
Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
$5.40 - $19.50
|
|
|
238,174
|
|
|
|
7.51
|
|
|
$
|
8.41
|
|
|
|
142,177
|
|
|
$
|
9.02
|
|
$19.51 - $23.70
|
|
|
1,000
|
|
|
|
6.04
|
|
|
|
23.70
|
|
|
|
1,000
|
|
|
$
|
23.70
|
|
$23.71 - $367.50
|
|
|
519
|
|
|
|
4.59
|
|
|
|
112.30
|
|
|
|
519
|
|
|
$
|
112.30
|
|
|
|
|
239,693
|
|
|
|
7.50
|
|
|
$
|
8.69
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted Average
|
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
Balance, December 31, 2016
|
|
|
249,693
|
|
|
$
|
8.56
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited or expired
|
|
|
10,000
|
|
|
|
5.40
|
|
Balance, December 31, 2017
|
|
|
239,693
|
|
|
$
|
8.69
|
|
The
weighted average remaining contractual life for options exercisable is 7.50 years as of December 31, 2017.
NOTE
13: STOCK-BASED COMPENSATION
Stock
Compensation Expense Information
FASB ASC 718-10 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 12,186 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. There are 227,507 options outstanding
under the 2014 Stock Incentive Plan.
Compensation
expense recognized for the issuance of stock options for the years ended December 31, 2017 and 2016 was as follows:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Stock-based compensation costs included in:
|
|
|
|
|
|
|
|
|
Costs of sales
|
|
$
|
6
|
|
|
$
|
1
|
|
Sales and marketing expense
|
|
|
76
|
|
|
|
74
|
|
General and administrative expense
|
|
|
202
|
|
|
|
198
|
|
Total stock-based compensation expense
|
|
$
|
284
|
|
|
$
|
273
|
|
At December 31, 2017, there
was approximately $554 of total unrecognized compensation expense related to unvested share-based awards. Generally, this expense
will be recognized over the next 1.6 years and will be adjusted for any future changes in estimated forfeitures.
Valuation
Information for Stock-Based Compensation
For
purposes of determining estimated fair value under FASB ASC 718-10, the Company computed the estimated fair values of stock options
using the Black-Scholes model.
There
were no options granted during the year ended December 31, 2017.
On November 11, 2016, the Company granted
10-year options to purchase 14,167 shares of its common stock to an employee. The options vest over 4 years and have an exercise
price of $5.40. The fair value of the options on the grant date was $2.70 and was determined using the Black-Sholes model. The
values set forth above were calculated using the following weighted average assumptions:
Risk-free
interest rate
|
|
|
1.14%
|
|
Expected
term
|
|
|
6.25
years
|
|
Expected
price volatility
|
|
|
47.89%
|
|
Dividend
yield
|
|
|
0%
|
|
The
Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and
post-vesting employment behavior, so we estimate the expected term of awards granted by taking the average of the vesting term
and the contractual term of the awards, referred to as the simplified method. The risk-free interest rate assumption is based
on observed interest rates appropriate for the term of the Company’s stock options. The Company used historical closing
stock price volatility for a period of 2 years. Although the Company has historical pricing for a period equal to the expected
life of the respective awards, the Company used a shorter period of time as the Company went through reorganization and was fundamentally
a different company. The dividend yield assumption is based on the Company’s history and expectation of no future dividend
payouts.
Our
stock-based compensation expense is based on awards ultimately expected to vest and is reduced for estimated forfeitures as permitted
by FASB ASU 2016-09,
Stock Compensation,
wherein a Company can make an entity-wide accounting policy election to either
estimate the number of awards that are expected to vest or account for forfeitures when they occur. The Company applied a pre-vesting
forfeiture rate of 10%.
NOTE
14: PROFIT-SHARING PLAN
We
have a defined contribution 401(k) retirement plans for eligible associates. Associates may contribute up to 15% of their pretax
compensation to the plan subject to IRS limitations. There are currently plans to implement an employer contribution match of
50% of employee wages up to 6%, for an effective match of 3% on April 1, 2018.
NOTE
15: SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
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. All sales for the years ended December 31, 2017 and 2016, were in the United States and Canada.
Major
Customers
We
had three and two customers that accounted for 63% and 71% of accounts receivable as of December 31, 2017 and 2016, respectively.
We do not believe the loss of this customer will have a material adverse effect on our business. The Company had three customers
that accounted for 56% and 56% of revenue for the years ended December 31, 2017 and 2016, respectively.
For
the years ended December 31, 2017 and 2016, the Company had sales of $3,390 and $1,344, respectively, with a related party entity
that is 22.5% owned by a member of senior management. Accounts receivable due from the related party was $3,017 and $543 at December
31, 2017 and 2016, respectively.
NOTE
16: SUBSEQUENT EVENTS
On January 16, 2018, we entered into the
Third Amendment to the Loan and Security Agreement with Slipstream Communications, LLC which extended the period through which
the Company could draw on the Revolver established by the Loan and Security Agreement. In conjunction with this Amendment, we
entered into a $1.0 million secured revolving promissory note pursuant to the August 17, 2016 Loan and Security Agreement with
Slipstream Communications, LLC, a related party, addressed below (see Note 10), wherein we borrowed $1.0 million with interest
thereon at 8% per annum, maturing on January 16, 2019. In connection with the loan, we issued the lender a five-year warrant to
purchase up to 61,729 shares of common stock at a per-share price of $8.10 (subject to adjustment), all pursuant to a securities
purchase agreement. In connection with the secured revolving promissory note, we did not incur any fees.
On August 10, 2017, we announced the planned
closure of our office facilities located at 22 Audrey Place, Fairfield, New Jersey 07004 which housed our previous operations
center and ceased use of the facilities in February 2018. In ceasing use of these facilities, we will incur a one-time non-cash
charge of $0.6 million in the first quarter of 2018 to accrue for the remaining rent under the lease term, net of anticipated
subtenant rental income.
On October 17, 2018, the Company effectuated
a l-for-30 reverse stock split of its outstanding common stock, which was approved by the Company’s board of directors on
October 17, 2018. The reverse stock split resulted in an adjustment to the preferred stock conversion prices to reflect a proportional
decrease in the number of shares of common stock to be issued upon conversion. The accompanying financial statements and notes
to the financial statements give retroactive effect to the reverse stock split for all periods presented. The shares of common
stock retained a par value of $0.01 per share. Accordingly, the stockholders’ deficit reflects the reverse stock split by
reclassifying from “common stock” to “additional paid-in capital” in an amount equal to the par value
of the decreased shares resulting from the reverse stock split.
