NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands, except share and per share amounts)
All
currency is rounded to the nearest thousands except share and per share amounts
NOTE
1: NATURE OF ORGANIZATION AND OPERATIONS
Unless
the context otherwise indicates, references in these Notes to the accompanying Consolidated Financial Statements to “we,”
“us,” “our” and “the Company” refer to Creative Realities, Inc. and its subsidiaries.
Nature
of the Company’s Business
Creative
Realities, Inc. is a Minnesota corporation that provides innovative digital marketing technology and solutions to retail companies, individual
retail brands, enterprises and organizations throughout the United States and in certain international markets. The Company has expertise
in a broad range of existing and emerging digital marketing technologies, as well as the related media management and distribution software
platforms and networks, device management, product management, customized software service layers, systems, experiences, workflows, and
integrated solutions. Our technology and solutions include: digital merchandising systems and omni-channel customer engagement systems,
interactive digital shopping assistants, advisors and kiosks, and other interactive marketing technologies such as mobile, social media,
point-of-sale transactions, beaconing and web-based media that enable our customers to transform how they engage with consumers. We have
expertise in a broad range of existing and emerging digital marketing technologies, as well as the following related aspects of our business:
content, network management, and connected device software and firmware platforms; customized software service layers; hardware platforms;
digital media workflows; and proprietary processes and automation tools.
Our main operations are conducted directly through
Creative Realities, Inc., and under our wholly owned subsidiaries Allure Global Solutions, Inc., a Georgia corporation, and Creative Realities
Canada, Inc., a Canadian corporation, and Reflect Systems, Inc., a Delaware corporation, which was acquired on February 17, 2022.
Acquisition of Reflect
On November 12, 2021,
the Company and Reflect Systems, Inc., or “Reflect,” entered into an Agreement and Plan of Merger (as amended on as amended
on February 8, 2022, the “Merger Agreement)” pursuant to which a direct, wholly owned subsidiary of Creative Realities, CRI
Acquisition Corporation, or “Merger Sub,” would merge with and into Reflect, with Reflect surviving as a wholly owned subsidiary
of Creative Realities, and the surviving company of the merger, which transaction is referred to herein as the “Merger.” On
February 17, 2022, the parties consummated the Merger.
Reflect provides digital
signage solutions, including software, strategic and media services to a wide range of companies across the retail, financial, hospitality
and entertainment, healthcare, and employee communications industries in North America. Reflect offers digital signage platforms, including
ReflectView, a platform used by companies to power hundreds of thousands of active digital displays. Through its strategic services, Reflect
assists its customers with designing, deploying and optimizing their digital signage networks, and through its media services, Reflect
assists customers with monetizing their digital advertising networks.
Subject to the terms and
conditions of the Merger Agreement, upon the closing of the Merger, Reflect stockholders as of to the effective time of the Merger collectively
received from the Company, in the aggregate, the following Merger consideration: (i) $16,166 payable in cash, (ii) 2,333,334 shares of
common stock of Creative Realities (valued based on an issuance price of $2 per share) (the “CREX Shares”), (iii) the Secured
Promissory Note (as described below), and (iv) supplemental cash payments (the “Guaranteed Consideration”), if any, payable
on or after the three-year anniversary of the effective time of the Merger (subject to the Extension Option described below, the “Guarantee
Date”), in an amount by which the value of the CREX Shares on such anniversary is less than $6.40 per share, or if certain customers
of Reflect collectively achieve over 85,000 billable devices online at any time on or before December 31, 2022, is less than $7.20 per
share (such applicable amount, the “Guaranteed Price”), multiplied by the amount of CREX Shares held by the Reflect stockholders
on the Guarantee Date (subject to the Extension Option described below), subject to the terms of the Merger Agreement.
Creative Realities may exercise an extension option
(the “Extension Option”) to extend the Guarantee Date from the three-year anniversary of the Closing Date to six (6) months
thereafter if (i) the Extension Threshold Price is greater than or equal to 70% of the Guaranteed Price described above, and (ii) Creative
Realities provides written notice of its election to exercise the Extension Option at least ten (10) days prior to the three-year anniversary
of the Closing. The “Extension Threshold Price” means the average closing price per share of Creative Realities Shares as
reported on the Nasdaq Capital Market (or NYSE) in the fifteen (15) consecutive trading day period ending fifteen (15) days prior to the
three-year anniversary of the Closing Date. If the Extension Threshold Price is less than 80% of the Guaranteed Price, then the Guaranteed
Price will be increased by $1.00 per share.
In connection with the Merger, the Company adopted
a Retention Bonus Plan and raised capital to, among other things, pay the cash portion of the Merger consideration.
Equity
Financing
On February 3, 2022, the Company entered into a
securities purchase agreement (the “Securities Purchase Agreement”) with a purchaser (the “Purchaser”), pursuant
to which the Company agreed to issue and sell to the Purchaser, in a private placement priced at-the-market under Nasdaq rules, (i) 1,315,000
shares (the “Shares”) of the Company’s common stock, par value $0.01 per share (the “Common Stock”) and
accompanying warrants to purchase an aggregate of 1,315,000 shares of Common Stock, and (ii) pre-funded warrants to purchase up to an
aggregate of 5,851,505 shares of Common Stock (the “Pre-Funded Warrants”) and accompanying warrants to purchase an aggregate
of 5,851,505 shares of Common Stock (collectively, the “Private Placement”). The accompanying warrants to purchase Common
Stock are referred to herein collectively as the “Common Stock Warrants.” Under the Securities Purchase Agreement, each Share
and accompanying warrants to purchase Common Stock were sold together at a combined price of $1.535, and each Pre-Funded Warrant and accompanying
warrants to purchase Common Stock were sold together at a combined price of $1.5349, for gross proceeds of approximately $11,000 before
deducting placement agent fees and estimated offering expenses payable by the Company. The net proceeds from the Private Placement were
used to fund, in part, payment of the closing cash consideration in the Merger.
Debt
Financing
On
February 17, 2022, the Company and its subsidiaries (collectively, the “Borrowers”) refinanced their current debt facilities
with Slipstream, pursuant to the Credit Agreement, and raised $10,000 in gross proceeds with a maturity date of February 1, 2025. The
Credit Agreement also provides that the Company’s outstanding loans from Slipstream, consisting of its pre-existing $4,767 senior
secured term loan and $2,418 secured convertible loan, with an aggregate of $7,185 in outstanding principal and accrued and unpaid interest
under such loans, were consolidated into a Consolidation Term Loan with a maturity date of February 1, 2025.
On
February 17, 2022, in connection with the closing of the acquisition of Reflect, the Company issued to RSI Exit Corporation (“Stockholders’
Representative”), the representative of Reflect stockholders, a $2,500 Note and Security Agreement (the “Secured Promissory
Note”). The Secured Promissory Note accrues interest at 0.59% (the applicable federal rate) and requires the Company and Reflect
to pay equal monthly principal installments of $104 on the fifteenth (15th) day of each month, commencing on March 17, 2022, for twelve
months with any remaining or unpaid principal due and payable on February 15, 2023.
See Note 8 Loans Payable to the Consolidated
Financial Statements for an additional discussion of the Company’s debt obligations and further discussion of the Company’s
refinancing activities subsequent to December 31, 2021.
Management
believes that, based on (i) the execution of the Equity Financing, (ii) the refinancing of our debt as part of the Debt Financing, including
extension of the maturity date on our term loans, and (iii) our operational forecast through 2022 following completion of the Reflect
Acquisition, that we can continue as a going concern through at least March 31, 2023. However, given our historical net losses and cash
used in operating activities, we obtained a continued support letter from Slipstream through March 31, 2023. 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.
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A
summary of the significant accounting policies consistently applied in the preparation of the accompanying Consolidated Financial Statements
follows:
1.
Basis of Presentation
The
accompanying Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-K and Article 8 of Regulation
S-X and include all of the information and disclosures required by generally accepted accounting principles in the United States of America
(“GAAP”) for annual financial reporting.
The
Consolidated Financial Statements include the accounts of Creative Realities, Inc. and our wholly owned subsidiaries Allure, and Creative
Realities (Canada), Inc. All intercompany balances and transactions have been eliminated in consolidation, as applicable.
2.
Revenue Recognition
We
recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
606, Revenue from Contracts with Customers, applying the five-step model.
If
an arrangement involves multiple performance obligations, the items are analyzed to determine the separate units of accounting, whether
the items have value on a standalone basis and whether there is objective and reliable evidence of their standalone selling price. The
total contract transaction price is allocated to the identified performance obligations based upon the relative standalone selling prices
of the performance obligations. The standalone selling price is based on an observable price for services sold to other comparable customers,
when available, or an estimated selling price using a cost plus margin approach.
The
Company estimates the amount of total contract consideration it expects to receive for variable arrangements by determining the most
likely amount it expects to earn from the arrangement based on the expected quantities of services it expects to provide and the contractual
pricing based on those quantities. The Company only includes some or a portion of variable consideration in the transaction price when
it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated
with the variable consideration is subsequently resolved. The Company considers the sensitivity of the estimate, its relationship and
experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable
consideration to the overall arrangement. The Company receives variable consideration in very few instances.
Revenue
is recognized when a customer obtains control of promised goods or services under the terms of a contract and is measured as the amount
of consideration the Company expects to receive in exchange for transferring goods or providing services. The Company does not have any
material extended payment terms as payment is due at or shortly after the time of the sale, typically ranging between thirty and ninety
days. Observable prices are used to determine the standalone selling price of separate performance obligations or a cost plus margin
approach when one is not available. Sales, value-added and other taxes collected concurrently with revenue producing activities are excluded
from revenue.
The
Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced
to the clients. A contract liability is recognized as deferred revenue when the Company invoices clients in advance of performing the
related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the related
performance obligation.
