CREATIVE REALITIES, INC. 10-Q

Item 1. Financial Statements CREATIVE REALITIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) (Unaudited) September 30, December 31, 2021 2020 (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 2,772 $ 1,826 Accounts receivable, net of allowance of $ 489 and $ 1,230 , respectively 2,591 2,302 Unbilled receivables 180 41 Work-in-process and inventories, net 1,952 2,351 Prepaid expenses and other current assets 1,517 507 Total current assets $ 9,012 $ 7,027 Operating lease right-of-use assets 712 931 Property and equipment, net 1,155 1,340 Intangibles, net 3,372 3,790 Goodwill 7,525 7,525 Other assets 5 5 TOTAL ASSETS $ 21,781 $ 20,618 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Short-term seller note payable $ - $ 1,637 Short-term related party convertible loans payable, at fair value 1,209 - Accounts payable 1,554 1,661 Accrued expenses 1,694 2,142 Deferred revenues 770 764 Customer deposits 368 770 Current maturities of operating and finance leases 283 359 Total current liabilities $ 5,878 $ 7,333 Long-term Payroll Protection Program note payable - 1,552 Long-term related party loans payable, net of $ 171 and $ 168 discount, respectively 4,595 4,436 Long-term related party convertible loans payable, at fair value 1,042 2,270 Long-term obligations under operating leases 472 584 Long-term accrued expenses 29 108 TOTAL LIABILITIES $ 12,016 $ 16,283 SHAREHOLDERS’ EQUITY Common stock, $ 0.01 par value, 200,000 shares authorized; 11,919 and 10,924 shares issued and outstanding, respectively 119 109 Additional paid-in capital 60,178 56,712 Accumulated deficit ( 50,532 ) ( 52,486 ) Total shareholders’ equity $ 9,765 $ 4,335 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 21,781 $ 20,618 See accompanying notes to condensed consolidated financial statements 1 CREATIVE REALITIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) For the Three Months Ended For the Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Sales Hardware $ 2,215 $ 2,850 $ 6,327 $ 5,818 Services and other 2,538 2,257 6,707 6,649 Total sales 4,753 5,107 13,034 12,467 Cost of sales Hardware 1,588 1,882 4,372 4,161 Services and other 818 781 2,206 2,438 Total cost of sales 2,406 2,663 6,578 6,599 Gross profit 2,347 2,444 6,456 5,868 Operating expenses: Sales and marketing expenses 330 411 834 1,209 Research and development expenses 226 229 455 787 General and administrative expenses 1,848 1,849 5,623 6,340 Bad debt (recovery) / expense - - ( 463 ) 830 Depreciation and amortization expense 347 377 1,035 1,123 Goodwill impairment - - - 10,646 Total operating expenses 2,751 2,866 7,484 20,935 Operating loss ( 404 ) ( 422 ) ( 1,028 ) ( 15,067 ) Other income / (expenses): Interest expense ( 186 ) ( 265 ) ( 617 ) ( 752 ) Gain on settlement of obligations 256 114 3,449 155 Change in fair value of Convertible Loan - - 166 ( 702 ) Other expense ( 8 ) ( 13 ) ( 7 ) ( 13 ) Total other income / (expense) 62 ( 164 ) 2,991 ( 1,312 ) Income/(loss) before income taxes ( 342 ) ( 586 ) 1,963 ( 16,379 ) Benefit/(provision) for income taxes ( 1 ) 1 ( 9 ) 152 Net income/(loss) $ ( 343 ) $ ( 585 ) $ 1,954 $ ( 16,227 ) Basic earnings/(loss) per common share $ ( 0.03 ) $ ( 0.06 ) $ 0.17 $ ( 1.63 ) Diluted earnings/(loss) per common share $ ( 0.03 ) $ ( 0.06 ) $ 0.17 $ ( 1.63 ) Weighted average shares outstanding - basic 11,897 10,312 11,692 9,977 Weighted average shares outstanding - diluted 11,897 10,312 11,692 9,977 See accompanying notes to condensed consolidated financial statements. 2 CREATIVE REALITIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, 2021 2020 Operating Activities: Net income/(loss) $ 1,954 $ ( 16,227 ) Adjustments to reconcile net income/(loss) to net cash used in operating activities Depreciation and amortization 1,035 1,123 Amortization of debt discount 130 254 Stock-based compensation 1,252 442 Shares issued for services 85 - Gain on forgiveness of Paycheck Protection Program ( 1,552 ) - Gain on settlement of Seller Note ( 1,538 ) - Change in fair value of Convertible Loan ( 166 ) 702 Deferred tax benefit - ( 175 ) Allowance for doubtful accounts ( 274 ) 701 Increase in notes due to in-kind interest 467 356 Loss on goodwill impairment - 10,646 Loss on disposal of assets - 13 Gain on settlement of obligations ( 359 ) ( 135 ) Changes to operating assets and liabilities: Accounts receivable and unbilled receivables ( 154 ) 523 Inventories 399 ( 2,283 ) Prepaid expenses and other current assets ( 1,010 ) ( 99 ) Operating lease right-of-use assets, net 219 411 Other assets - 133 Accounts payable ( 94 ) 214 Deferred revenue 6 244 Accrued expenses ( 181 ) ( 664 ) Deposits ( 402 ) 120 Operating lease liabilities, non-current ( 184 ) ( 409 ) Net cash used in operating activities ( 367 ) ( 4,110 ) Investing activities Purchases of property and equipment ( 10 ) ( 161 ) Capitalization of labor for software development ( 422 ) ( 398 ) Net cash used in investing activities ( 432 ) ( 559 ) Financing activities Principal payments on finance leases ( 4 ) ( 18 ) Proceeds from Paycheck Protection Program loan - 1,552 Issuance of common stock – warrant exercise - 121 Repayment of Seller Note ( 100 ) - Proceeds from sale of shares via registered direct offering, net 1,849 1,335 Net cash provided by financing activities 1,745 2,990 Increase/(decrease) in Cash and Cash Equivalents 946 ( 1,679 ) Cash and Cash Equivalents, beginning of period 1,826 2,534 Cash and Cash Equivalents, end of period $ 2,772 $ 855 See accompanying notes to condensed consolidated financial statements. 3 CREATIVE REALITIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in thousands, except shares) Additional Common Stock paid in Accumulated Shares Amount capital (Deficit) Total Three months ended September 30, 2021 Balance as of June 30, 2021 11,876,679 $ 118 $ 59,777 $ ( 50,189 ) $ 9,706 Shares issued for services 31,257 - 45 - 45 Shares issued to directors as compensation 11,524 1 25 - 26 Stock-based compensation - - 331 - 331 Net income / (loss) - - - ( 343 ) ( 343 ) Balance as of September 30, 2021 11,919,460 $ 119 $ 60,178 $ ( 50,532 ) $ 9,765 Additional Common Stock paid in Accumulated Shares Amount capital (Deficit) Total Nine months ended September 30, 2021 Balance as of December 31, 2020 10,924,287 $ 109 $ 56,712 $ ( 52,486 ) $ 4,335 Shares issued for services 53,461 1 84 - 85 Shares issued to directors as compensation 44,568 - 75 - 75 Stock-based compensation - - 1,177 - 1,177 Conversion of Disbursed Escrow Loan 97,144 1 263 - 264 Gain on Extinguishment of Special Loan - - 26 - 26 Sales of Shares via