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Item 1. Financial Statements

2023-05-15 compared with 2022-11-14 · 885 added, 1198 removed, 232 unchanged (90% of the section changed)

Financial Statements

CREATIVE REALITIES,

CONDENSED CONSOLIDATED

BALANCE SHEETS

(In thousands,

except per share amounts)

September 30,

CREATIVE REALITIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

CURRENT ASSETS

Cash and cash equivalents

Accounts receivable, net of allowance of $ 809 and $ 620 , respectively

Unbilled receivables

$ 3,905  

$ 1,633  

Accounts receivable, net

Work-in-process and inventories, net

1 unchanged sentence

Total current assets

Operating lease right-of-use assets

$ 13,037  

$ 13,982  

Property and equipment, net

Operating lease right-of-use assets

Intangibles, net

LIABILITIES AND SHAREHOLDERS’ EQUITY

23,819  

23,752  

26,453  

$ 65,102  

$ 66,015  

LIABILITIES AND SHAREHOLDERS’

CURRENT LIABILITIES

Short-term seller note payable

Short-term portion of Related Party Consolidation Term Loan

Accounts payable

$ 3,087  

$ 3,757  

Accrued expenses

2 unchanged sentences

Current maturities of operating leases

Short-term portion of Secured Promissory Note

Short-term portion of related party Consolidation Term Loan, net of $ 747 and $ 745 discount, respectively

Short-term related party Term Loan (2022)

Total current liabilities

16,859  

16,496  

Long-term Secured Promissory Note

Long-term related party Acquisition Term Loan, net of $ 1,312 and $ 1,484 discount, respectively

Long-term related party Consolidation Term Loan, net of $ 654 and $ 840 discount, respectively

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

Contingent acquisition consideration, at fair value

Long-term obligations under operating leases

Contingent acquisition consideration, at fair value

Other liabilities

TOTAL LIABILITIES

SHAREHOLDERS’ EQUITY

40,020  

40,436  

SHAREHOLDERS’

Common stock, $ 0.01 par value, 66,666 shares authorized;

1 unchanged sentence

Additional paid-in capital

76,417  

75,916  

Accumulated deficit

Total shareholders’ equity

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

See accompanying

notes to condensed consolidated financial statements

CREATIVE REALITIES,

CONDENSED CONSOLIDATED

STATEMENTS OF OPERATIONS

(In thousands,

except per share amounts)

( 51,409 )  

Total shareholders’

25,082  

25,579  

TOTAL LIABILITIES AND SHAREHOLDERS’

$ 65,102  

$ 66,015  

See accompanying notes to condensed consolidated financial statements

CREATIVE REALITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

For the Three Months Ended

For the Nine Months Ended

September 30,

Services and other

6 unchanged sentences

General and administrative expenses

Bad debt (recovery)/expense

Depreciation and amortization expense

3 unchanged sentences

Other income (expenses):

Interest expense

Interest expense, including amortization of debt discount

Change in fair value of warrant liability

Change in fair value of equity guarantee

Gain/(loss) on settlement of obligations

Loss on extinguishment/settlement of obligations

Loss on debt waiver consent

Loss on warrant amendment

Change in fair value of Convertible Loan

Other expense

Total other income (expense)

Income/(loss) before income taxes

Benefit/(provision) for income taxes

Net income/(loss)

Basic earnings/(loss) per common share

Diluted earnings/(loss) per common share

Net (loss) income before income taxes

Provision for income taxes

Net (loss) income

Basic (loss) earnings per common share

Diluted (loss) earnings per common share

Weighted average shares outstanding - basic

Weighted average shares outstanding - diluted

See accompanying

notes to condensed consolidated financial statements.

CREATIVE REALITIES,

CONDENSED CONSOLIDATED

STATEMENTS OF CASH FLOWS

See accompanying notes to condensed consolidated financial statements.

CREATIVE REALITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Nine Months Ended

September 30,

Three Months Ended

Operating Activities:

Adjustments to reconcile net income to net cash used in operating activities

Net (loss) income

$ ( 1,000 )  

$ 2,502  

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

Depreciation and amortization

Amortization of debt discount

Stock-based compensation

Shares issued for services

Gain on forgiveness of Paycheck Protection Program

Gain on settlement of Seller Note

Change in fair value of Convertible Loan

Allowance for doubtful accounts

Increase in notes due to in-kind interest

Amortization of stock-based compensation

Employee Retention and other Government Credits

Loss on extinguishment of debt

Loss on debt waiver consent

Loss on warrant amendment

Loss/(Gain) on settlement of obligations

Gain on change in fair value of contingent consideration

Bad debt expense

Gain on change in fair value of warrants

Loss on change in fair value of contingent consideration

Deferred income taxes

Changes to operating assets and liabilities:

Accounts receivable and unbilled receivables

Accounts receivable

Work-in-process and inventories

Prepaid expenses and other current assets

Operating lease right-of-use assets, net

Accounts payable

Deferred revenue

( 486 )  

Accrued expenses

Operating liabilities, net

Operating lease liabilities, non-current

Net cash used in operating activities

( 45 )  

Deferred revenues

Customer deposits

( 1,693 )  

( 40 )  

Net cash provided by operating activities

Investing activities

1 unchanged sentence

Purchases of property and equipment

( 31 )  

Capitalization of labor for software development

( 1,003 )  

Net cash used in investing activities

( 1,034 )  

Financing activities

3 unchanged sentences

Proceeds from Acquisition Loan, net of offering expenses

Repayment of Seller Note

Proceeds from sale of shares via registered direct offering, net

Net cash provided by financing activities

Increase/(decrease) in Cash and Cash Equivalents

Repayment of Term Loan (2022)

( 250 )  

Repayment of Secured Promissory Note

( 310 )  

Net cash (used in) provided by financing activities

( 562 )  

19,873  

Increase in Cash and Cash Equivalents

Cash and Cash Equivalents, beginning of period

Cash and Cash Equivalents, end of period

See accompanying notes to condensed consolidated

financial statements.

$ 3,905  

$ 5,988  

See accompanying notes to condensed consolidated financial statements.

CREATIVE REALITIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’

(in thousands, except

Three months ended September 30, 2022

Balance as of June 30, 2022

CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’

(in thousands, except shares)

Balance as of December 31, 2022

7,266,382  

$ 75,916  

$ ( 50,409 )  

$ 25,579  

Stock-based compensation

Stock-based compensation issued to vendors

Balance as of September 30, 2022

Nine months ended September 30, 2022

Shares issued to directors as compensation

51,616  

Shares issued to vendors as compensation

13,934  

Shares issued to employees pursuant to the Retention Bonus Plan

62,475  

( 1,000 )  

Balance as of March 31, 2023

7,394,407  

$ 76,417  

$ ( 51,409 )  

$ 25,082  

Balance as of December 31, 2021

Stock-based compensation

Stock-based compensation issued to vendors

Shares issued and warrants exercised in private investment in public entity ("PIPE")

1 unchanged sentence

Warrant repricing events

Warrant amendment

Balance as of September 30, 2022

Three months ended September 30, 2021

Balance as of June 30, 2021

Stock-based compensation

Stock-based compensation issued to vendors

Shares issued to directors as compensation

Balance as of September 30, 2021

Nine months ended September 30, 2021

Balance as of December 31, 2020

Stock-based compensation

Stock-based compensation issued to vendors

Shares issued to directors as compensation

Conversion of Disbursed Escrow Loan

Gain on Extinguishment of Special Loan

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

Balance as of September 30, 2021

See accompanying notes to condensed consolidated

financial statements.

Balance as of March 31, 2022

See accompanying notes to condensed consolidated financial statements.

CREATIVE REALITIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL

(all currency in thousands, except per share

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share amounts)

NATURE OF ORGANIZATION AND OPERATIONS

Unless the context otherwise

indicates, references in these Notes to the accompanying Consolidated Financial Statements to “we,” “us,” “our”

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

Unless the context otherwise indicates, references in these Notes to the accompanying Condensed Consolidated Financial Statements to “

the Company ”

refer to Creative Realities, Inc.

and its subsidiaries.

Nature of the Company’s

Nature of the Company ’

Creative Realities, Inc.

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

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:

network management, and connected device software and firmware platforms;

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;

media workflows;

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,

Creative Realities Canada, Inc., a Canadian corporation, and Reflect Systems, Inc., a Delaware corporation.

Acquisition of Reflect

On November 12, 2021,

the Company and Reflect Systems, Inc., or “Reflect,” entered into an Agreement and Plan of Merger (as amended

on February 8, 2022, the “Merger Agreement”) pursuant to which a direct, wholly owned subsidiary of Creative Realities,

CRI Acquisition Corporation, or “Merger Sub,” would merge with and into Reflect, with Reflect surviving the merger and becoming

our wholly owned subsidiary, which transaction is referred to herein as the “Merger.” On February 17, 2022, the parties

consummated 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 received

from the Company, in the aggregate, the following Merger consideration:

(i) $16,166 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”), (iii) the Secured Promissory Note

(as described below), and (iv) supplemental cash payments (the “Guaranteed Consideration”), if any, payable on or after February

17, 2025 (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).

The Company may exercise an extension option (the “Extension

Option”) to extend the Guarantee Date by six (6) months, from February 17, 2025 to August 17, 2025, if (i) the Extension Threshold

Price is greater than or equal to 70 % of the Guaranteed Price described above, and (ii) the Company provides written notice of its election

to exercise the Extension Option no later than February 7, 2022.

The “Extension Threshold Price” means the average closing

price per share of Creative Realities common stock as reported on the Nasdaq Capital Market (or NYSE) in the fifteen (15) consecutive

trading day period ending February 2, 2025.

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.

In connection with the Merger,

the Company adopted a Retention Bonus Plan and raised capital to, among other things, pay the cash portion of the Merger consideration.

The Retention Bonus Plan and financings are described below.

Retention Bonus Plan

On February 17, 2022,

in connection with the closing of the Merger (the “Closing”), the Company adopted a Retention Bonus Plan, pursuant to which

the Company is required to pay to key members of Reflect’s management team an aggregate of $1,334 in cash, which was paid 50% at

the Closing, and subject to continuous employment with Reflect or Creative Realities, 25% will be paid on February 17, 2023 (the one-year

anniversary of Closing) and 25% will be paid on February 17, 2024 (the two-year anniversary of the Closing).

The future cash payments

due on the one-year and two-year anniversaries of the Closing have been deposited into an escrow agreement.

The Retention Bonus Plan also

requires the Company to issue Common Stock having an aggregate value of $667 to the plan participants as follows:

50% of the value of

such shares were issued at the Closing, and subject to continuous employment with Reflect or Creative Realities, 25% of the value of such

shares will be issued on February 17, 2023 (the one-year anniversary of Closing) and the remaining 25% of the value of such shares will

be issued on February 17, 2024 (the two-year anniversary of the Closing).

The shares issued on the Closing were valued at $2.00 per share,

and the shares to be issued after the Closing will be determined based on dividing the value of shares issuable on such date divided by

the trailing 10-day volume weighted average price (VWAP) of the shares as of such date as reported on the Nasdaq Capital Market.

Upon the resignation of

a participant’s employment for “good reason,” or termination of the employment of a participant without “cause,”

each as defined in the Retention Bonus Plan, the participant will be fully vested and will receive all cash and shares allocated to such

participant under the Retention Bonus Plan.

Any amounts unpaid by reason of a lapse in continuous employment or otherwise will be reallocated

among the remaining Retention Bonus Plan participants.

Equity Financing

On February 3, 2022,

the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with a purchaser (the “Purchaser”),

pursuant to which the Company agreed to issue and sell to the Purchaser, in a private placement priced at-the-market under Nasdaq rules,

(i) 1,315,000 shares (the “Shares”) of the Company’s common stock, par value $0.01 per share (the “Common Stock”)

and accompanying warrants to purchase an aggregate of 1,315,000 shares of Common Stock, and (ii) pre-funded warrants to purchase up to

an aggregate of 5,851,505 shares of Common Stock (the “Pre-Funded Warrants”) and accompanying warrants to purchase an aggregate

of 5,851,505 shares of Common Stock (collectively, the “Private Placement”).

The accompanying warrants to purchase Common

Stock are referred to herein collectively as the “Common Stock Warrants.” Under the Securities Purchase Agreement, each Share

and accompanying warrants to purchase Common Stock were sold together at a combined price of $1.535, and each Pre-Funded Warrant and accompanying

warrants to purchase Common Stock were sold together at a combined price of $1.5349, for gross proceeds of approximately $11,000 before

deducting placement agent fees and offering expenses payable by the Company.

Net proceeds to the Company were $10,160.

The remaining exercise

price for the Pre-Funded Warrant was $0.0001.

Collectively, we refer to this transaction throughout this filing as the “Equity Financing”.

The net proceeds from the Private Placement were used to fund, in part, payment of the closing cash consideration in the Merger.

Effective June 30, 2022, the

Company amended the terms of Common Stock Warrants to remove the holder’s option to exercise such warrants on a cashless basis utilizing

the VWAP of the Company’s common stock on the trading day immediately preceding the date of a notice of cashless exercise in certain

circumstances, and removes the condition to exercising such warrants that the Company’s shareholders approve the exercise thereof

(which has already been obtained).

The amendments to the Common Stock Warrants also extend the term of such warrants for an additional

one year, The foregoing amendments to the warrants caused such warrants to be accounted for as equity instruments on the Company’s

financial statements.

Debt Financing

On February 17, 2022,

the Company and its subsidiaries (collectively, the “Borrowers”) refinanced their current debt facilities with Slipstream

Communications, LLC (“Slipstream”), pursuant to a Second Amended and Restated Credit and Security Agreement (the “Credit

Agreement”), and raised $ 10,000 in gross proceeds with a maturity date of February 1, 2025 .

The Credit Agreement also provides

that the Company’s outstanding loans from Slipstream, consisting of its pre-existing $ 4,767 senior secured term loan and $ 2,418

secured convertible loan, with an aggregate of $ 7,185 in outstanding principal and accrued and unpaid interest under such loans, were

consolidated into a Consolidation Term Loan with a maturity date of February 1, 2025.

Collectively, we refer to this transaction

throughout this filing as the “Debt Financing”.

The net proceeds from the Debt Financing were used to fund, in part, payment

of the closing cash consideration in the Merger, and the cash payable under the terms of the Retention Bonus Plan at the Closing.

On February 17, 2022,

in connection with the Closing of the Merger, the Company issued to the representative of Reflect stockholders, RSI Exit Corporation (“Stockholders’

Representative”), a $ 2,500 Note and Security Agreement (the “Secured Promissory Note”).

The Secured Promissory Note

accrues interest at 0.59 % (the applicable federal rate on the date of issuance of the Secured Promissory Note) and requires the Company

and Reflect to collectively pay equal monthly principal installments of $ 104 on the fifteenth (15th) day of each month, commencing on

March 15, 2022.

Any remaining or unpaid principal is due and payable on February 17, 2023.

