CREATIVE REALITIES, INC. 10-Q

10-Q 1 f10q0920_creativerealities.htm QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2020 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ 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, Suite 100, Louisville KY 40223 Address of Principal Executive Offices Zip Code (502) 791-8800 Registrant’s Telephone Number, Including Area Code Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, par value $0.01 per share CREX The Nasdaq Stock Market LLC Warrants to purchase Common Stock CREXW The Nasdaq Stock Market LLC Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) 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 whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒ APPLICABLE ONLY TO CORPORATE ISSUERS As of November 11, 2020, the registrant had 10,924,287 shares of common stock outstanding. PART 1. FINANCIAL INFORMATION Item 1. Financial Statements CREATIVE REALITIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) September 30, December 31, 2020 2019 (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 855 $ 2,534 Accounts receivable, net of allowance of $1,318 and $617, respectively 3,468 4,663 Unbilled receivables 57 86 Work-in-process and inventories, net of reserve of $108 and $134, respectively 2,662 379 Prepaid expenses and other current assets 419 320 Total current assets 7,461 7,982 Operating lease right-of-use assets 730 1,728 Property and equipment, including depreciable software, net 1,454 1,553 Intangibles, net 3,929 4,407 Goodwill 7,525 18,171 Other assets 2 135 TOTAL ASSETS $ 21,101 $ 33,976 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Short-term seller note payable $ 1,637 $ 1,637 Short-term related party convertible loans payable, at fair value 2,825 2,000 Short-term related party loans payable, net of $253 and $0 discount, respectively $ 4,244 - Accounts payable 1,948 1,849 Accrued expenses 2,087 2,751 Deferred revenues 1,016 772 Customer deposits 875 755 Current maturities of operating leases 345 646 Current maturities of finance leases 7 21 Total current liabilities 14,984 10,431 Long-term Paycheck Protection Program loans payable 1,552 - Long-term related party loans payable, net of $0 and $507 discount, respectively - 3,757 Long-term obligations under operating leases 385 1,100 Long-term obligations under finance leases 1 - Deferred tax and other long-term liabilities - 180 TOTAL LIABILITIES 16,922 15,468 SHAREHOLDERS’ EQUITY Common stock, $0.01 par value, 200,000 shares authorized; 10,443 and 9,775 shares issued and outstanding, respectively 104 98 Additional paid-in capital 55,944 54,052 Accumulated deficit (51,869 ) (35,642 ) Total shareholders’ equity 4,179 18,508 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 21,101 $ 33,976 See accompanying notes to condensed consolidated financial statements 1 CREATIVE REALITIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) For the Three Months Ended For the Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Sales Hardware $ 2,850 $ 2,034 $ 5,818 $ 5,329 Services and other 2,257 4,689 6,649 20,192 Total sales 5,107 6,723 12,467 25,521 Cost of sales Hardware 1,882 1,484 4,161 4,200 Services and other 781 1,933 2,438 10,106 Total cost of sales 2,663 3,417 6,599 14,306 Gross profit 2,444 3,306 5,868 11,215 Operating expenses: Sales and marketing expenses 411 523 1,209 1,830 Research and development expenses 229 306 787 1,073 General and administrative expenses 1,849 2,113 7,170 6,824 Depreciation and amortization expense 377 278 1,123 872 Goodwill impairment - - 10,646 - Total operating expenses 2,866 3,220 20,935 10,599 Operating income/(loss) (422 ) 86 (15,067 ) 616 Other income/(expenses): Interest expense (265 ) (199 ) (752 ) (616 ) Change in fair value of warrant liability - - - 21 Change in fair value of Special Loan - - (702 ) - Gain on settlement of obligations 114 406 155 419 Loss on disposal of assets (13 ) - (13 ) - Total other income/(expense) (164 ) 207 (1,312 ) (176 ) Income/(loss) before income taxes (586 ) 293 (16,379 ) 440 Benefit from / (provision for) income taxes 1 (51 ) 152 35 Net income/(loss) $ (585 ) 242 (16,227 ) 475 Basic earnings/(loss) per common share $ (0.06 ) $ 0.02 $ (1.63 ) $ 0.05 Diluted earnings/(loss) per common share $ (0.06 ) $ 0.02 $ (1.63 ) $ 0.05 Weighted average shares outstanding - basic 10,312 9,756 9,977 9,739 Weighted average shares outstanding - diluted 10,312 9,756 9,977 9,739 See accompanying notes to condensed consolidated financial statements. 2 CREATIVE REALITIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, 2020 2019 Operating Activities: Net income/(loss) $ (16,227 ) $ 475 Adjustments to reconcile net income/(loss) to net cash provided by operating activities Depreciation and amortization 1,123 847 Amortization of debt discount 254 419 Stock-based compensation 442 395 Change in warrant liability - (21 ) Change in fair value of Special Loan 702 Deferred tax benefit (175 ) (29 ) Allowance for doubtful accounts 701 194 Increase in notes due to in-kind interest 356 - Loss on goodwill impairment 10,646 - Loss on disposal of assets 13 - Gain on settlement of obligations (135 ) (419 ) Changes to operating assets and liabilities: Accounts receivable and unbilled revenues 523 1,739 Inventories (2,283 ) (212 ) Prepaid expenses and other current assets (99 ) 1,295 Operating lease right of use asset, net 411 409 Other assets 133 23 Accounts payable 214 (235 ) Deferred revenue 244 (5,527 ) Accrued expenses (664 ) 2,491 ) Deposits 120 (990 ) Operating lease liabilities (409 ) (395 ) Other liabilities - (3 ) Net cash provided by/(used in) operating activities (4,110 ) 456 Investing activities Purchases/additions of property and equipment and software development (559 ) (652 ) Proceeds from net working capital settlement - 210 Net cash used in investing activities (559 ) (442 ) Financing activities Principal payments on finance leases (18 ) - Proceeds from Payroll Protection Program loan 1,552 - Proceeds from issuance of common stock via at-the-market offering 1,335 30 Proceeds from warrant holder exercise of common stock 121 - Repayment of seller note - (498 ) Other financing activities, net, including principal payments on finance leases - (24 ) Net cash provided by / (used in) financing activities 2,990 (492 ) Increase/(decrease) in Cash and Cash Equivalents (1,679 ) (478 ) Cash and Cash Equivalents, beginning of period 2,534 2,718 Cash and Cash Equivalents, end of period $ 855 $ 2,240 See accompanying notes to condensed consolidated financial statements. 3 CREATIVE REALITIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in thousands, except shares) (Unaudited) Additional Common Stock paid in Accumulated Three months ended September 30, 2020 Shares Amount capital (Deficit) Total Balance as of June 30, 2020 9,854,623 $ 98 $ 54,342 $ (51,284 ) $ 3,156 Shares issued to directors as compensation 10,044 - 25 - 25 Stock-based compensation - - 248 - 248 Shares issued through at-the-market offering 578,183 6 1,329 - 1,335 Net loss - - - (585 ) (585 ) Balance as of September 30, 2020 10,442,850 $ 104 $ 55,944 $ (51,869 ) $ 4,179 Additional Common Stock paid in Accumulated Nine months ended September 30, 2020 Shares Amount capital (Deficit) Total Balance as of December 31, 2019 9,774,546 $ 98 $ 54,052 $ (35,642 ) $ 18,508 Shares issued to directors as compensation 62,521 - 74 - 74 Stock-based compensation - - 368 - 368 Shares issued through at-the-market offering 578,183 6 1,329 - 1,335 Exercise of warrants 27,600 - 121 - 121 Net loss - - - (16,227 ) (16,227 ) Balance as of September 30, 2020 10,442,850 $ 104 $ 55,944 $ (51,869 ) $ 4,179 Additional Common Stock paid in Accumulated Three months ended September 30, 2019 Shares Amount capital (Deficit) Total Balance as of June 30, 2019 9,742,786 $ 97 $ 53,937 $ (36,447 ) $ 17,587 Shares issued to directors as compensation 13,590 1 31 - 32 Stock-based compensation - - 31 - 31 Net income - - - 242 242 Balance as of September 30, 2019 9,756,376 $ 98 $ 53,999 $ (36,205 ) $ 17,892 Additional Common Stock paid in Accumulated Nine months ended September 30, 2019 Shares Amount capital (Deficit) Total Balance as of December 31, 2018 9,724,826 $ 97 $ 53,575 $ (36,851 ) $ 16,821 Adoption of ASU 2016-02 - - - 171 171 Shares issued for services 17,960 - 30 - 30 Shares issued to directors as compensation 13,590 1 31 - 32 Stock-based compensation - - 113 - 113 Vesting of performance shares previously granted to CEO - - 250 - 250 Net income - - - 475 475 Balance as of September 30, 2019 9,756,376 $ 98 $ 53,999 $ (36,205 ) $ 17,892 See accompanying notes to condensed consolidated financial statements. 4 CREATIVE REALITIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (all currency in thousands, except per share amounts) (unaudited) NOTE 1: NATURE OF ORGANIZATION AND OPERATIONS Unless the context otherwise indicates, references in these Notes to the accompanying condensed consolidated financial statements to “we,” “us,” “our” and “the Company” refer to Creative Realities, Inc. and its subsidiaries. Nature of the Company’s Business Creative Realities, Inc. is a Minnesota corporation that provides innovative digital marketing technology and solutions to retail companies, individual retail brands, enterprises and organizations throughout the United States and in certain international markets. The Company has expertise in a broad range of existing and emerging digital marketing technologies, as well as the related media management and distribution software platforms and networks, device management, product management, customized software service layers, systems, experiences, workflows, and integrated solutions. Our technology and solutions include: digital merchandising systems and omni-channel customer engagement systems, interactive digital shopping assistants, advisors and kiosks, and other interactive marketing technologies such as mobile, social media, point-of-sale transactions, beaconing and web-based media that enable our customers to transform how they engage with consumers. We have expertise in a broad range of existing and emerging digital marketing technologies, as well as the following related aspects of our business: content, network management, and connected device software and firmware platforms; customized software service layers; hardware platforms; digital media workflows; and proprietary processes and automation tools. On November 20, 2018, we closed on our acquisition of Allure Global Solutions, Inc. (the “Allure Acquisition”). While the Allure Acquisition expanded our operations, geographical footprint and customer base and also enhanced our current product offerings, the core business of Allure is consistent with the existing operations of Creative Realties, Inc. and as a result of the Allure Acquisition we did not add different operating activities to our business. Our main operations are conducted directly through Creative Realities, Inc., and under our wholly owned subsidiaries Allure Global Solutions, Inc., a Georgia corporation, and Creative Realities Canada, Inc., a Canadian corporation. Our other wholly owned subsidiaries, Creative Realities, LLC, a Delaware limited liability company, and ConeXus World Global, LLC, a Kentucky limited liability company, are effectively dormant. Liquidity and Financial Condition The accompanying Condensed Consolidated Financial Statements have been prepared on the basis of the realization of assets and the satisfaction of liabilities and commitments in the normal course of business and do not include any adjustments to the recoverability and classifications of recorded assets and liabilities as a result of uncertainties. We produced net income for the year ended December 31, 2019 but incurred a net loss for the year ended December 31, 2018 and had negative cash flows from operating activities for both the year-ended December 31, 2019 and the nine months ended September 30, 2020. 5 For the three and nine months ended September 30, 2020 we incurred net losses of $585 and $16,227, respectively. As of September 30, 2020, we had cash and cash equivalents of $855 and working capital deficit of $7,523. Excluding debt classified as current liabilities based on having maturity dates within twelve months of the Condensed Consolidated Balance Sheet date, we have a working capital surplus of $1,183 as of September 30, 2020. While our outlook for the digital signage industry over the long term remains strong, we have experienced rapid and immediate deterioration in our short term core digital signage business as a result of the COVID-19 pandemic, generating increased uncertainty across our customer base in many of our key vertical markets. The elective and forced closures of businesses across the United States and Canada has resulted in reduced demand for our services, which primarily assist business in engaging with their end customers in a physical space through digital technology. The elimination and minimizing of public gatherings have materially impacted demand for products and services in our movie theater, sports arena and large entertainment markets. These conditions have resulted in downward revisions of our internal forecasts on current and future projected earnings and cash flows. The effective halting of pending and anticipated projects caused our projected incoming cash to be delayed, and consequently cash flows have slowed, including a slowdown in payments by customers for previously completed projects, which has further limited cash collections. We have implemented various cost cutting measures, including slowing our payments of accounts payable and accrued liabilities, negotiated extensions for certain currently and past due payments to key vendors, and implemented compensation reductions for most personnel retained following the reduction-in-force activities taken by the Company in mid-March 2020. On April 28, 2020, we announced the joint launch of an AI-integrated non-contact temperature inspection kiosk known as the Thermal Mirror with our partner, InReality, LLC (“InReality”), for use by businesses as COVID-19 related workplace restrictions are reduced or eliminated. Although we have experience in providing customers digital integration solutions, our launch of the Thermal Mirror involves the development, marketing and sale of a new product to new customers involving a joint effort with InReality. The product also uses hardware and technologies that have not been used with our other customers. Although we believe this product and our launch will be successful, there are a number of risks involved in such launch, including investing significant time and resources in the launch, which may ultimately not be successful. While market response has been encouraging, we remain in the early stages of this product launch as of the date of this report, as the hardware and software solution, in addition to the related services, continue to evolve based on customer feedback and requests. Revenue recognized from the sale of hardware and services associated with the Thermal Mirror product, including software activation, configuration, and software-as-a-service (“SaaS”) revenues generated via software subscriptions to the platform, were approximately $2,033 and $2,560 for the three and nine months ended September 30, 2020, respectively. On June 19, 2020, the Company entered into a Sales Agreement (the “Agreement”) with Roth Capital Partners, LLC (“Roth”) under which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, par value $0.01 per share (the “Common Stock”), having an aggregate offering price of up to $8,000,000 through Roth as the Company’s sales agent. Roth may sell the Common Stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 of the Securities Act of 1933, as amended. Subject to the terms of the Agreement, Roth will use its commercially reasonable efforts to sell the Common Stock from time to time, based upon instructions from the Company (including any price, time or size limits or other customary parameters or conditions the Company may impose). The Company or Roth may suspend the offering of the Common Stock being made through Roth under the Agreement upon proper notice to the other party. The Company will pay Roth a commission of 3.0% of the gross sales proceeds of any Common Stock sold through Roth under the Agreement, and also has provided Roth with customary indemnification rights. The sale of Common Stock under the Agreement is registered on a Form S-3 registration statement (Registration No. 333-238275) and related prospectus supplement filed with the SEC on June 19, 2020, and pursuant to the “baby shelf” rules that apply to such registration statement, we cannot sell our common stock in a public primary offering (including under the Agreement) with a value exceeding more than one-third of our public float in any 12 calendar month period so long as our public float remains below $75.0 million. The Company is not obligated to make any sales of Common Stock under the Agreement. The offering of shares of Common Stock pursuant to the Agreement will terminate upon the earlier of (i) the sale of all Common Stock subject to the Agreement or (ii) termination of the Agreement in accordance with its terms. Through September 30, 2020, the Company received gross proceeds under the Agreement of $1,336 from the issuance of 578,183 shares of our common stock, and paid an aggregate of $38 to Roth in commissions, yielding net proceeds of $1,298 after commissions and net proceeds of $1,158 after other offering-related expenses. 