CREATIVE
REALITIES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except per share amounts)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,461
|
|
|
$
|
1,003
|
|
Accounts receivable, net of allowance of $53 and $40, respectively
|
|
|
4,760
|
|
|
|
5,912
|
|
Unbilled receivables
|
|
|
312
|
|
|
|
77
|
|
Work-in-process and inventories
|
|
|
462
|
|
|
|
851
|
|
Prepaid expenses and other current assets
|
|
|
1,320
|
|
|
|
1,030
|
|
Total current assets
|
|
|
12,315
|
|
|
|
8,873
|
|
Long-term receivables
|
|
|
900
|
|
|
|
-
|
|
Property and equipment, net
|
|
|
1,154
|
|
|
|
1,136
|
|
Intangibles, net
|
|
|
411
|
|
|
|
875
|
|
Goodwill
|
|
|
14,989
|
|
|
|
14,989
|
|
Other assets
|
|
|
122
|
|
|
|
172
|
|
TOTAL ASSETS
|
|
$
|
29,891
|
|
|
$
|
26,045
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Short-term related party loans payable, net of $557 and $0 discount, respectively
|
|
$
|
1,551
|
|
|
$
|
-
|
|
Accounts payable
|
|
|
2,083
|
|
|
|
2,017
|
|
Accrued expenses
|
|
|
3,519
|
|
|
|
2,689
|
|
Deferred revenues
|
|
|
9,444
|
|
|
|
6,721
|
|
Customer deposits
|
|
|
1,152
|
|
|
|
1,247
|
|
Other current liabilities
|
|
|
75
|
|
|
|
-
|
|
Total current liabilities
|
|
|
17,824
|
|
|
|
12,674
|
|
Long-term related party loans payable, net of $1,336 and $1,916 discount,
respectively
|
|
|
6,361
|
|
|
|
5,465
|
|
Warrant liability
|
|
|
650
|
|
|
|
858
|
|
Deferred tax liabilities
|
|
|
472
|
|
|
|
549
|
|
Other long-term liabilities
|
|
|
169
|
|
|
|
220
|
|
TOTAL LIABILITIES
|
|
|
25,476
|
|
|
|
19,766
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
Convertible preferred stock, net of discount (liquidation
preference of $5,535)
|
|
|
1,802
|
|
|
|
1,927
|
|
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 200,000 shares authorized; 2,796 and 2,753
shares issued and outstanding
|
|
|
28
|
|
|
|
28
|
|
Additional paid-in capital
|
|
|
31,666
|
|
|
|
30,555
|
|
Accumulated deficit
|
|
|
(29,081
|
)
|
|
|
(26,231
|
)
|
Total shareholders’ equity
|
|
|
2,613
|
|
|
|
4,352
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
29,891
|
|
|
|
26,045
|
|
See
accompanying notes to condensed consolidated financial statements
CREATIVE
REALITIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
(Unaudited)
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
|
|
$
|
2,839
|
|
|
$
|
1,543
|
|
|
$
|
4,070
|
|
|
$
|
2,081
|
|
Services and other
|
|
|
4,340
|
|
|
|
2,025
|
|
|
|
7,175
|
|
|
|
7,906
|
|
Total sales
|
|
|
7,179
|
|
|
|
3,568
|
|
|
|
11,245
|
|
|
|
9,987
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
|
|
|
1,844
|
|
|
|
1,141
|
|
|
|
2,944
|
|
|
|
1,674
|
|
Services and other
|
|
|
2,245
|
|
|
|
803
|
|
|
|
3,702
|
|
|
|
3,843
|
|
Total cost of sales (exclusive
of depreciation and amortization shown below)
|
|
|
4,089
|
|
|
|
1,944
|
|
|
|
6,646
|
|
|
|
5,517
|
|
Gross profit
|
|
|
3,090
|
|
|
|
1,624
|
|
|
|
4,599
|
|
|
|
4,470
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses
|
|
|
538
|
|
|
|
404
|
|
|
|
1,041
|
|
|
|
822
|
|
Research and development expenses
|
|
|
297
|
|
|
|
146
|
|
|
|
618
|
|
|
|
303
|
|
General and administrative expenses
|
|
|
1,938
|
|
|
|
1,688
|
|
|
|
3,641
|
|
|
|
3,436
|
|
Depreciation and amortization expense
|
|
|
324
|
|
|
|
408
|
|
|
|
651
|
|
|
|
809
|
|
Lease termination expense
|
|
|
-
|
|
|
|
-
|
|
|
|
474
|
|
|
|
-
|
|
Total operating expenses
|
|
|
3,097
|
|
|
|
2,646
|
|
|
|
6,425
|
|
|
|
5,370
|
|
Operating income/(loss)
|
|
|
(7
|
)
|
|
|
(1,022
|
)
|
|
|
(1,826
|
)
|
|
|
(900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(752
|
)
|
|
|
(273
|
)
|
|
|
(1,326
|
)
|
|
|
(757
|
)
|
Change in fair value of warrant liability
|
|
|
11
|
|
|
|
(369
|
)
|
|
|
208
|
|
|
|
(377
|
)
|
Gain on settlement of obligations
|
|
|
39
|
|
|
|
-
|
|
|
|
39
|
|
|
|
866
|
|
Other expense
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
Total other expense
|
|
|
(707
|
)
|
|
|
(644
|
)
|
|
|
(1,080
|
)
|
|
|
(270
|
)
|
Loss before income taxes
|
|
|
(714
|
)
|
|
|
(1,666
|
)
|
|
|
(2,906
|
)
|
|
|
(1,170
|
)
|
Benefit/(provision) for income taxes
|
|
|
102
|
|
|
|
(73
|
)
|
|
|
56
|
|
|
|
(152
|
)
|
Net loss
|
|
|
(612
|
)
|
|
|
(1,739
|
)
|
|
|
(2,850
|
)
|
|
|
(1,322
|
)
|
Dividends on preferred stock
|
|
|
(129
|
)
|
|
|
(113
|
)
|
|
|
(240
|
)
|
|
|
(227
|
)
|
Net loss attributable to common shareholders
|
|
$
|
(741
|
)
|
|
$
|
(1,852
|
)
|
|
$
|
(3,090
|
)
|
|
$
|
(1,549
|
)
|
Basic loss per common share
|
|
$
|
(0.22
|
)
|
|
$
|
(0.76
|
)
|
|
$
|
(1.03
|
)
|
|
$
|
(0.58
|
)
|
Diluted loss per common share
|
|
$
|
(0.27
|
)
|
|
$
|
(0.81
|
)
|
|
$
|
(1.12
|
)
|
|
$
|
(0.68
|
)
|
Weighted average shares outstanding - basic
|
|
|
2,763
|
|
|
|
2,296
|
|
|
|
2,758
|
|
|
|
2,267
|
|
Weighted average shares outstanding - diluted
|
|
|
2,763
|
|
|
|
2,296
|
|
|
|
2,758
|
|
|
|
2,267
|
|
See
accompanying notes to condensed consolidated financial statements.