registered direct offering, net of offering cost 800,000 8 1,841 - 1,849 Net income / (loss) - - - 1,954 1,954 Balance as of September 30, 2021 11,919,460 $ 119 $ 60,178 $ ( 50,532 ) $ 9,765 Additional Common Stock paid in Accumulated Shares Amount capital (Deficit) Total Three months ended September 30, 2020 Balance as of June 30, 2020 9,854,623 $ 98 $ 54,342 $ ( 51,284 ) $ 3,156 Stock-based compensation - - 248 - 248 Shares issued to directors as compensation 10,044 - 25 - 25 Shares issued through at-the-market offering 578,183 6 1,329 - 1,335 Net income / (loss) - - - ( 585 ) ( 585 ) Balance as of September 30, 2020 10,442,850 $ 104 $ 55,944 $ ( 51,869 ) $ 4,179 Additional Common Stock paid in Accumulated Shares Amount capital (Deficit) Total Nine months ended September 30, 2020 Balance as of December 31, 2019 9,774,546 $ 98 $ 54,052 $ ( 35,642 ) $ 18,508 Shares issued to directors as compensation 62,521 - 74 - 74 Stock-based compensation - - 368 - 368 Shares issued through at-the-market offering 578,183 6 1,329 - 1,335 Exercise of warrants 27,600 - 121 - 121 Net income / (loss) - - - ( 16,227 ) ( 16,227 ) Balance as of September 30, 2020 10,442,850 $ 104 $ 55,944 $ ( 51,869 ) $ 4,179 See accompanying notes to condensed consolidated financial statements. 4 CREATIVE REALITIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (all currency in thousands, except per share amounts) (unaudited) NOTE 1: NATURE OF ORGANIZATION AND OPERATIONS Unless the context otherwise indicates, references in these Notes to the accompanying condensed consolidated financial statements to “we,” “us,” “our” and “the Company” refer to Creative Realities, Inc. and its subsidiaries. Nature of the Company’s Business Creative Realities, Inc. is a Minnesota corporation that provides innovative digital marketing technology and solutions to retail companies, individual retail brands, enterprises and organizations throughout the United States and in certain international markets. The Company has expertise in a broad range of existing and emerging digital marketing technologies, as well as the related media management and distribution software platforms and networks, device management, product management, customized software service layers, systems, experiences, workflows, and integrated solutions. Our technology and solutions include: digital merchandising systems and omni-channel customer engagement systems, interactive digital shopping assistants, advisors and kiosks, and other interactive marketing technologies such as mobile, social media, point-of-sale transactions, beaconing and web-based media that enable our customers to transform how they engage with consumers. We have expertise in a broad range of existing and emerging digital marketing technologies, as well as the following related aspects of our business: content, network management, and connected device software and firmware platforms; customized software service layers; hardware platforms; digital media workflows; and proprietary processes and automation tools. 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. Liquidity and Financial Condition The accompanying Condensed Consolidated Financial Statements have been prepared on the basis of the realization of assets and the satisfaction of liabilities and commitments in the normal course of business and do not include any adjustments to the recoverability and classifications of recorded assets and liabilities as a result of uncertainties. For the three months ended September 30, 2021 and 2020 we incurred net losses of $ 343 and $ 585 , respectively. For the nine months ended September 30, 2021 and 2020, we recognized/(incurred) net income/(losses) of $ 1,954 and ($ 16,227 ), respectively. As of September 30, 2021, we had cash and cash equivalents of $ 2,772 and a working capital surplus of $ 3,134 . 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 . 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. 5 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. 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 registration statement (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 November 15, 2022. However, given our history of net losses and cash used in operating activities, we obtained a continued support letter from Slipstream through November 15, 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 and nine months ended September 30, 2021. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the significant accounting policies consistently applied in the preparation of the accompanying Condensed Consolidated Financial Statements follows: 1. Basis of Presentation The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the applicable instructions to Form 10-Q and Regulation S-X and include all of the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”) for interim financial reporting. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes for the year ended December 31, 2020, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2021. The results of operations for the interim periods are not necessarily indicative of results of operations for a full year. Management believes the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, including normal recurring items, considered necessary for a fair statement of results for the interim periods presented. 2. Revenue Recognition We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers , applying the five-step model. 6 If an arrangement involves multiple performance obligations, the items are analyzed to determine the separate units of accounting, whether the items have value on a standalone basis and whether there is objective and reliable evidence of their standalone selling price. The total contract transaction price is allocated to the identified performance obligations based upon the relative standalone selling prices of the performance obligations. The standalone selling price is based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost plus margin approach. The Company estimates the amount of total contract consideration it expects to receive for variable arrangements by determining the most likely amount it expects to earn from the arrangement based on the expected quantities of services it expects to provide and the contractual pricing based on those quantities. The Company only includes some or a portion of variable consideration in the transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company considers the sensitivity of the estimate, its relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to the overall arrangement. The