6 Through November 11, 2020, the Company received gross proceeds under the Agreement of $1,831 from the issuance of 1,034,068 shares of our common stock, and paid an aggregate of $53 to Roth in commissions, yielding net proceeds of $1,778 after commissions, and net proceeds of $1,636 after other offering-related expenses. On April 27, 2020, the Company entered into a Promissory Note with Old National Bank (the “Promissory Note”), which provided for an unsecured loan of $1,552 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”). The Promissory Note has a term of two years with a 1% per annum interest rate. While the Promissory Note currently has a two-year term, the amended law permits the Company to request a five-year maturity from Old National Bank. Payments are deferred for six months from the date of the Promissory Note and the Company can apply for forgiveness of the Promissory Note after 60 days. Forgiveness of the Promissory Note will be determined in accordance with the provisions of the CARES Act and applicable regulations. Any principal and interest amount outstanding after the determination of amounts forgiven will be repaid on a monthly basis. The Company is in process of finalizing their calculation of amounts forgivable in accordance with guidance issued by the Small Business Administration and anticipates applying for forgiveness during the fourth quarter of 2020. No assurance is provided that we will be able to obtain forgiveness of the Promissory Note in whole or in part. On November 6, 2019, Slipstream Communications, LLC (“Slipstream”) extended the maturity date of our term loan and revolver loan to June 30, 2021 through the Sixth Amendment to the Loan and Security Agreement, aligning the maturity date of our term loan and revolver loan with the Secured Disbursed Escrow Promissory Note. On December 30, 2019, we entered into the Secured Convertible Special Loan Promissory Note (“Special Loan”) as part of the Seventh Amendment of the Loan and Security Agreement with Slipstream, under which we obtained $2,000, with interest thereon at 8% per annum payable 6% in cash and 2% via the issuance of paid-in-kind (“SLPIK”) interest, provided however that upon occurrence of an event of default the interest rate shall automatically be increased by 6% per annum payable in cash. The entry into the Seventh Amendment adjusted the interest rate on the Company’s Term Loan and Revolving Loan to 8% per annum, provided, however, at all times when the aggregate outstanding principal amount of the Term Loan and the Revolving Loan exceeds $4,100 then the Loan Rate shall be 10%, of which eight percent 8% shall be payable in cash and 2% shall be paid by the issuance of and treated as additional PIK. Upon the earlier to occur of an Event of Default or October 1, 2020, if any of the principal amount of the Special Loan is then outstanding, the principal and accrued but unpaid interest of the Special Loan and the outstanding SLPIK shall be automatically converted into shares of a new series of Senior Convertible Preferred Stock of CRI (“New Preferred”) having an Appraised Value equal to three times the then outstanding principal amount and accrued but unpaid interest of the Special Loan and the outstanding SLPIK and having the following terms and conditions, as reasonably determined by CRI and the Lender, the New Preferred shall: ● be the most senior equity security of CRI, including with respect to the payment of dividends and other distributions; ● be on substantially the same terms and conditions as CRI’s Series A-1 6% Convertible Preferred Stock as set forth in its Certificate of Designation immediately before the same was cancelled pursuant to a Certificate of Cancellation dated as of March 13, 2019; ● not be subject to a right of redemption upon the part of a holder thereof; ● accrue and pay quarterly dividends at the rate of twelve percent (12%) per annum which shall be payable in cash; ● have a Stated Value that is an amount mutually agreed by CRI and the Lender at the time of issuance; ● Conversion Price shall be an amount equal to 80% of the average for the 30-day period ending two days prior to the required conversion date of the daily average of the range of CRI’s common stock (calculated pursuant to information on The Wall Street Journal Online Edition), subject to appropriate adjustments; and ● neither section 6(e) of the Series A-1 Certificate of Designation nor any similar provision shall apply to the New Preferred. 7 On April 1, 2020, the Company entered into an Eighth Amendment to Loan and Security Agreement (the “Eighth Amendment”) with its subsidiaries and Slipstream to amend the terms of the payments and interest accruing on the Company’s Term Loan, Secured Revolving Promissory Note, and Special Loan. The Eighth Amendment increased the interest rates of these loans from 8% to 10%, effective April 1, 2020. Until January 1, 2021, rather than cash payments of accrued interest under the term and revolving loans, interest will be paid by the issuance of and treated as additional principal thereunder. Commencing January 2, 2021, such interest will be payable in cash. Interest on the special loan will no longer be paid in cash, but by the issuance of and treated as additional principal thereunder. On September 29, 2020, the Company entered into a Ninth Amendment to Loan and Security Agreement (the “Ninth Amendment”) with its subsidiaries and Slipstream to amend the automatic conversion date of the Special Loan. The Ninth Amendment changed the automatic conversion date of the Special Loan into the defined new class of senior preferred stock of the Company from October 1, 2020 to November 30, 2020 (or upon an earlier event of default). The Company paid no fees in exchange for this extension. Management believes that, based on (i) our receipt of approximately $1,552 of funding through the Paycheck Protection Program on April 27, 2020, of which a significant portion we believe will ultimately be forgiven, (ii) our operational forecast through 2021, (iii) our access to capital markets through the Agreement with Roth, and (iv) a commitment of continued support from Slipstream, we can continue as a going concern through at least November 12, 2021. However, given our history of net losses, cash used in operating activities and working capital deficit, each of which continued as of and for the nine months ended September 30, 2020, we can provide no assurance that our ongoing operational efforts or ability to access the public markets for capital will be successful, particularly in consideration of the business interruptions and uncertainty generated as a result of the COVID-19 pandemic ,which has materially adversely affected our results of operations and cash flows. See Note 8 Loans Payable to the Consolidated Financial Statements for an additional discussion of the Company’s debt obligations. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the significant accounting policies consistently applied in the preparation of the accompanying Condensed Consolidated Financial Statements follows: 1. Basis of Presentation The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the applicable instructions to Form 10-Q and Regulation S-X and include all of the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”) for interim financial reporting. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 13, 2020. The results of operations for the interim periods are not necessarily indicative of results of operations for a full year. Management believes the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, including normal recurring items, considered necessary for a fair statement of results for the interim periods presented. 8 2. Revenue Recognition We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers , applying the five-step model. If an arrangement involves multiple performance obligations, the items are analyzed to determine the separate units of accounting, whether the items have value on a standalone basis and whether there is objective and reliable evidence of their standalone selling price. The total contract transaction price is allocated to the identified performance obligations based upon the relative standalone selling prices of the performance obligations. The standalone selling price is based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost plus margin approach. The Company estimates the amount of total contract consideration it expects to receive for variable arrangements by determining the most likely amount it expects to earn from the arrangement based on the expected quantities of services it expects to provide and the contractual pricing based on those quantities. The Company only includes some or a portion of variable consideration in the transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company considers the sensitivity of the estimate, its relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to the overall arrangement. The Company receives variable consideration in very few instances. Revenue is recognized when a customer obtains control of promised goods or services under the terms of a contract and is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. The Company does not have any material extended payment terms as payment is due at or shortly after the time of the sale, typically ranging between thirty and ninety days. Observable prices are used to determine the standalone selling price of separate performance obligations or a cost plus margin approach when one is not available. Sales, value-added and other taxes collected concurrently with revenue producing activities are excluded from revenue. The Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced to the clients. Unbilled receivables are recorded as accounts receivable when the Company has an unconditional right to contract consideration. A contract liability is recognized as deferred revenue when the Company invoices clients in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the related performance obligation. The Company uses the practical expedient for recording an immediate expense for incremental costs of obtaining contracts, including certain design/engineering services, commissions, incentives and payroll taxes, as these incremental and recoverable costs have terms that do not exceed one year. 3. Inventories Inventories are stated at the lower of cost or market (net realizable value), determined by the first-in, first-out (FIFO) method, and consist of the following: September 30, December 31, 2020 2019 Raw materials, net of reserve of $108 and $134, respectively $ 2,157 $ 200 Inventory on consignment with distributors 336 - Work-in-process 169 179 Total inventories $ 2,662 $ 379 Inventories on consignment with distributors are relieved from inventory and recognized in revenue when sold by distributors to their customers, not at time of shipment or delivery to the distributor. 4. Impairment of Long-Lived Assets We review the carrying value of all long-lived assets, including property and equipment, for impairment in accordance with ASC 360, Accounting for the Impairment or Disposal of Long-Lived Assets . Under ASC 360, impairment losses are recorded whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. 9 If the impairment tests indicate that the carrying value of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment loss would be recognized. The impairment loss is determined as the amount by which the carrying value of such asset exceeds its fair value. We generally measure fair value by considering sale prices for similar assets or by discounting estimated future cash flows from such assets using an appropriate discount rate. Assets to be disposed of are carried at the lower of their carrying value or fair value less costs to sell. Considerable management judgment is necessary to estimate the fair value of assets, and accordingly, actual results could vary significantly from such estimates. 5. Basic and Diluted Income/(Loss) per Common Share Basic and diluted income/(loss) per common share for all periods presented is computed using the weighted average number of common shares outstanding. Basic weighted average shares outstanding includes only outstanding common shares. Diluted weighted average shares outstanding includes outstanding common shares and potential dilutive common shares outstanding in accordance with the treasury stock method. Shares reserved for outstanding stock options, including stock options with performance restricted vesting, and warrants totaling approximately 7,229,998 and 5,021,888 at September 30, 2020 and 2019, respectively were excluded from the computation of income/(loss) per share as all options and warrants were anti-dilutive due to the net loss in each period. In calculating diluted earnings per share for the three and nine months ended September 30, 2020, in accordance with ASC 260 Earnings per share , we excluded the dilutive effect of the potential issuance of common stock upon an assumed conversion of the Special Loan. 6. Income Taxes Deferred income taxes are recognized in the financial statements for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates. Temporary differences arise from net operating losses, differences in basis of intangibles, stock-based compensation, reserves for uncollectible accounts receivable and inventory, differences in depreciation methods, and accrued expenses. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company accounts for uncertain tax positions utilizing an established recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We had no uncertain tax positions as of September 30, 2020 and December 31, 2019. 7. Goodwill We follow the provisions of ASC 350, Goodwill and Other Intangible Assets. Pursuant to ASC 350, goodwill acquired in a purchase business combination is not amortized, but instead tested for impairment at least annually. The Company uses a measurement date of September 30 (see Note 7 Intangible Assets and Goodwill ). 8. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Our significant estimates include: the allowance for doubtful accounts, valuation allowances related to deferred taxes, the fair value of acquired assets and liabilities, the fair value of liabilities reliant upon the appraised fair value of the Company, valuation of stock-based compensation awards and other assumptions and estimates used to evaluate the recoverability of long-lived assets, goodwill and other intangible assets and the related amortization methods and periods. Actual results could differ from those estimates. 9. Leases We account for leases in accordance with ASU No. 2016-02, Leases (Topic 842), as amended. 10 We determine if an arrangement is a lease at inception. Right of use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, we consider only payments that are fixed and determinable at the time of commencement. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our incremental borrowing rate is a hypothetical rate based on our understanding of what our credit rating would be. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. Operating leases are included in operating lease right-of-use assets, current maturities of operating leases, and long-term obligations under operating leases on our condensed consolidated balance sheets. Finance leases are included in property and equipment, net, current maturities of financing leases, and long-term obligations under financing leases on our condensed consolidated balance sheets. NOTE 3: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Recently adopted On January 1, 2020, we adopted ASU 2018-15 Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract , which provide guidance on evaluating the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The adoption of this guidance had no material impact on our Condensed Consolidated Financial Statements. On January 1, 2020, we adopted ASU No. 2018-13, Changes to Disclosure Requirements for Fair Value Measurements (Topic 820) , which improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removed, modified, and added certain disclosure requirements. The adoption of this guidance had no material impact on our Condensed Consolidated Financial Statements. Not yet adopted In August 2020, the FASB issued Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06) , which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. This guidance will be effective for us in the first quarter of 2022 on a full or modified retrospective basis, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes , which simplifies the accounting for income taxes. This guidance will be effective for us in the first quarter of 2021 on a prospective basis, and early adoption is permitted. We are currently evaluating the impact of the new guidance on our Condensed Consolidated Financial Statements. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses . The main objective is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this update replace the incurred loss methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. For trade receivables and loans, entities will be required to estimate lifetime expected credit losses. The amendments are effective for public business entities that qualify as smaller reporting companies for fiscal years and interim periods beginning after December 15, 2022. We are currently evaluating the disclosure requirements related to adopting this guidance. 11 NOTE 4: REVENUE RECOGNITION The Company applies ASC 606 for revenue recognition. The following table disaggregates the Company’s revenue by major source for the three and nine months ended September 30, 2020 and 2019: (in thousands) Three Months Ended September 30, 2020 Three Months Ended September 30, 2019 Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019 Hardware $ 2,850 $ 2,034 $ 5,818 $ 5,329 Services: Installation Services 674 2,143 2,006 6,306 Software Development Services 248 695 427 8,930 Managed Services 1,335 1,851 4,216 4,956 Total Services 2,257 4,689 6,649 20,192 Total Hardware and Services $ 5,107 $ 6,723 $ 12,467 $ 25,521 System hardware sales System hardware revenue is recognized generally upon shipment of the product or customer acceptance depending upon contractual arrangements with the customer in instances in which the sale of hardware is the sole performance obligation. Shipping charges billed to customers are included in hardware sales and the related shipping costs are included in hardware cost of sales. The cost of freight and shipping to the customer is recognized in cost of sales at the time of transfer of control to the customer. System hardware revenues are classified as “Hardware” within our disaggregated revenue. Installation services The Company performs outsourced installation services for customers and recognizes revenue upon completion of the installations. Installation services also includes engineering services performed as part of an installation project. When system hardware sales include installation services to be performed by the Company, the goods and services in the contract are not distinct, so the arrangement is accounted for as a single performance obligation. Our customers control the work-in-process and can make changes to the design specifications over the contract term. Revenues are recognized over time as the installation services are completed based on the relative portion of labor hours completed as a percentage of the budgeted hours for the installation. Installation services revenues are classified as “Installation Services” within our disaggregated revenue. The aggregate amount of the transaction price allocated to installation service performance obligations that are partially unsatisfied as of September 30, 2020 and 2019 were $0 and $1,428, respectively. Software design and development services Software and software license sales are revenue when a fixed fee order has been received and delivery has occurred to the customer. Revenue is recognized generally upon customer acceptance (point-in-time) of the software product and verification that it meets the required specifications. Software is delivered to customers electronically. Software design and development revenues are classified as “Software Development Services” within our disaggregated revenue. 12 Software as a service Software as a service includes revenue from software licensing and delivery in which software is licensed on a subscription basis and is centrally hosted. These services often include software updates which provide customers with rights to unspecified software product upgrades and maintenance releases and patches released during the term of the support period. Contracts for these services are generally 12-36 months in length. We account for revenue from these services in accordance with ASC 985-20-15-5 and recognize revenue ratably over the performance period. Software as a service revenues are classified as “Managed Services” within our disaggregated revenue. Maintenance and support services The Company sells support services which include access to technical support personnel for software and hardware troubleshooting. The Company offers a hosting service through our network operations center, or NOC, allowing the ability to monitor and support its customers’ networks 7 days a week, 24 hours a day. These contracts are generally 12-36 months in length. Revenue is recognized over the term of the agreement in proportion to the costs incurred in fulfilling performance obligations under the contract. Maintenance and Support revenues are classified as “Managed Services” within our disaggregated revenue. Maintenance and support fees are based on the level of service provided to end customers, which can range from monitoring the health of a customer’s network to supporting a sophisticated web-portal to managing the end-to-end hardware and software of a digital marketing system. These agreements are renewable by the customer. Rates for maintenance and support, including subsequent renewal rates, are typically established based upon a fee per location, per device, or a specified percentage of net software license fees as set forth in the arrangement. These contracts are generally 12-36 months in length. Revenue is recognized ratably and evenly over the service period. The Company also performs time and materials-based maintenance and repair work for customers. Revenue is recognized at a point in time when the performance obligation has been fully satisfied. NOTE 5: FAIR VALUE MEASUREMENT We measure certain financial assets, including cash equivalents, at fair value on a recurring basis. In accordance with ASC 820-10-30, fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820-10-35 establishes a three-level hierarchy that prioritizes the inputs used in measuring fair value. The three hierarchy levels are defined as follows: Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets. Level 2 — Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. Level 3 — Valuations based on inputs that are unobservable and involve management judgment and the reporting entity’s own assumptions about market participants and pricing. The Company previously recorded warrant liabilities that were measured at fair value on a recurring basis using a binomial option pricing model. The fair value of the warrant liabilities had decreased to $0 as of June 30, 2019. All of the Company’s outstanding warrants classified as liabilities expired during the three months ended September 30, 2019. As part of the Allure Acquisition, the Purchase Agreement contemplated additional consideration of $2,000 to be paid by us to Christie Digital Systems, USA (“Seller”) in the event that acquiree revenue exceeds $13,000, as defined in the underlying agreement, for any of the trailing twelve-month periods measured as of December 31, 2019, March 31, 2020, June 30, 2020, September 30, 2020 and December 31, 2020. The fair value of the earnout liability was determined to be $250 at the time of acquisition. As part of our finalization of opening balance sheet accounting at the close of the measurement period in November 2019, we recorded an adjustment to reflect the earnout liability to $0. The fair value estimate remains at $0 as of September 30, 2020. The liability is deemed to be Level 3 as the valuation is based on revenue projections and estimates developed by management as informed by historical results. As discussed in Note 7 Intangible Assets, Including Goodwill , the calculation of the weighted average cost of capital and management’s forecast of future financial performance utilized within our discounted cash flow model for the impairment of goodwill contains inputs which are unobservable and involve management judgment and are considered Level 3 estimates. 13 As discussed in Note 8 Loans Payable , the Special Loan is reported at fair value. This liability is deemed to be a Level 3 valuation. As of September 30, 2020, we updated our fair value analysis of the Special Loan, which was originally evaluated at March 31, 2020 utilizing the assistance of a third-party valuation specialist, resulting in recognition of a $0 and $702 loss during the three and nine months ended September 30, 2020, respectively, from the change in fair value of the liability and a corresponding increase in the debt balance recorded in the Condensed Consolidated Balance Sheet. NOTE 6: SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION Nine Months Ended September 30, 2020 2019 Supplemental Cash Flow Information Non-cash Investing and Financing Activities Right of offset settlement of Amended and Restated Seller Note $ - $ 498 Cash paid during the period for: Interest $ - $ 108 Income taxes, net $ 17 $ - NOTE 7: INTANGIBLE ASSETS, INCLUDING GOODWILL Intangible Assets Intangible assets consisted of the following at September 30, 2020 and December 31, 2019: September 30, December 31, 2020 2019 Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization Technology platform $ 4,635 3,337 $ 4,635 3,147 Customer relationships 5,330 2,822 5,330 2,679 Trademarks and trade names 1,020 897 1,020 752 10,985 7,056 10,985 6,578 Accumulated amortization 7,056 6,578 Net book value of amortizable intangible assets $ 3,929 $ 4,407 For the three months ended September 30, 2020 and 2019, amortization of intangible assets charged to operations was $161 and $147, respectively. For the nine months ended September 30, 2020 and 2019 amortization of intangible assets charged to operations was $478 and $451, respectively. Goodwill The following is a rollforward of the Company’s goodwill since December 31, 2019: Total Balance as of December 31, 2019 $ 18,171 Adjustments due to impairment loss (10,646 ) Balance as of September 30, 2020 $ 7,525 14 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. Interim Impairment Assessment – March 31, 2020 Despite the excess fair value identified in our 2019 annual impairment assessment, we determined that the reduced cash flow projections and the significant decline in our market capitalization as a result of the COVID-19 pandemic during the three months ended March 31, 2020 indicated that an impairment loss may have been incurred during the first quarter. Therefore, we qualitatively assessed whether it was more likely than not that the goodwill was impaired as of March 31, 2020. We reviewed our previous forecasts and assumptions based on our current projections that are subject to various risks and uncertainties, including: (1) forecasted revenues, expenses and cash flows, including the duration and extent of impact to our business and our alliance partners from the COVID-19 pandemic, (2) current discount rates, (3) the reduction in our market capitalization, (5) changes to the regulatory environment and (6) the nature and amount of government support that will be provided. As a result of this qualitative assessment, we concluded that indicators of impairment were present and that a quantitative interim impairment assessment of our goodwill was necessary as of March 31, 2020. As a result of the adoption of ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment the impairment test consists solely of comparing the carrying value of the reporting unit with its fair value and