NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(all currency in thousands, except
per share amounts)
(unaudited)
NOTE 1: NATURE OF ORGANIZATION AND OPERATIONS
Unless the context otherwise indicates,
references in these Notes to the accompanying condensed consolidated financial statements to “we,” “us,”
“our” and “the Company” refer to Creative Realities, Inc. and its subsidiaries.
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. We believe
we are one of the world’s leading interactive marketing technology companies that focuses on the retail shopper experience
by helping retailers and brands use the latest technologies to create better shopping experiences.
On November 20, 2018, we closed on our acquisition
of Allure Global Solutions, Inc. (the “Allure Acquisition”). While the Allure Acquisition expanded our operations,
geographical footprint and customer base and also enhanced our current product offerings, the core business of Allure is consistent
with the operations of Creative Realties, Inc. and as a result of the Allure Acquisition we did not add different operating activities
to our business.
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
ConeXus World Global, LLC, a Kentucky limited liability company. Our other wholly owned subsidiary Creative Realities, LLC, a Delaware
limited liability company, has been effectively dormant since October 2015, the date of the merger with ConeXus World Global, LLC.
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.
We incurred a net loss for the year ended
December 31, 2018 and had negative cash flows from operating activities as of December 31, 2018. For the three months ended September
30, 2019 and 2018 we have recognized/(incurred) net income/(losses) of $242 and ($878), respectively. For the nine months ended
September 30, 2019 and 2018, we recognized/(incurred) net income/(losses) of $475 and ($3,728), respectively. As of September 30,
2019, we had cash and cash equivalents of $2,240 and working capital deficit of $3,486, which includes $640 representing current
maturities of operating leases recorded January 1, 2019 upon adoption of Accounting Standards Update (“ASU”) 2016-02.
On November 9, 2018, Slipstream Communications,
LLC, an Anguillan limited liability company, (“Slipstream”) a related party (see Note 9), extended the maturity date of our term loan and revolving loan to
August 16, 2020. Our intent is to refinance our term loan and revolving loan with an unrelated third party during 2019. In conjunction
with the extension of the maturity date of our term loan, we agreed that the cash portion of the interest rate would increase prospectively
from 8.0% per annum to 10.0% per annum effective July 1, 2019.
On November 6, 2019, Slipstream extended
the maturity date of our term loan and revolver loan to June 30, 2021 through the Sixth Amendment to the Loan and Security Agreement,
aligning the maturity date of our term loan and revolver loan with the Secured Disbursed Escrow Promissory Note.
Management believes that, based on (i) the
extension of the maturity date on our term loan and revolving loans and (ii) our operational forecast through 2020, we can continue
as a going concern through at least November 8, 2020. However, given our historical net losses, cash used in operating activities
and working capital deficit, we obtained a continued support letter from Slipstream through November 15, 2020. We can provide no
assurance that our ongoing operational efforts will be successful which could have a material adverse effect on our results of
operations and cash flows.
See Note 9 to the Condensed Consolidated
Financial Statements for a discussion of the Company’s debt obligations.
Acquisitions
Acquisition of Allure Global Solutions,
Inc.
On September 20, 2018, we entered into a Stock Purchase Agreement (the “Purchase Agreement”)
with Christie Digital Systems, Inc. (“Seller”) to acquire the capital stock of Allure Global Solutions, Inc. (“Allure”),
a wholly owned subsidiary of Seller (the “Allure Acquisition”). Allure is an enterprise software development company
providing software solutions, a suite of complementary services, and ongoing support for an array of digital media and POS solutions.
Allure provides a wide range of products for the theatre, restaurant, convenience store, theme park, and retail spaces and works
to create, develop, deploy, and maintain enterprise software solutions including those designed specifically to integrate, manage,
and power ambient client-owned networks. Those networks manage data and marketing content that has been designed and proven to
influence consumer purchase behavior. The Allure Acquisition closed on November 20, 2018.
Subject to the terms and conditions of the Purchase Agreement, upon the closing of the Allure Acquisition,
we acquired ownership of all of Allure’s issued and outstanding capital shares in consideration for a total purchase price
of approximately $8,450, subject to a post-closing working capital adjustment. Of this purchase price amount, we paid $6,300 in
cash. Of the remaining purchase price amount, approximately $1,250 is to be paid to former management of Allure, and approximately
$900 is due from Allure to Seller, under an existing Seller note which was amended and restated for this reduced amount (as so
amended and restated, the “Amended and Restated Seller Note”). The Amended and Restated Seller Note accrues interest
at 3.5% per annum and requires us to make quarterly payments of interest only through February 19, 2020, on which date the Amended
and Restated Seller Note will mature and all remaining amounts owing thereunder will be due. We are able to prepay in whole or
in part amounts owing under the Amended and Restated Seller Note, without penalty, at our option, at any time and from time to
time.
On May 10, 2019, we reached a settlement agreement with Seller on, among other things, the final net working
capital as of the acquisition date resulting in (i) a payment to us from Seller in the amount of $210, and (ii) a reduction of
the amount due under the Amended and Restated Seller Note of $168 of cash collected by the Company which had been previously designated
for payment on the Amended and Restated Seller Note but was not ultimately remitted to the Seller and (b) $20 of unpaid accrued
interest. In addition to this net working capital settlement, Seller accepted collection risk for one acquired receivable in the
amount of $666, which was net settled through the Amended and Restated Seller Note. As a result, our condensed consolidated balance
sheet reflects a reduction in both accounts receivable and the Amended and Restated Seller Note of $666 as of June 30, 2019. The
outstanding principal balance of the Amended and Restated Seller Note as of September 30, 2019 is $1,637.
The Amended and Restated Seller Note is convertible into shares of our common stock at Seller’s
option on or after May 19, 2019, at an initial conversion price of $8.40 per share, subject to customary equitable adjustments.
Conversion of all amounts owing under the Amended and Restated Seller Note will be mandatory if the 30-day volume-weighted average
price of our common stock exceeds 200% of the common stock trading price at the closing of the Allure Acquisition. We will grant
Seller customary registration rights for the shares of our common stock issuable upon conversion of the Amended and Restated Seller
Note.
The Purchase Agreement contemplates additional
consideration of $2,000 to be paid by us to Seller in the event that Allure’s revenue exceeds $13,000, provided that revenues
from one specifically-named customer is capped at 70% of their gross revenue as part of the aggregate revenue calculation, for
any of (i) the 12-month period ending December 31, 2019, or (ii) any of the next following trailing 12-month periods ending on
each of March 31, June 30, September 30 and December 31, 2020.
See Note 5 to the Condensed Consolidated
Financial Statements for further discussion of the Company’s Allure Acquisition.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Basis of Presentation
The accompanying unaudited Condensed
Consolidated Financial Statements have been prepared in accordance with the 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, 2018, included in the Company’s Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 28, 2019.
The results of operations for the interim
periods are not necessarily indicative of results of operations for a full year. It is the opinion of management that all necessary
adjustments for a fair presentation of the results of operations for the interim periods have been made and are of a recurring
nature unless otherwise disclosed herein.
2. Revenue Recognition
We recognize revenue in accordance with
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue
from Contracts with Customers, which we adopted effective January 1, 2018, using the modified retrospective method.
See further discussion of the impact of adoption and our revenue recognition policy in Note 4.
3. Inventories
Inventories are stated at the lower of cost
or market (net realizable value), determined by the first-in, first-out (FIFO) method, and consist of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials, net of reserve of $158 and $207, respectively
|
|
$
|
265
|
|
|
$
|
220
|
|
Work-in-process
|
|
|
326
|
|
|
|
159
|
|
Total inventories
|
|
$
|
591
|
|
|
$
|
379
|
|
4. Impairment of Long-Lived Assets
We review the carrying value of all long-lived
assets, including property and equipment, for impairment in accordance with ASC 360, Accounting for the Impairment or Disposal
of Long-Lived Assets. Under ASC 360, impairment losses are recorded whenever events or changes in circumstances indicate the
carrying value of an asset may not be recoverable.
