NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
amounts)
All currency is rounded to the nearest thousands except share
and per share amounts
NOTE 1: NATURE OF ORGANIZATION AND OPERATIONS
Unless the context otherwise indicates,
references in these Notes to the accompanying Consolidated Financial Statements to “we,” “us,” “our”
and “the Company” refer to Creative Realities, Inc. and its subsidiaries.
Nature of the Company’s Business
Creative Realities, Inc. is a Minnesota
corporation that provides innovative digital marketing technology and solutions to retail companies, individual retail brands,
enterprises and organizations throughout the United States and in certain international markets. The Company has expertise in a
broad range of existing and emerging digital marketing technologies, as well as the related media management and distribution software
platforms and networks, device management, product management, customized software service layers, systems, experiences, workflows,
and integrated solutions. Our technology and solutions include: digital merchandising systems and omni-channel customer engagement
systems, interactive digital shopping assistants, advisors and kiosks, and other interactive marketing technologies such as mobile,
social media, point-of-sale transactions, beaconing and web-based media that enable our customers to transform how they engage
with consumers. We have expertise in a broad range of existing and emerging digital marketing technologies, as well as the following
related aspects of our business: content, network management, and connected device software and firmware platforms; customized
software service layers; hardware platforms; digital media workflows; and proprietary processes and automation tools. 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 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 produced net income for the year ended
December 31, 2019 but incurred a net loss for the year ended December 31, 2018 and have negative cash flows from operating activities
as of December 31, 2019. As of December 31, 2019, we had cash and cash equivalents of $2,534 and a working capital deficit of
$2,449.
On November 6, 2019, Slipstream Communications,
LLC (“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.
On December 30, 2019, Slipstream into the
Secured Convertible Special Loan Promissory Note (“Special Loan”) as part of the Seventh Amendment of the Loan and
Security Agreement with Slipstream, under which we obtained $2,000, with interest thereon at 8% per annum payable 6% in cash and
2% via the issuance of paid-in-kind (“SLPIK”) interest, provided however that upon occurrence of an event of default
the interest rate shall automatically be increased by 6% per annum payable in cash. The entry into the Seventh Amendment adjusted
the interest rate on the Company’s Term Loan and Revolving Loan to 8% per annum, provided, however, at all times when the
aggregate outstanding principal amount of the Term Loan and the Revolving Loan exceeds $4,100 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 PIK.
Upon the earlier to occur of an Event of
Default or October 1, 2020, if any of the principal amount of the Special Loan is then outstanding, the principal and accrued but
unpaid interest of the Special Loan and the outstanding SLPIK shall be automatically converted into shares of a new series of Senior
Convertible Preferred Stock of CRI (“New Preferred”) having an Appraised Value equal to three times the then outstanding
principal amount and accrued but unpaid interest of the Special Loan and the outstanding SLPIK and having the following terms and
conditions, as reasonably determined by CRI and the Lender, the New Preferred shall:
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be the most senior equity security of CRI, including with respect
to the payment of dividends and other distributions;
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be on substantially the same terms and conditions as CRI’s Series
A-1 6% Convertible Preferred Stock as set forth in its Certificate of Designation immediately before the same was cancelled pursuant
to a Certificate of Cancellation dated as of March 13, 2019;
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not be subject to a right of redemption upon the part of a holder
thereof;
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accrue and pay quarterly dividends at the rate of twelve percent (12%)
per annum which shall be payable in cash;
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have a Stated Value that is an amount mutually agreed by CRI and the
Lender at the time of issuance;
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Conversion Price shall be an amount equal to 80% of the average for
the 30-day period ending two days prior to the required conversion date of the daily average of the range of CRI’s common stock
(calculated pursuant to information on The Wall Street Journal Online Edition), subject to appropriate adjustments; and
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neither section 6(e) of the Series A-1 Certificate of Designation
nor any similar provision shall apply to the New Preferred.
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See Note 9 Loans Payable to the Consolidated
Financial Statements for discussion of the accounting for the Special Loan.
On November 9, 2018, Slipstream extended
the maturity date of our term loan and revolving loan to August 16, 2020. 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 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 2021, we can continue
as a going concern through at least March 31, 2021. However, given our history of net losses, cash used in operating activities
and working capital deficit, we obtained a continued support letter from Slipstream through March 31, 2021. 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 Loans Payable to the Consolidated
Financial Statements for an additional 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 was 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 accrued interest at 3.5% per annum and required us to make quarterly payments of interest only through
February 19, 2020, on which date the Amended and Restated Seller Note matured and all remaining amounts owing thereunder were due.
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. Our consolidated balance sheet reflects a reduction in both accounts receivable and the Amended and Restated
Seller Note of $666. The outstanding principal balance of the Amended and Restated Seller Note as of December 31, 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. We currently do not expect to owe any amount of additional consideration
to Seller and no liability has been recorded in the Consolidated Financial Statements for this contingent liability as of December
31, 2019.
See Note 5 Business Combinations for
further discussion of the Company’s Allure Acquisition.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting
policies consistently applied in the preparation of the accompanying Consolidated Financial Statements follows:
1. Basis of Presentation
The accompanying Consolidated Financial
Statements have been prepared in accordance with the instructions to Form 10-K and Article 3 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 annual financial reporting.
The Consolidated Financial Statements include
the accounts of Creative Realities, Inc., our wholly owned subsidiaries Allure, ConeXus World Global LLC, Creative Realities (Canada),
Inc., and Creative Realities, LLC. All inter-company balances and transactions have been eliminated in consolidation, as applicable.
2. Revenue Recognition
We recognize revenue in accordance with
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue
from Contracts with Customers (“ASC 606”), which we adopted effective January 1, 2018, using the modified
retrospective method. See Note 4 Revenue Recognition for further discussion of the impact of adoption and our revenue recognition
policy.