The
Company uses the practical expedient for recording an immediate expense for incremental costs of obtaining contracts, including certain
design/engineering services, commissions, incentives and payroll taxes, as these incremental and recoverable costs have terms that do
not exceed one year.
3.
Inventories
Inventories
are stated at the lower of cost or net realizable value, determined by the first-in, first-out (FIFO) method, and consist of the following:
| |
December 31, | | |
December 31, | |
| |
2021 | | |
2020 | |
Raw materials, net of reserve of $502 and $104, respectively | |
$ | 1,580 | | |
$ | 1,920 | |
Inventory on consignment with distributors | |
| 3 | | |
| 208 | |
Work-in-process | |
| 297 | | |
| 223 | |
Total inventories | |
$ | 1,880 | | |
$ | 2,351 | |
4.
Impairment of Long-Lived Assets
We
review the carrying value of all long-lived assets, including property and equipment, for impairment in accordance with ASC 360, Accounting
for the Impairment or Disposal of Long-Lived Assets. Under ASC 360, impairment losses are recorded whenever events or changes
in circumstances indicate the carrying value of an asset may not be recoverable.
If
the impairment tests indicate that the carrying value of the asset is greater than the expected undiscounted cash flows to be generated
by such asset, an impairment loss would be recognized. The impairment loss is determined as the amount by which the carrying value of
such asset exceeds its fair value. We generally measure fair value by considering sale prices for similar assets or by discounting estimated
future cash flows from such assets using an appropriate discount rate. Assets to be disposed of are carried at the lower of their carrying
value or fair value less costs to sell. Considerable management judgment is necessary to estimate the fair value of assets, and accordingly,
actual results could vary significantly from such estimates.
5.
Basic and Diluted Income/(Loss) per Common Share
Basic
and diluted income/(loss) per common share for all periods presented is computed using the weighted average number of common shares outstanding.
Basic weighted average shares outstanding includes only outstanding common shares. Diluted weighted average shares outstanding includes
outstanding common shares and potential dilutive common shares outstanding in accordance with the treasury stock method. Shares reserved
for outstanding stock options, including stock options with performance restricted vesting, and warrants totaling approximately 6,972,020
and 7,040,709 at December 31, 2021 and 2020, respectively were excluded from the computation of income/(loss) per share as all options
and warrants were anti-dilutive due to the net loss in 2020 and no options or warrants were in the money for 2021. In calculating diluted
earnings per share for the years ended December 31, 2021 and 2020, in accordance with ASC 260 Earnings per share, we excluded
the dilutive effect of the potential issuance of common stock upon an assumed conversion of the Special Loan as the Company has both
the intent and ability to make the scheduled amortization payments on the Special Loan.
6.
Income Taxes
Deferred
income taxes are recognized in the financial statements for the tax consequences in future years of differences between the tax basis
of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates. Temporary differences
arise from net operating losses, differences in basis of intangibles, stock-based compensation, reserves for uncollectible accounts receivable
and inventory, differences in depreciation methods, and accrued expenses. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. The Company accounts for uncertain tax positions utilizing an established
recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. We had no uncertain tax positions as of December 31, 2021 and December 31, 2020.
7.
Goodwill and Definite-Lived Intangible Assets
We
follow the provisions of ASC 350, Goodwill and Other Intangible Assets. Pursuant to ASC 350, goodwill acquired in a purchase business
combination is not amortized, but instead tested for impairment at least annually. The Company uses an annual measurement date of September
30 (see Note 7 Intangible Assets and Goodwill).
8.
Use of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Our significant estimates include: the allowance for doubtful
accounts, valuation allowances related to deferred taxes, the fair value of acquired assets and liabilities, the fair value of liabilities
reliant upon the appraised fair value of the Company, valuation of stock-based compensation awards and other assumptions and estimates
used to evaluate the recoverability of long-lived assets, goodwill and other intangible assets and the related amortization methods and
periods. Actual results could differ from those estimates.
9.
Property and Equipment
Property
and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation is provided for in amounts sufficient
to relate the cost of depreciable assets to operations over the estimated service lives, principally using straight-line methods. Leasehold
improvements are amortized over the shorter of the life of the improvement or the lease term, using the straight-line method.
Property
and equipment consist of the following at December 31, 2021 and 2020:
| |
December 31, | |
| |
2021 | | |
2020 | |
Equipment | |
$ | 89 | | |
$ | 81 | |
Leasehold improvements | |
| 135 | | |
| 135 | |
Furniture and fixtures | |
| 121 | | |
| 119 | |
Other depreciable assets | |
| 56 | | |
| 56 | |
Total property and equipment | |
| 401 | | |
| 391 | |
Less: accumulated depreciation and amortization | |
| (326 | ) | |
| (216 | ) |
Net property and equipment | |
$ | 75 | | |
$ | 175 | |
The
estimated useful lives used to compute depreciation and amortization are as follows:
Asset
class |
|
Useful
life assigned |
Equipment |
|
3 – 5 years |
Furniture and fixtures |
|
5 years |
Leasehold improvements |
|
Shorter of 5 years or term of lease |
Depreciation expense was $109 and $124 for the
years ended December 31, 2021 and 2020, respectively.
12.
Research and Development and Software Development Costs
Research and development expenses consist primarily
of development personnel and non-employee contractor costs related to the development of new products and services, enhancement of existing
products and services, quality assurance and testing. The Company capitalizes its costs incurred for additional functionality to its internal
software. We capitalized approximately $1,140 and $603 for the years ended December 31, 2021 and 2020, respectively. These software development
costs include both enhancements and upgrades of our client-based systems including functionality of our internal information systems to
aid in our productivity, profitability and customer relationship management. We are amortizing these costs over 3 years once the new projects
are completed and placed in service. These costs are included in intangible assets, net on the Consolidated Balance Sheets.
13.
Leases
We
account for leases in accordance with ASU No. 2016-02, Leases (Topic 842), as amended.
We
determine if an arrangement is a lease at inception. Right of use (“ROU”) assets and liabilities are recognized at commencement
date based on the present value of remaining lease payments over the lease term. For this purpose, we consider only payments that are
fixed and determinable at the time of commencement. As most of our leases do not provide an implicit rate, we use our incremental borrowing
rate based on the information available at commencement date in determining the present value of lease payments. Our incremental borrowing
rate is a hypothetical rate based on our understanding of what our credit rating would be. The ROU asset also includes any lease payments
made prior to commencement and is recorded net of any lease incentives received. Our lease terms may include options to extend or terminate
the lease when it is reasonably certain that we will exercise such options.
Operating
leases are included in operating lease right-of-use assets, current maturities of operating leases, and long-term obligations under operating
leases on our Consolidated Balance Sheets. Finance leases are included in property and equipment, net, current maturities of financing
leases, and long-term obligations under financing leases on our Consolidated Balance Sheets.
NOTE
3: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently
adopted
None.
Not
yet adopted
In
October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract
Liabilities from Contracts with Customers (ASU 2021-08), which clarifies that an acquirer of a business should recognize and
measure contract assets and contract liabilities in a business combination in accordance with Accounting Standards Codification (ASC)
Topic 606, Revenue from Contracts with Customers (Topic 606). This guidance will be effective for us in the first quarter
of 2023 on a prospective basis, with early adoption permitted. We are currently evaluating the impact of the new guidance on our consolidated
financial statements.
In
May 2021, the FASB issued ASU No. 2021-04, Modification of equity-classified written call options, which clarifies how an
issuer should account for modifications made to equity-classified written call options (e.g., warrants to purchase an issuer’s
common stock). The guidance in the ASU requires the issuer to treat a modification of an equity-classified warrant that does not cause
the warrant to become liability-classified as an exchange of the original warrant for a new warrant. This guidance applies whether the
modification is structured as an amendment to the terms and conditions of the warrant or as termination of the original warrant and issuance
of a new warrant. This guidance will be effective for us in the first quarter of 2022. We are currently evaluating the disclosure requirements
and potential impact on our consolidated financial statements, but anticipate there may be impacts as the Company has issued warrants
in prior debt financing activities, including in both our Equity Financing and Debt Financings.
In
August 2020, the FASB issued Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic
470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments
and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for convertible instruments by
reducing the number of accounting models available for convertible debt instruments. This guidance also eliminates the treasury stock
method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. This
guidance will be effective for us in the first quarter of 2024 on a full or modified retrospective basis, with early adoption
permitted. We are currently evaluating the disclosure requirements and potential impact on our consolidated financial statements.
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses. The main objective is to provide financial
statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments
to extend credit held by a reporting entity at each reporting date. The amendments in this update replace the incurred loss methodology
with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information
to calculate credit loss estimates. For trade receivables and loans, entities will be required to estimate lifetime expected credit losses.
The amendments are effective for public business entities that qualify as smaller reporting companies for fiscal years and interim periods
beginning after December 15, 2022. We are currently evaluating the disclosure and accounting requirements related to adopting this guidance,
given the transition from an incurred loss to an expected loss model.
NOTE
4: REVENUE RECOGNITION
The
Company applies ASC 606 for revenue recognition. The following table disaggregates the Company’s revenue by major source for the
years ended December 31, 2021 and 2020:
(in thousands) | |
Year Ended December 31, 2021 | | |
Year Ended December 31, 2020 | |
Hardware | |
$ | 9,450 | | |
$ | 8,991 | |
| |
| | | |
| | |
Services: | |
| | | |
| | |
Installation Services | |
| 2,600 | | |
| 2,537 | |
Software Development Services | |
| 791 | | |
| 549 | |
Managed Services | |
| 5,596 | | |
| 5,380 | |
Total Services | |
| 8,987 | | |
| 8,466 | |
| |
| | | |
| | |
Total Hardware and Services | |
$ | 18,437 | | |
$ | 17,457 | |
System
hardware sales
System
hardware revenue is recognized generally upon shipment of the product or customer acceptance depending upon contractual arrangements
with the customer in instances in which the sale of hardware is the sole performance obligation. Shipping charges billed to customers
are included in hardware sales and the related shipping costs are included in hardware cost of sales. The cost of freight and shipping
to the customer is recognized in cost of sales at the time of transfer of control to the customer. System hardware revenues are classified
as “Hardware” within our disaggregated revenue.
