What changed in this filing

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Item 1. Financial Statements

2020-11-12 compared with 2020-08-13 · 944 added, 865 removed, 743 unchanged (71% of the section changed)

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thousands, except per share amounts)

September 30,

CURRENT ASSETS

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Operating lease right-of-use assets

Property and equipment, net

Property and equipment, including depreciable software, net

Intangibles, net

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Short-term related party convertible loans payable, at fair value

Short-term related party loans payable, net of $338 and $0 discount, respectively

Short-term related party loans payable, net of $253 and $0 discount,

Accounts payable

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Long-term obligations under operating leases

Deferred tax liabilities

Other long-term liabilities

Long-term obligations under finance leases

Deferred tax and other long-term liabilities

TOTAL LIABILITIES

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thousands, except per share amounts)

For the Three

For the Three Months Ended

For the Nine Months Ended

September 30,

Services and other

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Change in fair value of warrant liability

Gain on settlement of obligations

Change in fair value of Special Loan

Other expense

Total other expense

Gain on settlement of obligations

Loss on disposal of assets

Total other income/(expense)

Income/(loss) before income taxes

Benefit/(provision) for income taxes

Benefit from / (provision for) income taxes

Net income/(loss)

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CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended

Nine Months Ended

September 30,

Operating Activities:

Net income/(loss)

Adjustments to reconcile net income/(loss) to net cash used in operating activities

Adjustments to reconcile net income/(loss) to net cash provided by operating activities

Depreciation and amortization

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Change in fair value of Special Loan

Deferred tax provision

Deferred tax benefit

Allowance for doubtful accounts

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Loss on goodwill impairment

Loss on disposal of assets

Gain on settlement of obligations

Changes to operating assets and liabilities:

Accounts receivable and unbilled receivables

Accounts receivable and unbilled revenues

Prepaid expenses and other current assets

Operating lease right-of-use assets, net

Operating lease right of use asset, net

Accounts payable

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Accrued expenses

Operating lease liabilities, non-current

Operating lease liabilities

Other liabilities

Net cash used in operating activities

Net cash provided by/(used in) operating activities

Investing activities

Purchases of property and equipment

Purchases/additions of property and equipment and software development

Proceeds from net working capital settlement

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Principal payments on finance leases

Proceeds from Paycheck Protection Program loan

Issuance of common stock –

warrant exercise

Issuance of common stock –

vendor payments

Other financing activities, net

Net cash provided by financing activities

Proceeds from Payroll Protection Program loan

Proceeds from issuance of common stock via at-the-market offering

Proceeds from warrant holder exercise of common stock

Repayment of seller note

Other financing activities, net, including principal payments on finance leases

Net cash provided by / (used in) financing activities

Increase/(decrease) in Cash and Cash Equivalents

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thousands, except shares)

Three months ended June 30, 2020

Balance as of March 31, 2020

Stock-based compensation

Shares issued to directors as compensation

Exercise of warrants

Three months ended September 30, 2020

Balance as of June 30, 2020

Six months ended June 30, 2020

Balance as of December 31, 2019

Shares issued to directors as compensation

Stock-based compensation

Shares issued through at-the-market offering

Balance as of September 30, 2020

Nine months ended September 30, 2020

Balance as of December 31, 2019

Shares issued to directors as compensation

Stock-based compensation

Shares issued through at-the-market offering

Exercise of warrants

Balance as of September 30, 2020

Three months ended September 30, 2019

Balance as of June 30, 2019

Three months ended June 30, 2019

Balance as of March 31, 2019

Shares issued for services

Shares issued to directors as compensation

Stock-based compensation

Vesting of performance shares previously granted to CEO

Balance as of June 30, 2019

Six months ended June 30, 2019

Balance as of September 30, 2019

Nine months ended September 30, 2019

Balance as of December 31, 2018

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Shares issued for services

Shares issued to directors as compensation

Stock-based compensation

Vesting of performance shares previously granted to CEO

Balance as of June 30, 2019

Balance as of September 30, 2019

accompanying notes to condensed consolidated financial statements.

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and proprietary processes and automation

We believe we are one of the world’s leading interactive marketing technology companies that focuses on the retail

shopper experience by helping retailers and brands use the latest technologies to create better shopping experiences.

November 20, 2018, we closed on our acquisition of Allure Global Solutions, Inc.

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the Allure Acquisition we did not add different operating activities to our business.

main operations are conducted directly through Creative Realities, Inc., and under our wholly owned subsidiaries Allure Global

Solutions, Inc., a Georgia corporation, Creative Realities Canada, Inc., a Canadian corporation, and ConeXus World Global, LLC,

a Kentucky limited liability company.

