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., Creative Realities Canada,
Inc., 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 have incurred net losses for the years
ended December 31, 2018 and 2017 and have negative cash flows from operating activities as of December 31, 2018. For the three
months ended June 30, 2019 and 2018 we have recognized/(incurred) net income/(losses) of $417 and ($612), respectively. For the
six months ended June 30, 2019 and 2018, we recognized/(incurred) net income/(losses) of $233 and ($2,850), respectively. As of
June 30, 2019, we had cash and cash equivalents of $1,824 and working capital deficit of $3,930, 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, (“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.
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 August 15, 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 August 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, a wholly owned subsidiary of the 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 due from Allure to the
Seller, under an existing Seller Note which was amended and restated for this reduced amount. That debt is represented by our
issuance to the Seller of a promissory note accruing interest at 3.5% per annum. The promissory note will require us to make quarterly
payments of interest only through February 19, 2020, on which date the promissory 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 promissory note, without penalty, at
our option, at any time and from time to time.
On May 10, 2019, we reached agreement with
Seller on the final net working capital as of the acquisition date resulting in a net cash settlement including a payment to us
from Seller in the amount of $210 and a reduction 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 $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 June 30, 2019 is $1,637.
The promissory note is convertible into
shares of Creative Realities common stock, at the 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 promissory 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 the Seller customary registration rights for the shares of our common stock
issuable upon conversion of the promissory 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 instructions to Form 10-Q and Article 10 of Regulation S-X and
include all of the information and disclosures required by generally accepted accounting principles in the United States of America
(“GAAP”) for 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:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials, net of reserve of $185 and $207, respectively
|
|
$
|
128
|
|
|
$
|
220
|
|
Work-in-process
|
|
|
640
|
|
|
|
159
|
|
Total inventories
|
|
$
|
768
|
|
|
$
|
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
5,320,162 and 1,759,664 at June 30, 2019 and 2018, respectively, were excluded from the computation of loss per share as they are
anti-dilutive. Net income/(loss) attributable to common shareholders for the three months ended June 30, 2019 and 2018 is after
dividends on convertible preferred stock of $0 and $129, respectively. Net income/(loss) attributable to common shareholders for
the six months ended June 30, 2019 and 2018 is after dividends on convertible preferred stock of $0 and $240, 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 June 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 six months ended June 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. Reverse Stock Split
On October 17, 2018, the Company effectuated
a l-for-30 reverse stock split of its outstanding common stock. The accompanying financial statements and notes to the financial
statements give effect to the reverse stock split for all periods presented. The shares of common stock retained a par value of
$0.01 per share. Accordingly, the stockholders’ equity for the three- and six-months ended June 30, 2018 reflects the reverse
stock split by reclassifying from “common stock” to “additional paid-in capital” an amount equal to the
par value of the decreased shares resulting from the reverse stock split.
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 Allure Acquisition.
11. 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.
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 will apply a one-step quantitative test and record 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 for fiscal years and interim periods beginning after December 15, 2019. The Company
is evaluating the impact that adoption will have on its consolidated financial statements.
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 six-months ended June 30, 2019:
(in thousands)
|
|
Three
Months
Ended June 30,
2019
|
|
|
Six Months
Ended June 30,
2019
|
|
Hardware
|
|
$
|
1,654
|
|
|
$
|
3,295
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
Installation Services
|
|
|
1,791
|
|
|
|
4,163
|
|
Software Development Services
|
|
|
4,259
|
|
|
|
8,235
|
|
Managed Services
|
|
|
1,610
|
|
|
|
3,105
|
|
Total Services
|
|
|
7,660
|
|
|
|
15,503
|
|
|
|
|
|
|
|
|
|
|
Total Hardware and Services
|
|
$
|
9,314
|
|
|
$
|
18,798
|
|
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 June 30, 2019 were $0.
