What changed in this filing

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Item 1. Financial Statements

2021-05-17 compared with 2020-11-12 · 975 added, 1386 removed, 301 unchanged (89% of the section changed)

Financial Statements

REALITIES, INC.

CONSOLIDATED BALANCE SHEETS

thousands, except per share amounts)

September 30,

CREATIVE REALITIES,

CONDENSED CONSOLIDATED

BALANCE SHEETS

(In thousands,

except per share amounts)

CURRENT ASSETS

2 unchanged sentences

Unbilled receivables

Work-in-process and inventories, net of reserve of $108 and $134, respectively

Work-in-process and inventories, net

Prepaid expenses and other current assets

1 unchanged sentence

Operating lease right-of-use assets

Property and equipment, including depreciable software, net

Property and equipment, net

Intangibles, net

2 unchanged sentences

Short-term seller note payable

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

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

Accounts payable

2 unchanged sentences

Customer deposits

Current maturities of operating leases

Current maturities of finance leases

Current maturities of operating and finance leases

Total current liabilities

Long-term Paycheck Protection Program loans payable

Long-term Payroll Protection Program note payable

Long-term related party loans payable, net of $229 and $168 discount, respectively

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

Long-term obligations under operating leases

Long-term obligations under finance leases

Deferred tax and other long-term liabilities

Long-term accrued expenses

TOTAL LIABILITIES

6 unchanged sentences

TOTAL LIABILITIES AND SHAREHOLDERS’

accompanying notes to condensed consolidated financial statements

REALITIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

thousands, except per share amounts)

See accompanying

notes to condensed consolidated financial statements

CREATIVE REALITIES,

CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS

(In thousands,

except per share amounts)

For the Three Months Ended

For the Nine Months Ended

September 30,

Services and other

3 unchanged sentences

Operating expenses:

Sales and marketing expenses

Research and development expenses

General and administrative expenses

Depreciation and amortization expense

Sales and marketing

Research and development

General and administrative

Bad debt (recovery)/expense

Depreciation and amortization

Goodwill impairment

Total operating expenses

Operating income/(loss)

Operating loss

Other income (expenses):

Interest expense

Change in fair value of warrant liability

Change in fair value of Special Loan

Gain on settlement of obligations

Loss on disposal of assets

Change in fair value of Special Loan

Total other income/(expense)

6 unchanged sentences

Weighted average shares outstanding - diluted

accompanying notes to condensed consolidated financial statements.

REALITIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended

September 30,

See accompanying notes to condensed consolidated

financial statements.

CREATIVE REALITIES,

CONDENSED CONSOLIDATED

STATEMENTS OF CASH FLOWS

(In thousands)

Three Months Ended

Operating Activities:

Net income/(loss)

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

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

Depreciation and amortization

1 unchanged sentence

Stock-based compensation

Change in warrant liability

Change in fair value of Special Loan

Deferred tax benefit

Gain on forgiveness of Paycheck Protection Program

Change in fair value of Convertible Loan

Deferred tax provision

Allowance for doubtful accounts

1 unchanged sentence

Loss on goodwill impairment

Loss on disposal of assets

Gain on settlement of obligations

Changes to operating assets and liabilities:

Accounts receivable and unbilled revenues

Accounts receivable and unbilled receivables

Prepaid expenses and other current assets

Operating lease right of use asset, net

Operating lease right-of-use assets, net

Accounts payable

1 unchanged sentence

Accrued expenses

Operating lease liabilities

Other liabilities

Net cash provided by/(used in) operating activities

Net cash used in operating activities

Investing activities

Purchases/additions of property and equipment and software development

Proceeds from net working capital settlement

Purchases of property and equipment

Capitalization of third-party labor for software development

Capitalization of internal labor for software development

Net cash used in investing activities

1 unchanged sentence

Principal payments on finance leases

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

Proceeds from sale of shares via registered direct offering, net

Net cash provided by / (used in) financing activities

2 unchanged sentences

Cash and Cash Equivalents, end of period

accompanying notes to condensed consolidated financial statements.

REALITIES, INC.

STATEMENTS OF SHAREHOLDERS’

thousands, except shares)

Three months ended September 30, 2020

Balance as of June 30, 2020

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

See accompanying notes to condensed consolidated

financial statements.

CREATIVE REALITIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’

(in thousands, except shares)

Balance as of December 31, 2020

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

Shares issued to directors as compensation

Stock-based compensation

Balance as of September 30, 2019

Nine months ended September 30, 2019

Conversion of Disbursed Escrow Loan

Gain on Extinguishment of Special Loan

Sales of Shares via registered direct offering, net of offering cost

Balance as of March 31, 2021

Balance as of December 31, 2019

Adoption of ASU 2016-02

Shares issued for services

Shares issued to directors as compensation

Stock-based compensation

Vesting of performance shares previously granted to CEO

Balance as of September 30, 2019

accompanying notes to condensed consolidated financial statements.

REALITIES, INC.

TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

currency in thousands, except per share amounts)

Shares issued to directors as compensation

Balance as of March 31, 2020

See accompanying notes to condensed consolidated

financial statements.