CREATIVE
REALITIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Six Months Ended
|
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
Operating Activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,850
|
)
|
|
$
|
(1,322
|
)
|
Adjustments to reconcile net loss to net cash provided
by operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
651
|
|
|
|
810
|
|
Amortization of debt discount
|
|
|
832
|
|
|
|
326
|
|
Stock-based compensation
|
|
|
177
|
|
|
|
142
|
|
Change in warrant liability
|
|
|
(208
|
)
|
|
|
377
|
|
Deferred tax (benefit)/provision
|
|
|
(77
|
)
|
|
|
126
|
|
Allowance for doubtful accounts
|
|
|
13
|
|
|
|
28
|
|
Increase in notes due to in-kind
interest
|
|
|
62
|
|
|
|
39
|
|
Charge for lease termination
|
|
|
474
|
|
|
|
-
|
|
Gain on settlement of obligations
|
|
|
(39
|
)
|
|
|
(866
|
)
|
Changes to operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable and unbilled
revenues
|
|
|
4
|
|
|
|
538
|
|
Inventories
|
|
|
389
|
|
|
|
(34
|
)
|
Prepaid expenses and other current
assets
|
|
|
(290
|
)
|
|
|
(30
|
)
|
Other assets
|
|
|
50
|
|
|
|
(19
|
)
|
Accounts payable
|
|
|
66
|
|
|
|
(616
|
)
|
Deferred revenue
|
|
|
2,723
|
|
|
|
6,039
|
|
Accrued expenses
|
|
|
830
|
|
|
|
289
|
|
Deposits
|
|
|
(95
|
)
|
|
|
(513
|
)
|
Other liabilities
|
|
|
(147
|
)
|
|
|
6
|
|
Net cash
provided by operating activities
|
|
|
2,565
|
|
|
|
5,320
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(207
|
)
|
|
|
(306
|
)
|
Net cash
used in investing activities
|
|
|
(207
|
)
|
|
|
(306
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
-
|
|
|
|
500
|
|
Proceeds from related party loans
|
|
|
2,100
|
|
|
|
-
|
|
Payments
on debt
|
|
|
-
|
|
|
|
(786
|
)
|
Net cash
provided by/(used in) financing activities
|
|
|
2,100
|
|
|
|
(286
|
)
|
Increase/(decrease) in Cash and Cash Equivalents
|
|
|
4,458
|
|
|
|
4,728
|
|
Cash and Cash Equivalents,
beginning of period
|
|
|
1,003
|
|
|
|
1,352
|
|
Cash and Cash Equivalents,
end of period
|
|
$
|
5,461
|
|
|
$
|
6,080
|
|
See
accompanying notes to condensed consolidated financial statements.
CREATIVE
REALITIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(all currency in thousands, except
per share amounts)
(unaudited)
NOTE
1: NATURE OF ORGANIZATION AND OPERATIONS
Unless
the context otherwise indicates, references in these Notes to the accompanying condensed consolidated financial statements to
“we,” “us,” “our” and “the Company” refer to Creative Realities, Inc. and its
subsidiaries.
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. We believe we are one of the world’s leading interactive marketing technology companies that focuses on the retail
shopper experience by helping retailers and brands use the latest technologies to create better shopping experiences.
Our
main operations are conducted directly through Creative Realities, Inc., and under our wholly owned subsidiaries Creative Realities,
LLC, a Delaware limited liability company, Creative Realities Canada, Inc., and ConeXus World Global, LLC, a Kentucky limited
liability company.
Liquidity
and Financial Condition
The
accompanying unaudited condensed 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.
We have incurred net
losses and negative cash flows from operating activities for the years ended December 31, 2017 and 2016. For the three months
ended June 30, 2018 and 2017, we incurred a net loss of $612 and $1,739 respectively. For the six months ended June 30, 2018 and
2017, we incurred a net loss of $2,850 and $1,322 respectively. As of June 30, 2018, we had cash and cash equivalents of $5,461
and working capital deficit of $5,509.
On November 13, 2017,
Slipstream Communications, LLC, a related party, extended the maturity date of our term loan to August 17, 2019 and extended the
maturity date of our promissory notes on a rolling quarter addition basis, which is now August 24, 2019. While management believes
that due to the extension of our debt maturity date, our current cash balance and our operational forecast for 2018, we can continue
as a going concern through at least August 14, 2019, given our net losses and working capital deficit, we obtained a continued
support letter from Slipstream Communications, LLC through August 15, 2019. 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 to the Condensed Consolidated Financial Statements for a discussion of the Company’s debt obligations.
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1.
Basis of Presentation
The
accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X and include all of the information and disclosures required by generally accepted accounting
principles in the United States (“GAAP”) for interim financial reporting. These unaudited Condensed Consolidated Financial
Statements should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes for the
year ended December 31, 2017, included in the Company’s Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 26, 2018.
The
results of operations for the interim periods are not necessarily indicative of results of operations for a full year. It is the
opinion of management that all necessary adjustments for a fair presentation of the results of operations for the interim periods
have been made and are of a recurring nature unless otherwise disclosed herein.
2.
Revenue Recognition
We
recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 606,
Revenue from Contracts with Customers
, which we adopted effective January 1, 2018,
using the modified retrospective method. See further discussion of the impact of adoption and current revenue recognition policy
in Note 4.
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:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Finished goods
|
|
$
|
414
|
|
|
$
|
719
|
|
Work-in-process
|
|
|
48
|
|
|
|
132
|
|
Total inventories
|
|
$
|
462
|
|
|
$
|
851
|
|
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 360-10-05-4,
Accounting for the Impairment or Disposal of Long-Lived Assets
. Under ASC 360-10-05-4, 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 and warrants totaling approximately 1,759,695 at June 30, 2018 were excluded from the computation of
loss per share. Additionally, the potential common shares issuable upon conversion of convertible preferred stock and convertible
promissory notes of 1,250,095 were excluded at June 30, 2018 as their effect was antidilutive due to net loss. Net income/(loss)
attributable to common shareholders for the three and six months ended June 30, 2018 is after dividends on convertible preferred
stock of $129 and $240, respectively.
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 (other than goodwill), 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 June
30, 2018 and December 31, 2017.
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 a measurement date of September 30. There
was no impairment loss recognized on goodwill or definite-lived intangible assets during the three and six months ended June 30,
2018 and 2017 (see Note 7).
8. Use of Estimates
The preparation of financial
statements in conformity with U.S. generally accepted accounting principles 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, recognition of revenue, deferred tax assets, deferred revenue, depreciable lives
and depreciation methods for property and equipment, valuation of warrants and other stock-based compensation 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.
NOTE 3: RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
In March 2018, the FASB
issued Accounting Standards Update (“ASU”) 2018-05,
Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting
Bulletin No. 118
. The amendments in this update provide guidance on when to record and disclose provisional amounts for
certain income tax effects of the Tax Cuts and Jobs Act (“Tax Reform Act”). The amendments also require any provisional
amounts or subsequent adjustments to be included in net income from continuing operations. Additionally, this ASU discusses required
disclosures that an entity must make with regard to the Tax Reform Act. This ASU is effective immediately as new information is
available to adjust provisional amounts that were previously recorded. The Company has adopted this standard and will continue
to evaluate indicators that may give rise to a change in our tax provision as a result of the Tax Reform Act. Refer to Note 11 for
additional information on the Tax Reform Act.