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:
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December 31,
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December 31,
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2019
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2018
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Raw materials, net of reserve of $134 and $207, respectively
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$
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200
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$
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220
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Work-in-process
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179
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159
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Total inventories
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$
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379
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$
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379
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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. Shares reserved for
outstanding stock options and warrants totaling approximately 5,046,888 and 5,320,162 at December 31, 2019 and 2018, respectively
were excluded from the computation of income/(loss) per share as no options or warrants were in the money for 2019 and all options
and warrants were anti-dilutive in 2018 due to the net loss. In calculating diluted earnings per share for 2019, in accordance
with ASC 260 Earnings per share, we included the dilutive issuance of the potential issuance of common stock upon an assumed
conversion of the Special Loan. Net loss attributable to common shareholders for the years ended December 31, 2018 is after common
stock dividends on Series A Convertible Preferred Stock (“preferred stock”) of $345 and a preferred stock conversion
expense of $3,932 as discussed further in Note 13 Convertible Preferred Stock.
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 December 31, 2019 and 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 years ended December 31, 2019 and 2018 (see Note 8 Intangible Assets
and Goodwill).
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, valuation allowances related to deferred taxes, deferred revenue, the fair value of acquired assets and liabilities,
valuation of stock-based compensation awards and other assumptions and estimates used to evaluate the recoverability of long-lived
assets, goodwill and other intangible assets and the related amortization methods and periods. Actual results could differ from
those estimates.
9. Stock Split
On October 17, 2018, the Company effectuated
a l-for-30 reverse stock split of its outstanding common stock, which was approved by the Company’s board of directors on
October 17, 2018. The accompanying financial statements and notes to the financial statements give retroactive effect to the reverse
stock split for all periods presented. The shares of common stock retained a par value of $0.01 per share.
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. Property and Equipment
Property and equipment are carried at cost,
less accumulated depreciation and amortization. Depreciation is provided for in amounts sufficient to relate the cost of depreciable
assets to operations over the estimated service lives, principally using straight-line methods. Leasehold improvements are amortized
over the shorter of the life of the improvement or the lease term, using the straight-line method.
Property and equipment consist of the following
at December 31, 2019 and 2018:
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December 31,
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2019
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2018
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Equipment
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$
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83
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$
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159
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Leasehold improvements
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136
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58
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Purchased and developed software
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2,563
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1,758
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Furniture and fixtures
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102
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82
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Other depreciable assets
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65
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57
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Total property and equipment
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2,949
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2,114
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Less: accumulated depreciation and amortization
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(1,396
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)
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(884
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)
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Net property and equipment
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$
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1,553
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$
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1,230
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During 2018, we wrote-off fully depreciated
property and equipment and the related accumulated depreciation of $3,628.
The estimated useful lives used to compute
depreciation and amortization are as follows:
Asset class
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Useful life assigned
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Equipment
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3 – 5 years
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Furniture and fixtures
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5 years
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Purchased and developed software
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3 years
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Leasehold improvements
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Shorter of 5 years or term of lease
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Depreciation expense was $564 and $391 for
the years ended December 31, 2019 and 2018, respectively.
12. Research and Development and Software Development Costs
Research and development expenses consist
primarily of development personnel and non-employee contractor costs related to the development of new products and services, enhancement
of existing products and services, quality assurance and testing. The Company capitalizes its costs incurred for additional functionality
to its internal software. We capitalized approximately $805 and $243 for the years ended December 31, 2019 and 2018, respectively.
These software development costs include both enhancements and upgrades of our client-based systems including functionality of
our internal information systems to aid in our productivity, profitability and customer relationship management. We are amortizing
these costs over 3 years once the new projects are completed and placed in service. These costs are included in property and equipment,
net on the consolidated balance sheets.
13. Leases
On January 1, 2019, we adopted Accounting
Standards Updates (“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 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 effect of the adoption resulted in a $171 cumulative effect adjustment to retained
earnings on January 1, 2019 but did not impact our prior year consolidated statements of income, 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 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 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.
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 Consolidated
Financial Statements as the result of adoption.
Not yet adopted
In December 2019, the FASB issued ASU 2019-12, Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes.
This guidance will be effective for us in the first quarter of 2021 on a prospective basis, and early adoption is permitted. We
are currently evaluating the impact of the new guidance on our Consolidated Financial Statements.
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:
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Identify the contract, or contracts, with a customer
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Identify the performance obligations in the contract
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Determine the transaction price
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Allocate the transaction price to the identified performance obligations
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Recognize revenue when, or as, the Company satisfies the performance obligations
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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 customer 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 customers. 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, including technical help desk operations
|
The following table disaggregates the Company’s
revenue by major source for the year-ended December 31, 2019:
(in thousands)
|
|
Year Ended
December 31,
2019
|
|
Hardware
|
|
$
|
8,229
|
|
|
|
|
|
|
Services:
|
|
|
|
|
Installation Services
|
|
|
7,500
|
|
Software Development Services
|
|
|
9,303
|
|
Managed Services
|
|
|
6,566
|
|
Total Services
|
|
|
23,369
|
|
|
|
|
|
|
Total Hardware and Services
|
|
$
|
31,598
|
|
System hardware sales
Included in “hardware” are system
hardware sales whereby 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.
The company generally provides a warranty
on hardware sales in-line with the warranty provided by the original equipment manufacturer and therefore has not identified hardware
warranties as a significant estimate or additional performance obligation at the date of sale.
Installation services
The Company performs outsourced installation
services for customers and recognizes revenue upon completion of the installations.
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.
The aggregate amount of the transaction
price allocated to installation service performance obligations that are unsatisfied (or partially unsatisfied) as of December
31, 2019 and 2018 were $0 and $52, respectively.
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 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. We account for revenue from these services in accordance with ASC 985
Software and recognize revenue ratably over the performance period. These services are classified as Managed Services.