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 the 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 June 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 Stock 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 Stock 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 the 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 thereby increased from $900 per the Stock Purchase Agreement to $2,303 at the opening balance sheet. That debt is represented by our issuance to the Seller of a promissory note accruing interest at 3.5% per annum. The promissory note will require us to make quarterly payments of interest through February 19, 2020, on which date the promissory 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 promissory note, without penalty, at our option, at any time and from time to time.
|
|
|
|
On May 10, 2019, we reached agreement with Seller on the final
net working capital as of the acquisition date resulting in a net cash settlement including a payment to us from Seller in the
amount of $210 and a reduction 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 $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 June 30, 2019 is $1,637.
|
(4)
|
The Stock Purchase Agreement contemplates additional
consideration or $2,000 to be paid by us to Seller in the event that acquiree revenue exceeds $13,000, as further described in the underlying
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
|
|
$
|
1,543
|
|
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
|
|
|
3,253
|
|
Accounts payable
|
|
|
(331
|
)
|
Accrued expenses
|
|
|
(447
|
)
|
Customer deposits
|
|
|
(503
|
)
|
Deferred revenues
|
|
|
(276
|
)
|
Accounts payable converted into Seller Note
|
|
|
(737
|
)
|
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 six months ended June 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 six
months ended June 30, 2018 includes Allure’s pro forma information for the six month period January 1, 2018 through June 30,
2018. The unaudited information set forth below for the six months ended June 30, 2019 represents the Company’s consolidated
results for that period.
|
|
Six Months Ended
June 30,
|
|
(in thousands, except earnings per common share)
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
Net sales
|
|
$
|
18,798
|
|
|
$
|
15,985
|
|
Net income/(loss)
|
|
$
|
233
|
|
|
$
|
(2,789
|
)
|
Earnings/(loss) per common share
|
|
$
|
0.02
|
|
|
$
|
(0.66
|
)
|
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 following table presents information
about the Company’s warrant liabilities that are measured at fair value on a recurring basis, and indicates the fair value
hierarchy of the valuation techniques the Company used to determine such fair value. See Note 14 for the inputs used for the probability
weighted Black Scholes valuations at June 30, 2019.
|
|
|
|
|
Quote Prices In Active Markets
|
|
|
Significant Other Observable Inputs
|
|
|
Significant Other Unobservable Inputs
|
|
Description
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Warrant liabilities at December 31, 2018
|
|
$
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
21
|
|
Warrant liabilities at June 30, 2019
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in level 3 fair value is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability as of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21
|
|
Decrease in fair value of warrant liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
Ending warrant liability as of June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
As part of the Allure Acquisition, the Stock 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 June 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 an revenue projections and estimates developed by management
as informed by historical results.
NOTE 7: SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
|
|
Six Months Ended
|
|
|
|
June 31,
|
|
|
|
2019
|
|
|
2018
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
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
|
|
Right of offset settlement of Amended and Restated Seller Note
|
|
$
|
498
|
|
|
$
|
-
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
181
|
|
|
$
|
359
|
|
Income taxes, net
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE 8: INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
Intangible assets
consisted of the following at June 30, 2019 and December 31, 2018:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Technology platform
|
|
$
|
4,635
|
|
|
|
3,021
|
|
|
$
|
4,635
|
|
|
|
2,895
|
|
Customer relationships
|
|
|
5,330
|
|
|
|
2,583
|
|
|
|
5,330
|
|
|
|
2,477
|
|
Trademarks and trade names
|
|
|
1,020
|
|
|
|
624
|
|
|
|
1,020
|
|
|
|
553
|
|
|
|
|
10,985
|
|
|
|
6,228
|
|
|
|
10,985
|
|
|
|
5,925
|
|
Accumulated amortization
|
|
|
6,228
|
|
|
|
|
|
|
|
5,925
|
|
|
|
|
|
Net book value of amortizable intangible assets
|
|
$
|
4,757
|
|
|
|
|
|
|
$
|
5,060
|
|
|
|
|
|
For the three months ended June 30, 2019
and 2018, amortization of intangible assets charged to operations was $147 and $232, respectively. For the six months ended June
30, 2019 and 2018 amortization of intangible assets charged to operations was $303 and $464, 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)
|
|
|
(658
|
)
|
Balance as of June 30, 2019
|
|
$
|
18,242
|
|
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
|
|
|
8/16/2020
|
|
|
61,729
|
|
|
8.0% interest
(2)
|
C
|
|
8/17/2016
|
|
|
3,000
|
|
|
8/16/2020
|
|
|
588,236
|
|
|
8.0% interest
(2)
|
D
|
|
11/19/2018
|
|
|
1,637
|
|
|
2/15/2020
|
|
|
-
|
|
|
3.5% interest
(3)
|
|
|
|
|
$
|
5,901
|
|
|
|
|
|