recording impairment, if identified. The fair value of the reporting unit was estimated via the income approach. Under the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for our industry. Actual results may differ from those assumed in our forecasts. We derive our discount rates using a capital asset pricing model and by analyzing published rates relevant to our business to estimate the cost of equity financing. We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. We utilized a discount rate of 15.3% in our valuation completed as of March 31, 2020. While our outlook for the digital signage industry over the long term remains strong, we have experienced rapid and immediate deterioration in our short term business as a result of the COVID-19 pandemic, generating increased uncertainty across our customer base in many of our key vertical markets. The elective and forced closures of businesses across the United States has resulted in reduced demand for our services, which primarily assist business in engaging with their end customers in a physical space through digital technology. The elimination and minimization of public gatherings has materially impacted demand for products and services in our movie theater, sports arena and large entertainment markets. These conditions resulted in downward revisions of our internal forecasts on current and future projected earnings and cash flows, leading to an implied fair value of goodwill substantially below the carrying value. Therefore, during the three months ended March 31, 2020, we recorded a non-cash impairment loss of $10,646. We recorded the estimated impairment losses in the caption “Goodwill impairment” in our Condensed Consolidated Statement of Operations. Following the impairment loss, there remained $7,525 goodwill as of March 31, 2020. Interim Impairment Assessment – June 30, 2020 As of June 30, 2020, we performed a qualitative impairment assessment in accordance with ASU 2011-08 Testing Goodwill for Impairment to determine whether any indicators of impairment of intangible assets were present as of the balance sheet date. Our analysis included evaluating events and circumstances impacting the Company, including the continued closure of numerous businesses through the second quarter as a result of the COVID-19 pandemic and the Company’s previously goodwill impairment. As a result of our analysis, we concluded that the Company’s actual and forecasted financial results remain in-line with estimates made during our impairment assessment as of March 31, 2020 and that the factors analyzed support an assertion that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount. As a result, no further impairment was recorded during the three months ended June 30, 2020. 15 Annual Impairment Assessment – September 30, 2020 The Company assessed the carrying value of goodwill at the reporting unit level based on an estimate of the fair value of the respective reporting unit. Fair value of the reporting unit was estimated using a discounted cash flow analyses consisting of various assumptions, including expectations of future cash flows based on projections or forecasts derived from analysis of business prospects and economic or market trends that may occur, specifically, the Company gave significant consideration to actual historic financial results, including revenue growth rates in the preceding three years. Based on the Company’s assessment, we determined that the fair value of our reporting unit exceeds its carrying value, and accordingly, the goodwill associated with the reporting unit is not considered to be impaired at September 30, 2020. Given the proximity in time to the most recent goodwill impairment, which marked the Company’s goodwill balance down to fair value, the Company anticipated its analysis would result in a thin margin in the percentage of excess fair value over carrying value as of the assessment date. Through the analysis performed as of September 30, 2020, the excess fair value over carrying value was approximately 10%. The Company recognizes that any changes in our projected 2020 or 2021 results could potentially have a material impact on our assessment of goodwill impairment. The Company will continue to monitor the actual performance of its operations against expectations and assess further indicators of possible impairment. The valuation of goodwill and intangible assets is subject to a high degree of judgment, uncertainty and complexity. Should any indicators of impairment occur in subsequent periods, the Company will be required to perform an analysis in order to determine whether goodwill is impaired. NOTE 8: LOANS PAYABLE The outstanding debt with detachable warrants, as applicable, are shown in the table below. Further discussion of the notes follows. Debt Type Issuance Date Principal Maturity Date Warrants Interest Rate Information A 6/30/2018 $ 264 6/30/2021 - 0.0% interest B 1/16/2018 1,059 6/30/2021 61,729 10.0% interest (1) C 8/17/2016 3,174 6/30/2021 588,236 10.0% interest (1) D 11/19/2018 1,637 2/15/2020 - 3.5% interest E 12/30/2019 2,123 6/30/2021 - 10.0% interest (2) F 4/27/2020 1,552 4/27/2022 - 1.0% interest (3) Total debt, gross 9,809 649,965 Fair value (E) 702 Total debt, gross 10,511 Debt discount (253 ) Total debt, net $ 10,258 Less current maturities (8,706 ) Long term debt 1,552 A – Secured Disbursed Escrow Promissory Note with related party B – Secured Revolving Promissory Note with related party C – Term Loan with related party D – Amended and Restated Seller Note from acquisition of Allure E – Secured Convertible Special Loan Promissory Note, at fair value F – Paycheck Protection Program Loan from Small Business Administration (1) 8.0% cash interest per annum through March 31, 2020. 10.0% paid-in-kind interest (“PIK”) interest per annum from April 1, 2020 through December 31, 2020. 8.0% cash interest per annum January 1, 2021 through the maturity date. 16 (2) 8.0% cash interest per annum, comprised of 6.0% cash, 2.0% PIK through March 31, 2020. 10.0% PIK interest per annum through September 30, 2020. In an event of default, the interest rate increases by 6.0% to 16.0%. Debt is automatically convertible to a new class of senior preferred stock of the Company at the earlier of an event of default or November 30, 2020. The principal, including PIK interest, as of September 30, 2020 is $2,123; however, fair value accounting for the convertible debt instrument results in an additional $702 of debt recorded on the Condensed Consolidated Balance Sheet as of September 30, 2020 related to this instrument. (3) 1,0% cash interest per annum. Payments are deferred for six months from the date of the Promissory Note and the Company can apply for forgiveness of the Promissory Note after 60 days. Forgiveness of the Promissory Note will be determined in accordance with the provisions of the CARES Act and applicable regulations. Any principal and interest amounts outstanding after the determination of amounts forgiven will be repaid on a monthly basis. SBA Paycheck Protection Program Loan On April 27, 2020, the Company entered into a Promissory Note with Old National Bank (the “Promissory Note”), which provided for an unsecured loan of $1,552 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”). The Promissory Note has a term of two years with a 1% per annum interest rate. While the Promissory Note currently has a two-year term, the amended law permits the Company to request a five-year maturity from Old National Bank. Payments are deferred for six months from the date of the Promissory Note and the Company can apply for forgiveness of the Promissory Note after 60 days. Forgiveness of the Promissory Note will be determined in accordance with the provisions of the CARES Act and applicable regulations. Any principal and interest amount outstanding after the determination of amounts forgiven will be repaid on a monthly basis. The Company is in process of finalizing their calculation of amounts forgivable in accordance with guidance issued by the Small Business Administration and anticipates applying for forgiveness during the fourth quarter of 2020. No assurance is provided that we will be able to obtain forgiveness of the Promissory Note in whole or in part. Loan and Security Agreement On August 17, 2016, the Company entered into a Loan and Security Agreement with Slipstream (“Loan and Security Agreement”). Since the initial entry into the Loan and Security Agreement in 2016, the Company has entered into several financing arrangements with varying interest rates, maturity dates, and number of associated detachable warrants, each entered within the structure of the Loan and Security Agreement. The debt instruments outstanding under the Loan and Security Agreement as of March 31, 2020 include the Term Loan, Secured Revolving Promissory Note, Secured Disbursed Escrow Promissory Note, and the Special Loan. The Loan and Security Agreement contains certain customary restrictions including, but not limited to, restrictions on mergers and consolidations with other entities, cancellation of any debt or incurring new debt (subject to certain exceptions), and other customary restrictions. Obligations under the loan and security agreement are secured by a grant of collateral security in all of the tangible assets of Creative Realities, Inc. and each of its wholly owned subsidiaries. Ninth Amendment; Modification of Conversion Date of Special Loan under Loan and Security Agreement On September 29, 2020, the Company entered into a Ninth Amendment to Loan and Security Agreement (the “Ninth Amendment”) with its subsidiaries and Slipstream to amend the automatic conversion date of the Special Loan. The Ninth Amendment changed the automatic conversion date of the Special Loan into the defined new class of senior preferred stock of the Company from October 1, 2020 to November 30, 2020 (or upon an earlier event of default). The Company paid no fees in exchange for this extension. 17 Eighth Amendment; Modification of Interest Rates under Loan and Security Agreement On April 1, 2020, the Company entered into an Eighth Amendment to Loan and Security Agreement (the “Eighth Amendment”) with its subsidiaries and Slipstream to amend the terms of the payments and interest accruing on the Company’s Term Loan, Secured Revolving Promissory Note, and Special Loan. The Eighth Amendment increased the interest rates of these loans from 8% to 10%, effective April 1, 2020. Until January 1, 2021, rather than cash payments of accrued interest under the term and revolving loans, interest will be paid by the issuance of and treated as additional principal thereunder. Commencing January 2, 2021, such interest will be payable in cash. Interest on the special loan will no longer be paid in cash, but by the issuance of and treated as additional principal thereunder. Upon entry into the Eighth Amendment, the Company completed an analysis of the changes in the Loan and Security Agreement within ASC 470 Debt , concluding that the changes represent a modification to the existing debt that was not a troubled debt restructuring and will account for the modified terms prospectively as yield adjustments, based on the revised terms. Seventh Amendment; Entry into Secured Convertible Special Loan Promissory Note On December 30, 2019, we entered into the Special Loan as part of the Seventh Amendment under which we obtained $2,000, with interest thereon at 8% per annum payable 6% in cash and 2% via the issuance of SLPIK interest, provided however that upon occurrence of an event of default the interest rate shall automatically be increased by 6% per annum payable in cash. The entry into the Seventh Amendment adjusted the interest rate on the Company’s Term Loan and Revolving Loan to 8% per annum, provided, however, at all times when the aggregate outstanding principal amount of the Term Loan and the Revolving Loan exceeds $4,100 then the Loan Rate shall be 10%, of which eight percent 8% shall be payable in cash and 2% shall be paid by the issuance of and treated as additional PIK. Upon the earlier to occur of an Event of Default or October 1, 2020, if any of the principal amount of the Special Loan is then outstanding, the principal and accrued but unpaid interest of the Special Loan and the outstanding SLPIK shall be automatically converted into shares of a new series of Senior Convertible Preferred Stock of CRI (“New Preferred”) having an Appraised Value equal to three times the then outstanding principal amount and accrued but unpaid interest of the Special Loan and the outstanding SLPIK and having the following terms and conditions, as reasonably determined by CRI and the Lender, the New Preferred shall: ● be the most senior equity security of CRI, including with respect to the payment of dividends and other distributions; ● be on substantially the same terms and conditions as CRI’s Series A-1 6% Convertible Preferred Stock as set forth in its Certificate of Designation immediately before the same was cancelled pursuant to a Certificate of Cancellation dated as of March 13, 2019; ● not be subject to a right of redemption upon the part of a holder thereof; ● accrue and pay quarterly dividends at the rate of twelve percent (12%) per annum which shall be payable in cash; ● have a Stated Value that is an amount mutually agreed by CRI and the Lender at the time of issuance; ● Conversion Price shall be an amount equal to 80% of the average for the 30-day period ending two days prior to the required conversion date of the daily average of the range of CRI’s common stock (calculated pursuant to information on The Wall Street Journal Online Edition), subject to appropriate adjustments; and ● neither section 6(e) of the Series A-1 Certificate of Designation nor any similar provision shall apply to the New Preferred. In entering the Seventh Amendment and Special Loan, pursuant to ASC 825-10-25-1, Fair Value Option , we made an irrevocable election to report the Special Loan at fair value, with changes in fair value recorded through the Company’s consolidated statements of operations in each reporting period. For the three and nine months ended September 30, 2020, we utilized the assistance of a third-party valuation specialist to assist in updating our fair value analysis of the Special Loan, resulting in recognition of a $0 and $702 loss, respectively, from the change in fair value of the liability. 