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 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. These services
are classified as Managed Services.
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. Certain portions of these revenues are classified as Hardware, Installation Services and Managed Services, depending
on the customer and related contractual terms.
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 principle and agent presentation.
NOTE 5: BUSINESS COMBINATION
On November 20, 2018, the Company completed
the Allure Acquisition. Pursuant to the Stock 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. The difference between the total purchase
price and the net consideration transferred is driven by the cash acquired in the acquisition, including cash received by the Company
as a result of a net working capital settlement with Seller. During the fourth quarter of 2019, the Company finalized the purchase
price accounting of Allure. The final purchase price consisted of the following items:
(in thousands)
|
|
Consideration
|
|
Cash consideration for stock
|
|
$
|
6,300
|
(1)
|
Payable to former Allure management
|
|
|
1,021
|
(2)
|
Seller note payable
|
|
|
900
|
(3)
|
Earnout liability
|
|
|
250
|
(4)
|
Total consideration
|
|
|
8,471
|
|
Cash acquired
|
|
|
(424
|
)(5)
|
Net consideration transferred
|
|
$
|
8,047
|
|
(1)
|
Cash consideration for outstanding shares of Allure common stock per Stock Purchase Agreement.
|
|
|
(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. During November 2019, the Company entered a payment plan with each former member of Allure management to spread the remaining payments due from the Company throughout 2020. As of December 31, 2019, the Company’s consolidated balance sheet includes $535 related to this liability within accrued expenses.
|
|
|
(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 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 required us to make quarterly payments of interest through February 19, 2020, on which date the promissory note matured and all remaining amounts owing thereunder were due. See Note 10 Commitments and Contingencies in the consolidated financial statements for further discussion of this note, which is now past due.
|
(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 defined in the underlying agreement. The fair value of the earnout liability was initially determined to be $250 at the time of acquisition but has since been adjusted to $0, resulting in a gain on reversal of earnout liability of $250 in the fourth quarter of 2019. We currently do not expect to owe any amount of additional consideration to Seller and no liability has been recorded in the Consolidated Financial Statements for this contingent liability as of December 31, 2019. We utilized a third-party valuation specialist to assist in evaluating this liability as of the opening balance sheet date. Should revenues from Allure customers exceed $13,000 during 2020, the $2,000 liability generated would be recorded through the Company’s statement of operations.
|
|
|
(5)
|
Represents the Allure cash balance acquired at acquisition ($26)
and the cash received from Seller in settlement of our net working capital claim ($398).
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 consolidated balance sheet reflects a reduction in both accounts receivable and the Amended and Restated
Seller Note of $666. The outstanding principal balance of the Amended and Restated Seller Note as of December 31, 2019 is $1,637.
|
The Company incurred $710 of direct
transaction costs for the year ended December 31, 2018. These costs are included in general, administrative expense in the accompanying
consolidated statement of operations. In addition, the Company incurred $9 of incremental interest expense for the year ended
December 31, 2018, representing interest on the Allure Amended and Restated Note for the period from November 20, 2018 to December
31, 2018.
The Company accounted for the Allure Acquisition
using the acquisition method of accounting. The allocation of the purchase price, which was finalized in November 2019 in conjunction
with the close of the one-year measurement period, is based on estimates of the fair value of assets acquired and liabilities assumed
as of November 20, 2018. The components of the final purchase price allocation are as follows:
(in thousands)
|
|
Total
|
|
Accounts receivable
|
|
$
|
1,452
|
|
Unbilled receivables
|
|
|
221
|
|
Inventory
|
|
|
142
|
|
Prepaid expenses & other current assets
|
|
|
17
|
|
Property and equipment
|
|
|
177
|
|
Other assets
|
|
|
7
|
|
Identified intangible assets:
|
|
|
|
|
Definite-lived trade names
|
|
|
340
|
|
Developed technology
|
|
|
1,770
|
|
Customer relationships
|
|
|
2,870
|
|
Goodwill
|
|
|
3,812
|
|
Accounts payable
|
|
|
(330
|
)
|
Accrued expenses
|
|
|
(294
|
)
|
Customer deposits
|
|
|
(494
|
)
|
Deferred revenues
|
|
|
(276
|
)
|
Accounts payable converted into Seller Note
|
|
|
(737
|
)
|
Net consideration transferred
|
|
$
|
8,047
|
|
The 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 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
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 3 to 15 years.
The table below sets forth the valuation
and amortization period of identifiable intangible assets:
(in thousands)
|
|
Preliminary
Valuation
|
|
|
Amortization
Period
|
Identifiable intangible assets:
|
|
|
|
|
|
Definite-lived trade names
|
|
$
|
340
|
|
|
3-5 years
|
Developed technology
|
|
|
1,770
|
|
|
7 years
|
Customer relationships
|
|
|
2,870
|
|
|
15 years
|
Total
|
|
$
|
4,980
|
|
|
|
The Company estimated the fair value of
the acquired property, plant and equipment using a combination of the cost and market approaches, depending on the component. The
fair value of property, plant and equipment of $177.
The excess of the purchase price over the
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 year-ended December 31, 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 year-ended
December 31, 2018 includes Allure’s pro forma information for the twelve-month period January 1, 2018 through December 31,
2018. The information set forth below for the year-ended December 31, 2019 represents the Company’s consolidated results
for that period.
|
|
Year Ended December 31,
|
|
(in thousands, except earnings per common share)
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
Net sales
|
|
$
|
31,598
|
|
|
$
|
31,477
|
|
Net income/(loss)
|
|
$
|
1,038
|
|
|
$
|
(11,615
|
)
|
Earnings per common share
|
|
$
|
0.11
|
|
|
$
|
(3.22
|
)
|
The information above does not include the
pro forma adjustments that would be required under Regulation S-X for pro forma financial information and does not reflect future
events that may occur after December 31, 2018 or any operating efficiencies or inefficiencies that may result from the Allure
Acquisition and related financing. Therefore, the information is not necessarily indicative of results that would have been achieved
had the businesses been combined during the periods presented or the results that the Company will experience going forward.