Company receives variable consideration in very few instances. Revenue is recognized when a customer obtains control of promised goods or services under the terms of a contract and is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. The Company does not have any material extended payment terms as payment is due at or shortly after the time of the sale, typically ranging between thirty and ninety days. Observable prices are used to determine the standalone selling price of separate performance obligations or a cost plus margin approach when one is not available. Sales, value-added and other taxes collected concurrently with revenue producing activities are excluded from revenue. The Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced to the clients. Unbilled receivables are recorded as accounts receivable when the Company has an unconditional right to contract consideration. A contract liability is recognized as deferred revenue when the Company invoices clients in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the related performance obligation. The Company uses the practical expedient for recording an immediate expense for incremental costs of obtaining contracts, including certain design/engineering services, commissions, incentives and payroll taxes, as these incremental and recoverable costs have terms that do not exceed one year. 3. Inventories Inventories are stated at the lower of cost or net realizable value, determined by the first-in, first-out (FIFO) method, and consist of the following: September 30, December 31, 2021 2020 Raw materials, net of reserve of $ 260 and $ 104 , respectively $ 1,771 $ 1,920 Inventory on consignment with distributors 10 208 Work-in-process 171 223 Total inventories $ 1,952 $ 2,351 4. Impairment of Long-Lived Assets We review the carrying value of all long-lived assets, including property and equipment, for impairment in accordance with ASC 360, Accounting for the Impairment or Disposal of Long-Lived Assets . Under ASC 360, impairment losses are recorded whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We evaluated whether there were any triggering events for consideration of impairment of long-lived assets as of September 30, 2021 and concluded there were none. 7 If the impairment tests indicate that the carrying value of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment loss would be recognized. The impairment loss is determined as the amount by which the carrying value of such asset exceeds its fair value. We generally measure fair value by considering sale prices for similar assets or by discounting estimated future cash flows from such assets using an appropriate discount rate. Assets to be disposed of are carried at the lower of their carrying value or fair value less costs to sell. Considerable management judgment is necessary to estimate the fair value of assets, and accordingly, actual results could vary significantly from such estimates. 5. Basic and Diluted Income/(Loss) per Common Share Basic and diluted income/(loss) per common share for all periods presented is computed using the weighted average number of common shares outstanding. Basic weighted average shares outstanding includes only outstanding common shares. Diluted weighted average shares outstanding includes outstanding common shares and potential dilutive common shares outstanding in accordance with the treasury stock method. Shares reserved for outstanding stock options, including stock options with performance restricted vesting, and warrants totaling approximately 6,776,771 at September 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 nine-months ended September 30, 2021 included 8,333 options which were both exercisable and in-the-money as of September 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 7,229,998 at September 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 nine months ended September 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. 6. Income Taxes Deferred income taxes are recognized in the financial statements for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates. Temporary differences arise from net operating losses, differences in basis of intangibles, stock-based compensation, reserves for uncollectible accounts receivable and inventory, differences in depreciation methods, and accrued expenses. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company accounts for uncertain tax positions utilizing an established recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We had no uncertain tax positions as of September 30, 2021 and December 31, 2020. 7. Goodwill We follow the provisions of ASC 350, Goodwill and Other Intangible Assets . Pursuant to ASC 350, goodwill acquired in a purchase business combination is not amortized, but instead tested for impairment at least annually. The Company uses a measurement date of September 30 (see Note 7 Intangible Assets and Goodwill). For quarters that do not coincide with the measurement date, we evaluate whether there are any triggering events for consideration of impairment of goodwill. 8. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Our significant estimates include: the allowance for doubtful accounts, valuation allowances related to deferred taxes, the fair value of acquired assets and liabilities, the fair value of liabilities reliant upon the appraised fair value of the Company, valuation of stock-based compensation awards and other assumptions and estimates used to evaluate the recoverability of long-lived assets, goodwill and other intangible assets and the related amortization methods and periods. Actual results could differ from those estimates. 8 9. Leases We account for leases in accordance with ASC 842, Leases , as amended. We determine if an arrangement is a lease at inception. Right of use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, we consider only payments that are fixed and determinable at the time of commencement. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our incremental borrowing rate is a hypothetical rate based on our understanding of what our credit rating would be. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. Operating leases are included in operating lease right-of-use assets, current maturities of operating leases, and long-term obligations under operating leases on our condensed consolidated balance sheets. Finance leases are included in property and equipment, net, current maturities of finance leases, and long-term obligations under financing leases on our condensed consolidated balance sheets. NOTE 3: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Recently adopted None. Not yet adopted In August 2020, the FASB issued Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06) , which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. This guidance will be effective for us in the first quarter of 2024 on a full or modified retrospective basis, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses . The main objective is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this update replace the incurred loss methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. For trade receivables and loans, entities will be required to estimate lifetime expected credit losses. The amendments are effective for public business entities that qualify as smaller reporting companies for fiscal years and interim periods beginning after December 15, 2022. We are currently evaluating the disclosure requirements related to adopting this guidance. 9 NOTE 4: REVENUE RECOGNITION The Company applies ASC 606 for revenue recognition. The following table disaggregates the Company’s revenue by major source for the three and nine months ended September 30, 2021 and 2020: (in thousands) Three Months Ended September 30, 2021 Three Months Ended September 30, 2020 Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020 Hardware $ 2,215 $ 2,850 $ 6,327 $ 5,818 Services: Installation Services 985 674 2,057 2,006 Software Development Services 109 248 476 427 Managed Services 1,444 1,335 4,174 4,216 Total Services 2,538 2,257 6,707 6,649 Total Hardware and Services $ 4,753 $ 5,107 $ 13,034 $ 12,467 System hardware sales System hardware revenue is recognized generally upon shipment of the product or customer acceptance depending upon contractual arrangements with the customer in instances in which the sale of hardware is the sole performance obligation. Shipping charges billed to customers are included in hardware sales and the related shipping costs are included in hardware cost of sales. The cost of freight and shipping to the customer is recognized in cost of sales at the time of transfer of control to the customer. System hardware revenues are classified as “Hardware” within our disaggregated revenue. Installation services The Company performs outsourced installation services for customers and recognizes revenue upon completion of the installations. Installation services also includes engineering services performed as part of an installation project. When system hardware sales include installation services to be performed by the Company, the goods and services in the contract are not distinct, so the arrangement is accounted for as a single performance obligation. Our customers control the work-in-process and can make changes to the design specifications over the contract term. Revenues are recognized over time as the installation services are completed based on the relative portion of labor hours completed as a percentage of the budgeted hours for the installation. Installation services revenues are classified as “Installation Services” within our disaggregated revenue. The aggregate amount of the transaction price allocated to installation service performance obligations that are partially unsatisfied as of September 30, 2021 and 2020 were $35 and $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 as a service Software as a service includes revenue from software licensing and delivery in which software is licensed on a subscription basis and is centrally hosted. These services often include software updates which provide customers with rights to unspecified software product upgrades and maintenance releases and patches released during the term of the support period. Contracts for these services are generally 12-36 months in length. We account for revenue from these services in accordance with ASC 985-20-15-5 and recognize revenue ratably over the performance period. Software as a service revenues are classified as “Managed Services” within our disaggregated revenue. 10 Maintenance and support services The Company sells maintenance and support services which include access to technical support personnel for software and hardware troubleshooting and monitoring of the health of a customer’s network, access to a sophisticated web-portal for managing the end-to-end hardware and software digital ecosystem, and hosting support services through our network operations center, or NOC. These services provide either physical or automated remote monitoring which support customer networks 7 days a week, 24 hours a day. These contracts are generally 12-36 months in length and generally automatically renew for additional 12-month periods unless cancelled by the customer. Rates for maintenance and support contracts are typically established based upon a fee per location or fee per device structure, with total fees subject to the number of services selected. Revenue is recognized ratably and evenly over the term of the agreement. Maintenance and Support revenues are classified as “Managed Services” within our disaggregated revenue. The Company also performs time and materials-based maintenance and repair work for customers. Revenue is recognized at a point in time when the performance obligation has been fully satisfied. NOTE 5: FAIR VALUE MEASUREMENT We measure certain financial assets, including cash equivalents, at fair value on a recurring basis. In accordance with ASC 820-10-30, fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820-10-35 establishes a three-level hierarchy that prioritizes the inputs used in measuring fair value. The three hierarchy levels are defined as follows: Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets. Level 2 — Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. Level 3 — Valuations based on inputs that are unobservable and involve management judgment and the reporting entity’s own assumptions about market participants and pricing. As discussed in Note 7 Intangible Assets, Including Goodwill , the calculation of the weighted average cost of capital and management’s forecast of future financial performance utilized within our discounted cash flow model for the impairment of goodwill contains inputs which are unobservable and involve management judgment and are considered Level 3 estimates. As discussed in Note 8 Loans Payable , the Convertible Loan is reported at fair value. This liability is deemed to be a Level 3 valuation. Certain unobservable inputs into the calculation of the fair value of this liability include an estimate of the fair value of the Company at a future date using a discounted cash flow model, discount rate assumptions, and an estimation of the likelihood of conversion of the Convertible Loan. 