Installation
services
The
Company performs outsourced installation services for customers and recognizes revenue upon completion of the installations. Installation
services also includes engineering services performed as part of an installation project.
When
system hardware sales include installation services to be performed by the Company, the goods and services in the contract are not distinct,
so the arrangement is accounted for as a single performance obligation. Our customers control the work-in-process and can make changes
to the design specifications over the contract term. Revenues are recognized over time as the installation services are completed based
on the relative portion of labor hours completed as a percentage of the budgeted hours for the installation. Installation services revenues
are classified as “Installation Services” within our disaggregated revenue.
Software
design and development services
Software
and software license sales are revenue when a fixed fee order has been received and delivery has occurred to the customer. Revenue is
recognized generally upon customer acceptance (point-in-time) of the software product and verification that it meets the required specifications.
Software is delivered to customers electronically. Software design and development revenues are classified as “Software Development
Services” within our disaggregated revenue.
Software
as a service
Software
as a service includes revenue from software licensing and delivery in which software is licensed on a subscription basis and is centrally
hosted. These services often include software updates which provide customers with rights to unspecified software product upgrades and
maintenance releases and patches released during the term of the support period. Contracts for these services are generally 12-36 months
in length. We account for revenue from these services in accordance with ASC 985-20-15-5 and recognize revenue ratably over the performance
period. Software as a service revenue are classified as “Managed Services” within our disaggregated revenue.
Maintenance
and support services
The
Company sells support services which include access to technical support personnel for software and hardware troubleshooting. The Company
offers a hosting service through our network operations center, or NOC, allowing the ability to monitor and support its customers’
networks 7 days a week, 24 hours a day. These contracts are generally 12-36 months in length. Revenue is recognized over the term of
the agreement in proportion to the costs incurred in fulfilling performance obligations under the contract. Maintenance and Support revenues
are classified as “Managed Services” within our disaggregated revenue.
Maintenance
and support fees are based on the level of service provided to end customers, which can range from monitoring the health of a customer’s
network to supporting a sophisticated web-portal to managing the end-to-end hardware and software of a digital marketing system. These
agreements are renewable by the customer. Rates for maintenance and support, including subsequent renewal rates, are typically established
based upon a fee per location, per device, or a specified percentage of net software license fees as set forth in the arrangement. These
contracts are generally 12-36 months in length. Revenue is recognized ratably and evenly over the service period.
The
Company also performs time and materials-based maintenance and repair work for customers. Revenue is recognized at a point in time when
the performance obligation has been fully satisfied.
NOTE
5: FAIR VALUE MEASUREMENT
We
measure certain financial assets, including cash equivalents, at fair value on a recurring basis. In accordance with ASC 820-10-30, fair
value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing
an asset or liability. As a basis for considering such assumptions, ASC 820-10-35 establishes a three-level hierarchy that prioritizes
the inputs used in measuring fair value. The three hierarchy levels are defined as follows:
Level
1 — Valuations based on unadjusted quoted prices in active markets for identical assets.
Level
2 — Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement
date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly.
Level
3 — Valuations based on inputs that are unobservable and involve management judgment and the reporting entity’s own assumptions
about market participants and pricing.
The
Company previously recorded warrant liabilities that were measured at fair value on a recurring basis using a binomial option pricing
model. All of the Company’s outstanding warrants classified as liabilities expired during 2019.
As
discussed in Note 7 Intangible Assets, Including Goodwill, the calculation of the weighted average cost of capital and management’s
forecast of future financial performance utilized within our discounted cash flow model for the impairment of goodwill contains inputs
which are unobservable and involve management judgment and are considered Level 3 estimates.
As
discussed in Note 8 Loans Payable, the Special Loan is reported at fair value. This liability is deemed to be a Level 3 valuation.
Certain unobservable inputs into the calculation of the fair value of this liability include an estimate of the fair value of the Company
at a future date using a discounted cash flow model, discount rate assumptions, and an estimation of the likelihood of conversion of
the Special Loan. We utilized a discounted cash flow analysis in updating our fair value analysis of the Convertible Loan, resulting
in recognition of a $166 gain during 2021 from the change in fair value of the liability and a corresponding decrease in the debt balance
recorded in the Condensed Consolidated Balance Sheet. The Company recorded a $93 loss during 2020 related to the fair value of the Special
Loan.
NOTE
6: SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
| |
Year Ended | |
| |
December 31, | |
| |
2021 | | |
2020 | |
Supplemental non-cash Investing and Financing activities | |
| | |
| |
Conversion of disbursed escrow loan into common stock | |
$ | 264 | | |
$ | - | |
Increase in debt related to financing fees | |
$ | 200 | | |
$ | - | |
Decrease in debt discount via amended Credit Agreement | |
$ | 133 | | |
$ | - | |
| |
| | | |
| | |
Supplemental disclosure information for cash flow | |
| | | |
| | |
Cash paid during the period for: | |
| | | |
| | |
Interest | |
$ | 106 | | |
$ | 140 | |
Income taxes, net | |
$ | 32 | | |
$ | 19 | |
NOTE
7: INTANGIBLE ASSETS AND GOODWILL
Intangible
Assets
Intangible
assets consisted of the following at December 31, 2021 and December 31, 2020:
| |
December 31, | | |
December 31, | |
| |
2021 | | |
2020 | |
| |
Gross | | |
| | |
Gross | | |
| |
| |
Carrying | | |
Accumulated | | |
Carrying | | |
Accumulated | |
| |
Amount | | |
Amortization | | |
Amount | | |
Amortization | |
Technology platform | |
$ | 4,635 | | |
| 3,652 | | |
$ | 4,635 | | |
| 3,400 | |
Purchased and developed software | |
| 3,488 | | |
| 2,713 | | |
| 3,167 | | |
| 2,002 | |
In-Process internally developed software platform | |
| 824 | | |
| - | | |
| - | | |
| - | |
Customer relationships | |
| 3,960 | | |
| 1,692 | | |
| 5,330 | | |
| 2,870 | |
Trademarks and trade names | |
| 640 | | |
| 640 | | |
| 1,020 | | |
| 925 | |
| |
| 13,547 | | |
| 8,697 | | |
| 14,152 | | |
| 9,197 | |
Accumulated amortization | |
| 8,697 | | |
| | | |
| 9,197 | | |
| | |
Net book value of amortizable intangible assets | |
$ | 4,850 | | |
| | | |
$ | 4,955 | | |
| | |
For the years ended December 31, 2021 and 2020,
amortization of intangible assets charged to operations was $1,251 and $1,330, respectively. For the year ended December 31, 2021, the
Company wrote-off a $380 fully amortized trade name asset and a $1,370 fully amortized customer list asset and the related accumulated
amortization for each related to ConeXus World Global, LLC, an entity dissolved by the Company during 2021. There was no impact on the
Company’s Condensed Consolidated Balance Sheet or Condensed Consolidated Statement of Operations during the period.
Estimated
amortization is as follows:
Year ending December 31, | |
Estimated Future Amortization | |
2022 | |
$ | 954 | |
2023 | |
| 636 | |
2024 | |
| 487 | |
2025 | |
| 415 | |
Thereafter | |
| 1,503 | |
Intangible
assets include the following and are being amortized over their estimated useful lives as follows:
Acquired Intangible Asset: | |
Amortization Period: (years) | |
Technology platform and patents | |
| 7 | |
Purchased and developed software | |
| 3 | |
Trademark | |
| 3 | |
Customer relationships | |
| 15 | |
Goodwill
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 assessed the carrying value of goodwill
at the reporting unit level based on an estimate of the fair value of the respective reporting unit. Fair value of the reporting unit
was estimated using a discounted cash flow analyses consisting of various assumptions, including expectations of future cash flows based
on projections or forecasts derived from analysis of business prospects and economic or market trends that may occur, specifically, the
Company gave significant consideration to actual historic financial results, including revenue growth rates in the preceding three years.
Based on the Company’s assessment, we determined that the fair value of our reporting unit exceeds its carrying value, and accordingly,
the goodwill associated with the reporting unit was not considered to be impaired at September 30, 2021.
The
Company recognizes that any changes in our projected 2022 and future results could potentially have a material impact on our assessment
of goodwill impairment. The Company will continue to monitor the actual performance of its operations against expectations and assess
further indicators of possible impairment. The valuation of goodwill and intangible assets is subject to a high degree of judgment, uncertainty
and complexity. Should any indicators of impairment occur in subsequent periods, the Company will be required to perform an analysis
in order to determine whether goodwill is impaired.
Interim
Impairment Assessment – March 31, 2020
Despite
the excess fair value identified in our 2019 annual impairment assessment, we determined that the reduced cash flow projections and the
significant decline in our market capitalization as a result of the COVID-19 pandemic during the three months ended March 31, 2020 indicated
that an impairment loss may have been incurred during the first quarter. Therefore, we qualitatively assessed whether it was more likely
than not that the goodwill was impaired as of March 31, 2020. We reviewed our previous forecasts and assumptions based on our current
projections that are subject to various risks and uncertainties, including: (1) forecasted revenues, expenses and cash flows, including
the duration and extent of impact to our business and our alliance partners from the COVID-19 pandemic, (2) current discount rates, (3)
the reduction in our market capitalization, (5) changes to the regulatory environment and (6) the nature and amount of government support
that will be provided. As a result of this qualitative assessment, we concluded that indicators of impairment were present and that a
quantitative interim impairment assessment of our goodwill was necessary as of March 31, 2020.
