NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(all currency in thousands, except per share
amounts)
(unaudited)
NOTE 1: NATURE OF ORGANIZATION AND OPERATIONS
Unless the context otherwise
indicates, references in these Notes to the accompanying 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,
Creative Realities Canada, Inc., a Canadian corporation, and Reflect Systems, Inc., a Delaware corporation.
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 the effective time of the Merger collectively received
from the Company, in the aggregate, the following Merger consideration: (i) $16,166 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) calendar 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.
The Retention Bonus Plan and financings are described below.
Retention Bonus Plan
On February 17, 2022,
in connection with the closing of the Merger (the “Closing”), the Company adopted a Retention Bonus Plan, pursuant to which
the Company is required to pay to key members of Reflect’s management team an aggregate of $1,333 in cash, which was paid 50% at
the Closing, and subject to continuous employment with Reflect or Creative Realities, 25% on the one-year anniversary of Closing and 25%
on the two-year anniversary of the Closing. The future cash payments due on the one-year and two-year anniversaries of the Closing have
been deposited into an escrow agreement. The Retention Bonus Plan also requires the Company to issue Common Stock having an aggregate
value of $667 to the plan participants as follows: 50% of the value of such shares were issued at the Closing, and subject to continuous
employment with Reflect or Creative Realities, 25% of the value of such shares will be issued on the one-year anniversary of Closing and
the remaining 25% of the value of such shares will be issued on the two-year anniversary of the Closing. The shares issued on the Closing
were valued at $2.00 per share, and the shares to be issued after the Closing will be determined based on dividing the value of shares
issuable on such date divided by the trailing 10-day volume weighted average price (VWAP) of the shares as of such date as reported on
the Nasdaq Capital Market.
Upon the resignation of a
participant’s employment for “good reason,” or termination of the employment of a participant without “cause,”
each as defined in the Retention Bonus Plan, the participant will be fully vested and will receive all cash and shares allocated to such
participant under the Retention Bonus Plan. Any amounts unpaid by reason of a lapse in continuous employment or otherwise will be reallocated
among the remaining Retention Bonus Plan participants.
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 offering expenses payable by the Company. Net proceeds to the Company were $10,160. The remaining exercise
price for the Pre-Funded Warrant was $0.0001. Collectively, we refer to this transaction throughout this filing as the “Equity Financing”.
The net proceeds from the Private Placement were used to fund, in part, payment of the closing cash consideration in the Merger.
Effective June 30, 2022, the
Company amended the terms of Common Stock Warrants to remove the holder’s option to exercise such warrants on a cashless basis utilizing
the volume weighted average price (“VWAP”) of the Company’s common stock on the trading day immediately preceding the
date of a notice of cashless exercise in certain circumstances, and removes the condition to exercising such warrants that the Company’s
shareholders approve the exercise thereof (which has already been obtained). The amendments to the Common Stock Warrants also extend the
term of such warrants for an additional one year, The foregoing amendments to the warrants are intended to cause such warrants to be accounted
for as equity instruments on the Company’s financial statements.
Debt Financing
On February 17, 2022,
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”), 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. Collectively, we refer to this transaction
throughout this filing as the “Debt Financing”. The net proceeds from the Credit Agreement were used to fund, in part, payment
of the closing cash consideration in the Merger, and the cash payable under the terms of the Retention Bonus Plan at the Closing.
On February 17, 2022,
in connection with the closing of the acquisition of Reflect, the Company issued to the representative of Reflect stockholders, RSI Exit
Corporation (“Stockholders’ Representative”), 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 15, 2022, Any remaining or
unpaid principal is due and payable on February 17, 2023. The Secured Promissory Note represents consideration in the Merger and
is included as part of the purchase price.
See Note 9 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.
Liquidity and Financial Condition
The accompanying Condensed
Consolidated Financial Statements have been prepared on the basis of the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business and do not include any adjustments to the recoverability and classifications of recorded
assets and liabilities as a result of uncertainties.
For the three months ended
June 30, 2022 and 2021 we have recognized net income of $1,262 and $1,025, respectively. For the six months ended June 30, 2022 and 2021,
we recognized net income of $3,764 and $2,297, respectively. As of June 30, 2022, we had cash and cash equivalents of $2,840 and a working
capital surplus of $649.
Management believes that,
based on (i) the refinancing of our debt as part of the Debt Financing, including extension of the maturity date on our term loans, and
(ii) our operational forecast through 2022 and 2023 following completion of the Merger, that we can continue as a going concern through
at least August 15, 2023. However, given our historical net losses and cash used in operating activities, we obtained a continued support
letter from Slipstream through August 15, 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 Condensed Consolidated Financial Statements follows:
1. Basis of Presentation
The accompanying unaudited
Condensed Consolidated Financial Statements have been prepared in accordance with the applicable instructions to Form 10-Q and 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 interim financial reporting. These unaudited Condensed Consolidated Financial Statements should be read in conjunction
with the Consolidated Financial Statements of the Company and related footnotes for the year ended December 31, 2021, included in
the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 22, 2022.
The results of operations
for the interim periods are not necessarily indicative of results of operations for a full year. Management believes the accompanying
unaudited Condensed Consolidated Financial Statements reflect all adjustments, including normal recurring items, considered necessary
for a fair statement of results for the interim periods presented.
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. See Note 4 Revenue Recognition for additional detail and discussion of the Company’s
performance obligations.
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, 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 net realizable value,
determined by the first-in, first-out (FIFO) method, and consist of the following:
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Raw materials, including those on consignment, net of reserve of $770 and $502, respectively | |
$ | 2,135 | | |
$ | 1,583 | |
Work-in-process | |
| 503 | | |
| 297 | |
Total inventories | |
$ | 2,638 | | |
$ | 1,880 | |
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. We evaluated whether there were any triggering events for consideration of impairment of long-lived
assets as of June 30, 2022 and concluded there were none.
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 22,472,886 at June 30, 2022 were excluded from
the computation of income per share as the strike price on the options and warrants were higher than the Company’s market price
and therefore anti-dilutive.