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, 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 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. As part of our finalization of opening balance sheet accounting at the close of the measurement
period, we recorded an adjustment to reflect the earnout liability to $0. 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.
As discussed in Note 9 Loans Payable,
the Special Loan is reported at fair value. This liability is deemed to be a Level 3 valuation. As the Special Loan was entered
into on December 30, 2019, we have concluded that the fair value on December 31, 2019 approximates the cash proceeds received on
the issuance of the debt.
NOTE 7: SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Supplemental non-cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
Issuance of common stock upon conversion of preferred stock
|
|
$
|
-
|
|
|
$
|
1,927
|
|
Issuance of warrants with term loan extensions / revolver draws
|
|
$
|
-
|
|
|
$
|
809
|
|
Noncash preferred stock dividends
|
|
$
|
-
|
|
|
$
|
345
|
|
Conversion of promissory notes
|
|
$
|
-
|
|
|
$
|
10,031
|
|
Noncash preferred stock conversion expense
|
|
$
|
-
|
|
|
$
|
3,932
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure information for cash flow
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
403
|
|
|
$
|
630
|
|
Income taxes, net
|
|
$
|
25
|
|
|
$
|
34
|
|
NOTE 8: INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
Intangible assets consisted
of the following at December 31, 2019 and December 31, 2018:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Technology platform
|
|
$
|
4,635
|
|
|
|
3,147
|
|
|
$
|
4,635
|
|
|
|
2,895
|
|
Customer relationships
|
|
|
5,330
|
|
|
|
2,679
|
|
|
|
5,330
|
|
|
|
2,477
|
|
Trademarks and trade names
|
|
|
1,020
|
|
|
|
752
|
|
|
|
1,020
|
|
|
|
553
|
|
|
|
|
10,985
|
|
|
|
6,578
|
|
|
|
10,985
|
|
|
|
5,925
|
|
Accumulated amortization
|
|
|
6,578
|
|
|
|
|
|
|
|
5,925
|
|
|
|
|
|
Net book value of amortizable intangible assets
|
|
$
|
4,407
|
|
|
|
|
|
|
$
|
5,060
|
|
|
|
|
|
For the year ended December 31, 2018, the
gross carrying amount of technology platform, customer relationships, and trademarks and trade names increased $1,770, $2,870,
and $340, respectively, from the Allure acquisition completed on November 19, 2018. For the years ended December 31, 2019 and
2018, amortization of intangible assets charged to operations was $654 and $795, respectively, inclusive of amortization expense
for the acquired intangible assets for the six-week period from November 19, 2018 to December 31, 2018.
Estimated amortization is as follows:
Year ending December 31,
|
|
Estimated Future Amortization
|
|
2020
|
|
$
|
616
|
|
2021
|
|
|
544
|
|
2022
|
|
|
444
|
|
2023
|
|
|
444
|
|
Thereafter
|
|
|
2,359
|
|
Intangible assets include the following
and are being amortized over their estimated useful lives as follows:
Acquired Intangible Asset:
|
|
Amortization
Period:
(years)
|
|
|
|
Technology platform and patents
|
|
4 - 7
|
Trademark
|
|
3-5
|
Customer relationships
|
|
15
|
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 finalization of purchase price allocation
(Note 5)
|
|
|
(729
|
)
|
Balance as of December 31, 2019
|
|
$
|
18,171
|
|
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.
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 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
|
|
|
8.0% interest (2)
|
C
|
|
8/17/2016
|
|
|
3,000
|
|
|
6/30/2021
|
|
|
588,236
|
|
|
8.0% interest (2)
|
D
|
|
11/19/2018
|
|
|
1,637
|
|
|
2/15/2020
|
|
|
-
|
|
|
3.5% interest (3)
|
E
|
|
12/30/2019
|
|
|
2,000
|
|
|
6/30/2021 (4)
|
|
|
-
|
|
|
8.0% interest (4)
|
|
|
|
|
$
|
7,901
|
|
|
|
|
|
649,965
|
|
|
|
|
|
Debt discount
|
|
|
(507
|
)
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
7,394
|
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(3,637
|
)
|
|
|
|
|
|
|
|
|
|
|
Long term debt
|
|
|
3,757
|
|
|
|
|
|
|
|
|
|
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 acquisition
of Allure
E – Secured Convertible Special Loan Promissory Note,
at fair value
|
(1)
|
0.0% interest per annum.
|
|
(2)
|
8.0% cash interest per annum when total borrowings under
the term and revolver loans, in aggregate, are below $4,100 in principal (disregarding PIK interest); 8.0% cash, 2.0% PIK when
total borrowing under the term and revolver loans, in aggregate, exceed $4,100 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.
|
|
(4)
|
8.0% cash interest per annum, comprised of 6.0% cash,
2.0% PIK. Interest payable monthly with the first payment due on February 1, 2020. In an event of default, the interest rate increases
by 6.0% to 14.0%. Debt is convertible to preferred stock at the earlier of an event of default or October 1, 2020. While the stated
maturity date of the Special Loan is June 30, 2021, the mandatory conversion feature into preferred stock as of October 1, 2020
results in the classification of this debt instrument as a current liability on the consolidated balance sheet.
|
Term Note, Revolving Promissory Note,
Secured Convertible Special Loan and Secured Disbursed Escrow Promissory Note
On August 17, 2016, we entered into a Loan
and Security Agreement with Slipstream, and obtained a $3,000 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 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.