18 Sixth Amendment; Extension of Maturity Dates On November 6, 2019, Slipstream extended the maturity date of our term loan and revolver loan to June 30, 2021 through the Sixth Amendment to the Loan and Security Agreement, aligning the maturity date of our Term Loan and Secured Revolving Promissory Note with the Secured Disbursed Escrow Promissory Note. Amended and Restated Seller Note from acquisition of Allure The Amended and Restated Seller Note represents a note payable due from Allure to Seller, under a pre-existing Seller Note which was amended and restated to a reduced amount of $900 through the Stock Purchase Agreement. At the closing date, the estimated net working capital deficit of Allure was $801 in excess of the target net working capital as defined in the Stock Purchase Agreement. As of the acquisition date, Allure also had accounts payable to Seller for outsourced services of $2,204. We agreed with the Seller to settle the estimated net working capital deficit through a reduction in the accounts payable to Seller as of the acquisition date and to further amend the Seller Note to include the remaining $1,403 accounts payable due from Allure to Seller, resulting in a Seller Note of $2,303. That debt is represented by our issuance to the Seller of a promissory note accruing interest at 3.5% per annum. The promissory note requires us to make quarterly payments of interest only through February 19, 2020, on which date the promissory note matured and all remaining amounts owing thereunder became due. The promissory note is convertible into shares of Creative Realities common stock, at the seller’s option on or after the 180th day after issuance, at an initial conversion price of $8.40 per share, subject to customary equitable adjustments. Conversion of all amounts owing under the promissory note will be mandatory if the 30-day volume-weighted average price of our common stock exceeds 200% of the common stock trading price at the closing of the acquisition. We granted the seller customary registration rights for the shares of our common stock issuable upon conversion of the promissory note. On February 20, 2020, the Company and Allure filed a demand for arbitration against Seller for (1) breach of contract, (2) indemnification, and (3) fraudulent misrepresentation under the Allure Purchase Agreement. This demand included a claim for the right to offset the amounts owing under the Amended and Restated Seller Note due February 20, 2020. We have not paid, nor do we intend to pay, the Amended and Restated Seller Note, which is now past its maturity date, without resolution of our demand for arbitration. On February 27, 2020, Seller sent the Company a notice of breach for failure to pay the Amended and Restated Seller Note on the maturity date of February 20, 2020 and demanding immediate payment. The Company continues to accrue interest on the Amended and Restated Seller Note and have included $43 in accrued expenses in the Condensed Consolidated Financial Statements as of September 30, 2020. See Note 9 Commitments and Contingencies for further discussion. NOTE 9: COMMITMENTS AND CONTINGENCIES Litigation On August 2, 2019, the Company filed suit in Jefferson Circuit Court, Kentucky, against a supplier of Allure for breach of contract, breach of warranty, and negligence with respect to equipment installations performed by such supplier for an Allure customer. This case remains in the early stages of litigation, in part due to delays resulting from the COVID-19 pandemic, and, as a result, the outcome of each case is unclear, so the Company is unable to reasonably estimate the possible recovery, or range of recovery, if any. On October 10, 2019, the Allure customer that is the basis of our claim above sent a demand to the Company for payment of $3,200 as settlement for an alleged breach of contract related to hardware failures of equipment installations performed by Allure between November 2017 and August 2018. The suits filed by and against Allure have been adjoined in the Jefferson Circuit Court, Kentucky in January 2020. This suit remains in the early stages of litigation and, as a result, the outcome of the suit and the allocation of liability, if any, remain unclear, so the Company is unable to reasonably estimate the possible liability, recovery, or range of magnitude for either the liability or recover, if any, at the time of this filing. 19 The Company has notified its insurance company on notice of potential claims and continues to evaluate both the claim made by the customer and potential avenues for recovery against third parties should the customer prevail. On February 20, 2020, the Company and Allure filed a demand for arbitration against Seller for breach of contract, indemnification, and fraudulent misrepresentation under the Allure Purchase Agreement. This demand included a claim for the right to offset the amounts owing under the Amended and Restated Seller Note due February 20, 2020. We have not paid the Amended and Restated Seller Note which is now past its maturity date. On February 27, 2020, Seller sent the Company a notice of breach for failure to pay the Amended and Restated Seller Note on the maturity date of February 20, 2020 and demanding immediate payment. Except as noted above, the Company is not party to any other material legal proceedings, other than ordinary routine litigation incidental to the business, as of November 11, 2020, and there were no other such proceedings pending during the period covered by this Report. Employee-related Expenses We implemented cost-control measures in light of the effect of the COVID-19 pandemic on our business, including employment compensation reductions designed to achieve preliminary cost savings. On March 19, 2020, the Company’s Board of Directors approved a six-month reduction of the salaries of our Chief Executive Officer and Chief Financial Officer by twenty percent (20%), thereby reducing the salaries payable to such officers in 2020 to $297,000 and $224,100, respectively. The reduction of the salaries of our Chief Executive Officer and Chief Financial Officer remain active as of the date of this report. On March 20, 2020, we completed a reduction-in-force and accrued one-time termination benefits related to severance to the affected employees of $135, the total of which was paid during the three months ended June 30, 2020 with $0 remaining in accrued expenses on the Condensed Consolidated Balance Sheet as of September 30, 2020. NOTE 10: RELATED PARTY TRANSACTIONS In addition to the financing transactions with Slipstream, a related party, discussed in Note 8 Loans Payable , we have the following related party transactions. On August 14, 2018, we entered into a payment agreement with 33 Degrees Convenience Connect, Inc., a related party that is approximately 17.5% owned by a member of our senior management (“33 Degrees”) outlining terms for repayment of $2,567 of aged accounts receivable as of that date. The payment agreement stipulated a simple interest rate of 12% on aged accounts receivable to be paid on the tenth day of each month through the maturity date of December 31, 2019. As of December 31, 2019, 33 Degrees paid the note in full. Following repayment of the note, 33 Degrees has continued to purchase additional hardware and services from the Company under normal payment terms. For the three and nine months ended September 30, 2020, the Company had sales to 33 Degrees of $131, or 2.6%, and $922, or 7.4%, respectively, of consolidated revenue. For the three and nine months ended September 30, 2019, the Company had sales to 33 Degrees of $279, or 4.2%, and $750, or 2.9%, respectively, of consolidated revenue. Accounts receivable due from 33 Degrees was $5, or 0.1%, and $1, or 0.0% of consolidated accounts receivable at September 30, 2020 and December 31, 2019, respectively. 20 NOTE 11: INCOME TAXES Our deferred tax assets are primarily related to net federal and state operating loss carryforwards (NOLs). We have substantial NOLs that are limited in usage by IRC Section 382. IRC Section 382 generally imposes an annual limitation on the amount of NOLs that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership within a statutory testing period. We have performed a preliminary analysis of the annual NOL carryforwards and limitations that are available to be used against taxable income. Based on the history of losses of the Company, there continues to be a full valuation allowance against the net deferred tax assets of the Company with a definite life. For the three and nine months ended September 30, 2020, we reported tax benefit of $1 and $152, respectively. As of September 30, 2020, the net deferred tax assets totaled $0 after valuation allowance, as compared to $175 at December 31, 2019. The reduction is primarily the result of the impairment to goodwill, which resulted in adjusting the deferred tax impact associated with indefinite lived goodwill from a deferred tax liability to a deferred tax asset. As the indefinite-lived intangibles can no longer provide a source of income, a full valuation allowance was placed against the deferred tax assets. NOTE 12: WARRANTS A summary of outstanding equity warrants is included below: Warrants (Equity) Amount Weighted Average Exercise Price Weighted Average Remaining Contractual Life Balance January 1, 2020 4,733,028 $ 4.83 3.41 Warrants issued - - - Warrants exercised (27,600 ) 4.38 - Warrants expired (89,238 ) 9.49 - Balance September 30, 2020 4,616,190 $ 4.71 2.72 NOTE 13: STOCK-BASED COMPENSATION A summary of outstanding options is included below: Time Vesting Options Weighted Average Weighted Weighted Remaining Average Average Range of Exercise Number Contractual Exercise Options Exercise Prices between Outstanding Life Price Exercisable Price $0.01 - $3.00 1,525,000 9.66 $ 2.52 - $ - $3.01 - $7.50 184,830 5.60 $ 6.72 168,163 $ 6.64 $7.51+ 103,979 4.70 11.74 94,396 $ 12.05 1,813,809 8.97 $ 3.48 262,559 Performance Vesting Options Weighted Average Weighted Weighted Remaining Average Average Range of Exercise Number Contractual Exercise Options Exercise Prices between Outstanding Life Price Exercisable Price $0.01 - $3.00 800,000 9.67 $ 2.53 - $ - $3.01 - $7.50 - - $ - - $ - $7.51+ - - $ - - $ - 800,000 9.67 $ 2.53 - 21 Time Vesting Options Performance Vesting Options Weighted Weighted Average Average Options Exercise Options Exercise Date/Activity Outstanding Price Outstanding Price Balance, December 31, 2019 313,860 $ 8.06 - $ - Granted 1,580,000 2.53 800,000 2.53 Exercised - - - - Forfeited or expired (80,051 ) 2.76 - - Balance, September 30, 2020 1,813,809 3.48 800,000 $ 2.53 The weighted average remaining contractual life for options exercisable is 5.0 years as of September 30, 2020. Valuation Information for Stock-Based Compensation For purposes of determining estimated fair value under FASB ASC 718-10, Stock Compensation , the Company computed the estimated fair values of stock options using the Black-Scholes model. On June 1, 2020 the Board of Directors of the Company granted 10-year options to purchase an aggregate of 2,380,000 shares of its common stock to employees of the Company subject to shareholder approval of an increase in the reserve of shares authorized for issuance under the Company’s 2014 Stock Incentive Plan (the “Plan”). On July 10, 2020, the Company held a special meeting of the Company’s shareholders at which the shareholders approved the amendment to the Plan, which increased the reserve of shares authorized for issuance thereunder to 6,000,000 shares. Of the 2,380,000 options awarded, 1,580,000 vest over 3 years and have an exercise price of $2.53, the market value of the Company’s common stock on the grant date. The fair value of the options on the grant date was $1.87 and was determined using the Black-Scholes model. These values were calculated using the following weighted average assumptions: Risk-free interest rate 0.66 % Expected term 6.25 years Expected price volatility 89.18 % Dividend yield 0 % The remaining 800,000 options awarded vest in equal installments over a three-year period subject to satisfying the Company revenue target and earnings before interest, taxes, depreciation and amortization (“EBITDA”) target for the applicable year. In each of calendar years 2020, 2021 and 2022, one-third of the total shares may vest (if the revenue and EBITDA targets are met), and the shares that are subject to vesting each year are allocated equally to each of the revenue and EBITDA targets for such year. These performance options include a catch-up provision, where any options that did not vest during a prior year due to the Company’s failure to meet a prior revenue or EBITDA target may vest in a subsequent vesting year if the revenue or EBITDA target, as applicable, is met in the future year. The revenue and EBITDA targets for the following three years are as follows: Calendar Year Revenue Target EBITDA Target 2020 $32 million $2.2 million 2021 $35 million $3.1 million 2022 $38 million $3.5 million The exercise price of the foregoing options is $2.53 per share, the closing price of the Company’s common stock on the date of issuance. The options were issued from the Company’s 2014 Stock Incentive Plan. The fair value of the options on the grant date was $1.87 and was determined using the Black-Scholes model. These values were calculated using the same weighted average assumptions as the time vesting options issued. Performance against the identified revenue and EBITDA targets will be assessed quarterly by the Company in order to determine whether any compensation expense should be recorded. As of September 30, 2020, the Company had recorded no compensation expense in the Consolidated Statement of Operations with respect to these awards. 22 Stock Compensation Expense Information ASC 718-10, Stock Compensation , requires measurement and recognition of compensation expense for all stock-based payments including warrants, stock options, restricted stock grants and stock bonuses based on estimated fair values. Under the Amended and Restated 2006 Equity Incentive Plan, the Company reserved 1,720,000 shares for purchase by the Company’s employees and under the Amended and Restated 2006 Non-Employee Director Stock Option Plan the Company reserved 700,000 shares for purchase by the Company’s employees. There are 12,135 options outstanding under the 2006 Equity Incentive Plan. In October 2014, the Company’s shareholders approved the 2014 Stock Incentive Plan, under which 7,390,355 shares were reserved for purchase by the Company’s employees. In August 2018, a special meeting of shareholders was held in which the shareholders voted to amend the Company’s 2014 Stock Incentive Plan to increase the reserve of shares authorized for issuance thereunder, from 7,390,355 shares to 18,000,000 shares. Following a 1-for-30 reverse stock split, the shares authorized for issuance under the Company’s 2014 Stock Incentive Plan was reduced to 600,000. On July 10, 2020, the Company’s shareholders approved an amendment to the Company’s 2014 Stock Incentive Plan to increase the reserve of authorized for issuance thereunder to 6,000,000. There are 2,601,674 options outstanding under the 2014 Stock Incentive Plan. Compensation expense recognized for the issuance of common stock and amortization of stock option awards for the three and nine months ended September 30, 2020 of $273 and $442, respectively, was included in general and administrative expense in the Condensed Consolidated Financial Statements. Compensation expense recognized for the issuance of common stock and amortization of stock option awards for the three and nine months ended September 30, 2019 of $63 and $395, respectively, was included in general and administrative expense in the Condensed Consolidated Financial Statements. Amounts recorded include stock compensation expense for awards granted to directors of the Company in exchange for services at fair value, including $25 and $74, respectively, for the three and nine months ended September 30, 2020 and $32 and $32, respectively, for the three and nine months ended September 30, 2019. At September 30, 2020, there was approximately $2,617 and $1,499 of total unrecognized compensation expense related to unvested share-based awards with time vesting and performance vesting criteria, respectively. Generally, expense related to the time vesting options will be recognized over the next three years and will be adjusted for any future forfeitures as they occur. Compensation expense related to performance vesting options will be recognized if it becomes probable that the Company will achieve the identified performance metrics. NOTE 14: SIGNIFICANT CUSTOMERS/VENDORS Significant Customers We had two (2) and one (1) customers that in the aggregate accounted for 22.5% and 18.5% of accounts receivable as of September 30, 2020 and December 31, 2019, respectively. We had one (1) and two (2) customers that accounted for 11.3% and 23.2% of revenue for the three months ended September 30, 2020 and 2019, respectively. We had one (1) and two (2) customers that accounted for 11.5% and 22.5% of revenue for the nine months ended September 30, 2020 and 2019, respectively. Significant Vendors We had one (1) vendor that accounted for 14% and 50% of outstanding accounts payable at September 30, 2020 and December 31, 2019, respectively. 