The Secured Promissory Note represents

consideration in the Merger and is included as part of the purchase price.

See Note 9 Loans Payable to the Condensed Consolidated Financial

Statements for an additional discussion of the Company’s debt obligations and further discussion of the Company’s refinancing

activities subsequent to December 31, 2021.

Liquidity and Financial

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, 2022 and 2021, we incurred net losses of $( 554 ) and $( 343 ), respectively.

For the nine months ended September 30, 2022 and

2021, we recognized net income of $ 3,210 and $ 1,954 , respectively.

As of September 30, 2022, we had cash and cash equivalents of $ 819

and a working capital deficit of $ 487 .

Management believes that, based

on (i) securing incremental debt of $ 2,000 on October 31, 2022 (see Note 9 Loans Payable, Term Loan (2022) to the Condensed Consolidated

Financial Statements for a description of such transaction), and (ii) our operational forecast through 2023, that we can continue as a

going concern through at least November 14, 2023.

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

a continued support letter from Slipstream through November 14, 2023.

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

("Allure), a Georgia corporation, Creative Realities Canada, Inc., a Canadian corporation, and Reflect Systems, Inc.

("Reflect"), a Delaware corporation.

Reverse stock split

On March 23, 2023, the Company filed Articles of Amendment with the Secretary of State of the State of Minnesota to effectuate, effective March 27, 2023, a 1 -for- 3 reverse stock split of the shares of the Company's common stock, par value $ 0.01 per share. 

All share and per share information (including share and per share information related to share-based compensation) has been retroactively adjusted to reflect the reverse stock split within this Quarterly Report on Form 10 -Q.

As a result of the reverse stock split, effective 12:01 am on March 27, 2023, every three shares of common stock then-issued and outstanding automatically combined into one share of common stock, with no change in par value per share. 

No fractional shares were outstanding following the reverse stock split and any fractional shares resulting from the reverse split were rounded up to the nearest whole share of common stock. 

In connection with the reverse stock split, the total number of shares of common stock authorized for issuance was reduced from 200,000,000 shares to 66,666,666 shares in proportion to the reverse stock split.

Effective as of the same time as the reverse stock split, the number of shares of common stock available for issuance under the Company's equity compensation plans were reduced in proportion to the reverse stock split. 

The reverse stock split also resulted in reductions in the number of shares of common stock issuable upon exercising or vesting of equity awards in proportion to the reverse stock split and proportionate increases in exercise price or share-based performance criteria, if any, applicable to such awards.

Similarly, the number of shares of common stock issuable upon exercise of outstanding warrants were reduced in proportion to the reverse stock split, and the exercise prices of outstanding warrants were proportionately increased.

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.

At March 31, 2023, we have an accumulated deficit of $ 51,409 , negative working capital of $ 3,822 and cash of $ 3,905 .

For the three months ended March 31, 2023, we incurred an operating loss of $ 90  and cash inflows from operations of $ 3,868 .

Our history of operating losses and near term cash obligations are indicators of substantial doubt about our ability to continue as a going concern. We obtained a continuing support letter from Slipstream Communications, LLC ("Slipstream") through May 31, 2024, which alleviated the substantial doubt about our ability to continue as a going concern. 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.

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:

A summary of the significant accounting policies consistently applied in the preparation of the accompanying Condensed Consolidated Financial Statements follows:

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, 2021, included in

the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 22, 2022.

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.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the applicable instructions to Form 10 -Q and Article 10 of 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, 2022 , included in the Company’s Annual Report on Form 10 -K filed with the Securities and Exchange Commission on March 30, 2023.

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.

Recently Issued and Adopted Accounting Pronouncements

Credit Losses.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2016 - 13,  

Financial Instruments —

Credit Losses , which requires entities to estimate expected lifetime credit losses on financial assets and provide expanded disclosures.

The ASU replaced the incurred loss methodology with one that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

We adopted ASU No.

2016 - 13 on January 1, 2023. 

The adoption of this guidance did not have a material impact on the Company's Condensed Consolidated Financial Statements, as the Company's primary financial assets are its trade accounts receivable, which are short-term financings under industry standard credit and trade terms.

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 intend to early adopt this standard, nor do we expect the adoption of this guidance to have a material impact on our Consolidated Financial Statements.

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.

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.

See Note 4 Revenue Recognition for additional detail and discussion of the Company’s

performance obligations.

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

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.

We recognize revenue in accordance with ASC 606, Revenue from Contracts with Customers , applying the five -step model.

If an arrangement involves multiple performance obligations, the items are analyzed to determine the separate units of accounting, whether the items have value on a standalone basis and whether there is objective and reliable evidence of their standalone selling price.

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

The standalone selling price is based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost plus margin approach.

The Company estimates the amount of total contract consideration it expects to receive for variable arrangements by determining the most likely amount it expects to earn from the arrangement based on the expected quantities of services it expects to provide and the contractual pricing based on those quantities.

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, 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.

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, 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.

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

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

A contract liability is recognized as deferred revenue when the Company invoices clients in advance of performing the related services under the terms of a contract.

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

The Company uses the practical

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

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

Inventories are stated at

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

September 30,

Raw materials, including those on consignment, net of reserve of $ 883 and $ 502 , respectively

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.

Allowance for Credit Losses

The allowance for credit losses is the Company's best estimate of the amount of expected lifetime credit losses in the Company's accounts receivable. The Company regularly reviews the adequacy of its allowance for credit losses.

The Company estimates losses over the contractual life using assumptions to capture the risk of loss, even if remote, based principally on how long a receivable has been outstanding.

Account balances are charged off against the allowance for credit losses after all reasonable means of collection have been exhausted and the potential for recovery is considered remote.

Other factors considered include historical write-off experience, current economic conditions, customer credit, and past transaction history with the customer.

The allowance for credit losses is included in accounts receivable, net in the accompanying Condensed Consolidated Balance Sheets.

The Company had the following activity for its allowance for credit losses from December 31, 2022 to March 31, 2023:

Balance as of December 31, 2022

Amounts accrued

Write-offs charged against the allowance

Balance as of March 31, 2023

$ 1,217  

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:

Raw materials, net of reserve

$ 1,671  

Work-in-process

Total inventories

$ 1,479  

$ 2,267  

The reserve for obsolete inventory at March 31, 2023 and December 31, 2022 was $ 1,777 , of which $ 1,707 related to Safe Space Solutions. 

The Company is no longer actively promoting the sale of our Safe Space Solutions or purchasing inventory to support such solutions.

Impairment of Long-Lived Assets

We review the carrying value

of all long-lived assets, including property and equipment, for impairment annually as of September 30 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 was any impairment of long-lived

assets as of September 30, 2022 and concluded there was none.

If the impairment tests indicate

that the carrying value of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment

loss would be recognized.

We review the carrying value of all long-lived assets, including property and equipment, for impairment annually as of September 30 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.

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.

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 22,276,807 at September

30, 2022 were excluded from the computation of income per share as the strike price on the options and warrants were higher than the Company’s

market price and therefore anti-dilutive.

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.

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.

had no uncertain tax positions as of September 30, 2022 and December 31, 2021.

We generally measure fair value by considering sale prices for similar assets or by discounting estimated future cash flows from such assets using an appropriate discount rate.

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

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

Basic and Diluted (Loss)/Earnings per Common Share

Basic and diluted (loss)/earnings 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 7,339,582 and 6,910,962 at March 31, 2023 and 2022, respectively were excluded from the computation of (loss)/earnings per share as the strike price on the options and warrants were higher than the Company's market price and therefore anti-dilutive.

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 a number of matters including, but not limited to, net operating losses, differences in basis of intangibles, stock-based compensation, reserves for uncollectible accounts receivable and inventory, differences in depreciation methods, and accrued expenses.

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

The Company accounts for uncertain tax positions utilizing an established recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

We had no uncertain tax positions as of March 31, 2023 and December 31, 2022 .

Goodwill and Intangible Assets

We follow the provisions of

ASC 350, Goodwill and Other Intangible Assets .

Pursuant to ASC 350, goodwill acquired in a business combination is not amortized,

but instead tested for impairment at least annually.

The Company uses an annual measurement date of September 30 to assess impairment

of goodwill and any indefinite-lived intangible assets, or as indicators of impairment are identified (see Note 8 Intangible Assets

and Goodwill ).

Definite-lived intangible

assets are amortized straight-line in accordance with their identified useful lives.

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 an annual measurement date of September 30 to assess impairment of goodwill and indefinite-lived intangible assets, or as indicators are identified.

Definite-lived intangible assets are amortized straight-line in accordance with their identified useful lives.

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:

warrant liability valuation, contingent purchase consideration

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

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

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

and the related amortization methods and periods.

The 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: contingent purchase consideration valuation, allowance for credit losses, 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.

We account for leases in accordance

with Accountings Standards Update (“ASU”) No.

2016-02, Leases (Topic 842), 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.

incremental borrowing rate is a hypothetical rate based on our understanding of what our credit rating would be and corresponding market rates at the time of lease inception.

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.

Business Combinations

Accounting for acquisitions

requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values.

Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net acquisition date fair values of

the assets acquired and the liabilities assumed.

While we use our best estimates and assumptions to accurately value assets acquired and

liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain

and subject to refinement.

As a result, during the measurement period, which may be up to one year from the acquisition date, we may record

adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill.

Upon the conclusion of the measurement

period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments

are recorded to our consolidated statements of operations.

Refer to Note 5, Business Combination for a discussion of the accounting

for the Merger.

Accounting for acquisitions requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values.

Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net acquisition date fair values of the assets acquired and the liabilities assumed.

While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement.

As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill.

Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.

Contingent Consideration

The Company has contingent

consideration arrangements related to certain acquisitions to potentially pay additional cash amounts in future periods based on the lack

of achievement of certain share price performance goals of our common stock.

Such contingent consideration arrangements are recorded at

fair value and are classified as liabilities on the acquisition date and are remeasured at each reporting period in accordance with ASC

805-30-35-1 using a Monte Carlo simulation model.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Recently adopted

January 1, 2022, we adopted early Accounting Standards Update (“ASU”) No.

2021-08, Business Combinations (Topic

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08), which clarifies that

an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance

with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606) .

The adoption of

this new standard did not have a material impact on our condensed consolidated financial statements.

Not yet adopted

In August 2020, the FASB issued Accounting Standards

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

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

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

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

debt instruments.

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

and requires the use of the if-converted method.

This guidance will be effective for us in the first quarter of 2024 on a full or modified retrospective

basis, with early adoption permitted.

We do not intend to early adopt this standard, nor do we 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

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.

The Company has contingent consideration arrangements related to certain acquisitions to potentially pay additional cash amounts in future periods based on the lack of achievement of certain share price performance goals of our common stock.

Such contingent consideration arrangements are recorded at fair value and are classified as liabilities on the acquisition date and are remeasured at each reporting period in accordance with ASC 805 - 30 - 35 - 1 using a Monte Carlo simulation model.

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.

The calculation of the fair value of the contingent consideration contains inputs which are unobservable and involve management judgment and are considered Level 3 estimates.

Additionally, the separately identifiable intangible assets rely on a discounted cash flow model which utilizes inputs including the calculation of the weighted average cost of capital and management’s forecast of future financial performance which are unobservable and involve management judgment and are considered Level 3 estimates.

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.

The calculation of the fair value of the warrant liability contains valuation inputs which are based on observable inputs (other than Level 1 prices) and are considered Level 2 estimates.

The liability warrants were converted to equity warrants effective June 30, 2022.

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, 2022 and

The following table disaggregates the Company’s revenue by major source for the three months ended March 31, 2023 and 2022 :

(in thousands)

September 30,

$ 4,322  

$ 6,459  

Installation Services

3 unchanged sentences

Total Hardware and Services

$ 9,944  

$ 10,757  

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

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, 2022 and 2021 were $ 0 and $ 35 .

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.

Software design and development services

Software and software license sales are recognized

as revenue when a fixed fee order has been received and delivery has occurred to the customer.

Revenue is recognized generally upon customer

acceptance (point-in-time) of the software product and verification that it meets the required specifications.

Software is delivered to

customers electronically.

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

our disaggregated revenue.

Software and software license sales are 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.

Software as a service includes revenue from software licensing and delivery in which software is licensed on a subscription basis and is centrally hosted by the Company.

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.

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 revenue are classified as “Managed Services”

within our disaggregated revenue.

Maintenance and support services

The Company sells maintenance and support services

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

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

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.

The Company sells support services which include access to technical support personnel for software and hardware troubleshooting.

The Company offers a hosting service through our network operations center, or NOC, allowing the ability to monitor and support its customers’

networks 7 days a week, 24 hours a day.

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

Maintenance and Support revenues are classified as “Managed Services”

within our disaggregated revenue.

Maintenance and support fees are based on the level of service provided to end customers, which can range from monitoring the health of a customer’s network to supporting a sophisticated web-portal to managing the end-to-end hardware and software of a digital marketing system.

These agreements are renewable by the customer.

Rates for maintenance and support, including subsequent renewal rates, are typically established based upon a fee per location, per device, or a specified percentage of net software license fees as set forth in the arrangement.

These contracts are generally 12 - 36 months in length.

Revenue is recognized ratably and evenly over the service period.

The Company also performs time and materials-based maintenance and repair work for customers.

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

Media revenues are derived from selling (i) sponsorship packages, including mobile takeover or physical presence, or (ii) advertising space to customers on digital displays or other outdoor structures, each within physical venues. We generally do not  own the physical structures on which we display advertising for our customers but instead sell advertising or sponsorship opportunities on behalf of our media network owners to our brand customers.

Media revenue services are recognized either on a straight-line basis over the available hours of advertising during the contracted period, or at the time of an event in the case of sponsorships.

Our media revenue contracts with customers range from four weeks to 

three years and billing commences at the beginning of the contract term, with payment generally due within 

ninety ( 90 ) days of billing.

For the majority of our contracts, transaction prices are explicitly stated.

Any contracts with transaction prices that contain multiple performance obligations are allocated primarily based on a relative standalone selling price basis. 

Any deferred revenues primarily consist of revenues paid in advance of being earned.

On a contract-by-contract basis, we evaluate whether we should be considered the principal (i.e., report revenues on a gross basis) or an agent (i.e., report revenues on a net basis).

We are considered the principal in our arrangements and report revenues on a gross basis, wherein the amounts billed to customers are recorded as revenues and amounts paid to network owners are recorded as expenses.

We are considered the principal because we control the advertising space before and after the contract term, are primarily responsible to our customers, and have discretion in pricing.

For revenues generated through the use of a subcontracted advertising agency, commissions are calculated based on a stated percentage of gross advertising revenue and reported in the Consolidated Statement of Operations within Sales and Marketing expenses.

BUSINESS COMBINATION

On November 12, 2021,

the Company and Reflect entered into an Agreement and Plan of Merger (as amended on as amended on February 8, 2022, the “Merger

Agreement”) pursuant to which a direct, wholly owned subsidiary of the Company, CRI Acquisition Corporation, or “Merger Sub,”

would merge with and into Reflect, with Reflect becoming our wholly owned subsidiary, which transaction is referred to herein as the “Merger.”