If the impairment tests indicate that the
carrying value of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment loss
would be recognized. The impairment loss is determined as the amount by which the carrying value of such asset exceeds its fair
value. We generally measure fair value by considering sale prices for similar assets or by discounting estimated future cash flows
from such assets using an appropriate discount rate. Assets to be disposed of are carried at the lower of their carrying value
or fair value less costs to sell. Considerable management judgment is necessary to estimate the fair value of assets, and accordingly,
actual results could vary significantly from such estimates.
5. Basic and Diluted Income/(Loss) per Common Share
Basic and diluted income/(loss) per common
share for all periods presented is computed using the weighted average number of common shares outstanding. Basic weighted average
shares outstanding includes only outstanding common shares. Diluted weighted average shares outstanding includes outstanding common
shares and potential dilutive common shares outstanding in accordance with the treasury stock method. All of the shares reserved
for outstanding stock options and warrants totaling approximately 5,021,888 and 1,787,029 at September 30, 2019 and 2018, respectively,
were excluded from the computation of income/(loss) per share as they are anti-dilutive. Net income/(loss) attributable to common
shareholders for the three months ended September 30, 2019 and 2018 is after dividends on convertible preferred stock of $0 and
$105, respectively. Net income/(loss) attributable to common shareholders for the nine months ended September 30, 2019 and 2018
is after dividends on convertible preferred stock of $0 and $345, respectively.
6. Income Taxes
Deferred income taxes are recognized in
the financial statements for the tax consequences in future years of differences between the tax basis of assets and liabilities
and their financial reporting amounts based on enacted tax laws and statutory tax rates. Temporary differences arise from net operating
losses, differences in basis of intangibles, 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 September 30, 2019 and December 31, 2018.
7. Goodwill and Definite-Lived Intangible
Assets
We follow the provisions of ASC 350, Goodwill
and Other Intangible Assets. Pursuant to ASC 350, goodwill acquired in a purchase business combination is not amortized, but instead
tested for impairment at least annually. The Company uses a measurement date of September 30. There was no impairment loss recognized
on goodwill or definite-lived intangible assets during the nine months ended September 30, 2019 and 2018 (see Note 8).
8. Use of Estimates
The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Our significant estimates include: the allowance for doubtful accounts, recognition
of revenue, right-of-use assets and related lease liabilities, deferred taxes, deferred revenue, the fair value of acquired assets
and liabilities, valuation of warrants and other stock-based compensation and other assumptions and estimates used to evaluate
the recoverability of long-lived assets, goodwill and other intangible assets and the related amortization methods and periods.
Actual results could differ from those estimates.
9. 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 Allure Acquisition.
10. Leases
On January 1, 2019, we adopted ASU No. 2016-02, Leases
(Topic 842), as amended, which supersedes the lease accounting guidance under ASC 840, and generally requires lessees to recognize
operating and financing lease liabilities and corresponding right-of-use (“ROU”) assets on the balance sheet and to
provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. We
adopted the new guidance using the modified retrospective transition approach by applying the new standard to all leases existing
at the date of initial application and not restating comparative periods. The most significant impact was the recognition of ROU
assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. For
information regarding the impact of Topic 842 adoption, see Note 17— Leases.
Lease accounting results and disclosure
requirements for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts have
not been adjusted and continue to be reported in accordance with our historical accounting under Topic 840.
We elected the package of practical expedients
permitted under the transition guidance, which allowed us to carryforward our historical lease classification, our assessment on
whether a contract was or contains a lease, and our initial direct costs for any leases that existed prior to January 1, 2019.
We also elected to combine our lease and non-lease components. We have no leases with an initial term of 12 months or less.
Upon adoption, we recognized total ROU assets
of $2,319, with corresponding liabilities of $2,319 on the condensed consolidated balance sheets. This included $54 of
pre-existing finance lease ROU assets previously reported in computer equipment within property and equipment, net. The ROU assets
include adjustments for prepayments and accrued lease payments. The net effect of the adoption resulted in an insignificant cumulative
effect adjustment to retained earnings on January 1, 2019 but did not impact our prior year consolidated statements of operations,
statements of cash flows, or statements of shareholders’ equity.
Under Topic 842, we determine if an arrangement
is a lease at inception. 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. Finance leases are included in property and equipment, net, current maturities of financing leases,
and long-term obligations under financing leases on our condensed consolidated balance sheets.
NOTE 3: RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
Recently adopted
On January 1, 2019, we adopted ASU No. 2016-02, Leases
(Topic 842), as amended. For information regarding the impact of Topic 842 adoption, see Note 2 – Summary of Significant
Accounting Policies and Note 17— Leases.
On January 1, 2019, we adopted ASU No. 2018-07, Improvements
to Nonemployee Share-Based Payment Accounting (Topic 718) to simplify the accounting for share-based payments to nonemployees
by aligning it with the accounting for share-based payments to employees, with certain exceptions. The new guidance expanded the
scope of ASC 718 to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in
an entity’s own operations. The adoption had no impact to the Company’s consolidated financial statements.
In October 2018, the FASB issued ASU No.
2018-16 (“ASU 2018-16”), Derivatives and Hedging. ASU 2018-16 expands the permissible benchmark interest rates
to include the Secured Overnight Financing Rate (SOFR) to be eligible as a U.S. benchmark interest rate for purposes of applying
hedge accounting under Topic 815, Derivatives and Hedging. The Company adopted this ASU effective January 1, 2019 on a prospective
basis for qualifying or redesignated hedging relationships entered on or after the date of adoption. As we previously adopted the
amendments in Update 2017-12, and as the benchmark rate on our term loan debt does not utilize the SOFR, the adoption of this amendment
had no effect on the Company’s results of operations, financial position and cash flows.
On January 1, 2019, we adopted the final
rule under SEC Release No. 33-10532, Disclosure Update and Simplification, which amended certain disclosure requirements
that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements
on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in
each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. We
have updated our Condensed Consolidated Financial Statements to include a reconciliation of the beginning balance to the ending
balance of stockholders’ equity for each period for which a statement of comprehensive income is filed.
On January 1, 2019, we adopted ASU 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment which aimed to address concerns
over the cost and complexity of the two-step goodwill impairment test by removing the second step of the test. Prior to adoption,
an entity was required to perform a two-step test to determine the amount, if any, of goodwill impairment. In Step 1, an entity
compared the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting
unit exceeds its fair value, the entity performed Step 2 by comparing the implied fair value of goodwill with the carrying amount
of that goodwill for that reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for
the reporting unit exceeds the implied fair value of that goodwill is recorded, limited to the amount of goodwill allocated to
that reporting unit. As a result of adoption, in completing our annual impairment testing of goodwill as of September 30, 2019,
we applied a one-step quantitative test and would have recorded the amount of goodwill impairment, if any, as the excess of a reporting
unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. There
was no impact on our condensed consolidated financial statements as the result of adoption.
Not yet adopted
In August 2018, the FASB issued ASU 2018-15
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.
The amendments in this update provide guidance on evaluating the accounting for fees paid by a customer in a cloud computing arrangement
(hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The amendments in
this ASU are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within
those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period, for all
entities. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.
This standard modifies the disclosure requirements for fair value measurements by removing the requirements to disclose: (i) amount
of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) timing of recognizing transfers between
levels within the fair value hierarchy; and (iii) valuation processes used for Level 3 fair value measurements. Additionally, the
standard now requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income
(loss) for recurring Level 3 fair value measurements held at the end of each reporting period and the range and weighted average
of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years beginning
after December 15, 2019, including interim periods within those fiscal years. An entity is permitted to early adopt all of the
disclosure changes or early adopt only the removed disclosure requirements and delay adoption of the additional disclosures until
the effective date of this amendment. We are currently evaluating the disclosure requirements related to adopting this guidance.
