NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(all
currency in thousands, except per share amounts)
(unaudited)
NOTE
1: NATURE OF ORGANIZATION AND OPERATIONS
Unless
the context otherwise indicates, references in these Notes to the accompanying condensed consolidated financial statements to
“we,” “us,” “our” and “the Company” refer to Creative Realities, Inc. and its
subsidiaries.
Nature
of the Company’s Business
Creative
Realities, Inc. is a Minnesota corporation that provides innovative digital marketing technology and solutions to retail companies,
individual retail brands, enterprises and organizations throughout the United States and in certain international markets. The
Company has expertise in a broad range of existing and emerging digital marketing technologies, as well as the related media management
and distribution software platforms and networks, device management, product management, customized software service layers, systems,
experiences, workflows, and integrated solutions. Our technology and solutions include: digital merchandising systems and omni-channel
customer engagement systems, interactive digital shopping assistants, advisors and kiosks, and other interactive marketing technologies
such as mobile, social media, point-of-sale transactions, beaconing and web-based media that enable our customers to transform
how they engage with consumers. We have expertise in a broad range of existing and emerging digital marketing technologies, as
well as the following related aspects of our business: content, network management, and connected device software and firmware
platforms; customized software service layers; hardware platforms; digital media workflows; and proprietary processes and automation
tools. We believe we are one of the world’s leading interactive marketing technology companies that focuses on the retail
shopper experience by helping retailers and brands use the latest technologies to create better shopping experiences.
On
November 20, 2018, we closed on our acquisition of Allure Global Solutions, Inc. (the “Allure Acquisition”). While
the Allure Acquisition expanded our operations, geographical footprint and customer base and also enhanced our current product
offerings, the core business of Allure is consistent with the existing operations of Creative Realties, Inc. and as a result of
the Allure Acquisition we did not add different operating activities to our business.
Our
main operations are conducted directly through Creative Realities, Inc., and under our wholly owned subsidiaries Allure Global
Solutions, Inc., a Georgia corporation, Creative Realities Canada, Inc., a Canadian corporation, and ConeXus World Global, LLC,
a Kentucky limited liability company. Our other wholly owned subsidiary, Creative Realities, LLC, a Delaware limited liability
company, has been effectively dormant since October 2015, the date of the merger with ConeXus World Global, LLC.
Liquidity
and Financial Condition
The
accompanying Condensed Consolidated Financial Statements have been prepared on the basis of the realization of assets and the
satisfaction of liabilities and commitments in the normal course of business and do not include any adjustments to the recoverability
and classifications of recorded assets and liabilities as a result of uncertainties.
We produced net income for the year ended December
31, 2019 but incurred a net loss for the year ended December 31, 2018 and had negative cash flows from operating activities for
both the year-ended December 31, 2019 and the three months ended March 31, 2020. For the three months ended March 31, 2020 and
2019, we have incurred net losses of $13,183 and $184, respectively. As of March 31, 2020, we had cash and cash equivalents of
$2,141 and working capital deficit of $4,896, which includes $649 representing current maturities of operating leases that were
initially recognized January 1, 2019 upon adoption of Accounting Standards Update (“ASU”) 2016-02, and for which no
corresponding current asset is recorded.
While
our outlook for the digital signage industry over the long term remains strong, we have experienced rapid and immediate deterioration
in our short term business as a result of the COVID-19 pandemic, generating increased uncertainty across our customer base in
each of our key vertical markets. The elective and forced closures of businesses across the United States has resulted in reduced
demand for our services, which primarily assist business in engaging with their end customers in a physical space through digital
technology. The elimination of public gatherings has materially impacted demand for products and services in our theater, sports
arena and large entertainment markets. These conditions have resulted in downward revisions of our internal forecasts on current
and future projected earnings and cash flows. The effective halting of pending and anticipated projects has caused the projected
incoming cash to be delayed, and consequently cash flows have been slowed, including a slowdown in payments by customers for
previously completed projects, which has further limited cash collections. We have implemented various cost cutting measures,
including slowing our payments of accounts payable and accrued liabilities, negotiated extensions for certain currently and past
due payments to key vendors, and implemented compensation reductions for most personnel retained following the reduction-in-force
activities taken by the Company in mid-March 2020.