On February 17, 2022, the parties consummated 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 received

from the Company, in the aggregate, the following Merger consideration:

(i) $16,166 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”), (iii) the Secured Promissory

Note (as described below), and (iv) supplemental cash payments (the “Guaranteed Consideration”), if any, payable on or after

February 17, 2025 (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).

The Company may exercise an

extension option (the “Extension Option”) to extend the Guarantee Date by six (6) months, from February 17, 2025 to August

17, 2025 if (i) the Extension Threshold Price is greater than or equal to 70% of the Guaranteed Price described above, and (ii) the Company

provides written notice of its election to exercise the Extension Option no later than February 7, 2025.

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 February 2, 2025.

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.

On November 12, 2021, the Company and Reflect, entered into an Agreement and Plan of Merger (as amended on February 8, 2022 

and February 11, 2023, the “Merger Agreement") pursuant to which a direct, wholly owned subsidiary of Creative Realities, CRI Acquisition Corporation, or “Merger Sub,”

would merge with and into Reflect, with Reflect surviving the merger and becoming our wholly owned subsidiary, which transaction is referred to herein as the “Merger.”

On February 17, 2022, the parties consummated the Merger (the "Closing").

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, at the Closing, Reflect stockholders as of the effective time of the Merger collectively received from the Company, in the aggregate, the following Merger consideration:

(i) $ 16,166 in cash, (ii) 777,778 shares of common stock of Creative Realities (valued based on an issuance price of $ 6 per share) (the “CREX Shares”), (iii) the Secured Promissory Note (as described below), and (iv) supplemental cash payments (the “Guaranteed Consideration”), if any, payable on or after February 17, 2025 ( 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 $ 19.20 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 $ 21.60 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). 

At or before December 31, 2022, the condition of certain customers of Reflect collectively to achieve over 85,000 billable devices online was not met. 

Accordingly, the contingent cash payment amount was reduced at December 31, 2022 from $ 21.60 per share to $ 19.20 per share, a reduction of $ 2.40 per share.   

The Company may exercise an extension option (the “Extension Option”) to extend the Guarantee Date by six ( 6 ) months, from February 17, 2025 to August 17, 2025, if (i) the Extension Threshold Price is greater than or equal to 70 % of the Guaranteed Price described above, and (ii) the Company provides written notice of its election to exercise the Extension Option no later than February 7, 2025.

The “Extension Threshold Price”

means the average closing price per share of Creative Realities common stock as reported on the Nasdaq Capital Market (or NYSE) in the fifteen ( 15 ) consecutive trading day period ending February 2, 2025.

If the Extension Threshold Price is less than 80 % of the Guaranteed Price, then the Guaranteed Price will be increased by $ 3.00 per share.

In connection with the Merger, the Company adopted a Retention Bonus Plan and raised capital to, among other things, pay the cash portion of the Merger consideration. The Retention Bonus Plan is described below.

Retention Bonus Plan

On February 17, 2022,

in connection with the closing of the Merger (the “Closing”), the Company adopted a Retention Bonus Plan, pursuant to which

the Company is required to pay to key members of Reflect’s management team an aggregate of $1,333 in cash, which was paid 50% at

the Closing, and subject to continuous employment with Reflect or Creative Realities, will be paid 25% on February 17, 2023 (the one-year

anniversary of Closing) and 25% on February 17, 2024 (the two-year anniversary of the Closing).

The future cash payments due on the one-year

and two-year anniversaries of the Closing have been deposited into an escrow agreement.

The Retention Bonus Plan also requires the Company

to issue Common Stock having an aggregate value of $667 to the plan participants as follows:

50% of the value of such shares were issued

at the Closing, and subject to continuous employment with Reflect or Creative Realities, 25% of the value of such shares will be issued

on February 17, 2023 (the one-year anniversary of Closing) and the remaining 25% of the value of such shares will be issued on February

17, 2024 (the two-year anniversary of the Closing).

The shares issued on the Closing were valued at $2.00 per share, and the shares to

be issued after the Closing will be determined based on dividing the value of shares issuable on such date divided by the trailing 10-day

volume weighted average price (VWAP) of the shares as of such date as reported on the Nasdaq Capital Market.

Upon the resignation of a

participant’s employment for “good reason,” or termination of the employment of a participant without “cause,”

each as defined in the Retention Bonus Plan, the participant will be fully vested and will receive all cash and shares allocated to such

participant under the Retention Bonus Plan.

Any amounts unpaid by reason of a lapse in continuous employment or otherwise will be reallocated

among the remaining Retention Bonus Plan participants.

Secured Promissory Note

On February 17, 2022,

pursuant to the terms of the Merger, the Company issued to Stockholders’ Representative a $ 2,500 Note and Security Agreement (the

“Secured Promissory Note”).

The Secured Promissory Note

accrues interest at 0.59 % (the applicable federal rate at the time of issuance of the Secured Promissory Note) and requires the Company

and Reflect to collectively pay equal monthly principal installments of $ 104 on the fifteenth (15th) day of each month, commencing on

March 15, 2022.

Any remaining or unpaid principal shall be due and payable on February 17, 2023.

All payments under the Secured

Promissory Note will be paid to the escrow agent in the Merger Agreement to be placed into the escrow account to secure the former Reflect

stockholders’ indemnification obligations until released on February 17, 2023 (the one-year anniversary of the closing of the Merger),

at which time any remaining proceeds not subject to a pending indemnification claim will be paid to the exchange agent for payment to

the former Reflect stockholders.

The obligations of the Company and Reflect set forth in the Secured Promissory Note are secured by a

first-lien security interest in various contracts of Reflect, together with all accounts arising under such contracts, supporting obligations

related to the accounts arising under such contracts, all related books and records, and products and proceeds of the foregoing.

subordinated its security interest in such collateral, and the recourse for any breach of the Secured Promissory Note by the Company or

Reflect will be against such collateral.

The preliminary purchase price

of Reflect consisted of the following items:

On February 

17, 2022, in connection with the Closing, the Company adopted a Retention Bonus Plan, pursuant to which the Company is required to pay to key members of Reflect’s management team an aggregate of $ 1,334 in cash, which was paid 50 % at the Closing, and subject to continuous employment with Reflect or Creative Realities, 25 % was paid on February 17, 2023 ( the one -year anniversary of Closing) and 25 % will be paid on February 17, 2024 ( the two -year anniversary of the Closing).

In connection with the closing of the Merger, the future cash payments due on the one -year and two -year anniversaries of the Closing were deposited into an escrow agreement.

The Retention Bonus Plan also requires the Company to issue Common Stock having an aggregate value of $ 667 to the plan participants as follows:

50 % of the value of such shares were issued at the Closing, and subject to continuous employment with Reflect or Creative Realities, 25 % of the value of such shares was issued on February 17, 2023 ( the one -year anniversary of Closing) and the remaining 25 % of the value of such shares will be issued on February 17, 2024 ( the two -year anniversary of the Closing).

The shares issued on the Closing were valued at $ 6.00 per share. The shares issued on the one -year anniversary were valued at $ 2.22 based on the value of shares issuable divided by the trailing 10 -day volume weighted average price ("VWAP") of the shares as of February 17, 2023 as reported on the Nasdaq Capital Market. 

The Company issued 62,475 shares to key members of Reflect's management team pursuant to the Retention Bonus Plan. Certain participants made an election to have stock withheld to cover applicable withholding taxes. 

In such cases, the Company reduced the stock award issued to the employee and settled the employees tax liability by remitting cash to the applicable taxing authorities. The shares to be issued on the two -year anniversary will be determined based on the value of shares issuable divided by the trailing 10 -day VWAP of the shares as of February 17, 2024 as reported on the Nasdaq Capital Market.

Upon the resignation of a participant’s employment for “good reason,”

or termination of the employment of a participant without “cause,”

each as defined in the Retention Bonus Plan, the participant will be fully vested and will receive all cash and shares allocated to such participant under the Retention Bonus Plan.

Any amounts unpaid by reason of a lapse in continuous employment or otherwise will be reallocated among the remaining Retention Bonus Plan participants.

Purchase price

The preliminary purchase price of Reflect consisted of the following items:

(in thousands)

7 unchanged sentences

Total consideration

36,360  

Vendor deposit with the Company

1 unchanged sentence

Net consideration transferred

consideration for outstanding shares of Reflect capital stock per Merger Agreement.

consideration utilized to fund the Retention Bonus Plan per Merger Agreement.

common stock issued in exchange for outstanding shares of Reflect capital stock per Merger Agreement.

$ 34,730  

Cash consideration for outstanding shares of Reflect capital stock per Merger Agreement.

Cash consideration utilized to fund the Retention Bonus Plan per Merger Agreement.

Company common stock issued in exchange for outstanding shares of Reflect capital stock per Merger Agreement.

Company common stock issued to fund the Retention Bonus Plan per Merger Agreement.

(5) The Secured Promissory Note accrues interest at 0.59 % (the applicable federal rate at the time of issuance of the Secured Promissory Note) and requires the Company and Reflect to collectively pay equal monthly principal installments of $ 104 on the fifteenth (15th) day of each month, commencing on March 15, 2022.

Any remaining or unpaid principal shall be due and payable on February 17, 2023.

(6) Represents an estimate of the fair value of the Guaranteed Consideration as of the Merger, which, if any, is payable on or after February 17, 2025 (subject to the Extension Option), 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), subject to the terms of the Merger Agreement.

During the nine months ended September 30, 2022, the Company’s third party specialist completed valuation of this contingent liability as of the opening balance sheet date, resulting in a measurement period adjustment recorded to increase goodwill and the contingent liability as of February 17, 2022 by $ 5,262 .

The Secured Promissory Note accrued interest at 0.59 % (the applicable federal rate at the time of issuance of the Secured Promissory Note) and required the Company and Reflect to collectively pay equal monthly principal installments of $ 104 on the fifteenth ( 15th ) day of each month, commencing on March 15, 2022. 

On February 11, 2023, the Company and the Stockholders’

Representative executed an amendment (the “Note Amendment”) to the Secured Promissory Note. The Note Amendment eliminated the balloon payment, extending the maturity date for a one -year period, to February 17, 2024.

During the extended period, the Company will continue to make monthly principal payments of $ 104 , and the annual interest rate on the outstanding principal increased from 0.59 % to 4.60 %, which will accrue and is payable in full on the new maturity date.

Represents an estimate of the fair value of the Guaranteed Consideration as of the Merger, which, if any, is payable on or after February 17, 2025 ( subject to the Extension Option), in an amount by which the value of the CREX Shares on such anniversary is less than $ 19.20 per share, multiplied by the amount of CREX Shares held by the Reflect stockholders on the Guarantee Date (subject to the Extension Option), subject to the terms of the Merger Agreement.

Prior to the Merger, Reflect had engaged the Company on a project and paid the Company a deposit of $ 818 .

1 unchanged sentence

Represents the Reflect cash balance acquired at Closing.

The Company incurred $ 16 and

$ 444 of direct transaction costs related to the Reflect Merger for the three and nine months ended September 30, 2022, respectively.

costs are included in deal and transaction expense in the accompanying Condensed Consolidated Statement of Operations.

The Company accounted for

the Merger using the acquisition method of accounting.

The preliminary allocation of the purchase price is based on estimates of the fair

value of assets acquired and liabilities assumed as of February 17, 2022.

The Company is continuing to obtain information to determine

the acquired assets and liabilities, including tax assets, liabilities and other attributes.

The components of the preliminary purchase

price allocation, inclusive of measurement period adjustments recorded by the Company during the nine months ended September 30, 2022,

are as follows:

The Company incurred $ 391 of direct transaction costs related to the Reflect Merger for the three months ended March 31, 2022.

These costs are included in deal and transaction expense in the accompanying Condensed Consolidated Statement of Operations.

The Company accounted for the Merger using the acquisition method of accounting.

The final allocation of the purchase price is based on the fair value of assets acquired and liabilities assumed as of February 17, 2022, which included the following:

(in thousands)

Accounts receivable

$ 1,359  

Prepaid expenses & other current assets

5 unchanged sentences

Definite-lived Customer relationships

11,040  

Definite-lived Noncompete agreements

18,935  

Accounts payable

4 unchanged sentences

Long-term obligations under operating leases

Other liabilities

Net consideration transferred

The Company engaged a third

party valuation specialist to assist in the identification and calculation of the fair value of those separately identifiable intangible

assets and recorded those assets based on an initial draft valuation report.

The Company remains in process of reviewing the valuation

report and finalizing its opening balance sheet accounting.

The Company completed its

valuation procedures by asset utilizing the following approaches:

$ 34,730  

The Company engaged a third -party valuation specialist to assist in the identification and calculation of the fair value of those separately identifiable intangible assets.

The Company completed its valuation procedures by asset utilizing the following approaches:

Customer relationship asset was estimated using the income approach through a discounted cash flow analysis wherein the cash flows will be based on estimates used to price the Merger.

Discount rates were benchmarked with reference to the implied rate of return from the Company’s pricing model and the weighted average cost of capital.

Trade name asset represents the “Reflect” brand name as marketed primarily as a full services digital software solution, marketed in numerous verticals with the exception of food service.

Discount rates were benchmarked with reference to the implied rate of return from the Company’s pricing model and the weighted average cost of capital.

Trade name asset represents the Reflect brand name as marketed primarily as a full services digital software solution, marketed in numerous verticals with the exception of food service.

The Company applied the income approach through an excess earnings analysis to determine the fair value of the trade name asset.

The Company applied the income approach through a relief-from-royalty analysis to determine the fair value of this asset.

The developed technology assets are primarily comprised of know-how and functionality embedded in Reflect’s proprietary content management applications, which drive currently marketed products and services.

The Company applied the income approach through a relief-from-royalty analysis to determine the preliminary fair value of this asset.

The Company is amortizing

the identifiable intangible assets on a straight-line basis over the weighted average lives ranging from 2 to 10 years as outlined below.

The table below sets forth

the preliminary valuation and amortization period of identifiable intangible assets:

The Company is amortizing the identifiable intangible assets on a straight-line basis over the weighted average lives ranging from 2 to 10 years as outlined in the table below.

The table below sets forth the valuation and amortization period of identifiable intangible assets:

(in thousands)

Preliminary Valuation

Amortization Period

Amortization Period (in years)

Identifiable definite-lived intangible assets:

1 unchanged sentence

Customer relationships

The Company estimated the

preliminary fair value of the acquired property, plant and equipment using a combination of the cost and market approaches, depending

on the component.

The preliminary fair value of such property, plant and equipment is $ 96 .

The excess of the purchase

price over the preliminary estimated fair value of the tangible net assets and identifiable intangible assets acquired was recorded as

goodwill and is subject to change upon final valuation.

The factors contributing to the recognition of the amount of goodwill are based

on several strategic and synergistic benefits that are expected to be realized from the Merger.

