Attached files
| file | filename |
|---|---|
| EX-32.2 - CERTIFICATION - CREATIVE REALITIES, INC. | f10k2016ex32ii_creative.htm |
| EX-32.1 - CERTIFICATION - CREATIVE REALITIES, INC. | f10k2016ex32i_creative.htm |
| EX-31.2 - CERTIFICATION - CREATIVE REALITIES, INC. | f10k2016ex31ii_creative.htm |
| EX-31.1 - CERTIFICATION - CREATIVE REALITIES, INC. | f10k2016ex31i_creative.htm |
| EX-23.1 - CONSENT OF EISNERAMPER LLP - CREATIVE REALITIES, INC. | f10k2016ex23i_creative.htm |
| EX-10.23 - EMPLOYMENT AGREEMENT WITH RICHARD MILLS - CREATIVE REALITIES, INC. | f10k2016ex10xxiii_creative.htm |
| EX-10.22 - EMPLOYMENT AGREEMENT WITH JOHN WALPUCK - CREATIVE REALITIES, INC. | f10k2016ex10xxii_creative.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark one)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-33169
CREATIVE REALITIES, INC.
(Exact name of registrant as specified in its charter)
| Minnesota | 41-1967918 | |
| (State or other
jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 13100 Magisterial Drive, Ste. 100, Louisville, KY | 40223 | |
| (Address of principal executive offices) | (Zip Code) |
(502) 791-8800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, Par Value $0.01
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| Non-accelerated filer | ☐ | (Do not check if a smaller reporting company) | Smaller reporting company | ☒ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the common equity held by non-affiliates of the issuer as of June 30, 2016, was approximately $4,630,000 based upon the last sale price of one share on such date.
As of March 22, 2017, the issuer had outstanding 67,442,088 shares of common stock.
| ITEM 1 | BUSINESS |
(All currency is rounded to the nearest thousands, except share and per share amounts.)
Our Company
Creative Realities, Inc. is a Minnesota corporation that provides innovative digital marketing technology and solutions to global retail companies, luxury and other individual retail brands, digital out-of-home (DOOH) companies, advertising networks, outdoor clients, enterprises and other organizations. We have deployed our digital marketing technology and solutions throughout the United States and in approximately 40 countries globally. We have 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 digital marketing technology and solutions include: digital merchandising systems; omni-channel customer engagement systems, interactive digital shopping assistants, advisors and kiosks; high-end audio-visual networks, 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.
Our main operations are conducted directly through Creative Realities, Inc., and under our wholly owned subsidiaries Wireless Ronin Technologies Canada, Inc., and ConeXus World Global, LLC, a Kentucky limited liability company.
We seek to generate revenue in this business by:
| ● | consulting with our customers to determine the technologies and solutions required to achieve their specific goals, strategies and objectives; | |
| ● | designing our customers’ digital marketing experiences, content and interfaces; | |
| ● | engineering the systems architecture delivering the digital marketing experiences we design – both software and hardware – and integrating those systems into a customized, reliable and effective digital marketing experience; | |
| ● | managing the efficient, timely and cost-effective deployment of our digital marketing technology solutions for our customers; | |
| ● | delivering and updating the content of our digital marketing technology solutions using a suite of advanced media, content and network management software products; and | |
| ● | maintaining our customers’ digital marketing technology solutions by: providing content production and related services; creating additional software-based features and functionality; hosting the solutions; monitoring solution service levels; and responding to and/or managing remote or onsite field service maintenance, troubleshooting and support calls. |
We seek to generate revenue through these activities through: bundled-solution sales; service fees for consulting, experience design, content development and production, software development, engineering, implementation, and field services; software license fees; and maintenance and support services related to our software, managed systems and solutions.
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Our digital marketing technology and solutions are deployed in and have application across diverse categories: automotive, apparel and accessories, banking, baby/children, beauty, consumer products, department stores, electronics, fashion, fitness, foodservice/quick service restaurants, financial services, gaming, luxury retail, mass merchants, mobile operators, and pharmacy retail The industries in which we sell our solutions are established, but the planning, development, implementation and maintenance of technology-enabled experiences involving combinations of digital marketing technologies is relatively new and evolving. Moreover, a number of participants in these industries have only recently started considering or expanding the adoption of these types of technologies, solutions and experiences as part of their overall marketing strategies. As a result, we remain an early stage company without an established history of profitability.
We believe that the adoption and evolution of digital marketing technology and solutions will increase substantially in years to come both in the industries or categories on which we currently focus and in others. We also believe that adoption of our technology and solutions depends upon not only the services and solutions that we provide, but also depends heavily upon the cost of hardware used to process and display content on them. While the costs of hardware configurations and software media players have historically decreased and we believe they will continue to do so at an accelerating rate, flat panel displays typically constitute a large portion of the expenditure customers make relative to the entire cost of implementing a digital marketing system implementation and can be a barrier to customer deployment. As a result, we believe that the broader adoption of digital marketing technology solutions is likely to increase, although we cannot predict the rate at which such adoption will occur.
Another key component of our business strategy, especially given the evolving industry dynamics in which we operate, is to acquire and integrate other operating companies in the industry in conjunction with pursuing our organic growth objectives. We believe that the selective acquisition and successful integration of certain companies will accelerate our growth; enable us to aggregate multiple customer bases onto a single business and technology platform; provide us with greater operating scale; enable us to leverage a common set of processes, tools, and cost efficiencies; and ultimately result in higher operating profitability and cash flow from operations. Our management team is actively pursuing and evaluating alternative acquisition opportunities on an ongoing basis. Our management team and Board of Directors have broad experience with the execution, integration and financing of acquisitions. We believe that, based on the foregoing and other factors, the Company can successfully serve as a consolidator of multiple business and technology platforms serving similar markets.
Our company sells products and services primarily throughout North America.
Corporate Organization
Our principal offices are located at 13100 Magisterial Drive, Ste 100, Louisville, Kentucky 40223, and our telephone number at that office is (502) 791-8800.
The legal entity that is the registrant was originally incorporated and organized as a Minnesota corporation under the name Wireless Ronin Technologies, Inc. in March 2003. Our business initially focused on the provision of expertise digital media marketing solutions to customers, including digital signage, interactive kiosks, mobile, social media and web-based media solutions. We acquired the assets and business of Broadcast International, Inc., a Utah corporation and public registrant, through a merger transaction that was effective as of August 1, 2014. Then on August 20, 2014, we consummated a merger transaction with Creative Realities, LLC, a privately owned Delaware limited liability company, in which we issued a majority of our issued and outstanding shares of common stock. In that merger transaction, we acquired the interactive marketing technology business of Creative Realities that we currently operate. Shortly after that merger, we changed our corporate name from Wireless Ronin Technologies, Inc. to “Creative Realities, Inc.” On October 15, 2015, we acquired the assets and business of ConeXus World Global, LLC, a privately owned Kentucky limited liability company for which we issued preferred and common stock. In that merger transaction, we acquired the systems integration and marketing technology business of ConeXus World that we currently operate. On May 23, 2016, we dissolved Broadcast International, Inc.
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Our fiscal year ends December 31. Neither we nor any of our predecessors have been in bankruptcy, receivership or any similar proceeding. Our corporate structure, including our principal operating subsidiaries, is as follows:
Recent Acquisitions
Acquisition of ConeXus World Global
On October 15, 2015, we completed the acquisition of ConeXus World Global, LLC for 2,080,000 shares of Series A-1 Convertible Preferred Stock, and the conversion of $823 of ConeXus World Global debt into (i) 2,639,258 shares of our common stock, and (ii) $150 in principal amount of our convertible debt. As a result of the merger transaction, ConeXus World Global, LLC is now our wholly owned operating subsidiary. The merger was completed by the filing of articles of merger with the Kentucky Secretary of State.
The debtholders and members of ConeXus received a total of 1,664,000 shares of Series A-1 Convertible Preferred Stock, par value $1.00, and 16,000,000 shares of our common stock, par value $0.01. In accordance with the terms of the amendment to the agreement and plan of merger and reorganization, an additional 416,000 shares of Series A-1 Convertible Preferred Stock and 4,000,000 shares of common stock, collectively referred to as holdback shares, were to be issued immediately upon the reorganization of the capital structure of a Belgian affiliate of ConeXus. As of the date of this Annual Report on Form 10-K, this reorganization has not occurred and the Company will not be acquiring the ConeXus Belgian affiliate. Therefore, no liability has been recorded for these additional shares, the consideration has not been included in the purchase price allocation and the financial results of the Belgian affiliate have not been included in the consolidated financial statements.
As used throughout this report, the “Company” generally refers to the registrant (Creative Realities, Inc., formerly known as Wireless Ronin Technologies, Inc.), unless the context otherwise indicates or requires. Use of the first person “we” refers to the Company or, if the context so requires, to the historical business of Creative Realities or the registrant itself, in each case prior to the consummation of the August 20, 2014 merger transaction.
Financing Arrangements
Factoring Agreement
On October 15, 2015, we entered into a Factoring Agreement with Allied Affiliated Funding, L.P. Under the Factoring Agreement, Allied Affiliated Funding, or “Allied,” was permitted, but not required to purchase approved receivables from the Company and its subsidiaries up to a maximum amount of $3.0 million. Upon receipt of any advance under the Factoring Agreement, the Company and its subsidiaries sold and assigned all of their rights in such receivables and all proceeds thereof to Allied, with recourse. The purchase price for receivables bought and sold under the Factoring Agreement was equal to their face amount less a 1.10% base discount. Added to the base discount was an additional .037% discount from the face value of a receivable for each day beyond 30 days that the receivable remained unpaid by the account debtor. The base discount was subject to adjustment in the event of changes in the prime lending rate as published by The Wall Street Journal. Allied provided advances under the Factoring Agreement net of an applicable reserve amount, as specified in the agreement. The obligations of the Company and its subsidiaries under the Factoring Agreement were secured by substantially all of the assets of the Company and its subsidiaries. Allied had the right under the Factoring Agreement to require the Company to repurchase any receivable earlier sold for a purchase price equal to the face value of the receivable. The Factoring Agreement had an initial term of one year, subject to potential one-year renewals thereafter, unless earlier terminated (or not renewed) in accordance with the agreement. The Company terminated the Factoring Agreement on August 17, 2016, upon payment to Allied of an early termination fee equal to $37.5.
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Common Stock
In December 2016, accredited investors converted 106,500 shares of preferred stock for 417,647 shares of common stock.
In October 2016, an accredited investor converted 25,500 shares of preferred stock for 100,000 shares of common stock.
In August 2016, an accredited investor converted 50,000 shares of preferred stock for 196,078 shares of common stock
In July 2016, an accredited investor converted 25,500 shares of preferred stock for 100,000 shares of common stock.
In June 2016, in conjunction with the structured settlement program, the Company issued 409,347 shares of its restricted common stock to creditors and 809,842 shares of stock were issued to investors.
In May 2016, 409,347 shares of the Company’s common stock were issued to certain creditors of the Company in settlement of outstanding accounts payable aggregating $163 pursuant to agreements entered into in March 2016. The Company recognized a gain on debt extinguishment of $78 on the date the stock was issued.
In February 2016, accredited investors exchanged 100,000 shares of preferred stock in exchange for 392,157 shares of common stock.
In December 2015, we entered into an Exchange Agreement with an accredited investor who held a warrant, dated February 18, 2015, for the purchase of up to 1,515,152 shares of our common stock. Pursuant to the Exchange Agreement, we issued 975,000 shares of our common stock to the investor in exchange for the investor’s surrender of the warrant.
The Company and the investors entered into registration rights agreements requiring Creative Realities to register under the Securities Act of 1933 the resale of the shares of common stock issuable upon conversion of the secured notes and upon exercise of the warrants. The Company filed a registration statement on Form S-1/A on May 13, 2016 registering 23,272,184 shares of common stock and that registration statement became effective on June 1, 2016.
Secured Notes
Term Notes
On December 12, 2016, we entered into a $1.0 million secured revolving promissory note pursuant to the August 17, 2016 Loan and Security Agreement with Slipstream Communications, LLC, a related party, wherein we borrowed $786 with interest thereon at 8% per annum, maturing on February 1, 2017. In connection with the loan, we issued the lender a five-year warrant to purchase up to 1,542,452 shares of the Company’s common stock at a per-share price of $0.28 (subject to adjustment), all pursuant to a securities purchase agreement. In connection with the secured revolving promissory note, we incurred fees aggregating $37. The fair value of the warrants on the issuance date was $136. This note was repaid on January 12, 2017.
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On August 17, 2016, we entered into a Loan and Security Agreement with Slipstream Communications, LLC, a related party (see Note 11), under which we obtained a $3.0 million term loan, with interest thereon at 8% per annum, maturing on August 17, 2017 (with a one-year option for us to extend that maturity, so long as we are not then in default and we deliver additional warrants to the lender). 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. In connection with the new debt, we issued the lender a five-year warrant to purchase up to 5,882,352 shares of the Company’s common stock shares at a per-share price of $0.28 (subject to adjustment), all pursuant to a securities purchase agreement. The proceeds from the loan were used to (i) satisfy the obligations owed to Allied Affiliated Lending, L.P. under the Factoring Agreement (see Note 4), (ii) pay off certain obligations under settlement arrangements in effect as of the date hereof (see Note 9), and (iii) obtain working capital. The Loan and Security Agreement permits the lender to make additional advances of up to an additional $1.0 million. In connection with this financing transaction, we terminated the Factoring Agreement with Allied Affiliated Lending. Our principal subsidiaries — Creative Realities, Inc., Creative Realities, LLC, Conexus World Global, LLC, and Broadcast International, Inc. — were also parties to the securities purchase agreement and are co-makers of the secured convertible promissory notes. In connection with the term loan, we incurred fees aggregating $20. The fair value of the warrants on the issuance date was $361.
Convertible Promissory Notes
The convertible promissory notes were issued in a private placement exempt from registration under the Securities Act of 1933. Our principal subsidiaries — Creative Realities, LLC, Wireless Ronin Technologies Canada, Inc., and Conexus World Global, LLC — were also parties to the Securities Purchase Agreement and are co-makers of the secured convertible promissory notes. Obligations under the secured convertible promissory notes are secured by a grant of collateral security in all of the personal property of the co-makers pursuant to the terms of a security agreement. The secured convertible promissory notes bear interest at the rate of 14% per annum. Of this amount, 12% per annum is payable monthly in cash, and the remaining 2% per annum is payable in the form an additional principal through increases in the principal amount of the note. Upon the consummation of a change in control transaction of the company or a default, interest on the secured convertible promissory note will increase to the rate of 17% per annum. The secured convertible promissory note matures on April 15, 2017, unless the holder of a note elects to extend the maturity date for an additional six-month period, in which case such note will mature on October 15, 2017. On January 17, 2017, Slipstream Communications, LLC elected to extend the maturity date of the convertible promissory notes to October 15, 2017. At any time prior to the maturity date, the holder of a promissory note may convert the outstanding principal and accrued and unpaid interest into our common stock at its conversion rate. We may not prepay the secured convertible promissory note prior to the maturity date. The secured convertible promissory note contains other customary terms.
In December 2016 and January 2017, Slipstream Communications, LLC purchased all of our outstanding convertible promissory notes from the original debtholders. The terms of the notes have remained the same. Further discussion of the notes follows.
On June 29, 2016, we entered into a secured convertible promissory note in the principal amount of $50 and an immediately exercisable five-year warrant to purchase up to 89,286 shares of the Company’s common stock at a per-share price of $0.28 (subject to adjustment). The fair value of the warrants on the issuance date was $6. This note was subsequently purchased by Slipstream Communications, LLC on December 20, 2016.
On June 13, 2016, upon receipt of an additional $300 of principal, we exchanged two short term demand notes entered into in July 2015 totaling $150 for two secured convertible promissory notes totaling a principal amount of $450 and immediately exercisable five-year warrants to purchase up to 803,572 shares of the Company’s common stock at a per-share price of $0.28 (subject to adjustment). This exchange is accounted for as a modification of the debt. The fair value of the warrants on the issuance date was $57. On December 20, 2016, $200 of this note was subsequently purchased by Slipstream Communications, LLC, the remaining $250 was already owed to Slipstream Communications, LLC.
On or about May 3, 2016, we entered into a secured convertible promissory note in the principal amount of $500,000 and an immediately exercisable five-year warrant to purchase up to 892,857 shares of the Company’s common stock at a per-share price of $0.28 (subject to adjustment). In connection with the secured convertible promissory note, we incurred commissions to a placement agent aggregating $25. The fair value of the warrants on the issuance date was $89. This note was subsequently purchased by Slipstream Communications, LLC on December 22, 2016.
On December 28, 2015, we entered into secured convertible promissory notes in the aggregate principal amount of $1,250 and immediately exercisable five-year warrants to purchase up to 2,232,143 shares of the Company’s common stock at a per-share price of $0.28 (subject to adjustment). In connection with the secured convertible promissory note, we incurred commissions to a placement agent aggregating $88. The fair value of the warrants on the issuance date was $166. This note was subsequently purchased by Slipstream Communications, LLC on December 20, 2016.
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On October 26, 2015, we entered into a secured convertible promissory note in the principal amount of $300 together with an immediately exercisable five-year warrant to purchase up to 535,714 shares of the Company’s common stock at a per-share price of $0.28, (subject to adjustment). In connection with the secured convertible promissory note, we paid commissions to a placement agent aggregating $15. The fair value of the warrants on the issuance date was $61. This note was subsequently purchased by Slipstream Communications, LLC on December 20, 2016.
On October 15, 2015, the Company entered into a secured convertible promissory note in the principal amount of $500 together with an immediately exercisable five-year warrant to purchase up to 892,857 shares of the Company’s common stock at a per-share price of $0.28, (subject to adjustment). In connection with the secured convertible promissory note, we paid commissions to a placement agent aggregating $25. The fair value of the warrants on the issuance date was $107. This note was subsequently purchased by Slipstream Communications, LLC on December 20, 2016.
On June 23, 2015, the Company entered into a secured convertible promissory note in the principal amount of $400 together with an immediately exercisable five-year warrant to purchase up to 640,000 shares of the Company’s common stock at a per-share price of $0.30 (subject to adjustment). The fair value of the warrants on the issuance date was $78. In connection with the October 26, 2015 secured convertible promissory note, we entered into extension agreements with the holders of this secured convertible promissory to primarily extend the maturity date to April 15, 2017 in exchange for 75,000 shares of the Company’s common stock valued at $16.5. This change was accounted for as a modification of the debt. The $16.5 is recognized as additional debt discount that will be amortized over the remaining life of the debt. This note was subsequently purchased by Slipstream Communications, LLC on December 29, 2016.
On May 20, 2015, the Company entered into a secured convertible promissory note in the principal amount of $465 together with a five-year immediately exercisable warrant to purchase up to 762,295 shares of the Company’s common stock at a per-share price of $0.30, (subject to adjustment). The fair value of the warrants on the issuance date was $167. This secured convertible promissory note together with accrued but unpaid interest and a 25% conversion premium was converted into a secured convertible promissory note in the principal amount of $585 maturing on August 18, 2016, together with new immediately exercisable five-year warrants to purchase up to 935,210 shares of the Company’s common stock at a price of $0.30 per share, (subject to adjustment). The fair value of the warrants on the issuance date was $114. In connection with the October 26, 2015 secured convertible promissory note, we entered into extension agreements with the holders of this secured convertible promissory to primarily extend the maturity date to April 15, 2017 in exchange for 109,688 shares of the Company’s common stock valued at $24. This change is accounted for as a modification of the debt. The $24 is recognized as additional debt discount that will be amortized over the remaining life of the debt.
On February 18, 2015, the Company entered into a secured convertible promissory note in the principal amount of $1.0 million together with an immediately exercisable a five-year warrant to purchase up to 1,515,152 shares of the Company’s common stock at a per-share price of $0.38. The warrant had a fair value of $272 on the date of issuance. On December 21, 2015, this warrant was surrendered in exchange for 975,000 shares of the Company’s common stock in a noncash transaction. The interest on this note was payable 12% in cash and 2% as additional principal amount to the note. This note was paid in full on October 15, 2015.
Preferred Stock
In 2016, 307,500 shares of Series A Preferred Stock were converted into 1,205,882 shares of common stock at the conversion rate of $0.255 per share.
On October 15, 2015, we issued 1,664,000 shares of Series A-1 Convertible Preferred Stock at $1.00 per share as part of the consideration for the acquisition of Conexus World Global, LLC.
The preferred stock entitles its holders to a 6% dividend, payable semi-annually in cash or in kind. During the years ended December 31, 2016 and 2015, the Company issued an aggregate of 452,224 and 345,794 shares of preferred stock in satisfaction of its semi-annual dividend obligation for 2016 and 2015, respectively.
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The preferred stock may be converted into our common stock at the option of a holder at an initial conversion price as adjusted of $0.255 per share. Subject to certain conditions, we may call and redeem the preferred stock after three years. During such time as a majority of the preferred stock sold remains outstanding, holders will have the right to elect a member to our Board of Directors. The preferred stock has full-ratchet price protection in the event that we issue common stock below the conversion price, as adjusted, subject to certain customary exceptions. The warrants issued to purchasers of the preferred stock contain weighted-average price protection in the event that we issue common stock below the exercise price, as adjusted, again subject to certain customary exceptions. In the Securities Purchase Agreement, we granted purchasers of the preferred stock certain registration rights pertaining to the common shares they may receive upon conversion of their preferred stock and upon exercise of their warrants.
Changes in Management and Board of Directors
On May 2, 2016, Eric J. Bertrand was appointed to the Board of Directors of Creative Realities, Inc. Mr. Bertrand possesses voting and investment power over shares beneficially held by Lincoln Road Media Partners LLC, which was the holder of a convertible promissory note and is the holder of a warrant issued in a private placement transaction on April 14, 2016. See Note 8 to the Consolidated Financial Statements for additional information. Mr. Bertrand was appointed to the board in connection with Lincoln Road Media’s investment in the convertible note and warrant.
In November 2015, Patrick O’Brien was appointed to our Board of Directors.
On October 15, 2015, Richard Mills was appointed to our Board of Directors. Mr. Mills also became our Chief Executive Officer. As a result of this appointment, Mr. John Walpuck is no longer our Interim Chief Executive Officer, but retained his titles of Chief Financial Officer and Chief Operating Officer. In connection with the appointment of Richard Mills as the Chief Executive Officer, we entered into an employment agreement with Mr. Mills. Under the employment agreement, Mr. Mills will serve as Chief Executive Officer for a two-year term, which automatically renews for additional one-year periods unless either we or Mr. Mills elects not to extend the term. The agreement provides for an initial annual base salary of $270, subject to annual increases but generally not subject to decreases, and includes provisions for the right to receive up to 4,951,557 performance shares of common stock in connection with a series of performance-based requirements. These performance shares are included as part of the purchase price of ConeXus. Under the agreement, Mr. Mills is eligible to participate in performance-based cash bonus or equity award plans for our senior executives. Mr. Mills will participate in our employee benefit plans, policies, programs, perquisites and arrangements to the extent he meets applicable eligibility requirements.
Business Strategy
We believe that our existing business model is highly scalable and can be expanded successfully as we continue to grow organically and integrate our recent merger transactions, strengthen our operational practices and procedures, further streamline our administrative office functions, and continue to capitalize on various marketing programs and activities.
Industry Background
Over approximately the past 18-24 months, we believe certain digital marketing technology industry trends are creating the opportunity for retailers, brands, venue-operators, enterprises, non-profits and other organizations to create innovative shopping, marketing, and informational experiences for their customers and other stakeholders in various venues worldwide. These trends include: (i) the expectations of technology-savvy consumers; (ii) addressing on-line competitors by improving physical experiences (iii) accelerating decline in the cost of hardware configurations (primarily flat panel displays) and software media players; (ii) the continued evolution of mobile, social, software and hardware technologies, applications and tools; (iii) the increasing sophistication of social networking platforms; (iv) increasingly complex customer requirements related to their specific digital marketing technology and solution objectives; and (v) customers challenging service providers with the delivery of a satisfactory consumer experience with the traditional pressure on reducing installation and ongoing operating costs.
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As a result, a growing number of retailers, brands, venue-operators and other organizations have identified the need and opportunity to implement increasingly cost-effective and “sales-lifting” digital marketing, and interactive experiences to market to their customers. These include creating unique and customized experiences for targeted, timely offerings and relevant promotions; improving engagement resulting in increased sales; and increasing shopping basket size. We believe our clients consider capitalizing on these industry trends to be increasingly critical to any successful “store of the future” retail and brand sales environment, especially where sales staff turnover is high, training outcomes are inconsistent and product knowledge is low.