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, we entered 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:
|
●
|
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.
|
On
April 1, 2020, the “Company entered into an Eighth Amendment to Loan and Security Agreement (the “Eighth Amendment”)
with its subsidiaries and Slipstream to amend the terms of the payments and interest accruing on the Company’s Term Loan,
Secured Revolving Promissory Note, and Special Loan. The Eighth Amendment increased the interest rates of the Company’s
term, revolving and special loans from 8% to 10%, effective April 1, 2020. Until January 1, 2021, rather than cash payments of
accrued interest under the term and revolving loans, interest will be paid by the issuance of and treated as additional principal
thereunder. Commencing January 2, 2021, such interest will be payable in cash. Interest on the special loan will no longer be
paid in cash, but by the issuance of and treated as additional principal thereunder.
Management believes that, based on (i)
the extension of the maturity date on our term loan and revolving loans to June 30, 2021, (ii) our receipt of approximately $1,551
of funding through the Payroll Protection Program on April 27, 2020, (iii) our operational forecast through 2021, and (iv) support
from Slipstream through June 30, 2021, we can continue as a going concern through at least May 15, 2021. However, given
our history of net losses, cash used in operating activities and working capital deficit, each of which continued as of and for
the three months ended March 31, 2020, we can provide no assurance that our ongoing operational efforts will be successful, particularly
in consideration of the business interruptions and uncertainty generated as a result of the COVID-19 pandemic which could have
a material adverse effect on our results of operations and cash flows.
See
Note 8 Loans Payable to the Consolidated Financial Statements for an additional discussion of the Company’s debt
obligations.
NOTE
2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A
summary of the significant accounting policies consistently applied in the preparation of the accompanying Condensed Consolidated
Financial Statements follows:
1.
Basis of Presentation
The
accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the applicable instructions
to Form 10-Q and Regulation S-X and include all of the information and disclosures required by generally accepted accounting principles
in the United States of America (“GAAP”) for interim financial reporting. These unaudited Condensed Consolidated Financial
Statements should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes for the
year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 13, 2020.
The
results of operations for the interim periods are not necessarily indicative of results of operations for a full year. Management
believes the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, including normal recurring
items, considered necessary for a fair statement of results for the interim periods presented.
2.
Revenue Recognition
We
recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 606, Revenue from Contracts with Customers, applying the five-step model.
If
an arrangement involves multiple performance obligations, the items are analyzed to determine the separate units of accounting,
whether the items have value on a standalone basis and whether there is objective and reliable evidence of their standalone selling
price. The total contract transaction price is allocated to the identified performance obligations based upon the relative standalone
selling prices of the performance obligations. The standalone selling price is based on an observable price for services sold
to other comparable customers, when available, or an estimated selling price using a cost plus margin approach.
The
Company estimates the amount of total contract consideration it expects to receive for variable arrangements by determining the
most likely amount it expects to earn from the arrangement based on the expected quantities of services it expects to provide
and the contractual pricing based on those quantities. The Company only includes some or a portion of variable consideration in
the transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not
occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company considers the sensitivity
of the estimate, its relationship and experience with the client and variable services being performed, the range of possible
revenue amounts and the magnitude of the variable consideration to the overall arrangement. The Company receives variable consideration
in very few instances.
Revenue
is recognized when a customer obtains control of promised goods or services under the terms of a contract and is measured as the
amount of consideration the Company expects to receive in exchange for transferring goods or providing services. The Company does
not have any material extended payment terms as payment is due at or shortly after the time of the sale, typically ranging between
thirty and ninety days. Observable prices are used to determine the standalone selling price of separate performance obligations
or a cost plus margin approach when one is not available. Sales, value-added and other taxes collected concurrently with revenue
producing activities are excluded from revenue.
The
Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced
to the clients. 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.
The
Company uses the practical expedient for recording an immediate expense for incremental costs of obtaining contracts, including
certain design/engineering services, commissions, incentives and payroll taxes, as these incremental and recoverable costs have
terms that do not exceed one year.
3.
Inventories
Inventories
are stated at the lower of cost or market (net realizable value), determined by the first-in, first-out (FIFO) method, and consist
of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials, net of reserve of $136 and $134, respectively
|
|
$
|
241
|
|
|
$
|
200
|
|
Work-in-process
|
|
|
473
|
|
|
|
179
|
|
Total inventories
|
|
$
|
714
|
|
|
$
|
379
|
|
4.
Impairment of Long-Lived Assets
We
review the carrying value of all long-lived assets, including property and equipment, for impairment in accordance with ASC 360,
Accounting for the Impairment or Disposal of Long-Lived Assets. Under ASC 360, impairment losses are recorded whenever
events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We evaluated whether there
were any triggering events for consideration of impairment of our long-lived assets as of March 31, 2020 and concluded there were
none.