These benefits include a comprehensive

portfolio of iconic customer brands, complementary product offerings, enhanced national footprint, and attractive synergy opportunities

and value creation.

11,040  

$ 17,160  

The Company estimated the preliminary fair value of the acquired property and equipment using a combination of the cost and market approaches, depending on the component.

The fair value of such property and equipment is $ 96 .

The excess of the purchase price over the fair value of the tangible net assets and identifiable intangible assets acquired was recorded as goodwill. The factors contributing to the recognition of the amount of goodwill are based on several strategic and synergistic benefits that are expected to be realized from the Merger.

These benefits include a comprehensive portfolio of iconic customer brands, complementary product offerings, enhanced national footprint, and attractive synergy opportunities and value creation.

None of the goodwill is expected to be deductible for income tax purposes.

The following unaudited pro

forma information presents the combined financial results for the Company and Reflect as if the Merger had been completed at the beginning

of the Company’s prior year, January 1, 2021.

(in thousands, except earnings per common share)

Earnings per common share

The information above does

not include the pro forma adjustments that would be required under Regulation S-X for pro forma financial information and does not reflect

future events that may occur after December 31, 2021 or any operating efficiencies or inefficiencies that may result from the Merger

and related financings.

Therefore, the information is not necessarily indicative of results that would have been achieved had the businesses

been combined during the periods presented or the results that the Company will experience going forward.

We have not included disaggregated

information for Reflect on a standalone basis in the current year for either revenue or net income as the integration activities undertaken

by the Company have prevented this information from being useful to financial statement readers.

Reflect Systems, Inc.

(in thousands)

September 30,

Net income/(loss)

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.

hierarchy levels are defined as follows:

Level 1 — Valuations based on unadjusted

quoted prices in active markets for identical assets.

Level 2 — Valuations based on observable

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

quoted prices in markets that are

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

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 5 Business

Combinations , the calculation of the fair value of the Guaranteed Consideration contains inputs which are unobservable and involve

management judgment and are considered Level 3 estimates.

Additionally, the separately identifiable intangible assets rely on a discounted

cash flow model which utilizes inputs including the calculation of the weighted average cost of capital and management’s forecast

of future financial performance which are unobservable and involve management judgment and are considered Level 3 estimates.

As discussed in Note 8 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 9 Loans

Payable , the Convertible Loan was 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.

The Convertible Loan was refinanced into the Consolidation Term Loan in February 2022.

As discussed in Note 12 Warrants ,

the calculation of the fair value of the warranty liability contains valuation inputs which are based on observable inputs (other than

Level 1 prices) and are considered Level 2 estimates.

The liability warrants were converted to equity warrants effective June 30, 2022.

SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION

Nine Months Ended

September 30,

Supplemental Cash Flow Information

Investing activities not yet paid in cash:

Three Months Ended

Supplemental non-cash Investing activities

Capitalized software in accounts payable

Property and equipment in accounts payable

Right-of-use assets obtained in exchange for new finance lease liabilities

Supplemental disclosure information for cash flow

Cash paid during the period for:

Operating leases

Income taxes, net

1 unchanged sentence

Intangible Assets

Intangible assets consisted

of the following at September 30, 2022 and December 31, 2021:

September 30,

Intangible assets consisted of the following at 

March 31, 2023 and December 31, 2022 :

Technology platform

$ 9,765  

$ 4,546  

$ 9,765  

$ 4,354  

Purchased and developed software

1 unchanged sentence

Customer relationships

15,000  

Trademarks and trade names

35,972  

12,153  

35,151  

11,399  

Accumulated amortization

12,153  

11,399  

Net book value of amortizable intangible assets

On February 17, 2022, the

Company added intangible assets as a result of accounting for the Merger in accordance with ASC 805 Business Combinations , as outlined

in Note 5 Business Combinations .

For the three months ended

September 30, 2022 and 2021, amortization of intangible assets charged to operations was $ 848 and $ 139 , respectively.

For the nine months

ended September 30, 2022 and 2021 amortization of intangible assets charged to operations was $ 1,959 and $ 418 , respectively.

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.

Following the Merger, the Company evaluated its reporting units in accordance with ASC 280 Segment Reporting

and concluded that the Company has only one reporting unit.

Therefore, the entire goodwill is allocated to that reporting unit.

The Company assessed the carrying value of goodwill

at the reporting unit level based on an estimate of the fair value of its reporting unit.

Fair value of the reporting unit was estimated

using both (1) a market approach, leveraging recent industry merger and acquisition activity as well as comparable public company information,

and (2) a discounted cash flow analyses consisting of various assumptions, including expectations of future cash flows based on projections

or forecasts derived from analysis of business prospects and economic or market trends that may occur, specifically, the Company gave

significant consideration to actual historic financial results, including revenue growth rates in the current and preceding three years,

further informed by known backlog and customer acquisitions.

Based on the Company’s assessment, we determined that the fair value

of our reporting unit exceeds its carrying value, and accordingly, the goodwill associated with the reporting unit is not considered to

be impaired at September 30, 2022.

The Company recognizes that any changes in our

actual fourth quarter 2022 or projected 2023 results could potentially have a material impact on our assessment of goodwill impairment.

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

$ 23,819  

$ 23,752  

For the three months ended March 31, 2023 and 2022 , amortization of intangible assets charged to operations was $ 754 and $ 680 , respectively.

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 at 

September 30th  each fiscal year, 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.

The Company assessed the carrying value of goodwill at the reporting unit level based on an estimate of the fair value of its reporting unit.

Fair value of the reporting unit was estimated using both ( 1 ) a market approach, leveraging recent industry merger and acquisition activity as well as comparable public company information, and ( 2 ) a discounted cash flow analyses consisting of various assumptions, including expectations of future cash flows based on projections or forecasts derived from analysis of business prospects and economic or market trends that may occur, specifically, the Company gave significant consideration to actual historic financial results, including revenue growth rates in the current and preceding three years, further informed by known backlog and customer acquisitions.

Based on the Company’s assessment, we determined that the fair value of our reporting unit exceeds its carrying value, and accordingly, the goodwill associated with the reporting unit is not considered to be impaired at September 30, 2022.

At December 31, 2022, we concluded the decline in our market value represented an interim indicator of potential impairment. 

Based on a quantitative assessment of our fair value performed at December 31, 2022, using the same approach as our annual impairment performed at September 30, described above, we concluded that the carrying value of our goodwill did not exceed the reporting unit fair value.

No indicators of impairment were identified as of March 31, 2023.

The Company recognizes that any differences between our actual and projected future results, or changes in our projected future results, could potentially have a material impact on our assessment of goodwill impairment.

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

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

Should any indicators

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

While our overall

business performance has been consistent with our expectations, both before and after the acquisition of Reflect, we believe a

significant portion of the decline in our market price relates primarily to several macroeconomic factors including:

wide recessionary fears, (2) rapid inflation fears, which often have an outsized, direct negative impact on the share price of

high-growth companies with limited or negative cash flow from operations, (3) a lack of comprehension by the markets of the recent

Merger with Reflect and related financing transaction, and (4) the sale of over 7,000,000 shares of our common stock into the

market by a new investor, resulting in significant negative volume and price pressure on the stock unrelated to the Company

fundamentals.

We do not believe these factors are consistent with or reflective of the underlying value of the business, and there

were no other indicators of potential impairment as of September 30, 2022.

Should our market price remain at this level for an

extended period of time, however there could be potential future impairment.

Based on the relatively recent

decline in our share price and market capitalization, along with improving Company fundamentals following our Merger with Reflect and

a share price that was substantially higher upon announcing that Merger mere months ago, we believe our implied fair value continues to

exceed our total carrying value.

There were no other indications of impairment as of September 30, 2022.

Should any indicators of impairment occur in subsequent periods, the Company will be required to perform an analysis in order to determine whether goodwill is impaired.

LOANS PAYABLE

The outstanding debt with detachable warrants,

as applicable, are shown in the table below.

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

Further discussion of the debt follows.

As of September 30, 2022

As of March 31, 2023

Interest Rate Information

$ 10,000  

833,334  

8.0% interest (1)

4.60% interest (2)

898,165  

10.0% interest (3)

12.5% interest (4)

Total debt, gross

20,081  

1,731,499  

Debt discount

( 2,713 )  

Total debt, net

$ 17,368  

Less current maturities

( 4,944 )  

Long term debt

$ 12,424  

As of December 31, 2022

Interest Rate Information

$ 10,000  

833,334  

8.0% interest (1)

0.59% interest (2)

Total debt, gross

Fair value (B)

898,165  

10.0% interest (3)

12.5% interest (4)

Total debt, gross

20,641  

1,731,499  

Debt discount

( 3,069 )  

Total debt, net

$ 17,572  

Less current maturities

( 4,499 )  

Long term debt

A – Acquisition Loan

B – Reflect Seller Secured Promissory Note

C – Consolidation Term Loan

D – Term Loan with related party

E – Secured Convertible Special Loan Promissory

Note, at fair value

cash interest per annum through maturity at February 15, 2025.

cash interest per annum (the applicable federal rate) through maturity at February 17, 2023.

$ 13,073  

Acquisition Term Loan with related party

Secured Promissory Note

Consolidation Term Loan with related party

Term Loan ( 2022 ) with related party

8.0 % cash interest per annum through maturity at February 15, 2025.

was paid-in-kind (“PIK”) through October 2021, at which point interest became payable in cash at the stated interest

rates through maturity.

SBA Paycheck Protection Program

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.

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 nine months ended September 30, 2021.

Annual interest rate on the outstanding principal increased from 0.59 % to 4.60 % per annum effective February 17, 2023 

through maturity at February 17, 2024.

Annual interest rate was 0.59 % cash interest per annum (the applicable federal rate) through February 17, 2023. 

10.0 % cash interest per annum through maturity date at February 15, 2025.

Interest was paid-in-kind through October 2021, at which point interest became payable in cash at the stated interest rates through maturity.

Secured Promissory Note

On February 17, 2022,

in connection with the closing of the Merger, the Company issued to RSI Exit Corporation (“Stockholders’ Representative”),

the representative of Reflect stockholders, a $ 2,500 Note and Security Agreement (the “Secured Promissory Note”).

The Secured Promissory Note

accrues interest at 0.59 % per annum (the applicable federal rate on the date of issuance of the Secured Promissory Note) and requires

the Company and Reflect to collectively pay equal monthly principal installments of $ 104 on the fifteenth (15th) day of each month, commencing

on March 15, 2022.

Any remaining or unpaid principal shall be due and payable on February 17, 2023.

All payments under the Secured

Promissory Note will be paid to the escrow agent in the Merger Agreement to be placed into the escrow account to secure the Reflect stockholders’

indemnification obligations until released on February 17, 2023 (the one-year anniversary of the closing of the Merger), at which time

any remaining proceeds not subject to a pending indemnification claim will be paid to the exchange agent for payment to the Reflect Stockholders.

The Secured Promissory Note is secured by a first-lien security interest in certain contracts of Reflect, including obligations arising

out of those certain contracts..

The Company has the right to offset amounts payable under the Secured Promissory Note upon a final, non-appealable

decision of a court that entitles the Company or its affiliates to any damages for indemnification under the Merger Agreement, or the

Stockholders’ Representative’s agreement in writing to such damages.

Second Amended and Restated Loan

and Security Agreement

On February 17, 2022,

the Company and its subsidiaries (collectively, the “Borrowers”) refinanced their debt facilities with Slipstream Communications,

LLC (“Slipstream”), pursuant to a Second Amended and Restated Credit and Security Agreement (the “Credit Agreement”).

The Borrowers include Reflect Systems, Inc.

(“Reflect”), which became a wholly owned subsidiary of the Company as a result

of the closing of the Merger on February 17, 2022.

On February 17, 2022, in connection with the Closing, the Company issued to RSI Exit Corporation (“Stockholders’

Representative”), the representative of Reflect stockholders, a $ 2,500 Note and Security Agreement (the “Secured Promissory Note”).

The Secured Promissory Note accrued interest at 0.59 % per annum (the applicable federal rate on the date of issuance of the Secured Promissory Note) and required the Company and Reflect to collectively pay equal monthly principal installments of $ 104 on the fifteenth ( 15th ) day of each month, commencing on March 15, 2022.

Any remaining or unpaid principal was due and payable on February 17, 2023.

All payments under the Secured Promissory Note are paid to the escrow agent in the Merger Agreement to be placed into the escrow account to secure the Reflect stockholders’

indemnification obligations until released on February 17, 2023 ( the one -year anniversary of the Closing), at which time any remaining proceeds not subject to a pending indemnification claim would be paid to the exchange agent for payment to the Reflect stockholders pursuant to the Merger Agreement.

The Secured Promissory Note is secured by a first -lien security interest in certain contracts of Reflect, including obligations arising out of those certain contracts. The Company has the right to offset amounts payable under the Secured Promissory Note upon a final, non-appealable decision of a court that entitles the Company or its affiliates to any damages for indemnification under the Merger Agreement, or the Stockholders’

Representative’s agreement in writing to such damages.

On February 11, 2023, the Company and the Stockholders’

Representative executed an amendment (the “Note Amendment”) to the Secured Promissory Note. The Note Amendment eliminates the balloon payment, extending the maturity date for a one -year period, to February 17, 2024.

Second Amended and Restated Loan and Security Agreement

On February 17, 2022, the Company and its subsidiaries (collectively, the “Borrowers”) refinanced their debt facilities with Slipstream, pursuant to a Second Amended and Restated Credit and Security Agreement (the “Credit Agreement”).

The Borrowers include Reflect, which became a wholly owned subsidiary of the Company as a result of the Closing on February 17, 2022.

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

The Credit Agreement also

provides that the Company’s outstanding loans from Slipstream at December 31, 2021, consisting of its pre-existing $4,767 senior

secured term loan and $2,418 secured convertible loan, with an aggregate of $7,185 in outstanding principal and accrued and unpaid interest

under such loans, were consolidated into a term loan (the “Consolidation Term Loan”).

The Consolidation Term Loan has an interest

rate of 10.0%, with 75.0% warrant coverage (or 2,694,495 warrants).

On the first day of each month, commencing March 1, 2022 through

February 1, 2025, the Borrowers will make interest-only payments on the Consolidation Term Loan (estimated to be $60 per monthly

Commencing on September 1, 2023, and on the first day of each month thereafter until the Maturity Date, the Borrowers will

make a payment on the Consolidation Term Loan, in an equal monthly installment of principal sufficient to fully amortize the Consolidation

Term Loan in eighteen equal installments (estimated to be $399 per monthly installment).

The Company assessed the combination of the pre-existing

senior secured term loan and secured convertible loan in accordance with ASC 470 Debt and determined the transaction should be

accounted for as an extinguishment, in part as the Consolidation Term Loan eliminated a substantive conversion feature.

In aggregate the

Company recorded a loss on extinguishment of $295, primarily associated with the write-off of pre-existing debt discounts.