As
a result of the adoption of ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
the impairment test consists solely of comparing the carrying value of the reporting unit with its fair value and recording impairment,
if identified.
The
fair value of the reporting unit was estimated via the income approach. Under the income approach, fair value is determined based on
the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate
future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for
our industry. Actual results may differ from those assumed in our forecasts. We derive our discount rates using a capital asset pricing
model and by analyzing published rates relevant to our business to estimate the cost of equity financing. We use discount rates that
are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. We utilized
a discount rate of 14.5% in our valuation completed as of March 31, 2020.
While
our outlook for the digital signage industry over the long term remains strong, we have experienced rapid and immediate deterioration
in our short term business as a result of the COVID-19 pandemic, generating increased uncertainty across our customer base in many of
our key vertical markets. The elective and forced closures of businesses across the United States has resulted in reduced demand for
our services, which primarily assist business in engaging with their end customers in a physical space through digital technology. The
elimination and minimization of public gatherings has materially impacted demand for products and services in our movie theater, sports
arena and large entertainment markets. These conditions resulted in downward revisions of our internal forecasts on current and future
projected earnings and cash flows, leading to an implied fair value of goodwill substantially below the carrying value. Therefore, during
the three months ended March 31, 2020, we recorded a non-cash impairment loss of $10,646. We recorded the estimated impairment losses
in the caption “Goodwill impairment” in our Consolidated Statement of Operations.
Annual
Impairment Assessment – September 30, 2020
The
Company assessed the carrying value of goodwill at the reporting unit level based on an estimate of the fair value of the respective
reporting unit. Fair value of the reporting unit was estimated using a discounted cash flow analyses consisting of various assumptions,
including expectations of future cash flows based on projections or forecasts derived from analysis of business prospects and economic
or market trends that may occur, specifically, the Company gave significant consideration to actual historic financial results, including
revenue growth rates in the preceding three years. Based on the Company’s assessment, we determined that the fair value of our
reporting unit exceeds its carrying value, and accordingly, the goodwill associated with the reporting unit is not considered to be impaired
at September 30, 2020.
NOTE
8: LOANS PAYABLE
The
outstanding debt with detachable warrants, as applicable, are shown in the table below. Further discussion of the notes follows.
As of December 31, 2021 |
|
Debt Type | |
Issuance Date | |
Principal | | |
Maturity Date |
| |
Warrants | | |
Interest Rate Information |
|
C | |
8/17/2016 | |
| 4,767 | | |
2/17/2025 |
| |
| 588,236 | | |
8.0% interest |
|
E | |
12/30/2019 | |
| 2,418 | | |
2/17/2025 |
| |
| - | | |
10.0% interest |
|
| |
Total debt, gross | |
| 7,185 | | |
|
| |
| 588,236 | | |
|
|
| |
Fair value (E) | |
| (166 | ) | |
|
| |
| | | |
|
|
| |
Total debt, gross | |
| 7,019 | | |
|
| |
| | | |
|
|
| |
Debt discount | |
| (144 | ) | |
|
| |
| | | |
|
|
| |
Total debt, net | |
$ | 6,875 | | |
|
| |
| | | |
|
|
| |
Less current maturities | |
| - | | |
|
| |
| | | |
|
|
| |
Long term debt | |
| 6,875 | | |
|
| |
| | | |
|
|
As
of December 31, 2020 |
|
Debt Type |
|
Issuance
Date |
|
Principal |
|
|
Maturity
Date |
|
|
Warrants |
|
|
Interest
Rate Information |
|
A |
|
6/30/2018 |
|
$ |
264 |
|
|
N/A |
|
|
|
- |
|
|
0.0% interest |
|
B |
|
1/16/2018 |
|
|
1,085 |
|
|
3/31/2023 |
|
|
|
61,729 |
|
|
10.0% interest |
(1) |
C |
|
8/17/2016 |
|
|
3,255 |
|
|
3/31/2023 |
|
|
|
588,236 |
|
|
10.0% interest |
(1) |
D |
|
11/19/2018 |
|
|
1,637 |
|
|
2/15/2020 |
|
|
|
- |
|
|
3.5% interest |
|
E |
|
12/30/2019 |
|
|
2,177 |
|
|
3/31/2023 |
|
|
|
- |
|
|
10.0% interest |
(2) |
F |
|
4/27/2020 |
|
|
1,552 |
|
|
4/27/2022 |
(3) |
|
|
- |
|
|
1.0% interest |
(3) |
|
|
Total debt, gross |
|
|
9,970 |
|
|
|
|
|
|
649,965 |
|
|
|
|
|
|
Fair value (E) |
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt, gross |
|
|
10,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt discount |
|
|
(168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total debt, net |
|
$ |
9,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current maturities |
|
|
(1,637 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Long term debt |
|
|
8,258 |
|
|
|
|
|
|
|
|
|
|
|
A
– Secured Disbursed Escrow Promissory Note with related party
B
– Secured Revolving Promissory Note with related party
C
– Term Loan with related party
D
– Amended and Restated Seller Note from acquisition of Allure
E
– Secured Convertible Special Loan Promissory Note, at fair value
F
– Paycheck Protection Program Loan from Small Business Administration
(1) | 8.0% cash interest per annum through March 31, 2020. 10.0% paid-in-kind interest (“PIK”) interest per annum from April 1, 2020 through December 31, 2020. 8.0% cash interest per annum January 1, 2021 through the maturity date. |
(2) | 8.0% cash interest per annum, comprised of 6.0% cash, 2.0% PIK through March 31, 2020. 10.0% PIK interest per annum through September 30, 2020. In an event of default, the interest rate increases by 6.0% to 16.0%. Debt is automatically convertible to a new class of senior preferred stock of the Company at the earlier of an event of default or November 30, 2020. The principal, including PIK interest, as of December 31, 2020 is $2,177; however, fair value accounting for the convertible debt instrument results in an additional $93 of debt recorded on the Consolidated Balance Sheet as of December 31, 2020 related to this instrument. |
| |
(3) | 1,0% cash interest per annum. Payments are deferred for six months from the date of the Promissory Note and the Company can apply for forgiveness of the Promissory Note after 60 days. |
Second
Amended and Restated Loan and Security Agreement
On
February 17, 2022, Creative Realities, Inc. (the” Company”) and its subsidiaries (collectively, the “Borrowers”)
refinanced their current debt facilities with Slipstream Communications, LLC (“Slipstream”), pursuant to a Second Amended
and Restated Credit and Security Agreement (the “Credit Agreement”). The Borrowers include Reflect Systems, Inc. (“Reflect”),
which became a wholly owned subsidiary of the Company as a result of the closing of the Merger on February 17, 2022. The debt facilities
continue to be fully secured by all assets of the Borrowers.
The Credit Agreement also provides that the
Company’s outstanding loans from Slipstream at December 31, 2021, consisting of its pre-existing $4,767 senior secured term
loan and $2,418 secured convertible loan, with an aggregate of $7,185 in outstanding principal and accrued and unpaid interest under
such loans, were consolidated into a term loan (the “Consolidation Term Loan”). The Consolidation Term Loan has an
interest rate of 10.0%, with 75.0% warrant coverage (or 2,694,495 warrants). The Company issued to Slipstream a $7,185 Consolidation
Term Note in connection with consolidating the Consolidation Term Loan. On the first day of each month, commencing March 1, 2022
through February 1, 2025, the Borrowers will make interest-only payments on the Consolidation Term Loan (estimated to be $60 per
monthly payment). Commencing on September 1, 2023, and on the first day of each month thereafter until the Maturity Date, the
Borrowers will make a payment on the Consolidation Term Loan, in an equal monthly installment of principal sufficient to fully
amortize the Consolidation Term Loan in eighteen equal installments (estimated to be $399 per monthly installment).
In addition to refinancing the existing debt with
Slipstream, the Company also raised $10,000 in gross proceeds, or $9,950 in net proceeds, from entry into a new, 36-month senior secured
term loan (the “Acquisition Loan”) with Slipstream as part of the Credit Agreement, which matures on February 17, 2025 (the
“Maturity Date”). The Acquisition Loan has an interest rate of 8.0%, with 50.0% warrant coverage (or 2,500,000 warrants).
The Company issued to Slipstream a $10,000 Acquisition Term Note in connection with obtaining the Acquisition Loan. On the first day of
each month, commencing March 1, 2022 through February 1, 2025, the Borrowers will make interest-only payments on the Acquisition Loan
(estimated to be $67 per monthly payment). No principal payments on the Acquisition Loan are payable until the Maturity Date.
In connection with the
Acquisition Loan and Consolidation Term Loan warrant coverage, the Company issued to Slipstream a warrant to purchase an aggregate of
5,194,495 shares of Company common stock (the “Lender Warrant”). The Lender Warrant has a five-year term, an initial exercise
price of $2.00 per share, subject to adjustments in the Lender Warrant, and is not exercisable until August 17, 2022.
In
certain circumstances, upon a fundamental transaction of the Company (e.g., a disposal or sale of all or the greater part of the assets
or undertaking of the Company, an amalgamation or merger with another company, or implementation of a scheme of arrangement), the holder
of the Lender Warrant will have the right to require the Company to repurchase the Lender Warrant at its fair value using a Black Scholes
option pricing formula; provided that such holder may not require the Company or its successor entity to repurchase the Lender Warrant
for the Black Scholes value in connection with a fundamental transaction that is not approved by the Company’s Board of Directors,
and therefore not within the Company’s control.