On December 30, 2019, we entered into the Special Loan as part
of the Seventh Amendment under which we obtained $2,000, with interest thereon at 8% per annum payable 6% in cash and 2% via the
issuance of SLPIK interest, provided however that upon occurrence of an event of default the interest rate shall automatically
be increased by 6% per annum payable in cash. The entry into the Seventh Amendment adjusted the interest rate on the Company’s
Term Loan and Revolving Loan to 8% per annum, provided, however, at all times when the aggregate outstanding principal amount of
the Term Loan and the Revolving Loan exceeds $4,100 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 PIK.
Upon the earlier to occur of an Event of
Default or October 1, 2020, if any of the principal amount of the Special Loan is then outstanding, the principal and accrued but
unpaid interest of the Special Loan and the outstanding SLPIK shall be automatically converted into shares of a new series of Senior
Convertible Preferred Stock of CRI (“New Preferred”) having an Appraised Value equal to three times the then outstanding
principal amount and accrued but unpaid interest of the Special Loan and the outstanding SLPIK and having the following terms and
conditions, as reasonably determined by CRI and the Lender, the New Preferred shall:
|
●
|
be the most senior equity security of CRI, including with respect
to the payment of dividends and other distributions;
|
|
●
|
be on substantially the same terms and conditions as CRI’s Series
A-1 6% Convertible Preferred Stock as set forth in its Certificate of Designation immediately before the same was cancelled pursuant
to a Certificate of Cancellation dated as of March 13, 2019;
|
|
●
|
not be subject to a right of redemption upon the part of a holder
thereof;
|
|
●
|
accrue and pay quarterly dividends at the rate of twelve percent (12%)
per annum which shall be payable in cash;
|
|
●
|
have a Stated Value that is an amount mutually agreed by CRI and the
Lender at the time of issuance;
|
|
●
|
Conversion Price shall be an amount equal to 80% of the average for
the 30-day period ending two days prior to the required conversion date of the daily average of the range of CRI’s common stock
(calculated pursuant to information on The Wall Street Journal Online Edition), subject to appropriate adjustments; and
|
|
●
|
neither section 6(e) of the Series A-1 Certificate of Designation
nor any similar provision shall apply to the New Preferred.
|
In entering the Seventh Amendment and Special
Loan, pursuant to ASC 825-10-25-1, Fair Value Option, we made an irrevocable election to report the Special Loan at fair
value, with changes in fair value recorded through the Company’s consolidated statements of operations in each reporting
period.
On November 19, 2018, we used proceeds from
our common stock 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 consolidated balance sheet includes $27 of accrued interest as of December 31, 2018 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.
In conjunction with the extension of the maturity date of our term loan, we agreed that the interest rate would increase from 8.0%
per annum to 10.0% per annum effective July 1, 2019.
On January 16, 2018, we entered into the
Third Amendment to the Loan and Security Agreement with Slipstream and obtained a $1,000 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 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 $1,100 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 is accounted for as an additional debt discount and 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.
See Note 13 Convertible Preferred Stock
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 Company’s common stock offering completed on November 19, 2018 (“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 $10,000, 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 acquisition of Allure
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. The promissory note requires
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 promissory note is convertible into
shares of Creative Realities common stock, at the seller’s option on or after the 180th day after issuance, 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.
On February 20, 2020, the Company and Allure
filed a demand for arbitration against Seller for (1) breach of contract, (2) indemnification, and (3) fraudulent misrepresentation
under the Purchase Agreement. This demand included a claim for the right to offset the amounts owing under the Amended and Restated
Seller Note due February 20, 2020. We have not paid, nor do we intend to pay, the Amended and Restated Seller Note, which is now
past its maturity date, without resolution of our demand for arbitration. On February 27, 2020, Seller sent the Company a notice
of breach for failure to pay the Amended and Restated Seller Note on the maturity date of February 20, 2020 and demanding immediate
payment. See Note 10 Commitments and Contingencies in the consolidated financial statements for further discussion.
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. There were no such lease terminations during 2019.
Settlement of obligations
During the year ended December 31, 2019,
the Company settled and/or wrote off obligations of $3,178 for $1,132 cash payment and recognized a gain of $2,046. $1,619 of this
gain related to settlement of legacy sales commissions due to a third party vendor which were settled with a cash payment of $1,100
during the three-months ended December 31, 2019. The remaining settlements related to legacy accounts payable deemed to no longer
be legal obligations to vendors.
In 2018, the Company settled and/or wrote
off obligations of $313 for $58 cash payment and recognized a gain of $255. This obligation included $30 of accrued wage labor
liabilities no longer anticipated to be pursued against the Company.
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. The
suits filed by and against Allure have been adjoined in the Jefferson Circuit Court, Kentucky in January 2020. This suit remains
in the early stages of litigation and, as a result, the outcome of the suit and the allocation of liability, if any, remain unclear,
so the Company is unable to reasonably estimate the possible liability, recovery, or range of magnitude for either the liability
or recover, if any, at the time of this filing.
The Company has notified its insurance company
on notice of potential claims and continues to evaluate both the claim made by the customer and potential avenues for recovery
against third parties should the customer prevail.
On February 20, 2020, the Company and Allure
filed a demand for arbitration against Seller for breach of contract, indemnification, and fraudulent misrepresentation under the
Purchase Agreement. This demand included a claim for the right to offset the amounts owing under the Amended and Restated Seller
Note due February 20, 2020. We have not paid the Amended and Restated Seller Note which is now past its maturity date. On February
27, 2020, Seller sent the Company a notice of breach for failure to pay the Amended and Restated Seller Note on the maturity date
of February 20, 2020 and demanding immediate payment.
(b) The Company is not party to any other
material legal proceedings, other than ordinary routine litigation incidental to the business, as of March 11, 2020, and there
were no other such proceedings pending during the period covered by this Report.