In addition to refinancing

the existing debt with Slipstream, the Company issued to Slipstream a $ 10,000 , 36-month senior secured term loan (the “Acquisition

Loan”) resulting in $ 10,000 in gross proceeds, or $ 9,950 in net proceeds.

The Acquisition Loan matures on February 17, 2025

(the “Maturity Date”) and has an interest rate of 8.0 %, with 50.0 % warrant coverage (or 2,500,000 warrants).

day of each month, commencing March 1, 2022 through February 1, 2025, the Borrowers will make interest-only payments on the

Acquisition Loan (estimated to be $67 per monthly payment).

No principal payments on the Acquisition Loan are payable until the Maturity

In connection with the Acquisition Loan and Consolidation Term Loan

warrant coverage, the Company issued to Slipstream a warrant to purchase an aggregate of 5,194,495 shares of Company common stock (the

“Lender Warrant”).

The Lender Warrant has a five-year term, an initial exercise price of $ 2.00 per share, subject to adjustments

in the Lender Warrant, and is not exercisable until August 17, 2022.

The warrants were assessed in accordance with ASC 470 and ASC

815 Derivatives and were deemed to represent bifurcated derivative instruments that should be recorded as liabilities in the Condensed

Consolidated Balance Sheets.

The Company performed a Black-Scholes valuation of the warrants as of the issuance date, resulting in a fair

value of $ 0.8129 per warrant.

In recording the warrant liability, the Company recorded a debt discount associated with each of the Acquisition

and Consolidation Term Loans in an amount of $ 2,032 and $ 2,190 , respectively.

These amounts are being amortized straight-line through

interest expense over the life of the loans, resulting in incremental interest expense of $ 363 and $ 904 during the three and nine months

ended September 30, 2022, respectively.

The Company has deemed straight-line amortization to be materially consistent with the effective

interest method.

In certain circumstances,

upon a fundamental transaction of the Company (e.g., a disposal or sale of all or the greater part of the assets or undertaking of the

Company, an amalgamation or merger with another company, or implementation of a scheme of arrangement), the holder of the Lender Warrant

will have the right to require the Company to repurchase the Lender Warrant at its fair value using a Black Scholes option pricing formula;

provided that such holder may not require the Company or its successor entity to repurchase the Lender Warrant for the Black Scholes value

in connection with a fundamental transaction that is not approved by the Company’s Board of Directors, and therefore not within

the Company’s control.

Effective June 30, 2022, the

Company amended the terms of the Lender Warrant to remove the holder’s option to exercise such warrant on a cashless basis utilizing

the volume weighted average price (“VWAP”) of the Company’s common stock on the trading day immediately preceding the

date of a notice of cashless exercise in certain circumstances, and remove the condition to exercising such warrant that the Company’s

shareholders approve the exercise thereof (which has already been obtained).

The amendments to the Lender Warrant also extend the term

of such warrants for an additional one year, such that the Lender Warrant will expire on February 17, 2028.

The foregoing amendments to

the Lender Warrant such warrants to be accounted for as equity instruments on the Company’s financial statements.

Loan and Security Agreement

Ninth, Tenth, Eleventh,

Twelfth, and Thirteenth Amendment;

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

Prior to the execution of

the Credit Agreement, Borrower and Slipstream were parties to a Loan and Security Agreement.

On March 7, 2021, On February 28,

2021, January 31, 2021, December 31, 2020, November 30, 2020, and September 29, 2020, the parties entered into several

amendments to the Loan and Security Agreement to amend the automatic conversion date of the Special Loan and, later, to eliminate the

conversion feature.

Each amendment extended the automatic conversion date of the Special Loan.

The Company paid no fees in exchange for

these extensions, with the exception of the March 7, 2021 extension which resulted in the Company recording of $133 of incremental

debt discount, a net gain of $26 via the extinguishment of the Special Loan, and expense of $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.

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 bore no interest.

Upon entry into an amendment to the Loan and Security Agreement on March 7,

2021, this note was converted into Disbursed Escrow Conversion Shares, with elimination of the debt recorded as an equity issuance within

the Statement of Shareholders Equity during the nine months ended September 30, 2021.

Term Loan (2022)

On October 31, 2022, the Borrowers and Slipstream amended the Credit

Agreement to provide the Borrowers with a $ 2,000 term loan, the net proceeds of which are being used by the Company to accelerate an active

software development project with potential to expand SaaS revenues associated with an existing customer.

The term loan has an annual

interest rate of 12.5% and matures on September 1, 2023.

Commencing on February 1, 2023, the Borrowers will make monthly installment payments

of approximately $270 until the maturity date, consisting of principal and interest sufficient to fully amortize the term loan through

the maturity date.

The Credit Agreement also provides that the Company’s outstanding loans from Slipstream at December 31, 2021, consisting of its pre-existing $ 4,767 senior secured term loan and $ 2,418 secured convertible loan, with an aggregate of $ 7,185 in outstanding principal and accrued and unpaid interest under such loans, were consolidated into a term loan (the “Consolidation Term Loan”).

The Consolidation Term Loan has an interest rate of 10.0 %, with 75.0 % warrant coverage (or 898,165 warrants).

On the first day of each month, commencing March 1, 2022 through February 1, 2025, the Borrowers will make interest-only payments on the Consolidation Term Loan.

Commencing on September 1, 2023, and on the first day of each month thereafter until the Maturity Date, the Borrowers will make a payment on the Consolidation Term Loan, in an equal monthly installment of principal sufficient to fully amortize the Consolidation Term Loan in eighteen equal installments.

The Company assessed the combination of the pre-existing senior secured term loan and secured convertible loan in accordance with ASC 470 Debt and determined the transaction should be accounted for as an extinguishment, in part as the Consolidation Term Loan eliminated a substantive conversion feature.

In aggregate the Company recorded a loss on extinguishment of $ 295 during the three month period ending March 31, 2022, primarily associated with the write-off of pre-existing debt discounts.

In addition to refinancing the existing debt with Slipstream, the Company issued to Slipstream a $ 10,000 , 36 -month senior secured term loan (the “Acquisition Term Loan”) resulting in $ 10,000 in gross proceeds, or $ 9,950 in net proceeds.

The Acquisition Term Loan matures on February 17, 2025 ( the “Maturity Date”) and has an interest rate of 8.0 %, with 50.0 % warrant coverage (or 833,334 warrants).

On the first day of each month, commencing March 1, 2022 through February 1, 2025, the Borrowers will make interest-only payments on the Acquisition Term Loan.

No principal payments on the Acquisition Term Loan are payable until the Maturity Date.

In connection with the Acquisition Term Loan and Consolidation Term Loan warrant coverage, the Company issued to Slipstream a warrant to purchase an aggregate of 1,731,499 shares of Company common stock (the “Lender Warrant”).

The Lender Warrant has a five -year term, an initial exercise price of $ 6.00 per share, subject to adjustments in the Lender Warrant, and was not exercisable until August 17, 2022.

The warrants were assessed in accordance with ASC 470 and ASC 815 Derivatives and were deemed to represent bifurcated derivative instruments that should be recorded as liabilities in the Condensed Consolidated Balance Sheets.

The Company performed a Black-Scholes valuation of the warrants as of the issuance date, resulting in a fair value of $ 2.4387 per warrant.

In recording the warrant liability, the Company recorded a debt discount associated with each of the Acquisition and Consolidation Term Loans in an amount of $ 2,032 and $ 2,190 , respectively.

These amounts are being amortized straight-line through interest expense over the life of the loans, resulting in incremental interest expense of $ 356 and $ 162 for the three months ended March 31, 2023 and 2022, respectively. The Company has deemed straight-line amortization to be materially consistent with the effective interest method.

In certain circumstances, upon a fundamental transaction of the Company (e.g., a disposal or sale of all or the greater part of the assets or undertaking of the Company, an amalgamation or merger with another company, or implementation of a scheme of arrangement), the holder of the Lender Warrant will have the right to require the Company to repurchase the Lender Warrant at its fair value using a Black Scholes option pricing formula;

provided that such holder may not require the Company or its successor entity to repurchase the Lender Warrant for the Black Scholes value in connection with a fundamental transaction that is not approved by the Company’s Board of Directors, and therefore not within the Company’s control.

Effective June 30, 2022, the Company amended the terms of the Lender Warrant to remove the holder’s option to exercise such warrant on a cashless basis utilizing the VWAP of the Company’s common stock on the trading day immediately preceding the date of a notice of cashless exercise in certain circumstances, and remove the condition to exercising such warrant that the Company’s shareholders approve the exercise thereof (which has already been obtained).

The amendments to the Lender Warrant also extend the term of such warrants for an additional one year, such that the Lender Warrant will expire on February 17, 2028.

The foregoing amendments to the Lender Warrant caused such warrants to be accounted for as equity instruments in the Company’s Consolidated Financial Statements.

On October 31, 2022, the Borrowers and Slipstream amended the Credit Agreement to provide the Borrowers with a $ 2,000 term loan ("Term Loan ( 2022 )"), the net proceeds of which were used by the Company to accelerate an active software development project with potential to expand SaaS revenues associated with an existing customer. The Term Loan ( 2022 ) has an annual interest rate of 12.5 % and matures on September 1, 2023.

Commencing on February 1, 2023, the Borrowers will make monthly installment payments of approximately $ 270 until the maturity date, consisting of principal and interest sufficient to fully amortize the Term Loan ( 2022 ) through the maturity date.

COMMITMENTS AND CONTINGENCIES

On August 2, 2019, the

Company filed suit in Jefferson Circuit Court, Kentucky, against a supplier of the Company’s wholly owned subsidiary, Allure Global

Solutions, Inc.

(“Allure”) for breach of contract, breach of warranty, and negligence with respect to equipment installations

performed by such supplier for an Allure customer.

Due to delays on account of the COVID-19 pandemic, this case remains in the early stages

of litigation, and, as a result, the outcome of each case is unclear, so the Company is unable to reasonably estimate the possible recovery,

or range of recovery, if any.

On October 10, 2019,

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

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

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

An attempt to

mediate the litigation is in process as of the filing date of this Report.

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, and there

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

Settlement of obligations

There were no individually material settlements

during the nine months ended September 30, 2022.

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 repayment obligations tied to an Amended and Restated Seller Note (the “Seller Note”)

and related accrued interest for $ 100 , recording a gain on settlement of $ 1,624 , representing $ 1,538 related to the 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.

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.

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.

As of September 30, 2022,

we reported tax liability of $ 0 .

As of September 30, 2022, the net deferred tax assets totaled $ 0 after valuation allowance, consistent

with December 31, 2021.

On August 2, 2019, the Company filed suit in Jefferson Circuit Court, Kentucky, against a supplier of the Company’s wholly owned subsidiary, 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.

On March 10, 2023, the Company, the supplier and the Allure customer reached a Settlement Agreement and Release of Claims ("Settlement Agreement").

Pursuant to the Settlement Agreement, the Company is obligated to pay $733;

however, its insurer agreed to pay $ 700 of that amount. 

Thus, the Company paid $ 33 of the settlement amount in April 2023. 

Except as noted above, the Company is not party to any other material legal proceedings, other than ordinary routine litigation incidental to the business, and there were no other such proceedings pending during the period covered by this Report.

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.

As of March 31, 2023 , we reported tax liability of $ 43 .

As of March 31, 2023 , the net deferred tax liabilities totaled $ 52 after valuation allowance, compared to net tax liabilities of $ 28 at 

December 31, 2022 .

A summary of outstanding warrants is included below:

Warrants (Equity)

Balance December 31, 2022

Warrants issued

Warrants exercised

( 5,851,505 )

Warrants expired

Warrants reclassified

Balance September 30, 2022

Warrants (Liability)

Balance December 31, 2021

Warrants issued

5,824,027  

$ 6.56  

Warrants expired

Warrants reclassified

Balance September 30, 2022

On February 3, 2022,

the Company entered into a Securities Purchase Agreement with a purchaser (the “Purchaser”), pursuant to which the Company

agreed to issue and sell to the Purchaser, in a private placement priced at-the-market under Nasdaq rules, (i) 1,315,000 shares (the “Shares”)

of the Company’s common stock, par value $0.01 per share (the “Common Stock”) and accompanying warrants to purchase

an aggregate of 1,315,000 shares of Common Stock, and (ii) pre-funded warrants to purchase up to an aggregate of 5,851,505 shares of Common

Stock (the “Pre-Funded Warrants”) and accompanying warrants to purchase an aggregate of 5,851,505 shares of Common Stock (collectively,

the “Private Placement”).

The accompanying warrants to purchase Common Stock are referred to herein collectively as the “Common

Stock Warrants.” Under the Securities Purchase Agreement, each Share and accompanying warrants to purchase Common Stock were sold

together at a combined price of $1.535, and each Pre-Funded Warrant and accompanying warrants to purchase Common Stock were sold together

at a combined price of $1.5349, for gross proceeds of approximately $11,000, before deducting placement agent fees and estimated offering

expenses payable by the Company.

During the three months ended March 31, 2022, each of the Pre-Funded Warrants were exercised.

Common Stock Warrants expired five years from the date of issuance.

The Company evaluated the Pre-Funded Warrants and concluded that they

met the criteria to be classified within stockholders’ equity, with proceeds recorded as common stock and additional paid-in-capital.

The Company evaluated the Common Stock Warrant and concluded they did not meet the criteria to be classified within stockholders’

The Common Stock Warrant included provisions which could result in a different settlement value for the Common Stock Warrant depending

on the registration status of the underlying shares.

Because these conditions were not an input into the pricing of a fixed-for-fixed

option on the Company’s ordinary shares, the Common Stock Warrant was not considered to be indexed to the Company’s own stock.

The Company recorded these warrants as liabilities on the consolidated balance sheets at fair value, with subsequent changes in their

respective fair values recognized in the consolidated statements of operations at each reporting date.

At the date of issuance, the Company

performed a Black-Scholes valuation of the warrants, resulting in a fair value of $ 1.0927 per warrant.

At June 30, 2022, the Company reassessed

the fair value of these warrants via Black Scholes valuation methodology and determined that the fair value of these warrants was $ 0.4019

per warrant, resulting in the Company recording a gain on the fair value of these warrants of $ 4,951 in the Condensed Consolidated

Statement of Operations for the nine months ended September 30, 2022, respectively.

On February 17, 2022,

in connection with the Credit Agreement with Slipstream, the Company issued to Slipstream 5,194,495 warrants with an exercise price of

$ 2.00 per share, which expire five years from the date of issuance (the “Lender Warrant”).

These warrants are not exercisable

until 180 days after the issuance date.

The common shares underlying these warrants have not yet been registered for resale under the

Securities Act of 1933, which provides Slipstream with an option for cashless exercise once the warrant becomes exercisable until such

time as such registration occurs.

The Lender Warrant expired five years from the date of issuance.

The Company evaluated the Lender Warrant

and concluded that it did not meet the criteria to be classified within stockholders’ equity.

The Lender Warrant included provisions

that could result in a different settlement value for the Lender Warrant depending on the registration status of the underlying shares.