CREATIVE REALITIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

(all currency in thousands, except per share

NATURE OF ORGANIZATION AND OPERATIONS

the context otherwise indicates, references in these Notes to the accompanying condensed consolidated financial statements to

“we,”

Unless the context otherwise indicates, references

in these Notes to the accompanying Consolidated Financial Statements to “we,”

“us,”

“our”

and “the Company”

and “the

Company”

refer to Creative Realities, Inc.

subsidiaries.

of the Company’s Business

Realities, Inc.

is a Minnesota corporation that provides innovative digital marketing technology and solutions to retail companies,

individual retail brands, enterprises and organizations throughout the United States and in certain international markets.

Company has expertise in a broad range of existing and emerging digital marketing technologies, as well as the related media management

and distribution software platforms and networks, device management, product management, customized software service layers, systems,

experiences, workflows, and integrated solutions.

Our technology and solutions include:

digital merchandising systems and omni-channel

customer engagement systems, interactive digital shopping assistants, advisors and kiosks, and other interactive marketing technologies

such as mobile, social media, point-of-sale transactions, beaconing and web-based media that enable our customers to transform

how they engage with consumers.

We have expertise in a broad range of existing and emerging digital marketing technologies, as

well as the following related aspects of our business:

content, network management, and connected device software and firmware

and its subsidiaries.

Nature of the Company’s Business

Creative Realities, Inc.

is a Minnesota corporation

that provides innovative digital marketing technology and solutions to retail companies, individual retail brands, enterprises and organizations

throughout the United States and in certain international markets.

The Company has expertise in a broad range of existing and emerging

digital marketing technologies, as well as the related media management and distribution software platforms and networks, device management,

product management, customized software service layers, systems, experiences, workflows, and integrated solutions.

Our technology and

solutions include:

digital merchandising systems and omni-channel customer engagement systems, interactive digital shopping assistants,

advisors and kiosks, and other interactive marketing technologies such as mobile, social media, point-of-sale transactions, beaconing

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

We have expertise in a broad range of existing

and emerging digital marketing technologies, as well as the following related aspects of our business:

content, network management, and

connected device software and firmware platforms;

customized software service layers;

1 unchanged sentence

digital media workflows;

and proprietary processes and automation

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

(the “Allure Acquisition”).

the Allure Acquisition expanded our operations, geographical footprint and customer base and also enhanced our current product

offerings, the core business of Allure is consistent with the existing operations of Creative Realties, Inc.

and as a result of

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

proprietary processes and automation tools.

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

accompanying Condensed Consolidated Financial Statements have been prepared on the basis of the realization of assets and the

satisfaction of liabilities and commitments in the normal course of business and do not include any adjustments to the recoverability

and classifications of recorded assets and liabilities as a result of uncertainties.

produced net income for the year ended December 31, 2019 but incurred a net loss for the year ended December 31, 2018 and had

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

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.

The offering of shares of Common Stock pursuant

to the Agreement will terminate upon the earlier of (i) the sale of all Common Stock subject to the Agreement or (ii) termination

of the Agreement in accordance with its terms.

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

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.

November 6, 2019, Slipstream Communications, LLC (“Slipstream”) extended the maturity date of our term loan and revolver

loan to June 30, 2021 through the Sixth Amendment to the Loan and Security Agreement, aligning the maturity date of our term loan

and revolver loan with the Secured Disbursed Escrow Promissory Note.

December 30, 2019, we entered into the Secured Convertible Special Loan Promissory Note (“Special Loan”) as part of

the Seventh Amendment of the Loan and Security Agreement with Slipstream, under which we obtained $2,000, with interest thereon

at 8% per annum payable 6% in cash and 2% via the issuance of paid-in-kind (“SLPIK”) interest, provided however that

upon occurrence of an event of default the interest rate shall automatically be increased by 6% per annum payable in cash.

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.

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.

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.

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

Creative Realities, Inc., and under our wholly owned subsidiaries Allure Global Solutions, Inc., a Georgia corporation (“Allure”),

and Creative Realities Canada, Inc., a Canadian corporation.

Our other wholly owned subsidiaries, Creative Realities, LLC, a Delaware

limited liability company, and ConeXus World Global, LLC, a Kentucky limited liability company, are effectively dormant.

Liquidity and Financial Condition

The accompanying Condensed Consolidated Financial

Statements have been prepared on the basis of the realization of assets and the satisfaction of liabilities and commitments in the normal

course of business and do not include any adjustments to the recoverability and classifications of recorded assets and liabilities as

a result of uncertainties.

We produced net income

for the three months ended March 31, 2021 but incurred a net loss for the year ended December 31, 2020 and have negative cash flows from

operating activities for both periods.

As of March 31, 2021, we had cash and cash equivalents of $3,535 and a working capital surplus

On January 11, 2021, Creative

Realities, Inc.

received a notice from Old National Bank regarding forgiveness of the loan in the principal amount of $1,552 (the “PPP

Loan”) that was made pursuant to the Small Business Administration Paycheck Protection Program under the Coronavirus Aid, Relief

and Economic Security Act of 2020.

