CREATIVE REALITIES, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements The following discussion contains various forward-looking statements within the meaning of Section 21E of the Exchange Act of 1934, as amended. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statements 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, our management or the Merger, are intended to identify such forward-looking statements. For example, forward-looking statements include any statements regarding the strategies, prospects, plans, expectations or objectives of management of Creative Realities or Reflect for future operations of the combined company, the risk that the conditions to the closing of the proposed Merger are not satisfied, including the failure to timely or at all obtain approval of the Creative Realities Proposals and Reflect Proposal; uncertainties as to the timing of the consummation of the proposed Merger and the ability of each of Creative Realities and Reflect to consummate the proposed Merger; risks related to Creative Realities’ ability to correctly estimate its operating expenses and expenses associated with the proposed Merger, including any debt expenses related to any debt financing obtained in advanced of the closing of the proposed Merger; Creative Realities’ ability to obtaining any financing necessary to pay the $18,666,667 cash portion of the Merger consideration and fund the $1,333,333 cash portion of the Reflect Retention Plan at the closing of the Merger, including the terms of any debt or equity financing; risks related to the changes in market price of the Creative Realities shares of common stock; competitive responses to the proposed Merger; unexpected costs, charges or expenses resulting from the proposed Merger; the effect of the COVID-19 pandemic and the steps taken by governments and customers of Creative Realities and Reflect to address the pandemic, including business closures; potential adverse reactions or changes to business relationships resulting from the announcement or completion of the proposed Merger; and legislative, regulatory, political and economic developments. The foregoing review of important factors that could cause actual events to differ from expectations should not be construed as exhaustive and should be read in conjunction with statements that are included herein and elsewhere. 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, Form 10-Q for the quarter ended March 31, 2021, and preliminary joint proxy statement/prospectus included in the Form S-4 registration statement, as filed with the Securities and Exchange Commission on March 10, 2021 May 17, 2021, and November 12, 2021 respectively. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking statements. Accordingly, we cannot be certain that any of the events anticipated by forward-looking statements will occur or, if any of them do occur, what impact they will have on us. We caution you to keep in mind the 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 this report. We do not undertake to update any forward-looking statement. Overview Creative Realities, Inc. is a Minnesota corporation that provides innovative digital marketing technology solutions to a broad range of companies, individual brands, enterprises, and organizations throughout the United States and in certain international markets. We have expertise in a broad range of existing and emerging digital marketing technologies across a variety of strategic vertical markets, as well as the related media management and distribution software platforms and networks, device and content management, product management, customized software service layers, systems, experiences, workflows, and integrated solutions. Our technology and solutions include: digital merchandising systems and omni-channel customer engagement systems; content creation, production and scheduling programs and systems; a comprehensive series of recurring maintenance, support, and field service offerings; interactive digital shopping assistants, advisors and kiosks; and, other interactive marketing technologies such as mobile, social media, point-of-sale transactions, beaconing and web-based media that enable our customers to transform how they engage with consumers. Our main operations are conducted directly through Creative Realities, Inc., and 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. We primarily 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; and 22 ● 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. These 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. Recent Developments Entry into Merger Agreement On November 12, 2021, Creative Realities and Reflect Systems, Inc., or “Reflect,” entered into an Agreement and Plan of Merger, or the “Merger Agreement,” pursuant to which a direct, wholly owned subsidiary of Creative Realities, CRI Acquisition Corporation, or “Merger Sub,” will merge with and into Reflect, with Reflect surviving as a wholly owned subsidiary of Creative Realities, and the surviving company of the merger, which transaction is referred to herein as the “Merger.” Reflect 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 North America. Reflect offers digital signage platforms, including ReflectView, a platform used by companies to power hundreds of thousands of active digital displays. Through its strategic services, Reflect assists its customers with designing, deploying and optimizing their digital signage networks, and through its media services, Reflect assists customers with monetizing their digital advertising networks. Subject to the terms and conditions of the Merger Agreement, upon the closing of