Because these conditions were not an input into the pricing of a fixed-for-fixed option on the Company’s ordinary shares, the Lender

Warrant was not considered to be indexed to the Company’s own stock.

The Company recorded these warrants as liabilities on the consolidated

balance sheets at fair value, with subsequent changes in their respective fair values recognized in the consolidated statements of operations

at each reporting date.

At the date of issuance, the Company performed a Black-Scholes valuation of the warrants, resulting in a fair

value of $ 0.8129 per warrant.

In recording the warrant liability, the Company recorded an increase in debt discount in the Condensed Consolidated

Balance Sheet associated with the issuance of the warrants of $ 4,223 , which is being amortized through interest expense in the Condensed

Consolidated Statement of Operations over the life of the Acquisition and Consolidation Term Loans.

At June 30, 2022, the Company reassessed

the fair value of these warrants via Black Scholes valuation methodology and determined that the fair value of these warrants was $ 0.3699

per warrant, resulting in the Company recording a gain on the fair value of these warrants of $ 2,302 in the Condensed Consolidated

Statement of Operations for the nine months ended September 30, 2022, respectively.

On February 17, 2022,

in connection with obtaining a waiver of certain restrictions in investment documents between an investor and the Company in order to

consummate the financing contemplated by the Credit Agreement, the Company paid consideration to such investor in the form of a warrant

(the “Purchaser Warrant”) to purchase 1,400,000 shares of Company common stock in an at-the-market offering under Nasdaq rules.

The number of shares of Company common stock subject to the Purchaser Warrant is equal to the waiver fee ($ 175 ) divided by $ 0.125 per

The exercise price of the Purchaser Warrant is $ 1.41 per share, and the Purchaser Warrant is not exercisable until August 17,

The Purchaser Warrant expired five years from the date of issuance.

The Company evaluated the Purchaser Warrant and concluded that

it did not meet the criteria to be classified within stockholders’ equity.

The Purchaser Warrant included provisions which could

result in a different settlement value for the Purchaser Warrant depending on the registration status of the underlying shares.

these conditions were not an input into the pricing of a fixed-for-fixed option on the Company’s ordinary shares, the Purchaser

Warrant was not considered to be indexed to the Company’s own stock.

The Company recorded these warrants as liabilities on the consolidated

balance sheets at fair value, with subsequent changes in their respective fair values recognized in the consolidated statements of operations

at each reporting date.

At the date of issuance, the Company performed a Black-Scholes valuation of the Purchaser Warrant, resulting in

a fair value of $ 0.8656 per warrant.

In recording the warrant liability, the Company recorded an expense in the Condensed Consolidated

Statement of Operations associated with the issuance of the Purchaser Warrant of $ 1,211 .

At June 30, 2022, the Company reassessed the

fair value of the Purchase Warrant via Black Scholes valuation methodology and determined that the fair value of the Purchaser Warrant

was $ 0.4017 per warrant, resulting in the Company recording a gain on the fair value of the Purchaser Warrant of $ 650 in the

Condensed Consolidated Statement of Operations for the nine months ended September 30, 2022, respectively.

June 30, 2022, the Company amended the terms of the Common Stock Warrant ( 7,166,505 warrants), Lender Warrant ( 5,194,495 warrants) and

Purchaser Warrant ( 1,400,000 warrants).

The amendments to such warrants removes the holder’s option to determine the value of such

warrants utilizing the volume weighted average price (“VWAP”) of the Company’s common stock on the trading day immediately

preceding the date of a notice in a cashless exercise, and removes the condition to exercising such warrants that the Company’s

shareholders approve the exercise thereof (which has already been obtained).

The amendments to the warrants also extend the term of such

warrants for an additional one year , such that the Common Stock Warrant will expire on February 3, 2028, and the Lender Warrant and Purchaser

Warrant will expire on February 17, 2028.

a result of the extension in term provided in exchange for the amendment, the Company reassessed the fair value of each of the Common

Stock, Lender and Purchaser Warrants, resulting in the Company recording a loss on the fair value of these warrants of $ 345 in the Condensed

Consolidated Statement of Operations for the nine months ended September 30, 2022.

The foregoing amendments to the warrants resulted in

such warrants to be accounted for as equity instruments on the Company’s financial statements as of June 30, 2022.

As such, following

recording the gains and losses with respect to these warrant amendments, the Company reclassified the warrant liability of $ 5,709 from

noncurrent liabilities to additional paid-in-capital as of June 30, 2022.

These amounts are reflected as additional paid-in-capital

in the Condensed Consolidated Balance Sheet as of September 30, 2022.

( 20,577 )  

Balance March 31, 2023

5,803,450  

$ 6.54  

On February 

3, 2022,  the Company, entered into a Securities Purchase Agreement with a purchaser (the “Purchaser”), pursuant to which the Company agreed to issue and sell to the Purchaser, in a private placement priced at-the-market under Nasdaq rules, (i) 438,334 shares (the “Shares”) of the Company’s common stock, par value $ 0.01 per share (the “Common Stock”) and accompanying warrants to purchase an aggregate of 438,334 shares of Common Stock, and (ii) pre-funded warrants to purchase up to an aggregate of 1,950,502 shares of Common Stock (the “Pre-Funded Warrants”) and accompanying warrants to purchase an aggregate of 1,950,502  shares of Common Stock (collectively, the “Private Placement”).

The accompanying warrants to purchase Common Stock are referred to herein collectively as the “Common Stock Warrants.”

Under the Securities Purchase Agreement, each Share and accompanying warrants to purchase Common Stock were sold together at a combined price of $ 4.605 , and each Pre-Funded Warrant and accompanying warrants to purchase Common Stock were sold together at a combined price of $ 4.6047 , for gross proceeds of approximately $ 11,000 , before deducting placement agent fees and estimated offering expenses payable by the Company. During the three months ended March 

31, 2022, each of the Pre-Funded Warrants were exercised.

The Common Stock Warrants expire 

five years from the date of issuance. The Company evaluated the Pre-Funded Warrants and concluded that they met the criteria to be classified within stockholders’

equity, with proceeds recorded as common stock and additional paid-in-capital.

The Company evaluated the Common Stock Warrant and concluded they do not meet the criteria to be classified within stockholders’

The Common Stock Warrant include provisions which could result in a different settlement value, for the Common Stock Warrant depending on the registration status of the underlying shares.

Because these conditions were 

not an input into the pricing of a fixed-for-fixed option on the Company’s ordinary shares, the Common Stock Warrant is not considered to be indexed to the Company’s own stock.

The Company recorded these warrants as liabilities on the Condensed Consolidated Balance Sheets at fair value, with subsequent changes in their respective fair values recognized in the Condensed Consolidated Statements of Operations at each reporting date.

At the date of issuance, the Company performed a Black-Scholes valuation of the warrants, resulting in a fair value of $ 3.2781 per warrant.

At March 

31, 2022, the Company reassessed the fair value of these warrants via Black Scholes valuation methodology and determined that the fair value of these warrants was $ 1.7445 per warrant, resulting in the Company recording a gain on the fair value of these warrants of $ 3,664  in the Condensed Consolidated Statement of Operations for the three months ended March 

On February 

17, 2022, in connection with the Credit Agreement with Slipstream, the Company issued to Slipstream 1,731,499 warrants with an exercise price of $ 6.00  per share which expire 

five years from the date of issuance (the “Lender Warrant”).

These warrants are not exercisable until 180 days after the issuance date.

The common shares underlying these warrants have not yet been registered for resale under the Securities Act of 1933, which provides Slipstream with an option for cashless exercise once the warrant becomes exercisable until such time as such registration occurs.

The Lender Warrants expire five years from the date of issuance.

The Company evaluated the Lender Warrant and concluded that it does not meet the criteria to be classified within stockholders’

The Lender Warrant includes provisions which could result in a different settlement value, for the Lender Warrant depending on the registration status of the underlying shares.

Because these conditions are not an input into the pricing of a fixed-for-fixed option on the Company’s ordinary shares, the Lender Warrant is not considered to be indexed to the Company’s own stock.

The Company recorded these warrants as liabilities on the consolidated balance sheets at fair value, with subsequent changes in their respective fair values recognized in the Condensed Consolidated Statements of Operations at each reporting date.

At the date of issuance, the Company performed a Black-Scholes valuation of the warrants, resulting in a fair value of $ 2.4387 per warrant.

In recording the warrant liability, the Company recorded an increase in debt discount in the Condensed Consolidated Balance Sheet associated with the issuance of the warrants of $ 4,223 , which is being amortized through interest expense in the Condensed Consolidated Statement of Operations over the life of the Acquisition Term Loan and Consolidation Term Loans.

At March 

31, 2022, the Company reassessed the fair value of these warrants via Black Scholes valuation methodology and determined that the fair value of these warrants was $ 1.626 per warrant, resulting in the Company recording a gain on the fair value of these warrants of $ 1,408  in the Condensed Consolidated Statement of Operations for the three months ended March 

On February 

17, 2022, in connection with obtaining a waiver of certain restrictions in investment documents between an investor and the Company in order to consummate the financing contemplated by the Credit Agreement, the Company paid consideration to such investor in the form of a warrant (the “Purchaser Warrant”) to purchase 

466,667 shares of Company common stock in an at-the-market offering under Nasdaq rules.

The number of shares of Company common stock subject to the Purchaser Warrant is equal to the waiver fee ($ 175 ) divided by $ 0.375  per share.

The exercise price of the Purchaser Warrant is $ 4.23 per share, and the Purchaser Warrant is not exercisable until August 

The Purchaser Warrant expires 

five years from the date of issuance.

The Company evaluated the Purchaser Warrant and concluded that it does not meet the criteria to be classified within stockholders’

The Purchaser Warrant includes provisions which could result in a different settlement value, for the Purchaser Warrant depending on the registration status of the underlying shares.

Because these conditions were not an input into the pricing of a fixed-for-fixed option on the Company’s ordinary shares, the Purchaser Warrant is not considered to be indexed to the Company’s own stock.

At the date of issuance, the Company performed a Black-Scholes valuation of the Purchaser Warrant, resulting in a fair value of $ 2.5968 per warrant.

In recording the warrant liability, the Company recorded an expense in the Condensed Consolidated Statement of Operations associated with the issuance of the Purchaser Warrant of $ 1,211 .

At March 

31, 2022, the Company reassessed the fair value of the Purchase Warrant via Black Scholes valuation methodology and determined that the fair value of the Purchaser Warrant was $ 1.7445 per warrant, resulting in the Company recording a gain on the fair value of the Purchaser Warrant of $ 397  in the Condensed Consolidated Statement of Operations for the three months ended March 

Effective June 30, 2022, the Company amended the terms of the Common Stock Warrant ( 2,388,836 warrants), Lender Warrant ( 1,731,499 warrants) and Purchaser Warrant ( 466,667 warrants).

The amendments to such warrants removes the holder’s option to determine the value of such warrants utilizing the VWAP of the Company’s common stock on the trading day immediately preceding the date of a notice in a cashless exercise, and removes the condition to exercising such warrants that the Company’s shareholders approve the exercise thereof (which has already been obtained).

The amendments to the warrants also extend the term of such warrants for an additional one year, such that the Common Stock Warrant will expire on February 3, 2028, and the Lender Warrant and Purchaser Warrant will expire on February 17, 2028

The foregoing amendments to the warrants resulted in such warrants to be accounted for as equity instruments on the Company’s Condensed Consolidated Financial Statements as of June 30, 2022.

As such, the Company reclassified the warrant liability from noncurrent liabilities to additional paid-in-capital as of June 30, 2022.

These amounts are reflected as additional paid-in-capital in the Condensed Consolidated Balance Sheet as of December 31, 2022.

STOCK-BASED COMPENSATION

4 unchanged sentences

$4.01 - $8.00

$ 1.01 - $ 2.00

566,673  

$ 7.42  

380,560  

$ 7.40  

96,125  

$ 25.22  

662,798  

$ 10.00  

476,685  

Performance Vesting Options

2 unchanged sentences

$4.01 - $8.00

$ 1.01 - $ 2.00

240,000  

$ 7.59  

240,000  

$ 7.59  

240,000  

$ 7.59  

240,000  

Market Vesting Options

2 unchanged sentences

$0.01 - $4.00

$ 1.01 - $ 2.00

633,334  

$ 3.00  

633,334  

$ 3.00  

Performance Vesting

Market Vesting Options

Time Vesting Options

Performance Vesting

Date/Activity

Balance, December 31, 2022

633,334  

662,910  

$ 10.02  

240,000  

$ 7.59  

Forfeited or expired

Balance, September 30, 2022

The weighted average remaining contractual life

for options exercisable is 7.0 years as of September 30, 2022.

( 112 )  

162.00  

Balance, March 31, 2023

633,334  

662,798  

240,000  

$ 7.59  

The weighted average remaining contractual life for options exercisable is 6.7 years as of March 31, 2023 .

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.

Amendment to Performance

On June 1, 2020, Rick Mills,

CEO, and Will Logan, CFO, were issued ten-year options to purchase 480,000 and 240,000 shares of common stock (the “Performance

Options”), respectively, which vest in equal installments over a three-year period (2020-2022), subject to satisfying the Company

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

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

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

The Performance Options

includes 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.

On June 15, 2022, the Board

approved of an amendment to the Performance Options to provide that the revenue target for the calendar year 2022 set forth therein ($ 38,000 )

is eliminated, and the remaining shares that are available for vesting under the Performance Options ( 320,000 unvested shares for Mr.

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.

Amendment to Performance Options

On June 1, 2020, Rick Mills, CEO, and Will Logan, CFO, were issued ten -year options to purchase 160,000 and 80,000 shares of common stock (the “Performance Options”), respectively, which vest in equal installments over a three -year period ( 2020 - 2022 ), subject to satisfying the Company revenue targets and EBITDA (earnings before interest, taxes, depreciation and amortization) targets 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.

The 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.

On June 15, 2022, the Board approved of an amendment to the Performance Options to provide that the revenue target for the calendar year 2022 set forth therein ($ 38,000 ) was eliminated, and the remaining shares that are available for vesting under the Performance Options ( 106,667 unvested shares for Mr.

Mills and 53,334 for Mr.

Logan) (including the unvested portions of shares based on the satisfaction of the revenue targets for 2020

and 2021 by virtue of the catch-up provisions in the Performance Options) will fully vest upon the achievement of an updated EBITDA target

for calendar year 2022 of $ 3,600 .

The Performance Options state

that the calculation of EBITDA set forth in the Performance Options shall be calculated in a form consistent with the Company’s

2022 approved budget, which

any impact on EBITDA of:

(a) the accounting

treatment (including any “mark-to-market accounting”) of the Company’s warrants or the “Guaranteed Consideration”

(as defined in the Merger Agreement),

(b) non-recurring

transaction expenses associated with the Merger and the capital raising financing activities of the Company to effectuate the Merger,

or write-off of any Company inventory of Safe Space Solutions products.