649,965
|
|
|
|
|
|
Debt discount
|
|
|
(717
|
)
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
5,184
|
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(1,637
|
)
|
|
|
|
|
|
|
|
|
|
|
Long term debt
|
|
$
|
3,547
|
|
|
|
|
|
|
|
|
|
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); 8.0% cash, when total borrowing under the term and revolver loans, in aggregate, exceed $4,000 in principal (disregarding
PIK interest)
(2) 8.0% cash interest per annum when total borrowings under the term and revolver loans, in aggregate,
are below $4,000 in principal (disregarding PIK interest); 8.0% cash, 2.0% PIK when total borrowing under the term and revolver
loans, in aggregate, exceed $4,000 in principal (disregarding PIK interest). The cash portion of the interest rate would increase
prospectively from 8.0% to 10.0% per annum effective July 1, 2019.
(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.
Obligations under the secured convertible
promissory notes are secured by a grant of collateral security in 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 with Slipstream, and obtained a $3.0 million 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), and other customary restrictions.
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, with interest thereon
at 8% per annum, maturing 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 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 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 the Loan 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, however, that the Loan Rate with respect to the Disbursed Escrow
Loan shall be 0%. 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 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 loan.
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 will bear simple interest at the 8%; provided, further, however, that the Loan Rate with respect
to the Secured Disbursed Escrow Promissory Note shall be 0% 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) 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
and Security Agreement to an aggregate of $4,264, comprised of $3,000 term loan, $1,000 revolving loan and $264 secured disbursed
escrow promissory note. The condensed consolidated balance sheet includes $27 of accrued interest as of June 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 our term loan and revolver loan to August 16, 2020 through the Fifth Amendment to the Loan and
Security Agreement. Our 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, 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.
See Note 14 for the Black Scholes inputs
used to calculate the fair value of the warrants.
Convertible Promissory Notes
On October 29, 2018, the holder of convertible
promissory notes, Slipstream, 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 to a reduced amount
of $900 through the Stock 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 balance sheet date, Allure also
had accounts payable to Seller for outsourced services of $2,204. We agreed with the Seller to 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, resulting in a Seller Note of $2,303. That debt
is represented by our issuance to the Seller of a promissory note accruing interest at 3.5% per annum.
On May 10, 2019, we reached agreement with
Seller on the final net working capital as of the acquisition date resulting in a net cash settlement including a payment to us
from Seller in the amount of $210 and a reduction 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 $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 June 30, 2019 is $1,637.
The promissory note will require us to
make quarterly payments of interest only through February 19, 2020, on which date the promissory note will mature and all remaining
amounts owing thereunder will be due. The condensed consolidated balance sheet includes $14 of accrued interest as of June 30,
2019 representing all interest accrued under the note since close of the Allure Acquisition. We are able to prepay in whole or
in part amounts owing under the promissory note, without penalty, at our option, at any time and from time to time.
The promissory note is convertible into
shares of Creative Realities common stock, at the 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 promissory 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 the 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 six months ended June
30, 2019, the Company wrote off obligations and recognized a gain of $6 and $13, respectively. There were no such settlements in
the three and six months ended June 30, 2018.
Litigation
The Company is involved in various legal
proceedings incidental to the operations of its business. The Company believes that the outcome of all such other pending legal
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 six months
ended June 30, 2019, cash payments for termination benefits of $119 and $211 were paid and a liability of $144 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 June 30, 2019 were $867, $300
of which has been paid subsequent to the reporting date as of the date of this filing. Remaining payments of $150 are to be paid
on the first day of each month beginning September 1, 2019 through the maturity date, or December 31, 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 six months ended June
30, 2019, the Company had sales to 33 Degrees of $275, or 3.0%, and $470, or 2.5%, respectively, of consolidated revenue. For the
three and six months ended June 30, 2018, the Company had sales to 33 Degrees of $618, or 8.6%, and $1,035, or 9.2%, respectively,
of consolidated revenue.