If
the impairment tests indicate that the carrying value of the asset is greater than the expected undiscounted cash flows to be
generated by such asset, an impairment loss would be recognized. The impairment loss is determined as the amount by which the
carrying value of such asset exceeds its fair value. We generally measure fair value by considering sale prices for similar assets
or by discounting estimated future cash flows from such assets using an appropriate discount rate. Assets to be disposed of are
carried at the lower of their carrying value or fair value less costs to sell. Considerable management judgment is necessary to
estimate the fair value of assets, and accordingly, actual results could vary significantly from such estimates.
5.
Basic and Diluted Income/(Loss) per Common Share
Basic and diluted income/(loss) per common share
for all periods presented is computed using the weighted average number of common shares outstanding. Basic weighted average shares
outstanding includes only outstanding common shares. Diluted weighted average shares outstanding includes outstanding common shares
and potential dilutive common shares outstanding in accordance with the treasury stock method. Shares reserved for outstanding
stock options and warrants totaling approximately 5,035,518 and 5,320,162 at March 31, 2020 and 2019, respectively were excluded
from the computation of income/(loss) per share as all options and warrants were anti-dilutive due to the net loss in each period.
In calculating diluted earnings per share for the three months ended March 31, 2020, in accordance with ASC 260 Earnings per
share, we included the dilutive effect of the potential issuance of common stock upon an assumed conversion of the Special
Loan.
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 March 31, 2020 and December
31, 2019.
7.
Goodwill
We
follow the provisions of ASC 350, Goodwill and Other Intangible Assets. Pursuant to ASC 350, goodwill acquired in a purchase
business combination is not amortized, but instead tested for impairment at least annually. The Company uses a measurement date
of September 30 (see Note 7 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, valuation allowances related to deferred taxes, the fair value of acquired assets and liabilities,
the fair value of liabilities reliant upon the appraised fair value of the Company, valuation of stock-based compensation awards
and other assumptions and estimates used to evaluate the recoverability of long-lived assets, goodwill and other intangible assets
and the related amortization methods and periods. Actual results could differ from those estimates.
9.
Leases
We
account for leases in accordance with ASU No. 2016-02, Leases (Topic 842), as amended.
We
determine if an arrangement is a lease at inception. Right of use (“ROU”) assets and liabilities are recognized at
commencement date based on the present value of remaining lease payments over the lease term. For this purpose, we consider only
payments that are fixed and determinable at the time of commencement. As most of our leases do not provide an implicit rate, we
use our incremental borrowing rate based on the information available at commencement date in determining the present value of
lease payments. Our incremental borrowing rate is a hypothetical rate based on our understanding of what our credit rating would
be. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received.
Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such
options.
Operating
leases are included in operating lease right-of-use assets, current maturities of operating leases, and long-term obligations
under operating leases on our condensed consolidated balance sheets. Finance leases are included in property and equipment, net,
current maturities of financing leases, and long-term obligations under financing leases on our condensed consolidated balance
sheets.
NOTE
3: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Recently
adopted
On
January 1, 2020, we adopted ASU 2018-15 Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement That is a Service Contract, which 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 adoption of this guidance had no material impact on our Condensed Consolidated Financial Statements.
On
January 1, 2020, we adopted ASU No. 2018-13, Changes to Disclosure Requirements for Fair Value Measurements (Topic 820),
which improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard
removed, modified, and added certain disclosure requirements. The adoption of this guidance had no material impact on our Condensed
Consolidated Financial Statements.
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 Condensed
Consolidated Financial Statements.
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses. The main objective is to provide
financial statement users with more decision-useful information about the expected credit losses on financial instruments and
other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this update replace the
incurred loss methodology with a methodology that reflects expected credit losses and requires consideration of a broader range
of reasonable and supportable information to calculate credit loss estimates. For trade receivables and loans, entities will be
required to estimate lifetime expected credit losses. The amendments are effective for public business entities that qualify as
smaller reporting companies for fiscal years and interim periods beginning after December 15, 2022. We are currently evaluating
the disclosure requirements related to adopting this guidance.