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
On January 1, 2018, the Company adopted
ASC 606 using the modified retrospective method for all contracts not completed as of the date of adoption. Results for reporting
periods beginning on or after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue
to be reported under the accounting standards in effect for the prior period. Under this method, we concluded that the cumulative
effect of applying this guidance was not material to the financial statements and no adjustment to the opening balance of accumulated
deficit was required on the adoption date.
Under ASC 606, the Company accounts for
revenue using the following steps:
|
●
|
Identify the contract, or contracts, with a customer
|
|
●
|
Identify the performance obligations in the contract
|
|
●
|
Determine the transaction price
|
|
●
|
Allocate the transaction price to the identified performance obligations
|
|
●
|
Recognize revenue when, or as, the Company satisfies the performance obligations
|
The Company combines contracts with the
same customer into a single contract for accounting purposes when the contracts are entered into at or near the same time and the
contracts are negotiated as a single commercial package, consideration in one contract depends on the other contract, or the services
are considered a single performance obligation. If an arrangement involves multiple performance obligations, the items are analyzed
to determine the separate units of accounting, whether the items have value on a standalone basis and whether there is objective
and reliable evidence of their standalone selling price. The total contract transaction price is allocated to the identified performance
obligations based upon the relative standalone selling prices of the performance obligations. The standalone selling price is based
on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost
plus margin approach.
The Company estimates the amount of total
contract consideration it expects to receive for variable arrangements by determining the most likely amount it expects to earn
from the arrangement based on the expected quantities of services it expects to provide and the contractual pricing based on those
quantities. The Company only includes some or a portion of variable consideration in the transaction price when it is probable
that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with
the variable consideration is subsequently resolved. The Company considers the sensitivity of the estimate, its relationship and
experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the
variable consideration to the overall arrangement. The Company receives variable consideration in very few instances.
As discussed in more detail below, revenue
is recognized when a customer obtains control of promised goods or services under the terms of a contract and is measured as the
amount of consideration the Company expects to receive in exchange for transferring goods or providing services. The Company does
not have any material extended payment terms as payment is due at or shortly after the time of the sale. Observable prices are
used to determine the standalone selling price of separate performance obligations or a cost plus margin approach when one is not
available. Sales, value-added and other taxes collected concurrently with revenue producing activities are excluded from revenue.
The Company recognizes contract assets or
unbilled receivables related to revenue recognized for services completed but not yet invoiced to the clients. Unbilled receivables
are recorded as accounts receivable when the Company has an unconditional right to contract consideration. A contract liability
is recognized as deferred revenue when the Company invoices clients in advance of performing the related services under the terms
of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the related performance obligation.
Deferred contract acquisition costs were
evaluated for inclusion in other assets; however, the Company elected to use the practical expedient for recording an immediate
expense for those incremental costs of obtaining contracts, including certain design/engineering services, commissions, incentives
and payroll taxes, as these incremental and recoverable costs have terms that do not exceed one year.
The Company provides innovative digital
marketing technology and solutions to retail companies, individual retail brands, enterprises and organizations throughout the
United States and in certain international markets. The Company’s technology and solutions include: digital merchandising
systems and omni-channel customer engagement systems, interactive digital shopping assistants, advisors and kiosks, and other interactive
marketing technologies such as mobile, social media, point-of-sale transactions, beaconing and web-based media that enable our
customers to transform how they engage with consumers.
We typically generate revenue through the
following sources:
|
○
|
System hardware sales – displays, computers and peripherals
|
|
○
|
Professional implementation and installation services
|
|
○
|
Software design and development services
|
|
○
|
Software as a service, including content management
|
|
○
|
Maintenance and support services
|
The following table disaggregates the Company’s
revenue by major source for the three and nine months ended September 30, 2019:
(in thousands)
|
|
Three Months
Ended September 30,
2019
|
|
|
Nine Months
Ended September 30,
2019
|
|
Hardware
|
|
$
|
2,034
|
|
|
$
|
5,329
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
Installation Services
|
|
|
2,143
|
|
|
|
6,306
|
|
Software Development Services
|
|
|
695
|
|
|
|
8,930
|
|
Managed Services
|
|
|
1,851
|
|
|
|
4,956
|
|
Total Services
|
|
|
4,689
|
|
|
|
20,192
|
|
|
|
|
|
|
|
|
|
|
Total Hardware and Services
|
|
$
|
6,723
|
|
|
$
|
25,521
|
|
System hardware sales
System hardware revenue is recognized generally
upon shipment of the product or customer acceptance depending upon contractual arrangements with the customer in instances in which
the sale of hardware is the sole performance obligation. Shipping charges billed to customers are included in hardware sales and
the related shipping costs are included in hardware cost of sales. The cost of freight and shipping to the customer is recognized
in cost of sales at the time of transfer of control to the customer. System hardware revenues are classified as “Hardware”
within our disaggregated revenue.
Installation services
The Company performs outsourced installation
services for customers and recognizes revenue upon completion of the installations. Installation services also includes engineering
services performed as part of an installation project.
When system hardware sales include installation
services to be performed by the Company, the goods and services in the contract are not distinct, so the arrangement is accounted
for as a single performance obligation. Our customers control the work-in-process and can make changes to the design specifications
over the contract term. Revenues are recognized over time as the installation services are completed based on the relative portion
of labor hours completed as a percentage of the budgeted hours for the installation. Installation services revenues are classified
as “Installation Services” within our disaggregated revenue.
The aggregate amount of the transaction
price allocated to installation service performance obligations that are partially unsatisfied as of September 30, 2019 were $1,428.
We expect to recognize $1,428 during the three months ended December 31, 2019.
Software design and development services
Software and software license sales are
revenue when a fixed fee order has been received and delivery has occurred to the customer. Revenue is recognized generally upon
customer acceptance (point-in-time) of the software product and verification that it meets the required specifications. Software
is delivered to customers electronically. Software design and development revenues are classified as “Software Development
Services” within our disaggregated revenue.
Software as a service
Software as a service includes revenue from
software licensing and delivery in which software is licensed on a subscription basis and is centrally hosted. These services often
include software updates which provide customers with rights to unspecified software product upgrades and maintenance releases
and patches released during the term of the support period. Contracts for these services are generally 12-36 months in length.
We account for revenue from these services in accordance with ASC 985-20-15-5 and recognize revenue ratably over the performance
period. Software as a service revenues are classified as “Managed Services” within our disaggregated revenue.
Maintenance and support services
The Company sells support services which
include access to technical support personnel for software and hardware troubleshooting. The Company offers a hosting service through
our network operations center, or NOC, allowing the ability to monitor and support its customers’ networks 7 days a week,
24 hours a day. These contracts are generally 12-36 months in length. Revenue is recognized over the term of the agreement in proportion
to the costs incurred in fulfilling performance obligations under the contract. Maintenance and Support revenues are classified
as “Managed Services” within our disaggregated revenue.
Maintenance and support fees are based on
the level of service provided to end customers, which can range from monitoring the health of a customer’s network to supporting
a sophisticated web-portal to managing the end-to-end hardware and software of a digital marketing system. These agreements are
renewable by the customer. Rates for maintenance and support, including subsequent renewal rates, are typically established based
upon a fee per location, per device, or a specified percentage of net software license fees as set forth in the arrangement. These
contracts are generally 12-36 months in length. Revenue is recognized ratably and evenly over the service period.
The Company also performs time and materials-based
maintenance and repair work for customers. Revenue is recognized at a point in time when the performance obligation has been fully
satisfied.
In addition to changes in the timing of
when we record variable consideration, ASC 606 provided clarification about the classification of certain costs relating to revenue
arrangements with customers. As a result of our analysis, we did not identify any components of our revenue transactions which
required reclassification between gross and net presentation.