Companies are accomplishing their strategies by implementing various digital marketing technology solutions, which: are implemented in multiple forms and types of configurations and locations; attempt to achieve any of a broad range of individual or combination of objectives; contain various levels of targeting; have the ability to instantly manage single or multiple locations remotely from a customer’s desktop or other connected device at each location; and are built to deliver or contain a standard or customized experience unique to and within the customer’s environment. Examples of such solutions include:
| ● | Digital Merchandising Systems, which aim to inform and interact with customers through various types of content in an integrated experience, improve in-store customer experiences and increase overall sales, upsells, and/or cross-sales; | |
| ● | Digital Sales Assistants, which aim to replace or augment existing sales resources and the level of interactive and informational sales assistance inside the store; | |
| ● | Digital Way-Finders, which aim to help customers navigate their way around individual retail stores and multi-store locations or venues, or within individual brand categories; | |
| ● | Digital Kiosks, which aim to provide data, specialized and customized broadcasts, promotional information and coupons, train, and other forms of information and interaction with customers in a variety of deployment forms, types, configurations and experiences;
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● | Digital Menu-Board Systems, which aim to enable various types of restaurant operators the ability to remotely and on a scheduled basis, update and modify menu information, promotions, and other forms of content dynamically; |
| ● | Dynamic Digital Signage which aims to deliver and manage in-store marketing and advertising campaigns, specialized and customized broadcasts, and various other forms of messaging targeting customers in a particular experience or environment. |
Our Markets
We currently market and sell our marketing technology solutions through our direct sales force and word-of-mouth referrals from existing customers. Select strategic partnerships and lead generation programs also drive business to the Company through targeted business development initiatives. We market to companies that seek digital marketing solutions across multiple connected devices and who specifically seek or could benefit from enhancements to the customer experience offered in their stores, venues, brands or organizations.
Our digital marketing technology solutions have application in a wide variety of industries. The industries in which we sell our solutions are established and include hospitality, branded retail, automotive, food service and retail healthcare, but the planning, development, implementation and maintenance of technology-enabled experiences is relatively new and evolving. Moreover, a number of participants in these industries have only recently started considering or expanding the adoption of these types of technologies, solutions and experiences as part of their overall marketing strategies.
Seasonality
A portion of our customer activity is influenced by seasonal effects related to traditional end of calendar year peak retail sales periods and other factors that arise from our target customer base. Nevertheless, our revenues can be materially affected by the launch of new markets, the timing of production rollouts, and other factors, any of which have the ability to reduce or outweigh certain seasonal effects.
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Effect of General Economic Conditions on our Business
We believe that demand for our services will increase in part as a result of recovering retail-related real estate investments and new construction and the recent economic recovery in general. These general economic improvements generally make it easier for our customers to justify decisions to invest in digital marketing technology solutions.
Regulation
We are subject to regulation by various federal and state governmental agencies. Such regulation includes radio frequency emission regulatory activities of the U.S. Federal Communications Commission, the consumer protection laws of the U.S. Federal Trade Commission, product safety regulatory activities of the U.S. Consumer Product Safety Commission, and environmental regulation in areas in which we conduct business. Some of the hardware components that we supply to customers may contain hazardous or regulated substances, such as lead. A number of U.S. states have adopted or are considering “takeback” bills addressing the disposal of electronic waste, including CRT style and flat panel monitors and computers. Electronic waste legislation is developing. Some of the bills passed or under consideration may impose on us, or on our customers or suppliers, requirements for disposal of systems we sell and the payment of additional fees to pay costs of disposal and recycling. Presently, we do not believe that any such legislation or proposed legislation will have a materially adverse impact on our business.
Competition
While we believe there is presently no direct competitor with the comprehensive offering of technologies, solutions and services we provide to our customers, there are multiple individual competitors who offer pieces of our solution stack. These include digital signage software companies such as Stratacache, Four Winds Interactive, and Reflect Systems; marketing services companies such as Sapient Nitro or digital signage systems integrators such as Convergent. Some of these competitors may have significantly greater financial, technical and marketing resources than we do and may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements. We believe that our sales and business development capabilities, network operations / field service management capabilities, our comprehensive offering of digital marketing technology and solutions, brand awareness, and proprietary processes are the primary factors affecting our competitive position.
Territories
Our Company sells products and services primarily throughout North America.
Employees
We have approximately 70 employees as of December 31, 2016. We do not have any employees that operate under collective-bargaining agreements.
| ITEM 1A | RISK FACTORS |
Investing in our securities involves a high degree of risk. You should carefully consider the specific risks described below, and any risks described in our other filings with the Securities and Exchange Commission, pursuant to Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934, before making an investment decision. See the section of this prospectus entitled “Where You Can Find More Information.” Any of the risks we describe below could cause our business, financial condition, results of operations or future prospects to be materially adversely affected.
RISKS RELATED TO OUR BUSINESS AND OUR INDUSTRY
We have generally incurred losses, and may never remain profitable.
Except for the second and fourth quarters of 2016, we have incurred net losses, have negative cash flows from operations and have a working capital deficit. We incurred net losses in each of the years ended December 31, 2016 and 2015, respectively.
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We have formulated our business plans and strategies based on certain assumptions regarding the acceptance of our business model and the marketing of our products and services. Nevertheless, our assessments regarding market size, market share, market acceptance of our products and services and a variety of other factors may prove incorrect. Our future success will depend upon many factors, including factors which may be beyond our control or which cannot be predicted at this time.
We have limited operating history as a combined company and cannot ensure the long-term successful operation of our business or the execution of our business plan.
We have limited operating history as a combined company since the closing of the merger transactions summarized herein, and our digital marketing technology and solutions are an evolving business offering. As a result, investors have a limited track record by which to evaluate our future performance. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by growing companies in new and rapidly evolving markets. We may be unable to accomplish any of the following, which would materially impact our ability to implement our business plan:
| ● | establishing and maintaining broad market acceptance of our technology, solutions, services, and platforms, and converting that acceptance into direct and indirect sources of revenue; | |
| ● | establishing and maintaining adoption of our technology, solutions, services, and platforms in and on a variety of environments, experiences, and device types; | |
| ● | timely and successfully developing new technology, solution, service, and platform features, and increasing the functionality and features of our existing technology, solution, service, and platform offerings; | |
| ● | developing technology, solutions, services, and platforms that result in a high degree of customer satisfaction and a high level of end-customer usage; | |
| ● | successfully responding to competition, including competition from emerging technologies and solutions; | |
| ● | developing and maintaining strategic relationships to enhance the distribution, features, content and utility of our technology, solutions, services, and platforms; | |
| ● | identifying, attracting and retaining talented engineering, network operations, program management, technical services, creative services, and other personnel at reasonable market compensation rates in the markets in which we employ such personnel; and | |
| ● | integration of acquisitions. |
Our business strategy may be unsuccessful and we may be unable to address the risks we face in a cost-effective manner, if at all. If we are unable to successfully accomplish these tasks, our business will be harmed.
Adequate funds for our operations may not be available, requiring us to raise additional financing or else curtail our activities significantly.
We will likely be required to raise additional funding through public or private financings, including equity financings, in 2017 and/or 2018. Any additional equity financings may be dilutive to shareholders and may be completed at a discount to the then-current market price of our common stock. Debt financing, if available, would likely involve restrictive covenants on our operations or pertaining to future financing arrangements. Nevertheless, we may not successfully complete any future equity or debt financing. Adequate funds for our operations, whether from financial markets, collaborative or other arrangements, may not be available when needed or on terms attractive to us. If adequate funds are not available, our plans to operate our business may be adversely affected and we could be required to curtail our activities significantly and/or cease operating.
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We will be unable to implement our business plan if we cannot raise sufficient capital and may be required to pay a high price for capital.
We will need to obtain additional capital to implement our business plan and meet our financial obligations as they become due. We may not be able to raise the additional capital needed or may be required to pay a high price for capital. Factors affecting the availability and price of capital may include the following:
| ● | the availability and cost of capital generally; | |
| ● | our financial results; |
| ● | the experience and reputation of our management team; | |
| ● | market interest, or lack of interest, in our industry and business plan; | |
| ● | the trading volume of, and volatility in, the market for our common stock; | |
| ● | our ongoing success, or failure, in executing our business plan; | |
| ● | the amount of our capital needs; and | |
| ● | the amount of debt, options, warrants, and convertible securities we have outstanding. |
We may be unable to meet our current or future obligations or to adequately exploit existing or future opportunities if we cannot raise sufficient capital. If we are unable to obtain capital for an extended period of time, we may be forced to discontinue operations.
We expect that there will be significant consolidation in our industry. Our failure or inability to lead that consolidation would have a severe adverse impact on our access to financing, customers, technology, and human resources.
Our industry is currently composed of a large number of relatively small businesses, no single one of which is dominant or which provides integrated solutions and product offerings incorporating much of the available technology. Accordingly, we believe that substantial consolidation may occur in our industry in the near future. If we do not play a positive role in that consolidation, either as a leader or as a participant whose capability is merged in a larger entity, we may be left out of this process, with product offerings of limited value compared with those of our competitors. Moreover, even if we lead the consolidation process, the market may not validate the decisions we make in that process.
Our success depends on our interactive marketing technologies achieving and maintaining widespread acceptance in our targeted markets.
Our success will depend to a large extent on broad market acceptance of our interactive marketing technologies among our current and prospective customers. Our prospective customers may still not use our solutions for a number of other reasons, including preference for static advertising, lack of familiarity with our technology, preference for competing technologies or perceived lack of reliability. We believe that the acceptance of our interactive marketing technologies by prospective customers will depend primarily on the following factors:
| ● | our ability to demonstrate the economic and other benefits attendant our marketing technologies; | |
| ● | our customers becoming comfortable with using our interactive marketing technologies; and | |
| ● | the reliability of our interactive marketing technologies. |
Our interactive technologies are complex and must meet stringent user requirements. Some undetected errors or defects may only become apparent as new functions are added to our technologies and products. The need to repair or replace products with design or manufacturing defects could temporarily delay the sale of new products and adversely affect our reputation. Delays, costs and damage to our reputation due to product defects could harm our business.
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Our financial condition and potential for continued net losses may negatively impact our relationships with customers, prospective customers and third-party suppliers.
Our financial condition and potential for continued net losses may cause current and prospective customers to defer placing orders with us, to require terms that are less favorable to us, or to place their orders with competing marketing technology suppliers, which could adversely affect our business, financial condition and results of operations. On the same basis, third-party suppliers may refuse to do business with us, or may do so only on terms that are unfavorable to us, which also could cause our revenue to decline.
Because we do not have long-term purchase commitments from our customers, the failure to obtain anticipated orders or the deferral or cancellation of commitments could have adverse effects on our business.
Our business is characterized by short-term purchase orders and contracts that do not require that purchases be made. This makes forecasting our sales difficult. The failure to obtain anticipated orders and deferrals or cancellations of purchase commitments because of changes in customer requirements, or otherwise, could have a material adverse effect on our business, financial condition and results of operations. We have experienced such challenges in the past and may experience such challenges in the future.
Our continued growth could be adversely affected by the loss of several key customers.
Our largest customers account for a majority of our total revenue. We had two and three customers that accounted for 71% and 53% of accounts receivable as of December 31, 2016 and December 31, 2015, respectively. In addition, we had three customers that accounted for 56% and 48% of revenue for the years ended December 31, 2016 and December 31, 2015, respectively. Decisions by one or more of these key customers and/or partners to not renew, terminate or substantially reduce their use of our products, technology, services, and platform could substantially slow our revenue growth and lead to a decline in revenue. Our business plan assumes continued growth in revenue, and it is unlikely that we will become profitable without a continued increase in revenue.
Most of our contracts are terminable by our customers with limited notice and without penalty payments, and early terminations could have a material effect on our business, operating results and financial condition.
Most of our contracts are terminable by our customers following limited notice and without early termination payments or liquidated damages due from them. In addition, each stage of a project often represents a separate contractual commitment, at the end of which the customers may elect to delay or not to proceed to the next stage of the project. We cannot assure you that one or more of our customers will not terminate a material contract or materially reduce the scope of a large project. The delay, cancellation or significant reduction in the scope of a large project or a number of projects could have a material adverse effect on our business, operating results and financial condition.
It is common for our current and prospective customers to take a long time to evaluate our products, most especially during economic downturns that affect our customers’ businesses. The lengthy and variable sales cycle makes it difficult to predict our operating results.
It is difficult for us to forecast the timing and recognition of revenue from sales of our products and services because our actual and prospective customers often take significant time to evaluate our products before committing to a purchase. Even after making their first purchases of our products and services, existing customers may not make significant purchases of those products and services for a long period of time following their initial purchases, if at all. The period between initial customer contact and a purchase by a customer may be years with potentially an even longer period separating initial purchases and any significant purchases thereafter. During the evaluation period, prospective customers may decide not to purchase or may scale down proposed orders of our products for various reasons, including:
| ● | reduced need to upgrade existing visual marketing systems; | |
| ● | introduction of products by our competitors; | |
| ● | lower prices and sometimes free services (for limited periods of time) offered by our competitors; and | |
| ● | changes in budgets and purchasing priorities. |
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Our prospective customers routinely require education regarding the use and benefit of our products. This may also lead to delays in receiving customers’ orders.
Our industry is characterized by frequent technological change. If we are unable to adapt our products and services and develop new products and services to keep up with these rapid changes, we will not be able to obtain or maintain market share.
The market for our products and services is characterized by rapidly changing technology, evolving industry standards, changes in customer needs, heavy competition and frequent new product and service introductions. If we fail to develop new products and services or modify or improve existing products and services in response to these changes in technology, customer demands or industry standards, our products and services could become less competitive or obsolete.
We must respond to changing technology and industry standards in a timely and cost-effective manner. We may not be successful in using new technologies, developing new products and services or enhancing existing products and services in a timely and cost-effective manner. Furthermore, even if we successfully adapt our products and services, these new technologies or enhancements may not achieve market acceptance.
A portion of business involves the use of software technology that we have developed or licensed. Industries involving the ownership and licensing of software-based intellectual property are characterized by frequent intellectual-property litigation, and we could face claims of infringement by others in the industry. Such claims are costly and add uncertainty to our operational results.
A portion of our business involves our ownership and licensing of software. This market space is characterized by frequent intellectual-property claims and litigation. We could be subject to claims of infringement of third-party intellectual-property rights resulting in significant expense and the potential loss of our own intellectual-property rights. From time to time, third parties may assert copyright, trademark, patent or other intellectual-property rights to technologies that are important to our business. Any litigation to determine the validity of these claims, including claims arising through our contractual indemnification of our business partners, regardless of their merit or resolution, would likely be costly and time consuming and divert the efforts and attention of our management and technical personnel. If any such litigation resulted in an adverse ruling, we could be required to:
| ● | pay substantial damages; | |
| ● | cease the development, use, licensing or sale of infringing products; | |
| ● | discontinue the use of certain technology; or | |
| ● | obtain a license under the intellectual property rights of the third party claiming infringement, which license may not be available on reasonable terms or at all. |
Our proprietary platform architectures and data tracking technology underlying certain of our services are complex and may contain unknown errors in design or implementation that could result in system performance failures or inability to scale.
The platform architecture, data tracking technology and integration layers underlying our proprietary platforms, our contract administration, procurement, timekeeping, content and network management, network services, device management, virtualized services, software automation and other tools, and back-end services are complex and include software and code used to generate customer invoices. This software and code is developed internally, licensed from third parties, or integrated by in-house personnel and third parties. Any of the system architecture, system administration, integration layers, software or code may contain errors, or may be implemented or interpreted incorrectly, particularly when they are first introduced or when new versions or enhancements to our tools and services are released. Consequently, our systems could experience performance failure or we may be unable to scale our systems, which may:
| ● | adversely impact our relationship with customers and others who experience system failure, possibly leading to a loss of affected and unaffected customers; |
| ● | increase our costs related to product development or service delivery; or |
| ● | adversely affect our revenues and expenses. |
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Our business may be adversely affected by malicious applications that interfere with, or exploit security flaws in, our products and services.
Our business may be adversely affected by malicious applications that make changes to our customers’ computer systems and interfere with the operation and use of our products or products that impact our business. These applications may attempt to interfere with our ability to communicate with our customers’ devices. The interference may occur without disclosure to or consent from our customers, resulting in a negative experience that our customers may associate with our products and services. These applications may be difficult or impossible to uninstall or disable, may reinstall themselves and may circumvent other applications’ efforts to block or remove them. The ability to provide customers with a superior interactive marketing technology experience is critical to our success. If our efforts to combat these malicious applications fail, or if our products and services have actual or perceived vulnerabilities, there may be claims based on such failure or our reputation may be harmed, which would damage our business and financial condition.
We compete with other companies that have more resources, which puts us at a competitive disadvantage.
The market for interactive marketing technologies is generally highly competitive and we expect competition to increase in the future. Some of our competitors or potential competitors may have significantly greater financial, technical and marketing resources than us. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements. They may also devote greater resources to the development, promotion and sale of their products than us.
We expect competitors to continue to improve the performance of their current products and to introduce new products, services and technologies. Successful new product and service introductions or enhancements by our competitors could reduce sales and the market acceptance of our products and services, cause intense price competition or make our products and services obsolete. To be competitive, we must continue to invest significant resources in research and development, sales and marketing and customer support. If we do not have sufficient resources to make these investments or are unable to make the technological advances necessary to be competitive, our competitive position will suffer. Increased competition could result in price reductions, fewer customer orders, reduced margins and loss of market share. Our failure to compete successfully against current or future competitors could adversely affect our business and financial condition.
Our future success depends on key personnel and our ability to attract and retain additional personnel.
Our key personnel include:
| ● | Richard Mills, our Chief Executive Officer; |
| ● | John Walpuck, our Chief Financial and Chief Operating Officer; |
| ● | Jerry Reese, our Vice President of Sales; and
| |
| ● | Alan Levy, our Vice President and Corporate Controller. |
If we fail to retain our key personnel or to attract, retain and motivate other qualified employees, our ability to maintain and develop our business may be adversely affected. Our future success depends significantly on the continued service of our key technical, sales and senior management personnel and their ability to execute our growth strategy. The loss of the services of our key employees could harm our business. We may be unable to retain our employees or to attract, assimilate and retain other highly qualified employees who could migrate to other employers who offer competitive or superior compensation packages.
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Unpredictability in financing markets could impair our ability to grow our business through acquisitions.
We anticipate that opportunities to acquire similar businesses will materially depend on the trading price of our common stock and the availability of financing alternatives with acceptable terms. As a result, poor credit and other market conditions or uncertainty in financial markets could materially limit our ability to grow through acquisitions since such conditions and uncertainty will result in a lower trading price for our common stock and make obtaining financing more difficult.
Our reliance on information management and transaction systems to operate our business exposes us to cyber incidents and hacking of our sensitive information if our outsourced service provider experiences a security breach.
Effective information security internal controls are necessary for us to protect our sensitive information from illegal activities and unauthorized disclosure, in addition to denial of service attacks and corruption of our data. In addition, we rely on the information security internal controls maintained by an outsourced service provider. Breaches of our information management system could also adversely affect our business reputation. Finally, significant information system disruptions could adversely affect our ability to effectively manage operations or reliably report results.
Because our technology, products, platform, and services are complex and are deployed in and across complex environments, they may have errors or defects that could seriously harm our business.
Our technology, proprietary platforms, products and services are highly complex and are designed to operate in and across data centers, large and complex networks, and other elements of the digital media workflow that we do not own or control. On an ongoing basis, we need to perform proactive maintenance services on our platform and related software services to correct errors and defects. In the future, there may be additional errors and defects in our software that may adversely affect our services. We may not have in place adequate reporting, tracking, monitoring, and quality assurance procedures to ensure that we detect errors in our software in a timely manner. If we are unable to efficiently and cost-effectively fix errors or other problems that may be identified, or if there are unidentified errors that allow persons to improperly access our services, we could experience loss of revenues and market share, damage to our reputation, increased expenses and legal actions by our customers.
We may have insufficient network or server capacity, which could result in interruptions in our services and loss of revenues.
Our operations are dependent in part upon: network capacity provided by third-party telecommunications networks; data center and cloud services provider owned and leased infrastructure and capacity; the Company’s dedicated and virtualized server capacity located at its data center services provider partner and a geo-redundant micro-data center location; and the Company’s own infrastructure and equipment. Collectively, this infrastructure, equipment, and capacity must be sufficiently robust to handle all of our customers' web-traffic, particularly in the event of unexpected surges in high-definition video traffic and network services incidents. We may not be adequately prepared for unexpected increases in bandwidth and related infrastructure demands from our customers. In addition, the bandwidth we have contracted to purchase may become unavailable for a variety of reasons, including payment disputes, outages, or such service providers going out of business. Any failure of these service providers or the Company’s own infrastructure to provide the capacity we require, due to financial or other reasons, may result in a reduction in, or interruption of, service to our customers, or the loss of large amounts of client data leading to an immediate decline in revenue and possible additional decline in revenue as a result of subsequent customer losses.
We do not have sufficient capital to engage in material research and development, which may harm our long-term growth.
In light of our limited resources in general over the past few years, we have made only limited investments in research and development over the past several years, not the material investments necessarily required to properly advance the features and functionality of our software platform and related solutions. This conserves capital in the short term. In the long term, as a result of our failure to invest in research and development, our technology and product offerings may not keep pace with the market and we may lose any existing competitive advantage. Over the long term, this may harm our revenues growth and our ability to become profitable.
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Our business operations are susceptible to interruptions caused by events beyond our control.
Our business operations are susceptible to interruptions caused by events beyond our control. We are vulnerable to the following potential problems, among others:
| ● | our platform, technology, products, and services and underlying infrastructure, or that of our key suppliers, may be damaged or destroyed by events beyond our control, such as fires, earthquakes, floods, power outages or telecommunications failures; |
| ● | we and our customers and/or partners may experience interruptions in service as a result of the accidental or malicious actions of Internet users, hackers or current or former employees; |
| ● | we may face liability for transmitting viruses to third parties that damage or impair their access to computer networks, programs, data or information. Eliminating computer viruses and alleviating other security problems may require interruptions, delays or cessation of service to our customers; and |
| ● | failure of our systems or those of our suppliers may disrupt service to our customers (and from our customers to their customers), which could materially impact our operations (and the operations of our customers), adversely affect our relationships with our customers and lead to lawsuits and contingent liability. |
The occurrence of any of the foregoing could result in claims for consequential and other damages, significant repair and recovery expenses and extensive customer losses and otherwise have a material adverse effect on our business, financial condition and results of operations.
General global market and economic conditions may have an adverse impact on our operating performance and results of operations.
Our business has been and could continue to be affected by general global economic and market conditions. Weakness in the United States and worldwide economy has had and could continue to have a negative effect on our operating results, including a decrease in revenue and operating cash flow. To the extent our customers are unable to profitably leverage various forms of digital marketing technology and solutions, and/or the content we create, deliver and publish on their behalf, they may reduce or eliminate their purchase of our products and services. Such reductions in traffic would lead to a reduction in our revenues. Additionally, in a down-cycle economic environment, we may experience the negative effects of increased competitive pricing pressure, customer loss, slowdown in commerce over the Internet and corresponding decrease in traffic delivered over our network and failures by our customers to pay amounts owed to us on a timely basis or at all. Suppliers on which we rely for equipment, field services, servers, bandwidth, co-location and other services could also be negatively impacted by economic conditions that, in turn, could have a negative impact on our operations or revenues. Flat or worsening economic conditions may harm our operating results and financial condition.
The markets in which we operate are rapidly emerging, and we may be unable to compete successfully against existing or future competitors to our business.
The market in which we operate is becoming increasingly competitive. Our current competitors generally include general digital signage companies, specialized digital signage operators targeting certain vertical markets (e.g., financial services), content management software companies, or integrators and vertical solution providers who develop single implementations of content distribution, digital marketing technology, and related services. These competitors, including future new competitors who may emerge, may be able to develop a comparable or superior solution capabilities, software platform, technology stack, and/or series of services that provide a similar or more robust set of features and functionality than the technology, products and services we offer. If this occurs, we may be unable to grow as necessary to make our business profitable.
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Whether or not we have superior products, many of these current and potential future competitors have a longer operating history in their current respective business areas and greater market presence, brand recognition, engineering and marketing capabilities, and financial, technological and personnel resources than we do. Existing and potential competitors with an extended operating history, even if not directly related to our business, have an inherent marketing advantage because of the reluctance of many potential customers to entrust key operations to a company that may be perceived as unproven. In addition, our existing and potential future competitors may be able to use their extensive resources:
| ● | to develop and deploy new products and services more quickly and effectively than we can; |
| ● | to develop, improve and expand their platforms and related infrastructures more quickly than we can; |
| ● | to reduce costs, particularly hardware costs, because of discounts associated with large volume purchases and longer term relationships and commitments; |
| ● | to offer less expensive products, technology, platform, and services as a result of a lower cost structure, greater capital reserves or otherwise; |
| ● | to adapt more swiftly and completely to new or emerging technologies and changes in customer requirements; |
| ● | to take advantage of acquisition and other opportunities more readily; and |
| ● | to devote greater resources to the marketing and sales of their products, technology, platform, and services. |
If we are unable to compete effectively in our various markets, or if competitive pressures place downward pressure on the prices at which we offer our products and services, our business, financial condition and results of operations may suffer.