Secured
Promissory Note
On
February 17, 2022, in connection with the closing of the Reflect Acquisition, the Company issued to RSI Exit Corporation (“Stockholders’
Representative”), the representative of Reflect stockholders, a $2,500 Note and Security Agreement (the “Secured Promissory
Note”).
The
Secured Promissory Note accrues interest at 0.59% (the applicable federal rate) and requires the Company and Reflect to pay equal monthly
principal installments of $104 on the fifteenth (15th) day of each month, commencing on March 17, 2022. Any remaining or unpaid principal
shall be due and payable on February 15, 2023. All payments under the Secured Promissory Note will be paid to the escrow agent in the
Merger Agreement to be placed into the escrow account to secure the Reflect stockholders’ indemnification obligations until released
on the one-year anniversary of the closing of the Merger, at which time any remaining proceeds not subject to a pending indemnification
claim will be paid to the exchange agent for payment to the Reflect Stockholders. The obligations of the Company and Reflect set forth
in the Secured Promissory Note are secured by a first-lien security interest in various contracts of Reflect, together with all accounts
arising under such contracts, supporting obligations related to the accounts arising under such contracts, all related books and records,
and products and proceeds of the foregoing. Slipstream subordinated its security interest in such collateral, and the recourse for any
breach of the Secured Promissory Note by the Company or Reflect will be against such collateral. The Company has the right to offset
amounts payable under the Secured Promissory Note upon a final, non-appealable decision of a court that entitles the Company or its affiliates
to any damages for indemnification under the Merger Agreement, or the Stockholders’ Representative’s agreement in writing
to such damages.
Amended
and Restated Loan and Security Agreement
On
March 7, 2021, the Company and its subsidiaries (collectively, the “Borrowers”) refinanced their current debt facilities
with Slipstream pursuant to an Amended and Restated Credit and Security Agreement (the “Prior Credit Agreement”). The debt
facilities continue to be fully secured by all assets of the Borrowers. The maturity date (“Maturity Date”) on the outstanding
debt and new debt is extended to March 31, 2023. The Prior Credit Agreement (i) provides a $1,000 of availability under a line of credit
(the “Line of Credit”), (ii) consolidates our existing term and revolving line of credit facilities into a new term loan
(the “New Term Loan”) having an aggregate principal balance of approximately $4,550 (including a 3.0% issuance fee capitalized
into the principal balance), (iii) increases the outstanding special convertible term loan (the “Convertible Loan”) to approximately
$2,280 (including a 3.0% issuance fee capitalized into the principal balance), and (iv) extinguishes the outstanding obligations owed
with respect to a $264 existing disbursed escrow loan in exchange for shares of the Company’s common stock (the “Disbursed
Escrow Conversion Shares”), valued at $2.718 per share (the trailing 10-day VWAP as reported on the Nasdaq Capital Market as of
the date of execution of the Prior Credit Agreement). The Line of Credit and Convertible Loan accrue interest at 10% per year, and the
New Term Loan accrues interest at 8% per year.
The
New Term Loan requires no principal payments until the Maturity Date, and interest payments are payable on the first day of each month
until the Maturity Date. All interest payments owed prior to October 1, 2021 are payable as PIK payments, or increases to the principal
balance only.
The
Line of Credit and Convertible Loan require payments of accrued interest payable on the first day of each month through April 1, 2022.
All such interest payments made prior to October 1, 2021 are payable as PIK payments, or increases to the principal balances under the
Line of Credit and Convertible Loan only. No principal payments are owed under the Line of Credit or Convertible Loan until April 1,
2022, at which time all principal and interest on each of the Line of Credit and Convertible Loan will be paid in monthly installments
until the Maturity Date to fully amortize outstanding principal by the Maturity Date.
All
payments of interest (other than PIK payments) and principal on the Line of Credit and Convertible Loan may be paid, in the Borrowers’
sole discretion, in shares of the Company’s Common Stock (the “Payment Shares,” and together with the Disbursed Escrow
Conversion Shares, the “Shares”). The Payment Shares will be valued on a per-Share basis at 70% of the VWAP of the Company’s
shares of common stock as reported on the Nasdaq Capital Market for the 10 trading days immediately prior to the date such payment is
due; provided that the Payment Shares shall not be valued below $0.50 per Share (the “Share Price”).
The
Prior Credit Agreement limits the Company’s ability to issue Shares as follows (the “Exchange Limitations”): (1) The
total number of Shares that may be issued under the Prior Credit Agreement will be limited to 19.99% of the Company’s outstanding
shares of common stock on the date the Prior Credit Agreement is signed (the “Exchange Cap”), unless stockholder approval
is obtained to issue shares in excess of the Exchange Cap; (2) if Slipstream and its affiliates (the “Slipstream Group”)
beneficially own the largest ownership position of shares of Company common stock immediately prior to the proposed issuance of Payment
Shares and such shares are less than 19.99% of the then-issued and outstanding shares of Company common stock, the issuance of such Payment
Shares will not cause the Slipstream Group to beneficially own in excess of 19.99% of the issued and outstanding shares of Company common
stock after such issuance unless stockholder approval is obtained for ownership in excess of 19.99%; and (3) if the Slipstream Group
does not beneficially own the largest ownership position of shares of Company common stock immediately prior to the proposed issuance
of Payment Shares, the Company may not issue Payment Shares to the extent that such issuance would result in Slipstream Group beneficially
owning more than 19.99% of the then issued and outstanding shares of Company common stock unless (A) such ownership would not be the
largest ownership position in the Company, or (B) stockholder approval is obtained for ownership in excess of 19.99%.
Accounting for the Prior Credit Agreement was accounted
for as a debt extinguishment in the first quarter of 2021.
Loan
and Security Agreement History
On
August 17, 2016, the Company entered into a Loan and Security Agreement with Slipstream (“Loan and Security Agreement”).
Since the initial entry into the Loan and Security Agreement in 2016, the Company has entered into several financing arrangements with
varying interest rates, maturity dates, and number of associated detachable warrants, each entered within the structure of the Loan and
Security Agreement. The debt instruments outstanding under the Loan and Security Agreement as of December 31, 2020 include the Term Loan,
Secured Revolving Promissory Note, Secured Disbursed Escrow Promissory Note, and the Special Loan.
The
Loan and Security Agreement contains certain customary restrictions including, but not limited to, restrictions on mergers and consolidations
with other entities, cancellation of any debt or incurring new debt (subject to certain exceptions), and other customary restrictions.
Obligations under the loan and security agreement are secured by a grant of collateral security in all of the tangible assets of Creative
Realities, Inc. and each of its wholly owned subsidiaries.
Ninth,
Tenth, Eleventh, Twelfth, and Thirteenth Amendment; Modification of Conversion Date of Special Loan under Loan and Security Agreement
On
February 28, 2021, January 31, 2021, December 31, 2020, November 30, 2020, and September 29, 2020, the Company entered into several amendments
to Loan and Security Agreement with its subsidiaries and Slipstream to amend the automatic conversion date of the Special Loan. Each
amendment extended the automatic conversion date of the Special Loan, which was ultimately Amended and Restated in full on March 7, 2021
as discussed further above. The Company paid no fees in exchange for these extensions.
Eighth
Amendment; Modification of Interest Rates under Loan and Security Agreement
On
April 1, 2020, the Company entered into an Eighth Amendment to Loan and Security Agreement (the “Eighth Amendment”) with
its subsidiaries and Slipstream to amend the terms of the payments and interest accruing on the Company’s Term Loan, Secured Revolving
Promissory Note, and Special Loan. The Eighth Amendment increased the interest rates of these loans from 8% to 10%, effective April 1,
2020. Until January 1, 2021, rather than cash payments of accrued interest under the term and revolving loans, interest will be paid
by the issuance of and treated as additional principal thereunder. Commencing January 2, 2021, such interest will be payable in cash.
Interest on the special loan will no longer be paid in cash, but by the issuance of and treated as additional principal thereunder.
Upon
entry into the Eighth Amendment, the Company completed an analysis of the changes in the Loan and Security Agreement within ASC 470 Debt,
concluding that the changes represent a modification to the existing debt that was not a troubled debt restructuring and will account
for the modified terms prospectively as yield adjustments, based on the revised terms.
Secured
Disbursed Escrow Promissory Note
The
Fourth Amendment to the Loan and Security Agreement included entry into a Secured Disbursed Escrow Promissory Note between the Company
and Slipstream, and, effective June 30, 2018, we drew $264 in conjunction with our exit from a previously leased operating facility.
The principal amount of the Secured Disbursed Escrow Promissory Note bears no interest. Upon entry into the Prior Credit Agreement on
March 7, 2021, this note was converted into Disbursed Escrow Conversion Shares, with elimination of the debt recorded as an equity issuance
with the Statement of Shareholder’s Equity.
SBA
Paycheck Protection Program Loan
On
April 27, 2020, the Company entered into a Promissory Note with Old National Bank (the “Promissory Note”), which provided
for an unsecured loan of $1,552 (the “PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief,
and Economic Security Act and applicable regulations (the “CARES Act”). The Promissory Note had a term of two years with
a 1% per annum interest rate.
On
January 11, 2021, the Company received a notice from Old National Bank that the full principal amount of the PPP Loan and the accrued
interest have been forgiven, resulting in a gain of $1,552 during the year-ended December 31, 2021.
Amended
and Restated Seller Note from acquisition of Allure
The
Amended and Restated Seller Note represented a note payable due from Allure to Seller, under a pre-existing Seller Note which was amended
and restated to a reduced amount of $1,637 through the Stock Purchase Agreement and a subsequent net working capital adjustment. That
debt accrued interest at 3.5% per annum, and required us to make quarterly payments of interest only through February 19, 2020, on which
date the promissory note matured and all remaining amounts owing thereunder became due.