NOTE
4: REVENUE RECOGNITION
The
Company applies ASC 606 for revenue recognition. The following
table disaggregates the Company’s revenue by major source for the three months ended March 31, 2020 and 2019:
(in thousands)
|
|
Three Months
Ended
March 31,
2020
|
|
|
Three Months
Ended
March 31,
2019
|
|
Hardware
|
|
$
|
1,367
|
|
|
$
|
1,641
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
Installation Services
|
|
|
869
|
|
|
|
2,372
|
|
Software Development Services
|
|
|
142
|
|
|
|
3,976
|
|
Managed Services
|
|
|
1,326
|
|
|
|
1,495
|
|
Total Services
|
|
|
2,337
|
|
|
|
7,843
|
|
|
|
|
|
|
|
|
|
|
Total Hardware and Services
|
|
$
|
3,704
|
|
|
$
|
9,484
|
|
System
hardware sales
System
hardware revenue is recognized generally upon shipment of the product or customer acceptance depending upon contractual arrangements
with the customer in instances in which the sale of hardware is the sole performance obligation. Shipping charges billed to customers
are included in hardware sales and the related shipping costs are included in hardware cost of sales. The cost of freight and
shipping to the customer is recognized in cost of sales at the time of transfer of control to the customer. System hardware revenues
are classified as “Hardware” within our disaggregated revenue.
Installation
services
The
Company performs outsourced installation services for customers and recognizes revenue upon completion of the installations. Installation
services also includes engineering services performed as part of an installation project.
When
system hardware sales include installation services to be performed by the Company, the goods and services in the contract are
not distinct, so the arrangement is accounted for as a single performance obligation. Our customers control the work-in-process
and can make changes to the design specifications over the contract term. Revenues are recognized over time as the installation
services are completed based on the relative portion of labor hours completed as a percentage of the budgeted hours for the installation.
Installation services revenues are classified as “Installation Services” within our disaggregated revenue.
The
aggregate amount of the transaction price allocated to installation service performance obligations that are partially unsatisfied
as of March 31, 2020 and 2019 were $0.
Software
design and development services
Software
and software license sales are revenue when a fixed fee order has been received and delivery has occurred to the customer. Revenue
is recognized generally upon customer acceptance (point-in-time) of the software product and verification that it meets the required
specifications. Software is delivered to customers electronically. Software design and development revenues are classified as
“Software Development Services” within our disaggregated revenue.
Software
as a service
Software
as a service includes revenue from software licensing and delivery in which software is licensed on a subscription basis and is
centrally hosted. These services often include software updates which provide customers with rights to unspecified software product
upgrades and maintenance releases and patches released during the term of the support period. Contracts for these services are
generally 12-36 months in length. We account for revenue from these services in accordance with ASC 985-20-15-5 and recognize
revenue ratably over the performance period. Software as a service revenues are classified as “Managed Services” within
our disaggregated revenue.
Maintenance
and support services
The
Company sells support services which include access to technical support personnel for software and hardware troubleshooting.
The Company offers a hosting service through our network operations center, or NOC, allowing the ability to monitor and support
its customers’ networks 7 days a week, 24 hours a day. These contracts are generally 12-36 months in length. Revenue is
recognized over the term of the agreement in proportion to the costs incurred in fulfilling performance obligations under the
contract. Maintenance and Support revenues are classified as “Managed Services” within our disaggregated revenue.
Maintenance
and support fees are based on the level of service provided to end customers, which can range from monitoring the health of a
customer’s network to supporting a sophisticated web-portal to managing the end-to-end hardware and software of a digital
marketing system. These agreements are renewable by the customer. Rates for maintenance and support, including subsequent renewal
rates, are typically established based upon a fee per location, per device, or a specified percentage of net software license
fees as set forth in the arrangement. These contracts are generally 12-36 months in length. Revenue is recognized ratably and
evenly over the service period.
The
Company also performs time and materials-based maintenance and repair work for customers. Revenue is recognized at a point in
time when the performance obligation has been fully satisfied.
NOTE
5: FAIR VALUE MEASUREMENT
We
measure certain financial assets, including cash equivalents, at fair value on a recurring basis. In accordance with ASC 820-10-30,
fair value is a market-based measurement that should be determined based on the assumptions that market participants would use
in pricing an asset or liability. As a basis for considering such assumptions, ASC 820-10-35 establishes a three-level hierarchy
that prioritizes the inputs used in measuring fair value. The three hierarchy levels are defined as follows:
Level
1 — Valuations based on unadjusted quoted prices in active markets for identical assets.
Level
2 — Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement
date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly.