Risks Related to Our Securities and Our Company
Because of our early stage of operations and limited resources, we may not have in place various processes and protections common to more mature companies and may be more susceptible to adverse events.
We are in an early stage of operations and have limited resources after incurring a significant amount of restructuring and integration costs. As a result, we may not have in place systems, processes and protections that many of our competitors have or that may be essential to protect against various risks. For example, we have in place only limited resources and processes addressing human resources, timekeeping, data protection, business continuity, personnel redundancy, and knowledge institutionalization concerns. As a result, we are at risk that one or more adverse events in these and other areas may materially harm our business, balance sheet, revenues, expenses or prospects.
Failure to achieve and maintain effective internal controls could limit our ability to detect and prevent fraud and thereby adversely affect our business and stock price.
Effective internal controls are necessary for us to provide reliable financial reports. Nevertheless, all internal control systems, no matter how well designed, have inherent limitations. Even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Our inability to maintain an effective control environment may cause investors to lose confidence in our reported financial information, which could in turn have a material adverse effect on our stock price. Our most recent Annual Report on Form 10-K discloses our finding of material weaknesses in our internal controls.
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Our controlling shareholder possesses controlling voting power with respect to our common stock and voting preferred stock, which will limit your influence on corporate matters.
Our controlling shareholder, Slipstream Communications, LLC, has beneficial ownership of 59,160,582 shares of common stock, including common shares that are beneficially owned by an affiliate of Slipstream Communications named Slipstream Funding, LLC. These shares represent beneficial ownership of approximately 60.97% of our common stock as of the date of this annual report on form 10-K. In addition, in the last quarter of 2016 and the first quarter of 2017, Slipstream Communications, LLC purchased all of our outstanding debt from the original debtholders. The terms of the debt have remained the same. As a result, Slipstream Funding has the ability to control our management and affairs through the election and removal of our entire Board of Directors and all other matters requiring shareholder approval, including the future merger, consolidation or sale of all or substantially all of our assets. This concentrated control could discourage others from initiating any potential merger, takeover or other change-of-control transaction that may otherwise be beneficial to our shareholders. Furthermore, this concentrated control will limit the practical effect of your participation in Company matters, through shareholder votes and otherwise.
Our Articles of Incorporation grant our Board of Directors the power to issue additional shares of common and preferred stock and to designate other classes of preferred stock, all without shareholder approval.
Our authorized capital consists of 250 million shares of capital stock. Pursuant to authority granted by our Articles of Incorporation, our Board of Directors, without any action by our shareholders, may designate and issue shares in such classes or series (including other classes or series of preferred stock) as it deems appropriate and establish the rights, preferences and privileges of such shares, including dividends, liquidation and voting rights, provided it is consistent with Minnesota law. The rights of holders of other classes or series of stock that may be issued could be superior to the rights of holders of our common shares. The designation and issuance of shares of capital stock having preferential rights could adversely affect other rights appurtenant to shares of our common stock. Furthermore, any issuances of additional stock (common or preferred) will dilute the percentage of ownership interest of then-current holders of our capital stock and may dilute our book value per share.
Significant issuances of our common stock, or the perception that significant issuances may occur in the future, could adversely affect the market price for our common stock.
Significant actual or perceived potential future issuance our common stock could adversely affect the market price of our common stock. Generally, issuances of substantial amounts of common stock in the public market, and the availability of shares for future sale could adversely affect the prevailing market price of our common stock and could cause the market price of our common stock to remain low for a substantial amount of time.
We cannot foresee the impact of potential securities issuances of common shares on the market for our common stock, but it is possible that the market for our shares may be adversely affected, perhaps significantly. It is also unclear whether or not the market for our common stock could absorb a large number of attempted sales in a short period of time, regardless of the price at which they might be offered. Even if a substantial number of sales do not occur within a short period of time, the mere existence of this “market overhang” could have a negative impact on the market for our common stock and our ability to raise additional equity capital.
Our common stock trades in an illiquid trading market.
Trading of our common stock is conducted on the OTC Markets (OTCQB). This has an adverse effect on the liquidity of our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts’ and the media’s coverage of us and our common stock. This may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked prices for our common stock if we were listed on a more liquid exchange.
There is not now and there may not ever be an active market for shares of our common stock.
In general, there has been minimal trading volume in our common stock. The small trading volume will likely make it difficult for our shareholders to sell their shares as and when they choose. Furthermore, small trading volumes are generally understood to depress market prices. As a result, investors and shareholders may not always be able to resell shares of our common stock publicly at the time and prices that such investors and shareholders feel are fair or appropriate.
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We do not intend to pay dividends on our common stock for the foreseeable future. We will, however, pay dividends on our Series A Convertible Preferred Stock and our Series A-1 Convertible Preferred Stock.
When permitted by Minnesota law, we are required to pay dividends to the holders of our Series A Convertible Preferred Stock and Series A-1 Convertible Preferred Stock, each share of which carries a $1.00 stated value. There are presently approximately 5.9 million shares of Series A Convertible Preferred Stock outstanding and 1.7 million shares of Series A-1 Convertible Preferred Stock outstanding. Our Series A Convertible Preferred Stock and Series A-1 Convertible Preferred Stock entitles its holders to:
| ● | a cumulative 6% dividend, payable on a semi-annual basis in cash unless (i) we are unable to pay the dividend in cash under applicable law, or (ii) we have demonstrated positive cashflow during the prior quarter reported on our Form 10-Q, in which case we may at our election pay the dividend through the issuance of additional shares of preferred stock; |
| ● | in the event of a liquidation or dissolution of the Company, a preference in the amount of all accrued but unpaid dividends plus the stated value of such shares before any payment shall be made or any assets distributed to the holders of any junior securities, including our common stock; |
| ● | convert their preferred shares into our common shares at a conversion rate of $0.255 per share, subject, however, to full-ratchet price protection in the event that we issue common stock below the then-current conversion price (subject to certain customary exceptions); and |
| ● | vote their preferred shares on an as-if-converted basis. |
After August 20, 2017, we will have the right to call and redeem some or all of such preferred shares, subject to a 30-day notice period and certain other conditions, at a price equal to $1.00 per share plus accrued but unpaid dividends thereon. Holders of Series A Convertible Preferred Stock and Series A-1 Convertible Preferred Stock have no preemptive or cumulative-voting rights.
We do not anticipate that we will pay any dividends for the foreseeable future on our common stock. Accordingly, any return on an investment in us will be realized only when a shareholder sells shares of our common stock. When legally permitted, we must expect to pay dividends to our preferred shareholders.
We do not have significant tangible assets that could be sold upon liquidation.
We have nominal tangible assets. As a result, if we become insolvent or otherwise must dissolve, there will be no tangible assets to liquidate and no corresponding proceeds to disburse to our shareholders. If we become insolvent or otherwise must dissolve, shareholders will likely not receive any cash proceeds on account of their shares.
| ITEM 1B | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 2 | PROPERTIES |
Our corporate headquarters are currently located at 13100 Magisterial Drive, Suite 100, Louisville, Kentucky 40223. The corporate phone number is (502) 791-8800. We lease warehouse and office space of approximately 6,400 square feet and 8,300 square feet for our Kentucky operations under a lease agreement through May 30, 2021 and March 31, 2021, respectively. The monthly lease payment for the warehouse is $0.3 for September 1, 2015 through August 31, 2016 and $5 for September 1, 2016 through May 30, 2021. The monthly lease payment for the office space is $6 for April 1, 2015 through March 31, 2017 and $12 for April 1, 2017 through March 31, 2021. We have approximately 18,000 square-feet of space for our Fairfield New Jersey office located at 22 Audrey Place. The monthly lease payment for this property is currently $21 and escalates to $22 by the end of the lease term on September 2020. We have entered into a sublet agreement for half of this property for $10 per month. We lease office space of approximately 10,000 square feet to support our Canadian operations at a facility located at 4510 Rhodes Drive, Suite 800, Windsor, Ontario under a lease through June 30, 2018 with a monthly rental of $3 CAD per month. We also lease 3,650 square feet of office space in Dallas, Texas, and 4,100 square feet of office space and 9,700 square feet of warehouse space in Los Angeles California for monthly lease payments of $4 and $3 per month which have lease terms ending on December 31, 2017 and June 30, 2018, respectively.
| ITEM 3 | LEGAL PROCEEDINGS |
Litigation
We are involved in a variety of legal claims and proceedings related to our business described in Note 10 to the Company’s financial statements, Commitments and Contingencies.
While we are unable to predict the ultimate outcome of these ordinary course claims and proceedings, management believes there is not a reasonable possibility that the costs and liabilities of such ordinary course matters, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.
| ITEM 4 | MINE SAFETY DISCLOSURES |
Not applicable.
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| ITEM 5 | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our common stock is listed for trading on the OTC Bulletin Board, the “OTCQB,” under the symbol “CREX.” The transfer agent and registrar for our common stock is Computershare Limited, 401 2nd Avenue North, Minneapolis, Minnesota 55401. The following table sets forth the high and low bid prices for our common stock as reported by the OTC Markets in 2016 and 2015. These quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission, and may not represent actual transactions. Trading in the Company’s common stock during the period represented was sporadic, exemplified by low trading volume and many days during which no trades occurred.
| High | Low | |||||||
| 2016 | ||||||||
| First Quarter | $ | 0.23 | $ | 0.15 | ||||
| Second Quarter | $ | 0.23 | $ | 0.14 | ||||
| Third Quarter | $ | 0.23 | $ | 0.11 | ||||
| Fourth Quarter | $ | 0.31 | $ | 0.16 | ||||
| High | Low | |||||||
| 2015 | ||||||||
| First Quarter | $ | 0.40 | $ | 0.20 | ||||
| Second Quarter | $ | 0.31 | $ | 0.17 | ||||
| Third Quarter | $ | 0.25 | $ | 0.13 | ||||
| Fourth Quarter | $ | 0.30 | $ | 0.13 | ||||
Shareholders
As of March 24, 2017, there were approximately 538 holders of record of our common stock.
Dividend Policy
We have never declared or paid cash dividends on our common stock. We currently intend to retain future earnings, if any, to operate and expand our business and to finance the development and expansion of our business. We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, earnings, capital requirements, contractual restrictions and other factors deemed relevant by our board of directors.
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Holders of our common stock are entitled to share pro rata in dividends and distributions with respect to the common stock when, as and if declared by our Board of Directors out of funds legally available therefor. In addition, we must first pay dividends on our Series A and Series A-1 Convertible Preferred Stock, which have priority over any dividends to be paid to holders of our common stock. The current dividend payable to the holders of Series A and Series A-1 Convertible Preferred Stock has been satisfied through the issuance of additional preferred stock. The current dividend for the Series A and Series A-1 Convertible Preferred Stock aggregates to up to approximately $230 on a semi-annual basis (which we may be able to satisfy our dividend-payment obligations relating to the Series A and Series A-1 Convertible Preferred Stock through the issuance of additional shares of preferred stock). Other than with respect to shares of Series A and Series A-1 Convertible Preferred Stock, future dividend policy is subject to the sole discretion of our Board of Directors and will depend upon a number of factors, including future earnings, capital requirements and our financial condition.
Securities Authorized for Issuance Under Equity Compensation Plans
See “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in Item 12 for information regarding securities authorized for issuance under our equity compensation plans.
Sales of Unregistered Securities During the Fourth Quarter of Fiscal Year 2016
Common Stock
During 2016, accredited investors converted 307,500 shares of Convertible Preferred Stock for 1,205,882 shares of common stock. The Company and the investors entered into registration rights agreements requiring Creative Realities to register under the Securities Act of 1933 the resale of the shares of common stock issuable upon conversion of the secured notes and upon exercise of the warrants. The Company filed a registration statement on Form S-1/A on May 13, 2016 registering 23,272,184 shares of common stock and that registration statement became effective on June 1, 2016.
Secured Notes
On December 12, 2016, we entered into a $1.0 million secured revolving promissory note pursuant to the August 17, 2016 Loan and Security Agreement with Slipstream Communications, LLC, a related party, addressed below, with interest thereon at 8% per annum, maturing on February 1, 2017. In connection with the loan, we issued the lender a five-year warrant to purchase up to 1,542,452 shares of common stock at a per-share price of $0.28 (subject to adjustment), all pursuant to a securities purchase agreement. The fair value of the warrants on the issuance date was $136. This note was repaid on January 12, 2017.
| ITEM 6 | SELECTED FINANCIAL DATA |
Not applicable.
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| ITEM 7 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Statements
The following discussion contains various forward-looking statements within the meaning of Section 21E of the Exchange Act. Although we believe that, in making any such statement, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. When used in the following discussion, the words “anticipates,” “believes,” “expects,” “intends,” “plans,” “estimates” and similar expressions, as they relate to us or our management, are intended to identify such forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated. Factors that could cause actual results to differ materially from those anticipated, certain of which are beyond our control, are set forth in Item 1A under the caption “Risk Factors.”
Our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking statements. Accordingly, we cannot be certain that any of the events anticipated by forward-looking statements will occur or, if any of them do occur, what impact they will have on us. We caution you to keep in mind the cautions and risks described in this document and to refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of the document in which they appear. We do not undertake to update any forward-looking statement.
Overview
Creative Realities, Inc. is a Minnesota corporation that provides innovative digital marketing technology solutions to retail companies, individual retail brands, enterprises, and organizations throughout the United States and in certain international markets. We have 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.
Our main operations are conducted directly through Creative Realities, Inc. (f/k/a Wireless Ronin Technologies, Inc.), and under our wholly owned subsidiaries Creative Realities, LLC, a Delaware limited liability company, Wireless Ronin Technologies Canada, Inc., a Canadian corporation, and ConeXus World Global, LLC, a Kentucky limited liability company.
We generate revenue in this business by:
| ● | consulting with our customers to determine the technologies and solutions required to achieve their specific goals, strategies and objectives; |
| ● | designing our customers’ digital marketing experiences, content and interfaces; |
| ● | engineering the systems architecture delivering the digital marketing experiences we design – both software and hardware – and integrating those systems into a customized, reliable and effective digital marketing experience; |
| ● | managing the efficient, timely and cost-effective deployment of our digital marketing technology solutions for our customers; |
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| ● | delivering and updating the content of our digital marketing technology solutions using a suite of advanced media, content and network management software products; and |
| ● | maintaining our customers’ digital marketing technology solutions by: providing content production and related services; creating additional software-based features and functionality; hosting the solutions; monitoring solution service levels; and responding to and/or managing remote or onsite field service maintenance, troubleshooting and support calls. |
These activities generate revenue through: bundled-solution sales; service fees for consulting, experience design, content development and production, software development, engineering, implementation, and field services; software license fees; and maintenance and support services related to our software, managed systems and solutions.
Our Sources of Revenue
We generate revenue through digital marketing solution sales, which include system hardware, professional and implementation services, software design and development, software licensing, deployment, and maintenance and support services.
We currently market and sell our technology and solutions primarily through our sales and business development personnel, but we also utilize agents, strategic partners, and lead generators who provide us with access to additional sales, business development and licensing opportunities.
Our Expenses
Our expenses are primarily comprised of three categories: sales and marketing, research and development, and general and administrative. Sales and marketing expenses include salaries and benefits for our sales, business development solution management and marketing personnel, and commissions paid on sales. This category also includes amounts spent on marketing networking events, promotional materials, hardware and software to prospective new customers, including those expenses incurred in trade shows and product demonstrations, and other related expenses. Our research and development expenses represent the salaries and benefits of those individuals who develop and maintain our proprietary software platforms and other software applications we design and sell to our customers. Our general and administrative expenses consist of corporate overhead, including administrative salaries, real property lease payments, salaries and benefits for our corporate officers and other expenses such as legal and accounting fees.
Critical Accounting Policies and Estimates
The Company's significant accounting policies are described in Note 2 of the Company’s consolidated financial statements included elsewhere in this filing. The Company’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. Certain accounting policies involve significant judgments, assumptions, and estimates by management that could have a material impact on the carrying value of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
We recognize revenue primarily from these sources:
| ● | Hardware: | |
| System hardware sales | ||
| ● | Services and Other: | |
| Professional and implementation services | ||
| Software design and development services | ||
| Software and software license sales | ||
| Maintenance and support services |
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We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 910, Contractors-Construction, ASC 605, Revenue Recognition, ASC 605-25, Accounting for Revenue Arrangements with Multiple Deliverables. and ASC subtopic 985-605, Software. In the event of a multiple-element arrangement, we evaluate each element of the transaction to determine if it represents a separate unit of accounting, taking into account all factors following the guidelines set forth in FASB ASC 985-605-25-5:
| (i) | persuasive evidence of an arrangement exists; | |
| (ii) | delivery has occurred, which is when product title transfers to the customer, or services have been rendered; | |
| (iii) | customer payments are fixed or determinable and free of contingencies and significant uncertainties; and | |
| (iv) | collection is reasonably assured. If it is determined that collection of a fee is not reasonably assured, we defer the revenue and recognize it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment, revenues are reported on a gross basis. |
We enter into arrangements with customers that include a combination of software products, system hardware, maintenance and support, or installation and training services. We allocate the total arrangement fee among the various elements of the arrangement based on the relative fair value of each of the undelivered elements determined by vendor-specific objective evidence (VSOE). In software arrangements for which we do not have VSOE of fair value for all elements, revenue is deferred until the earlier of when VSOE is determined for the undelivered elements (residual method) or when all elements for which we do not have VSOE of fair value have been delivered. We have determined VSOE of fair value for each of its products and services.
The VSOE for maintenance and support services is based upon the renewal rate for continued service arrangements. The VSOE for installation and training services is established based upon pricing for the services. The VSOE for software and licenses is based on the normal pricing and discounting for the product when sold separately.
Each element of our multiple-element arrangements qualifies for separate accounting. Nevertheless, when a sale includes both software and maintenance, we defer revenue under the residual method of accounting. Under this method, the undelivered maintenance and support fees included in the price of software is amortized ratably over the period the services are provided. We defer maintenance and support fees based upon the customer’s renewal rate for these services.
System hardware sales
Included in “hardware” are system hardware sales which is revenue recognized generally upon shipment of the product or customer acceptance depending upon contractual arrangements with the customer. Shipping charges billed to customers are included in sales and the related shipping costs are included in cost of sales.
Services and Other
Included in “services and other” revenue is professional and implementation services, software design and development services, software and software license sales and maintenance and support services revenue.
Professional and implementation services
Included in “services and other” are professional services revenue, which is derived primarily from consulting services related to the design and development of various marketing experiences, and content development and management. The majority of professional services and accompanying agreements qualify for separate accounting.
Included in “services and other” are implementation services revenue that is derived from implementation, maintenance and support contracts, content development, software development and training.
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These services are bid either on a fixed-fee basis, time-and-materials basis or both. For time-and-materials contracts, we recognize revenue as services are performed. For fixed-fee contracts, we recognize revenue upon completion of specific contractual milestones, by using the percentage-of-completion method.
Software design and development services
Included in “services and other,” are contracts for technology integration consulting services where we design/redesign, build and implement new or enhanced systems applications and related processes for clients are recognized on the percentage-of-completion method. The percentage-of-completion accounting involves calculating the percentage of services provided during the reporting period compared to the total estimated services to be provided over the duration of the contract. Estimated revenues from applying the percentage-of-completion method include estimated incentives for which achievement of defined goals is deemed probable. Contract costs include all direct material, labor, subcontractors, certain indirect costs, such as indirect labor, equipment costs, supplies, tools and depreciation costs. Selling, general and administrative costs are charges to expense as incurred. This method is followed where reasonably dependable estimates of revenues and costs can be made. We measure progress for completion based on either the hours worked as a percentage of the total number of hours of the project or by delivery and customer acceptance of specific milestones as outlined per the terms of the agreement with the customer. Estimates of total contract revenue and costs are continuously monitored during the term of the contract, and recorded revenue and costs are subject to revision as the contract progresses. Such revisions may result in increases or decreases to revenue and income and are reflected in the financial statements in the periods in which they are first identified. If estimates indicate that a contract loss will occur, a loss provision is recorded in the period in which the loss first becomes probable and reasonably estimable. Contract losses are determined to be the amount by which the estimated direct and indirect costs of the contract exceed the estimated total revenue that will be generated by the contract and are included in cost of sales and classified in accrued expenses in the balance sheet. Our presentation of revenue recognized on a contract completion basis has been consistently applied for all periods presented.
Software and software license sales
Included in “services and other” software and software license sales are recognized when a fixed fee order has been received and delivery has occurred to the customer. We assess whether the fee is fixed or determinable and free of contingencies based upon signed agreements received from the customer confirming terms of the transaction. Software is delivered to customers electronically or on a CD-ROM, and license files are delivered electronically.
Maintenance and support services
Included in “services and other” is maintenance and support services revenue. This consists of software updates and various forms of support services. Software updates provide customers with rights to unspecified software product upgrades and maintenance releases and patches released during the term of the support period. Support includes access to technical support personnel for software and hardware issues. We also offer 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. This revenue is recognized ratably over the term of the contract, which is typically one to three years. Maintenance and support is 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. We support agreement fees are based on the level of service provided to its 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.
Costs and estimated earnings recognized in excess of billings on uncompleted contracts are recorded as unbilled services and are included in work-in-process on the balance sheet. Billings in excess of costs and estimated earnings on uncompleted contracts are recorded as deferred revenue until revenue recognition criteria are met. Unbilled receivables are a normal part of our business as some receivables are invoiced in the month following shipment or completion of services.
Our policy is to present any taxes imposed on revenue-producing transactions on a net basis.
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Accounts Receivable
Our unsecured accounts receivable are customer obligations due under normal trade terms, carried at their face value less an allowance for doubtful accounts. We had a factoring arrangement with Allied Affiliated Funding for the majority of our accounts receivable during the period October 15, 2015 to August 16, 2016. We determine our allowance for doubtful accounts based on the evaluation of the aging of our accounts receivable and on a customer-by-customer analysis of its high-risk customers. Our reserves contemplate our historical loss rate on receivables, specific customer situations and the economic environments in which we operate. We determine past-due accounts receivable on a customer-by-customer basis. Accounts receivable are written off after all reasonable collection efforts have failed.
Goodwill and Intangible Assets
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, or when an event occurs or circumstances change that would indicate potential impairment. The Company has one reporting unit, and therefore the entire goodwill is allocated to that reporting unit. If the carrying value of the reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. 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, We also use these same expectations in a number of valuation models in addition to discounted cash flows, including, leveraged buy-out, trading comps and market capitalization, and ultimately determined an estimated fair value of our reporting unit based on weighted average calculations from these models. The Company bases its fair value estimates on assumptions it believes to be reasonable but that are unpredictable and inherently uncertain. In addition, the Company’s market capitalization could fluctuate from time to time. Such fluctuation may be an indicator of possible impairment of goodwill if the Company’s market capitalization falls below its book value. If this situation occurs, the Company will perform the required detailed analysis to determine if there is impairment.
The Company performed its annual impairment test at September 30, 2016 and determined there was no impairment of goodwill. We updated our goodwill analysis as of December 31, 2016 using actual fourth quarter 2016 results and updated projected 2017 results noting no impairment exists. 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 perform an analysis to determine whether goodwill is impaired.
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 and 5 | |
| Trademark | 5 | |
| Customer relationships | 3 |
Intangible assets are evaluated for impairment if events and circumstances warrant by comparing the fair value of the intangible asset with its carrying amount. The impairment evaluation involves testing the recoverability of the asset on an undiscounted cash-flow basis, and, if the asset is not recoverable, recognizing impairment charge, if necessary, to reduce the asset’s carrying amount to its fair value. The Company recognized an impairment loss on its technology platform for the year ended December 31, 2016.
Impairment of Long-lived Assets
In accordance with ASC 360, Property, Plant, and Equipment, long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted net cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying value of the asset exceeds the fair value of the asset. No impairment was determined.
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Income Taxes
The Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The Company measures deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those differences are expected to be recovered or settled. The Company recognizes in income the effect of a change in tax rates on deferred tax assets and liabilities in the period that includes the enactment date. The Company believes based on the facts and circumstances a full valuation allowance is necessary as it is more than likely the deferred taxes are not realizable as of December 31, 2016 or the date of the business combination.
Deferred 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, reserves for uncollectible accounts receivable and inventory, differences in depreciation and amortization methods, and accrued expenses. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with FASB ASC 718-10, which requires the measurements and recognition of compensation expense for all stock-based payments including warrants, stock options, restricted stock grants and stock bonuses based on estimated fair value. For purposes of determining estimated fair value, the Company computes the estimated fair values of stock options using the Black-Scholes option pricing model. The fair value of restricted stock and stock award grants are determined based on the number of shares granted and the closing price of the Company’s common stock on the date of grant. Compensation expense for all share-based payment awards is recognized using the straight-line amortization method over the vesting period.