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 nine-months ended September 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 $ 0 and $ 702 loss during the same periods in 2020, respectively, related to the fair value of the Special Loan. 11 NOTE 6: SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION Nine Months Ended September 30, 2021 2020 Supplemental Cash Flow Information Cash paid during the period for: Interest $ - $ - Income taxes, net $ 23 $ 17 NOTE 7: INTANGIBLE ASSETS, INCLUDING GOODWILL Intangible Assets Intangible assets consisted of the following at September 30, 2021 and December 31, 2020: September 30, December 31, 2021 2020 Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization Technology platform $ 4,635 3,589 $ 4,635 3,400 Customer relationships 3,960 1,644 5,330 2,870 Trademarks and trade names 640 630 1,020 925 9,235 5,863 10,985 7,195 Accumulated amortization 5,863 7,195 Net book value of amortizable intangible assets $ 3,372 $ 3,790 For the three months ended September 30, 2021 and 2020, amortization of intangible assets charged to operations was $ 139 and $ 161 , respectively. For the nine months ended September 30, 2021 and 2020 amortization of intangible assets charged to operations was $ 418 and $ 478 , respectively. Goodwill Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is subject to an impairment review at a reporting unit level, on an annual basis as of the end of September of each fiscal year, or when an event occurs, or circumstances change that would indicate potential impairment. The Company has only one reporting unit, and therefore the entire goodwill is allocated to that reporting unit. There were no indicators of impairment as of or during the three and nine months ended September 30, 2021. Interim Impairment Assessment – March 31, 2020 Despite the excess fair value identified in our 2019 annual impairment assessment, we determined that the reduced cash flow projections and the significant decline in our market capitalization as a result of the COVID-19 pandemic during the three months ended March 31, 2020 indicated that an impairment loss may have been incurred during the first quarter. As a result of our qualitative assessment, we concluded that indicators of impairment were present and that a quantitative interim impairment assessment of our goodwill was necessary, resulting in us recording a non-cash impairment loss of $ 10,646 as of March 31, 2020. We recorded the estimated impairment losses in the caption “Goodwill impairment” in our Consolidated Statement of Operations. 12 NOTE 8: LOANS PAYABLE The outstanding debt with detachable warrants, as applicable, are shown in the table below. Further discussion of the debt follows. As of September 30, 2021 Debt Type Issuance Date Principal Maturity Date Warrants Interest Rate Information G 3/7/2021 4,766 3/31/2023 649,965 8.0 % interest (1) H 3/7/2021 2,417 3/31/2023 - 10.0 % interest (1) Total debt, gross 7,183 649,965 Fair value (H) ( 166 ) Total debt, gross 7,017 Debt discount ( 171 ) Total debt, net $ 6,846 Less current maturities 1,209 Long term debt $ 5,637 As of December 31, 2020 Debt Type Issuance Date Principal Maturity Date Warrants Interest Rate Information A 6/30/2018 $ 264 N/A - 0.0 % interest B 1/16/2018 1,085 3/31/2023 61,729 10.0 % interest C 8/17/2016 3,255 3/31/2023 588,236 10.0 % interest D 11/19/2018 1,637 2/15/2020 - 3.5 % interest E 12/30/2019 2,177 3/31/2023 - 10.0 % interest F 4/27/2020 1,552 4/27/2022 - 1.0 % interest Total debt, gross 9,970 649,965 Fair value (E) 93 Total debt, gross 10,063 Debt discount ( 168 ) Total debt, net $ 9,895 Less current maturities ( 1,637 ) Long term debt $ 8,258 A – Secured Disbursed Escrow Promissory Note with related party B – Secured Revolving Promissory Note with related party C – Term Loan with related party D – Amended and Restated Seller Note from acquisition of Allure E – Secured Convertible Special Loan Promissory Note, at fair value F – Paycheck Protection Program Loan from Small Business Administration G – New Term Loan with related party H – Convertible Loan with related party, at fair value (1) Interest is paid-in-kind (“PIK”) through October 2021, at which point interest becomes payable in cash. SBA Paycheck Protection Program Loan On April 27, 2020, the Company entered into a Promissory Note with Old National Bank (the “Promissory Note”), which provided for an unsecured loan of $1,552 (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 rate. 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. 13 Amended and Restated Loan and Security Agreement On March 7, 2021, the Company refinanced its 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 was extended to March 31, 2023. The Credit Agreement (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). The Line of Credit and Convertible Loan accrue interest at 10% per year, and the New Term Loan accrues interest at 8% per year. The New Term Loan requires no principal payments until the Maturity Date, and interest payments are payable on the first day of each month until the Maturity Date. All interest payments owed prior to October 1, 2021 are payable as PIK payments, or increases to the principal balance of the New Term Loan only. The Line of Credit and Convertible Loan require payments of accrued interest payable on the first day of each month through April 1, 2022. All such interest payments made prior to October 1, 2021 are payable as PIK payments, or increases to the principal balances under the Line of Credit and Convertible Loan only. No principal payments are owed under the Line of Credit or Convertible Loan until April 1, 2022, at which time all principal and interest on each of the Line of Credit and Convertible Loan will be paid in monthly installments until the Maturity Date to fully amortize outstanding principal by the Maturity Date. All payments of interest (other than PIK payments) and principal on the Line of Credit and Convertible Loan may be paid, in the Company’s sole discretion, in shares of the Company’s Common Stock (the “Payment Shares,” and together with the Disbursed Escrow Conversion Shares, the “Shares”). The Payment Shares will be valued on a per-Share basis at 70 % of the VWAP of the Company’s shares of common stock as reported on the Nasdaq Capital Market for the 10 trading days immediately prior to the date such payment is due; provided that the Payment Shares shall not be valued below $ 0.50 