On
February 20, 2020, Creative Realities, Inc. and Allure made a demand for arbitration against Seller for (1) breach of contract, (2) indemnification,
and (3) fraudulent misrepresentation under the Allure Purchase Agreement.
On
May 13, 2021, the Company and Seller entered into a settlement agreement wherein neither party admitted liability, and the Company agreed
to pay, and Seller agreed to accept, $100 as settlement in full for the outstanding balance of principal and accrued interest under the
Amended and Restated Seller Note and a mutual release of all claims related to the Amended and Restated Seller Note and sale transaction
under the Allure Purchase Agreement and all related agreements.
As
a result of this settlement, the full principal amount of the Seller Note and the accrued interest were eliminated, resulting in a gain
in the Condensed Consolidated Financial statements of $1,624, representing $1,538 related to the Seller Note and $86 of related interest
thereon, during 2021.
NOTE
9: COMMITMENTS AND CONTINGENCIES
Litigation
On
August 2, 2019, the Company filed suit in Jefferson Circuit Court, Kentucky, against a supplier of Allure for breach of contract, breach
of warranty, and negligence with respect to equipment installations performed by such supplier for an Allure customer. This case remains
in the early stages of litigation, in part due to delays resulting from the COVID-19 pandemic, and, as a result, the outcome of each
case is unclear, so the Company is unable to reasonably estimate the possible recovery, or range of recovery, if any.
On October 10, 2019, the Allure customer that is
the basis of our claim above sent a demand to the Company for payment of $3,200 as settlement for an alleged breach of contract related
to hardware failures of equipment installations performed by Allure between November 2017 and August 2018. The suits filed by and against
Allure have been adjoined in the Jefferson Circuit Court, Kentucky in January 2020. Due to delays arising as a result of the ongoing COVID-19
pandemic, these suits remain in the early stages of litigation and, as a result, the outcome of the suits and the allocation of liability,
if any, remain unclear, so the Company is unable to reasonably estimate the possible liability, recovery, or range of magnitude for either
the liability or recover, if any, at the time of this filing.
The
Company has notified its insurance company of potential claims and continues to evaluate both the claim made by the customer and potential
avenues for recovery against third parties should the customer prevail.
On
February 20, 2020, Creative Realities, Inc. and Allure made a demand for arbitration against Seller for (1) breach of contract, (2) indemnification,
and (3) fraudulent misrepresentation under the Allure Purchase Agreement. This demand included a claim for the right to offset the amounts
owing under the Amended and Restated Seller Note due February 20, 2020. The Company did not pay the Amended and Restated Seller Note
on its maturity date. On February 27, 2020, Seller sent the Company a notice of breach for failure to pay the Amended and Restated Seller
Note on the maturity date of February 20, 2020 and demanding immediate payment. On September 11, 2020, the Company served a First Amended
Demand in the arbitration with Seller, and on November 5, 2020, Seller pre-served a Motion for Summary Disposition in the arbitration
demanding payment of the Amended and Restated Seller Note and accrued interest.
On
May 13, 2021, the Company and Seller entered into a settlement agreement wherein neither party admitted liability, and the Company agreed
to pay, and Seller agreed to accept, $100 as settlement in full for the outstanding balance of principal and accrued interest under the
Amended and Restated Seller Note and a mutual release of all claims related to the Amended and Restated Seller Note and sale transaction
under the Allure Purchase Agreement and all related agreements. The Company recorded a gain on settlement of obligations of $1,624 during
2021 upon settlement.
Except as noted above, the Company is not party
to any other material legal proceedings, other than ordinary routine litigation incidental to the business, and there were no other such
proceedings pending during the period covered by this Annual Report.
Settlement
of obligations
During
2021, (i) the full principal amount of the PPP Loan and the accrued interest of $1,552 were forgiven and recorded as a gain on settlement,
(ii) the Company settled the Amended and Restated Seller Note and related accrued interest for $100, recording a gain on settlement of
$1,624, representing $1,538 related to the Amended and Restated Seller Note and $86 of related interest thereon, and (iii) the statute
of limitations passed related to the remaining liability on a lease abandoned by the Company in 2015, resulting in a gain of $256.
During
the year ended December 31, 2020, the Company settled and/or wrote off obligations of $348 for aggregate cash payments of $139 and recognized
a gain of $209 related to legacy accounts payable deemed to no longer be legal obligations to vendors.
Employee-related
Expenses
We
implemented cost-control measures in light of the effect of the COVID-19 pandemic on our business, including employment compensation
reductions designed to achieve preliminary cost savings. On March 19, 2020, the Company’s Board of Directors approved a six-month
reduction of the salaries of several Company employees by between five percent (5%) and twenty percent (20%). During 2021, the Company
reinstated lost salaries one-third on each of April 1, July 1, and October 1, the final reinstate thereby increasing the compensation
to its pre-pandemic levels.
On
March 20, 2020, we completed a reduction-in-force and accrued one-time termination benefits related to severance to the affected employees
of $135, the total of which was paid during 2020.
Lease
termination
On
December 31, 2020, we vacated our office facilities located in Dallas, TX. In ceasing use of these facilities, we recorded a one-time
non-cash charge of $18. There were no such lease terminations during 2021.
NOTE
10: RELATED PARTY TRANSACTIONS
In
addition to the financing transactions with Slipstream, a related party, discussed in Note 8 Loans Payable, we have the following
related party transactions.
33
Degrees Convenience Connect, Inc., a related party that was approximately 17.5% owned by a member of our senior management (“33
Degrees”) until September 2021, is a customer of both equipment and services from the Company. For the years ended December 31,
2021 and 2020, we had sales of $457 (2.5% of consolidated sales) and $1,057 (6.1% of consolidated sales), respectively, with 33 Degrees.
Accounts receivable due from 33 Degrees was $35, or 1.0%, and $40, or 1.2% of consolidated accounts receivable at December 31, 2021 and
December 31, 2020, respectively.
NOTE
11: INCOME TAXES
Income
tax benefit/(expense) consisted of the following:
| |
Year ended December 31, | |
| |
2021 | | |
2020 | |
Tax provision summary: | |
| | |
| |
State income tax | |
$ | (22 | ) | |
$ | (17 | ) |
Deferred tax benefit/(expense) - federal | |
| - | | |
| 150 | |
Deferred tax benefit/(expense) – state | |
| - | | |
| 25 | |
Tax benefit/(expense) | |
$ | (22 | ) | |
$ | 158 | |
The
income tax benefit includes federal and state income taxes currently payable and those deferred or prepaid because of temporary differences
between financial statement and tax bases of assets and liabilities. The Company records income taxes under the liability method. Under
this method, deferred income taxes are recognized for the estimated future tax effects of differences between the tax bases of assets
and liabilities and their financial reporting amounts based on enacted tax laws.
A
reconciliation of the statutory income tax rate to the effective income tax rates as a percentage of income before income taxes is as
follows:
| |
2021 | | |
2020 | |
Federal statutory rate | |
| 21.00 | % | |
| 21.00 | % |
State taxes, net of federal benefit | |
| 5.21 | % | |
| 1.53 | % |
Foreign rate differential | |
| (26.47 | )% | |
| 0.51 | % |
PPP Loan Forgiveness | |
| (128.43 | )% | |
| 0.00 | % |
Discrete items, Transaction items, and Other | |
| 21.92 | % | |
| (7.00 | )% |
Changes in valuation allowance | |
| 115.43 | % | |
| (15.11 | )% |
Effective tax rate | |
| 8.66 | % | |
| 0.93 | % |
The
net deferred tax assets and liabilities recognized in the accompanying Consolidated Balance Sheets, determined using the income tax rate
applicable to each period, consist of the following:
| |
December 31, | |
| |
2021 | | |
2020 | |
Deferred tax assets (liabilities): | |
| | |
| |
Reserves | |
$ | 267 | | |
$ | 318 | |
Property and equipment | |
| (2 | ) | |
| (40 | ) |
Accrued expenses | |
| 106 | | |
| 326 | |
Right-of-use Asset | |
| (91 | ) | |
| (147 | ) |
Right-of-use Liability | |
| 91 | | |
| 149 | |
IRC 163(j) Interest Deduction | |
| 18 | | |
| 18 | |
Non-qualified stock options | |
| 1,074 | | |
| 675 | |
R&D credits | |
| 1,801 | | |
| 1,801 | |
Net foreign carryforwards | |
| 3,485 | | |
| 3,106 | |
US net operating loss and credit carryforwards | |
| 35,448 | | |
| 35,566 | |
Intangibles | |
| (11 | ) | |
| (13 | ) |
| |
| | | |
| | |
Total deferred tax assets, net | |
| 42,186 | | |
| 41,759 | |
Valuation allowance | |
| (42,186 | ) | |
| (41,759 | ) |
| |
| | | |
| | |
Net deferred tax assets | |
$ | - | | |
$ | - | |
As
of December 31, 2021, the Company had no reserves recorded as a liability for unrecognized tax benefits for U.S. federal and state tax
jurisdictions. There were no unrecognized tax benefits as of December 31, 2021 that, if recognized, would affect the tax rate. It
is the Company’s policy to accrue interest and penalties related to liabilities for income tax contingencies in the provision for
income taxes. As of December 31, 2021, the Company had no accrued interest or penalties related to uncertain tax positions.
Our
deferred tax assets are primarily related to net federal and state operating loss carryforwards (NOLs). As of December 31, 2021, the
Company has federal and state net operating loss carryforwards expiring between 2022 and 2037, $10,651 of which has an indefinite carryforward
period. The federal statute of limitations remains open for tax years 2018 through 2020 and state tax jurisdictions generally have statutes
of limitations open for tax years 2017 through 2020.