Level
3 — Valuations based on inputs that are unobservable and involve management judgment and the reporting entity’s own
assumptions about market participants and pricing.
The
Company previously recorded warrant liabilities that were measured at fair value on a recurring basis using a binomial option
pricing model. The fair value of the warrant liabilities had 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 Christie
Digital Systems, USA (“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 in November 2019, we recorded an adjustment
to reflect the earnout liability to $0. The fair value estimate remains at $0 as of March 31, 2020. 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 8 Loans Payable, the Special Loan is
reported at fair value. This liability is deemed to be a Level 3 valuation. As of March 31, 2020, we utilized the assistance of
a third-party valuation specialist to assist in updating our fair value analysis of the Special Loan, resulting in recognition
of a $151 loss during the period from the change in fair value of the liability and a corresponding increase in the debt balance
recorded in the Condensed Consolidated Balance Sheet.
NOTE
6: SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
Non-cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
107
|
|
|
$
|
80
|
|
Income taxes, net
|
|
$
|
1
|
|
|
$
|
-
|
|
NOTE
7: INTANGIBLE ASSETS, INCLUDING GOODWILL
Intangible
Assets
Intangible
assets consisted of the following at March 31, 2020 and December 31, 2019:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Technology platform
|
|
$
|
4,635
|
|
|
|
3,210
|
|
|
$
|
4,635
|
|
|
|
3,147
|
|
Customer relationships
|
|
|
5,330
|
|
|
|
2,727
|
|
|
|
5,330
|
|
|
|
2,679
|
|
Trademarks and trade names
|
|
|
1,020
|
|
|
|
800
|
|
|
|
1,020
|
|
|
|
752
|
|
|
|
|
10,985
|
|
|
|
6,737
|
|
|
|
10,985
|
|
|
|
6,578
|
|
Accumulated amortization
|
|
|
6,737
|
|
|
|
|
|
|
|
6,578
|
|
|
|
|
|
Net book value of amortizable intangible assets
|
|
$
|
4,248
|
|
|
|
|
|
|
$
|
4,407
|
|
|
|
|
|
For
the three months ended March 31, 2020 and 2019, amortization of intangible assets charged to operations was $159 and $156, respectively.
Goodwill
The
following is a rollforward of the Company’s goodwill since December 31, 2019:
|
|
Total
|
|
Balance as of December 31, 2019
|
|
$
|
18,171
|
|
Adjustments due to impairment loss
|
|
|
(10,646
|
)
|
Balance as of March 31, 2020
|
|
$
|
7,525
|
|
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.
Despite
the excess fair value identified in our 2019 annual impairment assessment, we determined that the reduced cash flow projections
and the significant decline in our market capitalization as a result of the COVID-19 pandemic during the three months ended March
31, 2020 indicate that an impairment loss may have been incurred during the period. Therefore, we qualitatively assessed whether
it was more likely than not that the goodwill was impaired as of March 31, 2020. We reviewed our previous forecasts and assumptions
based on our current projections that are subject to various risks and uncertainties, including: (1) forecasted revenues, expenses
and cash flows, including the duration and extent of impact to our business and our alliance partners from the COVID-19 pandemic,
(2) current discount rates, (3) the reduction in our market capitalization, (5) changes to the regulatory environment and (6)
the nature and amount of government support that will be provided. As a result of this qualitative assessment, we concluded that
indicators of impairment were present and that a quantitative interim impairment assessment of our goodwill was necessary as of
March 31, 2020.
As
a result of the adoption of ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment the impairment test consists solely of comparing the carrying value of the reporting unit with its fair value and
recording impairment, if identified.
The
fair value of the reporting unit was estimated via the income approach. Under the income approach, fair value is determined based
on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts
to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term
outlook for our industry. Actual results may differ from those assumed in our forecasts. We derive our discount rates using a
capital asset pricing model and by analyzing published rates relevant to our business to estimate the cost of equity financing.
We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally
developed forecasts. We utilized a discount rate of 15.3% in our valuation completed as of March 31, 2020.
While
our outlook for the digital signage industry over the long term remains strong, we have experienced rapid and immediate deterioration
in our short term business as a result of the COVID-19 pandemic, generating increased uncertainty across our customer base in
each of our key vertical markets. The elective and forced closures of businesses across the United States has resulted in reduced
demand for our services, which primarily assist business in engaging with their end customers in a physical space through digital
technology. The elimination of public gatherings has materially impacted demand for products and services in our theater, sports
arena and large entertainment markets. These conditions resulted in downward revisions of our internal forecasts on current and
future projected earnings and cash flows, leading to an implied fair value of goodwill substantially below the carrying value.