Termination benefits
Effective December 31, 2018, the Company
entered into a separation agreement with Mr. Walpuck, the Company’s former Chief Operating Officer. Mr. Walpuck and the Company
agreed to a transition of Mr. Walpuck’s duties commencing January 31, 2019. Mr. Walpuck began consulting for the Company
commencing February 1, 2019, and such services ended May 1, 2019. Mr. Walpuck was paid $100 per hour, with a maximum of 80 hours
each month during the term of the consulting arrangement.
Pursuant to the terms of Mr. Walpuck’s
employment agreement, Mr. Walpuck received a total of $220 in severance payments in even monthly installments through December
2019. The Company agreed to fully vest all stock options of Mr. Walpuck, such options do not terminate as a result of Mr. Walpuck’s
termination of employment and remain exercisable throughout the term of the options.
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. During the three-months ended December 31, 2018, cash payments for termination
benefits were $31, with the remaining cash payments of $355 paid during the year-ended December 31, 2019.
On August 10, 2017, the Company announced
that it was closing its New Jersey and Minnesota locations and accrued one-time termination benefits related to severance to the
affected employees of $75 in the third quarter of 2017 which were included in general and administrative expenses on the consolidated
statement of operations. During the three-months ended June 30, 2018, the remaining cash payments for termination benefits were
paid and no liability remains recorded on the consolidated balance sheet as of December 31, 2018.
NOTE 11: RELATED PARTY TRANSACTIONS
In addition to the financing transactions
with Slipstream, a related party, discussed in Note 9 Loans Payable, 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 stipulated
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. As of December 31, 2019, 33 Degrees paid the note in full and had a remaining outstanding accounts receivable
balance of $1 in the Consolidated Financial Statements. Interest income of $118 related to the agreement has been included in interest
expense in the consolidated statement of operations for the year ended December 31, 2019. 33 Degrees has continued to purchase
additional hardware and services from the Company on a prepaid basis.
For the years ended December 31, 2019 and
2018, we had sales of $1,103 (3.5% of consolidated revenue) and $1,566 (6.9% of consolidated revenue), respectively, with 33 Degrees
Convenience Connect, Inc., a related party that is approximately 17.5% owned by a member of our senior management (“33 Degrees”).
Accounts receivable due from 33 Degrees
was $1, or 0.0%, and $1,933, or 30.0% of consolidated accounts receivable at December 31, 2019 and December 31, 2018, respectively.
On December 30, 2019, we entered into the
Special Loan as part of the Seventh Amendment of the Loan and Security Agreement with Slipstream, under which we obtained $2,000,
with interest thereon at 8% per annum payable 6% in cash and 2% via the issuance of SLPIK interest, provided however that upon
occurrence of an event of default the interest rate shall automatically be increased by 6% per annum payable in cash. See Note
9 Loans Payable for additional information regarding the loans.
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 Loans Payable for
additional information regarding the loans.
On September 20, 2018, the Compensation
Committee of the Board of Directors (1) adjusted the salary of Mr. Mills, CEO, to $330,000 annually, retroactive to January 1,
2018 and (2) granted 166,667 shares of common stock to Mr. Mills, CEO as compensation for his performance and direction of the
Company since taking over as CEO in October 2015. The chart above reflects the fair value of the unrestricted shares which vested
and received by Mr. Mills on the date the shares were formally issued, December 19, 2018 (133,333) and January 11, 2019 (33,334).
NOTE 12: INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs
Act of 2017 (the “Act”) was signed into law, making significant changes to U.S. tax law. Changes include, but are not
limited to, a corporate income tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017. In
accordance with the Act, the Company recorded an income tax benefit of $200 in the fourth quarter of 2017, the period
in which the legislation was enacted.
The income tax provision/(benefit) consisted
of the following:
|
|
Year ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Tax provision summary:
|
|
|
|
|
|
|
State income tax
|
|
$
|
46
|
|
|
$
|
23
|
|
Deferred tax benefit - federal
|
|
|
17
|
|
|
|
(454
|
)
|
Deferred tax expense – state
|
|
|
30
|
|
|
|
33
|
|
Tax benefit
|
|
$
|
93
|
|
|
$
|
(398
|
)
|
The income tax provision/(benefit) includes
federal and state income taxes currently payable and those deferred or prepaid because of temporary differences between financial
statement and tax bases of assets and liabilities. The Company records income taxes under the liability method. Under this method,
deferred income taxes are recognized for the estimated future tax effects of differences between the tax bases of assets and liabilities
and their financial reporting amounts based on enacted tax laws. The amount provided for deferred income taxes reflects that impact
of the revaluation of the Company’s deferred income tax assets and liabilities required as the result of the change in the
U.S. federal and state income tax rates, as discussed above.