(iii) includes deductions

related to any cash or stock bonuses paid or payable to any employees of the Company for services provided in calendar year 2022 (even

if such bonuses are actually paid after calendar year 2022), including bonuses paid pursuant to the terms of the 2022 Cash Bonus Plan

(as described below) (collectively, the “EBITDA Calculations”).

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 2014 Stock Incentive Plan.

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

These values were calculated using the same weighted average assumptions as the time vesting options issued.

Performance against

the identified EBITDA target is assessed quarterly by the Company in order to determine whether any compensation expense should be recorded.

During the three and

nine months ended September 30, 2022, the Company deemed it probable that the Company would achieve the EBITDA target for calendar

year 2022 and recorded compensation expense in the Condensed Consolidated Statement of Operations with respect to these awards of

$ 225 and $ 624 , respectively, net of a benefit of $ 50 recorded for forfeiture of awards for the nine months ended September 30, 2022.

The remaining awards have not yet vested

and are subject to actual results for the full calendar year 2022.

Should this target not be achieved, amounts recorded as expense

in the Condensed Consolidated Statement of Operations would be reversed.

Logan) (including the unvested portions of shares based on the satisfaction of the revenue targets for 2020 and 2021 by virtue of the catch-up provisions in the Performance Options) will fully vest upon the achievement of an updated EBITDA target for calendar year 2022 of $ 3,600 .

The Performance Options state that the calculation of EBITDA set forth in the Performance Options shall be calculated in a form consistent with the Company’s 2022 approved budget, which

excludes any impact on EBITDA of:

(a) the accounting treatment (including any “mark-to-market accounting”) of the Company’s warrants or the Guaranteed Consideration (as defined in the Merger Agreement),

(b) non-recurring transaction expenses associated with the Merger and the capital raising financing activities of the Company to effectuate the Merger, and

(ii) includes deductions related to any cash or stock bonuses paid or payable to any employees of the Company for services provided in calendar year 2022 (even if such bonuses are actually paid after calendar year 2022 ), including bonuses paid pursuant to the terms of the 2022 Cash Bonus Plan (as described below) (collectively, the “EBITDA Calculations”).

The unvested portion of the Performance Options as of December 31, 2022 vested in full effective March 30, 2023 upon confirmation by the Board of Directors of achievement of the performance metrics for the year ended December 31, 2022.

The exercise price of the foregoing options is $ 7.59 per share, the closing price of the Company’s common stock on the date of issuance (as adjusted by the Company's 1 -for- 3 reverse stock split in March 2023).

The options were issued from the 2014 Stock Incentive Plan.

Issuance of New Options

On June 15, 2022, Messrs.

Mills and Logan received ten-year options to purchase 1,000,000 and 600,000 shares of common stock, respectively (the “New Options”).

The New Options are eligible to vest at any time on or prior to February 17, 2025 if the trailing 10-trading day volume-weighted average

price (“VWAP”) of the Company’s common stock, as reported on the Nasdaq Capital Market, exceeds the share price targets

below, subject to such executive serving the Company as a director, officer, employee or consultant at such time:

Share Price Targets

Mills and Logan received ten -year options to purchase 333,334 and 200,000 shares of common stock, respectively (the “New Options”).

The New Options are eligible to vest at any time on or prior to February 17, 2025 if the trailing 10 -trading day VWAP of the Company’s common stock, as reported on the Nasdaq Capital Market, exceeds the share price targets below, subject to such executive serving the Company as a director, officer, employee or consultant at such time:

Share Price Target

Mills Shares Vested

16,667  

33,334  

50,000  

66,667  

83,333  

333,334  

Logan Shares Vested

10,000  

20,000  

30,000  

40,000  

50,000  

200,000  

Percentage of Shares Vested

The “Guaranteed Price”

has the meaning ascribed to such term in the Merger Agreement, which means $6.40 per share, or $7.20 per share if, and only if, certain

customers set forth in the Merger Agreement collectively achieve over 85,000 billable devices online at any time on or before December

The exercise price of the

New Options is $ 1.00 per share, which exceeds the closing price of the Company’s common stock on the date of issuance.

The New Options

are issued from the Company’s 2014 Stock Incentive Plan, as amended.

An additional 300,000 options with identical market vesting

restrictions were issued to non-executives during the nine months ended September 30, 2022.

The fair value of the options

on the grant date varied between $ 0.21 and $ 0.37 per award as determined using the Monte Carlo model.

These values were calculated using

the following weighted average assumptions:

The “Guaranteed Price”

has the meaning ascribed to such term in the Merger Agreement, which currently means $ 19.20 per share.

The exercise price of the New Options is $ 3.00 per share, which exceeded the closing price of the Company’s common stock on the date of issuance (as adjusted by the Company's 1 -for- 3 reverse stock split in March 2023).

The New Options are issued from the Company’s 2014 Stock Incentive Plan, as amended.

An additional 100,000 options with identical market vesting restrictions were issued to non-executives.

The fair value of the options on the grant date varied between $ 0.63 and $ 1.11 per award as determined using the Monte Carlo model.

These values were calculated using the following weighted average assumptions:

Risk-free interest rate

Expected term

Expected term (in years)

Expected price volatility

Dividend yield

At September 30, 2022, the Company evaluated the probability of achieving

the share price targets in each tranche based, in part, on work performed by the Company’s third party valuation specialist in conjunction

with evaluating the equity guarantee contingent liability.

As a result of that evaluation of probability, during the three and nine months

ended September 30, 2022 the Company recorded $ 3 and $ 4 of compensation expense, respectively.

These awards have not yet vested and are

subject to actual share price performance through February 2025.

Should any target not be achieved, any amounts recorded as expense in

the Condensed Consolidated Statement of Operations related to that tranche would be reversed.

At March 

31, 2023, the Company evaluated the probability of achieving the share price targets in each tranche based, in part, on work performed by the Company’s third party valuation specialist in conjunction with evaluating the equity guarantee contingent liability.

As a result of that evaluation of probability, during the three month period ending 

March 31, 2023 the Company recorded $ 3 of compensation expense.

These awards have not yet vested and are subject to actual share price performance through February 2025.

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 12,001 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 .

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 .

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 573,334 shares for purchase by the Company’s employees and under the Amended and Restated 2006 Non-Employee Director Stock Option Plan the Company reserved 233,334  shares for purchase by the Company’s employees.

There are 3,890 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 . 

Following a 1 -for- 3 reverse stock split, the shares authorized for issuance under the Company's 2014 Stock Incentive Plan was reduced to 2,000,000 . There are 1,532,242 options outstanding under the 2014 Stock Incentive Plan.

Employee Awards

Compensation expense recognized

for the issuance of stock options, inclusive of stock options subject to both performance and market conditions for vesting, for the three

and nine months ended September 30, 2022 of $ 538 and $ 1,487 , respectively, was included in general and administrative expense in the Condensed

Consolidated Financial Statements.

Compensation expense recognized for the issuance of stock options, inclusive of stock options subject

to both performance and market conditions for vesting, 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.

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, 2022,

there was approximately $ 685 , $ 477 , and $ 225 of total unrecognized compensation expense related to unvested share-based employee awards

with time vesting, market, and performance vesting criteria, respectively.

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.

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.

Compensation expense recognized for the issuance of stock options to employees for the 

three months ended March 31, 2023 

and 2022  of $ 225 and $ 646 , respectively, was included in general and administrative expense in the Condensed Consolidated Financial Statements.

March 31, 2023 , there was approximately $ 148 and $ 471 of total unrecognized compensation expense related to unvested share-based awards with time vesting and performance vesting criteria for employees, respectively.

Generally, expense related to the time vesting options will be recognized over the next year 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

The Company engages 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.

During the three and nine months ended September 30, 2022, the Company

issued or accrued shares issuable in exchange for services in the amount of $ 30 and $ 100 , respectively.

During the three and nine months

ended September 30, 2021, the Company issued or accrued shares issuable in exchange for services in the amount of $ 30 and $ 70 , respectively.

Compensation expense recognized for the issuance of stock options, including those options awarded to our Board of Directors, for the three month period ended 

March 31, 2023 and 2022 of $ 43  and $ 82 , respectively, was included in general and administrative expense in the Condensed Consolidated Financial Statements.

At March 31, 2023, there was approximately $ 107 of total unrecognized compensation expense related to unvested share-based awards with time vesting criteria for non-employee directors.

Generally, expense related to the time vesting options will be recognized over the next year and will be adjusted for any future forfeitures as they occur.

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

Shares issued for services were calculated based on the ten ( 10 ) day VWAP for the last ten ( 10 ) days during the month of service provided.

During the three months ended March 31, 2023  and 2022, the Company issued or accrued shares issuable in exchange for services in the amount of $ 30 and 45 , respectively.

SIGNIFICANT CUSTOMERS/VENDORS

Significant Customers

We had two (2) and two (2)

customers that in the aggregate accounted for 27.5 % and 41.1 % of accounts receivable as of September 30, 2022 and December 31, 2021,

respectively.

We had two (2) and two (2) customer that accounted for 36.1 % and 45.9 %

of revenue for the three months ended September 30, 2022, and 2021, respectively.

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

for 49.2 % and 40.1 % of revenue for the nine months ended September 30, 2022 and 2021, respectively.

We had two customers that in the aggregate accounted for 39.7 % of accounts receivable at March 31, 2023 

three customers that in the aggregate accounted for 49.2 % of accounts receivable at 

December 31, 2022 .

We had two customers that in the aggregate accounted for 44.5 % of revenue for the three months ended 

March 31, 2023 , compared to three customers that in the aggregate accounted for 70.0 % of revenue for the three months ended March 31, 2022.

Significant Vendors

We had two (2) and three (3)

vendors that accounted for 46.2 % and 69.1 % of outstanding accounts payable at September 30, 2022 and December 31, 2021, respectively.

We have entered into various non-cancelable operating

lease agreements for certain of our offices and office equipment.

Our leases have original lease periods expiring between 2022 and 2027.

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)

September 30,

Finance lease cost

Amortization of right-of-use assets

Operating lease cost

Total lease cost

Weighted Average Remaining Lease Term

Operating leases

Weighted Average Discount Rate

Operating leases

The following is a schedule, by years, of maturities

of lease liabilities as of September 30, 2022:

(in thousands)

The remainder of 2022

Total undiscounted cash flows

Less imputed interest

Present value of lease liabilities

Supplemental cash flow information related to leases

are as follows:

(in thousands)

September 30,

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

Operating cash flows from operating leases, net

Operating cash flows from finance leases

Financing cash flows from finance leases

We had two vendors that in the aggregate accounted for 45.6 % of outstanding accounts payable at 

March 31, 2023 , and one vendor that accounted for 30.1 % of outstanding accounts payable at 

December 31, 2022 .

Management ’

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

The following discussion contains various forward-looking statements within the meaning of Section 21E of the Exchange Act.

Although we believe that, in making any such statement, our expectations are based on reasonable assumptions, any such statement may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.

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

“believes,”

“expects,”

“intends,”

“plans,”

“estimates,”

“projects,”

should,”

“may,”

“propose,”

and similar expressions (or the negative versions of such words or expressions), as they relate to us or our management, are intended to identify such forward-looking statements.

These forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated, and many of which are beyond our control.

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

in the Company’s Form 10-K for the year ended December 31, 2022 as filed with the Securities and Exchange Commission on March 30, 2023.

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 the document in which they appear.

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

Creative Realities, Inc.

(“Creative Realities,”

“we,”

“us,”

or the “Company”) transforms environments through digital solutions by providing innovative digital signage solutions for key market segments and use cases, including:

Entertainment and Sports Venues

Restaurants, including quick-serve restaurants (“QSR”)

Convenience Stores

Financial Services

Medical and Healthcare Facilities

Mixed Use Developments

Corporate Communications, Employee Experience

Digital out of Home (DOOH) Advertising Networks

We serve market-leading companies, so there is a good chance that if you leave your home today to shop, work, eat or play, you will encounter one or more of our digital signage experiences.

Our solutions are increasingly visible because we help our enterprise customers achieve a range of business objectives including:

Increased brand awareness

Improved customer support

Enhanced employee productivity and satisfaction

Increased revenue and profitability

Improved guest experience

Increased customer/guest engagement

Through a combination of organically grown platforms and a series of strategic acquisitions, including our recent acquisition of Reflect in February 2022, the Company assist clients to design, deploy, manage, and monetize their digital signage networks.

The Company sources leads and opportunities for its solutions through its digital and content marketing initiatives, close relationships with key industry partners, specifically equipment manufacturers, and the direct efforts of its in-house industry sales experts.

Client engagements focus on consultative conversations that ensure the Company’s solutions are positioned to help clients achieve their business objectives in the most cost-effective manner possible.

When comparing Creative Realities to other digital signage providers, our customers value the following competitive advantages:

Breadth of solutions – Creative Realities is one of only a few companies in the industry capable of providing the full portfolio of products  

and services required to implement and run an effective digital signage network.

We leverage a ‘single vendor’ approach, providing clients with a one-stop-shop for sourcing digital signage solutions from design through day two services.

Managed labor pool – Unlike most companies in our industry, we have a curated labor pool including thousands of qualified and vetted field  

technicians available to service clients quickly nationwide.

We can meet tight schedules even in exceptionally large deployments and still ensure quality and consistency.

In-house creative resources – We assist clients in repurposing existing content for digital signage experiences or creating new content, an  

activity for which the Company has won several design awards in recent years.

In each instance, our services can be essential in helping clients develop an effective content program.

Network scalability and reliability – Our software as a service (“SaaS”) content management platforms power some of the largest and most  

complex digital signage networks in North America evidencing our ability to manage enterprise scale projects.

This also provides us purchasing power to source products and services for our customers, enabling us to deliver cost effective, reliable and powerful solutions to small and medium size business clients.

Ad management platform – Our customers are increasingly interested in monetizing their digital signage networks through advertising  

However, efficiently scheduling advertising content into digital signage playlists to meet campaign objectives can be a challenging and labor-intensive process.

AdLogic, our home-grown, content management-agnostic platform, automates this process, allowing network owners to capture more revenue with less expense.

Media sales – Few, if any other digital signage solution providers, can offer their clients media sales as a service.

We have in-house media  

sales expertise to elevate conversations with clients interested in better understanding network monetization.

We believe this meaningful differentiation in the sales process provides an additional revenue stream to Creative Realities compared to our competitors.

Market sector expertise – Creative Realities has in-house experts in key market segments such as automotive, retail, quick-serve restaurants  

(QSR), convenience stores, and Digital Out of Home (DOOH) advertising.

Our expertise in these business segments enables our teams to provide meaningful business conversations and offer tailored solutions with prospects and customers to their unique business objectives.

These experts build industry relationships and create thought leadership that drives lead flow and new opportunities for our business.

Logistics – Implementing a large digital signage project can be a logistics nightmare that can stall an initiative even before deployment.

expertise in logistics improves deployment efficiency, reduces delays and problems, and saves customers time and money.

Technical support – Digital signage networks present unique challenges for corporate IT departments.

Creative Realities helps simplify and  

improve end user support by leveraging our own Network Operations Center (“NOC”) in Louisville, Kentucky.