The Company applies the guidance of FASB ASC 718-10-S99-1 for purposes of determining the expected term for stock options. The Company calculates the estimated expected life based upon historical exercise data. The Company uses historical closing stock price volatility for a period equal to the period its common stock has been trading publicly. The dividend yield assumption is based on the Company’s history and expectation of no future dividend payouts.
Fair Value of Financial Instruments
“FASB ASC 820-10,” Fair Value Measurements and Disclosures, requires disclosure of the estimated fair value of an entity’s financial instruments. Such disclosures, which pertain to the Company’s financial instruments, do not purport to represent the aggregate net fair value of the Company.
Results of Operations
Note: All dollar amounts reported in Results of Operations are in thousands, except per-share information.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
The tables presented below compare our results of operations from one period to another, and present the results for each period and the change in those results from one period to another in both dollars and percentage change.
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Our consolidated comparisons include certain historical data, transaction entries, journal entries, and chart of account classifications that are not uniformly consistent across Creative Realities, LLC, Wireless Ronin Technologies, Inc. Broadcast International, Inc. and ConeXus World Global, LLC. As a result, certain assessments and qualitative descriptions related to our consolidated results cannot be compared directly, and may not fully or accurately reflect actual changes in the specific statement of operations line-item category or subcategory at this time.
For the year ended December 31, 2016, the financial results include the results of the acquisition of ConeXus for the entire year. For the year ended December 31, 2015, the financial results include the results of the acquisition of ConeXus from the acquisition date of October 15, 2015 through the year ended December 31, 2015. As a result of this merger, the results of operations may not be entirely comparable and the variances are explained in more detail in the analysis below.
The columns present the following:
| ● | The first two data columns in the table show the dollar results for each period presented. | |
| ● | The column entitled “Dollars” show the change in results, in dollars. The column entitled “%” show the change in percentages. |
| For the Years Ended | ||||||||||||||||
| December 31, | Change | |||||||||||||||
| 2016 | 2015 | Dollars | % | |||||||||||||
| Sales | $ | 13,673 | $ | 11,471 | $ | 2,202 | 19 | % | ||||||||
| Cost of sales (exclusive of depreciation and amortization shown separately below) | 6,815 | 7,869 | (1,054 | ) | -13 | % | ||||||||||
| Gross profit | 6,858 | 3,602 | 3,256 | 90 | % | |||||||||||
| Sales and marketing expenses | 1,061 | 1,114 | (53 | ) | -5 | % | ||||||||||
| Research and development expenses | 893 | 804 | 89 | 11 | % | |||||||||||
| General and administrative expenses | 6,393 | 6,947 | (554 | ) | -8 | % | ||||||||||
| Depreciation and amortization expense | 2,003 | 2,027 | (24 | ) | -1 | % | ||||||||||
| Impairment loss on intangible assets | 1,065 | - | 1,065 | NM | ||||||||||||
| Total operating expenses | 11,415 | 10,892 | 523 | 5 | % | |||||||||||
| Operating loss | (4,557 | ) | (7,290 | ) | 2,733 | -37 | % | |||||||||
| Other income (expenses): | ||||||||||||||||
| Interest expense | (1,908 | ) | (1,286 | ) | (622 | ) | 48 | % | ||||||||
| Change in fair value of warrant liability | (982 | ) | 1,081 | (2,063 | ) | -191 | % | |||||||||
| Gain on settlement of debt | 1,008 | - | 1,008 | NM | ||||||||||||
| Other expense | 164 | (114 | ) | 278 | -244 | % | ||||||||||
| Total other expense | (1,718 | ) | (319 | ) | (1,399 | ) | 439 | % | ||||||||
| Net loss before income taxes | (6,275 | ) | (7,609 | ) | 1,334 | -18 | % | |||||||||
| Benefit/(provision) from income taxes | 365 | (358 | ) | 723 | -202 | % | ||||||||||
| Net loss | $ | (5,910 | ) | $ | (7,967 | ) | $ | 2,057 | -26 | % | ||||||
NM - not meaningful
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Sales
Sales increased by $2,202 or 19% in 2016 compared to 2015. In August 2015, the Company terminated a material customer relationship in connection with its then ongoing business realignment, integration and restructuring initiative. Excluding $1,800 in 2015 sales associated with that terminated customer relationship, sales increased $4,042 or 46% in 2016 compared to 2015. The $2,202 increase was primarily due to: an increase in revenues from a long-standing customer of approximately $4,000 associated with a large nonrecurring project initiative; decreases of approximately $800 associated with the reduction of certain nonrecurring project sales related to two other long-standing customers; the growth in sales of existing customer relationships, and; sales associated with the acquisition of new customers.
Gross Profit
Gross profit margin on a percentage basis increased to 50% in 2016 from 32% in 2015, and increased by $3,256 in absolute dollars during the same period. The increase in gross profit margin and increase in absolute dollars are the result of the acquisition of ConeXus, the improved mix of higher margin services, lower hardware sales, as well the winding down, termination or renewal of certain customer relationships with modified business terms as a result of the Company’s then ongoing business realignment, integration and restructuring initiative referenced above.
Sales and Marketing Expenses
Sales and marketing expenses generally include the salaries, taxes, and benefits of our sales and marketing personnel, as well as trade show activities, travel, and other related sales and marketing costs. Total sales and marketing expenses remained stable, decreasing to $1,061 in 2016 from $1,114 in 2015.
Research and Development Expenses
Research and development expenses increased to $893 in 2016 compared to $804 in 2015. Salaries increased by $470 due to new hires offset by a decrease in consulting fees of $381 as a result of an increasing volume of work necessitated by Company sales growth to shift labor resources to employees versus consultants.
General and Administrative Expenses
Total general and administrative expenses decreased 8% or $603 to $6,393 in 2016 from $6,947 in 2015. In 2015, the Company recorded a $371 loss for the termination of leases for the NY and MN offices and recorded a $230 loss on contract expense in 2015 in connection with the termination of a customer relationship. There was a decrease of $133 in facilities expenses due to combination of our subtenants in NJ absorbing certain utility expenses for the building, and lower utilities due to the closing of the MN office. This was offset by an increase of $350 in consulting fees due to an increase in contracted personnel, recruiting and consulting fees.
Depreciation and Amortization Expenses
Depreciation and amortization expenses decreased 1% to $2,003 in 2016 from $2,027 in 2015 primarily as a result of the reduction of intangible assets from the impairment recognized in the third quarter of 2016.
Interest Expense
See Notes 6 and 8 to the Consolidated Financial Statements for a discussion of the Company’s debt and related interest expense obligations.
Change in Fair Value of Warrant Liability
See Note 5 to the Consolidated Financial Statements for a discussion of the Company’s non-cash change in Warrant Liability.
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Gain on Settlement of Debt
In January 2016, in light of the Company’s outstanding accounts payable and accrued expense liabilities due to its unsecured historical creditors, long-term contractual commitments due to other historical creditors, and disputes with certain historical creditors, we initiated a comprehensive program to enter into negotiated settlements with these creditors. This comprehensive program broadly involved: (i) working with outside counsel to advise us in a comprehensive settlement program; (ii) engaging with a group of our largest historical unsecured creditors and certain other creditors to agree upon a set of settlement alternatives and related payment plans, to propose to all of our historical creditors, and; (iii) engaging with our historical unsecured creditors to enter into settlement agreements consistent with the agreed upon alternatives. These settlements resulted in a gain of $1,008 for the year and cash savings, including the impact of our lease termination, of $1,709.
Summary Quarterly Financial Information
The following represents unaudited financial information derived from the Company’s annual and quarterly financial statements:
| Quarters ended | December 31, 2016 | September 30, 2016 | June 30, 2016 | March 31, 2016 | ||||||||||||
| Net sales | $ | 5,501 | $ | 2,708 | $ | 3,029 | $ | 2,435 | ||||||||
| Cost of sales | 2,826 | 1,387 | 1,312 | 1,290 | ||||||||||||
| Gross profit | 2,675 | 1,321 | 1,717 | 1,145 | ||||||||||||
| Operating expenses, excluding depreciation and amortization | 2,108 | 2,060 | 1,976 | 2,203 | ||||||||||||
| Depreciation/amortization | 388 | 540 | 536 | 539 | ||||||||||||
| Impairment loss on intangible assets | - | 1,065 | - | - | ||||||||||||
| Operating (loss)/income | 179 | (2,344 | ) | (795 | ) | (1,597 | ) | |||||||||
| Other expenses/(income) | 2,206 | 302 | (1,324 | ) | 169 | |||||||||||
| Net (loss)/income | (2,027 | ) | (2,646 | ) | 529 | (1,766 | ) | |||||||||
| Quarters ended | December 31, 2015 | September 30, 2015 | June 30, 2015 | March 31, 2015 | ||||||||||||
| Net sales | 3,274 | 3,369 | 2,702 | 2,126 | ||||||||||||
| Cost of sales | 2,327 | 1,858 | 2,035 | 1,649 | ||||||||||||
| Gross profit | 947 | 1,511 | 667 | 477 | ||||||||||||
| Operating expenses, excluding depreciation and amortization | 1,392 | 2,389 | 2,427 | 2,657 | ||||||||||||
| Depreciation/amortization | 731 | 439 | 432 | 425 | ||||||||||||
| Operating (loss)/income | (1,176 | ) | (1,317 | ) | (2,192 | ) | (2,605 | ) | ||||||||
| Other expenses/(income) | 876 | 377 | 96 | (672 | ) | |||||||||||
| Net (loss)/income | $ | (2,052 | ) | $ | (1,694 | ) | (2,288 | ) | (1,933 | ) | ||||||
Supplemental Operating Results on a Non-GAAP Basis
The following non-GAAP data, which adjusts for the categories of expenses described below, is a non-GAAP financial measure. Our management believes that this non-GAAP financial measure is useful information for investors, shareholders and other stakeholders of our company in gauging our results of operations on an ongoing basis. We believe that EBITDA is a performance measure and not a liquidity measure, and therefore a reconciliation between net loss/income and EBITDA has been provided. EBITDA should not be considered as an alternative to net loss/income as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of cash flows, in each case as determined in accordance with GAAP, or as a measure of liquidity. In addition, EBITDA does not take into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows. We do not intend the presentation of these non-GAAP measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP. These non-GAAP measures should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP.
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Reconciliation of GAAP to Non-GAAP EBITDA
The following unaudited table presents the Company’s GAAP (Net Loss) measure, and the corresponding adjustments, to calculate “EBITDA” for the quarters ending December 31, 2016 and 2015, September 30, 2016 and 2015, June 30, 2016 and 2015 and March 31, 2016 and 2015:
| Quarters ended | December 31, 2016 | September 30, 2016 | June 30, 2016 | March 31, 2016 | ||||||||||||
| GAAP net (loss)/income | (2,027 | ) | (2,646 | ) | 529 | (1,766 | ) | |||||||||
| Interest expense: | ||||||||||||||||
| Amortization of debt discount | 385 | 307 | 248 | 184 | ||||||||||||
| Other interest | 228 | 187 | 156 | 213 | ||||||||||||
| Gain on settlement of debt | (55 | ) | (547 | ) | (406 | ) | - | |||||||||
| Change in warrant liability | 1,584 | 433 | (756 | ) | (279 | ) | ||||||||||
| Impairment loss on intangible assets | - | 1,065 | - | - | ||||||||||||
| Depreciation/amortization | 388 | 540 | 536 | 539 | ||||||||||||
| Other expenses/(income) | 64 | (78 | ) | (566 | ) | 51 | ||||||||||
| EBITDA | 567 | (739 | ) | (259 | ) | (1,058 | ) | |||||||||
| Quarters ended | December 31, 2015 | September 30, 2015 | June 30, 2015 | March 31, 2015 | ||||||||||||
| GAAP net (loss)/income | $ | (2,052 | ) | $ | (1,694 | ) | $ | (2,288 | ) | $ | (1,933 | ) | ||||
| Interest expense: | ||||||||||||||||
| Amortization of debt discount | 451 | 226 | 142 | 43 | ||||||||||||
| Other interest | 306 | 76 | 22 | 20 | ||||||||||||
| Change in warrant liability | (284 | ) | 15 | (67 | ) | (745 | ) | |||||||||
| Depreciation/amortization | 731 | 439 | 432 | 425 | ||||||||||||
| Other expenses/(income) | 403 | 60 | (1 | ) | 10 | |||||||||||
| EBITDA | $ | (445 | ) | $ | (878 | ) | $ | (1,760 | ) | $ | (2,180 | ) | ||||
Liquidity and Capital Resources
We have incurred net losses and negative cash flows from operating activities for the years ended December 31, 2016 and 2015. As of December 31, 2016, we had cash and cash equivalents of $1,352 and a working capital deficit of $(8,029). At December 31, 2016, our outstanding debt was due during 2017. In March 2017, we received a letter from our lender, Slipstream Communications, LLC, a related party, extending the maturity date for our debt to May 2018. Additionally, we entered into a substantial business transaction with one of our customers resulting in a large cash receipt in the first quarter of 2017 that increased our cash and cash equivalents to $3.6 million in March 2017. Management believes that due to the extension of our debt maturity date, our current cash balance and our operational forecast for 2017, we can continue as a going concern through at least March 31, 2018. However, 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 8 to the Consolidated Financial Statements for a discussion of the Company’s debt obligations.
Operating Activities
We do not currently generate positive cash flow. Our operational costs have been greater than sales generated to date. As of December 31, 2016, we had an accumulated deficit of $(20,524). The cash flow used in operating activities was $(4,106) and ($1,982) for the years ended December 31, 2016 and 2015, respectively. The majority of the cash consumed by operations for both periods was attributed to our net losses of $(5,910) and $(7,967) for the years ended December 31, 2016 and 2015, respectively. Included in our net losses were non-cash charges consisting of depreciation, and amortization of debt discount related to convertible preferred stock / issued for debt-issuance costs, change in warrant liability, stock-based compensation and changes in the allowance for doubtful accounts totaling $4,467 and $1,572 for the years ended December 31, 2016 and 2015, respectively.
Investing Activities
Net cash used in investing activities during the year ended December 31, 2016 was $(292) compared to $(580) during 2015. The decrease in cash used in investing activities is primarily due to less capital expenditures during the period. We currently do not have any material commitments for capital expenditures as of December 31, 2016, nor do we anticipate any significant expenditures in 2017.
Financing Activities
Net cash provided by financing activities during the year ended December 31, 2016 was $4,389 compared to $3,350 in 2015. The increase is mainly due to the issuance of new debt financing and warrants.
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Off-Balance Sheet Arrangements
During the year ended December 31, 2016, we did not engage in any off-balance sheet arrangements set forth in Item 303(a) (4) of Regulation S-K.
Contractual Obligations
We have no material commitments for capital expenditures, and we do not anticipate any significant capital expenditures in 2017.
| ITEM 7A | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We do not believe our operations are currently subject to significant market risks for interest rates or other relevant market price risks of a material nature.
Foreign exchange rate fluctuations may adversely impact our consolidated financial position as well as our consolidated results of operations. Foreign exchange rate fluctuations may adversely impact our financial position as the assets and liabilities of our Canadian operations are translated into U.S. dollars in preparing our consolidated balance sheet. These gains or losses are recognized in income.
| ITEM 8 | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
See Index to Consolidated Financial Statements on Page F-1.
| ITEM 9 | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None
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| ITEM 9A | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, as appropriate, to allow timely decisions regarding required disclosures. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, and Board of Directors, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer and VP, Corporate Controller, we conducted an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, we concluded as of December 31, 2016 that our disclosure controls and procedures and internal controls over financial reporting were not effective at the reasonable assurance level due to the material weaknesses described below.
In light of the material weaknesses described below, additional analyses and other procedures were performed to ensure that our consolidated financial statements included in this Annual Report on Form 10-K were prepared in accordance with GAAP. These measures included expanded year-end closing procedures, the dedication of significant internal resources and reconciliations and management’s own internal reviews, and efforts to remediate the material weaknesses in internal control over financial reporting described below. As a result of these measures, management concluded that our consolidated financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods, presented in conformity with GAAP.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| ● | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; | |
| ● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and | |
| ● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
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The Company identified that, while certain improvements did occur in the Company’s internal control over financial reporting for the year ended December 31, 2016, internal control over financial reporting was not effective as of December 31, 2016 and that material weaknesses exist including: a deficient process to close the monthly consolidated financial statements and prepare comprehensive and timely account analysis, and adequately identify and document multiple elements and deliverables, including allocation, deferral and cost estimates in support of revenue recognition. In addition, Creative Realities, Inc. currently does not have an independent financial expert on its Board of Directors.
A material weakness is a control deficiency (within the meaning of Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5) or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Management has already implemented certain practices and procedures during 2016 to address the foregoing deficiencies, plans to expand the scope of its assessment of the effectiveness of its internal controls over financial reporting at the consolidated Company in 2016, and develop a plan to complete the remediation of the foregoing deficiencies.
In completing its assessment of internal control over financial reporting, management has used and anticipates to continue using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—2013 Integrated Framework.
This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company, as a smaller reporting company, to provide only management's report in its annual report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 9B | OTHER INFORMATION |
On May 5, 2015, we entered into a Separation Agreement with Paul Price, our former Chief Executive Officer and director. The separation agreement provides a customary release of claims by Mr. Price in favor of the Company, and requires the Company to pay to Mr. Price 12 months of his base salary as severance at the intervals set forth in the agreement. The agreement also provided that an option to purchase 938,357 shares of common stock at $0.45 per share vested effective as of April 13, 2015, and that his remaining options were cancelled. On August 21, 2016, the Company entered into a settlement and release agreement and a replacement stock option agreement with Mr. Price, whereas the Company made a payment to Mr. Price of $70 and provided an option to purchase 100,000 shares of Company common stock at $0.45 in exchange for the prior 938,537 options.
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| ITEM 10 | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Our Board of Directors consists of Alec Machiels (Chairman), Rick Mills (CEO), David Bell, Donald Harris, Patrick O’Brien and Eric Bertrand. The following table sets forth the name and position of each of our current directors and executive officers.
| Name | Age | Positions | ||
| Alec Machiels | 44 | Director (Chairman) | ||
| David Bell | 73 | Director | ||
| Donald Harris | 64 | Director | ||
| Richard Mills | 62 | Director, Chief Executive Officer | ||
| John Walpuck | 55 | Chief Financial Officer and Chief Operating Officer | ||
| Patrick O’Brien | 70 | Director | ||
| Eric J. Bertrand | 44 | Director |
The biographies of the above-identified individuals are set forth below:
Alec Machiels is a Partner at Pegasus Capital Advisors, L.P., a private equity fund manager, and joined our Board of Directors in August 2014 in connection with the Creative Realities merger. Mr. Machiels is a member of the Executive and Investment Committees at Pegasus Capital Advisors. He has over 15 years of private equity investing and investment banking experience. Mr. Machiels is a current director serving on the Board of Directors of Molycorp, Inc. Previously, Mr. Machiels was a Financial Analyst in the Financial Services Group at Goldman Sachs Internatioxnal in London and in the Private Equity Group at Goldman Sachs and Co. in New York. Investments in which he has been highly involved in include Pure Biofuels, Molycorp Minerals, Traxys, Slipstream Communications, LLC, Coffeyville Resources and Merisant Company. He also served as a member of the Board of Trustees of the American Federation of Arts where he chaired the endowment committee. Mr. Machiels is a graduate of Harvard Business School, KU Leuven Law School in Belgium and Konstanz University in Germany.
David Bell joined our Board of Directors in August 2014 in connection with the Creative Realities merger. Mr. Bell brings over 40 years of advertising and marketing industry experience to the board, including serving as CEO of three of the largest companies in the industry–Bozell Worldwide, True North Communications and The Interpublic Group of Companies, Inc. Since 2007, Mr. Bell has led Slipstream Communications, LLC which is an international company providing strategic branding, digital marketing, and public relations services and served as a Senior Advisor to Google Inc. from 2006 to 2009. He is currently a Senior Advisor to AOL and has been an Operating Advisor at Pegasus Capital Advisors since 2004. He has also served on the boards of multiple publicly traded companies, including Lighting Science Group Corporation and Point Blank Solutions, Inc., and Primedia, Inc., and served as President and CEO of The Interpublic Group of Companies Inc. from 2003 to 2005. Mr. Bell currently serves on the Board of Directors of Time, Inc.
Donald A. Harris was appointed to our Board of Directors in August 2014 in connection with the Broadcast International merger. He has been President of 1162 Management, the General Partner of 5 Star Partnership, a private equity firm, since June 2006. Mr. Harris has been President and Chief Executive Officer of UbiquiTel Inc., a telecommunications company organized by Mr. Harris and other investors, since its inception in September 1999 and also its Chairman since May 2000. Mr. Harris served as the President of Comcast Cellular Communications Inc. from March 1992 to March 1997. Mr. Harris received a Bachelor of Science degree from the United States Military Academy and an MBA from Columbia University. Mr. Harris’s experience in the telecommunications industry and his association with private equity funding will be valuable to us.
Richard Mills is currently our Chief Executive Officer. Mr. Mills possesses over 31 years of industry experience. He was previously Chief Executive Officer of ConeXus World Global, a leading digital media services company, which he founded in 2010, and which was acquired by Creative Realities as reported herein. Prior to founding ConeXus, Mr. Mills was President and Director at Beacon Enterprise Solutions Group, Inc., a public telecom and technology infrastructure services provider. Previous to that, he joined publicly traded Pomeroy Computer Resources, Inc. in 1993 and served as Chief Operating Officer and a member of the Board of Directors from 1995 until 1999. Mr. Mills helped grow sales at Pomeroy during his time there from $100 million to $700 million. Mr. Mills was also a founder of Strategic Communications LLC.
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John Walpuck has served as our Chief Operating Officer and Chief Financial Officer since April 2014. Mr. Walpuck brings over 25 years of experience in financial and general management to Creative Realities, and over 20 years of experience in a broad range of digital media services, software, Internet services, online businesses, virtualization, and other technology industry sectors. Prior to Creative Realities, Mr. Walpuck served as the Chief Operating Officer and Chief Financial Officer of AllDigital, Inc. a digital broadcasting solutions company for the period from 2010 through 2013. Mr. Walpuck also served as the President and CEO of Disaboom, Inc., an online business and social network dedicated to people with disabilities, where he worked from 2007 to 2010. Prior to Disaboom, from 2005 to 2007, he served as the Senior Vice President and Chief Financial Officer of Nine Systems Corporation, a digital media services company. Mr. Walpuck has an MBA from the University of Chicago. He is a CMA, CPA and holds other professional certifications.
Patrick O’Brien has been a member of our Board of Directors since November 2015. Mr. O’Brien is the Managing Director& Principal of Granville Wolcott Advisors, which he formed in 2009 to provide consulting, due diligence and asset management services. Mr. O’Brien is a seasoned executive and business advisor, with 40 years of multi-unit international management experience with an emphasis in financial analysis and strategic business development. During the past five years, Mr. O’Brien has served on the boards of Merriman Holdings, Inc., Ironclad Performance Wear Corporation, Cinedigm, Inc., and is Chairman and CEO of LVI Liquidation Corp. (formerly Livevol, Inc.) He is a graduate of the Eli Broad School of Business of Michigan State University with BA in Hotel Management
Eric J. Bertrand joined our Board of Directors in May, 2016. Mr. Bertrand is the Chief Executive Officer and a partner of modop, a full-service advertising agency with offices in New York, Los Angeles, Miami, Portland and Panama City, Panama. Prior to modop, Mr. Bertrand was a PE/VC fund manager, having invested $300 million in 60+ companies over the past 20 years. Mr. Bertrand was a General Partner with Palisade Capital Management, where he jointly managed a private equity fund and venture capital funds. Mr. Bertrand began his private equity career with Aetna's Private Equity Group. Today, Mr. Bertrand is a Board Member of modop, Silverlight Digital, several privately held companies as well as international charities, Unite For Sight and the Alive Inside Foundation. Eric holds an MBA in Finance and Entrepreneurial Studies from New York University. He graduated from Bryant University with a BS in Business Administration concentrating on Finance and Applied Actuarial Mathematics. Mr. Bertrand possesses voting and investment power over shares beneficially held by Lincoln Road Media Partners LLC, which is the holder of a warrant issued in a private placement transaction on April 14, 2016. See Note 8 to the Consolidated Financial Statements for additional information. Mr. Bertrand was appointed to the board in connection with Lincoln Road Media’s investment in the convertible note and warrant.
Under our corporate bylaws, all of our directors serve for indefinite terms expiring upon the next annual meeting of our shareholders. The holders of a majority of our outstanding Series A Convertible Preferred Stock also have the right, but not the obligation, to designate one person to serve as a director on our board. As of the date of this Annual Report, the preferred shareholders have not exercised this right.
When considering whether directors and nominees have the experience, qualifications, attributes and skills to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of our business and structure, the Board of Directors focuses primarily on the industry and transactional experience, and other background, in addition to any unique skills or attributes associated with a director. With regard to Mr. Machiels, the Board of Directors considered his background and experience with the private investing market and his long-standing oversight of the Creative Realities business during such time as it was wholly owned by Pegasus Capital. With regard to Mr. Bell, the Board considered his deep experience within the advertising and marketing industries and his prior management of large enterprises. Finally, with regards to Mr. Harris, the Board of Directors considered his extensive experience in the telecommunications industry and association with private equity investors.