per Share (the “Share Price”). The Credit Agreement limits the Company’s ability to issue Shares as follows (the “Exchange Limitations”): (1) The total number of Shares that may be issued under the Credit Agreement will be limited to 19.99% of the Company’s outstanding shares of common stock on the date the Credit Agreement is signed (the “Exchange Cap”), unless stockholder approval is obtained to issue shares in excess of the Exchange Cap; (2) if Slipstream and its affiliates (the “Slipstream Group”) beneficially own the largest ownership position of shares of Company common stock immediately prior to the proposed issuance of Payment Shares and such shares are less than 19.99% of the then-issued and outstanding shares of Company common stock, the issuance of such Payment Shares will not cause the Slipstream Group to beneficially own in excess of 19.99% of the issued and outstanding shares of Company common stock after such issuance unless stockholder approval is obtained for ownership in excess of 19.99%; and (3) if the Slipstream Group does not beneficially own the largest ownership position of shares of Company common stock immediately prior to the proposed issuance of Payment Shares, the Company may not issue Payment Shares to the extent that such issuance would result in Slipstream Group beneficially owning more than 19.99% of the then issued and outstanding shares of Company common stock unless (A) such ownership would not be the largest ownership position in the Company, or (B) stockholder approval is obtained for ownership in excess of 19.99%. 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 Agreement separately for purposes of concluding on whether the amendment represented a modification or extinguishment in accordance with ASC 470 Debt . The Convertible Loan was deemed to have had a substantive conversion feature both added and removed via the Credit Agreement, one which the holder is reasonably willing and able to exercise their rights under the agreement, resulting in extinguishment accounting for the Convertible Loan during the three months ended March 31, 2021. Pursuant to ASC 825-10-25-1, Fair Value Option , we made an irrevocable election to report the Convertible Loan at fair value, with changes in fair value recorded through the Company’s Condensed Consolidated Statement of Operations in each reporting period. 14 We evaluated the Credit Agreement in accordance with ASC 470 Debt . The New Term Loan was accounted for as a modification, resulting in recording of $ 133 of incremental debt discount which will be amortized straight-line over the remaining life of the debt. We recorded a net gain of $ 26 via the extinguishment of the Special Loan, which was recorded as additional paid in capital in the Statement of Shareholders Equity given the transaction was with a related party, Slipstream. We expensed $ 69 of costs incurred with third parties as a result of extinguishment of the Special Loan, modification of the New Term Loan, and extinguishment of the Disbursed Escrow Loan. Loan and Security Agreement History Ninth, Tenth, Eleventh, Twelfth, and Thirteenth Amendment; Modification of Conversion Date of Special Loan under Loan and Security Agreement On February 28, 2021, January 31, 2021, December 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. 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 of Allure 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 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. and Allure made a demand for arbitration against Seller for (1) breach of contract, (2) indemnification, and (3) fraudulent misrepresentation under the Allure Purchase Agreement. 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. 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, 2021 15 NOTE 9: COMMITMENTS AND CONTINGENCIES Litigation On August 2, 2019, the Company filed suit in Jefferson Circuit Court, Kentucky, against a supplier of Allure for breach of contract, breach of warranty, and negligence with respect to equipment installations performed by such supplier for an Allure customer. 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 November 15, 2021, and there were no other such proceedings pending during the period covered by this Report. Settlement of obligations During the nine months ended September 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, (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, and (iii) the statute of limitations passed related to the remaining liability on a lease abandoned by the Company in 2015, resulting in a gain of $ 256 . During the three and nine months ended September 30, 2020, the Company settled and/or wrote off other obligations of $ 155 and $ 406 , respectively. NOTE 10: RELATED PARTY TRANSACTIONS In addition to the financing transactions with Slipstream, a related party, discussed in Note 8 Loans Payable , we have the following related party transactions. 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 nine months ended September 30, 2021, the Company had sales to 33 Degrees of $82, or 1.7%, and $365, or 2.8%, respectively, of consolidated revenue. For the three and nine months ended September 30, 2020, the Company had sales to 33 Degrees of $131, or 2.6%, and $922, or 7.4%, respectively, of consolidated revenue. Accounts receivable due from 33 Degrees was $ 5 , or 0.17 %, and $ 40 , or 1.2 % of consolidated accounts receivable at September 30, 2021 and December 31, 2020, respectively. NOTE 11: INCOME TAXES Our deferred tax assets are primarily related to net federal and state operating loss carryforwards (NOLs). We have substantial NOLs that are limited in usage by IRC Section 382. IRC Section 382 generally imposes an annual limitation on the amount of NOLs that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership within a statutory testing period. We have performed a preliminary analysis of the annual NOL carryforwards and limitations that are available to be used against taxable income. Based on the history of losses of the Company, there continues to be a full valuation allowance against the net deferred tax assets of the Company with a definite life. 16 For the three and nine-months ended September 30, 2021, we reported tax expense of $ 1 and $ 9 , respectively. As of September 30, 2021, the net deferred tax assets totaled $ 0 after valuation allowance, consistent with December 31, 2020. NOTE 12: WARRANTS A summary of outstanding warrants is included below: Warrants (Equity) Amount Weighted Average Exercise Price Weighted Average Remaining Contractual Life Balance January 