In May 2014, the FASB
issued ASU 2014-09,
Revenue from Contracts with Customers
, which replaces most existing revenue recognition guidance
in U.S. GAAP and is intended to improve and converge with international standards the financial reporting requirements for revenue
from contracts with customers. ASU 2014-09 and its amendments were included primarily in ASC 606. The core principle of ASC 606
is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled
to receive for those goods or services. ASC 606 also requires additional disclosures about the nature, amount, timing and uncertainty
of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. We adopted
ASC 606 effective January 1, 2018, using the modified retrospective method. Refer to Note 4.
In May 2017, the FASB
issued ASU 2017-09
Compensation—Stock Compensation (Topic 718) Scope of Modification Accounting
. This update provides
guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting for Stock Compensation. The Company adopted this standard effective January 1, 2018; there was no impact on our financial
statements for any period presented as a result of adoption.
In January 2017, the
FASB issued ASU 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
.
This update requires an entity to perform a two-step test to determine the amount, if any, of goodwill impairment. In Step 1,
an entity compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of
the reporting unit exceeds its fair value, the entity performs Step 2 and compares the implied fair value of goodwill with the
carrying amount of that goodwill for that reporting unit. An impairment charge equal to the amount by which the carrying amount
of goodwill for the reporting unit exceeds the implied fair value of that goodwill is recorded, limited to the amount of goodwill
allocated to that reporting unit. To address concerns over the cost and complexity of the two-step goodwill impairment test, the
amendments in this ASU removes the second step of the test. An entity will apply a one-step quantitative test and record the amount
of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total
amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill
impairment. This guidance is effective for public business entities for fiscal years beginning after December 15, 2019, and for
interim periods within those fiscal years, early adoption is permitted. The Company does not expect the adoption of this guidance
will have a material impact on our financial statements.
In January 2017, the
FASB issued ASU 2017-01
Business Combinations
, guidance clarifying the definition of a business with the objective of adding
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets
or businesses. The guidance provides a screen to determine when an integrated set of assets and activities is not a business,
provides a framework to assist entities in evaluating whether both an input and substantive process are present, and narrows the
definition of the term output. The Company adopted this standard on a prospective basis effective January 1, 2018.
In August 2016, the FASB
issued ASU No. 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
, which provides
guidance on the classification of certain cash receipts and cash payments in the statement of cash flows, including those related
to debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds
from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, and distributions received
from equity method investees. The Company adopted this standard effective January 1, 2018; there was no impact on our financial
statements for any period presented as a result of adoption.
In June 2016, the FASB
issued ASU No. 2016-13,
Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments
,
which provides guidance with respect to measuring credit losses on financial instruments, including trade receivables. This guidance
eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial
instruments. The credit loss estimate can now reflect an entity’s current estimate of all future expected credit losses.
Under the previous guidance, an entity only considered past events and current conditions. The guidance is effective for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the
impact, if any that the adoption of this guidance will have on our consolidated financial statements.
In February 2016, the
FASB issued ASU 2016-02,
Leases
, which amended guidance for lease arrangements in order to increase transparency and comparability
by providing additional information to users of financial statements regarding an entity’s leasing activities. The revised
guidance seeks to achieve this objective by requiring reporting entities to recognize lease assets and lease liabilities on the
balance sheet for substantially all lease arrangements. The guidance, which is required to be adopted in the first quarter of
2019, will be applied on a modified retrospective basis beginning with the earliest period presented. Early adoption is permitted.
We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.
NOTE 4: REVENUE RECOGNITION
On January 1, 2018, the
Company adopted ASC 606 using the modified retrospective method for all contracts not completed as of the date of adoption. Results
for reporting periods beginning on or after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted
and continue to be reported under the accounting standards in effect for the prior period. Under this method, we concluded that
the cumulative effect of applying this guidance was not material to the financial statements and no adjustment to the opening
balance of accumulated deficit was required on the adoption date.
Under ASC 606, the Company
accounts for revenue using the following steps:
|
●
|
Identify the contract, or contracts, with a
customer
|
|
●
|
Identify the performance obligations in the
contract
|
|
●
|
Determine the transaction price
|
|
●
|
Allocate the transaction price to the identified
performance obligations
|
|
●
|
Recognize revenue when, or as, the Company satisfies
the performance obligations
|
The Company combines
contracts with the same customer into a single contract for accounting purposes when the contracts are entered into at or near
the same time and the contracts are negotiated as a single commercial package, consideration in one contract depends on the other
contract, or the services are considered a single performance obligation. 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.
As discussed in more
detail below, 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. 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.
Deferred contract acquisition
costs were evaluated for inclusion in other assets; however, the Company elected to use the practical expedient for recording
an immediate expense for those 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.
The Company 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’s 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 typically generate
revenue through the following sources:
|
o
|
System
hardware sales – displays, computers and peripherals
|
|
o
|
Professional implementation
and installation services
|
|
o
|
Software design
and development services
|
|
o
|
Software as a service,
including content management
|
|
o
|
Maintenance and
support services
|
System hardware sales
Included in “hardware”
are system hardware sales whereby 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.
Installation services
The Company performs
outsourced installation services for customers and recognizes revenue upon completion of the installations.
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.
The aggregate amount
of the transaction price allocated to installation service performance obligations that are unsatisfied (or partially unsatisfied)
as of June 30, 2018 were $2,537, $2,375 of which is included in deferred revenue. We expect to recognize approximately $2,420
during the three months ended September 30, 2018 and the remainder in the three months ended December 31, 2018.
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 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. We account for revenue from these services in
accordance with ASC 985-20-15-5 and recognize revenue ratably over the performance period.
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
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.
In addition to changes
in the timing of when we record variable consideration, ASC 606 provided clarification about the classification of certain costs
relating to revenue arrangements with customers. As a result of our analysis, we did not identify any components of our revenue
transactions which required reclassification between gross and net presentation.
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 following table presents
information about the Company’s warrant liabilities that are measured at fair value on a recurring basis, and indicates
the fair value hierarchy of the valuation techniques the Company used to determine such fair value. See Note 13 for the inputs
used for the probability weighted Black Scholes valuations when the warrants were issued and at June 30, 2018.