The Board of Directors has determined that there are no “independent,” directors as such term is defined in Section 5605(a)(2) of the Nasdaq listing rules, and meets the criteria for independence set forth in Rule 10A-3(b)(1) under the Securities Exchange Act of 1934. The preceding disclosure respecting director independence is required under applicable SEC rules. Nevertheless, as a corporation whose shares are listed for trading on the OTCQB Markets, we presently are not required to have any independent directors at all on our board, or any independent directors serving on any particular committees of the Board of Directors. The Board of Directors has determined that at least one member of the board, Mr. Machiels, is an “audit committee financial expert” as that term is defined in Regulation S-K promulgated under the Securities Exchange Act of 1934. Mr. Machiels’s relevant experience in this regard is detailed above, which includes past employment experience in finance and investment banking. Mr. Machiels is not an “independent” member of the board as described above. The Board of Directors has determined that each director is able to read and understand fundamental financial statements.
Board and Committee Matters
The Company does not have a standing nominating committee, compensation committee or audit committee. Instead, the entire Board of Directors shares the responsibility of identifying potential director-nominees to serve on the Board of Directors, making compensation decisions and performing the functions of an audit committee. The Board believes the engagement of all directors in these functions is important at this time in the Company’s development in light of the Company’s recent acquisition activities.
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Communications with Board Members
Our board of directors has provided the following process for shareholders and interested parties to send communications to our board and/or individual directors. All communications should be addressed to Creative Realities, Inc., 22 Audrey Place, Fairfield, NJ 07004, Attention: Corporate Secretary. Communications to individual directors may also be made to such director at our company’s address. All communications sent to any individual director will be received directly by such individuals and will not be screened or reviewed by any company personnel. Any communications sent to the board in the care of the Corporate Secretary will be reviewed by the Corporate Secretary to ensure that such communications relate to the business of the company before being reviewed by the board.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our officers, directors and persons who own more than 10 percent of a registered class of our equity securities to file reports of ownership and changes in ownership with the SEC. Such officers, directors and shareholders are required by the SEC to furnish us with copies of all such reports. To our knowledge, based solely on a review of copies of reports filed with the SEC during 2016 and written representations from such persons that no other reports were required, all applicable Section 16(a) filing requirements were timely met except that Eric J. Bertrand filed a late Form 3 in connection with his admission to the Board of Directors, and a late Form 4 for one transaction; and Slipstream Communications and its affiliates filed late Form 4s for a series of related transactions.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers (including our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions) and directors. Our Code of Business Conduct and Ethics satisfies the requirements of Item 406(b) of Regulation S-K. Our Code of Business Conduct and Ethics is available, free of charge, upon written request to our Corporate Secretary at 22 Audrey Place, Fairfield, NJ 07004.
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| ITEM 11 | EXECUTIVE COMPENSATION |
Executive Compensation
Summary Compensation Table
The following table sets forth information concerning the compensation of our named executive officers for 2016 and 2015:
Name and Principal Position (a) | Years | Salary ($) (b) | Bonus ($) | Stock Awards ($) (c) | Option Awards ($) (c) | Non-Equity Incentive Plan Compensation ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||
| Richard Mills | 2016 | 270,000 | - | - | - | - | - | 270,000 | ||||||||||||||||||||||
| Chief Executive Officer and Director | 2015 | 56,250 | 56,250 | |||||||||||||||||||||||||||
| Paul Price | 2016 | - | - | - | - | - | - | 0 | ||||||||||||||||||||||
| Former Chief Executive Officer and Director | 2015 | 119,744 | - | - | 122,600 | - | - | 242,344 | ||||||||||||||||||||||
| John Walpuck | 2016 | 240,000 | - | - | - | - | - | 240,000 | ||||||||||||||||||||||
| Chief Financial Officer | 2015 | 230,000 | - | - | 446,208 | - | 676,208 | |||||||||||||||||||||||
| (a) | Mr. Mills joined the Company effective October 15, 2015. Messrs Price and Walpuck joined the company effective August 2014 and May 2014, respectively. |
| (b) | Represents their prorated annual base salaries of $270,000 for Mr. Mills and $400,000 for Mr. Price for 2015. |
| (c) | Represents the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. The assumptions made in the valuation are those set forth in Note 15 to the consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2015. Mr. Mills was awarded 4,951,557 performance shares with a grant date to be determined upon certain conditions being satisfied. At this time, the Company does not believe it is probable that all of the conditions will be met. |
The material terms of employment agreements and payments to be made upon a change in control are discussed below, in the narrative following “Employment Agreements.”
Our named executive officers are eligible for retirement benefits on the same terms as non-executives under the company’s defined contribution 401(k) retirement plan. Employees may contribute pretax compensation to the plan in accordance with current maximum contribution levels proscribed by the Internal Revenue Service. There is currently no plan for an employer contribution match.
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Outstanding Equity Awards at Fiscal Year-End
The following table sets forth certain information concerning outstanding stock options and restricted stock awards held by our named executive officers as of December 31, 2016:
| Option Awards (a) | Stock Awards | |||||||||||||||||||||
| Number of | Number of Securities | Number | Market value | |||||||||||||||||||
| Securities | Underlying | of shares | of shares | |||||||||||||||||||
| Underlying | Unexercised | or units of | or units of | |||||||||||||||||||
| Unexercised | Options | Option | stock | stock | ||||||||||||||||||
| Options | (#) | Exercise | Option | that has | that have | |||||||||||||||||
| (#) | Non- | Price | Expiration | not vested | not vested | |||||||||||||||||
| Name | Exercisable | Exercisable | ($) | Date | (#) | ($) | ||||||||||||||||
| Paul Price | 100,000 | (b) | $ | 0.45 | 10/9/2024 | - | - | |||||||||||||||
| John Walpuck | 170,000 | (c) | - | $ | 0.65 | 5/29/2024 | - | - | ||||||||||||||
| 50,000 | (c) | - | $ | 0.45 | 8/18/2024 | |||||||||||||||||
| 480,685 | (e) | $ | 0.45 | 10/9/2024 | ||||||||||||||||||
| 1,449,432 | (d) | $ | 0.32 | 1/22/2025 | ||||||||||||||||||
| 1,069,882 | (f) | $ | 0.19 | 11/20/2025 | ||||||||||||||||||
| (a) | Unless otherwise indicated, represents shares issuable upon the exercise of stock options granted under our Amended and Restated 2006 Equity Incentive Plan. |
| (b) | Mr. Price’s options to purchase 938,537 shares of common stock were replaced with options to purchase 100,000 common stock on August 16, 2016. See Item 9B; Other Information in this Form 10-K. . |
| (c) | These stock options became fully exercisable upon the effectiveness of the Company’s merger transaction with Creative Realities, LLC. |
| (d) | This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on January 22, 2016, with additional increments of 25 percent becoming exercisable annually thereafter. |
(e)
(f) |
This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on October 9, 2015, with additional increments of 25 percent becoming exercisable annually thereafter. This stock option becomes exercisable to the extent of 25 percent of the shares purchasable thereunder on November 20, 2016, with additional increments of 25 percent becoming exercisable annually thereafter. |
Employment Agreements and Potential Payments upon Termination or Change in Control
We employ Richard Mills as our Chief Executive Officers and John Walpuck as our Chief Financial Officer and Chief Operating Officer. Mr. Mills’ agreement is effective for a two-year term, which automatically renews for additional one-year periods unless either the Company or Mr. Mills elects not to extend the employment term. The agreement provides for an initial annual base salary of $270,000, subject to annual increases but generally not subject to decreases. Mr. Walpuck’s employment agreement is effective for a one-year term, which automatically renews for additional one-year periods unless either the Company or Mr. Walpuck elects not to extend the employment term. The agreement provides for an initial annual base salary of $240,000, subject to annual increases but generally not subject to decreases.
Under their respective agreements, Mr. Mills and Mr. Walpuck are eligible to participate in performance-based cash bonus or equity award plans for the Company’s senior executives. In addition, Mr. Mills and Mr. Walpuck will participate in employee benefit plans, policies, programs, perquisites and arrangements to the extent he meets eligibility and other requirements.
Under Mr. Mills’ employment agreement, he is entitled to 17 days of paid time off. In addition, upon any termination of employment Mr. Mills will receive his then-earned base salary through the date of termination, payment for the amount of any accrued and unpaid paid time off, and, if such termination was effected by the Company without “cause,” or if it was effected by Mr. Mills for “good reason,” or if such termination is effected by the Company within 12 months of a “change of control” that occurred during Mr. Mills’ tenure with the Company, as such terms are defined in his employment agreement, then (other than in cases involving Mr. Mills’ death or disability) Mr. Mills will be entitled to receive severance payments aggregating to an amount equal to six months of his then-current base salary. Mr. Mills would also be entitled to customary benefits regarding health insurance (COBRA) for a one-year period following any such termination.
Under Mr. Walpuck’s employment agreement, he is entitled to 17 days of paid time off. In addition, upon any termination of employment Mr. Walpuck will receive his then-earned base salary through the date of termination, payment for the amount of any accrued and unpaid paid time off, and, if such termination was effected by the Company without “cause,” or if it was effected by Mr. Walpuck for “good reason,” or if such termination is effected by the Company within 12 months of a “change of control” that occurred during Mr. Walpuck’s tenure with the Company, as such terms are defined in his employment agreement, then (other than in cases involving Mr. Walpuck’s death or disability) Mr. Walpuck will be entitled to receive severance payments aggregating to an amount equal to six months of his then-current base salary. Mr. Walpuck would also be entitled to customary benefits regarding health insurance (COBRA) for a one-year period following any such termination.
Upon the termination of a named executive officer or change in control of the company, a named executive officer may be entitled to payments or the provision of other benefits, depending on the triggering event. The potential payments for each named executive officer who is currently employed with our company were determined as part of the negotiation of each of their employment agreements, and the board believes that the potential payments for the triggering events are in line with current compensation trends.
Director Compensation Table
Non-employee directors received no compensation during 2016 and 2015.
| 39 |
| ITEM 12 | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
As of the close of business on March 27, 2017, we had outstanding three classes of voting securities – common stock, of which there were 67,422,080 shares issued and outstanding; Series A Convertible Preferred Stock, of which there were 5,929,233 shares issued and outstanding, including 349,319 and 336,266 shares issued in conjunction with the preferred dividend on December 31, 2016 and 2015, respectively, and Series A-1 Convertible Preferred Stock, of which there were 1,787,412 shares issued and outstanding, including 102,610 and 20,802 shares issued in conjunction with preferred dividends on December 31, 2016 and 2015, respectively. Each share of common stock is currently entitled to one vote on all matters put to a vote of our shareholders, and each share of preferred stock votes on an as-converted basis, which means that each preferred share is currently entitled to two and one-half votes on all matters put to a vote of our shareholders. Our preferred stock votes together with our common stock as a single class. The following table sets forth the number of common shares, and percentage of outstanding common shares, beneficially owned as of December 31, 2016, by:
| ● | each person known by us to be the beneficial owner of more than five percent of our outstanding common stock |
| ● | each current director |
| ● | each executive officer of the Company and other persons identified as a named executive in this Annual Report on Form 10-K, and |
| ● | all current executive officers and directors as a group. |
Unless otherwise indicated, the address of each of the following persons is 22 Audrey Place, Fairfield, NJ 07004, and each such person has sole voting and investment power with respect to the shares set forth opposite his, her or its name.
| Name and Address | Common Shares Beneficially Owned [1] | Percentage of Common Shares 1 | ||||||
Slipstream Funding, LLC [2] c/o Pegasus Capital Advisors, L.P. 99 River Road Cos Cob, CT 06807 | 30,349,949 | 44.42 | % | |||||
Slipstream Communications, LLC [3] c/o Pegasus Capital Advisors, L.P. 99 River Road Cos Cob, CT 06807 | 59,160,852 | 60.97 | % | |||||
| RFK Communications, LLC [4] | 14,559,920 | 20.22 | % | |||||
| Horton Capital Partners Fund, L.P. [5] | 5,668,999 | 7.97 | % | |||||
| Eric Bertrand[6] | 911,857 | 1.35 | % | |||||
| John Walpuck [7] | 1,552,529 | 2.28 | % | |||||
| Donald A. Harris [8] | 2,773,691 | 4.12 | % | |||||
| Alec Machiels [9] | 0 | * | ||||||
| David Bell [10] | 0 | * | ||||||
| Richard Mills [11] | 11,920,662 | 16.55 | % | |||||
| Patrick O’Brien [12] | 0 | * | ||||||
| All current executive officers and directors as a group [13] | 17,158,739 | 24.30 | % | |||||
* less than 1%
| (1) | Beneficial ownership is determined in accordance with the rules of the SEC, and includes general voting power and/or investment power with respect to securities. Shares of common stock issuable upon exercise of options or warrants that are currently exercisable or exercisable within 60 days of the record rate, and shares of common stock issuable upon conversion of other securities currently convertible or convertible within 60 days, are deemed outstanding for computing the beneficial ownership percentage of the person holding such securities but are not deemed outstanding for computing the beneficial ownership percentage of any other person. Under applicable SEC rules, each person’s beneficial ownership is calculated by dividing the total number of shares with respect to which they possess beneficial ownership by the total number of outstanding shares of the Company. In any case where an individual has beneficial ownership over securities that are not outstanding, but are issuable upon the exercise of options or warrants or similar rights within the next 60 days, that same number of shares is added to the denominator in the calculation described above. Because the calculation of each person’s beneficial ownership set forth in the “Percentage of Common Shares” column of the table may include shares that are not presently outstanding, the sum total of the percentages set forth in such column may exceed 100%. |
| 40 |
| (2) | Investment and voting power over shares held by Slipstream Funding, LLC is held by Slipstream Communications, LLC, its sole member. See footnote 3 for further information regarding Slipstream Communications, LLC. The share figure includes 1,779,015 shares of common stock issuable upon exercise of an outstanding warrant issued to the shareholder in connection with the Company’s merger transaction with Creative Realities, LLC |
| (3) | Investment and voting power over shares held by Slipstream Communications, LLC is held by BCOM Holdings, LP, its managing member. Slipstream Communications is the sole member of Slipstream Funding, LLC, and as a result share figure includes the 28,570,934 shares of common stock, and 1,779,015 common shares issuable upon exercise of an outstanding warrant, issued to and held by Slipstream Funding, LLC in connection with the merger transaction with Creative Realities, LLC. Share figure also includes 13,517,294 common shares issued on account of a convertible promissory note, and 13,941,544 common shares purchasable upon exercise of outstanding warrants |
| (4) | Includes 267,857 common shares purchasable upon exercise of outstanding warrants. The warrants to purchase shares held by RFK Communications, LLC contain “blocker” provisions that limits its ability to exercise such warrants to the extent that such exercise would cause the shareholder’s beneficial ownership in the Company to exceed 4.99% of the Company’s shares outstanding. The calculation of beneficial ownership does not take into account the effect of such “blocker” provisions. |
| (5) | Includes 1,205,357 common shares purchasable upon exercise of outstanding warrants. The warrants to purchase shares held by Horton Capital Partners Fund, LP contain “blocker” provisions that limits its ability to exercise such warrants to the extent that such exercise would cause the shareholder’s beneficial ownership in the Company to exceed 4.99% of the Company’s shares outstanding. The calculation of beneficial ownership does not take into account the effect of such “blocker” provisions. |
| (6) | Includes 892,857 common shares purchasable upon exercise of outstanding warrants. The warrants to purchase shares held Eric Bertrand contain “blocker” provisions that limits its ability to exercise such warrants to the extent that such exercise would cause the shareholder’s beneficial ownership in the Company to exceed 4.99% of the Company’s shares outstanding. The calculation of beneficial ownership does not take into account the effect of such “blocker” provisions. |
| (7) | Mr. Walpuck is our Chief Financial Officer and Chief Operating Officer. Shares reflected in the table are common shares issuable upon exercise of vested options. |
| (8) | Mr. Harris is a director of the Company. Share figure includes an aggregate of 96,154 shares purchasable upon the exercise of outstanding options, 422,320 shares purchasable upon the exercise of outstanding warrants. |
| (9) | Mr. Machiels is a director of the Company. |
| (10) | Mr. Bell is a director of the Company. |
| (11) | Mr. Mills is a director of the Company and Chief Executive Officer. Share figure includes 6,447,142 shares issued as merger consideration in connection with the merger with ConeXus World Global, LLC and 1,327,444 shares of Series A-1 Convertible Stock. |
| (12) | Mr. O’Brien is a director of the Company. |
| (13) | Includes Messrs. Walpuck, Harris, Machiels, Bell, Mills, O’Brien and Bertrand. |
| 41 |
| ITEM 13 | CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
On August 17, 2016, we entered into a Loan and Security Agreement with Slipstream Communications, LLC, a controlling shareholder of the Company, under which we obtained a $3.0 million term loan, with interest thereon at 8% per annum, maturing on August 17, 2017 (with a one-year option for us to extend that maturity, so long as we are not then in default and we deliver additional warrants to the lender). In connection with the loan, we issued Slipstream Communications a five-year warrant to purchase up to 5,882,352 shares of Creative Realities’ common stock at a per share price of $0.28 (subject to adjustment).
On December 12, 2016, we entered into a $1.0 million secured revolving promissory note pursuant to the August 17, 2016 Loan and Security Agreement with Slipstream Communications, LLC, with interest thereon at 8% per annum, maturing on February 1, 2017. Slipstream Communications is a controlling shareholder of the Company. In connection with the loan, we issued Slipstream Communications a five-year warrant to purchase up to 1,542,452 shares of common stock at a per-share price of $0.28 (subject to adjustment), all pursuant to a securities purchase agreement. This note was repaid on January 12, 2017.
Independence
The Company does not have a standing nominating committee, compensation committee or audit committee. Instead, the entire Board of Directors shares the responsibility of identifying potential director-nominees to serve on the Board of Directors, making compensation decisions and performing the functions of an audit committee. The board believes the engagement of all directors in these functions is important at this time in the Company’s development in light of the Company’s recent acquisition activities.
The Board of Directors has determined that none of its directors is “independent,” as such term is defined in Section 5605(a)(2) of the Nasdaq listing rules, or meets the criteria for independence set forth in Rule 10A-3(b)(1) under the Securities Exchange Act of 1934. The preceding disclosure respecting director independence is required under applicable SEC rules. Nevertheless, as a corporation whose shares are listed for trading on the OTCQB, we presently are not required to have any independent directors at all on our board, or any independent directors serving on any particular committees of the Board of Directors.
| 42 |
| ITEM 14 | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The following table presents fees for audit and other services provided by EisnerAmper LLP for 2016 and 2015 and Baker Tilly Virchow Krause, LLP for a portion of 2015; hence 2015 includes fees from both audit firms. Fees for tax services were provided by Eichen & Dimeglio, CPAs, PC in both 2016 and 2015.
| 2016 | 2015 | |||||||
| Audit fees (a) | $ | 193 | $ | 359 | ||||
| Audit related fees (b) | 4 | - | ||||||
| Tax fees (c) | 33 | 38 | ||||||
| $ | 230 | $ | 397 | |||||
| (a) | Audit fees relate to audits of Creative Realities, Inc. as of December 31, 2016 and 2015. Audit fees consisted of fees for services provided in connection with the audit of our financial statements and reviews of our quarterly financial statements. |
| (b) | Audit-related fees relate to services provided to Creative Realities, Inc. as of December 31, 2016 and 2015. Audit-related fees consisted of fees for services provided in connection with the Form S-1. |
| (c) | Tax fees consisted of the aggregate fees billed for tax compliance, tax advice, and tax planning. |
Our Board of Directors reviewed the audit services rendered by EisnerAmper, LLP during 2016 and 2015 and concluded that such services were compatible with maintaining the auditor’s independence.
| 43 |
| ITEM 15 | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| (a) | See “Index to Consolidated Financial Statements” on page F-1 and “Exhibit Index” on page E-1. | |
| (b) | See “Exhibit Index” on page E-1. | |
| (c) | Not applicable. |
| 44 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on March 28, 2017.
| Creative Realities, Inc. | ||
| By | /s/ Richard Mills | |
| Richard Mills | ||
| Chief Executive Officer | ||
| By | /s/ John Walpuck | |
| John Walpuck | ||
|
Chief Financial Officer and Chief Operating Officer |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant, and in the capacities and on the date indicated.
| Signature | Title | Date | ||
| /s/ Richard Mills | Chief Executive Officer | March 28, 2017 | ||
| Richard Mills | ||||
| /s/ John L. Walpuck | Chief Financial Officer and Chief Operating Officer | March 28, 2017 | ||
| John J. Walpuck | (Principal Financial Officer and | |||
| Principal Accounting Officer) | ||||
| /s/ Alec Machiels | Chairman of the Board of Directors | March 28, 2017 | ||
| Alec Machiels | ||||
| /s/ David Bell | Director | March 28, 2017 | ||
| David Bell | ||||
| /s/ Donald Harris | Director | March 28, 2017 | ||
| Donald Harris | ||||
| /s/ Patrick O’Brien | Director | March 28, 2017 | ||
| Patrick O’Brien |
| |||
| /s/ Eric J. Bertrand | Director | March 28, 2017 | ||
| Eric J. Bertrand |
| 45 |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Report of Independent Registered Public Accounting Firms | F-2 |
| Consolidated Financial Statements | |
| Consolidated Balance Sheets | F-3 |
| Consolidated Statements of Operations | F-4 |
| Consolidated Statements of Shareholders’ Equity | F-5 |
| Consolidated Statements of Cash Flows | F-6 |
| Notes to Consolidated Financial Statements | F-7 |
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Creative Realities, Inc.