Our other wholly owned subsidiary, Creative Realities, LLC, a Delaware limited liability

company, has been effectively dormant since October 2015, the date of the merger with ConeXus World Global, LLC.

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.

and Financial Condition

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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 six months ended June 30, 2020.

the three months ended June 30, 2020 and 2019 we have recognized/(incurred) net income/(losses) of ($2,459) and $417, respectively.

For the six months ended June 30, 2020 and 2019, we recognized/(incurred) net income/(losses) of ($15,642) and 233, respectively.

As of June 30, 2020, we had cash and cash equivalents of $870 and working capital deficit of $9,211, which includes $653 representing

current maturities of operating leases recorded January 1, 2019 upon adoption of Accounting Standards Update (“ASU”)

our outlook for the digital signage industry over the long term remains strong, we have experienced rapid and immediate deterioration

in our short term business as a result of the COVID-19 pandemic, generating increased uncertainty across our customer base in

each of our key vertical markets.

The elective and forced closures of businesses across the United States 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 has materially impacted demand for products and services

in our theater, sports arena and large entertainment markets.

These conditions have resulted in downward revisions of our internal

forecasts on current and future projected earnings and cash flows.

The effective halting of pending and anticipated projects 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.

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.

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

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 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.

negative cash flows from operating activities for both the year-ended December 31, 2019 and the nine months ended September 30,

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

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.

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

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.

Company is not obligated to make any sales of Common Stock under the Agreement.

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of the Agreement in accordance with its terms.

of June 30, 2020, the Company has not sold any shares of common stock under the Agreement.

Through August 6, 2020, we received

gross proceeds under the Agreement of $1,300 from the issuance of 558,183 shares of our common stock, and paid an aggregate of

$38 to Roth in commissions, yielding net proceeds of $1,160 after commissions and offering expenses.

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.

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.

April 27, 2020, the Company entered into a Promissory Note with Old National Bank (the “Promissory Note”), which provided

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as additional principal thereunder.

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 August 15, 2021.

However, given our history of net losses, cash used in operating activities and working capital deficit,

each of which continued as of and for the six months ended June 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 adverse affected our results of operations

and cash flows.

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.

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.

Note 8 Loans Payable to the Consolidated Financial Statements for an additional discussion of the Company’s debt

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of the following:

September 30,

Raw materials, net of reserve of $108 and $134, respectively

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Total inventories

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.

Impairment of Long-Lived Assets

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events or changes in circumstances indicate the carrying value of an asset may not be recoverable.

We evaluated whether there

were any triggering events for consideration of impairment of our long-lived assets as of June 30, 2020 and concluded there were

the impairment tests indicate that the carrying value of the asset is greater than the expected undiscounted cash flows to be

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Shares reserved for outstanding stock options, including stock options with performance restricted vesting, and

warrants totaling approximately 7,309,998 and 5,320,162 at June 30, 2020 and 2019, respectively were excluded from the computation

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 six months ended June 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.

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.

income taxes are recognized in the financial statements for the tax consequences in future years of differences between the tax

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of a tax position taken or expected to be taken in a tax return.

We had no uncertain tax positions as of June 30, 2020 and December

We had no uncertain tax positions as of September 30, 2020 and

December 31, 2019.

follow the provisions of ASC 350, Goodwill and Other Intangible Assets.

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Consolidated Financial Statements.

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

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.

December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

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The following table disaggregates the Company’s revenue by major source

for the three and six months ended June 30, 2020 and 2019:

for the three and nine months ended September 30, 2020 and 2019:

(in thousands)

September 30,

Installation Services

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Total Hardware and Services

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”

hardware sales

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”

Company performs outsourced installation services for customers and recognizes revenue upon completion of the installations.

services also includes engineering services performed as part of an installation project.

system hardware sales include installation services to be performed by the Company, the goods and services in the contract are

not distinct, so the arrangement is accounted for as a single performance obligation.

Our customers control the work-in-process

and can make changes to the design specifications over the contract term.

Revenues are recognized over time as the installation

services are completed based on the relative portion of labor hours completed as a percentage of the budgeted hours for the installation.

Installation services revenues are classified as “Installation Services”

within our disaggregated revenue.

The aggregate amount of the transaction

price allocated to installation service performance obligations that are partially unsatisfied as of June 30, 2020 and 2019 were

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.

is delivered to customers electronically.

