Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
As
previously disclosed, on February 17, 2022, Creative Realities, Inc. (the “Company”) consummated its merger (the “Merger”)
with Reflect Systems, Inc. (“Reflect”), pursuant to the terms of that certain Agreement and Plan of Merger, dated
as of November 12, 2021, by and among Reflect the Company, CRI Acquisition Corporation, and RSI Exit Corporation, as amended from time
to time (the “Merger Agreement”).
In light of, among other things,
the consummation of the Merger and the anticipated operations of the resulting combined company, on June 15, 2022, the Board of Directors
(the “Board”) of the Company approved an executive compensation package for its executive officers, Richard Mills,
Director and Chief Executive Officer; and Will Logan, Chief Financial Officer, based on the achievement of certain performance metrics.
The executive compensation package consists of an amendment to the executives’ outstanding performance-based stock options, the
issuance of new executive stock options, and the adoption of a cash bonus plan, each as described below.
Amendment
to Performance Options
As previously described in the
Company’s Form 8-K filed on June 3, 2020, on June 1, 2020, Messrs. Mills and Logan were issued ten-year options to purchase 480,000
and 240,000 shares of common stock (the “Performance Options”), respectively, which vest in equal installments over a three-year
period (2020-2022), subject to satisfying the Company revenue target and EBITDA (earnings before interest, taxes, depreciation and amortization)
targets 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. The Performance Options includes 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.
On
June 15, 2022, the Board approved of an amendment to the Performance Options to provide that the revenue target for the calendar year
2022 set forth therein ($38 million) is eliminated, and the remaining shares that are available for vesting under the Performance Options
(320,000 unvested shares for Mr. Mills and 160,000 for Mr. Logan) (including the unvested portions of shares based on the satisfaction
of the revenue targets for 2020 and 2021 by virtue of the catch-up provisions in the Performance Options) will fully vest upon the achievement
of an updated EBITDA target for calendar year 2022 of $3.6 million.
The
Performance Options state that the calculation of EBITDA set forth in the Performance Options shall be calculated in a form consistent
with the Company’s 2022 approved budget, which
| (i) | excludes
any impact on EBITDA of: |
(a)
the accounting treatment (including any “mark-to-market accounting”) of the Company’s warrants or the
“Guaranteed Consideration” (as defined in the Merger Agreement),
(b)
non-recurring transaction expenses associated with the Merger and the capital raising financing activities of the Company to effectuate
the Merger, and
(c)
any write-down or write-off of any Company inventory of Safe Space Solutions products.
(iii)
includes deductions related to any cash or stock bonuses paid or payable to any employees of the Company for services provided in calendar
year 2022 (even if such bonuses are actually paid after calendar year 2022), including bonuses paid pursuant to the terms of the 2022
Cash Bonus Plan (as described below)(collectively, the “EBITDA Calculations”).
Issuance
of New Options
Messrs. Mills and Logan received
ten-year options to purchase 1,000,000 and 600,000 shares of common stock, respectively (the “New Options”). The New Options
are eligible to vest at any time on or prior to February 17, 2025 if the trailing 10-trading day volume-weighted average price (VWAP)
of the Company’s common stock, as reported on the Nasdaq Capital Market, exceeds the share price targets below, subject to such
executive serving the Company as a director, officer, employee or consultant at such time:
|
| |
Share Price Targets | | |
| |
Executive |
| $ |
2.00 | | $ |
3.00 | | $ |
4.00 | | $ |
5.00 | | $ |
6.00 | | |
Guaranteed Price | | |
Total Shares | |
Mills’ Shares Vested |
| |
| 50,000 | | |
| 100,000 | | |
| 150,000 | | |
| 200,000 | | |
| 250,000 | | |
| 250,000 | | |
| 1,000,000 | |
Logan’s Shares Vested |
| |
| 30,000 | | |
| 60,000 | | |
| 90,000 | | |
| 120,000 | | |
| 150,000 | | |
| 150,000 | | |
| 600,000 | |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Percentage of Shares Vested |
| |
| 5 | % | |
| 10 | % | |
| 15 | % | |
| 20 | % | |
| 25 | % | |
| 25 | % | |
| | |
The
“Guaranteed Price” has the meaning ascribed to such term in the Merger Agreement, which means $6.40 per share, or $7.20 per
share if, and only if, certain customers set forth in the Merger Agreement collectively achieve over 85,000 billable devices online at
any time on or before December 31, 2022.
The exercise price of the New
Options is $1.00 per share, which exceeds the closing price of the Company’s common stock on the date of issuance. The New Options
are issued from the Company’s 2014 Stock Incentive Plan, as amended.
2022
Cash Bonus Plan
The
2022 Cash Bonus Plan provides that Messrs. Mills and Logan will receive a cash bonus of a percentage of their annual base salaries based
on the Company’s annual EBITDA results for the calendar year 2022, as set forth below:
| |
2022 EBITDA Target | |
Executive | |
$ | 3,600,000 | | |
$ | 4,600,000 | | |
$ | 5,600,000 | | |
$ | 6,600,000 | | |
$ | 7,600,000 | |
Mills Bonus Payment | |
$ | 112,500 | | |
$ | 180,000 | | |
$ | 225,000 | | |
$ | 450,000 | | |
$ | 675,000 | |
Logan Bonus Payment | |
$ | 52,500 | | |
$ | 87,500 | | |
$ | 140,000 | | |
$ | 210,000 | | |
$ | 350,000 | |
Executive | |
Base
Salary | | |
Bonus as a Percentage of Annual Base Salary | |
Mills | |
$ | 450,000 | | |
| 25 | % | |
| 40 | % | |
| 50 | % | |
| 100 | % | |
| 150 | % |
Logan | |
$ | 350,000 | | |
| 15 | % | |
| 25 | % | |
| 40 | % | |
| 60 | % | |
| 100 | % |
The
calculation of EBITDA for purposes of the 2022 Cash Bonus Plan will be determined consistent with the EBITDA Calculations. The terms
of the 2022 Cash Bonus Plan amend and supersede the cash bonuses that were contemplated to be paid to Messrs. Logan and Mills as part
of the Company’s 2020 Incentive Program for their services to be provided in calendar year 2022 based upon a revenue target of
$38 million and an EBITDA target of $3.5 million, which were disclosed on the Company’s Current Report on Form 8-K filed on May
26, 2020.
The
foregoing description of the amendments to the Performance Options and New Options are not complete descriptions thereof and are qualified
in their entireties by reference to the full text of such documents filed as Exhibits 10.1, 10.2, 10.3, and 10.4 to this Current Report
on Form 8-K, which are incorporated herein by reference.