Shares reserved for outstanding stock options,
including stock options with performance restricted vesting, and warrants totaling approximately 6,964,517 at June 30, 2021 were excluded
from the computation of income per share as the strike price on the options and warrants were higher than the Company’s market price
and therefore anti-dilutive. Diluted weighted average shares outstanding for the three and six-months ended June 30, 2021 included 8,333
options which were both exercisable and in-the-money as of June 30, 2021. Those options were included in the calculation of diluted earnings
per share as of the beginning of the calculation period.
In calculating diluted earnings per share for the
three and six months ended June 30, 2021, 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 Convertible Loan as we had the intent and ability to settle the debt
in cash.
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 June 30, 2022 and December 31, 2021.
7. Goodwill
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).
Definite-lived intangible
assets are amortized straight-line in accordance with their identified useful lives. Pursuant to ASC 350, these intangible assets are
evaluated for impairment at least annually, or as indicators of impairment are identified.
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: warrant liability valuation, contingent purchase consideration
valuation, 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. 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
condensed consolidated balance sheets.
10. Business Combinations
Accounting for acquisitions
requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values.
Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net acquisition date fair values of
the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and
liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain
and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record
adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement
period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments
are recorded to our consolidated statements of operations. Refer to Note 5, Business Combination for a discussion of the accounting
for the Merger.
11. Contingent Consideration
The Company has contingent
consideration arrangements related to certain acquisitions to potentially pay additional cash amounts in future periods based on the lack
of achievement of certain share price performance goals of our common stock. Such contingent consideration arrangements are recorded at
fair value and are classified as liabilities on the acquisition date and are remeasured at each reporting period in accordance with ASC
805-30-35-1 using a Monte Carlo simulation model.
NOTE 3: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently adopted
On January 1, 2022, we adopted early Accounting Standards Update
(“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). The adoption of this new standard did not have a material impact on our condensed consolidated financial
statements.
Not yet adopted
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 requirements related to adopting this guidance.
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 three and six months ended June 30, 2022 and 2021:
(in thousands) | |
Three Months Ended June 30, 2022 | | |
Three Months Ended June 30, 2021 | | |
Six Months Ended June 30, 2022 | | |
Six Months Ended June 30, 2021 | |
Hardware | |
$ | 5,667 | | |
$ | 1,296 | | |
$ | 12,126 | | |
$ | 4,112 | |
| |
| | | |
| | | |
| | | |
| | |
Services: | |
| | | |
| | | |
| | | |
| | |
Installation Services | |
| 903 | | |
| 497 | | |
| 2,242 | | |
| 1,072 | |
Software Development Services | |
| 109 | | |
| 93 | | |
| 300 | | |
| 367 | |
Media Services | |
| 412 | | |
| - | | |
| 477 | | |
| - | |
Managed Services | |
| 3,832 | | |
| 1,391 | | |
| 6,535 | | |
| 2,730 | |
Total Services | |
| 5,256 | | |
| 1,981 | | |
| 9,554 | | |
| 4,169 | |
| |
| | | |
| | | |
| | | |
| | |
Total Hardware and Services | |
$ | 10,923 | | |
$ | 3,277 | | |
$ | 21,680 | | |
$ | 8,281 | |
The italicized headers within
this footnote represent separate performance obligations the Company may sell. When a contract includes more than one such element, the
Company bifurcates these performance obligations according to our accounting policy and separately accounts for each.
System hardware sales
System hardware revenue is
recognized generally upon shipment of the product or customer acceptance depending upon contractual arrangements with the customer. When
hardware revenue is an element in a multiple-element performance obligation, including those sales in which the Company has bundled installation
services, the recognition of system hardware revenue is recognized at completion of the installation services. 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.
The aggregate amount of the
transaction price allocated to installation service performance obligations that are partially unsatisfied as of June 30, 2022 and
2021 were $0 and $0, respectively.
Software design and development
services
Software and software license
sales are recognized as 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 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
revenues are classified as “Managed Services” within our disaggregated revenue.
Maintenance and support
services
The Company sells maintenance and support services, which include access
to technical support personnel for software and hardware troubleshooting and monitoring of the health of a customer’s network, access
to a sophisticated web-portal for managing the end-to-end hardware and software digital ecosystem, and hosting support services through
our network operations center, or NOC. These services provide either physical or automated remote monitoring which support customer networks
7 days a week, 24 hours a day.
These contracts are generally
12-36 months in length and generally automatically renew for additional 12-month periods unless cancelled by the customer. Rates for maintenance
and support contracts are typically established based upon a fee per location or fee per device structure, with total fees subject to
the number of services selected. Revenue is recognized ratably and evenly over the term of the agreement. Maintenance and Support revenues
are classified as “Managed Services” within our disaggregated revenue.
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.
Media Sales
Through the Company’s
acquisition of Reflect as a result of the Merger, the Company has the capability to assist its customers with designing, deploying and
monetizing, through media services their digital advertising networks. This is executed through both subscription agreements to programmatic
advertising content and through direct sales media agreements in which the Company sells ads on behalf of its clients to be deployed on
those client networks. The Company and its clients operate these agreements on a revenue share basis. Media sales activities are classified
as Services revenues.
NOTE 5: BUSINESS COMBINATION
On November 12, 2021,
the Company and 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 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.
Retention Bonus Plan
On February 17, 2022,
in connection with the closing of the Merger, the Company adopted a Retention Bonus Plan, pursuant to which the Company is required to
pay to key members of Reflect’s management team an aggregate of $1,333 in cash, which was paid 50% at the closing of the Merger
(the “Closing”), and subject to continuous employment with Reflect or Creative Realities, 25% on the one-year anniversary
of Closing and 25% on the two-year anniversary of the Closing. The future cash payments due on the one-year and two-year anniversaries
of the Closing have been deposited into an escrow agreement. The Retention Bonus Plan also requires the Company to issue Common Stock
having an aggregate value of $667 to the plan participants as follows: 50% of the value of such shares were issued at the Closing, and
subject to continuous employment with Reflect or Creative Realities, 25% of the value of such shares will be issued on the one-year anniversary
of Closing and the remaining 25% of the value of such shares will be issued on the two-year anniversary of the Closing. The shares issued
on the Closing were valued at $2.00 per share, and the shares to be issued after the Closing will be determined based on dividing the
value of shares issuable on such date divided by the trailing 10-day volume weighted average price (VWAP) of the shares as of such date
as reported on the Nasdaq Capital Market.