Software design and development revenues are classified as “Software Development

Services”

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.

design and development services

and software license sales are revenue when a fixed fee order has been received and delivery has occurred to the customer.

is recognized generally upon customer acceptance (point-in-time) of the software product and verification that it meets the required

specifications.

Software is delivered to customers electronically.

Software design and development revenues are classified as

“Software Development Services”

within our disaggregated revenue.

Software as a service

Software as a service includes revenue from

software licensing and delivery in which software is licensed on a subscription basis and is centrally hosted.

These services often

include software updates which provide customers with rights to unspecified software product upgrades and maintenance releases

and patches released during the term of the support period.

Contracts for these services are generally 12-36 months in length.

We account for revenue from these services in accordance with ASC 985-20-15-5 and recognize revenue ratably over the performance

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.

our disaggregated revenue.

and support services

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”

recognized over the term of the agreement in proportion to the costs incurred in fulfilling performance obligations under the

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.

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

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.

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.

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.

for considering such assumptions, ASC 820-10-35 establishes a three-level hierarchy that prioritizes the inputs used in measuring

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;

Valuations based on unadjusted quoted prices in active markets for identical assets.

Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement

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

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

The fair value estimate remains at $0 as of June 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 8 Loans Payable ,

the Special Loan is reported at fair value.

This liability is deemed to be a Level 3 valuation.

As of June 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 $551 and $702 loss during the three and six months ended June 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.

Valuations based on inputs that are unobservable and involve management judgment and the reporting entity’s own

assumptions about market participants and pricing.

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.

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.

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

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.

discussed in Note 8 Loans Payable , the Special Loan is reported at fair value.

This liability is deemed to be a Level 3

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.

SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION

Six Months Ended

Nine Months Ended

September 30,

Supplemental Cash Flow Information

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INTANGIBLE ASSETS, INCLUDING GOODWILL

Intangible Assets

Intangible assets consisted

of the following at June 30, 2020 and December 31, 2019:

assets consisted of the following at September 30, 2020 and December 31, 2019:

September 30,

Technology platform

3 unchanged sentences

Net book value of amortizable intangible assets

For the three months ended June 30, 2020

and 2019, amortization of intangible assets charged to operations was $158 and $147, respectively.

For the six months ended June

30, 2020 and 2019 amortization of intangible assets charged to operations was $317 and $303, respectively.

The following is a rollforward of the Company’s

goodwill since December 31, 2019:

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.

following is a rollforward of the Company’s goodwill since December 31, 2019:

Balance as of December 31, 2019

Adjustments due to impairment loss

Balance as of June 30, 2020

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

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.

Balance as of September 30, 2020

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.

Impairment Assessment –

March 31, 2020

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.

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.

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 derive our discount rates using a

capital asset pricing model and by analyzing published rates relevant to our business to estimate the cost of equity financing.

We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally

developed forecasts.

We utilized a discount rate of 15.3% in our valuation completed as of March 31, 2020.

While our outlook for the digital signage

industry over the long term remains strong, we have experienced rapid and immediate deterioration in our short term business as

a result of the COVID-19 pandemic, generating increased uncertainty across our customer base in each of our key vertical markets.

The elective and forced closures of businesses across the United States has resulted in reduced demand for our services, which

primarily assist business in engaging with their end customers in a physical space through digital technology.

The elimination

and minimization of public gatherings has materially impacted demand for products and services in our theater, sports arena and

large entertainment markets.

These conditions resulted in downward revisions of our internal forecasts on current and future projected

earnings and cash flows, leading to an implied fair value of goodwill substantially below the carrying value.

Therefore, during

the three months ended March 31, 2020, we recorded a non-cash impairment loss of $10,646.

We recorded the estimated impairment

losses in the caption "Goodwill impairment"

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.

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

These conditions resulted in downward revisions of our internal forecasts on current and future projected earnings and

cash flows, leading to an implied fair value of goodwill substantially below the carrying value.

Therefore, during the three months

ended March 31, 2020, we recorded a non-cash impairment loss of $10,646.

We recorded the estimated impairment losses in the

caption “Goodwill impairment”

in our Condensed Consolidated Statement of Operations.

After the impairment

loss, there is $7,525 remaining goodwill as of March 31, 2020.

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.

The Company recognizes that any changes

in our projected 2020 results could potentially have a material impact on our assessment of goodwill impairment.

The Company will

continue to monitor the actual performance of its operations against expectations and assess further indicators of possible impairment.