|
|
|
|
|
Quote Prices In Active Markets
|
|
|
Significant Other Observable Inputs
|
|
|
Significant Other Unobservable Inputs
|
|
Description
|
|
Fair Value
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Warrant liabilities at December 31, 2017
|
|
$
|
858
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
858
|
|
Warrant liabilities at June 30, 2018
|
|
$
|
650
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in level 3 fair value is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability as of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
858
|
|
New warrant liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Decrease in fair value of warrant
liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208
|
|
Ending warrant liability as of June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
650
|
|
NOTE 6: SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
|
|
Six Months Ended
|
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
Non-cash Investing and Financing Activities
|
|
|
|
|
|
|
Noncash preferred stock dividends
|
|
$
|
-
|
|
|
$
|
246
|
|
Issuance of common stock upon conversion of preferred
stock
|
|
$
|
125
|
|
|
$
|
2,246
|
|
Issuance of warrants with term loan extensions / revolver
draws
|
|
$
|
809
|
|
|
$
|
2,218
|
|
NOTE 7: INTANGIBLE ASSETS
Intangible Assets
Intangible assets
consisted of the following at June 30, 2018 and December 31, 2017:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Technology platform
|
|
|
2,865
|
|
|
|
2,766
|
|
|
|
2,865
|
|
|
|
2,568
|
|
Customer relationships
|
|
|
2,460
|
|
|
|
2,321
|
|
|
|
2,460
|
|
|
|
2,093
|
|
Trademarks and trade names
|
|
|
680
|
|
|
|
507
|
|
|
|
680
|
|
|
|
469
|
|
|
|
|
6,005
|
|
|
|
5,594
|
|
|
|
6,005
|
|
|
|
5,130
|
|
Accumulated amortization
|
|
|
5,594
|
|
|
|
|
|
|
|
5,130
|
|
|
|
|
|
Net book value of amortizable
intangible assets
|
|
|
411
|
|
|
|
|
|
|
|
875
|
|
|
|
|
|
For the three months
ended June 30, 2018 and 2017, amortization of intangible assets charged to operations was $232 and $323, and for the six months
ended June 30, 2018 and 2017 amortization of intangible assets charged to operations was $464 and $646, respectively.
NOTE 8: LOANS PAYABLE
The outstanding debt
with detachable warrants, as applicable, are shown in the table below. Further discussion of the notes follows.
Debt
Type
|
|
Issuance
Date
|
|
Original
Principal
|
|
|
Additional
Principal
|
|
|
Total
Principal
|
|
|
Maturity
Date
|
|
Warrants
|
|
|
Interest
Rate Information
|
A
|
|
6/30/2018
|
|
$
|
264
|
|
|
$
|
-
|
|
|
$
|
264
|
|
|
6/30/2021
|
|
|
-
|
|
|
0.0% interest
(1)
|
B
|
|
4/27/2018
|
|
$
|
1,100
|
|
|
|
4
|
|
|
|
1,104
|
|
|
1/16/2019
|
|
|
143,791
|
|
|
8.0% interest
(2)
|
B
|
|
1/16/2018
|
|
$
|
1,000
|
|
|
|
3
|
|
|
|
1,003
|
|
|
1/16/2019
|
|
|
61,729
|
|
|
8.0% interest
(2)
|
C
|
|
8/17/2016
|
|
|
3,000
|
|
|
|
11
|
|
|
|
3,011
|
|
|
8/17/2019
|
|
|
588,237
|
|
|
8.0% interest
(2)
|
D
|
|
6/29/2016
|
|
|
50
|
|
|
|
2
|
|
|
|
52
|
|
|
8/24/2019
|
|
|
2,977
|
|
|
14% interest - 12% cash, 2% added to principal
|
D
|
|
6/13/2016
|
|
|
200
|
|
|
|
21
|
|
|
|
221
|
|
|
8/24/2019
|
|
|
11,905
|
|
|
14% interest - 12% cash, 2% added to principal
|
D
|
|
6/13/2016
|
|
|
250
|
|
|
|
17
|
|
|
|
267
|
|
|
8/24/2019
|
|
|
14,881
|
|
|
14% interest - 12% cash, 2% added to principal
|
D
|
|
5/3/2016
|
|
|
500
|
|
|
|
22
|
|
|
|
522
|
|
|
8/24/2019
|
|
|
29,762
|
|
|
14% interest - 12% cash, 2% added to principal
|
D
|
|
12/28/2015
|
|
|
150
|
|
|
|
8
|
|
|
|
158
|
|
|
8/24/2019
|
|
|
8,929
|
|
|
14% interest - 12% cash, 2% added to principal
|
D
|
|
12/28/2015
|
|
|
500
|
|
|
|
25
|
|
|
|
525
|
|
|
8/24/2019
|
|
|
29,762
|
|
|
14% interest - 12% cash, 2% added to principal
|
D
|
|
12/28/2015
|
|
|
600
|
|
|
|
30
|
|
|
|
630
|
|
|
8/24/2019
|
|
|
35,715
|
|
|
14% interest - 12% cash, 2% added to principal
|
D
|
|
10/26/2015
|
|
|
300
|
|
|
|
16
|
|
|
|
316
|
|
|
8/24/2019
|
|
|
17,858
|
|
|
14% interest - 12% cash, 2% added to principal
|
D
|
|
10/15/2015
|
|
|
150
|
|
|
|
8
|
|
|
|
158
|
|
|
8/24/2019
|
|
|
8,929
|
|
|
14% interest - 12% cash, 2% added to principal
|
D
|
|
10/15/2015
|
|
|
500
|
|
|
|
28
|
|
|
|
528
|
|
|
8/24/2019
|
|
|
29,762
|
|
|
14% interest - 12% cash, 2% added to principal
|
D
|
|
6/23/2015
|
|
|
400
|
|
|
|
25
|
|
|
|
425
|
|
|
8/24/2019
|
|
|
21,334
|
|
|
14% interest - 12% cash, 2% added to principal
|
D
|
|
6/23/2015
|
|
|
119
|
|
|
|
37
|
|
|
|
156
|
|
|
8/24/2019
|
|
|
31,176
|
|
|
Refinanced May 20, 2015 debt, 14% interest
(3)
|
D
|
|
5/20/2015
|
|
|
465
|
|
|
|
-
|
|
|
|
465
|
|
|
8/24/2019
|
|
|
25,410
|
|
|
14% interest - 12% cash, 2% added to
principal
|
|
|
|
|
$
|
9,548
|
|
|
$
|
257
|
|
|
$
|
9,805
|
|
|
|
|
|
1,062,157
|
|
|
|
|
|
Debt discount
|
|
|
|
|
|
|
|
|
|
|
(1,893
|
)
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
9,548
|
|
|
|
|
|
|
$
|
7,912
|
|
|
|
|
|
|
|
|
|
A – Secured Disbursed Escrow Promissory Note
B – Revolving Loan
C – Term Loan
D – Convertible Promissory Note
(1) 0.0% interest per annum when total borrowings
under the term and revolver loans, in aggregate, are below $4,000,000 in principal (disregarding paid-in-kind (“PIK”)
interest); 8.0% cash, when total borrowing under the term and revolver loans, in aggregate, exceed $4,000,000 in principal (disregarding
PIK interest)
(2) 8.0% interest per annum when total borrowings
under the term and revolver loans, in aggregate, are below $4,000,000 in principal (disregarding PIK interest); 8.0% cash, 2.0%
PIK when total borrowing under the term and revolver loans, in aggregate, exceed $4,000,000 in principal (disregarding PIK interest)
(3) 12.0% cash, 2.0% added to principal
Obligations under the
secured convertible promissory notes are secured by a grant of collateral security in all of the tangible assets of the co-makers
pursuant to the terms of an amended and restated security agreement.