NOTE 5: BUSINESS COMBINATION
On November 20, 2018, the Company completed
the Allure Acquisition. Pursuant to the Purchase Agreement, the total purchase price was $8,450, which was primarily funded
using cash from the Company’s public offering closed on November 19, 2018.
On May 10, 2019, the Company entered a settlement
agreement with Seller finalizing the opening balance sheet net working capital in accordance with the Purchase Agreement. The reconciliation
of final net working capital compared to the estimated net working capital at the date of the acquisition resulted in a final net
working capital below the estimated net working capital by $398. The $398 net working capital deficit was settled via cash payment
from Seller to the Company in the amount of $210, net of past due interest on the Amended and Restated Seller Note of $20 and
$168 collected by the Company on certain acquired accounts receivable which, in accordance with the Purchase Agreement, were required
to be utilized to pay down the Amended and Restated Seller Note. The preliminary purchase price and related allocation of the purchase
price has been updated to reflect the cash settlement. The difference between the total purchase price and the net consideration
transferred is driven by the cash acquired in the acquisition. The purchase price allocation remains preliminary as of September
30, 2019 as the Company continues to evaluate certain acquired assets and liabilities.
The revised preliminary purchase price of
Allure consisted of the following items:
(in thousands)
|
|
Consideration
|
|
Cash consideration for stock
|
|
$
|
5,902
|
(1)
|
Payable to former Allure management
|
|
|
1,021
|
(2)
|
Seller note payable
|
|
|
900
|
(3)
|
Earnout liability
|
|
|
250
|
(4)
|
Total consideration
|
|
|
8,073
|
|
Cash acquired
|
|
|
(26
|
)(5)
|
Net consideration transferred
|
|
$
|
8,047
|
|
(1)
|
Cash consideration for outstanding shares of Allure common stock per the Purchase Agreement, after the net adjustment upon finalizing the net working capital settlement on May 10, 2019.
|
|
|
(2)
|
Represents a payable due to two former members of the Allure management team for a total of $1,250 as a result of the acquisition: 30% due in November 2018 and 70% due in November 2019. The fair value of the payable as of the acquisition date was deemed to be $1,021.
|
|
|
(3)
|
Represents a note payable due from Allure to Seller, under a pre-existing Seller Note which was amended
and restated for this amount through the Purchase Agreement. At the closing date, the estimated net working capital deficit of
Allure was $801 in excess of the target net working capital as defined in the stock purchase agreement. As of the acquisition date,
Allure also had accounts payable to Seller for outsourced services of $2,204. We agreed with Seller to net cash settle the estimated
net working capital deficit through a reduction in the accounts payable to Seller as of the acquisition date and to further amend
the Seller Note to include the remaining $1,403 accounts payable due from Allure to Seller. The Seller Note (as amended and restated
below, the “Amended and Restated Seller Note”) thereby increased from $900 per the Purchase Agreement to $2,303 at
the opening balance sheet. The Amended and Restated Seller Note accrues interest at 3.5% per annum and requires us to make quarterly
payments of interest only through February 19, 2020, on which date the Amended and Restated Seller Note will mature and all remaining
amounts owing thereunder will be due. We are able to prepay the Amended and Restated Seller Note in whole or in part, without penalty,
at our option, at any time and from time to time.
|
|
|
|
On May 10, 2019, we reached a settlement agreement with Seller on, among other things, the final net working
capital as of the acquisition date resulting in (i) a payment to us from Seller in the amount of $210 and (ii) a reduction of the
amount due under the Amended and Restated Seller Note of $168 of cash collected by the Company which had been previously designated
for payment on the Amended and Restated Seller Note but was not ultimately remitted to Seller and (b) $20 of unpaid accrued interest.
In addition to this net working capital settlement, Seller accepted collection risk for one acquired receivable in the amount of
$666, which was net settled through the Amended and Restated Seller Note. As a result, our condensed consolidated balance sheet
reflects a reduction in both accounts receivable and the Amended and Restated Seller Note of $666 as of June 30, 2019. The outstanding
principal balance of the Amended and Restated Seller Note as of September 30, 2019 is $1,637.
|
(4)
|
The Purchase Agreement contemplates additional consideration or $2,000 to be paid by us to Seller in the
event that Allure’s revenue exceeds $13,000, as further described in the Purchase Agreement. The fair value of the earnout
liability was determined to be $250 at the time of acquisition.
|
|
|
(5)
|
Represents the Allure cash balance acquired at acquisition.
|
The Company accounted for the Allure Acquisition
using the acquisition method of accounting. The revised preliminary allocation of the purchase price is based on estimates of the
fair value of assets acquired and liabilities assumed as of November 20, 2018. 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 are as follows:
(in thousands)
|
|
Total
|
|
Accounts receivable
|
|
$
|
1,512
|
|
Unbilled receivables
|
|
|
221
|
|
Inventory
|
|
|
142
|
|
Prepaid expenses & other current assets
|
|
|
18
|
|
Property and equipment
|
|
|
177
|
|
Other assets
|
|
|
7
|
|
Identified intangible assets:
|
|
|
|
|
Definite-lived trade names
|
|
|
340
|
|
Developed technology
|
|
|
1,770
|
|
Customer relationships
|
|
|
2,870
|
|
Goodwill
|
|
|
3,276
|
|
Accounts payable
|
|
|
(331
|
)
|
Accrued expenses
|
|
|
(447
|
)
|
Customer deposits
|
|
|
(494
|
)
|
Deferred revenues
|
|
|
(276
|
)
|
Accounts payable converted into Seller Note
|
|
|
(738
|
)
|
Net consideration transferred
|
|
$
|
8,047
|
|
The preliminary fair value of the customer
relationship intangible asset has been estimated using the income approach through a discounted cash flow analysis with the cash
flow projections discounted using a rate of 26.0%. The cash flows are based on estimates used to price the Allure Acquisition,
and the discount rates applied were benchmarked with reference to the implied rate of return from the Company’s pricing model
and the weighted average cost of capital.
The definite-lived trade name represents
the Allure brand name as marketed primarily in the sports & entertainment, large venue and quick service restaurant verticals
of the digital signage industry. The Company applied the income approach through an excess earnings analysis to determine the preliminary
fair value of the trade name asset. The Company identified this asset as definite-lived as opposed to indefinite-lived as the Company
plans to utilize the Allure trade name as a product name as opposed to go-to-market company name. The Company applied the income
approach through a relief-from-royalty analysis to determine the preliminary fair value of this asset.
The developed technology assets are primarily
comprised of know-how and functionality embedded in Allure’s proprietary content management application which drives 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 5 to 15 years.
The table below sets forth the preliminary
valuation and amortization period of identifiable intangible assets:
(in thousands)
|
|
Preliminary Valuation
|
|
|
Amortization Period
|
Identifiable intangible assets:
|
|
|
|
|
|
Definite-lived trade names
|
|
$
|
340
|
|
|
5 years
|
Developed technology
|
|
|
1,770
|
|
|
7 years
|
Customer relationships
|
|
|
2,870
|
|
|
15 years
|
Total
|
|
$
|
4,980
|
|
|
|
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 property, plant and equipment is $177.
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 Allure Acquisition. 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
for the nine months ended September 30, 2018 presents the combined financial results for the Company and Allure, adjusted for Allure’s
fiscal year ended March 31, as if the Allure Acquisition had been completed January 1, 2017. Prior to the Allure Acquisition, Allure
had a fiscal year reporting from April 1 to March 31 annually. The pro forma financial information set forth below for the nine
months ended September 30, 2018 includes Allure’s pro forma information for the nine month period January 1, 2018 through
September 30, 2018. The unaudited information set forth below for the nine months ended September 30, 2019 represents the Company’s
consolidated results for that period.
|
|
Nine Months Ended
September 30,
|
|
(in thousands, except earnings per common share)
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
Net sales
|
|
$
|
25,521
|
|
|
$
|
25,306
|
|
Net income/(loss)
|
|
$
|
475
|
|
|
$
|
(3,865
|
)
|
Earnings/(loss) per common share
|
|
$
|
0.05
|
|
|
$
|
(0.41
|
)
|
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.