We have audited the accompanying consolidated balance sheets of Creative Realities, Inc. and Subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years then ended. The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Creative Realities, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for the each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ EisnerAmper LLP
Iselin, New Jersey
March 28, 2017
| F-2 |
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
| December 31, | December 31, | |||||||
| 2016 | 2015 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | 1,352 | $ | 1,361 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $85 and $0, respectively | 3,998 | 884 | ||||||
| Unbilled receivables | 242 | 81 | ||||||
| Work-in-process and inventories | 585 | 82 | ||||||
| Prepaid expenses | 168 | 348 | ||||||
| Total current assets | 6,345 | 2,756 | ||||||
| Property and equipment, net | 912 | 892 | ||||||
| Intangibles, net | 2,035 | 4,831 | ||||||
| Goodwill | 14,989 | 14,354 | ||||||
| Other assets | 138 | 203 | ||||||
| TOTAL ASSETS | $ | 24,419 | $ | 23,036 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Short-term related party loans payable, net of $561 and $2 discount, respectively | $ | 7,635 | $ | 150 | ||||
| Accounts payable | 3,218 | 3,601 | ||||||
| Accrued expenses | 2,162 | 2,318 | ||||||
| Deferred revenues | 753 | 1,213 | ||||||
| Customer deposits | 606 | - | ||||||
| Total current liabilities | 14,374 | 7,282 | ||||||
| Loans payable, net of $0 and $909 discount, respectively | - | 2,280 | ||||||
| Warrant liability | 3,316 | 1,649 | ||||||
| Deferred tax liabilities | 610 | 358 | ||||||
| Other liabilities | 218 | 96 | ||||||
| TOTAL LIABILITIES | 18,518 | 11,665 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| Convertible preferred stock, net of discount (liquidation preference of $7,690 and $7,544, respectively) | 3,925 | 3,769 | ||||||
| SHAREHOLDERS' EQUITY | ||||||||
| Common stock, $.01 per value, 200,000 shares authorized; 66,649 and 64,224 shares issued and outstanding, respectively | 666 | 642 | ||||||
| Additional paid-in capital | 21,834 | 21,574 | ||||||
| Accumulated deficit | (20,524 | ) | (14,614 | ) | ||||
| Total shareholders' equity | 1,976 | 7,602 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 24,419 | $ | 23,036 | ||||
See accompanying Notes to Consolidated Financial Statements.
| F-3 |
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Sales | ||||||||
| Hardware | $ | 3,031 | $ | 2,850 | ||||
| Services and other | 10,642 | 8,621 | ||||||
| Total sales | 13,673 | 11,471 | ||||||
| Cost of sales | ||||||||
| Hardware | 2,544 | 2,725 | ||||||
| Services and other | 4,271 | 5,144 | ||||||
| Total cost of sales (exclusive of depreciation and amortization shown separately below) | 6,815 | 7,869 | ||||||
| Gross profit | 6,858 | 3,602 | ||||||
| Operating expenses: | ||||||||
| Sales and marketing expenses | 1,061 | 1,114 | ||||||
| Research and development expenses | 893 | 804 | ||||||
| General and administrative expenses | 6,393 | 6,947 | ||||||
| Depreciation and amortization expense | 2,003 | 2,027 | ||||||
| Impairment loss on intangible assets | 1,065 | - | ||||||
| Total operating expenses | 11,415 | 10,892 | ||||||
| Operating loss | (4,557 | ) | (7,290 | ) | ||||
| Other income (expenses): | ||||||||
| Interest expense | (1,908 | ) | (1,286 | ) | ||||
| Change in fair value of warrant liability | (982 | ) | 1,081 | |||||
| Gain on settlement of debt | 1,008 | - | ||||||
| Other income/(expense) | 164 | (114 | ) | |||||
| Total other expense | (1,718 | ) | (319 | ) | ||||
| Net loss before income taxes | (6,275 | ) | (7,609 | ) | ||||
| Benefit/(provision) from income taxes | 365 | (358 | ) | |||||
| Net loss | (5,910 | ) | (7,967 | ) | ||||
| Dividends on preferred stock | 463 | 344 | ||||||
| Net loss attributable to common shareholders | $ | (6,373 | ) | $ | (8,311 | ) | ||
| Net loss per common share - basic and diluted | $ | (0.09 | ) | $ | (0.16 | ) | ||
| Net loss attributable to common shareholders | $ | (0.10 | ) | $ | (0.17 | ) | ||
| Weighted average shares outstanding - basic and diluted | 65,443 | 49,790 | ||||||
See accompanying Notes to Consolidated Financial Statements.
| F-4 |
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the years ended December 31, 2016 and 2015
(in thousands, except shares)
| Additional | ||||||||||||||||||||
| Common Stock | paid in | (Accumulated | ||||||||||||||||||
| Shares | Amount | capital | Deficit) | Total | ||||||||||||||||
| Balance as of December 31, 2014 | 46,217,968 | $ | 462 | $ | 17,439 | $ | (6,647 | ) | $ | 11,254 | ||||||||||
| Issuance of common shares to affect the merger with ConeXus | 16,000,000 | 160 | 3,360 | - | 3,520 | |||||||||||||||
| Issuance of warrants with promissory notes | - | - | 464 | - | 464 | |||||||||||||||
| Shares issued in exchanges for warrants | 975,000 | 9 | (9 | ) | - | - | ||||||||||||||
| Dividends on preferred stock | - | - | (344 | ) | - | (344 | ) | |||||||||||||
| Stock-based compensation | - | - | 254 | - | 254 | |||||||||||||||
| Shares issued for services | 771,892 | 8 | 146 | - | 154 | |||||||||||||||
| Beneficial conversion feature on issuance of convertible promissory notes | - | - | 401 | - | 401 | |||||||||||||||
| Adjustment for options issued due to merger with Wireless Ronin Technologies, Inc. | - | - | (212 | ) | - | (212 | ) | |||||||||||||
| Shares issued upon conversion of preferred stock | 260,000 | 3 | 75 | - | 78 | |||||||||||||||
| Net loss | - | - | - | (7,967 | ) | (7,967 | ) | |||||||||||||
| Balance as of December 31, 2015 | 64,224,860 | $ | 642 | $ | 21,574 | $ | (14,614 | ) | $ | 7,602 | ||||||||||
| Shares issued upon conversion of preferred stock | 1,205,882 | 12 | 295 | - | 307 | |||||||||||||||
| Shares issued for restructured settlement program | 1,219,189 | 12 | 155 | - | 167 | |||||||||||||||
| Dividends on preferred stock | - | (463 | ) | - | (463 | ) | ||||||||||||||
| Stock-based compensation | - | - | 273 | - | 273 | |||||||||||||||
| Net loss | - | - | - | (5,910 | ) | (5,910 | ) | |||||||||||||
| Balance as of December 31, 2016 | 66,649,931 | $ | 666 | $ | 21,834 | $ | (20,524 | ) | $ | 1,976 | ||||||||||
See accompanying Notes to Consolidated Financial Statements.
| F-5 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share per share amounts)
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Operating Activities: | ||||||||
| Net loss | (5,910 | ) | (7,967 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Depreciation and amortization | 2,003 | 2,027 | ||||||
| Amortization of debt discount | 1,124 | 862 | ||||||
| Stock-based compensation | 273 | 254 | ||||||
| Change in warrant liability | 982 | (1,081 | ) | |||||
| Allowance for doubtful accounts | 85 | (490 | ) | |||||
| Loss on lease termination | - | 371 | ||||||
| Warrants issued for services | 36 | - | ||||||
| Shares issued for serviced | - | 154 | ||||||
| Noncash interest added to promissory notes | 102 | - | ||||||
| Deferred tax provision | (365 | ) | 358 | |||||
| Loss on write-off of leasehold improvements | - | 266 | ||||||
| Impairment of intangible assets | 1,065 | - | ||||||
| Gain on debt settlement | (1,008 | ) | - | |||||
| Changes to operating assets and liabilities (net as of assets acquired and liabilities assumed in mergers): | ||||||||
| Accounts receivable and unbilled revenues | (3,360 | ) | 4,371 | |||||
| Inventories | (503 | ) | 745 | |||||
| Prepaid expenses and other current assets | 180 | 23 | ||||||
| Other assets | 65 | 45 | ||||||
| Accounts payable | 858 | (802 | ) | |||||
| Deferred revenue | (460 | ) | (1,281 | ) | ||||
| Accrued expenses | 17 | 501 | ||||||
| Customer deposits | 606 | - | ||||||
| Other non-current liabilities | 104 | (338 | ) | |||||
| Net cash used in operating activities | (4,106 | ) | (1,982 | ) | ||||
| Investing activities | ||||||||
| Purchases of property and equipment | (292 | ) | (639 | ) | ||||
| Cash received in acquisition of Conexus | - | 59 | ||||||
| Net cash used in investing activities | (292 | ) | (580 | ) | ||||
| Financing activities | ||||||||
| Issuance of common stock | 167 | - | ||||||
| Issuance of convertible preferred stock and warrants | - | 265 | ||||||
| Issuance of loans payable and warrants, net of discount | 4,510 | 4,244 | ||||||
| Payments of loan payable | (288 | ) | (1,050 | ) | ||||
| Payment of debt issuance costs | - | (109 | ) | |||||
| Net cash provided by financing activities | 4,389 | 3,350 | ||||||
| Decrease/(increase) in Cash and Cash Equivalents | (9 | ) | 788 | |||||
| Cash and Cash Equivalents, beginning of year | 1,361 | 573 | ||||||
| Cash and Cash Equivalents, end of year | 1,352 | 1,361 | ||||||
See accompanying Notes to Consolidated Financial Statements.
| F-6 |
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 OPERATIONS AND LIQUIDITY
Nature of the Company’s Business
Creative Realities, Inc. is a Minnesota corporation that provides innovative shopper marketing and digital marketing technology and solutions to retail companies, individual retail brands, enterprises and organizations throughout the United States and in certain international markets. We have expertise in a broad range of existing and emerging shopper and 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.
Our main operations are conducted directly through Creative Realities, Inc., and under our wholly owned subsidiaries Creative Realities, LLC, a Delaware limited liability company, Wireless Ronin Technologies Canada, Inc., and ConeXus World Global, LLC, a Kentucky limited liability company.
Liquidity
We have incurred net losses and negative cash flows from operating activities for the years ended December 31, 2016 and 2015. As of December 31, 2016, we had cash and cash equivalents of $1,352 and a working capital deficit of $(8,029). At December 31, 2016, our outstanding debt was due during 2017. In March 2017, we received a letter from our lender, Slipstream Communications, LLC, a related party, extending the maturity date for our debt to May 2018 (see Note 17). Additionally, we entered into a substantial business transaction with one of our customers resulting in a large cash receipt in the first quarter of 2017 that increased our cash and cash equivalents to $3.6 million in March 2017. Management believes that due to the extension of our debt maturity date, our current cash balance and our operational forecast for 2017, we can continue as a going concern through at least March 31, 2018. However, 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.
The consolidated financial statements do not include any adjustments to the recoverability and classifications of recorded assets and liabilities as a result of the above uncertainty.
Major Acquisitions
Acquisition of ConeXus World Global
On October 15, 2015, we completed the acquisition of ConeXus World Global, LLC pursuant to the Agreement and Plan of Merger and Reorganization for 2,080,000 shares of Series A-1 Convertible Preferred Stock, and the conversion of $823 of ConeXus World Global debt into (i) 2,639,258 shares of our common stock, and (ii) $150 in principal amount of our convertible debt. As a result of the merger transaction, ConeXus World Global, LLC is a wholly owned operating subsidiary.
The debtholders and members of ConeXus received a total of 1,664,000 shares of Series A-1 Convertible Preferred Stock, par value $1.00, and 16,000,000 shares of our common stock, par value $0.01. In accordance with the terms of the amendment to the agreement and plan of merger and reorganization, an additional 416,000 shares of Series A-1 Convertible Preferred Stock and 4,000,000 shares of common stock, collectively referred to as holdback shares, were to be issued immediately upon the reorganization of the capital structure of a Belgian affiliate of ConeXus. As of the date of this report, this reorganization has not occurred and the Company will not be acquiring the ConeXus Belgian affiliate. Therefore, no liability has been recorded for these additional shares, the consideration has not been included in the purchase price allocation and the financial results of the Belgian affiliate have not been included in the consolidated financial statements, as discussed below.
| F-7 |
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. Principles of Consolidation
The consolidated financial statements include the accounts of Creative Realities, Inc., our wholly owned subsidiaries ConeXus World Global LLC, Creative Realities, LLC and Wireless Ronin Technologies Canada, Inc. All inter-company balances and transactions have been eliminated in consolidation, as applicable.
2. Foreign Currency
For the Company’s Canadian operations, the local currency has been determined to be the functional currency. The results of its non-U.S. dollar based operations are translated to U.S. dollars at the average exchange rates during the period. Assets and liabilities are translated at the rate of exchange prevailing on the balance sheet date. Equity is translated at the prevailing rate of exchange at the date of the equity transaction. The effects of converting non-functional currency assets and liabilities into the functional currency are recorded as general and administrative expenses in the consolidated statements of operations. Translation adjustments which were considered immaterial to date, have been recorded as general and administrative expenses in the consolidated statements of operations.
3. Revenue Recognition
We recognize revenue primarily from these sources:
| ● | Hardware: System hardware sales | |
| ● | Services and Other: Professional and implementation services | |
| Software design and development services | ||
| Software and software license sales | ||
| Maintenance and support services |
We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 910, Contractors-Construction, ASC 605, Revenue Recognition, ASC 605-25, Accounting for Revenue Arrangements with Multiple Deliverables and ASC subtopic 985-605, Software. In the event of a multiple-element arrangement, we evaluate each element of the transaction to determine if it represents a separate unit of accounting, taking into account all factors following the guidelines set forth in FASB ASC 985-605-25-5:
| (i) | persuasive evidence of an arrangement exists; | |
| (ii) | delivery has occurred, which is when product title transfers to the customer, or services have been rendered; | |
| (iii) | customer payments are fixed or determinable and free of contingencies and significant uncertainties; and | |
| (iv) | collection is reasonably assured. If it is determined that collection of a fee is not reasonably assured, we defer the revenue and recognize it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment. Revenues are reported on a gross basis. |
| F-8 |
We enter into arrangements with customers that may include a combination of software products, system hardware, maintenance and support, or installation and training services. We allocate the total arrangement fee among the various elements of the arrangement based on the relative fair value of each of the undelivered elements determined by vendor-specific objective evidence (VSOE). In software arrangements for which we do not have VSOE of fair value for all elements, revenue is deferred until the earlier of when VSOE is determined for the undelivered elements (residual method) or when all elements for which we do not have VSOE of fair value have been delivered. We have determined VSOE of fair value for each of our products and services.
The VSOE for maintenance and support services is based upon the renewal rate for continued service arrangements. The VSOE for installation and training services is established based upon pricing for the services. The VSOE for software and licenses is based on the normal pricing and discounting for the product when sold separately.
Each element of our multiple-element arrangements qualifies for separate accounting. Nevertheless, when a sale includes both software and maintenance, we defer revenue under the residual method of accounting. Under this method, the undelivered maintenance and support fees included in the price of software is amortized ratably over the period the services are provided. We defer maintenance and support fees based upon the customer’s renewal rate for these services.
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. Shipping charges billed to customers are included in sales and the related shipping costs are included in cost of sales. Total hardware sales were $3,031 and $2,850 for the years ended December 31, 2016 and 2015, respectively.
Services and Other
Included in “services and other” revenue is professional and implementation services, software design and development services, software and software license sales and maintenance and support services revenue. Total services and other revenue was $10,642 and $8,621 for the years ended December 31, 2016 and 2015, respectively.
Professional and implementation services
Professional services revenue is derived primarily from consulting services related to the design and development of various marketing experiences, and content development and management. The majority of professional services and accompanying agreements qualify for separate accounting.
Implementation services revenue is derived from implementation, maintenance and support contracts, content development, software development and training.
These services are bid either on a fixed-fee basis, time-and-materials basis or both. For time-and-materials contracts, we recognize revenue as services are performed. For fixed-fee contracts, we recognize revenue upon completion of specific contractual milestones, by using the percentage-of-completion method.
| F-9 |
Software design and development services
Software design and development services includes revenue from contracts for technology integration consulting services where we design/redesign, build and implement new or enhanced systems applications and related processes for clients recognized on the percentage-of-completion method. The percentage-of-completion accounting involves calculating the percentage of services provided during the reporting period compared to the total estimated services to be provided over the duration of the contract. Estimated revenues from applying the percentage-of-completion method include estimated incentives for which achievement of defined goals is deemed probable. Contract costs include all direct material, labor, subcontractors, certain indirect costs, such as indirect labor, equipment costs, supplies, tools and depreciation costs. Selling, general and administrative costs are charged to expense as incurred. This method is followed where reasonably dependable estimates of revenues and costs can be made. We measure progress for completion based on either the hours worked as a percentage of the total number of hours of the project or by delivery and customer acceptance of specific milestones as outlined per the terms of the agreement with the customer. Estimates of total contract revenue and costs are continuously monitored during the term of the contract, and recorded revenue and costs are subject to revision as the contract progresses. Such revisions may result in increases or decreases to revenue and income and are reflected in the financial statements in the periods in which they are first identified. If estimates indicate that a contract loss will occur, a loss provision is recorded in the period in which the loss first becomes probable and reasonably estimable. Contract losses are determined to be the amount by which the estimated direct and indirect costs of the contract exceed the estimated total revenue that will be generated by the contract and are included in cost of sales and classified in accrued expenses in the balance sheet. Our presentation of revenue recognized on a contract completion basis has been consistently applied for all periods presented.
Software and software license sales
Software and software license sales are revenue when a fixed fee order has been received and delivery has occurred to the customer. We assess whether the fee is fixed or determinable and free of contingencies based upon signed agreements received from the customer confirming terms of the transaction. Software is delivered to customers electronically or on a CD-ROM, and license files are delivered electronically.
Maintenance and support services
Maintenance and support services revenue consists of software updates and various forms of support services. Software updates provide customers with rights to unspecified software product upgrades and maintenance releases and patches released during the term of the support period. Support includes access to technical support personnel for software and hardware issues. We also offer 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. This revenue is recognized ratably over the term of the contract, which is typically one to three years. Maintenance and support is 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. Support agreement fees are based on the level of service provided to its 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.
Costs and estimated earnings recognized in excess of billings on uncompleted contracts are recorded as unbilled services and are included in work-in-process on the balance sheet. Billings in excess of costs and estimated earnings on uncompleted contracts are recorded as deferred revenue until revenue recognition criteria are met. Unbilled receivables are a normal part of our business as some receivables are invoiced in the month following shipment or completion of services. Our policy is to present any taxes imposed on revenue-producing transactions on a net basis.
4. Cash and Cash Equivalents
Cash equivalents consist of commercial paper and all other liquid investments with original maturities of three months or less when purchased. As of December 31, 2016, the Company had substantially all cash invested in commercial banks. The balances are insured by the Federal Deposit Insurance Corporation up to $250.
5. Accounts Receivable and Allowance for Doubtful Accounts
Our unsecured accounts receivable are customer obligations due under normal trade terms, carried at their face value less an allowance for doubtful accounts. As discussed in Note 4, we entered into a factoring arrangement with Allied Affiliated Funding for our accounts receivable with recourse on October 15, 2015 which concluded on August 17, 2016. During that period, the majority of our receivables were factored. We determine our allowance for doubtful accounts based on the evaluation of the aging of its accounts receivable and on a customer-by-customer analysis of its high-risk customers. Our reserves contemplate our historical loss rate on receivables, specific customer situations and the economic environments in which we operate. We determine past-due accounts receivable on a customer-by-customer basis. Accounts receivable are written off after all reasonable collection efforts have failed.
| F-10 |
6. Work-In-Process and Inventories
Our work-in-process and inventories are recorded using the lower of cost or market on a first-in, first-out (FIFO) method. Inventory is net of an allowance for obsolescence of $10 and $27 as of December 31, 2016 and 2015, respectively.
7. Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Inputs are broadly defined as assumptions market participants would use in pricing an asset or liability.
FASB ASC 820-10, Fair Value Measurements and Disclosures, requires disclosure of the estimated fair value of an entity's financial instruments. Such disclosures, which pertain to our financial instruments, do not purport to represent our aggregate net fair value. The carrying value of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short maturity of those instruments. The fair value of the loan payable approximates carrying value based on the interest rates in the agreement compared to current market interest rates. The fair value of the warrant liabilities is calculated using a Black-Scholes model, which approximates a binomial model due to probability factors used to determine the fair value. This calculation of this liability is based on Level 3 inputs. See Notes 5 and 13 for further discussion on the valuation of warrant liabilities.
8. Impairment of Long-Lived Assets
We review the carrying value of all long-lived assets, including property and equipment, for impairment in accordance with FASB ASC 360-10-05-4, Accounting for the Impairment or Disposal of Long-Lived Assets. Under FASB ASC 360-10-05-4, 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 by 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. There were no impairment losses for long-lived assets recorded for the years ended December 31, 2016 and 2015.
9. 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.
| F-11 |
Property and equipment consists of the following at December 31, 2016 and 2015:
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Equipment | $ | 1,644 | $ | 1,627 | ||||
| Leasehold improvements | 673 | 723 | ||||||
| Purchased and developed software | 1,007 | 804 | ||||||
| Furniture and fixtures | 438 | 316 | ||||||
| Other depreciable assets | 27 | 27 | ||||||
| Total property and equipment | 3,789 | 3,497 | ||||||
| Less: accumulated depreciation and amortization | (2,877 | ) | (2,605 | ) | ||||
| Net property and equipment | $ | 912 | $ | 892 | ||||
The estimated useful lives used to compute depreciation and amortization are as follows:
| Equipment | 3 – 5 years | |
| Furniture and fixtures | 5 years | |
| Purchased and developed software | 5 years | |
| Leasehold improvements | Shorter of 5 years or term of lease |
Depreciation expense was $272 and $274 for the years ended December 31, 2016 and 2015, respectively.
10. 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. Effective April 2015, the Company began capitalizing its costs for additional functionality to its internal software. We capitalized approximately $270 and $562 for the years ended December 31, 2016 and 2015, 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 will be amortizing these costs over 5 years once the new projects are finished and placed in service. These costs are included in property and equipment, net on the consolidated balance sheets.
11. Basic and Diluted Loss per Common Share
Basic and diluted loss per common share for all periods presented is computed using the weighted average number of common shares outstanding. Basic weighted average shares outstanding include only outstanding common shares. Diluted net loss per common share is computed by dividing net loss by the weighted average common and potential dilutive common shares outstanding computed in accordance with the treasury stock method. Shares reserved for outstanding stock options and warrants totaling approximately 36.0 and 27.9 million at December 31, 2016 and 2015, respectively, were excluded from the computation of loss per share as well as the potential common shares issuable upon conversion of convertible preferred stock and convertible promissory notes as their effect was antidilutive due to our net loss. Net loss attributable to common shareholders for the year ended December 31, 2016 and December 31, 2015 is after dividends on convertible preferred stock of $463 and $344, respectively.
| F-12 |
12. Deferred Income Taxes
The calculation of our income tax provision involves dealing with uncertainties in the application of complex tax regulations. We recognize tax liabilities for uncertain income tax positions based on management’s estimate of whether it is more likely than not that additional taxes will be required. We had no uncertain tax positions as of December 31, 2016 and 2015. 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 (other than goodwill), 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. In the event of any future tax assessments, we have elected to record the income taxes and any related interest and penalties as income tax expense on our statement of operations.
13. Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718-10 that requires the 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 value. For purposes of determining estimated fair value under FASB ASC 718-10-30, the Company computes the estimated fair values of stock options using the Black-Scholes option pricing model. Stock-based compensation expense to employees of $273 and $254 was charged to expense during the years ended December 31, 2016 and 2015, respectively.
14. Goodwill and Definite-Lived Intangible Assets
We follow the provisions of FASB ASC 350, Goodwill and Other Intangible Assets. Pursuant to FASB ASC 350, goodwill acquired in a purchase business combination is not amortized, but instead tested for impairment at least annually. The Company used a measurement date of September 30 (see Note 7). An impairment loss was recognized during the year ended December 31, 2016. There was no impairment loss recognized during the year ended December 31, 2015.
15. Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 are the allowance for doubtful accounts, recognition of revenue under fixed price contracts, deferred tax assets, deferred revenue, depreciable lives and methods for property and equipment and definite lived intangible assets, valuation of warrants and other stock-based compensation, as well as valuations and purchase price allocations related to business combinations, expected future cash flows including growth rates, discount rates and terminal values 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.
16. Change in authorized shares
On February 11, 2016, the Company filed an S-1 Registration Statement registering 20,268,959 shares of common stock issuable upon conversion of its secured notes and upon exercise of the warrants. This S-1 was effective June 1, 2016.
17. Recently Issued Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This update requires an entity that has not elected the private company alternative for goodwill to perform a two-step test to determine the amount, if any, of goodwill impairment. In Step 1, an entity compares 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 performs Step 2 and compares 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. To address concerns over the cost and complexity of the two-step goodwill impairment test, the amendments in this Update remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment 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. The new guidance does not amend the optional qualitative assessment of goodwill impairment. This guidance is effective for public business entities for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, early adoption is permitted.
| F-13 |
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which provides guidance on the classification of certain cash receipts and cash payments in the statement of cash flows, including those related to debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, and distributions received from equity method investees. This guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption is permitted, including the adoption in an interim period. If an entity adopts the guidance in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The guidance must be adopted on a retrospective basis and must be applied to all periods presented, but may be applied prospectively if retrospective application would be impracticable. We are currently evaluating the impact, if any, that the adoption of this guidance will have on our consolidated statement of cash flows.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments, which provides guidance with respect to measuring credit losses on financial instruments, including trade receivables. This guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate can now reflect an entity’s current estimate of all future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the impact, if any that the adoptions of this guidance will have on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Stock Compensation, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The guidance for this update was adopted in the last quarter for 2016 and did not have any impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which amended guidance for lease arrangements in order to increase transparency and comparability by providing additional information to users of financial statements regarding an entity's leasing activities. The revised guidance seeks to achieve this objective by requiring reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements. The guidance, which is required to be adopted in the first quarter of 2019, will be applied on a modified retrospective basis beginning with the earliest period presented. Early adoption is permitted. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes, which simplifies the presentation of deferred income taxes, which requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. No prior periods were retrospectively adjusted.
In July 2015, FASB issued ASU 2015-11, Inventory (Topic 330) Related to Simplifying the Measurement of Inventory applies to all inventory except that which is measured using last-in, first-out (LIFO) or the retail inventory method. Inventory measured using first-in, first-out (FIFO) or average cost is included in the new amendments. Inventory within the scope of the new guidance should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments will take effect for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The new guidance should be applied prospectively, and earlier application is permitted as of the beginning of an interim or annual reporting period. The adoption of this standard did not have any impact on the Company’s consolidated financial statements.
| F-14 |
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), with an effective date for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, for public business entities, certain not-for-profit entities, and certain employee benefit plans. The effective date is for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is evaluating the impact, if any, the pronouncement will have on both historical and future financial positions and results of operations.
18. Reclassifications
Certain reclassifications were made to the 2015 consolidated financial statements to conform to the 2016 presentation with no effect on net loss or shareholders’ equity.
NOTE 3: ACQUISITIONS
Acquisition of ConeXus World Global
On October 15, 2015, we completed the acquisition of ConeXus World Global, LLC for 2,080,000 shares of Series A-1 Convertible Preferred Stock, and the conversion of $823 of ConeXus World Global debt into (i) 2,639,258 shares of our common stock, and (ii) $150 in principal amount of our convertible debt and a warrant to purchase 267,857 shares of common stock.