Therefore, during the three months ended March 31, 2020, we recorded a non-cash impairment loss of $10,646. We recorded the
estimated impairment losses in the caption "Goodwill impairment" in our Condensed Consolidated Statement of Operations.
After the impairment loss, there is $7,525 remaining goodwill as of March 31, 2020.
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
further 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
8: 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
|
|
|
1,007
|
|
|
6/30/2021
|
|
|
61,729
|
|
|
10.0% interest (2)
|
C
|
|
8/17/2016
|
|
|
3,020
|
|
|
6/30/2021
|
|
|
588,236
|
|
|
10.0% interest (2)
|
D
|
|
11/19/2018
|
|
|
1,637
|
|
|
2/15/2020
|
|
|
-
|
|
|
3.5% interest (3)
|
E
|
|
12/30/2019
|
|
|
2,171
|
|
|
6/30/2021(4)
|
|
|
-
|
|
|
10.0% interest (4)
|
|
|
Total debt, gross
|
|
|
8,099
|
|
|
|
|
|
649,965
|
|
|
|
|
|
Debt discount
|
|
|
(422
|
)
|
|
|
|
|
|
|
|
|
|
|
Total debt, net
|
|
$
|
7,677
|
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
(3,808
|
)
|
|
|
|
|
|
|
|
|
|
|
Long term debt
|
|
|
3,869
|
|
|
|
|
|
|
|
|
|
A
– Secured Disbursed Escrow Promissory Note with related party
B
– Secured Revolving Promissory Note 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)
8.0% cash interest per annum through March 31, 2020. 10.0% paid-in-kind interest (“PIK”) interest per annum from April
1, 2020 through December 31, 2020. 8.0% cash interest per annum January 1, 2021 through the maturity date.
(2)
8.0% cash interest per annum, comprised of 6.0% cash, 2.0% PIK through March 31, 2020. 10.0% PIK interest per annum through September
30, 2020. In an event of default, the interest rate increases by 6.0% to 16.0%. 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.
Loan
and Security Agreement
On
August 17, 2016, the Company entered into a Loan and Security Agreement with Slipstream (“Loan and Security Agreement”).
Since the initial entry into the Loan and Security Agreement in 2016, the Company has entered into several financing arrangements
with varying interest rates, maturity dates, and number of associated detachable warrants, each entered within the structure of
the Loan and Security Agreement. The debt instruments outstanding under the Loan and Security Agreement as of March 31, 2020 include
the Term Loan, Secured Revolving Promissory Note, Secured Disbursed Escrow Promissory Note, and the Special Loan.
The
Loan and Security Agreement 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. Obligations under the loan and security agreement are secured by a grant of collateral security in all
of the tangible assets of Creative Realities, Inc. and each of its wholly owned subsidiaries.
Eighth
Amendment; Modification of Interest Rates under Loan and Security Agreement
On
April 1, 2020, the “Company entered into an Eighth Amendment to Loan and Security Agreement (the “Eighth Amendment”)
with its subsidiaries and Slipstream to amend the terms of the payments and interest accruing on the Company’s Term Loan,
Secured Revolving Promissory Note, and Special Loan. The Eighth Amendment increased the interest rates of the Company’s
term, revolving and special loans from 8% to 10%, effective April 1, 2020. Until January 1, 2021, rather than cash payments of
accrued interest under the term and revolving loans, interest will be paid by the issuance of and treated as additional principal
thereunder. Commencing January 2, 2021, such interest will be payable in cash. Interest on the special loan will no longer be
paid in cash, but by the issuance of and treated as additional principal thereunder.
Upon
entry into the Eighth Amendment, the Company completed an analysis of the changes in the Loan and Security Agreement within ASC
470 Debt, concluding that the changes represent a modification to the existing debt that was not a troubled debt restructuring
and will account for the modified terms prospectively as yield adjustments, based on the revised terms.
Seventh
Amendment; Entry into Secured Convertible Special Loan 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. As of March
31, 2020, we utilized the assistance of a third-party valuation specialist to assist in updating our fair value analysis of the
Special Loan, resulting in recognition of a $151 loss during the period from the change in fair value of the liability.
Sixth
Amendment; Extension of Maturity Dates
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 Secured Revolving Promissory Note
with the Secured Disbursed Escrow Promissory Note.