the Merger, Reflect stockholders as of the effective time of the Merger collectively will receive from Creative Realities, in the aggregate the following Merger consideration: (i) $18,666,667 payable in cash, (ii) 2,333,334 shares of common stock of Creative Realities (valued based on an issuance price of $2 per share) (the “CREX Shares”), and (iii) supplemental cash payments (the “Guaranteed Consideration”), if any, payable on or after the three-year anniversary of the effective time of the Merger (subject to the Extension Option described below, the “Guarantee Date”), in an amount by which the value of the CREX Shares on such anniversary is less 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, is less than $7.20 per share (such applicable amount, the “Guaranteed Price”), multiplied by the amount of CREX Shares held by the Reflect stockholders on the Guarantee Date (subject to the Extension Option described below), subject to the terms of the Merger Agreement. Creative Realities may exercise an extension option (the “Extension Option”) to extend the Guarantee Date from the three-year anniversary of the Closing Date to six (6) months thereafter if (i) the Extension Threshold Price is greater than or equal to 70% of the Guaranteed Price described above, and (ii) Creative Realities provides written notice of its election to exercise the Extension Option at least 10 days prior to the three-year anniversary of the Closing. The “Extension Threshold Price” means the average closing price per share of Creative Realities Shares as reported on the Nasdaq Capital Market (or NYSE) in the fifteen (15) consecutive trading day period ending fifteen (15) days prior to the three-year anniversary of the Closing Date. If the Extension Threshold Price is less than 80% of the Guaranteed Price, then the Guaranteed Price will be increased by $1.00 per share. Under the terms of the Merger Agreement, Creative Realities will adopt a retention bonus plan for key Reflect employees that will continue their services after the effective time of the Merger in substantially the form attached as Exhibit C to the Merger Agreement (the “Retention Bonus Plan”), 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 of the Merger, and subject to continuous employment with Reflect, 25% on the one-year anniversary of the closing of the Merger and 25% on the two-year anniversary of the closing of the Merger. The future cash payments due on the one-year and two-year anniversaries of the closing of the Merger will be deposited into a “rabbi” trust at the closing of the Merger. The Reflect 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 of the Merger at the issuance price of $2.00 per share. Subject to continuous employment with Reflect, 25% of the value of such shares will be issued on the one-year anniversary of the closing of the Merger and the remaining 25% of the value of such shares will be issued on the two-year anniversary of the closing of the Merger. The shares to be issued on the one and two year anniversaries of the Merger 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 vesting date as reported on the Nasdaq Capital Market. The Merger Agreement contains customary closing conditions. Among these conditions, the Merger Agreement requires that the stockholders of Reflect approve the Merger and other related proposals (the “Reflect Proposals”), and that the shareholders of Creative Realities approve the issuance of the CREX Shares Consideration, and the terms of the Retention Bonus Plan and other related proposals (the “Creative Realities Proposals”). The parties intend to seek stockholder approvals of the Creative Realities Proposals and Reflect Proposal via a joint proxy statement/prospectus on Form S-4 (the “Proxy Statement”) with the Securities Exchange Commission (the “SEC”), which will include audited annual and unaudited interim historical financial information for the operations comprising the business of Reflect, together with pro forma financial information, and such other information as required by applicable SEC rules. The Merger Agreement contains customary representations, warranties, covenants, escrow and indemnification provisions. At closing of the Merger, $2.5 million of the cash Merger consideration will be deposited into a one-year escrow account as the sole remedy to secure the indemnification obligations of Reflect stockholders; provided that claims related to breaches of certain representations, warranties and covenants will not be limited by the escrow account and will be limited by the Merger consideration paid to such stockholders. Losses must exceed $200,000 before Reflect stockholders would be liable for any indemnification obligations, in which event Reflect stockholders would be responsible for the amount of all losses above such amount. Creative Realities may offset from the Guaranteed Consideration the amount of losses that Creative Realities is finally determined to be entitled under the indemnification provisions of the Merger Agreement. An additional $250,000 of the cash Merger consideration will be deposited into an escrow account to secure any required payments by the Reflect stockholders as part of the post-closing purchase price adjustments for closing date net working capital set forth in the Merger Agreement. 