23 NOTE 15: LEASES We have entered into various non-cancelable operating lease agreements for certain of our offices and office equipment. Our leases have original lease periods expiring between 2020 and 2023. Many leases include one or more options to renew. We do not assume renewals in our determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. During the three months ended September 30, 2020, the Company renegotiated the terms of certain of its operating lease agreements resulting in the elimination of approximately $587 in future commitments for payments previously included in our calculations of operating right of use assets and liabilities on the Condensed Consolidated Balance Sheet. These were accounted for as non-cash adjustments to the Condensed Consolidated Balance Sheet during the three months ended September 30, 2020. The components of lease costs, lease term and discount rate are as follows: (in thousands) Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019 Finance lease cost Amortization of right-of-use assets $ 17 $ 25 Interest 2 4 Operating lease cost 512 565 Total lease cost $ 531 $ 594 Weighted Average Remaining Lease Term Operating leases 3.2 years 3.6 years Finance leases 0.9 years 1.2 years Weighted Average Discount Rate Operating leases 10.0 % 10.0 % Finance leases 14.0 % 13.5 % The following is a schedule, by years, of maturities of lease liabilities as of September 30, 2020: (in thousands) Operating Leases Finance Leases The remainder of 2020 $ 106 $ 4 2021 310 4 2022 214 1 2023 210 - Thereafter - - Total undiscounted cash flows 840 9 Less imputed interest (110 ) $ (1 ) Present value of lease liabilities $ 730 $ 8 Supplemental cash flow information related to leases are as follows: (in thousands) Nine Months Ended September 30, 2020 Nine Months Ended September 30, 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 512 $ 551 Operating cash flows from finance leases 2 1 Financing cash flows from finance leases 17 23 24 Item 2. 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,” “projects,” should,” “may,” “propose,” and similar expressions (or the negative versions of such words or 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, and many of which are beyond our control. Factors that could cause actual results to differ materially from those anticipated are set forth under the caption “Risk Factors” in the Company’s reports filed with the Securities and Exchange Commission from time to time, including our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 13, 2020, our Quarterly Reports on Form 10-Q filed with the SEC on May 14, 2020 and August 13, 2020, and this Report under Part II, Item 1A. 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 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 a broad range of companies, individual 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 across 18 vertical markets, as well as the related media management and distribution software platforms and networks, device and content 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; content creation, production and scheduling programs and systems; a comprehensive series of recurring maintenance, support, and field service offerings; 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. Our main operations are conducted directly through Creative Realities, Inc. and our wholly owned subsidiaries Allure Global Solutions, Inc., a Georgia corporation, and Creative Realities Canada, Inc., a Canadian corporation. Our other wholly owned subsidiaries Creative Realities, LLC, a Delaware limited liability company, and ConeXus World Global, LLC, a Kentucky limited liability company, are effectively dormant. We generate revenue in our 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; 25 ● 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 and Safe Space 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 of both digital marketing technology and, beginning in April 2020, through the sale of a series of Safe Space Solutions products (including the Thermal Mirror); consulting services, experience design, content development and production, software development, engineering, implementation, and field services; software license fees via SaaS agreements; and maintenance and support services related to our software, managed systems and solutions. Recent Developments In January 2020, an outbreak of a new strain of coronavirus, COVID-19, was identified in Wuhan, China. Through the first quarter of 2020, the disease became widespread around the world, and on March 11, 2020, the World Health Organization declared a pandemic. Thereafter, state and local authorities in the United States and worldwide have forced many businesses to temporarily reduce or cease operations to slow the spread of the COVID-19 pandemic. As a result of the COVID-19 pandemic, we have experienced rapid and immediate deterioration in our business in many of our key vertical markets. The elective and forced closures of, and implementation of social distancing policies on, businesses across the United States has resulted in materially reduced demand for our services by our customers, as our customers purchase our products and services to engage with their end customers in a physical space through digital technology, particularly in our movie theater, sports arena and large entertainment markets. The reduced demand has resulted in customer orders being delayed. These conditions resulted in downward revisions of our internal forecasts on current and future projected earnings and cash flows, a non-cash impairment loss of $10,646 recording as of March 31, 2020, and reduced liquidity as described below. While we are experiencing an intense curtail in current customer demand, our long-term outlook for the digital signage industry remains strong. We believe that small providers in the digital signage industry may be unwilling or unable to continue business over the course of 2020 and 20201, and the industry will experience rapid consolidation, adding scale and enhancing profitability to those companies that emerge as the enterprise-level providers within our industry after the COVID-19 pandemic and consolidations. On April 28, 2020, we announced the joint launch of an AI-integrated non-contact temperature inspection kiosk known as the Thermal Mirror with our partner, InReality, LLC (“InReality”), for use by businesses as COVID-19 related workplace restrictions are reduced or eliminated. Although we have experience in providing customers digital integration solutions, our launch of the Thermal Mirror involves the development, marketing and sale of a new product to new customers involving a joint effort with InReality. The product also uses hardware and technologies that have not been used with our other customers. Although we believe this product and our launch will be successful, there are a number of risks involved in such launch, including investing significant time and resources in the launch, which may ultimately not be successful. While market response has been encouraging, we remain in the early stages of this product launch as of the date of this report, as the hardware and software solution, in addition to the related services, continue to evolve based on customer feedback and requests. Revenue recognized from the sale of hardware and services associated with the Thermal Mirror product, including software activation, configuration, and software-as-a-service (“SaaS”) revenues generated via software subscriptions to the platform, were approximately $2,033 and $2,560 for the three and nine months ended September 30, 2020, respectively. 26 On June 19, 2020, the Company entered into a Sales Agreement (the “Agreement”) with Roth Capital Partners, LLC (“Roth”) under which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, par value $0.01 per share (the “Common Stock”), having an aggregate offering price of up to $8,000,000 through Roth as the Company’s sales agent. Roth may sell the Common Stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 of the Securities Act of 1933, as amended. Subject to the terms of the Agreement, Roth will use its commercially reasonable efforts to sell the Common Stock from time to time, based upon instructions from the Company (including any price, time or size limits or other customary parameters or conditions the Company may impose). The Company or Roth may suspend the offering of the Common Stock being made through Roth under the Agreement upon proper notice to the other party. The Company will pay Roth a commission of 3.0% of the gross sales proceeds of any Common Stock sold through Roth under the Agreement, and also has provided Roth with customary indemnification rights. The sale of Common Stock under the Agreement is registered on a Form S-3 registration statement (Registration No. 333-238275) and related prospectus supplement filed with the SEC on June 19, 2020. Pursuant to the “baby shelf” rules that apply to such registration statement, we cannot sell our common stock in a public primary offering (including under the Agreement) with a value exceeding more than one-third of our public float in any 12 calendar month period so long as our public float remains below $75.0 million. The Company is not obligated to make any sales of Common Stock under the Agreement. The offering of shares of Common Stock pursuant to the Agreement will terminate upon the earlier of (i) the sale of all Common Stock subject to the Agreement or (ii) termination of the Agreement in accordance with its terms. As of September 30, 2020, the Company received gross proceeds under the Agreement of $1,336 from the issuance of 578,183 shares of Common Stock, and paid an aggregate of $38 to Roth in commissions, yielding net proceeds of $1,298 after commissions and net proceeds of $1,158 after other offering-related expenses. Through November 11, 2020, the Company received gross proceeds under the Agreement of $1,831 from the issuance of 1,034,068 shares of our Common Stock, and paid an aggregate of $53 to Roth in commissions, yielding net proceeds of $1,778 after commissions, and net proceeds of $1,636 after other offering-related expenses. On April 27, 2020, the Company entered into a Promissory Note with Old National Bank (the “Promissory Note”), which provided for an unsecured loan of $1,552 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”). The Promissory Note has a term of two years with a 1% per annum interest rate. While the Promissory Note currently has a two-year term, the amended law permits the Company to request a five-year maturity from Old National Bank. Payments are deferred for six months from the date of the Promissory Note and the Company can apply for forgiveness of the Promissory Note after 60 days. Forgiveness of the Promissory Note will be determined in accordance with the provisions of the CARES Act and applicable regulations. Any principal and interest amount outstanding after the determination of amounts forgiven will be repaid on a monthly basis. The Company is in process of finalizing their calculation of amounts forgivable in accordance with guidance issued by the Small Business Administration and anticipates applying for forgiveness during the fourth quarter of 2020. No assurance is provided that we will be able to obtain forgiveness of the Promissory Note in whole or in part. Given the uncertainty around the extent and timing of the potential future spread or mitigation of the COVID-19 pandemic and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact to our future results of operations, cash flows, or financial condition at this time. See “Termination Benefits” under Note 9 Commitments and Contingencies for a discussion of the Company’s cost-control measures, including employment compensation reductions designed to achieve preliminary cost savings in light of the significant economic uncertainty caused by the COVID-19 pandemic. Our Sources of Revenue We generate revenue through digital marketing solution sales and, beginning in April 2020, through the sale of a series of Safe Space Solutions products (including the Thermal Mirror), which include system hardware, professional and implementation services, software design and development, software licensing via SaaS agreements, deployment, and maintenance and support services. 27 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 Summary of Significant Accounting Policies of the Company’s Condensed Consolidated Financial Statements included elsewhere in this filing. The Company’s Condensed 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 condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Our actual results could differ from those estimates. Results of Operations Note: All dollar amounts reported in Results of Operations are in thousands, except per-share information. Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019 The tables presented below compare our results of operations and present the results for each period and the change in those results from one period to another in both dollars and percentage change. Three Months Ended September 30, Change 2020 2019 % Sales $ 5,107 $ 6,723 $ (1,616 ) -24 % Cost of sales 2,663 3,417 (754 ) -22 % Gross profit 2,444 3,306 (862 ) -26 % Sales and marketing expenses 411 523 (112 ) -21 % Research and development expenses 229 306 (77 ) -25 % General and administrative expenses 1,849 2,113 (264 ) -12 % Depreciation and amortization expense 377 278 99 36 % Total operating expenses 2,866 3,220 (354 ) -11 % Operating income/(loss) (422 ) 86 (508 ) -591 % Other income/(expenses): - Interest expense (265 ) (199 ) (66 ) 33 % Gain on settlement of debt 114 406 (292 ) -72 % Loss on disposal of assets (13 ) - (13 ) 100 % Total other income/(expense) (164 ) 207 (371 ) -179 % Net income/(loss) before income taxes (586 ) 293 (879 ) -300 % Benefit from / (provision) for income taxes 1 (51 ) 52 -102 % Net income/(loss) $ (585 ) $ 242 (827 ) -342 % 28 Sales Sales decreased by $1,616, or 24%, in the three months ended September 30, 2020 compared to the same period in 2019 driven a general reduction in installation activity following a significant increase in suspended, delayed, and cancelled customer projects, initiatives, and capital expenditures as a direct result of the COVID-19 pandemic. Reductions in year over year core digital signage business were partially offset by $2,033 of revenue generated from our Thermal Mirror product and services during the three months ended September 30, 2020 following launch of the Thermal Mirror product at the end of April 2020. Gross Profit Gross profit decreased $862 in absolute dollars from $3,306 to $2,444, or 26%, consistent with the reduction in sales during the same periods. The Company retained consistent gross margin percentage performance year over year, with a consolidated gross margin percentage of 47.9% and 49.2% for the three months ended September 30, 2020 and 2019, respectively. 