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 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, 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 matured and all remaining amounts owing thereunder became 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 Allure 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. The Company continues to accrue interest on the Amended and Restated
Seller Note and have included $29 in accrued expenses in the Condensed Consolidated Financial Statements as of March 31, 2020.
See Note 9 Commitments and Contingencies for further discussion.
NOTE
9: COMMITMENTS AND CONTINGENCIES
Litigation
On
August 2, 2019, the Company filed suit in Jefferson Circuit Court, Kentucky, against a supplier of Allure for breach of contract,
breach of warranty, and negligence with respect to equipment installations performed by such supplier for an Allure customer.
This case 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 Allure 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.
The
Company is not party to any other material legal proceedings, other than ordinary routine litigation incidental to the business,
as of May 7, 2020, and there were no other such proceedings pending during the period covered by this Report.
Termination
benefits
We
implemented cost-control measures in light of the effect of the COVID-19 pandemic on our business, including employment compensation
reductions designed to achieve preliminary cost savings. On March 19, 2020, the Company’s Board of Directors approved a
six-month reduction of the salaries of our Chief Executive Officer and Chief Financial Officer by twenty percent (20%), thereby
reducing the salaries payable to such officers in 2020 to $297,000 and $224,100, respectively.
On
March 20, 2020, we completed a reduction-in-force and accrued one-time termination benefits related to severance to the affected
employees of $135, the total of which is included in accrued expenses on the Condensed Consolidated Balance Sheet.
NOTE
10: RELATED PARTY TRANSACTIONS
In
addition to the financing transactions with Slipstream, a related party, discussed in Note 8 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.
Following repayment of the note, 33 Degrees
has continued to purchase additional hardware and services from the Company under normal payment terms. For the three months ended
March 31, 2020 and 2019, the Company had sales to 33 Degrees of $500, or 13.5%, and $195, or 2.1%, respectively, of consolidated
revenue. Accounts receivable due from 33 Degrees was $211, or 5.0%, and $1, or 0.0% of consolidated accounts receivable at March
31, 2020 and December 31, 2019, respectively.
NOTE
11: INCOME TAXES
Our
deferred tax assets are primarily related to net federal and state operating loss carryforwards (NOLs). We have substantial NOLs
that are limited in usage by IRC Section 382. IRC Section 382 generally imposes an annual limitation on the amount of NOLs that
may be used to offset taxable income when a corporation has undergone significant changes in stock ownership within a statutory
testing period. We have performed a preliminary analysis of the annual NOL carryforwards and limitations that are available to
be used against taxable income. Based on the history of losses of the Company, there continues to be a full valuation allowance
against the net deferred tax assets of the Company with a definite life.
For the three months ended March 31, 2020, we
reported tax benefit of $155. As of March 31, 2020, the net deferred tax assets totaled $0 after valuation allowance, as compared
to $175 at December 31, 2019. As discussed above, this is primarily the result of the impairment to goodwill, which resulted in
adjusting the deferred tax impact associated with indefinite lived goodwill from a deferred tax liability to a deferred tax asset.
As the indefinite-lived intangibles can no longer provide a source of income, a full valuation allowance was placed against the
deferred tax assets.
NOTE
12: WARRANTS
A
summary of outstanding equity warrants is included below:
|
|
Warrants (Equity)
|
|
|
|
Amount
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
|
|
Balance January 1, 2020
|
|
|
4,733,028
|
|
|
$
|
4.83
|
|
|
|
3.41
|
|
Warrants issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants expired
|
|
|
(11,318
|
)
|
|
|
12.20
|
|
|
|
-
|
|
Balance March 31, 2020
|
|
|
4,815,047
|
|
|
$
|
4.81
|
|
|
|
3.17
|
|
NOTE
13: STOCK-BASED COMPENSATION
A
summary of outstanding options is included below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of Exercise
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
Prices between
|
|
Outstanding
|
|
|
Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
$0.01 - $5.39
|
|
|
25,000
|
|
|
|
9.61
|
|
|
$
|
1.88
|
|
|
|
0
|
|
|
$
|
1.88
|
|
$5.40 - $7.50
|
|
|
203,997
|
|
|
|
6.24
|
|
|
$
|
6.91
|
|
|
|
166,913
|
|
|
$
|
6.73
|
|
$7.51 - $160.50
|
|
|
84,812
|
|
|
|
4.65
|
|
|
|
12.43
|
|
|
|
84,812
|
|
|
$
|
12.43
|
|
|
|
|
313,809
|
|
|
|
6.08
|
|
|
$
|
8.00
|
|
|
|
251,725
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted Average Exercise
|
|
|
|
Outstanding
|
|
|
Price
|
|
Balance, December 31, 2019
|
|
|
313,860
|
|
|
$
|
8.06
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited or expired
|
|
|
51
|
|
|
|
368
|
|
Balance, March 31, 2020
|
|
|
313,809
|
|
|
$
|
8.00
|
|
The
weighted average remaining contractual life for options exercisable is 5.4 years as of March 31, 2020.