The Company previously recorded warrant
liabilities that were measured at fair value on a recurring basis using a binomial option pricing model. The warrant liabilities
were classified as Level 3 and were determined to have a fair value of $21 as of December 31, 2018. The warrant liabilities had
been previously decreased to $0 as of June 30, 2019. All of the Company’s outstanding warrants classified as liabilities
expired during the three months ended September 30, 2019.
As part of the Allure Acquisition, the Purchase Agreement contemplated additional consideration of $2,000 to be paid by us to Seller in the event that acquiree revenue
exceeds $13,000, as defined in the underlying agreement, for any of the trailing twelve-month periods measured as of December 31,
2019, March 31, 2020, June 30, 2020, September 30, 2020 and December 31, 2020. The fair value of the earnout liability was determined
to be $250 at the time of acquisition. There were no changes to the assumptions nor adjustments recorded to the fair value of the
earnout liability as of September 30, 2019 given limited passage of time in the measurement period and performance in-line with
those estimates utilized in developing the initial estimate. The liability is deemed to be Level 3 as the valuation is based on
revenue projections and estimates developed by management as informed by historical results.
NOTE 7: SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Supplemental non-cash Investing and Financing Activities
|
|
|
|
|
|
|
Issuance of common stock upon conversion of preferred stock
|
|
$
|
-
|
|
|
$
|
125
|
|
Issuance of warrants with term loan extensions / revolver draws
|
|
$
|
-
|
|
|
$
|
809
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure information for cash flow
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
108
|
|
|
$
|
136
|
|
Income taxes, net
|
|
$
|
15
|
|
|
$
|
24
|
|
NOTE 8: INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
Intangible assets consisted
of the following at September 30, 2019 and December 31, 2018:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Technology platform
|
|
$
|
4,635
|
|
|
|
3,084
|
|
|
$
|
4,635
|
|
|
|
2,895
|
|
Customer relationships
|
|
|
5,330
|
|
|
|
2,631
|
|
|
|
5,330
|
|
|
|
2,477
|
|
Trademarks and trade names
|
|
|
1,020
|
|
|
|
660
|
|
|
|
1,020
|
|
|
|
553
|
|
|
|
|
10,985
|
|
|
|
6,375
|
|
|
|
10,985
|
|
|
|
5,925
|
|
Accumulated amortization
|
|
|
6,375
|
|
|
|
|
|
|
|
5,925
|
|
|
|
|
|
Net book value of amortizable intangible assets
|
|
$
|
4,610
|
|
|
|
|
|
|
$
|
5,060
|
|
|
|
|
|
For the three months ended September 30,
2019 and 2018, amortization of intangible assets charged to operations was $147 and $232, respectively. For the nine months ended
September 30, 2019 and 2018 amortization of intangible assets charged to operations was $451 and $696, respectively.
Goodwill
The following is a rollforward of the Company’s
goodwill since December 31, 2018:
|
|
Total
|
|
Balance as of January 1, 2019
|
|
$
|
18,900
|
|
Adjustments due to adjustments to preliminary purchase price allocation (Note 5)
|
|
|
(635
|
)
|
Balance as of September 30, 2019
|
|
$
|
18,265
|
|
Goodwill represents the excess of the purchase
price over the fair value of net assets acquired. Goodwill is subject to an impairment review at a reporting unit level, on an
annual basis as of the end of September of each fiscal year, or when an event occurs or circumstances change that would indicate
potential impairment. The Company has only one reporting unit, and therefore the entire goodwill is allocated to that reporting
unit.
On January 1, 2019, we adopted ASU 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment which aimed to address concerns
over the cost and complexity of the two-step goodwill impairment test by removing the second step of the test. The Company performed
its annual goodwill impairment test at September 30, 2019.
The Company assessed the carrying value
of goodwill at the reporting unit level based on an estimate of the fair value of the respective reporting unit. Fair value of
the reporting unit was estimated using a discounted cash flow analyses consisting of various assumptions, including expectations
of future cash flows based on projections or forecasts derived from analysis of business prospects and economic or market trends
that may occur, specifically, the Company gave significant consideration to actual historic financial results, including revenue
growth rates in the preceding three years. Based on the Company’s assessment, we determined that the fair value of our reporting
unit exceeds its carrying value, and accordingly, the goodwill associated with the reporting unit is not considered to be impaired
at September 30, 2019.
The Company recognizes that any changes
in our actual fourth quarter 2019 or projected 2020 results could potentially have a material impact on our assessment of goodwill
impairment. The Company will continue to monitor the actual performance of its operations against expectations and assess indicators
of possible impairment. The valuation of goodwill and intangible assets is subject to a high degree of judgment, uncertainty and
complexity. Should any indicators of impairment occur in subsequent periods, the Company will be required to perform an analysis
in order to determine whether goodwill is impaired.
NOTE 9: LOANS PAYABLE
The outstanding debt with detachable warrants,
as applicable, are shown in the table below. Further discussion of the notes follows.
Debt Type
|
|
Issuance
Date
|
|
Principal
|
|
|
Maturity
Date
|
|
Warrants
|
|
|
Interest Rate Information
|
A
|
|
6/30/2018
|
|
$
|
264
|
|
|
6/30/2021
|
|
|
-
|
|
|
0.0% interest (1)
|
B
|
|
1/16/2018
|
|
|
1,000
|
|
|
6/30/2021
|
|
|
61,729
|
|
|
10.0% interest (2)
|
C
|
|
8/17/2016
|
|
|
3,000
|
|
|
6/30/2021
|
|
|
588,236
|
|
|
10.0% interest (2)
|
D
|
|
11/19/2018
|
|
|
1,637
|
|
|
2/15/2020
|
|
|
-
|
|
|
3.5%
interest (3)
|
|
|
|
|
$
|
5,901
|
|
|
|
|
|
649,965
|
|
|
|
|
|
Debt discount
|
|
|
(612
|
)
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
5,289
|
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(1,637
|
)
|
|
|
|
|
|
|
|
|
|
|
Long term debt
|
|
$
|
3,652
|
|
|
|
|
|
|
|
|
|
A – Secured Disbursed Escrow Promissory Note with related
party
B – Revolving Loan with related party
C – Term Loan with related party
D – Amended and Restated Seller Note from the Allure Acquisition
(1) 0.0% interest per annum when total borrowings
under the term and revolver loans, in aggregate, are below $4,000 in principal (disregarding paid-in-kind (“PIK”) interest);
10.0% cash, when total borrowing under the term and revolver loans, in aggregate, exceed $4,000 in principal (disregarding PIK
interest)
(2) 10.0% cash interest per annum when total borrowings
under the term and revolver loans, in aggregate, are below $4,000 in principal (disregarding PIK interest); 10.0% cash, 2.0% PIK
when total borrowing under the term and revolver loans, in aggregate, exceed $4,000 in principal (disregarding PIK interest).
(3) 3.5% simple cash interest per annum; interest
payable quarterly with the first payment due on December 31, 2018 with payments of accrued interest continuing quarterly thereafter
until the maturity date of February 20, 2020.
The foregoing obligations are secured by all of the tangible assets of the co-makers pursuant to the terms
of an amended and restated security agreement.
Term Notes and Secured Disbursed Escrow Promissory
Note
On August 17, 2016, we entered into a Loan and Security Agreement (the “Loan Agreement”) with
Slipstream Communications, LLC, an Anguillan limited liability company (“Slipstream”), and obtained a $3.0 million
term loan (the “Term Loan”), with interest thereon at 8% per annum. The Term Loan contains certain customary restrictions
including, but not limited to, restrictions on mergers and consolidations with other entities, cancellation of any debt or incurring
new debt (subject to certain exceptions).