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. Sales and marketing expenses decreased by $112, or 21%, in the three months ended September 30, 2020 compared to the same period in 2019 driven by a $63 reduction in personnel costs, combined with reduced spend on trade show activity and related travel costs following the cancellation of several key industry events as a result of the COVID-19 pandemic. We anticipate that our sales and marketing expenses will continue to be significantly lower than those incurred in 2019 as trade shows and industry events planned for the remainder of 2020 have been suspended, delayed, or completely cancelled. We further anticipate our sales personnel will continue to incur reduced travel costs during the extended pandemic period and utilize virtual meeting technology more commonly moving forward. Research and Development Expenses Research and development expenses decreased by $77, or 25%, in the three months ended September 30, 2020 compared to the same period in 2019 as the result of a reduction in personnel costs during the period. General and Administrative Expenses Total general and administrative expenses decreased by $264, or 12%, in the three months ended September 30, 2020 compared to the same period in 2019 driven by a reduction of $381 in personnel costs, including salaries, benefits, and travel-related expenses, partially offset by an increase in stock compensation amortization expense of $211 related to incremental employee and directors awards during 2020 which are being amortized over the thirty six month vesting period based on the grant date fair value calculated using the Black Scholes method. Personnel costs were reduced following completion of a reduction-in-force and salary reductions for remaining personnel in March 2020. We expect a reduction in these employee-related expenses in future periods as a result of the actions outlined within Note 9 Commitments and Contingencies to the Condensed Consolidated Financial Statements and further reductions in our rent expenses as a result of changes to our lease arrangements as outlined within Note 15 Leases to the Condensed Consolidated Financial Statements. 29 Depreciation and Amortization Expenses Depreciation and amortization expenses increased by $99, or 36%, in the three months ended September 30, 2020 compared to the same period in 2019 driven by a combination of an increased intangible asset base following the acquisition of Allure and increased spending on capitalized software since the acquisition of Allure. Interest Expense See Note 8 Loans Payable to the condensed consolidated financial statements for a discussion of the Company’s debt and related interest expense obligations. Gain on Settlement of Obligations During the three months ended September 30, 2020, the Company wrote off liabilities and recognized a gain of $155, primarily related to legal settlements of accrued sales tax payable with state jurisdictions. During the three months ended September 30, 2019, the Company wrote off liabilities and recognized a gain of $406, primarily related to legacy accounts payable deemed to no longer be legal obligations to vendors. Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 The tables presented below compare our results of operations and present the results for each period and the change in those results from one period to another in both dollars and percentage change. Nine Months Ended September 30, Change 2020 2019 % Sales $ 12,467 $ 25,521 $ (13,054 ) -51 % Cost of sales 6,599 14,306 (7,707 ) -54 % Gross profit 5,868 11,215 (5,347 ) -48 % Sales and marketing expenses 1,209 1,830 (621 ) -34 % Research and development expenses 787 1,073 (286 ) -27 % General and administrative expenses 7,170 6,824 346 5 % Depreciation and amortization expense 1,123 872 251 29 % Goodwill impairment 10,646 - 10,646 100 % Total operating expenses 20,935 10,599 10,336 98 % Operating (loss)/income (15,067 ) 616 (15,683 ) -2,546 % Other income/(expenses): Interest expense (752 ) (616 ) (136 ) 22 % Change in fair value of warrant liability - 21 (21 ) -100 % Change in fair value of Special Loan (702 ) - (702 ) -100 % Loss on disposal of assets (13 ) - (13 ) 100 % Gain on settlement of debt 155 419 (264 ) -63 % Total other income/(expense) (1,312 ) (176 ) (1,136 ) 645 % Net income/(loss) before income taxes (16,379 ) 440 (16,819 ) -3,823 % Benefit from income taxes 152 35 117 334 % Net (loss)/income $ (16,227 ) $ 475 (16,702 ) -3,516 % 30 Sales Sales decreased by $13,054 , or 51%, in the nine months ended September 30, 2020 compared to the same period in 2019 driven a general reduction in all service lines and particularly within our installation activity following a significant increase in suspended, delayed, and cancelled customer projects, initiatives, and capital expenditures as a direct result of the COVID-19 pandemic. Reductions in year over year core digital signage business were partially offset by $2,560 of revenue generated from our Thermal Mirror product and services during the nine months ended September 30, 2020 following launch of the Thermal Mirror product at the end of April 2020. Gross Profit Gross profit decreased $5,347 in absolute dollars from $11,215 to $5,868, or 48%, consistent with the reduction in sales during the same periods. The Company expanded gross margin percentage to 47.1% in the nine months ended September 30, 2020 from 43.9% for the same period in 2019 driven by the growth in sales of the Thermal Mirror products and services which have slightly higher margins than our traditional core business. 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. Sales and marketing expenses decreased by $621, or 34%, in the nine months ended September 30, 2020 compared to the same period in 2019 driven by a $443 reduction in personnel costs, combined with reduced spend on trade show activity and related travel costs following the cancellation of several key industry events as a result of the COVID-19 pandemic. We anticipate that our sales and marketing expenses will continue to be significantly lower than those incurred in 2019 as trade shows and industry events planned for the remainder of 2020 have been suspended, delayed, or completely cancelled. We further anticipate our sales personnel will continue to incur reduced travel costs during the extended pandemic period and utilize virtual meeting technology more commonly moving forward. Research and Development Expenses Research and development expenses decreased by $286, or 27%, in the nine months ended September 30, 2020 compared to the same period in 2019 as the result of a reduction in personnel costs during the period. General and Administrative Expenses Total general and administrative expenses increased by $346, or 5%, in the nine months ended September 30, 2020 compared to the same period in 2019. During the nine months ended September 30, 2020, the Company reduced personnel costs, including salaries, benefits, and travel-related expenses, by $757, representing a reduction in personnel costs of 22.1% as compared to the nine months ended September 30, 2020. Personnel costs were reduced following completion of a reduction-in-force and salary reductions for remaining personnel in March 2020. We expect a reduction in these employee-related expenses in future periods as a result of the actions outlined within Note 9 Commitments and Contingencies to the Condensed Consolidated Financial Statements. Reductions in personnel costs were offset by increases in the nine months ended September 30, 2020 as compared to the same period in 2019 of (1) $678 related to recording an incremental reserve for bad debt primarily related to a customer bankruptcy and a general deterioration in payments from customers following the COVID-19 pandemic, (2) $247 in increased legal, accounting, and transaction costs associated with completion of the Company’s shelf registration statement on Form S-3 and subsequent at-the-market offering with Roth Capital Partners, and (3) $48 in increased stock compensation expenses related to newly issued awards in June 2020. Excluding the year-over-year incremental impact of one-time charges to bad debt expense and deal costs included within general and administrative expenses, general and administrative expenses decreased by $472, or 7%, versus the same period in the prior year. We expect a continued reduction in controllable general and administrative expenses moving forward as a result of the actions outlined within Note 15 Leases to the Condensed Consolidated Financial Statements. 31 Depreciation and Amortization Expenses Depreciation and amortization expenses increased by $251, or 29%, in the three months ended September 30, 2020 compared to the same period in 2019 driven by a combination of an increased intangible asset base following the acquisition of Allure and increased spending on capitalized software since the acquisition of Allure. Interest Expense See Note 8 Loans Payable to the condensed consolidated financial statements for a discussion of the Company’s debt and related interest expense obligations. Gain on Settlement of Obligations During the nine months ended September 30, 2020, the Company wrote off liabilities and recognized a gain of $155, primarily related to legal settlements of accrued sales tax payable with state jurisdictions. During the three months ended September 30, 2019, the Company wrote off liabilities and recognized a gain of $406, primarily related to legacy accounts payable deemed to no longer be legal obligations to vendors. Change in Fair Value of Warrant Liability See Note 5 Fair Value Measurements to the Condensed Consolidated Financial Statements for a discussion of the Company’s non-cash change in warrant liability for the nine months ended September 30, 2019. The change in the fair value of the warrant liability resulted in a gain of $21 in the nine months ended September 30, 2019. All warrants previously classified as liabilities within the balance sheet expired during the three months ended September 30, 2019 and expired as of December 31, 2019. Summary Unaudited Quarterly Financial Information The following represents unaudited financial information derived from the Company’s quarterly financial statements: September 30, June 30, March 31, December 31, September 30, Quarters ended 2020 2020 2020 2019 2019 Net sales $ 5,107 $ 3,656 $ 3,704 $ 6,077 $ 6,723 Cost of sales 2,663 1,839 2,097 3,553 3,417 Gross profit 2,444 1,817 1,607 2,524 3,306 Operating expenses, inclusive of one-time lease termination expense, excluding depreciation and amortization 2,489 3,081 3,596 2,872 2,942 Goodwill impairment - - 10,646 - - Depreciation/amortization 377 380 366 378 278 Operating (loss)/income (422 ) (1,644 ) (13,001 ) (726 ) 86 Other expenses/(income) 164 811 337 (1,417 ) (207 ) Income tax provision/(benefit) (1 ) 4 (155 ) 128 51 Net (loss)/income $ (585 ) $ (2,459 ) $ (13,183 ) $ 563 $ 242 32 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 evaluating our results of operations on an ongoing basis. We believe that earnings before interest, taxes, depreciation, and amortization (“EBITDA”) is a performance measure and not a liquidity measure, and therefore a reconciliation between net loss/income and EBITDA and Adjusted EBITDA, which is calculated by removing the impact of non-recurring and primarily non-cash transactions from EBITDA has been provided. Neither EBITDA nor Adjusted EBITDA should 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, neither EBITDA nor Adjusted EBITDA takes 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. September 30, June 30, March 31, December 31, September 30, Quarters ended 2020 2020 2020 2019 2019 GAAP net loss $ (585 ) $ (2,459 ) $ (13,183 ) $ 563 $ 242 Interest expense: Amortization of debt discount 85 84 85 105 105 Other interest, net 179 176 142 109 94 Depreciation/amortization: Amortization of intangible assets 161 158 159 204 147 Amortization of finance lease assets 5 5 7 7 8 Amortization of share-based awards 248 100 50 21 31 Depreciation of property, equipment & software 212 216 200 167 123 Income tax expense/(benefit) (1 ) 4 (155 ) 128 51 EBITDA $ 304 $ (1,716 ) $ (12,695 ) $ 1,304 $ 801 Adjustments Change in fair value of Special Loan - 551 151 - - Gain on settlement of obligations (114 ) (1 ) (40 ) (1,632 ) (406 ) Gain on earnout liability - - - (250 ) - Loss on disposal of assets 13 - - - - Loss on goodwill impairment - - 10,646 - - Stock-based compensation – Director grants 25 19 31 31 31 Adjusted EBITDA $ 228 $ (1,147 ) $ (1,907 ) $ (547 ) $ 426 Liquidity and Capital Resources We produced net income for the year ended December 31, 2019 but incurred a net loss for the year ended December 31, 2018 and had negative cash flows from operating activities for both the year-ended December 31, 2019 and the nine months ended September 30, 2020. For the three and nine months ended September 30, 2020 we incurred net losses of $585 and $16,227, respectively. As of September 30, 2020, we had cash and cash equivalents of $855 and working capital deficit of $7,523, which includes $345 representing current maturities of operating leases recorded January 1, 2019 upon adoption of Accounting Standards Update (“ASU”) 2016-02. Excluding debt classified as current liabilities based on having maturity dates within twelve months of the Condensed Consolidated Balance Sheet date, we have a working capital surplus of $1,183. 