Item 1.01 Entry into a Material Definitive Agreement.
Second Amendment to Merger Agreement
As previously reported, on November 12, 2021, Creative Realities, Inc., a Minnesota corporation, or “Creative Realities,” Reflect Systems, Inc., or “Reflect,” and RSI Exit Corporation, or the “Stockholders’ Representative,” entered into an Agreement and Plan of Merger (as amended on February 8, 2023, the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, on February 17, 2022, a direct, wholly owned subsidiary of Creative Realities, CRI Acquisition Corporation, or “Merger Sub,” merged with and into Reflect, with Reflect surviving as a wholly owned subsidiary of Creative Realities, and the surviving company of the merger, which is referred to herein as the “Merger.” On February 11, 2022, the parties executed a Second Amendment to the Merger Agreement.
The Second Amendment to the Merger Agreement provides that, among other things, the cash merger consideration payable in the Merger should be reduced by $241,817.43, or the “Claim Amount,” subject to a reduction in the Claim Amount to the extent that Reflect or Creative Realities receive payments of certain accounts receivable of Reflect, up to $26,670,18. An employer retention credit of $241,817.43 (the “ERC”) based on the operations of Reflect pre-Merger remains outstanding and will be paid to the Stockholders’ Representative for the benefit of former Reflect stockholders upon receipt, subject to the offset rights of Creative Realities described below.
Secured Promissory Note
On February 11, 2023, Creative Realities and the Stockholders’ Representative executed an amendment, or the “Note Amendment,” to the $2.5 million Note and Security Agreement (the “Secured Promissory Note”) previously executed by Creative Realities in favor of the Stockholders’ Representative at the closing of the Merger. The Secured Promissory Note required Creative Realities to pay to the Stockholders’ Representative a balloon payment of $1.25 million, plus all accrued and unpaid interest, on its stated maturity date, February 17, 2023. The Note Amendment eliminates the balloon payment, extending the maturity date for a one-year period, to February 17, 2024. During the extended period, Creative Realities will continue to make monthly principal payments of $104,166.67, and the annual interest rate on the outstanding principal increased from 0.59% to 4.60%, which will accrue and is payable in full on the new maturity date.
Offset Rights; Payment of Claim Amount
In light of the possible collection of the ERC and the Note Amendment, the parties agreed that the Claim Amount would be reduced by the amount of any ERC received by Creative Realities or Reflect prior to the maturity date of the Secured Promissory Note. If the Claim Amount exceeds the remaining amounts payable under the Secured Promissory Note on any payment date, Creative Realities may reduce the amount of the Secured Promissory Note, and the Claim Amount will be reduced on a dollar-for-dollar basis.
Escrow Agreement
In light of the resolution of the Claim Amount, the parties agreed to release the $250,000 escrow funds, plus interest, to the Stockholders’ Representative, which was placed in escrow at the closing of the Merger to be released once the Claim Amount was paid.
The parties also amended the Escrow Agreement executed at the closing of the Merger (the “Escrow Amendment”) to extend the period for which the escrow agent therein would accept monthly payments of the Secured Promissory Note until the extended maturity date, February 17, 2024.
The foregoing descriptions of the Second Amendment to the Merger Agreement, the Note Amendment and Escrow Amendment, and the transactions contemplated thereby, are not complete descriptions thereof and are qualified in their entireties by reference to the full text of such documents attached as exhibits 10.1, 10.2 and 10.3 to this Report, respectively, and incorporated herein by this reference.