Accounts receivable due from 33 Degrees
was $872, or 13.0%, and $1,933, or 30.0% of consolidated accounts receivable at June 30, 2019 and December 31, 2018, respectively.
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 the Loan 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, however, that the Loan Rate with respect to the Disbursed Escrow
Loan shall be 0%. 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 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 loan.
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 will bear simple interest at the 8%; provided, further, however, that the Loan Rate with respect
to the Secured Disbursed Escrow Promissory Note shall be 0% 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) is at or below $4,000.
On January 16, 2018, we entered into the
Third Amendment to the Loan and Security Agreement with Slipstream Communications, LLC, a related party investor, under which
we obtained a $1.0 million revolving loan, with interest thereon at 8% per annum, maturing on January 16, 2019 (subsequently extended
to August 2020). In connection with the loan, 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
2019). The fair value of the warrants was $266, which is accounted for as an additional debt discount and amortized over the remaining
life of the loan.
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 six-months ended June 30, 2019, we reported a tax benefit of $107 and $86, respectively.
The tax benefit for the three months ended June 30, 2019 excluded the net unfavorable impact of a discrete item for vesting of
restricted stock units in the period. The net deferred tax liability at June 30, 2019 of $45 represents the liability relating
to indefinite lived assets. This indefinite lived deferred tax liability is used as a source of taxable income to more likely than
not realize some of the Company’s indefinite lived deferred tax assets.
NOTE 13: CONVERTIBLE PREFERRED STOCK
The 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 in duly authorized, validly
issued, fully paid and non-assessable shares of common stock. The three-year anniversary of the initial investment date occurred
during the second half of 2017 for $5.2 million and the first quarter of 2018 for the remaining $0.3 million 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.
On March 18, 2019, we filed Statements
of Cancellation with the Secretary of State of the State of Minnesota that, effective upon filing, eliminated from the Company’s
Articles of Incorporation all matters set forth in the Certificates of Designation of Preferences, Rights and Limitations with
respect to the Series A Convertible Preferred Stock and Series A-1 Convertible Preferred Stock of the Company. No shares of Series
A Convertible Preferred Stock or Series A-1 Convertible Preferred Stock were issued or outstanding at the time of the filing of
the Statements of Cancellation. A copy of the Statements of Cancellation were attached as Exhibit 3.1 and 3.2 to Form 8-K filed
the same date.
As of June 30, 2018, the pro rata portion
of earned dividends to be distributed as of June 30, 2018 were the equivalent of 5,536 shares of Series A Convertible Preferred
Stock, which represents 26,391 equivalent common shares based on the volume-weighted adjusted price utilized for conversion. The
common share dividend was distributed by the Company on June 30, 2018 and is reflected in the issued and outstanding shares on
the balance sheet as of that date. The fair value of those common shares issued are reflected at fair value as a dividend on preferred
stock in the condensed consolidated statement of operations and do not impact net loss for the period. During the three and
six months ended June 30, 2018, accredited investors converted 4,167 shares of Series A Convertible 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 obtained a $1.1 million revolving loan, with
interest thereon at 8% per annum, maturing on January 16, 2019. In connection with the 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
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 obtained a $1.0 million revolving loan, with
interest thereon at 8% per annum, maturing on January 16, 2019 (subsequently extended to August 2020). In connection with the
loan, 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 six months ended June 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
|
|
Listed below are the inputs used for the
probability weighted Black Scholes option pricing model valuation for those warrants classified in the condensed consolidated
balance sheet as liabilities as of June 30, 2019.