We
have substantial NOLs that are limited in usage by IRC Section 382. IRC Section 382 generally imposes an annual limitation on the amount
of NOLs that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership within a statutory
testing period.
The
goodwill impairment recorded March 31, 2020 altered the deferred tax impact associated with indefinite lived goodwill from a deferred
tax liability to a deferred tax asset. As the indefinite-lived intangibles can no longer provide a source of income, a full valuation
allowance was placed against the deferred tax assets.
We
have performed a preliminary analysis of the annual NOL carryforwards and limitations that are available to be used against taxable income.
Based on the history of losses of the Company, there continues to be a full valuation allowance against the net deferred tax assets of
the Company.
NOTE
12: WARRANTS
A
summary of outstanding warrants for the years ended December 31, 2021 and 2020 is included below:
Year Ended December 31, 2021 |
| |
Warrants (Equity) | |
| |
Amount | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Life | |
Balance January 1, 2021 | |
| 4,426,900 | | |
$ | 4.62 | | |
| 2.83 | |
Warrants issued | |
| - | | |
| - | | |
| - | |
Warrants expired | |
| (323,689 | ) | |
| 4.69 | | |
| - | |
Balance December 31, 2021 | |
| 4,103,211 | | |
$ | 4.48 | | |
| 1.73 | |
Year Ended December 31, 2020 |
| |
Warrants (Equity) | |
| |
Amount | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Life | |
Balance January 1, 2020 | |
| 4,733,028 | | |
$ | 4.83 | | |
| 3.41 | |
Warrants issued | |
| - | | |
| - | | |
| - | |
Warrants exercised | |
| (27,600 | ) | |
| 4.38 | | |
| - | |
Warrants expired | |
| (278,528 | ) | |
| 7.08 | | |
| - | |
Balance December 31, 2020 | |
| 4,426,900 | | |
$ | 4.62 | | |
| 2.83 | |
As
of December 31, 2021, there remained outstanding 597,678 warrants which contain weighted average anti-dilution protection. During 2021,
those warrants were subject to a downward adjustment in their strike price following completion of the Company’s issuance of common
stock in (1) the Registered Direct Offering in February 2021 and (2) the conversion of the Disbursed Escrow Note in March 2021. The strike
prices prior to adjustment ranged from $5.80 to $5.96 and were adjusted to between $5.61 and $5.76. The remaining weighted-average contractual
life of warrants subject to weighted average anti-dilution protection is 0.92 years as of December 31, 2021.
As
of December 31, 2020, there remained outstanding 921,367 warrants which contain weighted average anti-dilution protection. During 2020,
those warrants were subject to a downward adjustment in their strike price following completion of the Company’s issuance of common
stock via at-the-market offering activities. The strike prices prior to adjustment ranged from $6.09 to $6.25 and were adjusted to between
$5.80 and $5.96. The remaining weighted-average contractual life of warrants subject to weighted average anti-dilution protection is
1.71 years as of December 31, 2020.
Subsequent
Events
On
February 17, 2022, in connection with obtaining a waiver of certain restrictions in investment documents between an investor and the
Company in order to consummate the financing contemplated by the Credit Agreement, the Company paid consideration to such investor in
the form of a warrant (the “Purchaser Warrant”) to purchase 1,400,000 shares of Company common stock in an at-the-market
offering under Nasdaq rules. The number of shares of Company common stock subject to the Purchaser Warrant is equal to the waiver fee
($175) divided by $0.125 per share. The exercise price of the Purchaser Warrant is $1.41 per share, and the Purchaser Warrant is not
exercisable until August 17, 2022. The Purchaser Warrant expires five years from the date of issuance.
On February 3, 2022, the Company, entered into a securities purchase
agreement (the “Securities Purchase Agreement”) with a purchaser (the “Purchaser”), pursuant to which the Company
agreed to issue and sell to the Purchaser, in a private placement priced at-the-market under Nasdaq rules, (i) 1,315,000 shares (the “Shares”)
of the Company’s common stock, par value $0.01 per share (the “Common Stock”) and accompanying warrants to purchase
an aggregate of 1,315,000 shares of Common Stock, and (ii) pre-funded warrants to purchase up to an aggregate of 5,851,505 shares of Common
Stock (the “Pre-Funded Warrants”) and accompanying warrants to purchase an aggregate of 5,851,505 shares of Common Stock (collectively,
the “Private Placement”). The accompanying warrants to purchase Common Stock are referred to herein collectively as the “Common
Stock Warrants.” Under the Securities Purchase Agreement, each Share and accompanying warrants to purchase Common Stock were sold
together at a combined price of $1.535, and each Pre-Funded Warrant and accompanying warrants to purchase Common Stock were sold together
at a combined price of $1.5349, for gross proceeds of approximately $11,000, before deducting placement agent fees and estimated offering
expenses payable by the Company.
On February 17, 2022, in connection with the restructured
Credit Agreement with Slipstream, the Company issued 5,194,495 warrants with an exercise price of $2.00 per share which expire five years
from the date of issuance.
NOTE
13: STOCK-BASED COMPENSATION
A
summary of outstanding options as of December 31, 2021 is included below:
Time Vesting Options | |
| | |
Weighted | | |
| | |
| | |
| |
| |
| | |
Average | | |
Weighted | | |
| | |
Weighted | |
| |
| | |
Remaining | | |
Average | | |
| | |
Average | |
Range of Exercise | |
Number | | |
Contractual | | |
Exercise | | |
Options | | |
Exercise | |
Prices between | |
Outstanding | | |
Life | | |
Price | | |
Exercisable | | |
Price | |
$0.01 - $3.00 | |
| 1,780,000 | | |
| 8.62 | | |
$ | 2.48 | | |
| 601,667 | | |
$ | 2.47 | |
$3.01 - $7.50 | |
| 184,830 | | |
| 4.35 | | |
$ | 6.72 | | |
| 176,496 | | |
$ | 6.69 | |
$7.51+ | |
| 103,979 | | |
| 3.44 | | |
| 11.74 | | |
| 103,979 | | |
$ | 11.74 | |
| |
| 2,068,809 | | |
| 7.71 | | |
$ | 3.48 | | |
| 882,142 | | |
| | |
Performance Vesting Options | |
| | |
Weighted | | |
| | |
| | |
| |
| |
| | |
Average | | |
Weighted | | |
| | |
Weighted | |
| |
| | |
Remaining | | |
Average | | |
| | |
Average | |
Exercise | |
Number | | |
Contractual | | |
Exercise | | |
Options | | |
Exercise | |
Price | |
Outstanding | | |
Life | | |
Price | | |
Exercisable | | |
Price | |
$2.53 | |
| 800,000 | | |
| 8.42 | | |
$ | 2.53 | | |
| 266,667 | | |
$ | 2.53 | |
| |
| 800,000 | | |
| 8.42 | | |
$ | 2.53 | | |
| 266,667 | | |
$ | 2.53 | |
| |
Time Vesting Options | | |
Performance Vesting Options | |
| |
| | |
Weighted | | |
| | |
Weighted | |
| |
| | |
Average | | |
| | |
Average | |
| |
Options | | |
Exercise | | |
Options | | |
Exercise | |
Date/Activity | |
Outstanding | | |
Price | | |
Outstanding | | |
Price | |
Balance, December 31, 2020 | |
| 1,813,809 | | |
| 3.48 | | |
| 800,000 | | |
$ | 2.53 | |
Granted | |
| 255,000 | | |
| 2.21 | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | | |
| - | |
Forfeited or expired | |
| - | | |
| - | | |
| - | | |
| - | |
Balance, December 31, 2021 | |
| 2,068,809 | | |
| 3.48 | | |
| 800,000 | | |
$ | 2.53 | |
The
weighted average remaining contractual life for options exercisable is 7.2 years as of December 31, 2021.
Valuation
Information for Stock-Based Compensation
For
purposes of determining estimated fair value under FASB ASC 718-10, Stock Compensation, the Company computed the estimated fair
values of stock options using the Black-Scholes model.
On
November 17, 2021, Creative Realities’ Board of Directors updated its director compensation plan to compensate non-officer directors
resulting in the Company granting 10-year options to purchase an aggregate of 255,000 shares of its common stock to non-employee directors
of the Company under the Company’s 2014 Stock Incentive Plan (the “Plan”). One-third of the options vested immediately,
with the half of the remaining options vesting at each of the first and second anniversaries of the grant date. The options have an exercise
price of $2.21, the market value of the Company’s common stock on the grant date. The fair value of the options on the grant date
was $1.744 and was determined using the Black-Scholes model. These values were calculated using the following weighted average assumptions:
Risk-free interest rate | |
| 1.60 | % |
Expected term | |
| 6.25 years | |
Expected price volatility | |
| 97.78 | % |
Dividend yield | |
| 0 | % |
On
June 1, 2020 the Board of Directors of the Company granted 10-year options to purchase an aggregate of 2,380,000 shares of its common
stock to employees of the Company subject to shareholder approval of an increase in the reserve of shares authorized for issuance under
the Company’s 2014 Stock Incentive Plan (the “Plan”). On July 10, 2020, the Company held a special meeting of the Company’s
shareholders at which the shareholders approved the amendment to the Plan, which increased the reserve of shares authorized for issuance
thereunder to 6,000,000 shares.
Of
the 2,380,000 options awarded, 1,580,000 vest over 3 years and have an exercise price of $2.53, the market value of the Company’s
common stock on the grant date. The fair value of the options on the grant date was $1.87 and was determined using the Black-Scholes
model. These values were calculated using the following weighted average assumptions:
Risk-free interest rate | |
| 0.66 | % |
Expected term | |
| 6.25 years | |
Expected price volatility | |
| 89.18 | % |
Dividend yield | |
| 0 | % |
The
remaining 800,000 options awarded vest in equal installments over a three-year period subject to satisfying the Company revenue target
and earnings before interest, taxes, depreciation and amortization (“EBITDA”) target for the applicable year. In each of
calendar years 2020, 2021 and 2022, one-third of the total shares may vest (if the revenue and EBITDA targets are met), and the shares
that are subject to vesting each year are allocated equally to each of the revenue and EBITDA targets for such year.