The NOC resolves many issues remotely and when field support is required, it can be dispatched from the NOC, leveraging our managed labor pool to resolve customer issues quickly and effectively.

Integrations and Application Development – The future of digital signage is not still images and videos on a screen.

Interactive applications  

and integrations with other data sources will dominate the future.

From social media feeds to corporate data stores to Point of Sale (“POS”) systems, our proven ability to build scalable applications and integrations is a key advantage clients can leverage to deliver more compelling and engaging experiences for their customers.

Hardware support – A number of digital signage providers sell a proprietary media player or align themselves with just one operating  

We utilize a range of media players including Windows, Android and BrightSign to provide clients the flexibility they need to select the appropriate hardware for any application knowing the entire network can still be served by a single digital signage platform, reducing complexity and improving the productivity of their teams.

The three primary sources of revenue for the Company are:

Hardware sales from reselling digital signage hardware from original equipment manufacturers such as Samsung and BrightSign.

Services revenue from helping customers design, deploy and manage their digital signage network, including:

Hardware system design/engineering

Hardware installation

Content development

Content scheduling

Post-deployment network and field support

Media sales, as a result of our acquisition of Reflect

Recurring subscription licensing and support revenue from our digital signage software platforms, which are generally sold via a SaaS model.

These include:

ReflectView , the Company’s core digital signage platform for most applications, scalable and cost effective from 10 to 100,000+ devices

Reflect Xperience , a web-based interface that allows customers to give content scheduling access to local users via the web or mobile devices, while still maintaining centralized programming control

Reflect AdLogic , the Company’s ad management platform for digital signage networks, which presently delivers approximately 50 million ads daily

Reflect Clarity , the Company’s menu board solution, which has become a market leader for a range of restaurant and convenience store applications

Reflect Zero Touch , which allows customers to turn any screen into an interactive experience by allowing guests to engage using their mobile device

iShowroomProX , an omni-channel digital sales support platform targeted at original equipment manufacturers in the transportation sector, which integrates with dozens of key data services including dealer inventory at the VIN level

OSx+ , a digital VIN-level checklist used to assist in the tracking and delivery of new vehicles in the transportation sector, providing measurable lift in customer satisfaction scores and connected vehicle enrollments and subscription activations.

While hardware sales and support services revenues can fluctuate more significantly year over year based on new, large-scale network deployments, the Company expects to see continuous growth in recurring SaaS revenue for the foreseeable future as digital signage adoption/utilization continues to expand across the vertical markets we serve.

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.

Recent Developments

Reverse stock split

On March 23, 2023, the Company filed Articles of Amendment with the Secretary of State of the State of Minnesota to effectuate, effective March 27, 2023, a 1-for-3 stock split of the shares of the Company's common stock, par value $0.01 per share.

No fractional shares were outstanding following the reverse stock split and any fractional shares resulting from the reverse split were rounded up to the nearest whole share of common stock. 

The reverse stock split also resulted in the number of shares of shares of common stock issuable upon exercise of outstanding warrants, or the exercise or vesting of equity awards, in proportion to the reverse stock split and caused a proportionate increase in exercise price or share-based performance criteria, where applicable.

Rejection of unsolicited offer

On February 2, 2023, we received an unsolicited proposal from Pegasus Capital Advisors, L.P., on behalf of itself and certain of its affiliates, including Slipstream (collectively, “Pegasus”), to acquire all of the outstanding shares of common stock of the Company that are not owned by Pegasus for a purchase price of $0.83 per share (or, as a result of our recent reverse stock split, $2.49 per share) in cash. Pegasus is the beneficial owner of our common stock owned of record by Slipstream.

The Special Committee of the Company’s Board of Directors (the “Special Committee”) has concluded that such proposal undervalues the Company based on the Special Committee’s views of the intrinsic value of the Company’s existing business and current and future prospects, and is not in the best interests of the Company’s existing shareholders.

Consequently, the Special Committee has advised Pegasus that it has rejected the proposal.

On May 1, 2023, we received a subsequent unsolicited proposal from Pegasus to acquire all of the outstanding shares of common stock of the Company that are not owned by Pegasus for a purchase price of $2.85 per share in cash.

The Special Committee, in consultation with its financial and legal advisors, is carefully reviewing and considering the updated proposal to pursue the course of action that it believes is in the best interests of the Company’s shareholders.

There can be no assurance that any revised proposal or definitive offer will be made or accepted, that any agreement will be executed, or that any transaction will be consummated.

Please see Note 5 Business Combinations , Note 8 Loans Payable , Note 11 Warrants , and Note 12 Stock-based Compensation to the Company’s Condensed Consolidated Financial Statements contained in this Report for a description of recent developments of the Company that occurred during, and subsequent to, the three months ended March 31, 2023.

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 Report.

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

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

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

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 March 31,

Cost of sales

Sales and marketing expenses

Research and development expenses

General and administrative expenses

Depreciation and amortization expense

Deal and transaction expense

Total operating expenses

Operating loss

Other income/(expenses):

Interest expense

Change in fair value of warrant liability

Change in fair value of equity guarantee

Loss on extinguishment of debt

Loss on debt waiver consent

Other income/(expense)

Total other income/(expense)

Net (loss) before income taxes

Provision for income taxes

Sales were $9,944, representing a decrease of $813, or 8%, as compared to the same period in 2022.

Hardware revenues were $4,322 for the three month period ending March 31, 2023, a decrease of $2,137, or 33%, as compared to the prior year which included a hardware refresh for two significant customers in the prior year that did not recur in the current year. Services and other revenues were $5,622 for the three month period ended March 31, 2023, an increase of $1,324, or 31%, driven by growth in managed services revenue. Managed services revenue, which includes both software-as-a-service (“SaaS”) and help desk technical subscription services, were $4,072 in the three months ended March 31, 2023 as compared to $2,703 in the same period in 2022, driven by expansion in the Company's SaaS revenue and the inclusion of Reflect revenue for a full three months in the current year as compared to approximately one and one half months during the three months ended March 31, 2022 as a result of the Merger closing on February 17, 2022.

This represents a year-over-year growth rate of 51% in our higher margin, typically subscription-based, managed services revenue.

Gross profit increased by $1,197, or 31% during the three months ended March 31, 2023 as compared to the same period in 2022 driven by an increase in (1) managed services revenue of $1,369 due to expansion in software subscription revenues and the inclusion of such revenues from Reflect for the full period in the current year as compared to approximately half the period in the prior year following the Merger on February 17, 2022, (2) software development revenue of $340 which has a higher contribution margin than other services, and (3) improvements in hardware gross margins as a result of a significant deployment with gross margin of approximately 25%.

Gross profit margin increased to 51.2% during the three months ended March 31, 2023, from 36.2% in the same period in 2022 driven by more favorable revenue mix during the three months ended March 31, 2023 as managed services, which includes high margin SaaS revenues, increased to 41% of total revenue as compared to 25% of total revenues in the three months ended March 31, 2022.

The increase as a result of margin expansion in hardware and mix associated with increased managed services was partially offset by reduced revenue in the current year.

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 increased by $429, or 61%, driven primarily by (i) the acquisition of Reflect via the Merger on February 17, 2022, and (ii) the Company’s enhanced investments into sales and marketing activities post-COVID-19 pandemic.

Immediately following the Merger, the Company integrated the sales and marketing functions and did not disaggregate expenses between the two legacy companies.

Following the Merger and through integration activities between the date of the Merger and March 31, 2023, the Company adopted certain tools, technology, and processes –

particularly with respect to lead generation and brand marketing –

that were undercapitalized historically by the Company.

Additionally, through completion of the Merger, the Company acquired a media sales business unit that sells advertising on behalf of our customers to be displayed on digital advertising networks owned by those customers.

This business utilizes internal and third party sales agents - the salaries and commissions of which are included within Sales and Marketing Expense within the Condensed Consolidated Statement of Operations. As a result, we expect the sales and marketing expenses of the Company for the three months ended March 31, 2023 to adequately reflect the pace for spend in these areas in future reporting periods.

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 expenses increased by $125, or 52%, for the three months period ended March 31, 2023 as compared to the same period in 2022 driven primarily by the completion of the Merger on February 17, 2022.

Through the Merger, we acquired a fully staffed, experienced software development team and elected to keep that team in-tact, particularly given current competitive employment market conditions with respect to talented software engineers.

We have integrated the pre-existing CRI development team with the acquired Reflect team and have experienced enhanced speed to market on new feature and functionality development activities from increasing our development team.

We expect a continued elevated level of capitalized activity through the third quarter of 2023 associated with a customer-facing opportunity, followed by a return to spending levels consistent with the Company’s results for the second quarter of 2022, which adequately reflect the pace for spend in these areas in future reporting periods.

General and Administrative Expenses

General and administrative expenses were effectively flat, increasing $38, or 1%. As compared to the three months ended March 31, 2022, the Company experienced decreases of (1) $283 in stock compensation expense as all expense associated with outstanding performance awards was recorded as of December 31, 2022, and (2) reductions in certain expenses following completion of integration activities/projects completed during 2022 following the Reflect Merger (including but not limited to consolidation of CMS tools, cloud hosting environments, IT tools) that materialized through the balance of 2022.

These decreases were partially offset by increases of (1) $117 in increased personnel costs, (2) $122 in legal expenses associated with the Company's establishment of a Special Committee of the Board of Directors to consider and respond to an unsolicited proposal of a Company shareholder to acquire certain outstanding shares of common stock of the Company and settlement of two open litigation matters during the period, and (3) other operating costs, each primarily associated with the consolidation of Reflect for three months in 2023 as compared to forty three (43) days during the three months ended March 31, 2022 as a result of completion of the Reflect Merger on February 17, 2022.

Depreciation and Amortization Expenses

Depreciation and amortization expenses increased $72, or 10%, in the three months ended March 31, 2023 compared to the same period in 2022.

This was driven by the addition of $17,160 in amortizing intangible assets on February 17, 2022, as a result of the Merger.

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.

Changes in Fair Value of Warrant Liability

During the three month period ended March 31, 2022, the Company recorded a gain of $5,469 as the result of assessing the fair value of warrant liabilities associated with the Company’s issuance of warrants in its debt and equity offerings completed in February 2022 to finance the Merger.

These warrants were initially assessed at fair value through Black Scholes calculation, with changes in fair value recognized at each period end.

Effective June 30, 2022, the Company amended the terms of certain warrants previously issued to its creditor and an investor, which removed the holder’s option to exercise such warrants on a cashless basis utilizing the VWAP of the Company’s common stock on the trading day immediately preceding the date of a notice of cashless exercise in certain circumstances, and removed the condition to exercising such warrants that the Company’s shareholders approve the exercise thereof (which has already been obtained).

The amendments to the warrants extended the term of such warrants for an additional one year.

As a result of the extension in term provided in exchange for the amendment (collectively, the "Warrant Amendment").

The foregoing amendments to the warrants resulted in such warrants to be accounted for as equity instruments in the Company’s Condensed Consolidated Financial Statements.

Changes in fair value of equity guarantee

The Company has contingent consideration arrangements related to the Merger to potentially pay additional cash amounts in future periods based on the lack of achievement of certain share price performance goals of our common stock.

The change in the period represents the mark-to-market adjustment as of the balance sheet dates.

Loss on extinguishment of debt

During the three months ended March 31, 2022, the Company refinanced its debt facilities with Slipstream.

In aggregate the Company recorded a loss on extinguishment of $295, primarily associated with the write-off of pre-existing debt discounts.

No such transactions occurred in the current period.

Loss on debt waiver consent

During the three months ended March 31, 2022, in connection with obtaining a waiver of certain restrictions in investment documents between an investor and the Company in order to consummate the financing contemplated by the Company's credit agreement with Slipstream Communications, the Company paid consideration to such investor in the form of the Purchaser Warrant to purchase 466,667 shares of Company common stock in an at-the-market offering under Nasdaq rules.

The number of shares of Company common stock subject to the Purchaser Warrant was equal to the waiver fee ($175) divided by $0.375 per share.

The exercise price of the Purchaser Warrant is $4.23 per share, and the Purchaser Warrant became exercisable on August 17, 2022.

The Purchaser Warrant expires six years from the date of issuance following execution of the Warrant Amendment.

At the date of issuance, the Company performed a Black-Scholes valuation of the Purchaser Warrant, resulting in a fair value of $2.5968 per warrant.

In recording the warrant liability, the Company recorded an expense in the Condensed Consolidated Statement of Operations associated with the issuance of the Purchaser Warrant of $1,212 for the three months ended March 31, 2022.

No such transactions occurred in the current period.

Summary Unaudited Quarterly Financial Information

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

Quarters Ended

Quarters ended

GAAP net income (loss)

Interest expense:

Amortization of debt discount

Other interest, net

Depreciation/amortization:

Amortization of intangible assets

Amortization of employee share-based awards

Depreciation of property, equipment

Income tax expense/(benefit)

Gain on fair value of warrant liability

(Gain)/loss on settlement of obligations

Loss on debt waiver consent

Loss on warrant amendment

(Gain)/loss on fair value of equity guarantee

Disposal of Safe Space Solutions inventory

Deal and transaction expenses

Other (income)/expense

Stock-based compensation –

Director grants

Adjusted EBITDA

Liquidity and Capital Resources

See Note 1 Nature of Organization and Operations to the accompanying Condensed Consolidated Financial Statements for a discussion of liquidity and financial resources.

Operating Activities

The cash provided by operating activities were $3,868 for the three months ended March 31, 2023 compared to $1,201 for the same period in 2022. Cash provided by operating activities in the three month period ending March 31, 2023, was driven by a reduction in accounts receivable and prepaid assets of $1,177 and $1,015, respectively. 

In addition, deferred revenue increased $2,382, partially offset by a decrease in customer deposits of $1,693.

Investing Activities

Net cash used in investing activities during the three months ended March 31, 2023 was $1,034 compared to $17,969 during the same period in 2022.

The use of cash in the prior year was driven by completion of the Merger.

We currently do not have any material commitments for capital expenditures as of March 31, 2023;

however, we anticipate continued elevated capital expenditures in excess of historical trends through third quarter of 2023 as we complete the modernization and internationalization of our automotive platform in an effort to capture incremental SaaS-based revenue contracts.

Financing Activities

Net cash used in financing activities during the three months ended March 31, 2023 was ($562) compared to net cash provided by financing activities of $19,873 for the same period in 2022.

The change is the result of the Company’s completion of equity and debt financing in the first quarter of 2022 to facilitate the Merger, which provided net cash of $10,109 and $9,868, respectively. 

Net cash used in financing activities during the three month period ended March 31, 2023, primarily represents repayments made on the Secured Promissory Note and Term Loan (2022) of $310 and $250, respectively. 

Off-Balance Sheet Arrangements

During the three months ended March 31, 2023, we did not engage in any off-balance sheet arrangements set forth in Item 303(a)(4) of Regulation S-K.

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

What changed 10-Q

Item 1. Financial Statements