The valuation of goodwill and intangible assets is subject to a high degree of judgment, uncertainty and complexity.

indicators of impairment occur in subsequent periods, the Company will be required to perform an analysis in order to determine

whether goodwill is impaired.

Following the impairment loss,

there remained $7,525 goodwill as of March 31, 2020.

Impairment Assessment –

June 30, 2020

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.

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.

Impairment Assessment –

September 30, 2020

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.

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

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.

LOANS PAYABLE

The outstanding debt with detachable warrants,

as applicable, are shown in the table below.

outstanding debt with detachable warrants, as applicable, are shown in the table below.

Further discussion of the notes follows.

1 unchanged sentence

0.0% interest

10.0% interest (1)

3.5% interest

10.0% interest (2)

1.0% interest (3)

Total debt, gross

Fair value (E)

Total debt, gross

Debt discount

2 unchanged sentences

Long term debt

Secured Disbursed Escrow Promissory Note with related

Secured Disbursed Escrow Promissory Note with related party

Secured Revolving Promissory Note with related party

Term Loan with related party

Amended and Restated Seller Note from acquisition

Secured Convertible Special Loan Promissory Note,

at fair value

Paycheck Protection Program Loan from Small Business

Administration

Amended and Restated Seller Note from acquisition of Allure

Secured Convertible Special Loan Promissory Note, at fair value

Paycheck Protection Program Loan from Small Business Administration

cash interest per annum through March 31, 2020.

paid-in-kind interest (“PIK”) interest per annum from April 1, 2020 through December 31, 2020.

8.0% cash interest

per annum January 1, 2021 through the maturity date.

(2) 8.0% cash interest per annum, comprised of 6.0% cash, 2.0%

PIK through March 31, 2020.

10.0% 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.

cash interest per annum, comprised of 6.0% cash, 2.0% PIK through March 31, 2020.

10.0% PIK interest per annum through September

In an event of default, the interest rate

increases by 6.0% to 16.0%.

Debt is convertible to preferred stock at the earlier of an event of default or October 1, 2020.

the stated maturity date of the Special Loan is June 30, 2021, the mandatory conversion feature into preferred stock as of October

1, 2020 results in the classification of this debt instrument as a current liability on the consolidated balance sheet.

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.

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.

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.

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

Any principal and interest amount outstanding after the determination of amounts forgiven will be repaid on a monthly

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.

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.

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.

Paycheck Protection Program Loan

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.

and Security Agreement

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.

Loan and Security Agreement contains certain customary restrictions including, but not limited to, restrictions on mergers and

consolidations with other entities, cancellation of any debt or incurring new debt (subject to certain exceptions), and other

customary restrictions.

Obligations under the loan and security agreement are secured by a grant of collateral security in all

of the tangible assets of Creative Realities, Inc.

and each of its wholly owned subsidiaries.

Eighth Amendment;

Modification of Interest

Rates under Loan and Security Agreement

On April 1, 2020, the Company entered into

an Eighth Amendment to Loan and Security Agreement (the “Eighth Amendment”) with its subsidiaries and Slipstream to

amend the terms of the payments and interest accruing on the Company’s Term Loan, Secured Revolving Promissory Note, and

Special Loan.

The Eighth Amendment increased the interest rates of 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.

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;

neither section 6(e) of the Series A-1 Certificate of Designation nor any similar provision shall apply to the New Preferred.

Modification of Conversion Date of Special Loan under Loan and Security Agreement

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.

Modification of Interest Rates under Loan and Security Agreement

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.

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.

Entry into Secured Convertible Special Loan Promissory Note

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

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:

the most senior equity security of CRI, including with respect to the payment of dividends and other distributions;

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;

be subject to a right of redemption upon the part of a holder thereof;

and pay quarterly dividends at the rate of twelve percent (12%) per annum which shall be payable in cash;

a Stated Value that is an amount mutually agreed by CRI and the Lender at the time of issuance;

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;

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

1 unchanged sentence

value, with changes in fair value recorded through the Company’s consolidated statements of operations in each reporting

For the three and six months ended June 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 $551 and $702 loss, respectively, from the

change in fair value of the liability.

Sixth Amendment;

Extension of Maturity

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

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 June 30, 2020.

See Note 9 Commitments and Contingencies for

further discussion.

COMMITMENTS AND CONTINGENCIES

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.

suits filed by and against Allure have been adjoined in the Jefferson Circuit Court, Kentucky in January 2020.

This suit remains

in the early stages of litigation and, as a result, the outcome of the suit and the allocation of liability, if any, remain unclear,

so the Company is unable to reasonably estimate the possible liability, recovery, or range of magnitude for either the liability

or recover, if any, at the time of this filing.

The Company has notified its insurance company

on notice of potential claims and continues to evaluate both the claim made by the customer and potential avenues for recovery

against third parties should the customer prevail.

On February 20, 2020, the Company and Allure

filed a demand for arbitration against Seller for breach of contract, indemnification, and fraudulent misrepresentation under the

Allure Purchase Agreement.

This demand included a claim for the right to offset the amounts owing under the Amended and Restated

Seller Note due February 20, 2020.

We have not paid the Amended and Restated Seller Note which is now past its maturity date.

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.

Extension of Maturity Dates

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.

and Restated Seller Note from acquisition of Allure

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%

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.

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.

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.

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.

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 August

14, 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.

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 June

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.

COMMITMENTS AND CONTINGENCIES

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,

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.

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.

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.

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

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.

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.

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.

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 six months ended June

30, 2020, the Company had sales to 33 Degrees of $291, or 8.0%, and $791, or 10.7%, respectively, of consolidated revenue.

the three and six months ended June 30, 2019, the Company had sales to 33 Degrees of $275, or 3.0%, and $470, or 2.5%, respectively,

addition to the financing transactions with Slipstream, a related party, discussed in Note 8 Loans Payable , we have the

following related party transactions.

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

repayment of the note, 33 Degrees has continued to purchase additional hardware and services from the Company under normal payment

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.

Accounts receivable due from 33 Degrees

was $28, or 0.8%, and $1, or 0.0% of consolidated accounts receivable at June 30, 2020 and December 31, 2019, respectively.

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

IRC Section 382 generally imposes an annual limitation on the amount of NOLs that may be used to offset taxable income when

a corporation has undergone significant changes in stock ownership within a statutory testing period.

We have performed a preliminary

analysis of the annual NOL carryforwards and limitations that are available to be used against taxable income.

Based on the history

of losses of the Company, there continues to be a full valuation allowance against the net deferred tax assets of the Company with

a definite life.

For the three and six-months ended June

30, 2020, we reported tax (expense)/benefit of ($4) and $151, respectively.

As of June 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.

A summary of outstanding equity warrants

is included below:

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.

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.

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.

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.

summary of outstanding equity warrants is included below:

Warrants (Equity)

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Warrants issued

Warrants exercised

Warrants expired

Balance June 30, 2020

Balance September 30, 2020

STOCK-BASED COMPENSATION

A summary of outstanding options is included

summary of outstanding options is included below:

Time Vesting Options

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$3.01 - $7.50

$7.51 - $160.50

Performance Vesting Options

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$3.01 - $7.50

Time Vesting Options

Performance Vesting Options

Vesting Options

Date/Activity

Balance, December 31, 2019

Forfeited or expired

Balance, June 30, 2020

The weighted average remaining contractual

life for options exercisable is 5.2 years as of June 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:

December 31, 2019

September 30, 2020

weighted average remaining contractual life for options exercisable is 5.0 years as of September 30, 2020.

Information for Stock-Based Compensation

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.

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.

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

These values were calculated using the following weighted average assumptions:

Risk-free interest rate

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Dividend yield

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.

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

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

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.

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 June 30, 2020, the Company had recorded no compensation

expense in the Consolidated Statement of Operations with respect to these awards.

Stock Compensation Expense Information

ASC 718-10, Stock Compensation , requires

measurement and recognition of compensation expense for all stock-based payments including warrants, stock options, restricted

stock grants and stock bonuses based on estimated fair values.

Under the Amended and Restated 2006 Equity Incentive Plan, the Company

reserved 1,720,000 shares for purchase by the Company’s employees and under the Amended and Restated 2006 Non-Employee Director

Stock Option Plan the Company reserved 700,000 shares for purchase by the Company’s employees.

There are 12,186 options outstanding

under the 2006 Equity Incentive Plan.

In October 2014, the Company’s shareholders

approved the 2014 Stock Incentive Plan, under which 7,390,355 shares were reserved for purchase by the Company’s employees.

In August 2018, a special meeting of shareholders was held in which the shareholders voted to amend the Company’s 2014 Stock

Incentive Plan to increase the reserve of shares authorized for issuance thereunder, from 7,390,355 shares to 18,000,000 shares.

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.

Compensation expense recognized for the

issuance of stock options for the three and six months ended June 30, 2020 of $19 and $119, respectively, was included in general

and administrative expense in the Condensed Consolidated Financial Statements.

Compensation expense recognized for the issuance

of stock options for the three and six months ended June 30, 2019 of $41 and $83, respectively, was included in general and administrative

expense in the Condensed Consolidated Financial Statements.

Amounts recorded include stock compensation expense for awards granted

to directors of the Company in exchange for services at fair value.

At June 30, 2020, there was approximately

$3,014 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.

exercise price of the foregoing options is $2.53 per share, the closing price of the Company’s common stock on the date

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.

Compensation Expense Information

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

There are 12,135 options outstanding under the 2006 Equity Incentive Plan.

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

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.

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.

SIGNIFICANT CUSTOMERS/VENDORS

Significant Customers

We had one (1) and one (1) customers that

in the aggregate accounted for 16% and 18.5% of accounts receivable as of June 30, 2020 and December 31, 2019, respectively.

We had two (2) customers that accounted

for 27% and 51% of revenue for the three months ended June 30, 2020 and 2019, respectively.

We had two (2) customers that accounted

for 22% and 41% of revenue for the six months ended June 30, 2020 and 2019, respectively.

Significant Vendors

We had one (1) vendor that accounted

for 22% and 50% of outstanding accounts payable at June 30, 2020 and December 31, 2019, respectively.

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.

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.

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.

had one (1) vendor that accounted for 14% and 50% of outstanding accounts payable at September 30, 2020 and December 31, 2019,

respectively.

have entered into various non-cancelable operating lease agreements for certain of our offices and office equipment.

have original lease periods expiring between 2020 and 2023.

Many leases include one or more options to renew.

We do not assume renewals in our determination of the lease term unless the renewals

are deemed to be reasonably assured at lease commencement.

Our lease agreements do not contain any material residual value guarantees

or material restrictive covenants.

The components of lease costs, lease term

and discount rate are as follows:

do not assume renewals in our determination of the lease term unless the renewals are deemed to be reasonably assured at lease

commencement.

Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

the 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.

components of lease costs, lease term and discount rate are as follows:

(in thousands)

Six Months Ended

Nine Months Ended

September 30,

Nine Months Ended

September 30,

Finance lease cost

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Finance leases

The following is a schedule, by years, of

maturities of lease liabilities as of June 30, 2020:

following is a schedule, by years, of maturities of lease liabilities as of September 30, 2020:

(in thousands)

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Present value of lease liabilities

Supplemental cash flow information related

to leases are as follows:

cash flow information related to leases are as follows:

(in thousands)

Six Months Ended

Nine Months Ended

September 30,

Nine Months Ended

September 30,

Cash paid for amounts included in the measurement of lease liabilities:

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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 Report on Form 10-Q filed with the SEC on May 14, 2020, and this Report under Part II, Item 1A.

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.

actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking statements.

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beaconing and web-based media that enable our customers to transform how they engage with consumers.

main operations are conducted directly through Creative Realities, Inc.

and our wholly owned subsidiaries Allure Global Solutions,

Inc., a Georgia corporation, Creative Realities Canada, Inc., a Canadian corporation, and ConeXus World Global, LLC, a Kentucky

limited liability company.

Our other wholly owned subsidiary Creative Realities, LLC, a Delaware limited liability company, has

been effectively dormant since October 2015, the date of the merger with ConeXus World Global, LLC.

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.

generate revenue in our business by:

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our customers’

digital marketing technology solutions by:

providing content production and related services;

additional software-based features and functionality;

digital marketing technology and Safe Space solutions by:

providing content production and related

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.

activities generate revenue through:

bundled-solution sales;

consulting services, experience design, content development and production,

software development, engineering, implementation, and field services;

software license fees;

and maintenance and support services

related to our software, managed systems and solutions.

monitoring solution service

and responding to and/or managing remote or onsite field service maintenance, troubleshooting and support

These activities generate revenue

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.

January 2020, an outbreak of a new strain of coronavirus, COVID-19, was identified in Wuhan, China.

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cease operations to slow the spread of the COVID-19 pandemic.

a result of the COVID-19 pandemic, we have experienced rapid and immediate deterioration in our business in each of our key vertical

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 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, resulting in a non-cash

impairment loss of $10,646 recording as of March 31, 2020, and reduced liquidity as described below.

we are experiencing an intense curtail in current customer demand, our long-term outlook for the digital signage industry remains

We believe that the digital signage 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.

We believe that one byproduct of the COVID-19 pandemic may be the acceleration of industry consolidation as smaller providers

may be unwilling or unable to continue business over the course of 2020.