Term Notes and Secured Disbursed
Escrow Promissory Note
On August 17, 2016, we
entered into a Loan and Security Agreement with Slipstream Communications, LLC (“Slipstream”), a related party (see
Note 10), and obtained a $3.0 million term loan, with interest thereon at 8% per annum. The loan currently matures August 17,
2019. The term loan 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.
On January 16, 2018,
we entered into the Third Amendment to the Loan and Security Agreement with Slipstream and obtained a $1.0 million revolving loan,
with interest thereon at 8% per annum, maturing on January 16, 2019. In connection with the loan, we issued Slipstream a five-year
warrant to purchase up to 61,729 shares of Creative Realities’ common stock at a per share price of $8.10 (subject to adjustment).
The fair value of the warrants was $266, which is accounted for as an additional debt discount and amortized over the remaining
life of the loan.
On April 27, 2018,
we entered into the Fourth Amendment to the Loan and Security Agreement with Slipstream, a related party investor, under which
we obtained a $1.1 million revolving loan, with interest thereon at 8% per annum, provided, however, at all times when the aggregate
outstanding principal amount of the Term Loan and the Revolving Loan (excluding the additional principal added pursuant to this
proviso) exceeds $4,000,000 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 principal of the Term Loan (“PIK”); provided, further, however,
that the Loan Rate with respect to the Disbursed Escrow Loan shall be 0%. The revolving loan matures on January 16, 2019. In connection
with the loan, we issued the lender a five-year warrant to purchase up to 143,791 shares of Creative Realities’ common stock
at a per share price of $7.65 (subject to adjustment). The fair value of the warrants was $543, which is accounted for as an additional
debt discount and amortized over the remaining life of the loan.
The Fourth Amendment
to the Loan and Security Agreement included entry into a Secured Disbursed Escrow Promissory Note between the Company and Slipstream,
a related party investor, 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 will bear simple interest at the 8%; provided,
further, however, that the Loan Rate with respect to the Secured Disbursed Escrow Promissory Note shall be 0% at all times when
the aggregate outstanding principal amount of the Term Loan and the Revolving Loan (excluding the additional principal added pursuant
to this proviso) exceeds $4,000,000.
See Note 13 for the Black
Scholes inputs used to calculate the fair value of the warrants.
Convertible Promissory Notes
In December 2016 and
January 2017, Slipstream purchased all of our outstanding convertible promissory notes from the original debtholders. The terms
of the notes are set forth in the table above and are discussed in further detail below.
The convertible promissory
notes were issued in a private placement exempt from registration under the Securities Act of 1933. Our principal subsidiaries
— Creative Realities, LLC, Creative Realities Canada, Inc., and Conexus World Global, LLC — are also parties to the
Securities Purchase Agreement and are co-makers of the secured convertible promissory notes. Obligations under the secured convertible
promissory notes are secured by a grant of collateral security in all of the personal property of the co-makers pursuant to the
terms of a security agreement. The secured convertible promissory notes bear interest at the rate of 14% per annum. Of this amount,
12% per annum is payable monthly in cash, and the remaining 2% per annum is payable in the form an additional principal through
increases in the principal amount of the note. Upon the consummation of a change in control transaction of the Company or a default,
interest on the secured convertible promissory note will increase to the rate of 17% per annum. The secured convertible promissory
note contains other customary terms. See Note 13 for the Black Scholes inputs used to calculate the fair value of the warrants
issued in connection with such notes. On August 10, 2017, Slipstream extended the maturity date of all the promissory notes to
October 15, 2018. The change was accounted for as a modification of the debt. On November 13, 2017, Slipstream elected to extend
the maturity date of the convertible promissory notes on a rolling quarter addition basis to January 15, 2019, which is now extended
to August 24, 2019.
At any time prior to
the maturity date, the holder of a promissory note may convert the outstanding principal and accrued and unpaid interest into
our common stock at its conversion rate. We may not prepay the secured convertible promissory note prior to the maturity date.
The secured convertible promissory note contains other customary terms. See Note 13 for the Black Scholes inputs used to calculate
the fair value of the warrants.
NOTE 9: COMMITMENTS AND CONTINGENCIES
Lease termination
On August 10, 2017, we
announced the planned closure of our office facilities located at 22 Audrey Place, Fairfield, New Jersey 07004 which housed our
previous operations center and ceased use of the facilities in February 2018. In ceasing use of these facilities, we recorded
a one-time non-cash charge of $474 to accrue for the remaining rent under the lease term, net of anticipated subtenant rental
income. Effective June 30, 2018, we entered a settlement agreement to exit this lease agreement, resulting in the Company drawing
on the Secured Disbursed Escrow Promissory Note entered with Slipstream on April 27, 2018 (Note 8). The Company reclassified $264
of the previously recorded liability from a Lease Termination Liability to a Note as a result of this transaction and recorded
a gain on settlement of $39. Approximately $75 remains recorded as an accrued liability as of June 30, 2018 which was paid subsequent
to the balance sheet date.
Structured Settlement Program
In March 2017, the Company
settled and/or wrote off debt of $1,109 for $243 cash payment and recognized a gain of $866. This debt included $693 of payables
previously recorded by our dissolved subsidiary Broadcast International, Inc., as we had exhausted all efforts to identify and
settle these obligations in the first quarter of 2017. There were no such settlements in any other period presented.
Litigation
The Company is involved
in various legal proceedings incidental to the operations of its business. The Company believes that the outcome of all such other
pending legal proceedings in the aggregate will not have a material adverse effect on its business, financial condition, liquidity,
or operating results.
Termination benefits
On August 10, 2017, the
Company announced that it was closing its New Jersey and Minnesota locations and accrued one-time termination benefits related
to severance to the affected employees of $75. During the three-months ended June 30, 2018, the remaining cash payments for termination
benefits were paid and no liability remains recorded on the balance sheet.
NOTE 10: RELATED PARTY TRANSACTIONS
On August 14, 2018, we
entered into a payment agreement with 33 Degrees Convenience Connect, Inc. (“33 Degrees”) outlining terms for repayment
of $2,567 of aged accounts receivable as of that date. The payment agreement stipulates 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. Payments under the
agreement are due as follows: $450 paid August 14, 2018, $350 to be paid November 1, 2018, $450 to be paid March 2, 2018 and $150
to be paid on the first day of each month thereafter through the maturity date. As a result of entry into this payment agreement,
we have reclassified $900 to long-term receivables in the balance sheet as we anticipate collecting those balances greater than
one year from the balance sheet date.
On April 27, 2018,
we entered into the Fourth Amendment to the Loan and Security Agreement with Slipstream Communications, LLC, a related party investor,
under which we obtained a $1.1 million revolving loan, with interest thereon at 8% per annum; provided however at all times when
the aggregate outstanding principal amount of the Term Loan and the Revolving Loan (excluding the additional principal added pursuant
to this proviso) exceeds $4,000,000 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 principal of the Term Loan (“PIK”); provided, further,
however, that the Loan Rate with respect to the Disbursed Escrow Loan shall be 0%. The revolving loan matures on January 16, 2019.