Stock
Compensation Expense Information
ASC
718-10, Stock Compensation, requires measurement and recognition of compensation expense for all stock-based payments including
warrants, stock options, restricted stock grants and stock bonuses based on estimated fair values. Under the Amended and Restated
2006 Equity Incentive Plan, the Company reserved 1,720,000 shares for purchase by the Company’s employees and under the
Amended and Restated 2006 Non-Employee Director Stock Option Plan the Company reserved 700,000 shares for purchase by the Company’s
employees. There are 12,186 options outstanding under the 2006 Equity Incentive Plan.
In
October 2014, the Company’s shareholders approved the 2014 Stock Incentive Plan, under which 7,390,355 shares were reserved
for purchase by the Company’s employees. In August 2018, a special meeting of shareholders was held in which the shareholders
voted to amend the Company’s 2014 Stock Incentive Plan to increase the reserve of shares authorized for issuance thereunder,
from 7,390,355 shares to 18,000,000 shares. There are 276,674 options outstanding under the 2014 Stock Incentive Plan.
Compensation
expense recognized for the issuance of stock options for the years three months ended March 31, 2020 and 2019 of $50 and $41,
respectively, was included in general and administrative expense in the Condensed Consolidated Financial Statements. Amounts recorded
include stock compensation expense for awards granted to directors of the Company in exchange for services at fair value.
At
March 31, 2020, there was approximately $155 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.
NOTE 14: SIGNIFICANT CUSTOMERS/VENDORS
Significant Customers
We had two (2) and one (1) customers that in
the aggregate accounted for 24% and 18.5% of accounts receivable as of March 31, 2020 and December 31, 2019, respectively, which
includes transactions with 33 Degrees for both periods.
We had 3 and 2 customers that accounted for
39% and 42% of revenue for the three months ended March 31, 2020 and 2019, respectively, of which 33 Degrees represented 13.6%
and 2.1% for the same periods, respectively.
Significant Vendors
We had two (2) and one (1) vendors that accounted
for 41% and 50% of outstanding accounts payable at March 31, 2020 and December 31, 2019, respectively.
NOTE
15: 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)
|
|
Three Months Ended
March 31,
2020
|
|
|
Three Months Ended
March 31,
2019
|
|
Finance lease cost
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
7
|
|
|
$
|
8
|
|
Interest
|
|
|
1
|
|
|
|
2
|
|
Operating lease cost
|
|
|
172
|
|
|
|
197
|
|
Total lease cost
|
|
$
|
180
|
|
|
$
|
207
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
3.2 years
|
|
|
|
4.0 years
|
|
Finance leases
|
|
|
1.1 years
|
|
|
|
1.6 years
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
Finance leases
|
|
|
13.8
|
%
|
|
|
13.3
|
%
|
The
following is a schedule, by years, of maturities of lease liabilities as of March 31, 2020:
(in thousands)
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
The remainder of 2020
|
|
$
|
513
|
|
|
$
|
15
|
|
2021
|
|
|
630
|
|
|
|
4
|
|
2022
|
|
|
377
|
|
|
|
1
|
|
2023
|
|
|
375
|
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
-
|
|
Total undiscounted cash flows
|
|
|
1,895
|
|
|
|
20
|
|
Less imputed interest
|
|
|
(277
|
)
|
|
$
|
(2
|
)
|
Present value of lease liabilities
|
|
$
|
1,619
|
|
|
$
|
18
|
|
Supplemental
cash flow information related to leases are as follows:
(in thousands)
|
|
Three Months Ended
March 31,
2020
|
|
|
Three Months Ended
March 31,
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
170
|
|
|
$
|
191
|
|
Operating cash flows from finance leases
|
|
|
1
|
|
|
|
1
|
|
Financing cash flows from finance leases
|
|
|
7
|
|
|
|
8
|
|