According to such notice, the full principal amount of the PPP Loan and the accrued interest have been

forgiven, resulting in a gain of $1,552 during the three months ended March 31, 2021.

On February 18, 2021,

the Company entered into a securities purchase agreement with an institutional investor which provided for the issuance and sale by the

Company of 800,000 shares of the Company’s common stock (the “Shares”), in a registered direct offering (the “Offering”)

at a purchase price of $2.50 per Share, for gross proceeds of $2,000.

The net proceeds from the Offering after paying estimated offering

expenses were approximately $1,849, which the Company intends to use for general corporate purposes.

The closing of the Offering occurred

on February 22, 2021.

On March 7, 2021, the

Company and Slipstream entered into an agreement to refinance the Company’s Loan and Security Agreement, including (1) the extension

of all maturity dates therein to March 31, 2023, (2) the conversion of the Disbursed Escrow Promissory Note into equity, (3) access to

an additional $1,000 via a multi-advance line of credit facility, and (4) the removal of the three times liquidation preference with respect

to the Company’s Secured Convertible Special Loan Promissory Note.

Management believes that, based on (i) the forgiveness of our PPP Loan,

(ii) the execution of the Offering and remaining availability for incremental offerings under our previously registered Form S-3 (including

our current at-the-market offering), (iii) the refinancing of our debt, including extension of the maturity date on our term and convertible

loans, as well as access to incremental borrowings under the new multi-advance line of credit, and (iv) our operational forecast through

2022, we can continue as a going concern through at least June 30, 2022.

However, given our history of net losses and cash used in operating

activities, we obtained a continued support letter from Slipstream through June 30, 2022.

We can provide no assurance that our ongoing

operational efforts will be successful which could have a material adverse effect on our results of operations and cash flows.

See Note 8 Loans

Payable to the Consolidated Financial Statements for an additional discussion of the Company’s debt obligations and further

discussion of the Company’s refinancing activities during the three months ended March 31, 2021.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

summary of the significant accounting policies consistently applied in the preparation of the accompanying Condensed Consolidated

Financial Statements follows:

A summary of the significant accounting policies

consistently applied in the preparation of the accompanying Condensed Consolidated Financial Statements follows:

Basis of Presentation

accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the applicable instructions

to Form 10-Q and Regulation S-X and include all of the information and disclosures required by generally accepted accounting principles

in the United States of America (“GAAP”) for interim financial reporting.

These unaudited Condensed Consolidated Financial

Statements should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes for the

year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K filed with the Securities and

Exchange Commission on March 13, 2020.

results of operations for the interim periods are not necessarily indicative of results of operations for a full year.

believes the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, including normal recurring

items, considered necessary for a fair statement of results for the interim periods presented.

The accompanying unaudited Condensed Consolidated

Financial Statements have been prepared in accordance with the applicable instructions to Form 10-Q and Regulation S-X and include all

of the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”)

for interim financial reporting.

These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated

Financial Statements of the Company and related footnotes for the year ended December 31, 2020, included in the Company’s

Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2021.

The results of operations for the interim periods

are not necessarily indicative of results of operations for a full year.

Management believes the accompanying unaudited Condensed Consolidated

Financial Statements reflect all adjustments, including normal recurring items, considered necessary for a fair statement of results for

the interim periods presented.

Revenue Recognition

recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification

(“ASC”) 606, Revenue from Contracts with Customers , applying the five-step model.

an arrangement involves multiple performance obligations, the items are analyzed to determine the separate units of accounting,

whether the items have value on a standalone basis and whether there is objective and reliable evidence of their standalone selling

The total contract transaction price is allocated to the identified performance obligations based upon the relative standalone

selling prices of the performance obligations.

The standalone selling price is based on an observable price for services sold

to other comparable customers, when available, or an estimated selling price using a cost plus margin approach.

Company estimates the amount of total contract consideration it expects to receive for variable arrangements by determining the

most likely amount it expects to earn from the arrangement based on the expected quantities of services it expects to provide

and the contractual pricing based on those quantities.

The Company only includes some or a portion of variable consideration in

the transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not

occur when the uncertainty associated with the variable consideration is subsequently resolved.

The Company considers the sensitivity

of the estimate, its relationship and experience with the client and variable services being performed, the range of possible

revenue amounts and the magnitude of the variable consideration to the overall arrangement.

The Company receives variable consideration

in very few instances.

is recognized when a customer obtains control of promised goods or services under the terms of a contract and is measured as the

amount of consideration the Company expects to receive in exchange for transferring goods or providing services.

The Company does

not have any material extended payment terms as payment is due at or shortly after the time of the sale, typically ranging between

thirty and ninety days.

Observable prices are used to determine the standalone selling price of separate performance obligations

or a cost plus margin approach when one is not available.

Sales, value-added and other taxes collected concurrently with revenue

producing activities are excluded from revenue.

Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced

to the clients.

Unbilled receivables are recorded as accounts receivable when the Company has an unconditional right to contract

consideration.

A contract liability is recognized as deferred revenue when the Company invoices clients in advance of performing

the related services under the terms of a contract.