A reconciliation of the statutory income
tax rate to the effective income tax rates as a percentage of income before income taxes is as follows:
|
|
2019
|
|
|
2018
|
|
Federal statutory rate
|
|
|
21.00
|
%
|
|
|
21.00
|
%
|
State taxes, net of federal benefit
|
|
|
9.85
|
%
|
|
|
1.36
|
%
|
Foreign rate differential
|
|
|
-9.69
|
%
|
|
|
0.58
|
%
|
IRC 162(m) limitation
|
|
|
0
|
%
|
|
|
-0.63
|
%
|
Meals and entertainment
|
|
|
0.81
|
%
|
|
|
0
|
%
|
Discrete items, Transaction items, and Other
|
|
|
44.05
|
%
|
|
|
239.77
|
%
|
Changes in valuation allowance
|
|
|
-57.76
|
%
|
|
|
-258.44
|
%
|
Effective tax rate
|
|
|
8.25
|
%
|
|
|
3.64
|
%
|
The net deferred tax assets and liabilities
recognized in the accompanying consolidated balance sheets, determined using the income tax rate applicable to each period, consist
of the following:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
Reserves
|
|
$
|
175
|
|
|
$
|
233
|
|
Property and equipment
|
|
|
(83
|
)
|
|
|
462
|
|
Accrued expenses
|
|
|
265
|
|
|
|
822
|
|
Right-of-use Asset
|
|
|
(414
|
)
|
|
|
-
|
|
Right-of-use Liability
|
|
|
419
|
|
|
|
-
|
|
Severance
|
|
|
-
|
|
|
|
65
|
|
IRC 163(j) Interest Deduction
|
|
|
17
|
|
|
|
591
|
|
Non-qualified stock options
|
|
|
528
|
|
|
|
336
|
|
R&D credits
|
|
|
1,801
|
|
|
|
1,538
|
|
Net foreign carryforwards
|
|
|
2,768
|
|
|
|
2,214
|
|
Net operating loss and credit carryforwards
|
|
|
34,754
|
|
|
|
33,988
|
|
Intangibles
|
|
|
(1,128
|
)
|
|
|
(672
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net
|
|
|
39,102
|
|
|
|
39,577
|
|
Valuation allowance
|
|
|
(39,277
|
)
|
|
|
(39,705
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(175
|
)
|
|
$
|
(128
|
)
|
Our deferred tax assets are primarily related
to net federal and state operating loss carryforwards (NOLs). We have substantial NOLs that are limited in its 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. The estimated federal
NOL carryforward after application of the IRC Section 382 limitation is $33,817 and foreign NOL carryforward is $2,768 as of December
31, 2019. 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.
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 $10,000, 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.
NOTE 14: WARRANTS
On November 19, 2018, the Company announced
the closing of its underwritten public offering of 2,857,142 shares of its common stock and warrants to purchase 1,428,571 shares
of common stock at a combined public offering price of $3.50 per share and warrant. The gross proceeds to the Company from
this the Public Offering were approximately $10,000, before deducting underwriting discounts and commissions and other estimated
offering expenses. The proceeds were primarily used in the Allure Acquisition and in the repayment of approximately $1,283 of debt.
On April 27, 2018, we entered into the Fourth
Amendment to the Loan and Security Agreement with Slipstream, under which we obtained a $1,100 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 $1,000 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 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 range of inputs
used for the probability weighted Black Scholes option pricing model valuations for when the warrants were issued and at December
31, 2019.
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
|
|
Remaining Expected Term
at December 31,
2019
|
|
Risk Free Interest Rate
at December 31,
2019
|
|
|
Volatility at
December 31,
2019
|
|
|
Stock Price at
December 31,
2019
|
|
0.13 - 3.92
|
|
|
1.69
|
%
|
|
|
74.49
|
%
|
|
$
|
1.53
|
|
A summary of outstanding debt 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 December 31, 2019
|
|
|
4,733,028
|
|
|
$
|
4.83
|
|
|
|
3.41
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
NOTE 15: STOCK-BASED COMPENSATION
A summary of outstanding options, including
non-employee directors, 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
|
|
$0.01 - $5.39
|
|
|
25,000
|
|
|
|
9.86
|
|
|
$
|
1.88
|
|
|
|
-
|
|
|
$
|
-
|
|
$5.40 - $19.50
|
|
|
287,341
|
|
|
|
6.04
|
|
|
$
|
8.35
|
|
|
|
250,257
|
|
|
$
|
8.45
|
|
$19.51 - $23.70
|
|
|
1,000
|
|
|
|
4.04
|
|
|
|
23.70
|
|
|
|
1,000
|
|
|
$
|
23.70
|
|
$23.71 - $367.50
|
|
|
519
|
|
|
|
2.58
|
|
|
|
112.30
|
|
|
|
519
|
|
|
$
|
112.30
|
|
|
|
|
313,860
|
|
|
|
6.33
|
|
|
$
|
8.06
|
|
|
|
251,776
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted Average Exercise
|
|
|
|
Outstanding
|
|
|
Price
|
|
Balance, December 31, 2018
|
|
|
288,860
|
|
|
$
|
8.59
|
|
Granted
|
|
|
25,000
|
|
|
|
1.88
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
Balance, December 31, 2019
|
|
|
313,860
|
|
|
$
|
8.06
|
|
The weighted average remaining contractual
life for options exercisable is 5.68 years as of December 31, 2019.
Valuation Information for Stock-Based Compensation
For purposes of determining estimated fair
value under FASB ASC 718-10, Stock Compensation, the Company computed the estimated fair values of stock options using the
Black-Scholes model.
On November 7, 2019, the Company granted
10-year options to purchase an aggregate of 25,000 shares of its common stock to one non-employee director. The options vest over
3 years and have an exercise price of $1.88, the market value of the Company’s common stock on the grant date. The fair value
of the options on the grant date was $1.19 and was determined using the Black-Scholes model. These values were calculated using
the following weighted average assumptions:
Risk-free interest rate
|
|
|
1.92
|
%
|
Expected term
|
|
|
6.25 years
|
|
Expected price volatility
|
|
|
68.77
|
%
|
Dividend yield
|
|
|
0
|
%
|
On September 7 and September 20, 2018, the
Company granted 10-year options to purchase an aggregate of 33,334 shares of its common stock to two employees, 16,667 of which
were granted to an Officer. The options vest over 4 years and have an exercise price of $7.50. The fair value of the options on
the grant date was $4.58 and was determined using the Black-Scholes model. These values were calculated using the following weighted
average assumptions:
Risk-free interest rate
|
|
|
2.82 – 2.96
|
%
|
Expected term
|
|
|
6.25 years
|
|
Expected price volatility
|
|
|
63.45
|
%
|
Dividend yield
|
|
|
0
|
%
|
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.
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 301,674 options outstanding under the 2014 Stock Incentive Plan.