1, 2021 4,426,900 $ 4.62 2.83 Warrants issued - - - Warrants expired ( 263,938 ) 5.76 - Balance September 30, 2021 4,162,962 $ 4.56 1.95 NOTE 13: STOCK-BASED COMPENSATION A summary of outstanding options is included below: Time Vesting Options Weighted Average Weighted Weighted Remaining Average Average Range of Exercise Number Contractual Exercise Options Exercise Prices between Outstanding Life Price Exercisable Price $ 0.01 - $ 3.00 1,525,000 8.66 $ 2.52 508,333 $ 2.52 $ 3.01 - $ 7.50 184,830 4.60 $ 6.72 176,497 $ 6.69 $ 7.51 + 103,979 3.70 11.74 99,187 $ 11.89 1,813,809 7.97 $ 3.48 784,017 Performance Vesting Options Weighted Average Weighted Weighted Remaining Average Average Range of Exercise Number Contractual Exercise Options Exercise Prices between Outstanding Life Price Exercisable Price $ 0.01 - $ 3.00 800,000 8.67 $ 2.53 - $ - 800,000 8.67 $ 2.53 - Time Vesting Options Performance Vesting Options Weighted Weighted Average Average Options Exercise Options Exercise Date/Activity Outstanding Price Outstanding Price Balance, December 31, 2020 1,813,809 $ 3.48 800,000 $ 2.53 Granted - - - - Exercised - - - - Forfeited or expired - - - - Balance, September 30, 2021 1,813,809 3.48 800,000 $ 2.53 The weighted average remaining contractual life for options exercisable is 7.2 years as of September 30, 2021. 17 Valuation Information for Stock-Based Compensation For purposes of determining estimated fair value under FASB ASC 718-10, Stock Compensation , the Company computed the estimated fair values of stock options using the Black-Scholes model. On June 1, 2020 the Board of Directors of the Company granted 10-year options to purchase an aggregate of 2,380,000 shares of its common stock to employees of the Company subject to shareholder approval of an increase in the reserve of shares authorized for issuance under the Company’s 2014 Stock Incentive Plan (as amended, the “Plan”). On July 10, 2020, the Company held a special meeting of the Company’s shareholders at which the shareholders approved the amendment to the Plan, which increased the reserve of shares authorized for issuance thereunder to 6,000,000 shares. Of the 2,380,000 options awarded, 1,580,000 vest over 3 years and have an exercise price of $ 2.53 , the market value of the Company’s common stock on the grant date. The fair value of the options on the grant date was $ 1.87 and was determined using the Black-Scholes model. These values were calculated using the following weighted average assumptions: Risk-free interest rate 0.66 % Expected term 6.25 years Expected price volatility 91.79 % Dividend yield 0 % The remaining 800,000 options awarded vest in equal installments over a three-year period subject to satisfying the Company revenue target and earnings before interest, taxes, depreciation and amortization (“EBITDA”) target for the applicable year. In each of calendar years 2020, 2021 and 2022, one-third of the total shares may vest (if the revenue and EBITDA targets are met), and the shares that are subject to vesting each year are allocated equally to each of the revenue and EBITDA targets for such year. These performance options include a catch-up provision, where any options that did not vest during a prior year due to the Company’s failure to meet a prior revenue or EBITDA target may vest in a subsequent vesting year if the revenue or EBITDA target, as applicable, is met in the future year. The revenue and EBITDA targets for the following three years are as follows: Calendar Year Revenue Target EBITDA Target 2020 $ 32 million $ 2.2 million 2021 $ 35 million $ 3.1 million 2022 $ 38 million $ 3.5 million The exercise price of the foregoing options is $ 2.53 per share, the closing price of the Company’s common stock on the date of issuance. The options were issued from the 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 September 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. 18 Stock Compensation Expense Information ASC 718-10, Stock Compensation , requires measurement and recognition of compensation expense for all stock-based payments including warrants, stock options, restricted stock grants and stock bonuses based on estimated fair values. Under the Amended and Restated 2006 Equity Incentive Plan, the Company reserved 1,720,000 shares for purchase by the Company’s employees and under the Amended and Restated 2006 Non-Employee Director Stock Option Plan the Company reserved 700,000 shares for purchase by the Company’s employees. There are 12,135 options outstanding under the 2006 Equity Incentive Plan. In October 2014, the Company’s shareholders approved the 2014 Stock Incentive Plan, under which 7,390,355 shares were reserved for purchase by the Company’s employees. In August 2018, a special meeting of shareholders was held in which the shareholders voted to amend the Company’s 2014 Stock Incentive Plan to increase the reserve of shares authorized for issuance thereunder, from 7,390,355 shares to 18,000,000 shares. Following a 1-for-30 reverse stock split, the shares authorized for issuance under the Company’s 2014 Stock Incentive Plan was reduced to 600,000 . On July 10, 2020, the Company’s shareholders approved an amendment to the Company’s 2014 Stock Incentive Plan to increase the reserve of authorized for issuance thereunder to 6,000,000 . Employee Awards Compensation expense recognized for the issuance of stock options, inclusive of performance-restricted stock options, for the three and nine months ended September 30, 2021 of $ 331 and $ 1,177 , 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 nine months ended September 30, 2020 of $ 273 and $ 442 , 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 September 30, 2021, there was approximately $ 1,609 and $ 1,078 of total unrecognized compensation expense related to unvested share-based awards with time vesting and performance vesting criteria, respectively. As of September 30, 2020, there was approximately $ 2,617 and $ 1,499 of total unrecognized compensation expense related to unvested share-based awards with time vesting and performance vesting criteria, respectively. Generally, expense related to the time vesting options will be recognized over the next 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 and nine months ended September 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 $ 45 and $ 85 in compensation expenses in exchange for issuance of 31,257 and 53,459 shares during the three and nine months ended September 30, 2021, respectively. $ 15 of the compensation expenses were recorded as capitalized software. NOTE 14: SIGNIFICANT CUSTOMERS/VENDORS Significant Customers We had one (1) and two (2) customers that in the aggregate accounted for 30.6 % and 42.6 % of accounts receivable as of September 30, 2021, and December 31, 2020, respectively. We had two (2) and one (1) customer that accounted for 45.9 % and 11.3 % of revenue for the three months ended September 30, 2021, and 2020, respectively. We had two (2) and one (1) customer that accounted for 40.1 % and 11.5 % of revenue for the nine months ended September 30, 2021 and 2020, respectively. 