On January 16, 2018, we entered into the Third Amendment to the Loan and Security Agreement with Slipstream
and obtained a $1.0 million revolving loan (the “Revolving Loan”), with interest thereon at 8% per annum, maturing
on January 16, 2019. In connection with the Revolving Loan, we issued Slipstream a five-year warrant to purchase up to 61,729 shares
of Creative Realities’ common stock at a per share price of $8.10 (subject to adjustment and subsequently adjusted to $8.09
in April 2018). The fair value of the warrants was $266, which was accounted for as an additional debt discount and is being amortized
over the remaining life of the Revolving Loan.
On April 27, 2018, we entered into the Fourth Amendment to the Loan and Security Agreement with Slipstream,
under which we obtained a $1.1 million Revolving Loan, with interest thereon at 8% per annum, provided, however, at all times when
the aggregate outstanding principal amount of the Term Loan and the Revolving Loan (excluding the additional principal added pursuant
to this proviso) exceeds $4,000 then interest rate shall be 10%, of which eight percent 8% shall be payable in cash and 2% shall
be paid by the issuance of and treated as additional principal of the Term Loan (“PIK”); provided, further, no interest
accrues on any portion of the outstanding Disbursed Escrow Loan. The Revolving Loan was originally set to mature on January 16,
2019, which was amended to August 16, 2020 in conjunction with the Fifth Amendment to the Loan and Security Agreement. In connection
with the Revolving Loan, we issued the lender a five-year warrant to purchase up to 143,791 shares of Creative Realities’
common stock at a per share price of $7.65 (subject to adjustment). The fair value of the warrants was $543, which was accounted
for as an additional debt discount and is being amortized over the remaining life of the Revolving Loan.
The Fourth Amendment also included our issuance to Slipstream a Secured Disbursed Escrow Promissory Note
(the “Disbursed Escrow Note”), and, effective June 30, 2018 we drew $264 thereon in conjunction with our exit from
a previously leased operating facility. The principal amount of the Disbursed Escrow Note bears simple interest at the 8%; provided,
that the Disbursed Escrow Note accrues no interest when the aggregate outstanding principal amount of the Term Loan and the
Revolving Loan (excluding the additional principal added pursuant to this proviso) is at or below $4,000.
On November 19, 2018, we used proceeds from our public offering to repay Slipstream $1,283, inclusive
of $125 of accrued interest, to reduce borrowings under the Loan Agreement to an aggregate of $4,264, comprised of $3,000 Term
Loan, $1,000 Revolving Loan and $264 Disbursed Escrow Note. The condensed consolidated balance sheet includes $33 of accrued interest
as of September 30, 2019 representing one month’s interest at 8.0% on the $4,000 outstanding balance.
On November 9, 2018, Slipstream extended the maturity date of the Term Loan and Revolver Loan to August
16, 2020 through the Fifth Amendment to the Loan and Security Agreement. Our current intent is to refinance our Term Loan with
an unrelated third party during 2019. In conjunction with the extension of the maturity date of our Term Loan, the cash portion
of the interest rate increased from 8.0% per annum to 10.0% per annum effective July 1, 2019.
On November 6, 2019, Slipstream extended the maturity date of the Term Loan and Revolver Loan to June
30, 2021 through the Sixth Amendment to the Loan and Security Agreement, aligning their maturity date with that of the Disbursed
Escrow Note.
See Note 14 for the Black Scholes inputs
used to calculate the fair value of the warrants.
Convertible Promissory Notes
On October 29, 2018, Slipstream, the holder of convertible promissory notes, agreed to convert $4,955
of outstanding principal, including paid-in-kind interest and all accrued interest thereon into shares of our common stock and
warrants at a conversion price equal to the lower of $7.65, or 80% of the price at which shares of common stock were sold in the
Public Offering. The conversion was contingent upon (i) the conversion of the Company’s Series A Preferred Stock, and (ii)
the successful completion of a Public Offering of at least $10 million, each of which were successfully completed on November 19,
2018. In exchange for participation in the Public Offering, subject to a minimum participation requirement as agreed between the
underwriters and the Company, and Slipstream’s execution of a lock-up agreement, Slipstream received, as a one-time incentive,
additional common stock and warrants in such number that decreased the effective conversion price of the convertible notes to 70%
of the lowest of those scenarios outlined above. Upon completion of the Company’s Public Offering on November 19, 2018, the
convertible promissory notes were converted into shares of the Company’s common stock. The Company issued 653,062 shares
of common stock at the stated conversion rate and an additional 1,386,090 shares of common stock in exchange for conversion of
the convertible promissory notes as a result of the one-time incentive. The lock-up agreement applied to all shares of common stock
and warrants issued to Slipstream.
Amended and Restated Seller Note
from the Allure Acquisition
The Amended and Restated
Seller Note represents a note payable due from Allure to Seller, under a pre-existing Seller Note which was amended and restated
through the Purchase Agreement as part of the Allure Acquisition. The Amended and Restated Seller Note accrues interest at 3.5%
per annum and requires us to make quarterly payments of interest only through February 19, 2020, on which date the Amended and
Restated Seller Note will mature and all remaining amounts owing thereunder will be due. The condensed consolidated balance sheet
includes $14 of accrued interest as of September 30, 2019 representing all interest accrued under the Amended and Restated Seller
Note since close of the Allure Acquisition. We are able to prepay in whole or in part amounts owing under the Amended and Restated
Seller Note, without penalty, at our option, at any time and from time to time.
The Amended and Restated Seller Note is convertible into shares of Creative Realities common stock, at
Seller’s option on or after May 19, 2019, at an initial conversion price of $8.40 per share, subject to customary equitable
adjustments. Conversion of all amounts owing under the Amended and Restated Seller Note will be mandatory if the 30-day volume-weighted
average price of our common stock exceeds 200% of the common stock trading price at the closing of the acquisition. We granted
Seller customary registration rights for the shares of our common stock issuable upon conversion of the promissory note.
NOTE 10: COMMITMENTS AND CONTINGENCIES
Lease termination
On August 10, 2017, we announced the planned
closure of our office facilities located at 22 Audrey Place, Fairfield, New Jersey 07004 which housed our previous operations center
and ceased use of the facilities in February 2018. In ceasing use of these facilities, we recorded a one-time non-cash charge of
$474 to accrue for the remaining rent under the lease term, net of anticipated subtenant rental income. Effective June 30, 2018,
we entered into a settlement agreement to exit this lease agreement, resulting in the Company recording a gain on settlement of
$39 in the three months ended June 30, 2018.
Settlement of obligations
During the three and nine months ended September
30, 2019, through settlements of liabilities no longer deemed valid, the Company wrote off obligations and recognized a gain of
$406 and $419, respectively. During the three and nine months ended September 30, 2018, the Company wrote off obligations and recognized
a gain of $169 and $208, respectively.
Litigation
(a) 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 is in the early
stages of litigation 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. As of the date of this filing, no formal legal action had been taken by the customer against the Company and, as a result,
the outcome of this matter is unclear, so the Company is unable to reasonably estimate the possible loss, or range of loss, if
any.
The Company has notified its insurance company and Seller 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.
(b) The Company is involved in various other
legal and administrative proceedings incidental to the operations of its business. The Company believes that the outcome of all
such other pending proceedings in the aggregate will not have a material adverse effect on its business, financial condition, liquidity,
or operating results.
Termination benefits
On December 21, 2018, the Company announced
certain restructuring activities following completion of its acquisition of Allure and accrued one-time termination benefits related
to severance to the affected employees of $386, $31 of which was paid prior to the year-end date. During the three and nine months
ended September 30, 2019, cash payments for termination benefits of $84 and $295 were paid and a liability of $60 remains included
in accrued expenses on the condensed consolidated balance sheet.
NOTE 11: RELATED PARTY TRANSACTIONS
In addition to the financing transactions
with Slipstream, a related party, discussed in Note 9, we have the following related party transactions.
On August 14, 2018, we entered into a payment
agreement with 33 Degrees Convenience Connect, Inc., a related party that is approximately 17.5% owned by a member of our senior
management (“33 Degrees”), outlining terms for repayment of $2,567 of aged accounts receivable as of that date. The
payment agreement stipulates a simple interest rate of 12% on aged accounts receivable to be paid on the tenth day of each month
through the maturity date of December 31, 2019. Remaining payments due under the agreement as of September 30, 2019 were $417,
$300 of which has been paid subsequent to the reporting date as of the date of this filing. Remaining payments of $117 are to be
paid on December 1, 2019. All amounts under this note are included in accounts receivable in current assets, as all amounts are
expected to be collected within one year of the balance sheet date. Since inception of this agreement up to and through the filing
date, all payments due under this agreement have been received from 33 Degrees timely, including monthly interest payments and
payments for ongoing services.
Since the Company entered into the payment
agreement with 33 Degrees, 33 Degrees has continued to purchase additional hardware and services from the Company, on a prepaid
basis, in addition to making payments under the payment agreement. On March 12, 2019, the Company entered into a security agreement
and promissory note with 33 Degrees Menu Services, LLC, a subsidiary of 33 Degrees, providing a line of credit of $300 for hardware,
installation and SaaS services. Under the agreement, product will be shipped and installed by the Company upon evidence of a valid
purchase order from the ultimate payer being provided as collateral.
For the three and nine months ended September
30, 2019, the Company had sales to 33 Degrees of $279, or 4.2%, and $750, or 2.9%, respectively, of consolidated revenue. For the
three and nine months ended September 30, 2018, the Company had sales to 33 Degrees of $235, or 3.9%, and $1,265, or 7.3%, respectively,
of consolidated revenue.
Accounts receivable due from 33 Degrees
was $517, or 9.1%, and $1,933, or 30.0% of consolidated accounts receivable at September 30, 2019 and December 31, 2018, respectively.
On November 6, 2019, Slipstream extended the maturity date of the Term Loan and Revolving Loan to June
30, 2021 through the Sixth Amendment to the Loan and Security Agreement, aligning the maturity date of such loans with the maturity
date of the Disbursed Escrow Note. See Note 9 for additional information regarding the loans.
NOTE
12: 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.
For the three and nine months ended September
30, 2019, we reported a tax expense/(benefit) of $51 and ($35), respectively. The net deferred tax liability at September 30,
2019 of $99 represents the liability relating to indefinite lived assets. This indefinite lived deferred tax liability may be
considered a source of taxable income and reduced by certain indefinite lived deferred tax assets that will never expire, subject
to statutory limitations.
NOTE
13: CONVERTIBLE PREFERRED STOCK
Our Series A Convertible Preferred Stock (the “preferred stock”) entitled its holders to a
6% dividend, payable semi-annually in cash or in kind through the three-year anniversary of the original issue date, and from and
after such three-year anniversary, payable in shares of common stock. The three-year anniversary of the initial investment date
occurred during the second half of 2017 for $5,200 and the first quarter of 2018 for the remaining $300 originally issued preferred
stock and therefore dividends on those investments will be paid via issuance of common shares at all future dividend dates.
On
November 5, 2018, the shareholders of preferred stock agreed to convert the entire class of preferred stock into common stock
at an exchange ratio of $7.65 per share. The conversion was contingent upon a successful Public Offering of at least $10 million,
which the Company completed on November 19, 2018.
Holders
of preferred stock received common stock at the stated conversion rate of $7.65 per share, or 723,561 shares of common stock.
Those holders of preferred stock who executed a customary lock-up agreement for a period continuing for 90 days after the consummation
of the public offering were issued, as a one-time incentive, additional common stock and warrants, in such number as defined in
underlying agreements. The Company issued an additional 1,123,367 shares of common stock in exchange for execution of such lock-up
agreements. The lock-up agreements applied to all shares of common stock issued to convert the holder’s preferred stock,
and the additional shares of common stock and warrants, and underlying warrant shares, issued by the Company in exchange for the
holder’s execution of the lock-up agreement and participation in the public offering. As a result of this conversion, there
remained no Series A Preferred Stock outstanding as of December 31, 2018.
During
the three and nine months ended September 30, 2018, accredited investors converted 124,985 shares of preferred stock for 16,339
shares of common stock.
NOTE
14: WARRANTS
On
April 27, 2018, we entered into the Fourth Amendment to the Loan and Security Agreement with Slipstream, under which we issued
the lender a five-year warrant to purchase up to 143,791 shares of Creative Realities’ common stock at a per share price
of $7.65 (subject to adjustment and subsequently adjusted to $6.25 in November 2018). The fair value of the warrants was $543,
which is accounted for as an additional debt discount and amortized over the remaining life of the loan.
On
January 16, 2018, we entered into the Third Amendment to the Loan and Security Agreement with Slipstream, under which we issued
the lender a five-year warrant to purchase up to 61,729 shares of Creative Realities’ common stock at a per share price
of $8.10 (subject to adjustment and subsequently adjusted to $6.09 in November 2018). The fair value of the warrants on the issuance
date was $266, which is accounted for as an additional debt discount and amortized over the remaining life of the loan.
Listed
below are the inputs used for the probability weighted Black Scholes option pricing model valuation for warrants issued during
the nine months ended September 30, 2019 and 2018.
Issuance
Date
|
|
Expected
Term at
Issuance
Date
|
|
|
Risk
Free Interest Rate at Date of Issuance
|
|
|
Volatility
at
Date of Issuance
|
|
|
Stock
Price at Date
of Issuance
|
|
1/16/2018
|
|
|
5.00
|
|
|
|
2.36
|
%
|
|
|
65.07
|
%
|
|
$
|
7.80
|
|
4/27/2018
|
|
|
5.00
|
|
|
|
2.80
|
%
|
|
|
65.95
|
%
|
|
$
|
6.90
|
|
A
summary of outstanding liability and equity warrants is included below:
|
|
Warrants
(Equity)
|
|
|
|
|
|
Warrants
(Liability)
|
|
|
|
|
|
|
Amount
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life
|
|
|
Amount
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life
|
|
Balance January 1, 2019
|
|
|
4,815,047
|
|
|
$
|
4.90
|
|
|
|
4.34
|
|
|
|
216,255
|
|
|
$
|
7.34
|
|
|
|
0.64
|
|
Warrants
issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants expired
|
|
|
(82,019
|
)
|
|
|
8.25
|
|
|
|
-
|
|
|
|
(216,255
|
)
|
|
|
7.34
|
|
|
|
-
|
|
Balance September 30, 2019
|
|
|
4,733,028
|
|
|
$
|
4.84
|
|
|
|
3.66
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
NOTE
15: STOCK-BASED COMPENSATION
A
summary of outstanding options is included below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of Exercise
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
Prices
between
|
|
Outstanding
|
|
|
Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
$5.40
- $19.50
|
|
|
287,341
|
|
|
|
6.29
|
|
|
$
|
8.35
|
|
|
|
238,381
|
|
|
$
|
8.53
|
|
$19.51 - $23.70
|
|
|
1,000
|
|
|
|
4.29
|
|
|
|
23.70
|
|
|
|
1,000
|
|
|
$
|
23.70
|
|
$23.71 - $367.50
|
|
|
519
|
|
|
|
2.83
|
|
|
|
112.30
|
|
|
|
519
|
|
|
$
|
112.30
|
|
|
|
|
288,860
|
|
|
|
6.27
|
|
|
$
|
8.59
|
|
|
|
239,900
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted Average Exercise
|
|
|
|
Outstanding
|
|
|
Price
|
|
Balance, December 31, 2018
|
|
|
288,860
|
|
|
$
|
8.59
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
Balance, September 30, 2019
|
|
|
288,860
|
|
|
$
|
8.59
|
|
The
weighted average remaining contractual life for options exercisable is 5.88 years as of September 30, 2019.