These
performance options include a catch-up provision, where any options that did not vest during a prior year due to the Company’s
failure to meet a prior revenue or EBITDA target may vest in a subsequent vesting year if the revenue or EBITDA target, as applicable,
is met in the future year. The revenue and EBITDA targets for the three plan years are as follows:
Calendar Year | |
| Revenue Target | | |
| EBITDA Target | |
2020 | |
$ | $32 million | | |
| $2.2 million | |
2021 | |
$ | $35 million | | |
| $3.1 million | |
2022 | |
$ | $38 million | | |
| $3.5 million | |
The
executives met the foregoing EBTIDA target for calendar year 2021.
The
exercise price of the foregoing options is $2.53 per share, the closing price of the Company’s common stock on the grant date.
The options were issued from the Company’s 2014 Stock Incentive Plan. The fair value of the options on the grant date was $1.87
and was determined using the Black-Scholes model. These values were calculated using the same weighted average assumptions as the time
vesting options issued. Performance against the identified revenue and EBITDA targets will be assessed quarterly by the Company in order
to determine whether any compensation expense should be recorded. No expense was recorded in 2020 as neither the revenue nor EBITDA target
were achieved. The Company recorded stock compensation expense of $500 within general and administrative expense related to these awards
for current year and catch-up expense related to the achievement of the EBITDA target in 2021.
Stock
Compensation Expense Information
ASC
718-10, Stock Compensation, requires measurement and recognition of compensation expense for all stock-based payments including
warrants, stock options, restricted stock grants and stock bonuses based on estimated fair values. Under the Amended and Restated 2006
Equity Incentive Plan, the Company reserved 1,720,000 shares for purchase by the Company’s employees and under the Amended and
Restated 2006 Non-Employee Director Stock Option Plan the Company reserved 700,000 shares for purchase by the Company’s employees.
There are 12,135 options outstanding under the 2006 Equity Incentive Plan.
In
October 2014, the Company’s shareholders approved the 2014 Stock Incentive Plan, under which 7,390,355 shares were reserved for
purchase by the Company’s employees. In August 2018, a special meeting of shareholders was held in which the shareholders voted
to amend the Company’s 2014 Stock Incentive Plan to increase the reserve of shares authorized for issuance thereunder, from 7,390,355
shares to 18,000,000 shares. Following a 1-for-30 reverse stock split, the shares authorized for issuance under the Company’s 2014
Stock Incentive Plan was reduced to 600,000. On July 10, 2020, the Company’s shareholders approved an amendment to the Company’s
2014 Stock Incentive Plan to increase the reserve of authorized for issuance thereunder to 6,000,000. There are 2,856,674 options outstanding
under the 2014 Stock Incentive Plan.
Employee
Awards
Compensation expense recognized for the issuance
of stock options to employees for the years ended December 31, 2021 and 2020 of $1,494 and $620, respectively, was included in general
and administrative expense in the Consolidated Financial Statements.
At
December 31, 2021, there was approximately $1,360 and $999 of total unrecognized compensation expense related to unvested share-based
awards with time vesting and performance vesting criteria for employees, respectively. Generally, expense related to the time vesting
options will be recognized over the next two- and one-half years and will be adjusted for any future forfeitures as they occur. Compensation
expense related to performance vesting options will be recognized if it becomes probable that the Company will achieve the identified
performance metrics.
Non-Employee
Awards
Compensation
expense recognized for the issuance of stock options, including those options awarded to our Board of Directors, for the years ended
December 31, 2021 and 2020 of $399 and $100, respectively, was included in general and administrative expense in the Consolidated Financial
Statements. At December 31, 2021, there was approximately $260 of total unrecognized compensation expense related to unvested share-based
awards with time vesting criteria for non-employee directors. Generally, expense related to the time vesting options will be recognized
over the next two- years and will be adjusted for any future forfeitures as they occur.
During
2021, the Company engaged certain consultants to perform services in exchange for Company common stock. Shares issued for services were
calculated based on the ten (10) day volume weighted average price (“VWAP”) for the last ten (10) days during the month of
service provided. The Company recorded $130 in compensation expenses in exchange for issuance of shares during 2021. $30 of the compensation
expenses were recorded as capitalized software.
NOTE
14: LEASES
We
have entered into various non-cancelable operating lease agreements for certain of our offices and office equipment. Our leases have
original lease periods expiring between 2022 and 2025. Many leases include one or more options to renew. We do not assume
renewals in our determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement. Our lease
agreements do not contain any material residual value guarantees or material restrictive covenants.
The
components of lease costs, lease term and discount rate are as follows:
(in thousands) | |
Year Ended December 31, 2021 | | |
Year Ended December 31, 2020 | |
Finance lease cost | |
| | |
| |
Amortization of right-of-use assets | |
$ | 4 | | |
$ | 20 | |
Interest | |
| - | | |
| 2 | |
Operating lease cost | |
| 379 | | |
| 626 | |
Total lease cost | |
$ | 383 | | |
$ | 648 | |
| |
| | | |
| | |
Weighted Average Remaining Lease Term | |
| | | |
| | |
Operating leases | |
| 2.8 years | | |
| 3.8 years | |
Finance leases | |
| - | | |
| 0.9 years | |
| |
| | | |
| | |
Weighted Average Discount Rate | |
| | | |
| | |
Operating leases | |
| 10.0 | % | |
| 10.0 | % |
Finance leases | |
| - | % | |
| 14.0 | % |
The
following is a schedule, by years, of maturities of lease liabilities as of December 31, 2021:
(in thousands) | |
Operating Leases | |
2022 | |
$ | 298 | |
2023 | |
| 295 | |
2024 | |
| 85 | |
2025 | |
| 78 | |
Thereafter | |
| - | |
Total undiscounted cash flows | |
| 756 | |
Less imputed interest | |
| (102 | ) |
Present value of lease liabilities | |
| 654 | |
| |
| | |
Lease liabilities, current | |
| 281 | |
Lease liabilities, non-current | |
| 373 | |
Present value of lease liabilities | |
$ | 654 | |
Supplemental
cash flow information related to leases are as follows:
(in thousands) | |
Year Ended December 31, 2021 | | |
Year Ended December 31, 2020 | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | |
| |
Operating cash flows from operating leases | |
$ | 383 | | |
$ | 627 | |
Financing cash flows from finance leases | |
| (4 | ) | |
| 24 | |
NOTE
15: PROFIT-SHARING PLAN
We
have a defined contribution 401(k) retirement plans for eligible associates in the United States. Associates may contribute up to 15%
of their pretax compensation to the plan subject to IRS limitations. Beginning on April 1, 2018, the Company began contributing an employer
contribution match of 50% of employee wages up to 6%, for an effective match of 3%. The Company indefinitely suspended the employer match
at the end of March 2020 in response to the uncertainty of the COVID-19 pandemic and reinstated the employer match in October 2021.
We
have a Registered Retirement Savings Plan for eligible associates in Canada. Associates may contribute up to 18% of earned income reported
on their tax return in the previous year, subject to legal contribution limits. Beginning on April 1, 2018, the Company began contributing
an employer contribution match of 50% of employee wages up to 6%, for an effective match of 3%. The Company indefinitely suspended the
employer match at the end of March 2020 in response to the uncertainty of the COVID-19 pandemic and reinstated the employer match in
October 2021.
The
Company contributed $19 and $35 to employee retirement plans for the year-ended December 31, 2021 and 2020, respectively.
NOTE
16: SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS/VENDORS
Segment
Information
We
currently operate in one reportable segment, marketing technology solutions. Substantially all property and equipment is located at our
offices in the United States, and a data center located in the United States. All material sales for the years ended December 31, 2021
and 2020 were in the United States and Canada.
Significant
Customers
We
had two (2) customers that accounted for 41.1% and 27.8% of revenue for the years ended December 31, 2021 and 2020, respectively.
We
had two (2) and customers that in the aggregate accounted for 56.6% and 42.6% of accounts receivable as of December 31, 2021 and December
31, 2020, respectively.
Significant
Vendors
We
had three (3) and two (2) vendors that accounted for 69.1% and 46.8% of outstanding accounts payable at December 31, 2021 and December
31, 2020, respectively.
NOTE 17: SUBSEQUENT EVENTS
Equity Financing
On February 3, 2022,
the Company entered into a Securities Purchase Agreement with the Purchaser for gross proceeds of approximately $11,000 before
deducting placement agent fees and estimated offering expenses. The net proceeds from such equity financing were used to fund, in
part, payment of the closing cash consideration in the Merger. A detailed explanation of this transaction is included in Note 1
to the audited annual financial statements included within this Annual Report.
Debt Financing
On February 17, 2022, the Company raised $10,000
in gross proceeds, or $9,950 in net proceeds, from entry into the Acquisition Loan with Slipstream as part of the Credit Agreement, with
an interest rate of 8.0% and which matures on February 17, 2025. The Company also refinanced their current debt facilities with Slipstream,
pursuant to the Credit Agreement into a single note for $7,185 with interest rate of 10.0% maturing on the same date. A detailed explanation
of this transaction is included in Note 1 to the audited annual financial statements included within this Annual Report.
Warrant Exercise
On March 18, 2022, the
Purchaser exercised 1,301,505 pre-funded warrants at an exercise price of $0.0001 per share in exchange for 1,301,505 shares of Company
common stock.