19 Significant Vendors We had two (2) vendors that accounted for 47.2 % and 47.0 % of outstanding accounts payable at September 30, 2021 and December 31, 2020, respectively. NOTE 15: LEASES We have entered into various non-cancelable operating lease agreements for certain of our offices and office equipment. Our leases have original lease periods expiring between 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. 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) Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020 Finance lease cost Amortization of right-of-use assets $ 4 $ 17 Interest - 2 Operating lease cost 236 512 Total lease cost $ 240 $ 531 Weighted Average Remaining Lease Term Operating leases 3.1 years 3.2 years Finance leases - 0.9 years Weighted Average Discount Rate Operating leases 10.0 % 10.0 % Finance leases - 14.0 % The following is a schedule, by years, of maturities of lease liabilities as of September 30, 2021: (in thousands) Operating Leases The remainder of 2021 $ 75 2022 298 2023 295 2024 85 Thereafter 77 Total undiscounted cash flows 830 Less imputed interest $ ( 118 ) Present value of lease liabilities $ 712 Supplemental cash flow information related to leases are as follows: (in thousands) Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases, net $ 184 $ 512 Operating cash flows from finance leases 4 2 Financing cash flows from finance leases ( 4 ) 17 NOTE 16: 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. Before 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. 20 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 September 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. Under the 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 September 30, 2021. 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 September 30, 2021 (the most recent assessment date). During the three months ended September 30, 2021, the Company recorded an ERC totaling $ 422 for credits earned for wages paid the third quarter of 2021. The credit for the third quarter of 2021 was 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 September 30, 2021. During the three months ended September 30, 2021, the $ 422 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 $ 136 , $ 50 , $ 49 , and $ 186 in Cost of Goods – Services, Sales and Marketing Expenses, Research and Development Expenses, and General and Administrative Expenses, respectively, for the three months ended September 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. NOTE 17: SUBSEQUENT EVENTS On November 12, 2021, the Company and Reflect Systems, Inc., a Delaware corporation (“RSI”), entered into an Agreement and Plan of Merger (the "Merger Agreement") providing for the merger of RSI with a wholly owned subsidiary of the Company in exchange for the consideration described below (the “Merger”). RSI provides digital signage solutions, including software, strategic and media services to a wide range of companies across the retail, financial, hospitality and entertainment, healthcare, and employee communications industries in the North America. Reflect offers digital signage platforms, including ReflectView, which delivers content to more than 75,000 devices. Through its strategic services, RSI assists its customers with designing, deploying and optimizing their digital signage networks, and through its media services, RSI assists customers with monetizing their digital advertising networks. If the Merger is consummated, each outstanding Reflect share will be converted into the right to receive a portion of (i) $ 18,667 in cash, subject to certain adjustments set forth in the Merger Agreement, (ii) 2,333,334 shares of Creative Realities common stock, par value $ 0.01 per share, referred to herein as the “Creative Realities shares,” and (iii) contingent cash payable on or after the three-year anniversary of the effective time of the merger, in an amount by which the closing price of the Creative Realities shares on such anniversary is than $ 6.40 per share, or if certain customers of Reflect collectively achieve over 85,000 billable devices online at any time on or before December 31, 2022, $7.20 per share, in each case multiplied by the amount of Creative Realities shares held by the Reflect stockholders on the three-year anniversary of the effective time of the Merger (subject to a possible six-month extension period) . At the closing of the Merger (the “Closing”), the Merger Agreement requires Creative Realities to adopt a Retention Plan in substantially the form attached as Exhibit C to the Merger Agreement, pursuant to which key members of Reflect’s management team will be eligible to receive an aggregate of $1,333,333 in cash, which will be paid 50% at the Closing, and subject to continuous employment with Reflect, 25% on the one-year anniversary of Closing and 25% on the two-year anniversary of the Closing. The future cash payments due on the one-year and two-year anniversaries of the Closing will be deposited into a “rabbi trust” at Closing. The Retention Plan also will require Creative Realities to issue Creative Realities shares having an aggregate value of $666,667 to the plan participants as follows: 50% of the value of such shares will be issued at the Closing, and subject to continuous employment with Reflect, 25% of the value of such shares will be issued on the one-year anniversary of Closing and the remaining 25% of the value of such shares will be issued on the two-year anniversary of the Closing. The shares to be issued will be determined based on dividing the value of shares issuable on such date by the trailing 10-day volume weighed average price (VWAP) of the shares as of the such date The Merger is subject to standard Closing conditions, including the approval of RSI’s stockholders, the approval of the listing of additional shares of CRI common stock to be issued to RSI’s stockholders in the Merger, required federal and state regulatory approvals and other customary Closing conditions. We expect the merger to close in the first quarter of 2022. 21