The debtholders and members of ConeXus received a total of 1,664,000 shares of Series A-1 Convertible Preferred Stock, par value $1.00, and 16,000,000 shares of our common stock, par value $0.01. In accordance with the terms of the amendment to the agreement and plan of merger and reorganization, an additional 416,000 shares of Series A-1 Convertible Preferred Stock and 4,000,000 shares of common stock were to be issued upon the reorganization of the capital structure of a Belgian affiliate of ConeXus. As of the date of this report, this reorganization has not occurred and the Company will not be acquiring the ConeXus Belgian affiliate. Therefore, no liability has been recorded for these additional shares, the consideration has not been included in the purchase price allocation and the financial results of the Belgian affiliate have not been included in the consolidated financial statements
The following is the consideration transferred to effect the merger:
| (in thousands) | ||||
| Issuance of common shares to ConeXus shareholders | $ | 3,520 | ||
| Issuance of preferred shares to ConeXus shareholders | 1,664 | |||
| Issuance of convertible promissory note with warrants | 150 | |||
| Total consideration | $ | 5,334 | ||
The fair value of the warrants was based on the Black-Scholes valuation model, using the CRI, Inc. share price on the merger date as an input.
The following assumptions were applied in determining the grant date fair value of the warrants awards:
| Risk-free interest rate | 1.71 | |||
| Expected term | 5.0 years | |||
| Expected price volatility | 60.47 | % | ||
| Dividend yield | - |
Our computation of expected volatility is based on historical volatility. The expected warrant term was the life of the warrant. The risk free interest rate of the award is based on the U.S. Treasury yield curve in effect at the time of the merger and having a term consistent with the expected term of the award.
| F-15 |
Under the acquisition method of accounting, the total purchase price is allocated to the identifiable tangible and intangible assets of ConeXus World Global LLC acquired in the merger, based on their fair values at the merger date. The estimated fair values are based on the information that was available as of the merger date. We believe that the information provides a reasonable basis for estimating the fair values. The fair value of goodwill and other liabilities was updated to reflect a measurement period adjustment. A tax benefit of $635 was recognized on the Company’s consolidated statements of operations and would have been recorded for the year ended December 31, 2015 if the adjustment to the provisional amounts had been recognized as of the acquisition date. See Note 12: Income Taxes. The allocation of the purchase price has been allocated to assets acquired and liabilities assumed as follows:
| (in thousands) | ||||
| Current assets | $ | 1,187 | ||
| Property and equipment | 47 | |||
| Goodwill | 4,629 | |||
| Other intangible assets | 1,750 | |||
| Other assets | 13 | |||
| Total assets | 7,626 | |||
| Current liabilities | 1,657 | |||
| Deferred tax liabilities | 635 | |||
| Total liabilities | 2,292 | |||
| Estimated purchase price | $ | 5,334 | ||
The estimated fair value of amortizable intangible assets of $1.8 million is amortized on a straight-line basis over the weighted average estimated useful life. The purchase price allocation to identifiable intangible assets and related amortization lives are as follows:
| Useful lives | ||||||||
| (in thousands) | Amounts | (years) | ||||||
| Customer relationships | $ | 1,370 | 3 | |||||
| Trademark | 380 | 5 | ||||||
| Total | $ | 1,750 | ||||||
The fair values of the customer relationship were estimated using a discounted present value income approach. Under the income approach, an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. Indications of value are developed by discounting future net cash flows to their present value at market-based rates of return. The useful life of the intangible assets for amortization purposes was determined considering the period of expected cash flows used to measure the fair value of the intangible assets adjusted as appropriate for the entity-specific factors including legal, regulatory, contractual, competitive, economic or other factors that may limit the useful life of intangible assets.
The goodwill recognized as a result of the merger is attributable primarily to the strategic and synergistic opportunities across the marketing technology spectrum, expected corporate synergies and the assembled workforce. The goodwill recognized is expected to be deductible for income tax purposes.
We incurred approximately $0.2 million of acquisition-related costs that were expensed during the year ended December 31, 2015. These costs are included in selling, general and administrative costs in our consolidated statements of operations.
| F-16 |
The following unaudited pro forma consolidated financial results have been prepared for illustrative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions of ConeXus (discussed above) occurred on the first day of the earliest period presented, or of future results of the consolidated entities.
| (Unaudited) | Year ended | |||
| December 31, | ||||
| 2015 | ||||
| Supplemental pro forma combined results of operations: | ||||
| Net sales | $ | 15,986 | ||
| Net loss | $ | (8,399 | ) | |
The pro forma financial information includes amortization expense from the acquired assets assuming the mergers occurred on January 1, 2015. The unaudited pro forma consolidated financial information does not reflect any operating efficiencies and cost savings that may be realized from the integration of the acquisition.
NOTE 4: FINANCING ARRANGEMENTS
Factoring Agreement
On October 15, 2015, we entered into a Factoring Agreement with Allied Affiliated Funding, L.P. Under the Factoring Agreement, Allied Affiliated Funding, or “Allied,” was permitted, but not required to purchase approved receivables from the Company and its subsidiaries up to a maximum amount of $3.0 million. Upon receipt of any advance under the Factoring Agreement, the Company and its subsidiaries sold and assigned all of their rights in such receivables and all proceeds thereof to Allied, with recourse. The purchase price for receivables bought and sold under the Factoring Agreement was equal to their face amount less a 1.10% base discount. Added to the base discount is an additional .037% discount from the face value of a receivable for each day beyond 30 days that the receivable remained unpaid by the account debtor. The base discount was subject to adjustment in the event of changes in the prime lending rate as published by The Wall Street Journal. Allied provided advances under the Factoring Agreement net of an applicable reserve amount, as specified in the agreement. The obligations of the Company and its subsidiaries under the Factoring Agreement were secured by substantially all of the assets of the Company and its subsidiaries. Allied had the right under the Factoring Agreement to require the Company to repurchase any receivable earlier sold for a purchase price equal to the face value of the receivable. The Factoring Agreement had an initial term of one year, subject to potential one-year renewals thereafter, unless earlier terminated (or not renewed) in accordance with the agreement. The Company terminated the Factoring Agreement on August 17, 2016, upon payment to Allied of an early termination fee equal to $37.5. The table below provides an analysis of the accounts receivables factored at December 31, 2015. There were no receivables factored at December 31, 2016.
| December 31, | ||||
| 2015 | ||||
| Accounts receivables assigned to factor | $ | 1,218 | ||
| Advances from factor | (1,049 | ) | ||
| Amounts due from factor | 169 | |||
| Unfactored accounts receivable | 715 | |||
| Total accounts receivable | $ | 884 | ||
| F-17 |
NOTE 5: FAIR VALUE MEASUREMENT
We measure certain financial assets, including cash equivalents, at fair value on a recurring basis. In accordance with FASB 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, FASB ASC 820-10-35 establishes a three-level hierarchy that prioritizes the inputs used in measuring fair value. The three hierarchy levels are defined as follows:
Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets.
Level 2 — Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly.
Level 3 — Valuations based on inputs that are unobservable and involve management judgment and the reporting entity’s own assumptions about market participants and pricing.
The following table presents information about the Company's warrant liabilities that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques the Company used to determine such fair value. In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs use data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability:
| Description | Fair Value | Quote Prices In Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) |
Significant Other Unobservable inputs (Level 3) |
||||||||||||
| Warrant liabilities at December 31, 2015 | $ | 1,649 | - | - | $ | 1,649 | ||||||||||
| Warrant liabilities at December 31, 2016 | $ | 3,316 | - | - | $ | 3,316 | ||||||||||
The change in level 3 fair value is as follows:
| Warrant liability December 31, 2015 | $ | 1,649 | ||
| New warrant liabilities | 685 | |||
| Increase in fair value of warrant liability | 982 | |||
| Ending warrant liability as of December 31, 2016 | $ | 3,316 |
NOTE 6: OTHER FINANCIAL STATEMENT INFORMATION
The following table provides details of selected financial statement items:
Inventories
| December 31, | December 31, | |||||||
| 2016 | 2015 | |||||||
| Finished goods | $ | 138 | $ | 69 | ||||
| Work-in-process | 447 | 13 | ||||||
| Total inventories | $ | 585 | $ | 82 | ||||
| F-18 |
| Supplemental Cash Flow Information: | December 31, | |||||||
| 2016 | 2015 | |||||||
| Cash paid for interest | $ | 363 | $ | 150 | ||||
| Cash paid for taxes | $ | 11 | $ | 38 | ||||
| Non-cash Investing and Financing Activities | ||||||||
| Noncash preferred stock dividends | $ | 463 | $ | 344 | ||||
| Adjustment for options issued due to merger with Wireless Ronin Technologies, Inc. | $ | - | $ | (212 | ) | |||
| Issuance of notes in exchange for accounts payable | $ | 288 | $ | - | ||||
| Issuance of notes in lieu of interest | $ | - | $ | 5 | ||||
| Exchange of warrants for common stock | $ | - | $ | 9 | ||||
| Issuance of stock upon conversion of preferred stock | $ | 307 | $ | 78 | ||||
| Common and preferred shares issued for ConeXus merger | $ | - | $ | 5,184 | ||||
| Issuance of stock in exchange for accounts payable | $ | 86 | $ | - | ||||
NOTE 7: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Changes in goodwill for the period from January 1, 2015 to December 31, 2016 are as follows (in millions):
| Goodwill at January 1, 2015 | $ | 10,572 | ||
| Measurement period adjustment for WRT purchase September 30, 2015 | (212 | ) | ||
| Goodwill from merger with ConeXus October 15, 2015 (Note 3), as adjusted | 4,629 | |||
| Goodwill at December 31, 2016 | $ | 14,989 |
Other Intangible Assets
Other intangible assets consisted of the following at December 31, 2016 and 2015 (in thousands):
| December 31, | ||||||||||||||||
| 2016 | 2015 | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
| Amount | Amortization | Amount | Amortization | |||||||||||||
| Technology platform | 4,190 | 2,433 | 4,190 | 1,598 | ||||||||||||
| Customer relationships | 2,460 | 1,404 | 2,460 | 584 | ||||||||||||
| Trademarks and trade names | 680 | 393 | 680 | 317 | ||||||||||||
| 7,330 | 4,230 | 7,330 | 2,499 | |||||||||||||
| Accumulated amortization | 4,230 | 2,499 | ||||||||||||||
| Impairment loss on technology platform | 1,065 | - | ||||||||||||||
| Net book value of amortizable intangible assets | 2,035 | 4,831 | ||||||||||||||
For the years ended December 31, 2016 and 2015, amortization of intangible assets charged to operations was $1,731 and $1,753, respectively.
| F-19 |
Estimated amortization is as follows:
| Year ending December 31, | ||||
| 2017 | $ | 1,160 | ||
| 2018 | 739 | |||
| 2019 | 76 | |||
| 2020 | 60 | |||
The Company has made comprehensive upgrades to its technology platform. Due to these upgrades, the Company evaluated the recoverability of the carrying amount of the original technology platform intangible asset at September 30, 2016. Based upon this evaluation, the Company determined that the technology platform intangible asset was impaired as its value was not recoverable and exceeded its fair value. The Company recognized an impairment loss of $1,065 in 2016.
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 has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The Company performed its annual goodwill impairment test at September 30, 2016.
Utilizing the two-step impairment test, the Company first 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 for purchase orders expected to be completed in the fourth quarter of 2016 and orders actively being negotiated for fiscal 2017. We also used these same expectations in a number of valuation models in addition to discounted cash flows, including, leveraged buy-out, trading comps and market capitalization, and ultimately determined an estimated fair value of our reporting unit based on weighted average calculations from these models. 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, 2016.
The Company updated our goodwill analysis as of December 31, 2016 using our actual fourth quarter 2016 results and updated projected 2017 results noting no impairment exists. 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 perform an analysis in order to determine whether goodwill is impaired.
| F-20 |
NOTE 8: LOANS PAYABLE
At the end of December 2016 and the beginning of January 2017, Slipstream Communications, LLC, a related party, see Note 11: Related Party Transactions, purchased all of our outstanding debt from the original debtholders. The terms of the debt have remained the same. The outstanding debt with detachable warrants are shown in the table below. Further discussion of the notes follows.
| Issuance Date | Original Principal | Additional Principal | Total Principal | Maturity Date | Warrants | |||||||||||||||
| 12/12/2016 | $ | 787 | $ | - | $ | 787 | 8/17/2017 | 1,542,452 | 8.0% interest | |||||||||||
| 8/17/2016 | 3,000 | - | 3,000 | 8/17/2017 | 5,882,352 | 8.0% interest | ||||||||||||||
| 6/29/2016 | 50 | 1 | 51 | 4/15/2017 | 89,286 | 14% interest* | ||||||||||||||
| 6/13/2016 | 200 | 14 | 214 | 4/15/2017 | 357,143 | 14% interest* | ||||||||||||||
| 6/13/2016 | 250 | 8 | 258 | 4/15/2017 | 446,429 | 14% interest* | ||||||||||||||
| 5/3/2016 | 500 | 7 | 507 | 4/15/2017 | 892,857 | 14% interest* | ||||||||||||||
| 12/28/2015 | 150 | 3 | 153 | 4/15/2017 | 267,857 | 14% interest* | ||||||||||||||
| 12/28/2015 | 500 | 10 | 510 | 4/15/2017 | 892,857 | 14% interest* | ||||||||||||||
| 12/28/2015 | 600 | 12 | 612 | 4/15/2017 | 1,071,429 | 14% interest* | ||||||||||||||
| 10/26/2015 | 300 | 7 | 307 | 4/26/2017 | 535,714 | 14% interest* | ||||||||||||||
| 10/15/2015 | 150 | 3 | 153 | 4/15/2017 | 267,857 | 14% interest* | ||||||||||||||
| 10/15/2015 | 500 | 12 | 512 | 4/15/2017 | 892,857 | 14% interest* | ||||||||||||||
| 6/23/2015 | 400 | 12 | 412 | 4/15/2017 | 640,000 | 14% interest* | ||||||||||||||
| 6/23/2015 | 119 | 18 | 137 | 4/15/2017 | 935,210 | Refinanced May 20, 2015 debt, 14% interest * | ||||||||||||||
| 5/20/2015 | 465 | 465 | 4/15/2017 | 762,295 | 14% cash interest | |||||||||||||||
| $ | 7,971 | $ | 107 | $ | 8,078 | 15,476,595 | ||||||||||||||
| Debt discount | (561 | ) | ||||||||||||||||||
| Unpaid interest | 118 | |||||||||||||||||||
| Total debt | $ | 7,971 | $ | 7,635 | ||||||||||||||||
* 12% cash, 2% added to principal
Obligations under the secured convertible promissory notes are secured by a grant of collateral security in all of the tangible assets of the co-makers pursuant to the terms of an amended and restated security agreement.
Term Notes
On December 12, 2016, we entered into a $1.0 million secured revolving promissory note pursuant to the August 17, 2016 Loan and Security Agreement with Slipstream Communications, LLC, a related party, addressed below (see Note 11), wherein we borrowed $786 with interest thereon at 8% per annum, maturing on February 1, 2017. In connection with the loan, we issued the lender a five-year warrant to purchase up to 1,542,452 shares of common stock at a per-share price of $0.28 (subject to adjustment), all pursuant to a securities purchase agreement. In connection with the secured revolving promissory note, we incurred fees aggregating $37. The fair value of the warrants on the issuance date was $136. This note was repaid on January 12, 2017.
On August 17, 2016, we entered into a Loan and Security Agreement with Slipstream Communications, LLC, a related party (see Note 11), under which we obtained a $3.0 million term loan, with interest thereon at 8% per annum, maturing on August 17, 2017 (with a one-year option for us to extend that maturity, so long as we are not then in default and we deliver additional warrants to the lender). 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. In connection with the new debt, we issued the lender a five-year warrant to purchase up to 5,882,352 shares of common stock shares of Creative Realities’ common stock at a per-share price of $0.28 (subject to adjustment), all pursuant to a securities purchase agreement. The proceeds from the loan were used to (i) satisfy the obligations owed to Allied Affiliated Lending, L.P. under the Factoring Agreement (see Note 4), (ii) pay off certain obligations under settlement arrangements in effect as of the date hereof (see Note 9), and (iii) obtain working capital. The Loan and Security Agreement permits the lender to make additional advances of up to an additional $1.0 million. In connection with this financing transaction, we terminated the Factoring Agreement with Allied Affiliated Lending. Our principal subsidiaries — Creative Realities, Inc., Creative Realities, LLC, Conexus World Global, LLC, and Broadcast International, Inc. — were also parties to the securities purchase agreement and are co-makers of the secured convertible promissory notes. In connection with the term loan, we incurred fees aggregating $20. The fair value of the warrants on the issuance date was $361.
See Note 13 for the Black Scholes inputs used to calculate the fair value of the warrants.
| F-21 |
Convertible Promissory Notes
The convertible promissory notes were issued in a private placement exempt from registration under the Securities Act of 1933. Our principal subsidiaries — Creative Realities, LLC, Wireless Ronin Technologies Canada, Inc., and Conexus World Global, LLC — were also parties to the Securities Purchase Agreement and are co-makers of the secured convertible promissory notes. Obligations under the secured convertible promissory notes are secured by a grant of collateral security in all of the personal property of the co-makers pursuant to the terms of a security agreement. The secured convertible promissory notes bear interest at the rate of 14% per annum. Of this amount, 12% per annum is payable monthly in cash, and the remaining 2% per annum is payable in the form an additional principal through increases in the principal amount of the note. Upon the consummation of a change in control transaction of the company or a default, interest on the secured convertible promissory note will increase to the rate of 17% per annum. The secured convertible promissory note matures on April 15, 2017, unless the holder of a note elects to extend the maturity date for an additional six-month period, in which case such note will mature on October 15, 2017. On January 17, 2017, Slipstream Communications, LLC elected to extend the maturity date of the convertible promissory notes to October 15, 2017. At any time prior to the maturity date, the holder of a promissory note may convert the outstanding principal and accrued and unpaid interest into our common stock at its conversion rate. We may not prepay the secured convertible promissory note prior to the maturity date. The secured convertible promissory note contains other customary terms. See Note 13 for the Black Scholes inputs used to calculate the fair value of the warrants.
In December 2016 and January 2017, Slipstream Communications, LLC purchased all of our outstanding convertible promissory notes from the original debtholders. The terms of the notes have remained the same. Further discussion of the notes follows.
On June 29, 2016, we entered into a secured convertible promissory note in the principal amount of $50 and an immediately exercisable five-year warrant to purchase up to 89,286 shares of the Company’s common stock at a per-share price of $0.28 (subject to adjustment). The fair value of the warrants on the issuance date was $6. This note was subsequently purchased by Slipstream Communications, LLC on December 20, 2016.
On June 13, 2016, upon receipt of an additional $300 of principal, we exchanged two short term demand notes entered into in July 2015 totaling $150 for two secured convertible promissory notes totaling a principal amount of $450 and immediately exercisable five-year warrants to purchase up to 803,572 shares of the Company’s common stock at a per-share price of $0.28 (subject to adjustment). This exchange is accounted for as a modification of the debt. The fair value of the warrants on the issuance date was $57. On December 20, 2016, $200 of this note was subsequently purchased by Slipstream Communications, LLC, the remaining $250 was already owed to Slipstream Communications, LLC.
On or about May 3, 2016, we entered into a secured convertible promissory note in the principal amount of $500,000 and an immediately exercisable five-year warrant to purchase up to 892,857 shares of the Company’s common stock at a per-share price of $0.28 (subject to adjustment). In connection with the secured convertible promissory note, we incurred commissions to a placement agent aggregating $25. The fair value of the warrants on the issuance date was $89. This note was subsequently purchased by Slipstream Communications, LLC on December 22, 2016.
| F-22 |
On December 28, 2015, we entered into secured convertible promissory notes in the aggregate principal amount of $1,250 and an immediately exercisable five-year warrant to purchase up to 2,232,143 shares of the Company’s common stock at a per-share price of $0.28 (subject to adjustment). In connection with the secured convertible promissory note, we incurred commissions to a placement agent aggregating $88. The fair value of the warrants on the issuance date was $166. This note was subsequently purchased by Slipstream Communications, LLC on December 20, 2016.
On October 26, 2015, we entered into a secured convertible promissory note in the principal amount of $300 together with an immediately exercisable five-year warrant to purchase up to 535,714 shares of the Company’s common stock at a per-share price of $0.28, (subject to adjustment). In connection with the secured convertible promissory note, we paid commissions to a placement agent aggregating $15. The fair value of the warrants on the issuance date was $61. This note was subsequently purchased by Slipstream Communications, LLC on December 20, 2016.
On October 15, 2015, the Company entered into a secured convertible promissory note in the principal amount of $500 together with an immediately exercisable five-year warrant to purchase up to 892,857 shares of the Company’s common stock at a per-share price of $0.28, (subject to adjustment). In connection with the secured convertible promissory note, we paid commissions to a placement agent aggregating $25. The fair value of the warrants on the issuance date was $107. This note was subsequently purchased by Slipstream Communications, LLC on December 20, 2016.
On June 23, 2015, the Company entered into a secured convertible promissory note in the principal amount of $400 together with an immediately exercisable five-year warrant to purchase up to 640,000 shares of the Company’s common stock at a per-share price of $0.30 (subject to adjustment). The fair value of the warrants on the issuance date was $78. In connection with the October 26, 2015 secured convertible promissory note, we entered into extension agreements with the holders of this secured convertible promissory to primarily extend the maturity date to April 15, 2017 in exchange for 75,000 shares of the Company’scommon stock valued at $16.5. This change was accounted for as a modification of the debt. The $16.5 is recognized as additional debt discount that will be amortized over the remaining life of the debt. This note was subsequently purchased by Slipstream Communications, LLC on December 29, 2016.
On May 20, 2015, the Company entered into a secured convertible promissory note in the principal amount of $465 together with a five-year immediately exercisable warrant to purchase up to 762,295 shares of the Company’s common stock at a per-share price of $0.30, (subject to adjustment). The fair value of the warrants on the issuance date was $167. This secured convertible promissory note together with accrued but unpaid interest and a 25% conversion premium was converted into a secured convertible promissory note in the principal amount of $585 maturing on August 18, 2016, together with new immediately exercisable five-year warrants to purchase up to 935,210 shares of the Company’s common stock at a price of $0.30 per share, (subject to adjustment). The fair value of the warrants on the issuance date was $114. In connection with the October 26, 2015 secured convertible promissory note, we entered into extension agreements with the holders of this secured convertible promissory to primarily extend the maturity date to April 15, 2017 in exchange for 109,688 shares of the Company’s common stock valued at $24. This change is accounted for as a modification of the debt. The $24 is recognized as additional debt discount that will be amortized over the remaining life of the debt.
On February 18, 2015, the Company entered into a secured convertible promissory note in the principal amount of $1.0 million together with an immediately exercisable a five-year warrant to purchase up to 1,515,152 shares of the Company’s common stock at a per-share price of $0.38. The warrant had a fair value of $272 on the date of issuance. On December 21, 2015, this warrant was surrendered in exchange for 975,000 shares of the Company’s common stock in a noncash transaction. The interest on this note was payable 12% in cash and 2% as additional principal amount to the note. This note was paid in full on October 15, 2015.
| F-23 |
NOTE 9: STRUCTURED SETTLEMENT PROGRAM
In August 2016, the Company settled debt of $90 for $35 cash payment, resulting in a gain on debt settlement of $55. In June 2016, the Company settled debt of $614 for $123 cash payment and the issuance of 409,347 shares of the Company’s restricted common stock, fair value at conversion date of $85, and recognized a gain on debt restructuring of $406. In conjunction with this debt settlement, an additional 809,842 shares of restricted common stock were issued to investors for cash to facilitate the settlement of a portion of the $614 debt.
In March 2016, the Company issued 8.00% nonconvertible promissory notes in favor of certain general unsecured creditors in the aggregate principal amount of $288 to settle an aggregate amount of $839 of accounts payable, accrued expenses and other liabilities. The aggregate amount of payables, accrued expenses and other liabilities was subsequently revised to $796. In September 2016, the amounts previously settled with nonconvertible promissory notes were paid in cash of $249 resulting in a gain on the debt settlement of $547. No gain was previously recorded.
NOTE 10: COMMITMENTS AND CONTINGENCIES
Litigation
In February 2016, a former vendor alleging our failure to pay outstanding invoices for approximately $335, which is included in accounts payable in the accompanying consolidated balance sheets, initiated a breach-of-contract lawsuit against us. It is our objective that we reach a negotiated settlement with the vendor. At this time, we do not believe this matter individually is likely to have a material adverse impact on the Company. Also in February 2016, a former vendor alleging our failure to pay outstanding invoices for approximately $70, which is included in accounts payable in the accompanying consolidated balance sheets, filed a motion for summary judgment against us. We have filed an opposition motion to the request for summary judgment, and have initiated a counter-claim in the same venue. It is our objective that we reach a negotiated settlement with the vendor. At this time, we do not believe this matter individually is likely to have a material adverse impact on the Company
Leases
Future minimum lease payments under leases with initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2016 are as follows:
| Year ending December 31, | Lease Obligations | |||
| 2017 | $ | 548 | ||
| 2018 | 465 | |||
| 2019 | 427 | |||
| 2020 | 352 | |||
| 2021 | 52 | |||
| Total future minimum obligations | $ | 1,844 | ||
Rent expense totaled $416 and $448 for the years ended December 31, 2016 and 2015, respectively, and is included in General and Administrative expenses. During 2015, the Company closed its offices in Minnetonka, MN and New York, NY resulting in a charge of $371 to record the loss on the lease, reversal of previously recognized deferred rent, and write off all related leasehold improvements.