Deferred revenue is recognized as revenue when the Company has satisfied the

related performance obligation.

Company uses the practical expedient for recording an immediate expense for incremental costs of obtaining contracts, including

certain design/engineering services, commissions, incentives and payroll taxes, as these incremental and recoverable costs have

terms that do not exceed one year.

are stated at the lower of cost or market (net realizable value), determined by the first-in, first-out (FIFO) method, and consist

of the following:

September 30,

We recognize revenue in accordance with Financial

Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts

with Customers , applying the five-step model.

If an arrangement involves multiple performance

obligations, the items are analyzed to determine the separate units of accounting, whether the items have value on a standalone basis

and whether there is objective and reliable evidence of their standalone selling price.

The total contract transaction price is allocated

to the identified performance obligations based upon the relative standalone selling prices of the performance obligations.

The standalone

selling price is based on an observable price for services sold to other comparable customers, when available, or an estimated selling

price using a cost plus margin approach.

The Company estimates the amount of total contract

consideration it expects to receive for variable arrangements by determining the most likely amount it expects to earn from the arrangement

based on the expected quantities of services it expects to provide and the contractual pricing based on those quantities.

only includes some or a portion of variable consideration in the transaction price when it is probable that a significant reversal in

the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently

The Company considers the sensitivity of the estimate, its relationship and experience with the client and variable services

being performed, the range of possible revenue amounts and the magnitude of the variable consideration to the overall arrangement.

Company receives variable consideration in very few instances.

Revenue is recognized when a customer obtains control

of promised goods or services under the terms of a contract and is measured as the amount of consideration the Company expects to receive

in exchange for transferring goods or providing services.

The Company does not have any material extended payment terms as payment is

due at or shortly after the time of the sale, typically ranging between thirty and ninety days.

Observable prices are used to determine

the standalone selling price of separate performance obligations or a cost plus margin approach when one is not available.

Sales, value-added

and other taxes collected concurrently with revenue producing activities are excluded from revenue.

The Company recognizes contract assets or unbilled

receivables related to revenue recognized for services completed but not yet invoiced to the clients.

Unbilled receivables are recorded

as accounts receivable when the Company has an unconditional right to contract consideration.

A contract liability is recognized as deferred

revenue when the Company invoices clients in advance of performing the related services under the terms of a contract.

Deferred revenue

is recognized as revenue when the Company has satisfied the related performance obligation.

The Company uses the practical expedient for recording

an immediate expense for incremental costs of obtaining contracts, including certain design/engineering services, commissions, incentives

and payroll taxes, as these incremental and recoverable costs have terms that do not exceed one year.

Inventories are stated at the lower of cost or

market (net realizable value), determined by the first-in, first-out (FIFO) method, and consist of the following:

Raw materials, net of reserve of $111 and $104, 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

review the carrying value of all long-lived assets, including property and equipment, for impairment in accordance with ASC 360,

Accounting for the Impairment or Disposal of Long-Lived Assets .

Under ASC 360, impairment losses are recorded whenever

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

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

generated by such asset, an impairment loss would be recognized.

The impairment loss is determined as the amount by which the

carrying value of such asset exceeds its fair value.

We generally measure fair value by considering sale prices for similar assets

or by discounting estimated future cash flows from such assets using an appropriate discount rate.

Assets to be disposed of are

carried at the lower of their carrying value or fair value less costs to sell.

Considerable management judgment is necessary to

estimate the fair value of assets, and accordingly, actual results could vary significantly from such estimates.

Basic and Diluted Income/(Loss) per Common Share

and diluted income/(loss) per common share for all periods presented is computed using the weighted average number of common shares

Basic weighted average shares outstanding includes only outstanding common shares.

Diluted weighted average shares

outstanding includes outstanding common shares and potential dilutive common shares outstanding in accordance with the treasury

stock method.

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

warrants totaling approximately 7,229,998 and 5,021,888 at September 30, 2020 and 2019, respectively were excluded from the computation

of income/(loss) per share as all options and warrants were anti-dilutive due to the net loss in each period.

In calculating diluted

earnings per share for the three and nine months ended September 30, 2020, in accordance with ASC 260 Earnings per share ,

we excluded the dilutive effect of the potential issuance of common stock upon an assumed conversion of the Special Loan.

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

basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates.

differences arise from net operating losses, differences in basis of intangibles, stock-based compensation, reserves for uncollectible

accounts receivable and inventory, differences in depreciation methods, and accrued expenses.

Valuation allowances are established

when necessary to reduce deferred tax assets to the amount expected to be realized.

The Company accounts for uncertain tax positions

utilizing an established recognition threshold and measurement attributes for the financial statement recognition and measurement

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

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

December 31, 2019.

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

Pursuant to ASC 350, goodwill acquired in a purchase

business combination is not amortized, but instead tested for impairment at least annually.

The Company uses a measurement date

of September 30 (see Note 7 Intangible Assets and Goodwill ).

We review the carrying value of all long-lived

assets, including property and equipment, for impairment in accordance with ASC 360, Accounting for the Impairment or Disposal

of Long-Lived Assets .

Under ASC 360, impairment losses are recorded whenever events or changes in circumstances indicate the carrying

value of an asset may not be recoverable.

We evaluated whether there were any triggering events for consideration of impairment of our

long-lived assets as of March 31, 2021 and concluded there were none.

If the impairment tests indicate that the carrying

value of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment loss would be recognized.

The impairment loss is determined as the amount by which the carrying value of such asset exceeds its fair value.

We generally measure

fair value by considering sale prices for similar assets or by discounting estimated future cash flows from such assets using an appropriate

discount rate.

Assets to be disposed of are carried at the lower of their carrying value or fair value less costs to sell.

management judgment is necessary to estimate the fair value of assets, and accordingly, actual results could vary significantly from such

Basic and Diluted Earnings/(Loss) per Common Share

Basic and diluted earnings/(loss) per common share

for all periods presented is computed using the weighted average number of common shares outstanding.

Basic weighted average shares outstanding

includes only outstanding common shares.

Diluted weighted average shares outstanding includes outstanding common shares and potential

dilutive common shares outstanding in accordance with the treasury stock method.

Shares reserved for outstanding stock options and warrants

totaling 7,032,375 at March 31, 2021 were excluded from the computation of income/(loss) per share as no stock options or warrants were

in-the-money as of March 31, 2021.

Shares reserved for outstanding stock options and warrants totaling 5,035,518 at March 31, 2020 were

excluded from the computation of earnings/(loss) per share as all options and warrants were anti-dilutive due to the net loss in the period.

In calculating diluted earnings per share for the three months ended March 31, 2021, 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 Convertible Loan as we have

the intent and ability to settle the debt in cash.

Deferred income taxes are recognized in the financial

statements for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial

reporting amounts based on enacted tax laws and statutory tax rates.

Temporary differences arise from net operating losses, differences

in basis of intangibles, stock-based compensation, reserves for uncollectible accounts receivable and inventory, differences in depreciation

methods, and accrued expenses.

Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected

to be realized.

The Company accounts for uncertain tax positions utilizing an established recognition threshold and measurement attributes

for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

We had no uncertain

tax positions as of March 31, 2021 and December 31, 2020.

We follow the provisions of ASC 350, Goodwill

and Other Intangible Assets.

Pursuant to ASC 350, goodwill acquired in a purchase business combination is not amortized, but instead tested

for impairment at least annually.

The Company uses a measurement date of September 30 (see Note 7 Intangible Assets and Goodwill ).

Use of Estimates

preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect

the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial

statements and the reported amounts of revenues and expenses during the reporting periods.

The preparation of financial statements in conformity

with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure

of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during

the reporting periods.

Our significant estimates include:

the allowance for doubtful accounts, valuation allowances related to deferred taxes, the fair value of acquired assets and liabilities,

the fair value of liabilities reliant upon the appraised fair value of the Company, valuation of stock-based compensation awards

and other assumptions and estimates used to evaluate the recoverability of long-lived assets, goodwill and other intangible assets

and the related amortization methods and periods.

the allowance for doubtful accounts, valuation allowances related to deferred

taxes, the fair value of acquired assets and liabilities, the fair value of liabilities reliant upon the appraised fair value of the Company,

valuation of stock-based compensation awards and other assumptions and estimates used to evaluate the recoverability of long-lived assets,

goodwill and other intangible assets and the related amortization methods and periods.

Actual results could differ from those estimates.

account for leases in accordance with ASU No.

We account for leases in accordance with ASU No.

2016-02, Leases (Topic 842), as amended.

determine if an arrangement is a lease at inception.

Right of use (“ROU”) assets and liabilities are recognized at

commencement date based on the present value of remaining lease payments over the lease term.

For this purpose, we consider only

payments that are fixed and determinable at the time of commencement.

As most of our leases do not provide an implicit rate, we

use our incremental borrowing rate based on the information available at commencement date in determining the present value of

lease payments.

Our incremental borrowing rate is a hypothetical rate based on our understanding of what our credit rating would

The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received.

Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such

leases are included in operating lease right-of-use assets, current maturities of operating leases, and long-term obligations

under operating leases on our condensed consolidated balance sheets.

Finance leases are included in property and equipment, net,

current maturities of financing leases, and long-term obligations under financing leases on our condensed consolidated balance

We determine if an arrangement is a lease at inception.

Right of use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of remaining lease

payments over the lease term.

For this purpose, we consider only payments that are fixed and determinable at the time of commencement.

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement

date in determining the present value of lease payments.

Our incremental borrowing rate is a hypothetical rate based on our understanding

of what our credit rating would be.

The ROU asset also includes any lease payments made prior to commencement and is recorded net of any

lease incentives received.

Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we

will exercise such options.

Operating leases are included in operating lease right-of-use

assets, current maturities of operating leases, and long-term obligations under operating leases on our condensed consolidated balance

Finance leases are included in property and equipment, net, current maturities of finance leases, and long-term obligations under

financing leases on our condensed consolidated balance sheets.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

January 1, 2020, we adopted ASU 2018-15 Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing

Arrangement That is a Service Contract , which provide guidance on evaluating the accounting for fees paid by a customer in

a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software

The adoption of this guidance had no material impact on our Condensed Consolidated Financial Statements.

January 1, 2020, we adopted ASU No.

2018-13, Changes to Disclosure Requirements for Fair Value Measurements (Topic 820) ,

which improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements.

removed, modified, and added certain disclosure requirements.

The adoption of this guidance had no material impact on our Condensed

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

Recently adopted

Not yet adopted

In August 2020, the FASB issued Accounting Standards

2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts

in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU

2020-06) , which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible

debt instruments.

This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments

and requires the use of the if-converted method.

This guidance will be effective for us in the first quarter of 2022 on a full or modified retrospective

basis, with early adoption permitted.

We do not expect the adoption of this guidance to have a material impact on our consolidated

financial statements.

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

Simplifying the Accounting for Income

Taxes , which simplifies the accounting for income taxes.

This guidance will be effective for us in the first quarter of 2021

on a prospective basis, and early adoption is permitted.

We are currently evaluating the impact of the new guidance on our Condensed

Consolidated Financial Statements.

June 2016, the FASB issued ASU No.

2016-13, Financial Instruments—Credit Losses .

The main objective is to provide

financial statement users with more decision-useful information about the expected credit losses on financial instruments and

other commitments to extend credit held by a reporting entity at each reporting date.

The amendments in this update replace the

incurred loss methodology with a methodology that reflects expected credit losses and requires consideration of a broader range

of reasonable and supportable information to calculate credit loss estimates.

For trade receivables and loans, entities will be

required to estimate lifetime expected credit losses.

The amendments are effective for public business entities that qualify as

smaller reporting companies for fiscal years and interim periods beginning after December 15, 2022.

We do not expect the adoption of this guidance to have a material impact on our consolidated financial

In June 2016, the FASB issued ASU No.

2016-13, Financial

Instruments—Credit Losses .

The main objective is to provide financial statement users with more decision-useful information

about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting

The amendments in this update replace the incurred loss methodology with a methodology that reflects expected credit losses and

requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates.

For trade receivables

and loans, entities will be required to estimate lifetime expected credit losses.

The amendments are effective for public business entities

that qualify as smaller reporting companies for fiscal years and interim periods beginning after December 15, 2022.

We are currently evaluating

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REVENUE RECOGNITION

Company applies ASC 606 for revenue recognition.

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

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

The Company applies ASC 606 for revenue recognition.

The following table disaggregates the Company’s revenue by major source for the three months ended March 31, 2021 and 2020:

(in thousands)

September 30,

Installation Services

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Total Hardware and Services

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.

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”

System hardware sales

System hardware revenue is recognized generally

upon shipment of the product or customer acceptance depending upon contractual arrangements with the customer in instances in which the

sale of hardware is the sole performance obligation.

Shipping charges billed to customers are included in hardware sales and the related

shipping costs are included in hardware cost of sales.

The cost of freight and shipping to the customer is recognized in cost of sales

at the time of transfer of control to the customer.

System hardware revenues are classified as “Hardware”

within our disaggregated

Installation services

The Company performs outsourced installation services

for customers and recognizes revenue upon completion of the installations.

Installation services also includes engineering services performed

as part of an installation project.

When system hardware sales include installation

services to be performed by the Company, the goods and services in the contract are not distinct, so the arrangement is accounted for

as a single performance obligation.

Our customers control the work-in-process and can make changes to the design specifications over the

contract term.

Revenues are recognized over time as the installation services are completed based on the relative portion of labor hours

completed as a percentage of the budgeted hours for the installation.

Installation services revenues are classified as “Installation

Services”

within our disaggregated revenue.

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

The aggregate amount of the transaction price allocated

to installation service performance obligations that are partially unsatisfied as of March 31, 2021 and 2020 were $0.

Software design and development services

Software and software license sales are

recognized as 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.

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within our disaggregated revenue.

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”

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.

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”

Software as a service

Software as a service includes revenue from software

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

These services often include software

updates which provide customers with rights to unspecified software product upgrades and maintenance releases and patches released during

the term of the support period.

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

We account for revenue from these services

in accordance with ASC 985-20-15-5 and recognize revenue ratably over the performance period.

Software as a service revenues are classified

as “Managed Services”

within our disaggregated revenue.

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.

Maintenance and support services

The Company sells maintenance and support services

which include access to technical support personnel for software and hardware troubleshooting and monitoring of the health of a customer’s

network, access to a sophisticated web-portal for managing the end-to-end hardware and software digital ecosystem, and hosting support

services through our network operations center, or NOC.

These services provide either physical or automated remote monitoring which support

customer networks 7 days a week, 24 hours a day.

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.

and generally automatically renew for additional 12-month periods unless cancelled by the customer.

Rates for maintenance and support

contracts are typically established based upon a fee per location or fee per device structure, with total fees subject to the number of

services selected.

Revenue is recognized ratably and evenly over the term of the agreement.

Maintenance and Support revenues are classified

as “Managed Services”

within our disaggregated revenue.

The Company also performs time and materials-based

maintenance and repair work for customers.

Revenue is recognized at a point in time when the performance obligation has been fully satisfied.

FAIR VALUE MEASUREMENT

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:

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;

We measure certain financial assets, including

cash equivalents, at fair value on a recurring basis.

In accordance with ASC 820-10-30, fair value is a market-based measurement that

should be determined based on the assumptions that market participants would use in pricing an asset or liability.

As a basis for considering

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

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

or other inputs that are observable, either directly or indirectly.

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

Level 3 —

Valuations based on inputs that

are unobservable and involve management judgment and the reporting entity’s own assumptions about market participants and pricing.

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.

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.

As discussed in Note 8 Loans Payable ,

the Convertible Loan is reported at fair value.

This liability is deemed to be a Level 3 valuation.

Certain unobservable inputs into the

calculation of the fair value of this liability include an estimate of the fair value of the Company at a future date using a discounted

cash flow model, discount rate assumptions, and an estimation of the likelihood of conversion of the Convertible Loan.

As of March 31,

2021, 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 $166 gain during the period from the change in fair value of the liability and a corresponding increase

in the debt balance recorded in the Condensed Consolidated Balance Sheet.

The Company recorded a $151 loss during the same period in 2020

related to the fair value of the Special Loan.

SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION

Nine Months Ended

September 30,

Three Months Ended

Supplemental Cash Flow Information

Non-cash Investing and Financing Activities

Right of offset settlement of Amended and Restated Seller Note

Cash paid during the period for:

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INTANGIBLE ASSETS, INCLUDING GOODWILL

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

September 30,

Intangible Assets

Intangible assets consisted

of the following at March 31, 2021 and December 31, 2020:

Technology platform

3 unchanged sentences

Net book value of amortizable intangible assets

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

While our outlook for the digital signage industry

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

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

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.

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.

For the three months ended March 31, 2021 and 2020, amortization of

intangible assets charged to operations was $140 and $159, respectively.

During the three months ended March 31, 2021, the Company

wrote-off a $380 fully amortized trade name asset and a $1,370 fully amortized customer list asset and the related accumulated amortization

for each related to ConeXus World Global, LLC.

There was no impact on the Company’s Condensed Consolidated Balance Sheet or Condensed

Consolidated Statement of Operations during the period.

Goodwill represents the excess of the purchase

price over the fair value of net assets acquired.

Goodwill is subject to an impairment review at a reporting unit level, on an annual

basis as of the end of September of each fiscal year, or when an event occurs, or circumstances change that would indicate potential impairment.

The Company has only one reporting unit, and therefore the entire goodwill is allocated to that reporting unit.

There were no indicators

of impairment as of or during the three months ended March 31, 2021.

Interim Impairment Assessment –

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.

As a result of our qualitative assessment, we concluded that indicators of impairment were present and that

a quantitative interim impairment assessment of our goodwill was necessary, resulting in us recording a non-cash impairment loss of $10,646

as of March 31, 2020.

We recorded the estimated impairment losses in the caption “Goodwill impairment”

in our Consolidated

Statement of Operations.

LOANS PAYABLE

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

The outstanding debt with detachable warrants,

as applicable, are shown in the table below.

Further discussion of the notes follows.

As of March 31, 2021

Interest Rate Information

2 unchanged sentences

10.0% interest (1)

Total debt, gross

Fair value (H)

Total debt, gross

Debt discount

Total debt, net

Less current maturities

Long term debt

As of December 31, 2020

Interest Rate Information

0.0% interest

1 unchanged sentence

10.0% interest

3.5% interest

10.0% interest

1.0% interest

Total debt, gross

9 unchanged sentences

Amended and Restated Seller Note from acquisition of Allure

Secured Convertible Special Loan Promissory Note, at fair value

Secured Convertible Special Loan Promissory Note, at fair

Paycheck Protection Program Loan from Small Business Administration

cash interest per annum through March 31, 2020.

10.0% paid-in-kind interest (“PIK”) interest per annum from April

1, 2020 through December 31, 2020.

8.0% cash interest per annum January 1, 2021 through the maturity date.

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 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.

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.

New Term Loan with related party

Convertible Loan with related party, at fair value

(1) Interest is paid-in-kind (“PIK”) through October 2021,

at which point interest becomes payable in cash

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 had a term of two years with a 1% per annum interest rate.

On January 11, 2021, Creative

Realities, Inc.

received a notice from Old National Bank regarding forgiveness of the loan in the principal amount of $1,552 (the “PPP

Loan”) that was made pursuant to the Small Business Administration Paycheck Protection Program under the Coronavirus Aid, Relief

and Economic Security Act of 2020.

According to such notice, the full principal amount of the PPP Loan and the accrued interest have been

forgiven, resulting in a gain of $1,552 during the three months ended March 31, 2021.

Amended and Restated Loan and Security Agreement

On March 7, 2021, the Company refinanced their

current debt facilities with Slipstream Communications, LLC (“Slipstream”), pursuant to an Amended and Restated Credit and

Security Agreement (the “Credit Agreement”).

The debt facilities continue to be fully secured by all assets of the Company.

The maturity date (“Maturity Date”) on the outstanding debt and new debt is extended to March 31, 2023.

The Credit Agreement

(i) provides a $1,000 of availability under a line of credit (the “Line of Credit”), (ii) consolidates our existing term and

revolving line of credit facilities into a new term loan (the “New Term Loan”) having an aggregate principal balance of approximately

$4,550 (including a 3.0% issuance fee capitalized into the principal balance), (iii) increases the outstanding special convertible term

loan (the “Convertible Loan”) to approximately $2,280 (including a 3.0% issuance fee capitalized into the principal balance),

and (iv) extinguishes the outstanding obligations owed with respect to a $264 existing disbursed escrow loan in exchange for shares of

the Company’s common stock (the “Disbursed Escrow Conversion Shares”), valued at $2.718 per share (the trailing 10-day

VWAP as reported on the Nasdaq Capital Market as of the date of execution of the Credit Agreement).

The Line of Credit and Convertible

Loan accrue interest at 10% per year, and the New Term Loan accrues interest at 8% per year.

The New Term Loan requires no principal payments until the Maturity

Date, and interest payments are payable on the first day of each month until the Maturity Date.

All interest payments owed prior to October

1, 2021 are payable as PIK payments, or increases to the principal balance of the New Term Loan only.

The Line of Credit and Convertible Loan require

payments of accrued interest payable on the first day of each month through April 1, 2022.

All such interest payments made prior to October

1, 2021 are payable as PIK payments, or increases to the principal balances under the Line of Credit and Convertible Loan only.

payments are owed under the Line of Credit or Convertible Loan until April 1, 2022, at which time all principal and interest on each of

the Line of Credit and Convertible Loan will be paid in monthly installments until the Maturity Date to fully amortize outstanding principal

by the Maturity Date.

All payments of interest (other than PIK payments)

and principal on the Line of Credit and Convertible Loan may be paid, in the Company’s sole discretion, in shares of the Company’s

Common Stock (the “Payment Shares,”

and together with the Disbursed Escrow Conversion Shares, the “Shares”).

Payment Shares will be valued on a per-Share basis at 70% of the VWAP of the Company’s shares of common stock as reported on the

Nasdaq Capital Market for the 10 trading days immediately prior to the date such payment is due;

provided that the Payment Shares shall

not be valued below $0.50 per Share (the “Share Price”).

The Credit Agreement limits the Company’s

ability to issue Shares as follows (the “Exchange Limitations”):

(1) The total number of Shares that may be issued under the

Credit Agreement will be limited to 19.99% of the Company’s outstanding shares of common stock on the date the Credit Agreement

is signed (the “Exchange Cap”), unless stockholder approval is obtained to issue shares in excess of the Exchange Cap;

if Slipstream and its affiliates (the “Slipstream Group”) beneficially own the largest ownership position of shares of Company

common stock immediately prior to the proposed issuance of Payment Shares and such shares are less than 19.99% of the then-issued and

outstanding shares of Company common stock, the issuance of such Payment Shares will not cause the Slipstream Group to beneficially own

in excess of 19.99% of the issued and outstanding shares of Company common stock after such issuance unless stockholder approval is obtained

for ownership in excess of 19.99%;

and (3) if the Slipstream Group does not beneficially own the largest ownership position of shares

of Company common stock immediately prior to the proposed issuance of Payment Shares, the Company may not issue Payment Shares to the

extent that such issuance would result in Slipstream Group beneficially owning more than 19.99% of the then issued and outstanding shares

of Company common stock unless (A) such ownership would not be the largest ownership position in the Company, or (B) stockholder approval

is obtained for ownership in excess of 19.99%.

We evaluated the instruments within the Credit

Agreement separately for purposes of concluding on whether the amendment represented a modification or extinguishment in accordance with

ASC 470 Debt .

The Convertible Loan was deemed to have had a substantive

conversion feature both added and removed via the Credit Agreement, one which the holder is reasonably willing and able to exercise their

rights under the agreement, resulting in extinguishment accounting for the Convertible Loan during the three months ended March 31, 2021.

Pursuant to ASC 825-10-25-1, Fair Value Option , we made an irrevocable election to report the Convertible Loan at fair value,

with changes in fair value recorded through the Company’s Condensed Consolidated Statement of Operations in each reporting period.

We evaluated the Credit Agreement

in accordance with ASC 470 Debt .

The New Term Loan was accounted for as a modification, resulting in recording of $133 of incremental

debt discount which will be amortized straight-line over the remaining life of the debt.

We recorded a net gain of $26 via the extinguishment

of the Special Loan, which was recorded as additional paid in capital in the Statement of Shareholders Equity given the transaction was

with a related party, Slipstream.

We expensed $69 of costs incurred with third parties as a result of extinguishment of the Special Loan

, modification of the New Term Loan, and extinguishment of the Disbursed Escrow Loan.

Loan and Security Agreement History

Ninth, Tenth, Eleventh, Twelfth, and Thirteenth

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