33 While our outlook for the digital signage industry over the long term remains strong, we have experienced rapid and immediate deterioration in our short term business as a result of the COVID-19 pandemic, generating increased uncertainty across our customer base in many of our key vertical markets. The elective and forced closures of businesses across the United States has resulted in reduced demand for our services, which primarily assist business in engaging with their end customers in a physical space through digital technology. The elimination and minimization of public gatherings has materially impacted demand for products and services in our movie theater, sports arena and large entertainment markets. These conditions have resulted in downward revisions of our internal forecasts on current and future projected earnings and cash flows. The effective halting of pending and anticipated projects has caused the projected incoming cash to be delayed, and consequently cash flows have been slowed, including a slowdown in payments by customers for previously completed projects, which has further limited cash collections. We have implemented various cost cutting measures, including slowing our payments of accounts payable and accrued liabilities, negotiated extensions for certain currently and past due payments to key vendors, and implemented compensation reductions for most personnel retained following the reduction-in-force activities taken by the Company in mid-March 2020. On April 28, 2020, we announced the joint launch of an AI-integrated non-contact temperature inspection kiosk known as the Thermal Mirror with our partner, InReality, LLC (“InReality”), for use by businesses as COVID-19 related workplace restrictions are reduced or eliminated. Although we have experience in providing customers digital integration solutions, our launch of the Thermal Mirror involves the development, marketing and sale of a new product to new customers involving a joint effort with InReality. The product also uses hardware and technologies that have not been used with our other customers. Although we believe this product and our launch will be successful, there are a number of risks involved in such launch, including investing significant time and resources in the launch, which may ultimately not be successful. While market response has been encouraging, we remain in the early stages of this product launch as of the date of this report, as the hardware and software solution, in addition to the related services, continue to evolve based on customer feedback and requests. Revenue recognized from the sale of hardware and services associated with the Thermal Mirror product, including software activation, configuration, and software-as-a-service (“SaaS”) revenues generated via software subscriptions to the platform, were approximately $2,037 and $2,560 for the three and nine months ended September 30, 2020, respectively. On June 19, 2020, the Company entered into a Sales Agreement (the “Agreement”) with Roth Capital Partners, LLC (“Roth”) under which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, par value $0.01 per share (the “Common Stock”), having an aggregate offering price of up to $8,000,000 through Roth as the Company’s sales agent. Roth may sell the Common Stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 of the Securities Act of 1933, as amended. Subject to the terms of the Agreement, Roth will use its commercially reasonable efforts to sell the Common Stock from time to time, based upon instructions from the Company (including any price, time or size limits or other customary parameters or conditions the Company may impose). The Company or Roth may suspend the offering of the Common Stock being made through Roth under the Agreement upon proper notice to the other party. The Company will pay Roth a commission of 3.0% of the gross sales proceeds of any Common Stock sold through Roth under the Agreement, and also has provided Roth with customary indemnification rights. The sale of Common Stock under the Agreement is registered on a Form S-3 registration statement (Registration No. 333-238275) and related prospectus supplement filed with the SEC on June 19, 2020. Pursuant to the “baby shelf” rules that apply to such registration statement, we cannot sell more our common stock in a public primary offering (including under the Agreement) with a value exceeding more than one-third of our public float in any 12 calendar month period so long as our public float remains below $75.0 million. The Company is not obligated to make any sales of Common Stock under the Agreement. The offering of shares of Common Stock pursuant to the Agreement will terminate upon the earlier of (i) the sale of all Common Stock subject to the Agreement or (ii) termination of the Agreement in accordance with its terms. As of September 30, 2020, the Company received gross proceeds under the Agreement of $1,336 from the issuance of 578,183 shares of Common Stock, and paid an aggregate of $38 to Roth in commissions, yielding net proceeds of $1,298 after commissions and net proceeds of $1,158 after other offering-related expenses. Through November 11, 2020, the Company received gross proceeds under the Agreement of $1,831 from the issuance of 1,034,068 shares of our Common Stock, and paid an aggregate of $53 to Roth in commissions, yielding net proceeds of $1,778 after commissions, and net proceeds of $1,636 after other offering-related expenses. 34 On April 27, 2020, the Company entered into a Promissory Note with Old National Bank (the “Promissory Note”), which provided for an unsecured loan of $1,552 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”). The Promissory Note has a term of two years with a 1% per annum interest rate. While the Promissory Note currently has a two-year term, the amended law permits the Company to request a five-year maturity from Old National Bank. Payments are deferred for six months from the date of the Promissory Note and the Company can apply for forgiveness of the Promissory Note after 60 days. Forgiveness of the Promissory Note will be determined in accordance with the provisions of the CARES Act and applicable regulations. Any principal and interest amount outstanding after the determination of amounts forgiven will be repaid on a monthly basis. The Company is in process of finalizing their calculation of amounts forgivable in accordance with guidance issued by the Small Business Administration and anticipates applying for forgiveness during the fourth quarter of 2020. No assurance is provided that we will be able to obtain forgiveness of the Promissory Note in whole or in part. On November 6, 2019, Slipstream Communications, LLC (“Slipstream”) extended the maturity date of our term loan and revolver loan to June 30, 2021 through the Sixth Amendment to the Loan and Security Agreement, aligning the maturity date of our term loan and revolver loan with the Secured Disbursed Escrow Promissory Note. On December 30, 2019, we entered into the Secured Convertible Special Loan Promissory Note (“Special Loan”) as part of the Seventh Amendment of the Loan and Security Agreement with Slipstream, under which we obtained $2,000, with interest thereon at 8% per annum payable 6% in cash and 2% via the issuance of paid-in-kind (“SLPIK”) interest, provided however that upon occurrence of an event of default the interest rate shall automatically be increased by 6% per annum payable in cash. The entry into the Seventh Amendment adjusted the interest rate on the Company’s Term Loan and Revolving Loan to 8% per annum, provided, however, at all times when the aggregate outstanding principal amount of the Term Loan and the Revolving Loan exceeds $4,100 then the Loan Rate shall be 10%, of which eight percent 8% shall be payable in cash and 2% shall be paid by the issuance of and treated as additional PIK. Upon the earlier to occur of an Event of Default or October 1, 2020 (such date was extended pursuant to the Ninth Amendment described below), if any of the principal amount of the Special Loan is then outstanding, the principal and accrued but unpaid interest of the Special Loan and the outstanding SLPIK shall be automatically converted into shares of a new series of Senior Convertible Preferred Stock of CRI (“New Preferred”) having an Appraised Value equal to three times the then outstanding principal amount and accrued but unpaid interest of the Special Loan and the outstanding SLPIK and having the following terms and conditions, as reasonably determined by CRI and the Lender, the New Preferred shall: ● be the most senior equity security of CRI, including with respect to the payment of dividends and other distributions; ● be on substantially the same terms and conditions as CRI’s Series A-1 6% Convertible Preferred Stock as set forth in its Certificate of Designation immediately before the same was cancelled pursuant to a Certificate of Cancellation dated as of March 13, 2019; ● not be subject to a right of redemption upon the part of a holder thereof; ● accrue and pay quarterly dividends at the rate of twelve percent (12%) per annum which shall be payable in cash; ● have a Stated Value that is an amount mutually agreed by CRI and the Lender at the time of issuance; ● Conversion Price shall be an amount equal to 80% of the average for the 30-day period ending two days prior to the required conversion date of the daily average of the range of CRI’s common stock (calculated pursuant to information on The Wall Street Journal Online Edition), subject to appropriate adjustments; and ● neither section 6(e) of the Series A-1 Certificate of Designation nor any similar provision shall apply to the New Preferred. On April 1, 2020, the Company entered into an Eighth Amendment to Loan and Security Agreement (the “Eighth Amendment”) with its subsidiaries and Slipstream to amend the terms of the payments and interest accruing on the Company’s Term Loan, Secured Revolving Promissory Note, and Special Loan. The Eighth Amendment increased the interest rates of these loans from 8% to 10%, effective April 1, 2020. Until January 1, 2021, rather than cash payments of accrued interest under the term and revolving loans, interest will be paid by the issuance of and treated as additional principal thereunder. Commencing January 2, 2021, such interest will be payable in cash. Interest on the special loan will no longer be paid in cash, but by the issuance of and treated as additional principal thereunder. 35 On September 29, 2020, the Company entered into a Ninth Amendment to Loan and Security Agreement (the “Ninth Amendment”) with its subsidiaries and Slipstream to amend the automatic conversion date of the Special Loan. The Ninth Amendment changed the automatic conversion date of the Special Loan into the defined new class of senior preferred stock of the Company from October 1, 2020 to November 30, 2020 (or upon an earlier event of default). The Company paid no fees in exchange for this extension. Management believes that, based on (i) our receipt of approximately $1,552 of funding through the Paycheck Protection Program on April 27, 2020, of which a significant portion we believe will ultimately be forgiven, (ii) our operational forecast through 2021, (iii) our access to capital markets through the Agreement with Roth, and (iv) a commitment of continued support from Slipstream, we can continue as a going concern through at least November 12, 2021. However, given our history of net losses, cash used in operating activities and working capital deficit, each of which continued as of and for the nine months ended September 30, 2020, we can provide no assurance that our ongoing operational efforts or ability to access the public markets for capital will be successful, particularly in consideration of the business interruptions and uncertainty generated as a result of the COVID-19 pandemic ,which has materially adversely affected our results of operations and cash flows. See Note 8 Loans Payable to the Consolidated Financial Statements for an additional discussion of the Company’s debt obligations. Operating Activities The cash flows provided by/(used in) operating activities was ($4,110) and $456 for the nine months ended September 30, 2020 and 2019, respectively. The cash use in operating activities was driven by The cash flows used in operating activities was driven by the Company’s net loss and increase in inventory on hand as a result of the launch of the Thermal Mirror, partially offset by non-cash charges of $702, $1,123, and $10,646 related to (1) fair value of our Special Loan, (2) depreciation and amortization expenses, and (3) impairment charge related to goodwill, respectively, combined with an increase of $701 in our allowance for doubtful accounts primarily as a result of a customer bankruptcy. Investing Activities Net cash used in investing activities during the nine months ended September 30, 2020 was $559 compared to $442 during the same period in 2018. The use of cash in both periods represents acquisition of capital assets, primarily related to the capitalization of software costs, partially offset by cash received from a net working capital settlement of $210 in 2019. We currently do not have any material commitments for capital expenditures as of September 30, 2020, nor do we anticipate any significant expenditures for the remainder of 2020. Financing Activities Net cash provided by / (used in) financing activities during the nine months ended September 30, 2020 and 2018 was $2,990 compared to ($492). The increase was the result of the Company’s receipt of $1,552 in proceeds from the Payroll Protection Program in April 2020 and $1,336 of proceeds from the sale of shares via at-the-market offering activities. Contractual Obligations We have no material commitments for capital expenditures, and we do not anticipate any significant capital expenditures for the remainder of 2020. 36 Off-Balance Sheet Arrangements During the three and nine months ended September 30, 2020, we did not engage in any off-balance sheet arrangements set forth in Item 303(a)(4) of Regulation S-K. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of September 30, 2020, and designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 37 PART II. OTHER INFORMATION Item 1. Legal Proceedings See Note 9 Commitments and Contingencies; Litigation to the Condensed Consolidated Financial Statements included in this report. Item 1A. Risk Factors As a smaller reporting company, we are not required to provide the information required by this Item; however, the discussion of our business and operations should be read together with the Risk Factors set forth in our Annual Report on Form 10-K filed with the SEC on March 13, 2020 and our Quarterly Reports on Form 10-Q filed with the SEC on May 14, 2020 and August 13, 2020. Such risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flow, strategies or prospects in a material and adverse manner. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Mine Safety Disclosures Not applicable. Item 5. Other Information None. 38 Item 6. Exhibits Exhibit No. Description 10.1 Amended and Restated Master Distribution Agreement dated effective September 1, 2020 between the Company and InReality, LLC (Certain information has been excluded from this Exhibit because it both is not material and would likely cause competitive harm to the registrant if publicly disclosed). 10.2 Ninth Amendment to Loan and Security Agreement dated September 29, 2020 by and among the Company, its subsidiaries and Slipstream Communications, LLC (1) 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. 99.1 Press release dated November 12, 2020 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 * Filed herewith (1) Filed on October 2, 2020 as Exhibit 10.1 to our Current Report on Form 8-K and incorporated herein by reference. 39 SIGNATURES Pursuant to the requirements 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. Creative Realities, Inc. Date: November 12, 2020 By /s/ Richard Mills Richard Mills Chief Executive Officer By /s/ Will Logan Will Logan Chief Financial Officer 40