Our CEO was awarded 4,951,557 performance shares with a grant date to be determined upon certain conditions being satisfied.
| F-24 |
NOTE 11: RELATED PARTY TRANSACTIONS
In December 2016 and January 2017, the Company’s majority shareholder and investor, Slipstream Communications LLC acquired all of the Company outstanding debt (see Note 8).
On December 12, 2016, we entered into a $1.0 million secured revolving promissory note pursuant to the August 17, 2016 Loan and Security Agreement with Slipstream Communications, LLC, with interest thereon at 8% per annum, maturing on February 1, 2017. In connection with the loan, we issued the lender a five-year warrant to purchase up to 1,542,452 shares of common stock at a per-share price of $0.28 (subject to adjustment), all pursuant to a securities purchase agreement. This note was repaid on January 12, 2017.
On August 17, 2016, we entered into a Loan and Security Agreement with Slipstream Communications, LLC, a related party investor, under which we obtained a $3.0 million term loan, with interest thereon at 8% per annum, maturing on August 17, 2017 (with a one-year option for us to extend that maturity, so long as we are not then in default and we deliver additional warrants to the lender). In connection with the loan, we issued the lender a five-year warrant to purchase up to 5,882,352 shares of Creative Realities’ common stock at a per share price of $0.28 (subject to adjustment).
For the year ended December 31, 2016, the Company had sales with a related party entity that is 22.5% owned by a member of senior management. Sales were $1,344. Accounts receivable due from the related party was $543 at December 31, 2016.
In December 2015, in connection with the offer and sale of the December 28, 2015 secured convertible promissory notes, the Company issued five-year warrants to Slipstream Communications LLC to purchase up to 1,750,000 shares of Creative Realities’ common stock at a per share price of $0.28 (subject to adjustment) in consideration of additional covenants and facilitating the financing.
In October 2015, in connection with the ConeXus acquisition, the Company entered into a Securities Purchase Agreement with our CEO under which it offered and sold a secured $150 14% interest convertible promissory note with an immediately exercisable five-year warrant to purchase up to 267,857 shares of the Company’s common stock at a per-share price of $0.28
In July 2015, the Company obtained two 1% demand promissory notes in the amounts of $100 and $50 from related party investors. These notes are due within ten business days of the holder’s written demand.
In May 2015, the Company entered into a Securities Purchase Agreement with Slipstream Communications LLC under which it offered and sold a secured $465 - 14% interest convertible promissory note with a five-year warrant immediately exercisable to purchase up to 762,295 shares of common stock at a per-share price of $0.30. This secured convertible promissory note together with accrued but unpaid interest and a 25% conversion premium was converted into a $585 - 14% convertible promissory note, maturing on August 18, 2016, with new five-year warrants to purchase up to 935,210 shares of common stock at a price of $0.30 per share, in a private placement exempt from registration under the Securities Act of 1933. The interest is payable 12% in cash and 2% as additional principal amount to the note. In connection with the October 26, 2015 secured convertible promissory note, we entered into extension agreements with the holders of this secured convertible promissory to primarily extend the maturity date to April 15, 2017 in exchange for 109,688 shares of common stock valued at $24. This change was accounted for as a modification of the debt. The $24 is recognized as additional debt discount that will be amortized over the remaining life of the debt.
In February 2015, the Company entered into an agreement with Slipstream Communications, LLC and two other related party investors to purchase 265,000 shares of convertible preferred stock with an immediately exercisable five-year warrant to purchase up to 331,250 shares of the Company’s common stock at the as adjusted per-share price of $0.37 for $50.
| F-25 |
NOTE 12: INCOME TAXES
Our gross 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 $19.3 million and foreign NOL carryforward is $7.0 million as of December 31, 2016.
A summary of the deferred tax assets and liabilities is included below:
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Deferred tax assets (liabilities): | ||||||||
| Reserves | $ | 35 | $ | 10 | ||||
| Property and equipment | 171 | 148 | ||||||
| Accrued expenses | 1,034 | 909 | ||||||
| Severance | 39 | 245 | ||||||
| Non-qualified stock options | 420 | 422 | ||||||
| Net foreign carryforwards | 1,844 | 1,359 | ||||||
| Net operating loss and credit carryforwards | 8,054 | 7,514 | ||||||
| Intangibles | 907 | 253 | ||||||
| Total deferred tax assets | 12,504 | 10,860 | ||||||
| Valuation allowance | (13,114 | ) | (11,218 | ) | ||||
| Net deferred tax liabilities | $ | (610 | ) | $ | (358 | ) | ||
| Year ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Tax provision summary | ||||||||
| State income tax | $ | 18 | $ | - | ||||
| Deferred tax benefit, release of valuation allowance | (635 | ) | - | |||||
| Deferred tax benefit - federal | (1,101 | ) | (2,376 | ) | ||||
| Deferred tax benefit - state | (89 | ) | (173 | ) | ||||
| Deferred tax benefit - foreign | (453 | ) | (29 | ) | ||||
| Change in valuation allowance | 1,895 | 2,936 | ||||||
| Tax (benefit)/expense | $ | (365 | ) | $ | 358 | |||
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:
| 2016 | 2015 | |||||||
| Federal statutory rate | -34.00 | % | -34.00 | % | ||||
| State taxes | -2.75 | % | -2.26 | % | ||||
| Foreign rate differential | 3.11 | % | - | |||||
| Stock-based compensation | 1.78 | % | - | |||||
| Other | 1.42 | % | 0.55 | % | ||||
| PY Deferred True-ups and Rate Differential | -1.52 | % | - | |||||
| Changes in valuation allowance | 36.72 | % | 40.32 | % | ||||
| Effective tax rate | 4.80 | % | 4.61 | % | ||||
| F-26 |
NOTE 13: CONVERTIBLE PREFERRED STOCK AND WARRANTS
During 2016, accredited investors converted 307,500 shares of Convertible Preferred Stock for 1,205,882 shares of common stock.
On August 17, 2016, the Company issued a warrant to purchase 5,882,352 shares of common stock at the per share price of $0.28 (subject to adjustment) pursuant to a securities purchase agreement as more fully described in Note 8, Loans Payable.
On June 29, 2016, the Company issued a warrant to purchase 89,286 shares of common stock at the per share price of $0.28 (subject to adjustment) pursuant to a securities purchase agreement as more fully described in Note 8, Loans Payable.
On June 13, 2016, the Company issued a warrant to purchase 803,572 shares of common stock at the per share price of $0.28 (subject to adjustment) pursuant to a securities purchase agreement as more fully described in Note 8, Loans Payable.
On May 3, 2016, the Company issued a warrant to purchase 892,857 shares common stock at the per share price of $0.28 (subject to adjustment) pursuant to a securities purchase agreement as more fully described in Note 8, Loans Payable.
On January 15, 2016, the Company issued a warrant to purchase 250,000 shares of the Company’s common stock at the per share price of $0.28 (subject to adjustment) in exchange for services rendered related to the issuance of debt on December 28, 2015. The fair value of the warrants on the issuance date was $20. The warrants were recorded as a liability with a discount to the debt issued, which will be amortized over the life of the debt.
On December 21, 2015, a warrant holder surrendered 1,515,152 warrants with a fair value of $272 for 975,000 shares of the Company’s common stock in a noncash transaction.
On November 3, 2015, a preferred stockholder converted 77,174 shares of the Company’s Series A Convertible Preferred Stock at a conversion rate of $0.255 for 260,000 shares of common stock in a noncash transaction.
On October 15, 2015, directly related to the ConeXus merger, we issued 1,664,000 shares of Series A-I Convertible Preferred Stock at $1.00 per share. There were no warrants issued with the Preferred Stock.
In February 2015, we issued 265,000 shares Series A Convertible Preferred Stock at $1.00 per share with detachable five-year warrants to purchase 331,250 common shares at a price of $0.50, subject to adjustment, for $0.3 million. As stated in Note 10, these shares were issued to three purchasers, one of whom was a director of the Company, one of whom was then our Chief Executive Officer and a director of the Company, and one of which was Slipstream Communications, LLC. Net proceeds were $265; the transactions costs were negligible and the Company expensed them immediately. We have determined that the convertible preferred stock issued in February 2015 contained a beneficial conversion feature based on the conversion price per share of $0.29 per share compared to the price on the date of issuance of $0.34. The $0.03 million value of the beneficial conversion feature was recognized as a discount against the carrying value of the preferred stock and a credit to additional paid in capital. Since the preferred stock was convertible at issuance the discount was immediately amortized and preferred stock is credited to recognize the total amount as proceeds from their issuance.
Additionally, in 2015, we issued 87,204 shares of common stock to satisfy outstanding obligations of the Company to an investor.
| F-27 |
Listed below are the range of inputs used for the probability weighted Black Scholes option pricing model valuations when the warrants were issued and at December 31, 2016.
| 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 | ||||||||||||
| 8/20/2014 | 5.00 | 1.50 | % | 96.00 | % | $ | 0.63 | |||||||||
| 2/13/2015 | 5.00 | 1.28 | % | 100.00 | % | $ | 0.34 | |||||||||
| 5/22/2015 | 5.00 | 1.28 | % | 107.58 | % | $ | 0.29 | |||||||||
| 10/15/2015 | 5.00 | 1.71 | % | 58.48 | % | $ | 0.22 | |||||||||
| 10/26/2015 | 5.00 | 1.71 | % | 60.47 | % | $ | 0.21 | |||||||||
| 12/21/2015 | 5.00 | 1.75 | % | 58.48 | % | $ | 0.21 | |||||||||
| 12/28/2015 | 5.00 | 1.75 | % | 58.48 | % | $ | 0.16 | |||||||||
| 1/15/2016 | 5.00 | 1.76 | % | 58.48 | % | $ | 0.17 | |||||||||
| 5/3/2016 | 5.00 | 1.25 | % | 51.15 | % | $ | 0.21 | |||||||||
| 6/13/2016 | 5.00 | 1.14 | % | 51.12 | % | $ | 0.17 | |||||||||
| 6/29/2016 | 5.00 | 1.01 | % | 48.84 | % | $ | 0.17 | |||||||||
| 8/17/2016 | 5.00 | 1.15 | % | 51.55 | % | $ | 0.15 | |||||||||
| 11/4/2016 | 5.00 | 1.66 | % | 47.48 | % | $ | 0.16 | |||||||||
| 12/12/2016 | 5.00 | 1.90 | % | 48.54 | % | $ | 0.19 | |||||||||
| Remaining Expected Term at December 31, 2016 | Risk Free Interest Rate at December 31, 2016 | Volatility at December 31, 2016 | Stock Price at December 31, 2016 | |||||||||||||
| 2.64-4.95 | 1.93 | % | 48.54 | % | $ | 0.31 | ||||||||||
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, 2015 | 4,590,576 | 4.75 | 3.33 | 7,015,125 | 0.50 | 4.64 | ||||||||||||||||||
| Issued with promissory note to CEO as part of ConeXus merger | - | - | - | 267,857 | 0.28 | 4.79 | ||||||||||||||||||
| Warrants issued to financial advisors | - | - | - | 1,750,000 | 0.28 | 4.62 | ||||||||||||||||||
| Warrants isued with Preferred Stock | - | - | - | 331,250 | 0.37 | 4.13 | ||||||||||||||||||
| Warrants issued with Promissory Notes | 1,575,210 | 0.28 | 4.48 | 4,423,009 | 0.28 | 4.62 | ||||||||||||||||||
| Balance, December 31, 2015 | 6,165,827 | 3.61 | 2.88 | 13,787,241 | 0.33 | 4.23 | ||||||||||||||||||
| Warrants issued to financial advisors | - | - | - | 500,000 | 0.28 | 4.46 | ||||||||||||||||||
| Warrants issued with promissory notes | - | - | - | 1,785,715 | 0.28 | 4.40 | ||||||||||||||||||
| Warrants issued with term loan | - | - | - | 7,424,804 | 0.28 | 4.69 | ||||||||||||||||||
| Warrants expired | (1,116,359 | ) | 11.52 | - | - | - | - | |||||||||||||||||
| Balance December 31, 2016 | 5,049,468 | 1.74 | 2.32 | 23,497,760 | 0.31 | 3.80 | ||||||||||||||||||
| F-28 |
NOTE 14: STOCKHOLDERS’ EQUITY
As stated above, during 2016, accredited investors converted 307,500 shares of Convertible Preferred Stock in exchange for 1,205,882 shares of common stock. In conjunction with the structured settlement program, the Company issued 409,347 shares of its restricted common stock to creditors and 809,842 shares of stock were issued to investors (see Note 9).
On October 15, 2015, directly related to the ConeXus merger, we issued 16,000,000 shares of our common stock valued at $0.22 per share on the acquisition date for a fair value of $3.52 million.
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 | |||||||||||||||
| $0.19 - $0.65 | 7,444,999 | 8.56 | $ | 0.28 | 2,855,825 | $ | 0.28 | |||||||||||||
| $0.65 - $0.79 | 30,000 | 7.04 | 0.79 | 90,000 | $ | 0.79 | ||||||||||||||
| $0.80 - $12.25 | 15,500 | 5.59 | 3.73 | 15,500 | $ | 3.73 | ||||||||||||||
| 7,490,499 | 8.55 | $ | 0.29 | |||||||||||||||||
| Options Outstanding | Weighted Average Exercise Price | |||||||
| Balance, December 31, 2015 | 7,898,578 | $ | 0.33 | |||||
| Granted | 725,000 | 0.18 | ||||||
| Exercised | - | - | ||||||
| Forfeited or expired | (1,133,079 | ) | 0.52 | |||||
| Balance, December 31, 2016 | 7,490,499 | $ | 0.29 | |||||
On November 11, 2016, the Company granted 10-year options to purchase 425,000 shares of its common stock to an employee. The options vest over 4 years and have an exercise price of $0.18. The fair value of the options on the grant date was $0.09 and was determined using the Black-Sholes model. The following inputs were used:
| Risk-free interest rate | 1.14 | % | ||
| Expected term | 6.25 years | |||
| Expected price volatility | 47.89 | % | ||
| Dividend yield | - |
On May 25, 2016, the Company granted 10-year options to purchase 300,000 shares of its common stock to an employee. The options vest over 4 years and have an exercise price of $0.19. The fair value of the options on the grant date was $0.10 and was determined using the Black-Sholes model. The following inputs were used:
| Risk-free interest rate | 1.24 | % | ||
| Expected term | 6.25 years | |||
| Expected price volatility | 51.12 | % | ||
| Dividend yield | - |
The weighted average remaining contractual life for options exercisable is 8.55 years as of December 31, 2016.
| F-29 |
NOTE 15: STOCK-BASED COMPENSATION
Stock Compensation Expense Information
FASB ASC 718-10 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 365,500 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. There are 7,124,999 options outstanding under the 2014 Stock Incentive Plan.
Compensation expense recognized for the issuance of stock options for the years ended December 31, 2016 and 2015 was as follows:
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Stock-based compensation costs included in: | ||||||||
| Cost of sales | $ | 1 | $ | 18 | ||||
| Sales and marketing expenses | 74 | 18 | ||||||
| General and administrative expenses | 198 | 218 | ||||||
| Total stock-based compensation expenses | $ | 273 | $ | 254 | ||||
At December 31, 2016, there was approximately $838 of total unrecognized compensation expense related to unvested share-based awards. Generally, this expense will be recognized over the next 2.6 years and will be adjusted for any future changes in estimated forfeitures.
Valuation Information for Stock-Based Compensation
For purposes of determining estimated fair value under FASB ASC 718-10, the Company computed the estimated fair values of stock options using the Black-Scholes model. The weighted average estimated fair value of stock options granted during the years ended December 31, 2016 and 2015 was $0.18 and $0.19 per share, respectively. The values set forth above were calculated using the following weighted average assumptions:
| Risk-free interest rate | 1.18 | % | ||
| Expected term | 10.0 years | |||
| Expected price volatility | 49.2 | % | ||
| Dividend yield | 0 | % |
The Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment behavior, so we estimate the expected term of awards granted by taking the average of the vesting term and the contractual term of the awards, referred to as the simplified method. The risk-free interest rate assumption is based on observed interest rates appropriate for the term of the Company’s stock options. The Company used historical closing stock price volatility for a period of 2 years. Although the Company has historical pricing for a period equal to the expected life of the respective awards, the Company used a shorter period of time to exclude certain anomalies that occurred prior to 2014. The dividend yield assumption is based on the Company’s history and expectation of no future dividend payouts.
Our stock-based compensation expense is based on awards ultimately expected to vest and is reduced for estimated forfeitures as permitted by FASB ASU 2016-09, Stock Compensation, wherein a Company can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The Company applied a pre-vesting forfeiture rate of 10%.
NOTE 16: PROFIT-SHARING PLAN
We have a defined contribution 401(k) retirement plans for eligible associates. Associates may contribute up to 15% of their pretax compensation to the plan subject to IRS limitations. There is currently no plan for an employer contribution match or company discretionary contributions.
| F-30 |
NOTE 17: SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
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 sales for the years ended December 31, 2016 and 2015, were in the United States and Canada.
Major Customers
We had 2 and 3 customers that accounted for 71% and 53% of accounts receivable as of December 31, 2016 and 2015, respectively. In 2015, we no longer were doing business with our largest customer that accounted for 16% of 2015 sales. We do not believe the loss of this customer will have a material adverse effect on our business.
The Company had 3 customers that accounted for 56% and 48% of revenue for the years ended December 31, 2016 and 2015, respectively.
NOTE 18: SUBSEQUENT EVENTS
On January 12, 2017, Slipstream Communications, LLC completed its purchase of all of our outstanding debt from the original debtholders. The terms of the debt have remained the same. On January 17, 2017, Slipstream Communications, LLC elected to extend the maturity date of the Convertible Promissory Notes to October 15, 2017 as permitted under the Convertible Promissory Notes agreement. On March 21, 2017, Slipstream Communications, LLC agreed to extend the maturity date of our convertible promissory notes and the term loan to May 2018.
| F-31 |
| Exhibit No. | Description | |
| 2.1 | Agreement and Plan of Merger and Reorganization dated as of August 11, 2015, by and among the registrant, CXW Acquisition, Inc. and ConeXus World Global, LLC (incorporated by reference to the registrants Quarterly Report on Form 10-Q filed with the SEC on August 14, 2015) | |
| 2.2 | Amendment to Agreement and Plan of Merger and Reorganization dated as of October 15, 2015, by and among the registrant, CXW Acquisition, Inc. and ConeXus World Global, LLC (incorporated by reference to the registrants Current Report on Form 8-K filed with the SEC on October 21, 2015) | |
| 3.1 | Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the registrant’s Form S-4 filed with the SEC on August 18, 2014) | |
| 3.2 | Amended and Restated Bylaws (incorporated by reference to the registrant’s Current Report on Form 8-K filed on November 2, 2011) | |
| 4.1 | Series A Convertible Preferred Stock Certificate of Designation of Preferences, Rights and Limitations filed August 19, 2014 (incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed with the SEC on August 22, 2014) | |
| 4.2 | Series A-1 Convertible Preferred Stock Certificate of Designation of Preferences, Rights and Limitations filed October 30, 3015 (incorporated by reference to Exhibit 4.2 of the registrant’s Registration Statement on Form S-1 filed with the SEC on February 11, 2016) | |
| 10.1 | Securities Purchase Agreement dated February 18, 2015 by and between Creative Realities, Inc. and Mill City Ventures II, Ltd. (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on February 24, 2015) | |
| 10.2 | Secured Convertible Promissory Note dated February 18, 2015, issued in favor of Mill City Ventures III, Ltd. (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the SEC on February 24, 2015) | |
| 10.3 | Warrant dated February 18, 2015, issued in favor of Mill City Ventures III, Ltd. (incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed with the SEC on February 24, 2015) | |
| 10.4 | Security Agreement dated February 18, 2015, by and among Creative Realities, Inc. and Broadcast International, Inc., Creative Realities, LLC, and Wireless Ronin Technologies Canada, Inc. (incorporated by reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed with the SEC on February 24, 2015) | |
| 10.5 | Separation Agreement with Paul Price dated as of May 5, 2015 (incorporated by reference to the registrant’s Registration Statement on Form S-1/A filed with the SEC on July 9, 2015) | |
| 10.6 | Subordinated Secured Promissory Note issued on May 20, 2015 to Slipstream Communications, LLC, in the original principal amount of $465,000 (incorporated by reference to the registrants Quarterly Report on Form 10-Q filed with the SEC on August 14, 2015) | |
| 10.7 | Warrant to Purchase Common Stock, issued in favor of Slipstream Communications, LLC (incorporated by reference to the registrants Quarterly Report on Form 10-Q filed with the SEC on August 14, 2015) | |
| 10.8 | Form of Secured Convertible Promissory Note (for use in connection with Form of Securities Purchase Agreement dated June 23, 2015) (incorporated by reference to the registrant’s Registration Statement on Form S-1/A filed with the SEC on July 9, 2015) | |
| 10.9 | Form of Warrant (for use in connection with Form of Securities Purchase Agreement dated June 23, 2015) (incorporated by reference to the registrant’s Registration Statement on Form S-1/A filed with the SEC on July 9, 2015) | |
| 10.10 | Form of Security Agreement (for use in connection with Form of Securities Purchase Agreement dated June 23, 2015) (incorporated by reference to the registrant’s Registration Statement on Form S-1/A filed with the SEC on July 9, 2015) |
| E-1 |
| 10.11 | Factoring Agreement dated October 15, 2015, by and among the registrant and Allied Affiliated Funding, L.P. (incorporated by reference to the registrants Current Report on Form 8-K filed with the SEC on October 21, 2015) | |
| 10.12 | Warrant dated December 22, 2015, issued in favor of Slipstream Communications, LLC (incorporated by reference to the registrant’s Annual Report on Form 10-K filed with the SEC on April 4, 2016) | |
| 10.13 | Form of Amended and Restated Securities Purchase Agreement dated December 28, 2015 (incorporated by reference to the registrant’s Registration Statement on Form S-1 filed with the SEC on February 11, 2016) | |
| 10.14 | Form of Securities Purchase Agreement dated December 28, 2015 (incorporated by reference to the registrant’s Registration Statement on Form S-1 filed with the SEC on February 11, 2016) | |
| 10.15 | Form of Secured Convertible Promissory Note (for use in connection with Form of Securities Purchase Agreement dated December 28, 2015) (incorporated by reference to the registrant’s Registration Statement on Form S-1 filed with the SEC on February 11, 2016) | |
| 10.16 | Form of Warrant (for use in connection with Form of Securities Purchase Agreement dated December 28, 2015) (incorporated by reference to the registrant’s Registration Statement on Form S-1 filed with the SEC on February 11, 2016) | |
| 10.17 | Form of Amended and Restated Security Agreement (for use in connection with Form of Securities Purchase Agreement dated December 28, 2015) (incorporated by reference to the registrant’s Registration Statement on Form S-1 filed with the SEC on February 11, 2016) | |
| 10.18 | Form of Registration Rights Agreement (for use in connection with Form of Securities Purchase Agreement dated December 28, 2015) (incorporated by reference to the registrant’s Registration Statement on Form S-1 filed with the SEC on February 11, 2016) | |
| 10.19 | Loan and Security Agreement with Slipstream Communications, LLC, dated as of August 17, 2016 (incorporated by reference to the registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 21, 2016) | |
| 10.20 | Secured Term Promissory Note in favor of Slipstream Communications, LLC (entered into in connection with Loan and Security Agreement dated August 17, 2016) (incorporated by reference to the registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 21, 2016) | |
| 10.22 | Employment Agreement with John Walpuck (filed herewith) | |
| 10.23 | Employment Agreement with Richard Mills (filed herewith) | |
| 10.24 | Warrant to Purchase Common Stock (entered into in connection with Loan and Security Agreement dated August 17, 2016) (incorporated by reference to the registrant’s Quarterly Report on Form 10-Q filed with the SEC on November 21, 2016) | |
| 10.25 | Form of Securities Purchase Agreement dated June 23, 2015 (incorporated by reference to the registrant’s Registration Statement on Form S-1/A filed with the SEC on July 9, 2015) | |
| 21.1 | List of Subsidiaries (incorporated by reference to the registrant’s Registration Statement on Form S-1 filed with the SEC on February 11, 2016) | |
| 23.1 | Consent of EisnerAmper LLP (filed herewith) | |
| 31.1 | Chief Executive Officer Certification pursuant to Exchange Act Rule 13a-14(a). | |
| 31.2 | Chief Financial Officer Certification pursuant to Exchange Act Rule 13a-14(a). | |
| 32.1 | Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350. | |
| 32.2 | Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350. | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
E-2