Remaining Expected
Term
at
June 30, 2019 (Years)
|
|
|
Risk
Free Interest
Rate
at June 30,
2019
|
|
|
Volatility at
June 30,
2019
|
|
|
Stock Price at
June 30,
2019
|
|
|
0.14
|
|
|
|
2.14
|
%
|
|
|
34.79
|
%
|
|
$
|
2.30
|
|
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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance June 30, 2019
|
|
|
4,815,047
|
|
|
$
|
4.90
|
|
|
|
3.84
|
|
|
|
216,255
|
|
|
$
|
7.34
|
|
|
|
0.14
|
|
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
|
|
|
|
6.54
|
|
|
$
|
8.35
|
|
|
|
217,548
|
|
|
$
|
8.63
|
|
$19.51 - $23.70
|
|
|
1,000
|
|
|
|
4.55
|
|
|
|
23.70
|
|
|
|
1,000
|
|
|
$
|
23.70
|
|
$23.71 - $367.50
|
|
|
519
|
|
|
|
3.09
|
|
|
|
112.30
|
|
|
|
519
|
|
|
$
|
112.30
|
|
|
|
|
288,860
|
|
|
|
6.53
|
|
|
$
|
8.59
|
|
|
|
219,067
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted
Average Exercise
|
|
|
|
Outstanding
|
|
|
Price
|
|
Balance, December 31, 2018
|
|
|
288,860
|
|
|
$
|
8.59
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
Balance, June 30, 2019
|
|
|
288,860
|
|
|
$
|
8.59
|
|
The weighted average remaining contractual
life for options exercisable is 6.02 years as of June 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 stock options for the three and six months ended June 30, 2019 and 2018 was as follows:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Stock-based compensation costs included in:
|
|
|
|
|
|
|
Costs of sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(6
|
)
|
Sales and marketing expense
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
16
|
|
General and administrative expense
|
|
|
291
|
|
|
|
103
|
|
|
|
333
|
|
|
|
167
|
|
Total stock-based compensation expense
|
|
$
|
291
|
|
|
$
|
113
|
|
|
$
|
333
|
|
|
$
|
177
|
|
At June 30, 2019, there was approximately
$196 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, non-recurring 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, non-recurring compensation expense in the period
of $250.
NOTE 16: SIGNIFICANT CUSTOMERS
Major Customers
We had 4 and 3 customers that in the aggregate
accounted for 51% and 40% of accounts receivable as of June 30, 2019 and December 31, 2018, respectively, which includes transactions
with 33 Degrees for both periods.
We had 2 customers that accounted for 51%
and 67% of revenue for the three months ended June 30, 2019 and 2018, respectively, which includes transactions with related parties.
We had 2 customers that accounted for 41% and 59% of revenue for the six months ended June 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
June 30,
2019
|
|
|
Six Months Ended
June 30,
2019
|
|
Finance lease cost
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
8
|
|
|
$
|
16
|
|
Interest
|
|
|
1
|
|
|
|
3
|
|
Operating lease cost
|
|
|
197
|
|
|
|
393
|
|
Total lease cost
|
|
$
|
206
|
|
|
$
|
412
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
|
|
3.83 years
|
|
Finance leases
|
|
|
|
|
|
|
1.4 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 June 30, 2019:
(in
thousands)
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
The remainder of 2019
|
|
$
|
335
|
|
|
$
|
17
|
|
2020
|
|
|
681
|
|
|
|
22
|
|
2021
|
|
|
630
|
|
|
|
3
|
|
2022
|
|
|
377
|
|
|
|
-
|
|
2023
|
|
|
375
|
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
-
|
|
Total undiscounted cash flows
|
|
|
2,398
|
|
|
|
42
|
|
Less imputed interest
|
|
|
(271
|
)
|
|
$
|
(4
|
)
|
Present value of lease liabilities
|
|
$
|
2,127
|
|
|
$
|
38
|
|
Supplemental cash flow information related
to leases are as follows:
|
|
Six Months
Ended
June
30,
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
383
|
|
Operating cash flows from finance leases
|
|
$
|
1
|
|
Financing cash flows from finance leases
|
|
$
|
15
|
|
|
|
|
|
|
Lease liabilities arising from obtaining right-of-use assets:
|
|
|
|
|
Operating leases
|
|
$
|
-
|
|
Finance leases
|
|
$
|
-
|
|