In connection with the loan, we issued the lender a five-year warrant to purchase up to 143,791 shares of Creative Realities’
common stock at a per share price of $7.65 (subject to adjustment). The fair value of the warrants was $543, which is accounted
for as an additional debt discount and amortized over the remaining life of the loan.
The Fourth Amendment
to the Loan and Security Agreement included entry into a Secured Disbursed Escrow Promissory Note between the Company and Slipstream,
a related party investor, 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 will bear simple interest at the 8%; provided,
further, however, that the Loan Rate with respect to the Secured Disbursed Escrow Promissory Note shall be 0% at all times when
the aggregate outstanding principal amount of the Term Loan and the Revolving Loan (excluding the additional principal added pursuant
to this proviso) exceeds $4,000,000.
On January 16, 2018,
we entered into the Third Amendment to the Loan and Security Agreement with Slipstream Communications, LLC, a related party investor,
under which we obtained a $1.0 million revolving loan, with interest thereon at 8% per annum, maturing on January 16, 2019. In
connection with the loan, we issued the lender a five-year warrant to purchase up to 61,729 shares of Creative Realities’
common stock at a per share price of $8.10 (subject to adjustment). The fair value of the warrants was $266, which is accounted
for as an additional debt discount and amortized over the remaining life of the loan.
For the three and six
months ended June 30, 2018, the Company had sales with a related party entity that is approximately 17.5% owned by a member of
senior management. Sales were $618, or 8.6%, and $1,035, or 9.2% of consolidated revenue for the three and six months ended June
30, 2018. Accounts receivable due from the related party was $2,650, or 46.8%, and $3,017, or 51.0% of consolidated accounts receivable
at June 30, 2018 and December 31, 2017, respectively.
For the three and six
months ended June 30, 2017, the Company had sales with a related party entity that is approximately 17.5% owned by a member of
senior management. Sales were $1,368, or 38.3%, and $1,477, or 14.8% of consolidated revenue for the three and six months ended
June 30, 2017.
In December 2016 and
January 2017, the Company’s majority shareholder and investor, Slipstream Communications LLC acquired all of the Company’s
outstanding debt (see Note 8).
NOTE 11: INCOME TAXES
Our deferred tax assets
are primarily related to net federal and state operating loss carryforwards (NOLs). We have substantial NOLs that are limited
in its 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.
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 with a definite life.
For the three and six
months ended June 30, 2018, we reported tax benefit of $102 and $56. The net deferred liability at June 30, 2018 of $472 represents
the liability relating to indefinite lived assets, which is not more likely than not to be offset by the Company’s deferred
tax assets.
The Tax Reform Act was
signed into law on December 22, 2017. Among other things, the Tax Reform Act reduced the U.S. federal corporate tax rate from 35.0
percent to 21.0 percent effective for tax years beginning after December 31, 2017. We applied the guidance
in the U.S. Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 118 (“SAB 118”) when
accounting for the enactment date effects of the Tax Reform Act. Accordingly, we remeasured our deferred taxes as of December
31, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized, resulting
in a one-time $0.2 million net tax benefit in 2017. Upon further analyses of certain aspects of the Tax Reform Act and refinement
of our calculations during the six months ended June 30, 2018, we made no adjustments to our provisional amounts
recorded.
NOTE 12: CONVERTIBLE PREFERRED STOCK
The preferred stock entitles
its holders to a 6% dividend, payable semi-annually in cash or in kind through the three-year anniversary of the original issue
date, and from and after such three-year anniversary in duly authorized, validly issued, fully paid and non-assessable shares
of common stock. The three-year anniversary of the initial investment date occurred during the second half of 2017 for $5.2 million
and the first quarter of 2018 for the remaining $0.3 million originally issued Convertible Preferred Stock and therefore dividends
on those investments will be paid via issuance of common shares at all future dividend dates.
As of June 30, 2018,
the pro rata portion of earned dividends to be distributed as of June 30, 2018 were the equivalent of 166,056 shares of Series
A Convertible Preferred Stock, which represents 26,391 equivalent common shares based on the volume-weighted adjusted price utilized
for conversion. The common share dividend was distributed by the Company on June 30, 2018 and is reflected in the issued and outstanding
shares on the balance sheet as of that date. The fair value of those common shares issued are reflected at fair value as a dividend
on preferred stock in the condensed consolidated statement of operations and do not impact net loss for the period.
The preferred stock
may be converted into our common stock at the option of a holder at an initial conversion price as adjusted of $7.65 per share.
Subject to certain conditions, we may call and redeem the preferred stock after three years. From and after the three-year anniversary
of the date of issuance, the Company has the right (but not the obligation), upon at least 30 days prior written notice, to call
some or all of the Series A Preferred Stock for redemption at any time after the common stock has had a closing price on the relevant
trading market, for a period of at least 15 consecutive days, all of which must be after the three-year anniversary date of the
purchase agreement, equal to at least one and one-half times the initial conversion price.
During such time as a
majority of the preferred stock sold remains outstanding, holders will have the right to elect a member to our Board of Directors.
The preferred stock has full-ratchet price protection in the event that we issue common stock below the conversion price, as adjusted,
subject to certain customary exceptions. The warrants issued to purchasers of the preferred stock contain weighted-average price
protection in the event that we issue common stock below the exercise price, as adjusted, again subject to certain customary exceptions.
In the Securities Purchase Agreement, we granted purchasers of the preferred stock certain registration rights pertaining to the
common shares they may receive upon conversion of their preferred stock and upon exercise of their warrants.
During the three and
six months ended June 30, 2018, accredited investors converted 124,985 shares of Series A Convertible Preferred Stock for 16,339
shares of common stock.
As of the date of
the conversion, the pro rata portion of earned dividends were the equivalent of 1,529 shares of Series A Convertible Preferred
Stock, which represents 222 equivalent common shares based on the stated conversion price. The common share dividend was distributed
by the Company and is reflected in the issued and outstanding shares on the balance sheet. The fair value of those common shares
issued are reflected at fair value as a dividend on preferred stock in the condensed consolidated statement of operations and
do not impact net loss for the period.
During the three and six months ended
June 30, 2017, accredited investors converted 12,750 and 252,750 shares of Convertible Preferred Stock for 1,667 and 33,072 shares
of common stock, respectively.
NOTE 13: WARRANTS
On April 27, 2018,
we entered into the Fourth Amendment to the Loan and Security Agreement with Slipstream, a related party investor, under which
we obtained a $1.1 million revolving loan, with interest thereon at 8% per annum, maturing on January 16, 2019. In connection
with the loan, we issued the lender a five-year warrant to purchase up to 143,791 shares of Creative Realities’ common stock
at a per share price of $7.65 (subject to adjustment). The fair value of the warrants was $543, which is accounted for as an additional
debt discount and amortized over the remaining life of the loan.
On January 16, 2018, we entered into
the Third Amendment to the Loan and Security Agreement with Slipstream, a related party investor, under which we obtained a $1.0
million revolving loan, with interest thereon at 8% per annum, maturing on January 16, 2019. In connection with the loan, we issued
the lender a five-year warrant to purchase up to 61,729 shares of Creative Realities’ common stock at a per share price
of $8.10 (subject to adjustment). The fair value of the warrants on the issuance date was $266, which is accounted for as an additional
debt discount and amortized over the remaining life of the loan.