Stock
Compensation Expense Information
ASC
718-10, Stock Compensation, requires measurement and recognition of compensation expense for all stock-based payments including
warrants, stock options, restricted stock grants and stock bonuses based on estimated fair values. Under the Amended and Restated
2006 Equity Incentive Plan, the Company reserved 1,720,000 shares for purchase by the Company’s employees and under the
Amended and Restated 2006 Non-Employee Director Stock Option Plan the Company reserved 700,000 shares for purchase by the Company’s
employees. There are 12,186 options outstanding under the 2006 Equity Incentive Plan.
In
October 2014, the Company’s shareholders approved the 2014 Stock Incentive Plan, under which 7,390,355 shares were reserved
for purchase by the Company’s employees. 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. There are 276,674 options outstanding under the 2014 Stock Incentive Plan.
Compensation
expense recognized for the issuance of both stock options to employees and common stock to directors for the three and nine months
ended September 30, 2019 and 2018 was as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Stock-based compensation costs included in:
|
|
|
|
|
|
|
Costs of sales
|
|
$
|
-
|
|
|
$
|
6
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Sales and marketing expense
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
-
|
|
|
|
-
|
|
General and administrative expense
|
|
|
62
|
|
|
|
1,109
|
|
|
|
395
|
|
|
|
1,276
|
|
Total stock-based compensation expense
|
|
$
|
62
|
|
|
$
|
1,099
|
|
|
$
|
395
|
|
|
$
|
177
|
|
At
September 30, 2019, there was approximately $166 of total unrecognized compensation expense related to unvested share-based awards.
Generally, this expense will be recognized over the next three years and will be adjusted for any future forfeitures as they occur.
Stock-based
compensation expense is based on awards ultimately expected to vest. ASC 718-10-55 allows companies to either estimate forfeitures
at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates or elect
to account for forfeitures as they occur by reversing compensation cost when the award is forfeited. Our accounting policy is
to account for forfeitures as they occur by reversing compensation cost in the period in which forfeitures occur.
On
September 20, 2018, the Compensation Committee of the Board of Directors proposed, and the Board of Directors approved, an aggregate
award of 166,667 shares of common stock to our current CEO in light of performance and growth of certain key customer relationships.
Of those shares granted, 133,334 were deemed to be awarded and fully vested as of such date, with the remaining 33,333 shares
restricted to vest upon the Company’s recognition in accordance with GAAP of approximately $6,200 of revenue which is was
deferred on the Company’s balance sheet. During the three-months ended September 30, 2018, the Company recorded compensation
expense for those vested awards based on the grant-date close price of the Company’s common stock, or $7.50, resulting in
a non-cash compensation expense in the period of $1,000. During the three months ended June 30, 2019, the conditions were met
for those remaining shares to vest. During the three-months ended June 30, 2019, the Company recorded compensation expense for
those vested awards based on the grant-date close price of the Company’s common stock, or $7.50, resulting in a non-cash
compensation expense in the period of $250.
NOTE
16: SIGNIFICANT CUSTOMERS
Major
Customers
We
had 1 and 3 customers that in the aggregate accounted for 11% and 40% of accounts receivable as of September 30, 2019 and December
31, 2018, respectively, which includes transactions with 33 Degrees for both periods.
We
had 1 and 2 customers that accounted for 13% and 56% of revenue for the three months ended September 30, 2019 and 2018, respectively.
We had 1 and 2 customers that accounted for 23% and 56% of revenue for the nine months ended September 30, 2019 and 2018, respectively.
NOTE
17: LEASES
We
have entered into various non-cancelable operating lease agreements for certain of our offices and office equipment. Our leases
have original lease periods expiring between 2019 and 2023. Many leases include one or more options to renew. We
do not assume renewals in our determination of the lease term unless the renewals are deemed to be reasonably assured at lease
commencement. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The
components of lease costs, lease term and discount rate are as follows:
(in
thousands)
|
|
Three Months
Ended
September 30,
2019
|
|
|
Nine Months
Ended
September 30,
2019
|
|
Finance lease cost
|
|
|
|
|
|
|
Amortization
of right-of-use assets
|
|
$
|
8
|
|
|
$
|
25
|
|
Interest
|
|
|
1
|
|
|
|
4
|
|
Operating lease cost
|
|
|
172
|
|
|
|
565
|
|
Total lease cost
|
|
$
|
181
|
|
|
$
|
594
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
|
|
3.6 years
|
|
Finance leases
|
|
|
|
|
|
|
1.2 years
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
|
|
10.0
|
%
|
Finance leases
|
|
|
|
|
|
|
13.5
|
%
|
The
following is a schedule, by years, of maturities of lease liabilities as of September 30, 2019:
(in
thousands)
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
The remainder of 2019
|
|
$
|
168
|
|
|
$
|
8
|
|
2020
|
|
|
681
|
|
|
|
22
|
|
2021
|
|
|
630
|
|
|
|
3
|
|
2022
|
|
|
377
|
|
|
|
-
|
|
2023
|
|
|
375
|
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
-
|
|
Total undiscounted cash flows
|
|
|
2,231
|
|
|
|
33
|
|
Less imputed interest
|
|
|
(363
|
)
|
|
$
|
(3
|
)
|
Present value of lease liabilities
|
|
$
|
1,868
|
|
|
$
|
30
|
|
Supplemental
cash flow information related to leases are as follows:
|
|
Nine
Months
Ended
September 30,
2019
|
|
Cash paid for amounts included in the measurement
of lease liabilities:
|
|
|
|
|
Operating
cash flows from operating leases
|
|
$
|
551
|
|
Operating cash flows
from finance leases
|
|
$
|
1
|
|
Financing cash flows
from finance leases
|
|
$
|
23
|
|
NOTE
18: SUBSEQUENT EVENTS
Extension of Maturity Date of Debt
On November 6, 2019, Slipstream extended the maturity date of our Term Loan and Second Revolver Loan to
June 30, 2021 through the Sixth Amendment to the Loan and Security Agreement, aligning the maturity date of those loans with that
of the Disbursed Escrow Note.
Director
Resignation; Election of Successor
Effective November 8, 2019, Alec Machiels is resigning as a member of the Company’s Board of Directors
(the “Board”) and Chairman of the Board. The Board elected Dennis McGill as Mr. Machiels’ successor, effective
November 8, 2019. The Board elected Mr. McGill to serve as the Company’s Chairman of the Board.
Consulting
Agreement
On November 7, 2019, the Company and Dennis McGill executed a Consulting Agreement (the “Consulting
Agreement”). The term of the Consulting Agreement is one year, and it automatically renews for successive one-year periods.
Either party may terminate the Consulting Agreement at any time upon 30 days’ written notice. Under the Consulting Agreement,
Mr. McGill will receive compensation of $5,000 per month in cash in exchange for general business and strategy consulting services
to the Company.
Option
Agreement
On November 7, 2019, the Company and Mr. McGill
also executed an Option Agreement (the “Option Agreement”). Under the Option Agreement, Mr. McGill has the option to
purchase 25,000 shares of the Company’s common stock under the Company’s 2014 Stock Incentive Plan. The options have
an exercise price of $1.88 per share, which was the closing price of the Company’s common stock as reported on Nasdaq on
the date prior to the date of the Option Agreement. The options vest in three equal annual installments beginning on the one-year
anniversary of the date of the Option Agreement, provided that Mr. McGill must continue to serve as a director of the Company.
Executive Bonus
On November 6, 2019, the Board approved payment
of a $150 cash bonus to Richard Mills, the Company’s Chief Executive Officer, for his significant contributions to the Company’s
performance in 2018.