23 The Merger Agreement contains certain termination rights for both Creative Realities and Reflect, including rights to terminate the Merger Agreement in the event of a breach by the other party (which right includes the right to recover out-of-pocket costs incurred by the non-breaching party) and limited rights permitting Creative Realities to terminate the Merger Agreement upon the failure to obtain sufficient financing to fund the cash portion of the Merger consideration, and certain adverse developments in the Reflect’s business. We expect the merger to close in the first quarter of 2022. For a discussion of the factors that may cause Creative Realities’, Reflect’s and the combined company’s actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied in such forward-looking statements, and for a discussion of risk associated with the ability of Creative Realities and Reflect to complete the Merger and the effect of the Merger on the business of Creative Realities, Reflect and the combined company, see “Risk Factors” set forth in the preliminary Proxy Statement filed with the SEC on November 12, 2021. Readers are also urged to carefully review and consider the various disclosures we make in amendments to the Proxy Statement filed with the SEC and that we will mail to our shareholders. In addition, additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in reports filed with the SEC by Creative Realities. There can be no assurance that the proposed Merger will be completed, or if it is completed, that it will be consummated within the anticipated time period or that the expected benefits of the proposed Merger will be realized. COVID-19 Pandemic In January 2020, an outbreak of a new strain of coronavirus, COVID-19, was identified in Wuhan, China. Through the first quarter of 2020, the disease became widespread around the world, and on March 11, 2020, the World Health Organization declared a pandemic. Thereafter, state and local authorities in the United States and worldwide have forced many businesses to temporarily reduce or cease operations to slow the spread of the COVID-19 pandemic. As a result of the COVID-19 pandemic, we 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 resulted in materially reduced demand and customer budgets for our services throughout 2020 and into 2021, 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. Those conditions resulted in downward revisions of our internal forecasts on current and future projected earnings and cash flows, resulting in a non-cash impairment loss of $10,646 recorded during the first quarter of 2020 and reduced liquidity as described below. While we have experienced an intense curtail in demand, our long-term outlook for the digital signage industry remains strong and we believe that the COIVD-19 pandemic has accelerated the long-term adoption of digital solutions. 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 semiconductor chip shortages in the industry, such suppliers expect delays and potentially increased costs for the Company to obtain digital displays necessary to fulfill 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 during the first half of 2022, the Company is unable to confirm 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. Our Sources of Revenue We primarily 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. We currently market and sell our technology and solutions primarily through our sales and business development personnel, but we also utilize agents, strategic partners, and lead generators who provide us with access to additional sales, business development and licensing opportunities. Our Expenses Our expenses are primarily comprised of three categories: sales and marketing, research and development, and general and administrative. Sales and marketing expenses include salaries and benefits for our sales, business development, solution management and marketing personnel, and commissions paid on sales. This category also includes amounts spent on marketing networking events, promotional materials, hardware and software to prospective new customers, including those expenses incurred in trade shows and product demonstrations, and other related expenses. Our research and development expenses represent the salaries and benefits of those individuals who develop and maintain our proprietary software platforms and other software applications we design and sell to our customers. Our general and administrative expenses consist of corporate overhead, including administrative salaries, real property lease payments, salaries and benefits for our corporate officers and other expenses such as legal and accounting fees. 24 Critical Accounting Policies and Estimates The Company’s significant accounting policies are described in Note 2 Summary of Significant Accounting Policies of the Company’s Condensed Consolidated Financial Statements included elsewhere in this filing. The Company’s Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States. Certain accounting policies involve significant judgments, assumptions, and estimates by management that could have a material impact on the carrying value of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Our actual results could differ from those estimates. Results of Operations Note: All dollar amounts reported in Results of Operations are in thousands, except per-share information. Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 The tables presented below compare our results of operations and present the results for each period and the change in those results from one period to another in both dollars and percentage change. For the three months ended September 30, Change 2021 2020 $ % Sales $ 4,753 $ 5,107 $ (354 ) -7 % Cost of sales 2,406 2,663 (257 ) -10 % Gross profit 2,347 2,444 (97 ) -4 % Sales and marketing expenses 330 411 (81 ) -20 % Research and development expenses 226 229 (3 ) -1 % General and administrative expenses 1,848 1,849 (1 ) 0 % Depreciation and amortization expense 347 377 (30 ) -8 % Total operating expenses 2,751 2,866 (115 ) -4 % Operating (loss) (404 ) (422 ) 18 -4 % Other income/(expenses): Interest expense (186 ) (265 ) 79 -30 % Gain on settlement of debt 256 114 142 -125 % Other income/(expense) (8 ) (13 ) 5 -38 % Total other income/(expense) 62 (164 ) 226 -138 % Net income/(loss) before income taxes (342 ) (586 ) 244 -42 % Provision from income taxes (1 ) 1 (2 ) -200 % Net income/(loss) $ (343 ) $ (585 ) 242 -41 % Sales Sales decreased by $354, or 7%, during the three months ended September 30, 2021 as compared to the same period in 2020 primarily driven by a reduction of $635 in hardware sales resulting from limited supply chain availability of semiconductor chips delaying the delivery of digital displays and media players to the Company, combined with a reduction in Safe Space Solutions hardware in 2021 following wide distribution of the COVID-19 vaccine. These reductions were partially offset by an increase in installation activity related to a continued customer rollout of previously purchased hardware. The supply disruption for digital displays prevented the Company from delivery of hardware and execution of installation activities during the quarter. As of September 30, 2021, the Company had customer purchase orders for equipment and installation activities in excess of $1,200 which were delayed as a result of product availability. The Company expects to experience continued disruptions and delays related to fulfillment of inventory purchases from vendors throughout the remainder of 2021, which may impact our results for the remainder of 2021. We expect a full recovery in the timely availability of equipment during the first half of 2022. During the three months ended September 30, 2021 and 2020, of our Safe Space Solutions products and services (inclusive of the portion of revenue recognized during the three months ended September 30, 2021 related to annual contracts sold in prior periods), were $182 and $2,067, respectively. Gross Profit Gross profit decreased $97, or 4% during the three months ended September 30, 2021 as compared to the same period in 2020 driven by the decrease in sales but offset by an increase in gross profit margin. Gross profit margin increased to 49.4% in 2021 from 47.9% during the same period in 2020 as a result of an increase in managed services as a percentage of total revenue during the period and headcount reductions in personnel servicing customers as a result of cost reductions executed throughout 2020. Sales and Marketing Expenses Sales and marketing expenses generally include the salaries, taxes, and benefits of our sales and marketing personnel, as well as trade show activities, travel, and other related sales and marketing costs. Sales and marketing expenses decreased by $81, or 20%, in 2021 compared to 2020. The decrease was driven by $50 of Employee Retention Credits related to the retention and payment of salaries to sales personnel during the period. The remaining reduction was the result of reduced commissions and bonuses. 25 Research and Development Expenses Research and development expenses generally include personnel and development tools costs associated with the continued development of the Company’s content management systems and other related application development. Research and development decreased by $3, or 1%, in 2021 compared to 2020. The decrease was driven by $49 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the three months ended September 30, 2021, partially offset by increased headcount as we began re-investment into our content management platforms. General and Administrative Expenses Total general and administrative expenses were flat for the three months ended September 30, 2021 as compared to the same period in 2020. There was a decrease of $186 from Employee Retention Credits related to the retention and payment of salaries to sales personnel during the period, offset by $95 in expenses related to one-time deal and transaction expenses and an increase of $83 in non-cash stock compensation expenses from employee stock option awards with time and performance-based vesting. Depreciation and Amortization Expenses Depreciation and amortization expenses decreased by $30, or 8%, in 2021 compared to 2020. This decrease was the result of a trade name asset becoming fully amortized during 2020, while no amortization was recorded during the three months ended September 30, 2021. Interest Expense See Note 8 Loans Payable to the Condensed Consolidated Financial Statements for a discussion of the Company’s debt and related interest expense obligations. Gain on Settlement of Debt During the three months ended September 30, 2021 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. Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020 The tables presented below compare our results of operations and present the results for each period and the change in those results from one period to another in both dollars and percentage change. For the Nine Months Ended September 30, Change 2021 2020 $ % Sales $ 13,034 $ 12,467 $ 567 5 % Cost of sales 6,578 6,599 (21 ) 0 % Gross profit 6,456 5,868 588 10 % Sales and marketing expenses 834 1,209 (375 ) -31 % Research and development expenses 455 787 (332 ) -42 % General and administrative expenses 5,623 6,340 (717 ) -11 % Bad debt (recovery) / expense (463 ) 830 (1,293 ) -156 % Depreciation and amortization expense 1,035 1,123 (88 ) -8 % Goodwill impairment - 10,646 (10,646 ) -100 % Total operating expenses 7,484 20,935 (13,451 ) -64 % Operating (loss) (1,028 ) (15,067 ) 14,039 -93 % Other income / (expenses): Interest expense (617 ) (752 ) 135 -18 % Change in fair value of Convertible Loan 166 (702 ) 868 -124 % Gain on settlement of debt 3,449 155 3,294 2,125 % Loss on disposal of assets - (13 ) 13 -100 % Other income/(expense) (7 ) (13 ) 6 -46 % Total other income/(expense) 2,991 (1,312 ) 4,303 -328 % Net income/(loss) before income taxes 1,963 (16,379 ) 18,342 -112 % Provision from income taxes (9 ) 152 (161 ) -106 % Net income/(loss) $ 1,954 $ (16,227 ) 18,181 -112 % 26 Sales Sales increased by $567, or 5%, in the nine months ended September 30, 2021 as compared to the same period in 2020 driven by an increase of $509 in hardware sales as compared to the same period in 2020, despite a decrease of $1,385 in the sale of our Safe Space Solutions products, which launched in April 2020. Core digital signage sales expanded by $976 in the period despite constraints from further growth due to limited supply chain availability of semiconductor chips delaying the delivery of digital displays and media players to the Company. The supply disruption for digital displays prevented the Company from delivery of hardware and execution of installation activities during the quarter. As of September 30, 2021, the Company had customer purchase orders for equipment and installation activities in excess of $1,200 which were delayed as a result of product availability. The Company expects to experience continued disruptions and delays related to fulfillment of inventory purchases from vendors throughout the remainder of 2021, which may impact our results for the remainder of 2021. We expect a full recovery in the timely availability of equipment during the first half of 2022. Gross Profit Gross profit increased $588, or 10%, during the nine months ended September 30, 2021 as compared to the same period in 2020, driven by both an increase in sales, which contributed $322 of incremental gross profit on a constant gross profit margin basis, and an increase in gross profit margin, which contributed $266 of incremental gross profit. Gross profit margin increased to 49.5% from 47.1% driven primarily by increased hardware margins driven by increased purchasing power with distributors as our purchases of digital displays have increased. Sales and Marketing Expenses Sales and marketing expenses generally include the salaries, taxes, and benefits of our sales and marketing personnel, as well as trade show activities, travel, and other related sales and marketing costs. Sales and marketing expenses decreased by $375, or 31%, in 2021 compared to 2020. The decrease was driven by $232 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the nine months ended September 30, 2021. The remaining reduction was the result of reduced personnel costs, partially offset by an increase of $78 on trade show activity and related travel costs following a return to participation in industry trade shows and events after the elimination of such costs in 2020 as a result of the COVID-19 pandemic. Research and Development Expenses Research and development expenses generally include personnel and development tools costs associated with the continued development of the Company’s content management systems and other related application development. Research and development decreased by $332, or 44%, in 2021 compared to 2020. The decrease was driven by $196 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the nine months ended September 30, 2021. The remaining reduction was the result of reduced personnel costs following the reduction of personnel and salary reductions implemented throughout 2020. General and Administrative Expenses Total general and administrative expenses decreased by $717, or 11%, in 2021 compared to 2020. The decrease was driven by $694 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the nine months ended September 30, 2021. Excluding the consideration of those Employee Retention Credits recorded in the period, total general and administrative expenses decreased $23, or 0%, during the nine months ended September 30, 2021 as compared to the same period in 2020. The comparable year-over-year expenses included reductions of (a) $157 in non-ERC-related personnel costs, including salaries, benefits, and travel-related expenses, (b) $280 in rent expense following closure, downsizing, or restructuring of four leases during 2020, and (c) reductions in legal expenses of $255 following settlement of the Amended and Restated Seller Note, partially offset by an increase in stock compensation amortization expense of $849 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. Bad Debt Expenses related to the Company’s allowance for bad debts decreased by $1,293, or 156%, for the nine months ended September 30, 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. 27 Goodwill impairment See 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. Depreciation and Amortization Expenses Depreciation and amortization expenses decreased by $88, or 8%, in 2021 compared to 2020. This decrease was the result of a trade name asset becoming fully amortized during 2020, while no amortization was recorded during the nine months ended September 30, 2021. Interest Expense; Change in fair value of Convertible Loan See Note 8 Loans Payable to the Condensed Consolidated Financial Statements for a discussion of the Company’s debt and related interest expense obligations. We updated our fair value analysis of the Convertible Loan quarterly, resulting in recognition of a $166 gain and a $702 loss during the nine months ended September 30, 2021 and 2020, respectively. See Note 8 Loans Payable to the Condensed Consolidated Financial Statements for a discussion of the Company’s Convertible Loan. Gain on Settlement of Debt On January 11, 2021, the Company 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 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 Amended and Restated 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 Amended and Restated Seller Note and $86 of related interest thereon, during the three months ended June 30, 2021. During the three months ended September 30, 2021 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. 28 Summary Unaudited Quarterly Financial Information The following represents unaudited financial information derived from the Company’s quarterly financial statements: Quarters Ended Quarters ended September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 Net sales $ 4,753 $ 3,277 $ 5,004 $ 4,990 $ 5,107 Cost of sales 2,406 1,402 2,770 2,737 2,663 Gross profit 2,347 1,875 2,234 2,253 2,444 Operating expenses, excluding depreciation and amortization 2,404 1,942 2,103 2,886 2,489 Depreciation/amortization 347 344 344 351 377 Operating income (loss) (404 ) (411 ) (213 ) (1,002 ) (422 ) Other expenses/(income) (62 ) 1,443 (1,486 ) (379 ) 164 Income tax expense/(benefit) 1 7 1 (6 ) (1 ) Net income (loss) (343 ) $ 1,025 $ 1,272 $ (617 ) $ (585 ) Supplemental Operating Results on a Non-GAAP Basis The following non-GAAP data, which adjusts for the categories of expenses described below, is a non-GAAP financial measure. Our management believes that this non-GAAP financial measure is useful information for investors, shareholders and other stakeholders of the Company in evaluating our results of operations on an ongoing basis. We believe that earnings before interest, taxes, depreciation, and amortization (“EBITDA”) is a performance measure and not a liquidity measure, and therefore a reconciliation between net loss/income and EBITDA and Adjusted EBITDA, which is calculated by removing the impact of non-recurring and primarily non-cash transactions from EBITDA, has been provided. Neither EBITDA nor Adjusted EBITDA should be considered as an alternative to net loss/income as an indicator of performance, or as an alternative to cash flows from operating activities as an indicator of cash flows, in each case as determined in accordance with GAAP, or as a measure of liquidity. In addition, neither EBITDA nor Adjusted EBITDA takes into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows. We do not intend the presentation of these non-GAAP measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP. These non-GAAP measures should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. Quarters Ended September 30, June 30, March 31, December 31, September 30, Quarters ended 2021 2021 2021 2020 2020 GAAP net income (loss) $ (343 ) $ 1,025 $ 1,272 $ (617 ) $ (585 ) Interest expense: Amortization of debt discount 29 29 72 85 85 Other interest, net 158 153 177 186 179 Depreciation/amortization: Amortization of intangible assets 139 139 140 139 161 Amortization of finance lease assets - - 4 3 5 Amortization of share-based awards 329 329 512 250 248 Depreciation of property, equipment & software 208 205 200 209 212 Income tax expense/(benefit) 1 7 1 (6 ) (1 ) EBITDA $ 521 1,887 2,378 249 $ 304 Adjustments Change in fair value of Special Loan - - (166 ) (609 ) - Gain on settlement of obligations (256 ) (1,628 ) (1,565 ) (54 ) (114 ) Loss on disposal of assets - - - - 13 Loss on lease termination - - - 18 - Stock-based compensation – Director grants 27 27 27 27 25 Adjusted EBITDA $ 292 286 674 (369 ) $ 228 Liquidity and Capital Resources See Note 1 Nature of Organization and Operations to the accompanying Condensed Consolidated Financial Statements for a detailed discussion of liquidity and financial resources. 29 Operating Activities The cash flows used in operating activities were ($367) and ($4,110) for the nine months ended September 30, 2021 and 2020, respectively. We produced net income during the nine months ended September 30, 2021 of $1,954, which was primarily reduced via addback of the gain on forgiveness of the Company’s PPP Loan in the amount of $1,552 and gain on the settlement of obligations in the amount of $1,624, representing $1,538 related to the Seller Note and $86 of related interest thereon, partially offset by an addback for depreciation and amortization, including amortization of debt discount and stock based compensation, of $2,417. The change in cash flows used in operations year-over-year was driven primarily by the current year gains on settlement of the Seller Note and forgiveness of the PPP loan, combined with a reduction in prepaid assets. Investing Activities Net cash used in investing activities during the nine months ended September 30, 2021 was $432 compared to $559 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 September 30, 2021; however, we anticipate an increase in our capital expenditures of approximately $430 in excess of our historical trends throughout the balance of 2021 to maintain and enhance the software platform for our customers and to enhance revenue generating activities through the platform. Financing Activities Net cash provided by financing activities during the nine months ended September 30, 2021 and 2020 were $1,745 and $2,990, respectively. 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. These proceeds were partially offset by the settlement payment of $100 on the Seller Note. The 2020 proceeds were driven by the Company’s receipt of a $1,552 Paycheck Protection Program loan, execution of sales via an at-the-market offering of $1,335, and the exercise of 27,600 warrants. Off-Balance Sheet Arrangements During the three and nine months ended September 30, 2021, we did not engage in any off-balance sheet arrangements set forth in Item 303(a)(4) of Regulation S-K.