Upon the resignation of a
participant’s employment for “good reason,” or termination of the employment of a participant without “cause,”
each as defined in the Retention Bonus Plan, the participant will be fully vested and will receive all cash and shares allocated to such
participant under the Retention Bonus Plan. Any amounts unpaid by reason of a lapse in continuous employment or otherwise will be reallocated
among the remaining Retention Bonus Plan participants.
Secured Promissory Note
On February 17, 2022,
pursuant to the terms of the Merger, the Company issued to Stockholders’ Representative 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 15, 2022. Any remaining or unpaid principal shall be due and
payable on February 17, 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 preliminary purchase price
of Reflect consisted of the following items:
(in thousands) | |
Consideration | |
Cash consideration for Reflect stock | |
$ | 16,664 | (1) |
Cash consideration for Retention Bonus Plan | |
| 1,334 | (2) |
Common stock issued to Reflect shareholders | |
| 4,667 | (3) |
Common stock issued to Retention Bonus Plan | |
| 333 | (4) |
Secured Promissory Note | |
| 2,500 | (5) |
Earnout liability | |
| 10,862 | (6) |
Total consideration | |
| 36,360 | |
Vendor deposit with the Company | |
| (818 | )(7) |
Cash acquired | |
| (812 | )(8) |
Net consideration transferred | |
$ | 34,730 | |
(1) |
Cash consideration for outstanding shares of Reflect capital stock per Merger Agreement. |
|
|
(2) |
Cash consideration utilized to fund the Retention Bonus Plan per Merger Agreement. |
|
|
(3) |
Company common stock issued in exchange for outstanding shares of Reflect capital stock per Merger Agreement. |
|
|
(4) |
Company common stock issued to fund the Retention Bonus Plan per Merger Agreement. |
(5) | 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 15, 2022. Any remaining or unpaid principal shall be due and payable on February 17, 2023. |
| |
(6) | Represents an estimate of the fair value of the Guaranteed Consideration as of the Merger, which, if any, is payable on or after the three-year anniversary of the effective time of the Merger (subject to the Extension Option), 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), subject to the terms of the Merger Agreement. During the three months ended June 30, 2022, the Company’s third party specialist completed valuation of this contingent liability as of the opening balance sheet date, resulting in a measurement period adjustment recorded to increase goodwill and the contingent liability as of February 17, 2022 by $5,262. |
| |
(7) | Prior to the Merger, Reflect
had engaged the Company on a project and paid the Company a deposit of $818. These amounts reduced consideration paid by the Company
in accordance with ASC 805. |
| |
(8) | Represents the Reflect cash balance acquired at Closing. |
The Company incurred $37 and
$428 of direct transaction costs for the three and six months ended June 30, 2022, respectively. These costs are included in deal and
transaction expense in the accompanying Condensed Consolidated Statement of Operations.
The Company accounted for
the Merger using the acquisition method of accounting. The preliminary allocation of the purchase price is based on estimates of the fair
value of assets acquired and liabilities assumed as of February 17, 2022. The Company is continuing to obtain information to determine
the acquired assets and liabilities, including tax assets, liabilities and other attributes. The components of the preliminary purchase
price allocation, inclusive of measurement period adjustments recorded by the Company during the six months ended June 30, 2022, are as
follows:
(in thousands) | |
Total | |
Accounts receivable | |
$ | 1,300 | |
Inventory | |
| 196 | |
Prepaid expenses & other current assets | |
| 666 | |
Property and equipment | |
| 96 | |
Operating right of use assets | |
| 493 | |
Deferred tax assets, net of valuation allowance | |
| - | |
Other assets | |
| 36 | |
Identified intangible assets: | |
| | |
Definite-lived trade names | |
| 960 | |
Definite-lived Developed technology | |
| 5,130 | |
Definite-lived Customer relationships | |
| 11,040 | |
Definite-lived Noncompete agreements | |
| 30 | |
Goodwill | |
| 18,569 | |
Accounts payable | |
| (96 | ) |
Accrued expenses | |
| (277 | ) |
Customer deposits | |
| (1,661 | ) |
Deferred revenues | |
| (1,259 | ) |
Current maturities of operating leases | |
| (277 | ) |
Long-term obligations under operating leases | |
| (216 | ) |
Net consideration transferred | |
$ | 34,730 | |
The Company engaged a third
party valuation specialist to assist in the identification and calculation of the fair value of those separately identifiable intangible
assets. Based on an initial draft valuation report, a measurement period adjustment reducing the value of these intangible assets by $4,340
as of the opening balance sheet date, with a corresponding increase in goodwill, was recorded in the three months ended June 30, 2022.
A related adjustment to reduce amortization expense by $180 for the three months ended March 31, 2022 was recorded as a period expense
in the three months ended June 30, 2022. The Company remains in process of reviewing the valuation report and finalizing its opening balance
sheet accounting.
The Company completed its
valuation procedures by asset utilizing the following approaches:
| ● | Customer
relationship asset was estimated using the income approach through a discounted cash flow analysis wherein the cash flows will be based
on estimates used to price the Merger. Discount rates were benchmarked with reference to the implied rate of return from the Company’s
pricing model and the weighted average cost of capital. |
| ● | Trade
name asset represents the “Reflect” brand name as marketed primarily as a full services digital software solution, marketed
in numerous verticals with the exception of food service. The Company applied the income approach through an excess earnings analysis
to determine the fair value of the trade name asset. The Company applied the income approach through a relief-from-royalty analysis to
determine the fair value of this asset. |
| ● | The
developed technology assets are primarily comprised of know-how and functionality embedded in Reflect’s proprietary content management
applications, which drive currently marketed products and services. The Company applied the income approach through a relief-from-royalty
analysis to determine the preliminary fair value of this asset. |
The Company is amortizing
the identifiable intangible assets on a straight-line basis over the weighted average lives ranging from 2 to 10 years as outlined below.
The table below sets forth
the preliminary valuation and amortization period of identifiable intangible assets:
(in thousands) | |
Preliminary Valuation | | |
Amortization Period | |
Identifiable definite-lived intangible assets: | |
| | | |
| | |
Trade names | |
$ | 960 | | |
| 5 years | |
Developed technology | |
| 5,130 | | |
| 10 years | |
Noncompete | |
| 30 | | |
| 2 years | |
Customer relationships | |
| 11,040 | | |
| 10 years | |
Total | |
$ | 17,160 | | |
| | |
The Company estimated the
preliminary fair value of the acquired property, plant and equipment using a combination of the cost and market approaches, depending
on the component. The preliminary fair value of such property, plant and equipment is $96.
The excess of the purchase
price over the preliminary estimated fair value of the tangible net assets and identifiable intangible assets acquired was recorded as
goodwill and is subject to change upon final valuation. The factors contributing to the recognition of the amount of goodwill are based
on several strategic and synergistic benefits that are expected to be realized from the Merger. These benefits include a comprehensive
portfolio of iconic customer brands, complementary product offerings, enhanced national footprint, and attractive synergy opportunities
and value creation. None of the goodwill is expected to be deductible for income tax purposes.
The following unaudited pro
forma information presents the combined financial results for the Company and Reflect as if the Merger had been completed at the beginning
of the Company’s prior year, January 1, 2021.
(in thousands, except earnings per common share) | |
2021 | |
Net sales | |
$ | 30,680 | |
Net income/(loss) | |
$ | 799 | |
Earnings per common share | |
$ | 0.06 | |
(in thousands) | |
Three Months
Ended
June 30,
2021 | | |
Six Months
Ended
June 30,
2021 | |
Net sales | |
| 6,266 | | |
| 13,707 | |
Net income/(loss) | |
| 1,141 | | |
| 2,175 | |
The information above does
not include the pro forma adjustments that would be required under Regulation S-X for pro forma financial information and does not reflect
future events that may occur after December 31, 2021 or any operating efficiencies or inefficiencies that may result from the Merger
and related financings. Therefore, the information is not necessarily indicative of results that would have been achieved had the businesses
been combined during the periods presented or the results that the Company will experience going forward. We have not included disaggregated
information for Reflect on a standalone basis in the current year for either revenue or net income as the integration activities undertaken
by the Company have prevented this information from being useful to financial statement readers.
NOTE 6: 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.
As discussed in Note 5 Business
Combinations, the calculation of the fair value of the Guaranteed Consideration contains inputs which are unobservable and involve
management judgment and are considered Level 3 estimates. Additionally, the separately identifiable intangible assets rely on a discounted
cash flow model which utilizes inputs including the calculation of the weighted average cost of capital and management’s forecast
of future financial performance which are unobservable and involve management judgment and are considered Level 3 estimates.
As discussed in Note 8 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 9 Loans
Payable, the Convertible Loan was 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 Convertible Loan.
The Convertible Loan was refinanced into the Consolidation Term Loan in February 2022.
As discussed in Note 12 Warrants,
the calculation of the fair value of the warranty liability contains valuation inputs which are based on observable inputs (other than
Level 1 prices) and are considered Level 2 estimates. The liability warrants were converted to equity warrants effective June 30, 2022.
NOTE 7: SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
| |
Six Months Ended | |
| |
June 30, | |
| |
2022 | | |
2021 | |
Supplemental Cash Flow Information | |
| | |
| |
Cash paid during the period for: | |
| | |
| |
Interest | |
$ | 656 | | |
$ | - | |
Income taxes, net | |
$ | 44 | | |
$ | 20 | |
| |
| | | |
| | |
Supplemental disclosure of non-cash financing activities: | |
| | | |
| | |
Conversion of liability warrants to equity warrants | |
$ | 5,709 | | |
$ | - | |
NOTE 8: INTANGIBLE ASSETS, INCLUDING GOODWILL
Intangible Assets
Intangible assets consisted
of the following at June 30, 2022 and December 31, 2021:
| |
June 30,
2022 | | |
December 31,
2021 | |
| |
Gross | | |
| | |
Gross | | |
| |
| |
Carrying | | |
Accumulated | | |
Carrying | | |
Accumulated | |
| |
Amount | | |
Amortization | | |
Amount | | |
Amortization | |
Technology platform | |
$ | 9,765 | | |
| 3,908 | | |
$ | 4,635 | | |
| 3,652 | |
Purchased and developed software | |
| 4,108 | | |
| 3,029 | | |
| 3,488 | | |
| 2,713 | |
In-Process internally developed software platform | |
| 2,532 | | |
| - | | |
| 824 | | |
| - | |
Customer relationships | |
| 15,000 | | |
| 2,153 | | |
| 3,960 | | |
| 1,692 | |
Non-compete | |
| 30 | | |
| 6 | | |
| - | | |
| - | |
Trademarks and trade names | |
| 1,600 | | |
| 712 | | |
| 640 | | |
| 640 | |
| |
| 33,035 | | |
| 9,808 | | |
| 13,547 | | |
| 8,697 | |
Accumulated amortization | |
| 9,808 | | |
| | | |
| 8,697 | | |
| | |
Net book value of amortizable intangible assets | |
$ | 23,227 | | |
| | | |
$ | 4,850 | | |
| | |
On February 17, 2022, the
Company added intangible assets as a result of accounting for the Merger in accordance with ASC 805 Business Combinations, as outlined
in Note 5 Business Combinations. The resulting amortization expense charged to operations during the three months ended March 31,
2022 was $680. Both the intangible assets and the related amortization expense related to the Merger which were recorded during the three
months ended March 31, 2022 represented estimates.
For the three months ended June 30, 2022 and 2021,
amortization of intangible assets charged to operations was $431 and $139, respectively. For the six months ended June 30, 2022 and 2021
amortization of intangible assets charged to operations was $1,111 and $279, respectively.
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. Following the Merger, the Company evaluated its reporting units in accordance with ASC 280 Segment Reporting
and concluded that the Company has only one reporting unit. Therefore, the entire goodwill is allocated to that reporting unit.
While the Company completes
its annual assessment of impairment as of September 30, we evaluate qualitative indicators during other interim periods that may be indicative
of impairment and require further quantitative assessments. During the three and six months ended June 30, 2022, the Company experienced
a significant decline in its common share price and overall market capitalization, which is below book value as of June 30, 2022. We deemed
this decline in market capitalization to be an indicator of a potential impairment of the Company’s recorded investment in its intangible
assets and goodwill. We evaluated certain facts and circumstances which management believes are responsible for the disparity between
our market capitalization and the book value of our equity as of June 30, 2022.
While our overall
business performance has been consistent with our expectations both before and after the acquisition of Reflect, we believe a
significant portion of the decline in our market price relates primarily to several macroeconomic factors including: (1) market
wide recessionary fears, (2) rapid inflation fears, which often have an outsized, direct negative impact on the share price of
high-growth companies with limited or negative cash flow from operations, (3) a lack of comprehension by the markets of the recent
Merger with Reflect and related financing transaction, and (4) the sale of over 7,000,000 shares of our common stock into the
market by a new investor, resulting in significant negative volume and price pressure on the stock unrelated to the Company
fundamentals. We do not believe these factors are consistent with or reflective of the underlying value of the business, and there
were no other indicators of potential impairment as of June 30, 2022. Should our market price remain at this level for an extended
period of time, there could be potential future impairment.
Based on the relatively recent decline in our share price and market
capitalization, along with improving Company fundamentals following our Merger with Reflect and a share price that was substantially higher
upon announcing that Merger mere months ago, we believe our implied fair value continues to exceed our total carrying value. There were
no other indications of impairment as of June 30, 2022.
NOTE 9: LOANS PAYABLE
The outstanding debt with detachable warrants,
as applicable, are shown in the table below. Further discussion of the debt follows.
As of June 30, 2022 |
Debt Type | |
Issuance Date | |
Principal | | |
Maturity Date | |
Warrants | | |
Interest Rate Information |
A | |
2/17/2022 | |
$ | 10,000 | | |
2/15/2025 | |
| 2,500,000 | | |
8.0% interest(1) |
B | |
2/17/2022 | |
| 2,089 | | |
2/17/2023 | |
| - | | |
0.59% interest (2) |
C | |
2/17/2022 | |
| 7,185 | | |
2/15/2025 | |
| 2,694,495 | | |
10.0% interest(3) |
| |
Total debt, gross | |
| 19,274 | | |
| |
| 5,194,495 | | |
|
| |
Debt discount | |
| (3,796 | ) | |
| |
| | | |
|
| |
Total debt, net | |
$ | 15,478 | | |
| |
| | | |
|
| |
Less current maturities | |
| (2,089 | ) | |
| |
| | | |
|
| |
Long term debt | |
$ | 13,389 | | |
| |
| | | |
|
As of December 31, 2021 |
Debt Type | |
Issuance Date | |
Principal | | |
Maturity Date | |
Warrants | | |
Interest Rate Information |
D | |
8/17/2016 | |
$ | 4,767 | | |
2/17/2025 | |
| 588,236 | | |
8.0% interest(4) |
E | |
12/30/2019 | |
| 2,418 | | |
2/17/2025 | |
| - | | |
10.0% interest(4) |
| |
Total debt, gross | |
| 7,185 | | |
| |
| 588,236 | | |
|
| |
Fair value (B) | |
| (166 | ) | |
| |
| | | |
|
| |
Total debt, gross | |
| 7,019 | | |
| |
| | | |
|
| |
Debt discount | |
| (144 | ) | |
| |
| | | |
|
| |
Total debt, net | |
$ | 6,875 | | |
| |
| | | |
|
| |
Less current maturities | |
| - | | |
| |
| | | |
|
| |
Long term debt | |
$ | 6,875 | | |
| |
| | | |
|
A – Acquisition Loan
B – Reflect Seller Secured Promissory Note
C – Consolidation Term Loan
D – Term Loan with related party
E – Secured Convertible Special Loan Promissory
Note, at fair value
(1) | 8.0% cash interest per annum through maturity at February 15, 2025. |
(2) | 0.59% cash interest per annum (the applicable federal rate) through maturity at February 17, 2023. |
(3) | 10.0% cash interest per annum through maturity at February 15, 2025. |
(4) | Interest was paid-in-kind (“PIK”) through October 2021, at which point interest became payable in cash at the stated interest rates through maturity. |
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 six months ended June 30, 2021.
Secured Promissory Note
On February 17, 2022,
in connection with the closing of the Merger, 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% per annum (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 15, 2022. Any remaining or unpaid principal shall
be due and payable on February 17, 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 Secured Promissory Note is secured by a first-lien security
interest in certain contracts of Reflect, including obligations arising out of those certain contracts.. 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.
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). 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). The Company assessed the combination of the pre-existing
senior secured term loan and secured convertible loan in accordance with ASC 470 Debt and determined the transaction should be
accounted for as an extinguishment, in part as the Consolidation Term Loan eliminated a substantive conversion feature. In aggregate the
Company recorded a loss on extinguishment of $295, primarily associated with the write-off of pre-existing debt discounts.
In addition to refinancing
the existing debt with Slipstream, the Company issued to Slipstream a $10,000, 36-month senior secured term loan (the “Acquisition
Loan”) resulting in $10,000 in gross proceeds, or $9,950 in net proceeds. The Acquisition Loan matures on February 17, 2025
(the “Maturity Date”) and has an interest rate of 8.0%, with 50.0% warrant coverage (or 2,500,000 warrants). 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. The warrants were assessed
in accordance with ASC 470 and ASC 815 Derivatives and were deemed to represent bifurcated derivative instruments that should be
recorded as liabilities in the Condensed Consolidated Balance Sheets. The Company performed a Black-Scholes valuation of the warrants
as of the issuance date, resulting in a fair value of $0.8129 per warrant. In recording the warrant liability, the Company recorded a
debt discount associated with each of the Acquisition and Consolidation Term Loans in an amount of $2,032 and $2,190, respectively. These
amounts are being amortized straight-line through interest expense over the life of the loans, resulting in incremental interest expense
of $166 and $525 during the three and six months ended June 30, 2022, respectively. The Company has deemed straight-line amortization
to be materially consistent with the effective interest method.
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.
Effective June 30, 2022, the
Company amended the terms of the Lender Warrant to remove the holder’s option to exercise such warrant on a cashless basis utilizing
the volume weighted average price (“VWAP”) of the Company’s common stock on the trading day immediately preceding the
date of a notice of cashless exercise in certain circumstances, and remove the condition to exercising such warrant that the Company’s
shareholders approve the exercise thereof (which has already been obtained). The amendments to the Lender Warrant also extend the term
of such warrants for an additional one year, such that the Lender Warrant will expire on February 17, 2028. The foregoing amendments to
the Lender Warrant were intended to cause such warrants to be accounted for as equity instruments on the Company’s financial statements.
Loan and Security Agreement
History
Ninth, Tenth, Eleventh,
Twelfth, and Thirteenth Amendment; Modification of Conversion Date of Special Loan under Loan and Security Agreement
Prior to the execution of
the Credit Agreement, Borrower and Slipstream were parties to a Loan and Security Agreement. On March 7, 2021, On February 28,
2021, January 31, 2021, December 31, 2020, November 30, 2020, and September 29, 2020, the parties entered into several
amendments to the Loan and Security Agreement to amend the automatic conversion date of the Special Loan and, later, to eliminate the
conversion feature. Each amendment extended the automatic conversion date of the Special Loan. The Company paid no fees in exchange for
these extensions, with the exception of the March 7, 2021 extension which resulted in the Company recording of $133 of incremental
debt discount, a net gain of $26 via the extinguishment of the Special Loan, and expense of $69 of costs incurred with third parties as
a result of extinguishment of the Special Loan, modification of the New Term Loan, and extinguishment of the Disbursed Escrow Loan.
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 bore no interest. Upon entry into an amendment to the Loan and Security 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 Shareholders Equity during the three months ended March 31, 2021.
NOTE 10: 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. As a result of
court delays as a result of the COVID-19 pandemic, this suit remains in the early stages of litigation with discovery requests ongoing,
and, as a result, the outcome of the suit and the allocation of liability, if any, remain unclear. The Company is unable to reasonably
estimate the possible liability, recovery, or range of magnitude for either the liability or recovery, if any, at the time of this filing.
The Company has notified its
insurance company on notice of potential claims and continues to evaluate both the claim made by the customer and potential avenues for
recovery against third parties should the customer prevail.
Except as noted above, the
Company is not party to any other material legal proceedings, other than ordinary routine litigation incidental to the business, and there
were no other such proceedings pending during the period covered by this Report.
Settlement of obligations
There were no individually material settlements
during the six months ended June 30, 2022.
During the six months ended June 30, 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, and (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, during the three months ended
June 30, 2021.
NOTE 11: INCOME TAXES
Our deferred tax assets are
primarily related to net federal and state operating loss carryforwards (NOLs). We have substantial NOLs that are limited in usage by
IRC Section 382. IRC Section 382 generally imposes an annual limitation on the amount of NOLs that may be used to offset taxable
income when a corporation has undergone significant changes in stock ownership within a statutory testing period. We have performed a
preliminary analysis of the annual NOL carryforwards and limitations that are available to be used against taxable income. Based on the
history of losses of the Company, there continues to be a full valuation allowance against the net deferred tax assets of the Company
with a definite life.
As of June 30, 2022, we reported
tax liability of $0. As of June 30, 2022, the net deferred tax assets totaled $0 after valuation allowance, consistent with December 31,
2021.
NOTE 12: WARRANTS
A summary of outstanding warrants is included below:
| |
Warrants (Equity) | |
| |
Amount | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Life | |
Balance December 31, 2021 | |
| 4,103,211 | | |
$ | 4.48 | | |
| 1.73 | |
Warrants issued | |
| 5,851,505 | | |
| 1.535 | | |
| 5.00 | |
Warrants exercised | |
| (5,851,505 | ) | |
| 1.535 | | |
| 4.86 | |
Warrants reclassified | |
| 13,761,000 | | |
| 1.63 | | |
| 4.61 | |
Balance June 30, 2022 | |
| 17,864,211 | | |
$ | 2.21 | | |
| 3.83 | |
| |
Warrants (Liability) | |
| |
Amount | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Life | |
Balance December 31, 2021 | |
| - | | |
$ | - | | |
| - | |
Warrants issued | |
| 13,761,000 | | |
| 1.63 | | |
| 5.00 | |
Warrants expired | |
| - | | |
| - | | |
| - | |
Warrants reclassified | |
| (13,761,000 | ) | |
| 1.63 | | |
| (5.00 | ) |
Balance June 30, 2022 | |
| - | | |
$ | - | | |
| - | |
On February 3, 2022,
the Company entered into a 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. During the three months ended March 31, 2022, each of the Pre-Funded Warrants were exercised. The
Common Stock Warrants expired five years from the date of issuance. The Company evaluated the Pre-Funded Warrants and concluded that they
met the criteria to be classified within stockholders’ equity, with proceeds recorded as common stock and additional paid-in-capital.
The Company evaluated the Common Stock Warrant and concluded they did not meet the criteria to be classified within stockholders’
equity. The Common Stock Warrant included provisions which could result in a different settlement value for the Common Stock Warrant depending
on the registration status of the underlying shares. Because these conditions were not an input into the pricing of a fixed-for-fixed
option on the Company’s ordinary shares, the Common Stock Warrant was not considered to be indexed to the Company’s own stock.
The Company recorded these warrants as liabilities on the consolidated balance sheets at fair value, with subsequent changes in their
respective fair values recognized in the consolidated statements of operations at each reporting date. At the date of issuance, the Company
performed a Black-Scholes valuation of the warrants, resulting in a fair value of $1.0927 per warrant. At June 30, 2022, the Company reassessed
the fair value of these warrants via Black Scholes valuation methodology and determined that the fair value of these warrants was $0.4019
per warrant, resulting in the Company recording a gain on the fair value of these warrants of $1,287 and $4,951 in the Condensed Consolidated
Statement of Operations for the three and six months ended June 30, 2022, respectively.
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 (the “Lender Warrant”). These warrants are not exercisable
until 180 days after the issuance date. The common shares underlying these warrants have not yet been registered for resale under the
Securities Act of 1933, which provides Slipstream with an option for cashless exercise once the warrant becomes exercisable until such
time as such registration occurs. The Lender Warrant expired five years from the date of issuance. The Company evaluated the Lender Warrant
and concluded that it did not meet the criteria to be classified within stockholders’ equity. The Lender Warrant included provisions
that could result in a different settlement value for the Lender Warrant depending on the registration status of the underlying shares.
Because these conditions were not an input into the pricing of a fixed-for-fixed option on the Company’s ordinary shares, the Lender
Warrant was not considered to be indexed to the Company’s own stock. The Company recorded these warrants as liabilities on the consolidated
balance sheets at fair value, with subsequent changes in their respective fair values recognized in the consolidated statements of operations
at each reporting date. At the date of issuance, the Company performed a Black-Scholes valuation of the warrants, resulting in a fair
value of $0.8129 per warrant. In recording the warrant liability, the Company recorded an increase in debt discount in the Condensed Consolidated
Balance Sheet associated with the issuance of the warrants of $4,223, which is being amortized through interest expense in the Condensed
Consolidated Statement of Operations over the life of the Acquisition and Consolidation Term Loans. At June 30, 2022, the Company reassessed
the fair value of these warrants via Black Scholes valuation methodology and determined that the fair value of these warrants was $0.3699
per warrant, resulting in the Company recording a gain on the fair value of these warrants of $894 and $2,302 in the Condensed Consolidated
Statement of Operations for the three and six months ended June 30, 2022, respectively.
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 expired five years from the date of issuance. The Company evaluated the Purchaser Warrant and concluded that
it did not meet the criteria to be classified within stockholders’ equity. The Purchaser Warrant included provisions which could
result in a different settlement value for the Purchaser Warrant depending on the registration status of the underlying shares. Because
these conditions were not an input into the pricing of a fixed-for-fixed option on the Company’s ordinary shares, the Purchaser
Warrant was not considered to be indexed to the Company’s own stock. The Company recorded these warrants as liabilities on the consolidated
balance sheets at fair value, with subsequent changes in their respective fair values recognized in the consolidated statements of operations
at each reporting date. At the date of issuance, the Company performed a Black-Scholes valuation of the Purchaser Warrant, resulting in
a fair value of $0.8656 per warrant. In recording the warrant liability, the Company recorded an expense in the Condensed Consolidated
Statement of Operations associated with the issuance of the Purchaser Warrant of $1,211. At June 30, 2022, the Company reassessed the
fair value of the Purchase Warrant via Black Scholes valuation methodology and determined that the fair value of the Purchaser Warrant
was $0.4017 per warrant, resulting in the Company recording a gain on the fair value of the Purchaser Warrant of $252 and $650 in the
Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2022, respectively.
Effective
June 30, 2022, the Company amended the terms of the Common Stock Warrant (7,166,505 warrants), Lender Warrant (5,194,495 warrants) and
Purchaser Warrant (1,400,000 warrants). The amendments to such warrants removes the holder’s option to determine the value of such
warrants utilizing the volume weighted average price (“VWAP”) of the Company’s common stock on the trading day immediately
preceding the date of a notice in a cashless exercise, and removes the condition to exercising such warrants that the Company’s
shareholders approve the exercise thereof (which has already been obtained). The amendments to the warrants also extend the term of such
warrants for an additional one year, such that the Common Stock Warrant will expire on February 3, 2028, and the Lender Warrant and Purchaser
Warrant will expire on February 17, 2028.
As
a result of the extension in term provided in exchange for the amendment, the Company reassessed the fair value of each of the Common
Stock, Lender and Purchaser Warrants, resulting in the Company recording a loss on the fair value of these warrants of $345 in the Condensed
Consolidated Statement of Operations for the three months ended June 30, 2022. The foregoing amendments to the warrants resulted in such
warrants to be accounted for as equity instruments on the Company’s financial statements as of June 30, 2022. As such, following
recording the gains and losses with respect to these warrant amendments, the Company reclassified the warrant liability of $5,709 from
noncurrent liabilities to additional paid-in-capital as of June 30, 2022.