Listed below are the
range of inputs used for the probability weighted Black Scholes option pricing model valuations for warrants issued during the
three-months ended June 30, 2018 and for warrants outstanding as of June 30, 2018.
Issuance
Date
|
|
Expected
Term at Issuance Date
|
|
|
Risk
Free Interest Rate at Date of Issuance
|
|
|
Volatility
at
Date of Issuance
|
|
|
Stock
Price at
Date of Issuance
|
|
4/27/2018
|
|
|
5.00
|
|
|
|
2.80
|
%
|
|
|
65.95
|
%
|
|
$
|
6.90
|
|
Remaining Expected
Term at June 30, 2018 (Years)
|
|
Risk
Free Interest Rate at
June 30,
2018
|
|
|
Volatility
at
June 30,
2018
|
|
|
Stock
Price at
June 30,
2018
|
|
0.04 - 4.8
|
|
|
2.49
|
%
|
|
|
70.35
|
%
|
|
$
|
9.00
|
|
A summary of outstanding
debt and equity warrants is included below:
|
|
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, 2018
|
|
|
1,100,150
|
|
|
|
14.10
|
|
|
|
3.55
|
|
|
|
216,255
|
|
|
|
10.51
|
|
|
|
1.64
|
|
Warrants issued with revolver loan
|
|
|
205,520
|
|
|
|
7.79
|
|
|
|
4.74
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants expired
|
|
|
17,756
|
|
|
|
326.09
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance June 30, 2018
|
|
|
1,287,914
|
|
|
|
8.69
|
|
|
|
3.37
|
|
|
|
216,255
|
|
|
|
10.51
|
|
|
|
1.14
|
|
NOTE 14: STOCK-BASED COMPENSATION
A summary of outstanding
options is included below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of Exercise
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
Prices between
|
|
Outstanding
|
|
|
Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
$5.40 - $19.50
|
|
|
254,007
|
|
|
|
7.19
|
|
|
$
|
8.46
|
|
|
|
156,756
|
|
|
$
|
9.03
|
|
$19.51 - $23.70
|
|
|
1,000
|
|
|
|
5.55
|
|
|
|
23.70
|
|
|
|
1,000
|
|
|
$
|
23.70
|
|
$23.71 - $367.50
|
|
|
519
|
|
|
|
4.09
|
|
|
|
112.30
|
|
|
|
519
|
|
|
$
|
112.30
|
|
|
|
|
255,526
|
|
|
|
7.18
|
|
|
$
|
8.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
Options
Outstanding
|
|
|
Exercise
Price
|
|
Balance, December 31,
2017
|
|
|
239,693
|
|
|
$
|
8.69
|
|
Granted
|
|
|
19,167
|
|
|
|
8.70
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited or expired
|
|
|
(3,334
|
)
|
|
|
5.70
|
|
Balance, June 30, 2018
|
|
|
255,526
|
|
|
$
|
8.73
|
|
The weighted average
remaining contractual life for options exercisable is 7.18 years as of June 30, 2018.
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 12,186 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.
There are 243,340 options outstanding under the 2014 Stock Incentive Plan.
Compensation expense
recognized for the issuance of stock options for the three and six months ended June 30, 2018 and 2017 was as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Stock-based compensation costs included in:
|
|
|
|
|
|
|
Costs of sales
|
|
$
|
-
|
|
|
$
|
2
|
|
|
$
|
(6
|
)
|
|
$
|
4
|
|
Sales and marketing expense
|
|
|
10
|
|
|
|
19
|
|
|
|
16
|
|
|
|
38
|
|
General and administrative expense
|
|
|
103
|
|
|
|
50
|
|
|
|
167
|
|
|
|
100
|
|
Total stock-based compensation expense
|
|
$
|
113
|
|
|
$
|
71
|
|
|
$
|
177
|
|
|
$
|
142
|
|
At June 30, 2018, there
was approximately $292 of total unrecognized compensation expense related to unvested share-based awards. Generally, this expense
will be recognized over the next 3.5 years and will be adjusted for any future changes in estimated forfeitures.
Stock-based compensation
expense is based on awards ultimately expected to vest and is reduced for estimated forfeitures. ASC 718-10-55 requires forfeitures
to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates. The Company applied a pre-vesting forfeiture rate of 10% based on upon actual historical experience for employee option
awards of the registrant.
On
October 15, 2015, our current CEO was awarded 165,052 performance shares with a grant date to be determined upon certain conditions
being satisfied. Those conditions had not been met as of June 30, 2018 and no compensation expense had been recorded.
NOTE 15: SEGMENT INFORMATION AND
SIGNIFICANT CUSTOMERS
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 sales for the three and six months ended June 30, 2018
and 2017 were in the United States and Canada.
Major Customers
We had 3 customers that
in the aggregate accounted for 66% and 63% of accounts receivable as of June 30, 2018 and December 31, 2017, respectively, which
includes transactions with related parties.
The Company had 2 customers
that accounted for 67% and 49% of revenue for the three months ended June 30, 2018 and 2017, respectively, which includes transactions
with related parties. The Company had 2 customers that accounted for 59% and 60% of revenue for the six months ended June 30,
2018 and 2017, respectively.
For the three and six
months ended June 30, 2018, the Company had sales with a related party entity that is approximately 17.5% owned by a member of
senior management. Sales to this related party were $618 and $1,035 for the three and six months ended June 30, 2018. Sales to
this related party were $1,368 and $1,477 for the three and six months ended June 30, 2017. Accounts receivable due from the related
party was $2,650 and $3,017 at June 30, 2018 and December 31, 2017, respectively.
NOTE 16: SUBSEQUENT EVENTS
On October 17, 2018, the Company effectuated
a l-for-30 reverse stock split of its outstanding common stock, which was approved by the Company’s board of directors on
October 17, 2018. The reverse stock split resulted in an adjustment to the preferred stock conversion prices to reflect a proportional
decrease in the number of shares of common stock to be issued upon conversion. The accompanying financial statements and notes
to the financial statements give retroactive effect to the reverse stock split for all periods presented. The shares of common
stock retained a par value of $0.01 per share. Accordingly, the stockholders’ deficit reflects the reverse stock split by
reclassifying from “common stock” to “additional paid-in capital” in an amount equal to the par value
of the decreased shares resulting from the reverse stock split.
ALLURE
GLOBAL SOLUTIONS, INC.
A
WHOLLY OWNED SUBSIDIARY OF CHRISTIE DIGITAL SERVICES, INC.
FINANCIAL
STATEMENTS
MARCH
31, 2018 AND 2017
ALLURE GLOBAL SOLUTIONS,
INC.
A WHOLLY OWNED SUBSIDIARY OF CHRISTIE
DIGITAL SERVICES, INC.
TABLE
OF CONTENTS
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Advisory Assurance Tax Private
Client
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