Compensation expense recognized for the
issuance of stock options for the years ended December 31, 2019 and 2018 of $447 and $1,383, respectively, was included in general
and administrative expense in the Consolidated Financial Statements.
At December 31, 2019, there was approximately
$174 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 was deferred on the Company’s balance sheet.
During 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 2019, the conditions were
met for those remaining shares to vest and the Company recorded compensation expense of $250 based on the grant-date close price
of the Company’s common stock, or $7.50.
On December 31, 2018, the Company recorded
$35 in additional compensation expense for the accelerated vesting of outstanding, unvested stock options in conjunction with the
separation agreement executed between the Chief Operating Officer and the Company during the year ended December 31, 2018.
NOTE 16: SHARE REPURCHASE PROGRAM
On August 9, 2017, our Board of Directors
authorized a program to repurchase up to 166,667 shares of our outstanding common stock through August 9, 2019. The authorization
allowed for the repurchases to be conducted through open market or privately negotiated transactions. Shares acquired under the
stock repurchase program are expected to be retired and returned to the status of authorized but unissued shares of common stock.
The stock repurchase program can be suspended, modified or discontinued at any time at our discretion. No shares were repurchased
by the Company during 2019 or 2018 and the program terminated August 9, 2019.
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 2020 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)
|
|
Year Ended
December 31,
2019
|
|
Finance lease cost
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
32
|
|
Interest
|
|
|
5
|
|
Operating lease cost
|
|
|
736
|
|
Total lease cost
|
|
$
|
773
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
|
|
Operating leases
|
|
|
3.4 years
|
|
Finance leases
|
|
|
1.2 years
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
Operating leases
|
|
|
10.0
|
%
|
Finance leases
|
|
|
13.64
|
%
|
|
|
|
|
|
The following is a schedule, by years, of
maturities of lease liabilities as of December 31, 2019:
(in thousands)
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
2020
|
|
|
681
|
|
|
|
23
|
|
2021
|
|
|
630
|
|
|
|
4
|
|
2022
|
|
|
377
|
|
|
|
1
|
|
2023
|
|
|
375
|
|
|
|
-
|
|
2024
|
|
|
-
|
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
-
|
|
Total undiscounted cash flows
|
|
|
2,063
|
|
|
|
28
|
|
Less imputed interest
|
|
|
(317
|
)
|
|
|
(2
|
)
|
Present value of lease liabilities
|
|
|
1,746
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Lease liabilities, current
|
|
|
646
|
|
|
|
21
|
|
Lease liabilities, non-current
|
|
|
1,100
|
|
|
|
5
|
|
Present value of lease liabilities
|
|
|
1,746
|
|
|
|
26
|
|
Supplemental cash flow information related
to leases are as follows:
|
|
Year
Ended
December 31,
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
719
|
|
Operating cash flows from finance leases
|
|
$
|
1
|
|
Financing cash flows from finance leases
|
|
$
|
31
|
|
Future minimum lease payments under leases
with initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2018 were as follows in accordance
with ASC 840:
Year ending December 31,
|
|
Lease Obligations
|
|
2019
|
|
$
|
726
|
|
2020
|
|
|
613
|
|
2021
|
|
|
423
|
|
2022
|
|
|
374
|
|
Thereafter
|
|
|
375
|
|
Total future minimum obligations
|
|
$
|
2,511
|
|
Rent expense totaled $488 for the year ended
December 31, 2018 and is included in General and Administrative expenses.
NOTE 18: PROFIT-SHARING PLAN
We have a defined contribution 401(k) retirement
plans for eligible associates in the United States. Associates may contribute up to 15% of their pretax compensation to the plan
subject to IRS limitations. Beginning on April 1, 2018, the Company began contributing an employer contribution match of 50% of
employee wages up to 6%, for an effective match of 3%. The Company contributed $155 and $101 to employee 401(k) retirement plans
for the year-ended December 31, 2019 and 2018, respectively.
During 2018, employees who joined the Company
via acquisition of Allure participated in a defined contribution 401(k) retirement plans. Associates were able to contribute up
to 15% of their pretax compensation to the plan subject to IRS limitations. There was no employer match on this plan during 2018.
Allure personnel became eligible for the Creative Realities 401(k) retirement plan effective January 1, 2019 and the related employer
match program.
We have a Registered Retirement Savings
Plan for eligible associates in Canada. Associates may contribute up to 18% of earned income reported on their tax return in the
previous year, subject to legal contribution limits. Beginning on April 1, 2018, the Company began contributing an employer contribution
match of 50% of employee wages up to 6%, for an effective match of 3%.
NOTE 19: SEGMENT INFORMATION AND
SIGNIFICANT CUSTOMERS/VENDORS
Segment Information
We currently operate in one reportable segment,
marketing technology solutions. Substantially all property and equipment is located at our offices in the United States, and a
data center located in the United States. All material sales for the years ended December 31, 2019 and 2018 were in the United
States and Canada.
Significant Customers
We had one (1) and two (2) customers that
accounted for 18.5% and 48.3% of revenue for the years ended December 31, 2019 and 2018, respectively.
For the years ended December 31, 2019 and
2018, we had sales of $1,103 (3.5% of consolidated sales) and $1,566 (6.9% of consolidated sales), respectively, with 33 Degrees
Convenience Connect, Inc., a related party that is approximately 17.5% owned by a member of our senior management (“33 Degrees”).
We had one (1) and two (2) customers that
in the aggregate accounted for 14.4% and 40.0% of accounts receivable as of December 31, 2019 and December 31, 2018, respectively.
Accounts receivable due from 33 Degrees was $1 and $1,933 at December 31, 2019 and 2018, respectively.
Significant Vendors
We had one (1) vendor that accounted for
50% of outstanding accounts payable at December 31, 2019. There were no vendors in excess of 10% of outstanding accounts payable
at December 31, 2018.