NOTE 13: STOCK-BASED COMPENSATION
A summary of outstanding options is included below:
Time Vesting Options | |
| | |
Weighted | | |
| | |
| | |
| |
| |
| | |
Average | | |
Weighted | | |
| | |
Weighted | |
| |
| | |
Remaining | | |
Average | | |
| | |
Average | |
Range of Exercise | |
Number | | |
Contractual | | |
Exercise | | |
Options | | |
Exercise | |
Prices between | |
Outstanding | | |
Life | | |
Price | | |
Exercisable | | |
Price | |
$0.01 - $1.00 | |
| - | | |
| - | | |
$ | - | | |
| - | | |
$ | - | |
$1.01 - $2.00 | |
| 25,000 | | |
| 7.36 | | |
$ | 1.88 | | |
| 16,667 | | |
$ | 1.88 | |
$2.01+ | |
| 1,963,675 | | |
| 7.47 | | |
| 4.29 | | |
| 1,312,008 | | |
$ | 3.78 | |
| |
| 1,988,675 | | |
| 7.47 | | |
$ | 3.34 | | |
| 1,328,675 | | |
| | |
Performance Vesting Options | |
| | |
Weighted | | |
| | |
| | |
| |
| |
| | |
Average | | |
Weighted | | |
| | |
Weighted | |
| |
| | |
Remaining | | |
Average | | |
| | |
Average | |
Range of Exercise | |
Number | | |
Contractual | | |
Exercise | | |
Options | | |
Exercise | |
Prices between | |
Outstanding | | |
Life | | |
Price | | |
Exercisable | | |
Price | |
$0.01 - $1.00 | |
| - | | |
| - | | |
$ | - | | |
| - | | |
$ | - | |
$1.01 - $2.00 | |
| - | | |
| - | | |
$ | - | | |
| - | | |
$ | - | |
$2.01+ | |
| 720,000 | | |
| 7.93 | | |
| 2.53 | | |
| 240,000 | | |
$ | 2.53 | |
| |
| 720,000 | | |
| 7.93 | | |
$ | 2.53 | | |
| 240,000 | | |
| | |
Market 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 - $1.00 | |
| 1,900,000 | | |
| 2.64 | | |
$ | 1.00 | | |
| - | | |
$ | - | |
$1.01 - $2.00 | |
| - | | |
| - | | |
$ | - | | |
| - | | |
$ | - | |
$2.01+ | |
| - | | |
| - | | |
| - | | |
| - | | |
$ | - | |
| |
| 1,900,000 | | |
| 2.64 | | |
$ | 1.00 | | |
| - | | |
| | |
| |
Market Vesting Options | | |
Time Vesting Options | | |
Performance Vesting Options | |
| |
| | |
Weighted | | |
| | |
Weighted | | |
| | |
Weighted | |
| |
| | |
Average | | |
| | |
Average | | |
| | |
Average | |
| |
Options | | |
Exercise | | |
Options | | |
Exercise | | |
Options | | |
Exercise | |
Date/Activity | |
Outstanding | | |
Price | | |
Outstanding | | |
Price | | |
Outstanding | | |
Price | |
Balance, December 31, 2021 | |
| - | | |
| - | | |
| 2,068,809 | | |
$ | 3.48 | | |
| 800,000 | | |
$ | 2.53 | |
Granted | |
| 1,900,000 | | |
| 1.00 | | |
| - | | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Forfeited or expired | |
| - | | |
| - | | |
| (80,134 | ) | |
| 2.79 | | |
| (80,000 | ) | |
| 2.53 | |
Balance, June 30, 2022 | |
| 1,900,000 | | |
| 1.00 | | |
| 1,988,675 | | |
| 3.34 | | |
| 720,000 | | |
$ | 2.53 | |
The weighted average remaining contractual life
for options exercisable is 7.25 years as of June 30, 2022.
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.
Amendment to Performance
Options
On June 1, 2020, Rick Mills,
CEO, and Will Logan, CFO, 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 ($38,000)
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 $3,600.
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”).
The exercise price of the foregoing options is
$2.53 per share, the closing price of the Company’s common stock on the date of issuance. The options were issued from the 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
EBITDA target is assessed quarterly by the Company in order to determine whether any compensation expense should be recorded.
During the three and six months
ended June 30, 2022, the Company deemed it probable that the Company would achieve the EBITDA target for calendar year 2022 and recorded
compensation expense in the Consolidated Statement of Operations with respect to these awards of $175 and $400, respectively, net of a
benefit of $50 recorded for forfeiture of awards. The remaining awards have not yet vested and are subject to actual results for the full
calendar year 2022. Should this target not be achieved, amounts recorded as expense in the Condensed Consolidated Statement of Operations
would be reversed.
Issuance of New Options
On June 15, 2022, 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:
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. An additional 300,000 options with identical market vesting
restrictions were issued to non-executives during the three months ended June 30, 2022.
The fair value of the options
on the grant date varied between $0.21 and $0.37 per award as determined using the Monte Carlo model. These values were calculated using
the following weighted average assumptions:
At June 30, 2022, the Company evaluated the probability
of achieving the share price targets in each tranche based, in part, on work performed by the Company’s third party valuation specialist
in conjunction with evaluating the equity guarantee contingent liability. As a result of that evaluation of probability, during the three
months ended June 30, 2022 the Company recorded $1 of compensation expense. These awards have not yet vested and are subject to actual
share price performance through February 2025. Should any target not be achieved, any amounts recorded as expense in the Condensed Consolidated
Statement of Operations related to that tranche would be reversed.
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.
Compensation expense recognized for the issuance
of stock options, inclusive of performance-restricted stock options, for the three and six months ended June 30, 2022 of $398 and $948,
respectively, was included in general and administrative expense in the Condensed Consolidated Financial Statements. Compensation expense
recognized for the issuance of stock options, inclusive of performance-restricted stock options, for the three and six months ended June
30, 2021 of $356 and $895, respectively, was included in general and administrative expense in the Condensed Consolidated Financial Statements.
Amounts recorded include stock compensation expense for awards granted to directors of the Company in exchange for services at fair value.
As of June 30, 2022, there was approximately $971
and $930 of total unrecognized compensation expense related to unvested share-based employee awards with time vesting and performance
vesting criteria, respectively. As of June 30, 2021, there was approximately $1,861 and $1,157 of total unrecognized compensation expense
related to unvested share-based awards with time vesting and performance vesting criteria, respectively. Generally, expense related to
the time vesting options will be recognized over the next two- and one-half years and will be adjusted for any future forfeitures as they
occur. Compensation expense related to performance vesting options will be recognized if it becomes probable that the Company will achieve
the identified performance metrics.
The Company engages 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.
During the three and six months ended June 30,
2022, the Company issued or accrued shares issuable in exchange for services in the amount of $45 and $70, respectively. During the three
and six months ended June 30, 2021, the Company issued or accrued shares issuable in exchange for services in the amount of $40 and $40,
respectively.
We had one (1) and two (2)
customers that in the aggregate accounted for 25.7% and 41.1% of accounts receivable as of June 30, 2022 and December 31, 2021, respectively.
We had two (2) and three (3) customers that accounted
for 37.5% and 44.0% of revenue for the three months ended June 30, 2022 and 2021, respectively.
We had three (3) and two
(2) customers that accounted for 54.3% and 37.4% of revenue for the six months ended June 30, 2022 and 2021, respectively.
We had two (2) and three (3)
vendors that accounted for 48.3% and 69.1% of outstanding accounts payable at June 30, 2022 and December 31, 2021, respectively.
We have entered into various non-cancelable operating
lease agreements for certain of our offices and office equipment. Our leases have original lease periods expiring between 2021 and 2027.
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 following is a schedule, by years, of maturities
of lease liabilities as of June 30, 2022: