What changed in this filing

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Item 1. Financial Statements

2021-08-16 compared with 2021-05-17 · 441 added, 740 removed, 536 unchanged (69% of the section changed)

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Intangibles, net

LIABILITIES AND SHAREHOLDERS’

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES

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TOTAL LIABILITIES

SHAREHOLDERS’

SHAREHOLDERS’ EQUITY

Common stock, $ 0.01 par value, 200,000 shares authorized;

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Accumulated deficit

Total shareholders’

TOTAL LIABILITIES AND SHAREHOLDERS’

Total shareholders’ equity

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

See accompanying

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For the Three Months Ended

For the Six Months Ended

Services and other

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Operating expenses:

Sales and marketing

Research and development

General and administrative

Sales and marketing expenses

Research and development expenses

General and administrative expenses

Bad debt (recovery) / expense

Depreciation and amortization

Depreciation and amortization expense

Goodwill impairment

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Gain on settlement of obligations

Change in fair value of Special Loan

Change in fair value of Convertible Loan

Other expense

Total other income / (expense)

Income/(loss) before income taxes

Benefit from / (provision for) income taxes

Benefit/(provision) for income taxes

Net income/(loss)

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Weighted average shares outstanding - diluted

See accompanying notes to condensed consolidated

financial statements.

See accompanying

notes to condensed consolidated financial statements.

CREATIVE REALITIES,

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(In thousands)

Three Months Ended

Six Months Ended

Operating Activities:

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Stock-based compensation

Shares issued for services

Gain on forgiveness of Paycheck Protection Program

Gain on settlement of Seller Note

Change in fair value of Convertible Loan

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Accrued expenses

Other liabilities

Operating lease liabilities, non-current

Net cash used in operating activities

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Principal payments on finance leases

Proceeds from Paycheck Protection Program loan

Issuance of common stock – warrant exercise

Repayment of Seller Note

Proceeds from sale of shares via registered direct offering, net

Net cash provided by / (used in) financing activities

Net cash provided by financing activities

Increase/(decrease) in Cash and Cash Equivalents

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CREATIVE REALITIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’

(in thousands, except shares)

Balance as of December 31, 2020

Three months ended June 30, 2021

Balance as of March 31, 2021

Shares issued for services

Shares issued to directors as compensation

Stock-based compensation

Balance as of June 30, 2021

Six months ended June 30, 2021

Balance as of December 31, 2020

Shares issued for services

Shares issued to directors as compensation

Stock-based compensation

Conversion of Disbursed Escrow Loan

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

Balance as of June 30, 2021

Three months ended June 30, 2020

Balance as of March 31, 2020

Stock-based compensation

Shares issued to directors as compensation

Exercise of warrants

Balance as of June 30, 2020

Six months ended June 30, 2020

Balance as of December 31, 2019

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Shares issued to directors as compensation

Balance as of March 31, 2020

Exercise of warrants

Balance as of June 30, 2020

See accompanying notes to condensed consolidated

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Unless the context otherwise indicates, references

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

“us,”

“our”

and “the

Company”

refer to Creative Realities, Inc.

in these Notes to the accompanying condensed consolidated financial statements to “we,” “us,” “our”

and “the Company” refer to Creative Realities, Inc.

and its subsidiaries.

Nature of the Company’s Business

Creative Realities, Inc.

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Our main operations are conducted directly through

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.

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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.

For the three months ended June 30, 2021 and 2020

we have recognized/(incurred) net income/(losses) of $ 1,025 and ($ 2,459 ), respectively.

For the six months ended June 30, 2021 and 2020,

we recognized/(incurred) net income/(losses) of $ 2,297 and ($ 15,642 ), respectively.

As of June 30, 2021, we had cash and cash equivalents

of $ 3,004 and a working capital surplus of $ 4,014 .

On January 11, 2021, we

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 .

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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.

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

On May 13, 2021, the Company and Christie Digital

Systems, Inc.

(“Seller”) entered into a settlement agreement with respect to the Amended and Restated Seller Note wherein

neither party admitted liability, and the Company agreed to pay, and Seller agreed to accept, $ 100 as settlement in full for the outstanding

balance of principal and accrued interest under the Amended and Restated Seller Note and a mutual release of all claims related to the

Seller Note and sale transaction under the Allure Purchase Agreement and all related agreements.

The settlement resulted in the Company

recording a gain on settlement of obligations of $ 1,624 , representing $ 1,538 related to the Seller Note and $ 86 of related interest thereon,

during the three months ended June 30, 2021.

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, (iv) the settlement of the Seller Note, and (v) our operational forecast through 2022, we can continue as a going concern

through at least August 16, 2022.

However, given our history of net losses and cash used in operating activities, we obtained a continued

support letter from Slipstream through August 16, 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.

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 and six months ended June 30, 2021.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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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.

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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.

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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:

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

Raw materials, net of reserve of $ 131 and $ 104 , respectively

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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.

We evaluated whether there were any triggering events for consideration of impairment of long-lived

assets as of June 30, 2021 and concluded there were none.

If the impairment tests indicate that the carrying

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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

Basic and Diluted Income/(Loss) per Common Share

Basic and diluted income/(loss) per common share

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

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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.

Shares reserved for outstanding stock options, including

stock options with performance restricted vesting, and warrants totaling approximately 6,964,517 at June 30, 2021 were excluded from the

computation of income/(loss) per share as the strike price on the options and warrants were higher than the Company’s market price

and therefore anti-dilutive.

Diluted weighted average shares outstanding for the three and six-months ended June 30, 2021 included 8,333

options which were both exercisable and in-the-money as of June 30, 2021.

Those options were included in the calculation of diluted earnings

per share as of the beginning of the calculation period.

Shares reserved for outstanding stock options, including stock options with performance

restricted vesting, and warrants totaling approximately 7,309,998 at June 30, 2020 were excluded from the computation of income/(loss)

per share due to the net loss in the period.

In calculating diluted earnings per share for the

three and six months ended June 30, 2021 and 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 Convertible Loan as we have the intent and ability to settle

the debt in cash.

Deferred income taxes are recognized in the financial

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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.

tax positions as of June 30, 2021 and December 31, 2020.

We follow the provisions of ASC 350, Intangibles

– Goodwill and Other.

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 evaluated whether there were any triggering events for consideration of impairment of our goodwill as of June 30, 2021 and concluded

there were none.

Use of Estimates

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Actual results could differ from those estimates.

We account for leases in accordance with ASU No.

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

We account for leases in accordance with ASC 842, Leases ,

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.

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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.

Operating leases are included in operating lease

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

balance sheets.

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

under financing leases on our condensed consolidated balance sheets.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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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, 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

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2016-13, Financial

Instruments—Credit Losses .

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

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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:

The following table disaggregates the Company’s revenue by major source for the three and six months ended June 30, 2021 and 2020:

(in thousands)

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at the time of transfer of control to the customer.

System hardware revenues are classified as “Hardware”

within our disaggregated

System hardware revenues are classified as “Hardware” within our disaggregated

Installation services

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

Installation services revenues are classified as “Installation

Services”

within our disaggregated revenue.

Installation services revenues are classified as “Installation

Services” within our disaggregated revenue.

The aggregate amount of the transaction price allocated

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

to installation service performance obligations that are partially unsatisfied as of June 30, 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.

Software is delivered to customers electronically.

Software design and development revenues are classified as

“Software Development Services”

within our disaggregated revenue.

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.

Software is delivered to

customers electronically.

Software design and development revenues are classified as “Software Development Services” within

our disaggregated revenue.

Software as a service

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Software as a service revenues are classified

as “Managed Services”

within our disaggregated revenue.

as “Managed Services” within our disaggregated revenue.

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

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Maintenance and Support revenues are classified

as “Managed Services”

within our disaggregated revenue.

as “Managed Services” within our disaggregated revenue.

The Company also performs time and materials-based

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hierarchy levels are defined as follows:

Level 1 —

Valuations based on unadjusted

Level 1 — Valuations based on unadjusted

quoted prices in active markets for identical assets.

Level 2 —

Valuations based on observable

Level 2 — Valuations based on observable

inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date;

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

Level 3 —

Valuations based on inputs that

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

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

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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.

As of June 30,

2021, we utilized a discounted cash flow analysis in updating our fair value analysis of the Convertible Loan, resulting in recognition

of a $ 0 and $ 166 gain during the three and six-months ended June 30, 2021, 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.

The Company recorded a $ 551 and

$ 702 loss during the same periods in 2020, respectively, related to the fair value of the Special Loan.

SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION

Three Months Ended

Six Months Ended

Supplemental Cash Flow Information

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Intangible assets consisted

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

of the following at June 30, 2021 and December 31, 2020:

Technology platform

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Net book value of amortizable intangible assets

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.

For the three months ended June 30, 2021 and 2020,

amortization of intangible assets charged to operations was $ 139 and $ 158 , respectively.

For the six months ended June 30, 2021 and 2020

amortization of intangible assets charged to operations was $ 279 and $ 317 , respectively.

Goodwill represents the excess of the purchase

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There were no indicators

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

Interim Impairment Assessment –

of impairment as of or during the three and six months ended June 30, 2021.

Interim Impairment Assessment – March

Despite the excess fair value identified in our

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as of March 31, 2020.

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

in our Consolidated

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

Statement of Operations.

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as applicable, are shown in the table below.

Further discussion of the notes follows.

As of March 31, 2021

Further discussion of the debt follows.

As of June 30, 2021

Interest Rate Information

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10.0 % interest (1)

10.0% interest (1)

Total debt, gross

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Long term debt

Secured Disbursed Escrow Promissory Note with related party

Secured Revolving Promissory Note with related party

Term Loan with related party

Amended and Restated Seller Note from acquisition of Allure

Secured Convertible Special Loan Promissory Note, at fair

Paycheck Protection Program Loan from Small Business Administration

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

A – Secured Disbursed Escrow Promissory Note with related party

B – Secured Revolving Promissory Note with related party

C – Term Loan with related party

D – Amended and Restated Seller Note from acquisition of Allure

E – Secured Convertible Special Loan Promissory Note, at fair

F – Paycheck Protection Program Loan from Small Business Administration

G – New Term Loan with related party

H – Convertible Loan with related party, at fair value

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.

Company entered into a Promissory Note with Old National Bank (the “Promissory Note”), which provided for an unsecured loan

of $1,552 (the “PPP Loan”) 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

On January 11, 2021, the

Company received a notice from Old National Bank that the full principal amount of the PPP Loan and the accrued interest have been forgiven,

resulting in a gain of $ 1,552 during the six months ended June 30, 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”).

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 maturity date (“Maturity Date”) on the outstanding debt and new debt was 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

(i) provides $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).

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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 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

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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

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”):

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

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

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is obtained for ownership in excess of 19.99%.

On May 17, 2021, the Company’s stockholders approved the issuance of Shares

in excess of the Exchange Limitations.

We evaluated the instruments within the Credit

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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

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On February 28, 2021, January 31, 2021, December

31, 2020, November 30, 2020, and September 29, 2020, the Company entered into several amendments to Loan and Security Agreement with its

subsidiaries and Slipstream to amend the automatic conversion date of the Special Loan.

Each amendment extended the automatic conversion

date of the Special Loan.

31, 2020, November 30, 2020, and September 29, 2020, the Company entered into amendments to Loan and Security Agreement with its subsidiaries

and Slipstream to amend the automatic conversion date of the Special Loan.

Each amendment extended the automatic conversion date of the

Special Loan.

The Company paid no fees in exchange for these extensions.

Disbursed Escrow Promissory Note

The Fourth Amendment to the Loan and Security Agreement included entry

into a Secured Disbursed Escrow Promissory Note between the Company and Slipstream, and, effective June 30, 2018 we drew $264 in conjunction

with our exit from a previously leased operating facility.

The principal amount of the Secured Disbursed Escrow Promissory Note bears

Upon entry into the Credit Agreement on March 7, 2021, this note was converted into Disbursed Escrow Conversion Shares, with

elimination of the debt recorded as an equity issuance with the Statement of Shareholders Equity during the three months ended March 31,

and Restated Seller Note from acquisition of Allure

The Amended and Restated Seller Note represents

Secured Disbursed Escrow Promissory Note

The Fourth Amendment to the Loan and Security Agreement

included entry into a Secured Disbursed Escrow Promissory Note between the Company and Slipstream, and, effective June 30, 2018, we drew

$ 264 in conjunction with our exit from a previously leased operating facility.

The principal amount of the Secured Disbursed Escrow Promissory

Note bears no interest.

Upon entry into the Credit Agreement on March 7, 2021, this note was converted into Disbursed Escrow Conversion

Shares, with elimination of the debt recorded as an equity issuance with the Statement of Shareholders Equity during the three months

ended March 31, 2021.

Amended and Restated Seller Note from acquisition

The Amended and Restated Seller Note represented

a note payable due from Allure to Seller, under a pre-existing Seller Note which was amended and restated to a reduced amount of $1,637

through the Stock Purchase Agreement.

At the closing date, the estimated net working capital deficit of Allure was $801 in excess of the

target net working capital as defined in the Stock Purchase Agreement.

As of the acquisition date, Allure also had accounts payable to

Seller for outsourced services of $2,204.

We agreed with the Seller to settle the estimated net working capital deficit through a reduction

in the accounts payable to Seller as of the acquisition date and to further amend the Seller Note to include the remaining $1,403 accounts

payable due from Allure to Seller, resulting in an Amended and Restated Seller Note of $2,303.

That debt is represented by our issuance

to the Seller of a promissory note accruing interest at 3.5% per annum.

The promissory note requires us to make quarterly payments of

interest only through February 19, 2020, on which date the promissory note matured and all remaining amounts owing thereunder became due.

promissory note is convertible into shares of Creative Realities common stock, at the seller’s option on or after the 180th day

after issuance, at an initial conversion price of $8.40 per share, subject to customary equitable adjustments.

Conversion of all amounts

owing under the promissory note will be mandatory if the 30-day volume-weighted average price of our common stock exceeds 200% of the

common stock trading price at the closing of the acquisition.

We granted the seller customary registration rights for the shares of our

common stock issuable upon conversion of the promissory note.

through the Stock Purchase Agreement and a subsequent net working capital adjustment.

That debt accrued interest at 3.5% per annum, and

required us to make quarterly payments of interest only through February 19, 2020, on which date the promissory note matured and all remaining

amounts owing thereunder became due.

On February 20, 2020, Creative Realities, Inc.

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under the Allure Purchase Agreement.

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

Seller Note due February 20, 2020.

We did not pay the Amended and Restated Seller Note on its maturity date.

On February 27, 2020, Seller

sent the Company a notice of breach for failure to pay the Amended and Restated Seller Note on the maturity date of February 20, 2020

and demanding immediate payment.

On September 11, 2020, we served a First Amended Demand in the arbitration with Seller, and on November

5, 2020, Seller pre-served a Motion for Summary Disposition in the arbitration demanding payment of the Amended and Restated Seller Note

and accrued interest.

The Company continued to accrue interest on the Amended and Restated Seller Note and have included $87 in accrued

expenses in the Condensed Consolidated Financial Statements as of March 31, 2021.

On May 13, 2021, the Company and Seller entered

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related agreements.

The Company expects to record a gain on settlement of obligations of $1,624 during the three months ended June 30,

As a result of this settlement, the full principal

amount of the Seller Note and the accrued interest have been eliminated, resulting in a gain in the Condensed Consolidated Financial statements

of $ 1,624 , representing $ 1,538 related to the Seller Note and $ 86 of related interest thereon, during the three months ended June 30,

COMMITMENTS AND CONTINGENCIES

August 2, 2019, the Company filed suit in Jefferson Circuit Court, Kentucky, against a supplier of Allure for breach of contract, breach

of warranty, and negligence with respect to equipment installations performed by such supplier for an Allure customer.

This case remains

in the early stages of litigation, in part due to delays resulting from the COVID-19 pandemic, and, as a result, the outcome of each

case is unclear, so the Company is unable to reasonably estimate the possible recovery, or range of recovery, if any.

October 10, 2019, the Allure customer that is the basis of our claim above sent a demand to the Company for payment of $3,200 as settlement

for an alleged breach of contract related to hardware failures of equipment installations performed by Allure between November 2017 and

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

suit remains in the early stages of litigation with discovery requests ongoing, and, as a result, the outcome of the suit and the allocation

of liability, if any, remain unclear, so the Company is unable to reasonably estimate the possible liability, recovery, or range of magnitude

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

Company has notified its insurance company on notice of potential claims and continues to evaluate both the claim made by the customer

and potential avenues for recovery against third parties should the customer prevail.

On February 20, 2020, the Company and Allure made

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

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

We did not pay the Amended and Restated Seller Note on its maturity date.

On February 27, 2020, Seller sent the Company a notice

of breach for failure to pay the Amended and Restated Seller Note on the maturity date of February 20, 2020 and demanding immediate payment.

On September 11, 2020, we served a First Amended Demand in the arbitration with Seller, and on November 5, 2020, Seller pre-served a Motion

for Summary Disposition in the arbitration demanding payment of the Amended and Restated Seller Note and accrued interest.

2020, the parties entered a pre-arbitration mediation process in an effort to settle the litigation.

On May 13, 2021, the Company and

Seller entered into a settlement agreement wherein neither party admitted liability, and the Company agreed to pay, and Seller agreed

to accept, $100 as settlement in full for the outstanding balance of principal and accrued interest under the Amended and Restated Seller

Note and a mutual release of all claims related to the Amended and Restated Seller Note and sale transaction under the Allure Purchase

Agreement and all related agreements.

The Company expects to record a gain on settlement of obligations of $1,624 during the three months

On August 2, 2019, the Company filed suit in Jefferson Circuit Court,

Kentucky, against a supplier of Allure for breach of contract, breach of warranty, and negligence with respect to equipment installations

performed by such supplier for an Allure customer.

On October 10, 2019, the Allure customer that is

the basis of our claim above sent a demand to the Company for payment of $ 3,200 as settlement for an alleged breach of contract related

to hardware failures of equipment installations performed by Allure between November 2017 and August 2018.

The suits filed by and against

Allure have been adjoined in the Jefferson Circuit Court, Kentucky in January 2020.

These suits remain in the early stages of litigation

and, as a result, the outcome of the suit and the allocation of liability, if any, remain unclear, so the Company is unable to reasonably

estimate the possible liability, recovery, or range of magnitude for either the liability or recover, if any, at the time of this filing.

The Company has notified its insurance company

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

third parties should the customer prevail.

Except as noted above, the Company is not party

to any other material legal proceedings, other than ordinary routine litigation incidental to the business, as of August 16, 2021, and

there were no other such proceedings pending during the period covered by this Report.

Settlement of obligations

During the six months ended June 30, 2021, (i)

the full principal amount of the PPP Loan and the accrued interest of $ 1,552 were forgiven and recorded as a gain on settlement, and (ii)

the Company settled the Amended and Restated Seller Note and related accrued interest for $ 100 , recording a gain on settlement of $ 1,624 ,

representing $ 1,538 related to the Amended and Restated Seller Note and $ 86 of related interest thereon, during the three months ended

June 30, 2021.

During the three and six months ended June 30,

2021 and 2020, the Company settled and/or wrote off obligations of $ 15 and $ 59 , respectively, for aggregate cash payments of $ 2 and $ 19 ,

respectively, resulting in recognition of a gain on settlement of $ 13 and $ 40 , respectively.

Employee-related Expenses

During the three months ended March 31, 2020, we

completed a reduction-in-force and accrued one-time termination benefits related to severance to the affected employees of $ 135 , the total

of which was paid during the three months ended June 30, 2020.

There were no comparable activities during the three or six months

ended June 30, 2021.

as noted above, the Company is not party to any other material legal proceedings, other than ordinary routine litigation incidental to

the business, and there were no other such proceedings pending during the period covered by this Report.

of obligations

During the three months ended March 31, 2021 the

full principal amount of the PPP Loan and the accrued interest of $1,552 were forgiven and recorded as a gain on settlement.

the three months ended March 31, 2020, the Company settled and/or wrote off obligations of $59 for aggregate cash payments of $19 and

recognized a gain of $40 related to legacy accounts payable deemed to no longer be legal obligations to vendors.

Employee-related

the three months ended March 31, 2020, we completed a reduction-in-force and accrued one-time termination benefits related to severance

to the affected employees of $135, the total of which was paid during the three months ended June 30, 2020.

There were no comparable

activities during the three months ended March 31, 2021.

RELATED PARTY TRANSACTIONS

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

related party transactions.

Degrees Convenience Connect, Inc., a related party that is approximately 17.5% owned by a member of our senior management (“33

Degrees”), is a customer of both equipment and services from the Company.

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

Company had sales to 33 Degrees of $111, or 2.2%, and $500, or 13.5%, respectively, of consolidated revenue.

Accounts receivable due

from 33 Degrees was $13, or 0%, and $40, or 1.2%, of consolidated accounts receivable at March 31, 2021 and December 31, 2020, respectively.

deferred tax assets are primarily related to net federal and state operating loss carryforwards (NOLs).

We have substantial NOLs that

are limited in usage by IRC Section 382.

IRC Section 382 generally imposes an annual limitation on the amount of NOLs that may be used

to offset taxable income when a corporation has undergone significant changes in stock ownership within a statutory testing period.

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

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

the Company with a definite life.

the three months ended March 31, 2021, we reported tax liability of $0.

As of March 31, 2021, the net deferred tax assets totaled $0

after valuation allowance, consistent with December 31, 2020.

summary of outstanding equity warrants is included below:

In addition to the financing transactions with

Slipstream, a related party, discussed in Note 8 Loans Payable , we have the following related party transactions.

33 Degrees Convenience Connect, Inc., a related

party that is approximately 17.5 % owned by a member of our senior management (“33 Degrees”), is a customer of both equipment

and services from the Company.

For the three and six months ended June 30, 2021, the Company had sales to 33 Degrees of $171, or 5.2%,

and $282, or 3.4%, respectively, of consolidated revenue.

For the three and six months ended June 30, 2020, the Company had sales to 33

Degrees of $291, or 8.0%, and $791, or 10.7%, respectively, of consolidated revenue.

Accounts receivable due from 33 Degrees was $ 21 , or

0.9 %, and $ 40 , or 1.2 % of consolidated accounts receivable at June 30, 2021 and December 31, 2020, respectively.

Our deferred tax assets are primarily related to

net federal and state operating loss carryforwards (NOLs).

We have substantial NOLs that are limited in usage by IRC Section 382.

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

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

We have performed a preliminary analysis of the

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

Based on the history of losses of the Company,

there continues to be a full valuation allowance against the net deferred tax assets of the Company with a definite life.

For the three and six-months ended June 30, 2021,

we reported tax expense of $ 7 and $ 8 , respectively.

As of June 30, 2021, the net deferred tax assets totaled $ 0 after valuation allowance,

consistent with December 31, 2020.

A summary of outstanding warrants is included below:

Warrants (Equity)

Weighted Average Exercise Price

Weighted Average Remaining Contractual Life

Balance January 1, 2021

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Warrants expired

Balance March 31, 2021

Balance June 30, 2021

STOCK-BASED COMPENSATION

summary of outstanding options is included below:

A summary of outstanding options is included below:

Time Vesting Options

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Forfeited or expired

Balance, March 31, 2021

weighted average remaining contractual life for options exercisable is 4.9 years as of March 31, 2021.

Information for Stock-Based Compensation

purposes of determining estimated fair value under FASB ASC 718-10, Stock Compensation , the Company computed the estimated fair

values of stock options using the Black-Scholes model.

June 1, 2020 the Board of Directors of the Company granted 10-year options to purchase an aggregate of 2,380,000 shares of its common

stock to employees of the Company subject to shareholder approval of an increase in the reserve of shares authorized for issuance under

the Company’s 2014 Stock Incentive Plan (the “Plan”).

On July 10, 2020, the Company held a special meeting of the Company’s

shareholders at which the shareholders approved the amendment to the Plan, which increased the reserve of shares authorized for issuance

thereunder to 6,000,000 shares.

the 2,380,000 options awarded, 1,580,000 vest over 3 years and have an exercise price of $2.53, the market value of the Company’s

common stock on the grant date.

The fair value of the options on the grant date was $1.87 and was determined using the Black-Scholes

These values were calculated using the following weighted average assumptions:

Balance, June 30, 2021

The weighted average remaining contractual life

for options exercisable is 7.5 years as of June 30, 2021.

Valuation Information for Stock-Based Compensation

For purposes of determining estimated fair value

under FASB ASC 718-10, Stock Compensation , the Company computed the estimated fair values of stock options using the Black-Scholes

On June 1, 2020 the Board of Directors of the Company

granted 10-year options to purchase an aggregate of 2,380,000 shares of its common stock to employees of the Company subject to shareholder

approval of an increase in the reserve of shares authorized for issuance under the Company’s 2014 Stock Incentive Plan (as amended,

On July 10, 2020, the Company held a special meeting of the Company’s shareholders at which the shareholders

approved the amendment to the Plan, which increased the reserve of shares authorized for issuance thereunder to 6,000,000 shares.

Of the 2,380,000 options awarded, 1,580,000 vest

over 3 years and have an exercise price of $ 2.53 , the market value of the Company’s common stock on the grant date.

The fair value

of the options on the grant date was $ 1.87 and was determined using the Black-Scholes model.

These values were calculated using the following

weighted average assumptions:

Risk-free interest rate

2 unchanged sentences

Dividend yield

remaining 800,000 options awarded vest in equal installments over a three-year period subject to satisfying the Company revenue target

and earnings before interest, taxes, depreciation and amortization (“EBITDA”) target for the applicable year.

calendar years 2020, 2021 and 2022, one-third of the total shares may vest (if the revenue and EBITDA targets are met), and the shares

that are subject to vesting each year are allocated equally to each of the revenue and EBITDA targets for such year.

performance options include a catch-up provision, where any options that did not vest during a prior year due to the Company’s

failure to meet a prior revenue or EBITDA target may vest in a subsequent vesting year if the revenue or EBITDA target, as applicable,

is met in the future year.

The revenue and EBITDA targets for the following three years are as follows:

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

The options were issued from the Company’s 2014 Stock Incentive Plan.

The fair value of the options on the grant date was $1.87

and was determined using the Black-Scholes model.

These values were calculated using the same weighted average assumptions as the time

vesting options issued.

Performance against the identified revenue and EBITDA targets will be assessed quarterly by the Company in order

to determine whether any compensation expense should be recorded.

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

probable that the Company would achieve the EBITDA target for Calendar Year 2021 and recorded catch-up compensation expense in the Consolidated

Statement of Operations with respect to these awards of $263 during the three months ended March 31, 2021.

These awards have not yet vested

and are subject to actual results for the full fiscal year 2021.

Should this target not be achieved, amounts recorded as expense in the

Condensed Consolidated Statement of Operations would be reversed.

The Company anticipates recording approximately $79 during each subsequent

quarter of 2021 related to the EBITDA target for Calendar Year 2020 and 2021 portion of these awards.

During the three months ended March

31, 2020, the Company recorded no compensation expense in the Consolidated Statement of Operations with respect to these awards.

Compensation Expense Information

718-10, Stock Compensation , requires measurement and recognition of compensation expense for all stock-based payments including

warrants, stock options, restricted stock grants and stock bonuses based on estimated fair values.

Under the Amended and Restated 2006

Equity Incentive Plan, the Company reserved 1,720,000 shares for purchase by the Company’s employees and under the Amended and

Restated 2006 Non-Employee Director Stock Option Plan the Company reserved 700,000 shares for purchase by the Company’s employees.

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

October 2014, the Company’s shareholders approved the 2014 Stock Incentive Plan, under which 7,390,355 shares were reserved for

purchase by the Company’s employees.

In August 2018, a special meeting of shareholders was held in which the shareholders voted

to amend the Company’s 2014 Stock Incentive Plan to increase the reserve of shares authorized for issuance thereunder, from 7,390,355

shares to 18,000,000 shares.

Following a 1-for-30 reverse stock split, the shares authorized for issuance under the Company’s 2014

Stock Incentive Plan was reduced to 600,000.

On July 10, 2020, the Company’s shareholders approved an amendment to the Company’s

2014 Stock Incentive Plan to increase the reserve of authorized for issuance thereunder to 6,000,000.

There are 2,601,674 options outstanding

under the 2014 Stock Incentive Plan.

The remaining 800,000 options awarded vest in equal

installments over a three-year period subject to satisfying the Company revenue target and earnings before interest, taxes, depreciation

and amortization (“EBITDA”) target for the applicable year.

In each of calendar years 2020, 2021 and 2022, one-third of the

total shares may vest (if the revenue and EBITDA targets are met), and the shares that are subject to vesting each year are allocated

equally to each of the revenue and EBITDA targets for such year.

These performance options include a catch-up provision,

where any options that did not vest during a prior year due to the Company’s failure to meet a prior revenue or EBITDA target may

vest in a subsequent vesting year if the revenue or EBITDA target, as applicable, is met in the future year.

The revenue and EBITDA targets

for the following three years are as follows:

Calendar Year

Revenue Target

EBITDA Target

$ 2.2 million

$ 3.1 million

$ 3.5 million

The exercise price of the foregoing options is

$ 2.53 per share, the closing price of the Company’s common stock on the date of issuance.

The options were issued from the Plan.

The fair value of the options on the grant date was $ 1.87 and was determined using the Black-Scholes model.

These values were calculated

using the same weighted average assumptions as the time vesting options issued.

Performance against the identified revenue and EBITDA

targets will be assessed quarterly by the Company in order to determine whether any compensation expense should be recorded.

During the three months ended March 31, 2021, the

Company deemed it probable that the Company would achieve the EBITDA target for Calendar Year 2021 and recorded catch-up compensation

expense in the Consolidated Statement of Operations with respect to these awards of $ 263 during the three months ended March 31, 2021.

These awards have not yet vested and are subject to actual results for the full fiscal year 2021.

Should this target not be achieved,

amounts recorded as expense in the Condensed Consolidated Statement of Operations would be reversed.

The Company recorded $ 79 during the

three months ended June 30, 2021 and anticipates recording $ 79 in each subsequent quarter of 2021 related to the EBITDA target for Calendar

Year 2020 and 2021 portion of these awards.

Stock Compensation Expense Information

ASC 718-10, Stock Compensation , requires

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

and stock bonuses based on estimated fair values.

Under the Amended and Restated 2006 Equity Incentive Plan, the Company reserved 1,720,000

shares for purchase by the Company’s employees and under the Amended and Restated 2006 Non-Employee Director Stock Option Plan the

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

There are 12,135 options outstanding under the 2006 Equity

Incentive Plan.

In October 2014, the Company’s shareholders

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

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

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

Following a 1-for-30

reverse stock split, the shares authorized for issuance under the Company’s 2014 Stock Incentive Plan was reduced to 600,000 .

July 10, 2020, the Company’s shareholders approved an amendment to the Company’s 2014 Stock Incentive Plan to increase the

reserve of authorized for issuance thereunder to 6,000,000 .

Employee Awards

Compensation expense recognized for the issuance

of stock options, including those options awarded to our Chairman of the Board, for the three months ended March 31, 2021 and 2020 of

$539 and $50, respectively, was included in general and administrative expense in the Condensed Consolidated Statement of Operations.

Amounts recorded include stock compensation expense for awards granted to directors of the Company in exchange for services at fair value

of $27 and $34 for the three months ended March 31, 2021 and 2020, respectively.

As of March 31, 2021, there was approximately $2,113

of stock options, inclusive of performance-restricted stock options, for the three and six months ended June 30, 2021 of $ 356 and $ 895 ,

respectively, was included in general and administrative expense in the Condensed Consolidated Financial Statements.

Compensation expense

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

in general and administrative expense in the Condensed Consolidated Financial Statements.

Amounts recorded include stock compensation

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

As of June 30, 2021, there was approximately $ 1,861

and $ 1,157 of total unrecognized compensation expense related to unvested share-based awards with time vesting and performance vesting

criteria, respectively.

As of March 31, 2020, there was approximately $155 and $0 of total unrecognized compensation expense related to

unvested share-based awards with time vesting and performance vesting criteria, respectively.

Generally, expense related to the time vesting

options will be recognized over the next two- and one-half years and will be adjusted for any future forfeitures as they occur.

expense related to performance vesting options will be recognized if it becomes probable that the Company will achieve the identified

performance metrics.

As of June 30, 2020, there was approximately $ 3,014 and $ 1,499 of total unrecognized compensation expense related

to unvested share-based awards with time vesting and performance vesting criteria, respectively.

Generally, expense related to the time

vesting options will be recognized over the next two- and one-half years and will be adjusted for any future forfeitures as they occur.

Compensation expense related to performance vesting options will be recognized if it becomes probable that the Company will achieve the

identified performance metrics.

Non-Employee Awards

During the three months ended June 30, 2021, the

Company engaged certain consultants to perform services in exchange for Company common stock.

Shares issued for services were calculated

based on the ten (10) day volume weighted average price (“VWAP”) for the last ten (10) days during the month of service provided.

The Company recorded $ 40 in compensation expense during the period in exchange for issuance of 22,204 shares.

SIGNIFICANT CUSTOMERS/VENDORS

had two (2) and two (2) customers that in the aggregate accounted for 41.6% and 42.6% of accounts receivable as of March 31, 2021 and

December 31, 2020, respectively.

had two (2) and three (3) customers that accounted for 40% and 40% of revenue for the three months ended March 31, 2021 and 2020, respectively,

of which 33 Degrees represented 2.2% and 13.6% for the same periods, respectively.

had three (3) and two (2) vendors that accounted for 48% and 47% of outstanding accounts payable at March 31, 2021 and December 31, 2020,

respectively.

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

Our leases have

original lease periods expiring between 2021 and 2025.

Significant Customers

We had two (2) customers that in the aggregate

accounted for 32.9 % and 42.6 % of accounts receivable as of June 30, 2021 and December 31, 2020, respectively.

We had three (3) and two (2) customers that accounted

for 44.0 % and 27.0 % of revenue for the three months ended June 30, 2021 and 2020, respectively.

We had two (2) customers that accounted

for 37.4 % and 22.5 % of revenue for the six months ended June 30, 2021 and 2020, respectively.

Significant Vendors

We had two (2) vendors that accounted for 22.7 %

and 47.0 % of outstanding accounts payable at June 30, 2021 and December 31, 2020, respectively.

We have entered into various non-cancelable operating

lease agreements for certain of our offices and office equipment.

Our leases have original lease periods expiring between 2021 and 2025.

Many leases include one or more options to renew.

We do not assume

renewals in our determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement.

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

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

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

are deemed to be reasonably assured at lease commencement.

Our lease agreements do not contain any material residual value guarantees

or material restrictive covenants.

The components of lease costs, lease term and discount

rate are as follows:

(in thousands)

Three Months Ended

Six Months Ended

Finance lease cost

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Finance leases

following is a schedule, by years, of maturities of lease liabilities as of March 31, 2021:

The following is a schedule, by years, of maturities

of lease liabilities as of June 30, 2021:

(in thousands)

3 unchanged sentences

Present value of lease liabilities

cash flow information related to leases are as follows:

Supplemental cash flow information related to leases

are as follows:

(in thousands)

Three Months Ended

Six Months Ended

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

2 unchanged sentences

Financing cash flows from finance leases

Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements

The following discussion contains various forward-looking statements

within the meaning of Section 21E of the Exchange Act.

Although we believe that, in making any such statement, our expectations are based

on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially

different from those projected.

When used in the following discussion, the words “anticipates,”

“believes,”

“expects,”

“intends,”

“plans,”

“estimates,”

“projects,”

should,”

“may,”

“propose,”

and similar expressions (or the negative versions of such words or expressions), as they relate to us or our management, are intended

to identify such forward-looking statements.

These forward-looking statements are subject to numerous risks and uncertainties that could

cause actual results to differ materially from those anticipated, and many of which are beyond our control.

Factors that could cause actual

results to differ materially from those anticipated are set forth under the caption “Risk Factors”

in the Company’s

Form 10-K for the year ended December 31, 2020 as filed with the Securities and Exchange Commission on March 10, 2021.

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

Accordingly, we cannot be certain that any of the events anticipated by forward-looking statements will occur or, if any of them do occur,

what impact they will have on us.

We caution you to keep in mind the cautions and risks described in this document and to refrain from

attributing undue certainty to any forward-looking statements, which speak only as of the date of the document in which they appear.

We do not undertake to update any forward-looking statement.

Realities, Inc.

is a Minnesota corporation that provides innovative digital marketing technology solutions to a broad range of companies,

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

We have expertise

in a broad range of existing and emerging digital marketing technologies across approximately fifteen (15) vertical markets, as well

as the related media management and distribution software platforms and networks, device and content management, product management,

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

Our technology and solutions include:

digital merchandising systems and omni-channel customer engagement systems;

content creation, production and scheduling programs and

a comprehensive series of recurring maintenance, support, and field service offerings;

interactive digital shopping assistants,

advisors and kiosks;

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

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

Our main operations are conducted directly through Creative Realities,

Inc., and 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..

generate revenue in our business by:

consulting with our customers to determine the technologies

and solutions required to achieve their specific goals, strategies and objectives;

designing our customers’

digital marketing experiences,

content and interfaces;

engineering the systems architecture delivering the

digital marketing experiences we design –

both software and hardware –

and integrating those systems into a customized,

reliable and effective digital marketing experience;

managing the efficient, timely and cost-effective deployment

of our digital marketing technology solutions for our customers;

delivering and updating the content of our digital

marketing technology solutions using a suite of advanced media, content and network management software products;

maintaining our customers’

digital marketing

technology solutions by:

providing content production and related services;

creating additional software-based features and functionality;

hosting the solutions;

monitoring solution service levels;

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

troubleshooting and support calls.

activities generate revenue through:

bundled-solution sales;

consulting services, experience design, content development and production,

software development, engineering, implementation, and field services;

software license fees;

and maintenance and support services related

to our software, managed systems and solutions.

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

Through the first quarter of

2020, the disease became widespread around the world, and on March 11, 2020, the World Health Organization declared a pandemic.

state and local authorities in the United States and worldwide have forced many businesses to temporarily reduce or cease operations

to slow the spread of the COVID-19 pandemic.

As a result of the COVID-19 pandemic, we have experienced

rapid and immediate deterioration in our business in each of our key vertical markets.

The elective and forced closures of, and implementation

of social distancing policies on, businesses across the United States has resulted in materially reduced demand for our services by our

customers, as our customers purchase our products and services to engage with their end customers in a physical space through digital

technology, particularly in our theater, sports arena and large entertainment markets.

The reduced demand has resulted in customer orders

being delayed.

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

and cash flows, resulting in a non-cash impairment loss of $10,646 recorded during the first quarter of 2020 and reduced liquidity

as described below.

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

We believe that the digital signage industry will experience rapid consolidation, adding scale and enhancing profitability to those companies

that emerge as the enterprise-level providers within our industry after the COVID-19 pandemic and consolidations.

We believe that one

byproduct of the COVID-19 pandemic may be the acceleration of industry consolidation as smaller providers may be unwilling or unable

to continue business over the course of 2021.

the uncertainty around the extent and timing of the potential future spread or mitigation of the COVID-19 pandemic and around the imposition

or relaxation of protective measures, we cannot reasonably estimate the impact to our future results of operations, cash flows, or financial

condition at this time.

Semiconductor Chip Shortage

The Company’s suppliers of digital displays,

the primary hardware component in the Company’s digital systems, have informed the Company that, due to component shortages in the

industry, such suppliers expect delays and potentially increased costs for the Company to obtain digital displays necessary to fulfil

and install the Company’s digital solutions.

Historically, such digital displays have been readily available for purchase and delivery,

to be purchased by the Company from distributors from such distributor’s existing inventory.

Such delays will likely result in a

longer sales cycles and prolonged periods in which the Company will be able to recognize revenues compared to historical time periods.

The increased costs for such displays may also reduce the margins in which the Company has received on account of the purchase and installation

of such displays as part the Company’s digital signage product offerings.

Although we believe that such shortage will be alleviated

in the future, the Company is not aware of how long such delays may exist, the effect such delays and increased demand may have on the

cost to procure such digital screens, or the adverse impacts on our financial results.

Space Solutions

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.

Throughout the course of the remainder of 2020 and thus far through 2021, the Company and InReality have continued to develop incremental

use cases and have launched a suite of Safe Space Solutions products addressing this market, each of which operate consistently with our

primary business model in that they represent a sale of hardware and a SaaS-based subscription license services contract.

During the three

months ended March 31, 2021, the Company generated revenue of $1,019 from of our Safe Space Solutions products and services (inclusive

of the portion of revenue recognized during the three months ended March 31, 2021 related to annual contracts sold in prior periods).

There was no revenue related to these products and services during the three months ended March 31, 2020.

these products and our launch have been successful, the Company retains some level of risk related to the ultimate recovery of our

initial investment into the inventory acquired to launch and support these products.

Direct Offering

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, in a registered direct offering at a purchase price of $2.50 per share, for gross proceeds of $2,000.

See Note 1 Nature of Organization to the Condensed Consolidated Financial Statements for additional details with respect to the

transaction and related accounting.

and Restated Credit Agreement

March 7, 2021, the Company refinanced their current debt facilities with Slipstream, pursuant to the Credit Agreement.

See Note 8 Loans

Payable to the Condensed Consolidated Financial Statements for additional details with respect to the transaction and related accounting.

Sources of Revenue

generate revenue through digital marketing solution sales, which include system hardware, professional and implementation services, software

design and development, software licensing, deployment, and maintenance and support services.

currently market and sell our technology and solutions primarily through our sales and business development personnel, but we also utilize

agents, strategic partners, and lead generators who provide us with access to additional sales, business development and licensing opportunities.

expenses are primarily comprised of three categories:

sales and marketing, research and development, and general and administrative.

Sales and marketing expenses include salaries and benefits for our sales, business development, solution management and marketing personnel,

and commissions paid on sales.

This category also includes amounts spent on marketing networking events, promotional materials, hardware

and software to prospective new customers, including those expenses incurred in trade shows and product demonstrations, and other related

Our research and development expenses represent the salaries and benefits of those individuals who develop and maintain our

proprietary software platforms and other software applications we design and sell to our customers.

Our general and administrative expenses

consist of corporate overhead, including administrative salaries, real property lease payments, salaries and benefits for our corporate

officers and other expenses such as legal and accounting fees.

Accounting Policies and Estimates

Company’s significant accounting policies are described in Note 2 Summary of Significant Accounting Policies of the Company’s

Condensed Consolidated Financial Statements included elsewhere in this filing.

The Company’s Condensed Consolidated Financial Statements

are prepared in conformity with accounting principles generally accepted in the United States.

Certain accounting policies involve significant

judgments, assumptions, and estimates by management that could have a material impact on the carrying value of certain assets and liabilities

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

of revenue and expenses during the reporting period.

Our actual results could differ from those estimates.

of Operations

All dollar amounts reported in Results of Operations are in thousands, except share and per-share information.

Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

tables presented below compare our results of operations and present the results for each period and the change in those results from

one period to another in both dollars and percentage change.

For the three months

ended March 31,

Cost of sales

Sales and marketing expenses

Research and development expenses

General and administrative expenses

Bad debt (recovery)/expense

Depreciation and amortization expense

Loss on goodwill impairment

Total operating expenses

Operating income/(loss)

Other income/(expenses):

Interest expense

Change in fair value of Convertible Loan

Gain on settlement of obligations

Other income/(expense)

Total other income/(expense)

Net income/(loss) before income taxes

Income tax (expense)/benefit

Net income/(loss)

Sales increased by $1,300, or 35%, in the three

months ended March 31, 2021 as compared to the same period in 2020, driven by sales of $1,019 during the three months ended March 31,

2021 of our Safe Space Solutions products and services (inclusive of the portion of revenue recognized during the three months ended March

31, 2021 related to annual contracts sold in prior periods), which launched in April 2020.

There were no sales of Safe Space Solutions

in the corresponding prior period.

During the three months ended March 31, 2021, the expansion of a relationship with a pre-existing customer

added approximately $1,162 as compared to the same period in 2020, partially offset by lower installation revenues in the period due to

continued closures in certain market verticals, including movie theaters and sports venues.

Gross profit increased $627, or 39%, from $1,607 during

the three months ended March 31, 2020 to $2,234 for the three months ended March 31, 2021.

Of the increase, $564, or 90% of the increase,

was directly attributable to the increase in sales period over period, with the remaining increase the result of gross margin percent

period-over-period to 44.6% from 43.4% as a result of increase in recurring revenues as a percent of total revenue.

and Marketing Expenses

and marketing expenses generally include the salaries, taxes, and benefits of our sales and marketing personnel, as well as trade show

activities, travel, and other related sales and marketing costs.

Sales and marketing expenses decreased by $92, or 22%, in 2021 compared

The decrease was a result of reduced personnel costs, combined with reduced spend on trade show activity and related travel

costs following the cancellation of several key industry events as a result of COVID-19.

We anticipate our sales personnel will maintain

a reduced level of travel costs as compared to 2019 during the extended pandemic period and utilize virtual meeting technology more commonly

moving forward, but that these costs will increase as compared to 2020 during the second half of 2021.

and Development Expenses

and development expenses decreased by $142, or 45%, in 2021 compared to 2020 as the result of a reduction in personnel costs during the

period and a reallocation of certain internal resources away from research and development activities into revenue generating services

and support activities.

and Administrative Expenses

Total general and administrative expenses decreased

by $403, or 16%, exclusive of the effects of bad debt expenses during the three months ended March 31, 2021 as compared to the same period

in the prior year because of reductions of (a) $552 in personnel costs, including salaries, benefits, and travel-related expenses, and

(b) $117 in rent expense following closure, downsizing, or restructuring of four leases during 2020, partially offset by an increase in

stock compensation amortization expense of $233 related to incremental employee and directors’

awards granted during 2020 which

are being amortized over a nineteen (19) month remaining vesting period based on the grant date fair value calculated using the Black

Scholes method.

Personnel costs were reduced following completion of a reduction-in-force and salary reductions for remaining personnel

in March 2020.

related to the Company’s allowance for bad debts decreased by $856, or 249%, in 2021 compared to 2020.

This decrease was primarily

driven by a cash recovery of $555 related to a customer bankruptcy for which the Company previously recorded a reserve during the three

months ended June 30, 2020.

and Amortization Expenses

and amortization expenses decreased by $22, or 6%, in 2021 compared to 2020.

This decrease was the result of a trade name asset becoming

fully amortized during 2020 and having no amortization recorded during the three months ended March 31, 2021.

Note 7 Intangible Assets, Including Goodwill to the Condensed Consolidated Financial Statements for a discussion of the Company’s

interim impairment test and the non-cash impairment charge recorded.

Note 8 Loans Payable to the Condensed Consolidated Financial Statements for a discussion of the Company’s debt and related

interest expense obligations.

in fair value of convertible loans

of March 31, 2021, we utilized the assistance of a third-party valuation specialist to assist in updating our fair value analysis of

the Convertible Loan, resulting in recognition of a $166 gain during the period from the change in fair value of the liability.

We recognized

a $151 loss related to the Convertible Loan during the three months ended March 31, 2020.

Unaudited Quarterly Financial Information

following represents unaudited financial information derived from the Company’s quarterly financial statements:

Quarters Ended

Quarters ended

September 30,

Cost of sales

Operating expenses, excluding depreciation and amortization

Goodwill impairment

Loss on lease termination

Depreciation/amortization

Operating income (loss)

Other expenses/(income)

Income tax expense/(benefit)

Net income (loss)

Operating Results on a Non-GAAP Basis

following non-GAAP data, which adjusts for the categories of expenses described below, is a non-GAAP financial measure.

Our management

believes that this non-GAAP financial measure is useful information for investors, shareholders and other stakeholders of our company

in gauging our results of operations on an ongoing basis.

We believe that EBITDA is a performance measure and not a liquidity measure,

and therefore a reconciliation between net loss/income and EBITDA and Adjusted EBITDA has been provided.

EBITDA should not be considered

as an alternative to net loss/income as an indicator of performance or as an alternative to cash flows from operating activities as an

indicator of cash flows, in each case as determined in accordance with GAAP, or as a measure of liquidity.

In addition, EBITDA does not

take into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows.

intend the presentation of these non-GAAP measures to be considered in isolation or as a substitute for results prepared in accordance

These non-GAAP measures should be read only in conjunction with our consolidated financial statements prepared in accordance

Quarters Ended

September 30,

Quarters ended

GAAP net income (loss)

Interest expense:

Amortization of debt discount

Other interest, net

Depreciation/amortization:

Amortization of intangible assets

Amortization of finance lease assets

Amortization of share-based awards

Depreciation of property, equipment & software

Income tax expense/(benefit)

Change in fair value of Special Loan

Gain on settlement of obligations

Loss on disposal of assets

Loss on lease termination

Loss on goodwill impairment

Stock-based compensation –

Director grants

Adjusted EBITDA

and Capital Resources

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.

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.

believes that, based on (i) the forgiveness of our PPP Loan, (ii) the execution of a registered direct offering and remaining availability

for incremental offerings under our previously registered Form S-3, (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.

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.

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.

The Company’s suppliers of digital screens

have informed the Company that, due to component shortages in the industry, such suppliers expect delays and increased costs for the Company

to obtain digital screens necessary to fulfil and install the Company’s digital solutions.

Historically, such digital screens have

been readily available for purchase and delivery, to be purchased by the Company from distributors from such distributor’s existing

Such delays will likely result in a longer sales cycles and prolonged periods in which the Company will be able to recognize

revenues compared to historical time periods.

The increased costs for such screens may also reduce the margins in which the Company has

received on account of the purchase and installation of such screens as part the Company’s digital signage product offerings.

we believe that such shortage will be alleviated in the future, the Company is not aware of how long such delays may exist, the effect

such delays and increased demand may have on the cost to procure such digital screens, or the adverse impacts on our financial results.

The cash flows used in operating activities were $21

and $117 for the period ended March 31, 2021 and March 31, 2020, respectively.

We produced net income of income of $1,272 which was offset

via addback of the gain on forgiveness of the Company’s PPP Loan in the amount of $1,552.

Cash flows from operating activities were

driven by increases of $661 and $225 in deferred revenues and inventories, respectively, offset by an increase of $1,491 in accounts receivable

due in part to the settlement of a customer bankruptcy during the reporting period.

cash used in investing activities during the three months ended March 31, 2021 was $115 compared to $268 during the same period in 2020.

The use of cash in both periods represents payments made for capital assets, primarily related to the capitalization of both internal

and external software development.

We currently do not have any material commitments for capital expenditures as of March 31, 2021, nor

do we anticipate capital expenditures in excess of our historical trends throughout the balance of the year.

Net cash provided by financing activities during

the three months ended March 31, 2021 was $1,845 compared to net cash used in financing activities of $8 for the same period in 2020.

On February 18, 2021, the Company entered into a securities purchase agreement with an institutional investor for the issuance and sale

of the Company’s common stock.

The net proceeds from the Offering after paying estimated offering expenses were approximately $1,849.

have no material commitments for capital expenditures, and we do not anticipate any significant capital expenditures for the remainder

Sheet Arrangements

the three months ended March 31, 2021, we did not engage in any off-balance sheet arrangements set forth in Item 303(a) (4) of Regulation

EMPLOYEE RETENTION CREDITS

The CARES Act provides an employee retention credit

(“ERC”) that is a refundable tax credit against certain employer taxes.

On December 27, 2020, Congress enacted the Taxpayer

Certainty and Disaster Tax Relief Act of 2020, which amended and extended ERC availability under Section 2301 of the CARES Act.

the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, businesses who were provided SBA PPP Loans under the CARES

Act were ineligible for the ERC.

Following enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, such businesses became

retroactively eligible for the ERC.

As a result of the foregoing legislation, the Company

is eligible to claim a refundable tax credit against the employer share of Social Security taxes equal to seventy percent ( 70 %) of the

qualified wages that the Company pays to employees between December 31, 2020 and June 30, 2021.

Qualified wages are limited to $ 10 per

employee per calendar quarter in 2021 for a maximum ERC per employee of $ 7 per calendar quarter in 2021.

As a result of the Taxpayer Certainty and Disaster

Tax Relief Act of 2020, the Company is now eligible to make ERC claims for each quarter in 2020 and 2021, subject to the other eligibility

requirements.

The ERC was extended and expanded in March 2021 through

December 31, 2021, as part of the American Rescue Plan Act of 2021 (“ARPA”).

Under the CARES Act, the amount of

credit was fifty percent (50%) of qualified wages paid to the employee plus the employer cost to provide health benefits.

Consolidated Appropriations Act of 2021, eligible employers can claim a refundable tax credit against the employer share of Social

Security taxes equal to seventy percent (70%) of the qualified wages they pay to employees after December 31, 2020, through June

The ARPA allows employers to retain a seventy percent (70%) credit for qualified wages paid between July 1, 2021, and December

31, 2021, including the cost to provide health benefits.

The Company qualified for the ERC beginning on

March 13, 2020 (the earliest eligibility date) through June 30, 2021 (the most recent assessment date).

During the three months ended June 30, 2021, the

Company recorded an ERC totaling $ 1,237 , representing $ 396 , $ 412 , and $ 429 for credits earned for wages paid in 2020, the first quarter

of 2021, and the second quarter of 2021, respectively.

The Company filed Form 941-X with the IRS for each quarter of 2020 and the first

quarter of 2021.

Credits for the second quarter of 2021 were claimed on the Company’s original Form 941 .

The Company has recorded

these amounts as receivable within prepaid and other currents assets within the Condensed Consolidated Balance Sheet as of June 30, 2021.

During the three months ended June 30, 2021, the

$ 1,237 of ERCs were included as a reduction in payroll taxes within the Condensed Consolidated Statement of Operations and allocated to

the financial statement caption from which the employee taxes were originally incurred.

As a result, the Company recorded a reduction

in expenses of $ 400 , $ 182 , $ 147 , and $ 508 in Cost of Goods – Services, Sales and Marketing Expenses, Research and Development Expenses,

and General and Administrative Expenses, respectively, for the three months ended June 30, 2021.

The Company would qualify for an ERC for each remaining

quarter during 2021 in which the Company experiences a “significant decline in gross receipts,” defined as quarterly gross

receipts that are less than eighty percent ( 80 %) of its gross receipts for the same calendar quarter in 2019.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements