What changed in this filing

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Item 1. Financial Statements

2024-05-10 compared with 2023-11-09 · 295 added, 877 removed, 328 unchanged (78% of the section changed)

3 unchanged sentences

(in thousands, except per share amounts)

September 30,

Current Assets:

Cash and cash equivalents

$ 8,376  

$ 1,633  

$ 2,899 $ 2,910

Accounts receivable, net

Work-in-process and inventories, net

Inventories, net

Prepaid expenses and other current assets

Total Current Assets

17,507  

13,982  

$ 16,317 $ 18,610

Property and equipment, net

26,453 26,453

Other intangible assets, net

23,985 24,062

Operating lease right-of-use assets

Intangibles, net

23,975  

23,752  

26,453  

$ 69,689  

$ 66,015  

LIABILITIES AND SHAREHOLDERS’

Other non-current assets

$ 68,206 $ 70,777

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities:

Accounts payable

$ 3,340  

$ 3,757  

Accrued expenses

$ 4,788 $ 7,876

Accrued expenses and other current liabilities

Deferred revenues

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Current maturities of operating leases

Short-term portion of Secured Promissory Note

Short-term portion of related party Acquisition Term Loan, net of $ 613 and $ 0 discount, respectively

Short-term portion of related party Consolidation Term Loan, net of $ 655 and $ 747 discount, respectively

Short-term related party Term Loan (2022)

Short-term portion of contingent consideration, at fair value

Total Current Liabilities

19,664  

16,496  

Long-term Secured Promissory Note

38,735 20,197

Long-term related party Acquisition Term Loan, net of $ 0 and $ 787 discount, respectively

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Long-term obligations under operating leases

Contingent acquisition consideration, at fair value

11,250  

Other liabilities

Long-term contingent consideration, at fair value

Other non-current liabilities

Total Liabilities

42,286  

40,436  

SHAREHOLDERS’

39,357 41,946

Shareholders' Equity

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

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Additional paid-in capital

82,064  

75,916  

82,200 82,073

Accumulated deficit

( 54,765 )  

( 53,455 ) ( 53,346 )

Total Shareholders’ Equity

27,403  

25,579  

TOTAL LIABILITIES AND SHAREHOLDERS’

$ 69,689  

$ 66,015  

28,849 28,831

Total Liabilities and Shareholders' Equity

$ 68,206 $ 70,777

See accompanying notes to condensed consolidated financial statements

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For the Three Months Ended

For the Nine Months Ended

September 30,

Services and other

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Depreciation and amortization expense

Deal and transaction expenses

Total operating expenses

Operating income (loss)

Other income (expenses):

Operating loss

Other expenses (income):

Interest expense, including amortization of debt discount

Change in fair value of warrant liability

Change in fair value of equity guarantee

Loss on debt waiver consent

Loss on warrant amendment

Gain/(loss) on settlement of obligations

Other income (expense)

Total other income (expense)

Net (loss) income before income taxes

Benefit (provision) for income taxes

Net (loss) income

Basic (loss) earnings per common share

Diluted (loss) earnings per common share

Change in fair value of contingent consideration

Other expense (income)

Total other expenses (income)

Net loss before income taxes

Provision for income taxes

Basic loss per common share

Diluted loss per common share

Weighted average shares outstanding - basic

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(in thousands)

Nine Months Ended

September 30,

Three Months Ended

Operating Activities:

Net (loss) income

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

Adjustments to reconcile net loss to net cash provided by operating activities

Depreciation and amortization

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Amortization of stock-based compensation

Loss on debt waiver consent

Loss on warrant amendment

Loss on settlement of obligations

Bad debt expense

Gain on change in fair value of warrants

Loss (Gain) on change in fair value of contingent consideration

(Gain) loss on change in fair value of contingent consideration

Deferred income taxes

1 unchanged sentence

Accounts receivable

Work-in-process and inventories

Inventories, net

Prepaid expenses and other current assets

Accounts payable

Accrued expenses

Deferred revenues

Accrued expenses and other current liabilities

Deferred revenue

Customer deposits

Net cash provided by (used in) operating activities

Net cash provided by operating activities

Investing activities

Acquisition of business, net of cash acquired

Purchases of property and equipment

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Financing activities

Principal payments on finance leases

Proceeds from sale of common stock, net of offering expenses

Proceeds from sale of common stock in PIPE, net of offering expenses

Proceeds from sale & exercise of pre-funded warrants in PIPE, net of offering expenses

Proceeds from Acquisition Loan, net of offering expenses

Repayment of Term Loan (2022)

Repayment of Consolidation Term Loan

Repayment of Secured Promissory Note

Net cash provided by financing activities

Repayment of Term Loan (2022)

Principal payments on finance leases

Net cash used in financing activities

Increase (decrease) in Cash and Cash Equivalents

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CREATIVE REALITIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’

CONSOLIDATED STATEMENTS OF SHAREHOLDERS ’ EQUITY

(in thousands, except shares)

Three Months Ended September 30, 2023

Balance as of June 30, 2023

Stock-based compensation

Issuance of common stock, net

Balance as of September 30, 2023

Nine Months Ended September 30, 2023

Three Months Ended March 31, 2024

Balance as of December 31, 2023

Stock-based compensation

Shares issued to directors as compensation

Shares issued to vendors as compensation

Shares issued to employees pursuant to the Retention Bonus Plan

Issuance of common stock, net

Balance as of September 30, 2023

Three Months Ended September 30, 2022

Balance as of June 30, 2022

Stock-based compensation

Shares issued to vendors as compensation

Balance as of September 30, 2022

Nine Months Ended September 30, 2022

Balance as of March 31, 2024

Three Months Ended March 31, 2023

Balance as of December 31, 2022

Stock-based compensation

Shares issued to directors as compensation

Shares issued to vendors as compensation

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

Shares issued in Reflect Systems, Inc.

Warrant repricing events

Warrant amendment

Balance as of September 30, 2022

Shares issued to employees pursuant to the Retention Bonus Plan

Balance as of March 31, 2023

See accompanying notes to condensed consolidated financial statements.

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NATURE OF ORGANIZATION AND OPERATIONS

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

our, ” “

Creative Realities ” 

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

and its subsidiaries.

Nature of the Company ’

Nature of the Company ’ s Business

Creative Realities, Inc.

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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.

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:

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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.

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

("Reflect"), a Delaware corporation.

Our main operations are conducted directly through Creative Realities, Inc., and under our wholly owned subsidiaries Allure Global Solutions, Inc., a Georgia corporation (“Allure”), Creative Realities Canada, Inc., a Canadian corporation (“CRI Canada”), and Reflect Systems, Inc., a Delaware corporation ("Reflect").

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. 

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 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.

Public Offering

On August 17, 2023, the Company priced a "reasonable best efforts" public offering for the sale by the Company of an aggregate of 3,000,000 shares of common stock, par value $ 0.01 per share at a public offering price of $ 2.00 per share and received approximately $ 5,454 in net proceeds, after deducting underwriting fees of $ 478 and offering costs of $ 68 .

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

In accordance with Accounting Standards Update (“ASU”) No.

2014 - 15, Disclosure of Uncertainties about an Entity ’

s Ability to Continue as a Going Concern (Subtopic 205 - 40 ) ( “

ASU 205 - 40 ”

) , the Company has evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the Condensed Consolidated Financial Statements are issued.

At September 30, 2023, the Company has an accumulated deficit of $ 54,765 , negative working capital of $ 2,157 , including current debt obligations of $ 4,211 , and cash of $ 8,376 .

For the nine  months ended September 30, 2023, the Company incurred an operating loss of $ 630 and generated positive net cash flows from operations of $ 8,306 .

Pursuant to the Second Amended and Restated Credit and Security Agreement (the "Credit Agreement") made between the Company and Slipstream Communications, LLC ("Slipstream"), the Company is required and began to make monthly repayments of principal on the Consolidation Term Loan on September 1, 2023.

The monthly principal payment is approximately $ 370 and will continue on the first day of each month thereafter until the Maturity Date on February 17, 2025, with total principal repayments of $ 4,440 during the twelve months subsequent to the reporting date of these Condensed Consolidated Financial Statements. Servicing this principal repayment raises substantial doubt about the Company's ability to continue as a going concern under the technical framework within ASU 205 - 40.

Management plans to control resource allocation with respect to new opportunities, implement more aggressive customer deposit protocols, transition portions of its workforce to just-in-time models, and implement other cost cutting initiatives to align cash spend with revenue production to ensure adequate debt servicing;

however the supplemental plans have not been fully implemented and the level of improvement to be achieved is uncertain. As a result, the Company has concluded that management's plans do not alleviate substantial doubt about the Company's ability to continue as a going concern.  

In accordance with Accounting Standards Update (“ASU”) No.

2014 - 15, Disclosure of Uncertainties about an Entity ’ s Ability to Continue as a Going Concern (Subtopic 205 - 40 ) ( “ ASU 205 - 40 ” ) , the Company has evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the Condensed Consolidated Financial Statements are issued.

At March 31, 2024 , the Company has an accumulated deficit of $ 53,455 , negative working capital of $ 22,418 , including current debt obligations of $ 12,770 , and cash of $ 2,899 .

For the three months ended March 31, 2024 , the Company incurred an operating loss of $ 76 and generated positive net cash flows from operations of $ 1,938 .

Pursuant to the Second Amended and Restated Credit and Security Agreement (the "Credit Agreement") between the Company and Slipstream Communications, LLC ("Slipstream"), the Company is required and began to make monthly repayments of principal on the Consolidation Term Loan on September 1, 2023.

In addition, the Company is required to repay the principal balance on the Acquisition Term Loan of $ 10,000 at maturity and resolve the contingent consideration, currently estimated for accounting purposes at $ 10,603 , each of which mature on February 17, 2025.

The Company does not have sufficient cash on hand or liquidity to make these principal repayments.

The conditions and events raise substantial doubt about the Company's ability to continue as a going concern under the technical framework within ASU 205 - 40.

In response to these conditions, the Company plans to evaluate its available options for refinancing, via recapitalization, debt financing or equity financing, its upcoming obligations associated with the Acquisition Term Loan, Consolidation Term Loan, and contingent consideration.

However, these plans have not been finalized, are subject to market conditions, and are not within the Company’s control, and therefore cannot be deemed probable.

As a result, the Company has concluded that management's plans do not alleviate substantial doubt about the Company's ability to continue as a going concern.

The Condensed Consolidated Financial Statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

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Basis of Presentation

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 accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the 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, 2023 , included in the Company’s Annual Report on Form 10 -K filed with the Securities and Exchange Commission on March 21, 2024, as amended on April 26, 2024.

The Condensed Consolidated Financial Statements include the accounts of Creative Realities, Inc.

and our wholly owned subsidiaries Allure, CRI Canada, and Reflect.

All intercompany balances and transactions have been eliminated in consolidation, as applicable.

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.

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

Recently Issued Accounting Pronouncements Not Yet Adopted

In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023 - 07, Segment Reporting (Topic 280 ):

Improvements to Reportable Segment Disclosures , which requires public entities to disclose information about their reportable segments’ significant expenses and other segment items on an interim and annual basis.

Public entities with a single reportable segment are required to apply the disclosure requirements in ASU 2023 - 07, as well as all existing segment disclosures and reconciliation requirements in ASC 280 on an interim and annual basis.

ASU 2023 - 07 is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted.

The Company is currently evaluating the impact of adopting ASU 2023 - 07.

In December 2023, the FASB issued ASU 2023 - 09, Income Taxes (Topic 740 ):

Improvements to Income Tax Disclosures , which requires public entities, on an annual basis, to provide disclosure of specific categories in the rate reconciliation, as well as disclosure of income taxes paid disaggregated by jurisdiction.

ASU 2023 - 09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted.

The Company is currently evaluating the impact of adopting ASU 2023 - 09.

Revenue Recognition

We recognize revenue in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers , applying the five -step model.

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

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

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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 considers the sensitivity of the estimate, its relationship and experience with the customer 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.

The Company has very few contracts with material extended payment terms as payment is typically due at or shortly after the time of the sale, typically ranging between thirty and ninety days.

In those instances where the Company has material extended payment terms (most commonly in multi-year arrangements where the Company acts as an agent to a transaction on behalf of its customers), the Company evaluates and applies constraints to arrive at the revenue recognized in the period in which a contract is entered.

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 contract.

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

A contract liability is recognized as deferred revenue when the Company invoices customers 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.

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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 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.

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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 September 30, 2023:

Balance as of December 31, 2022

The Company had the following activity for its allowance for credit losses from December 31, 2023 to March 31, 2024 :

Balance as of beginning of year

Amounts accrued

Write-offs charged against the allowance

Balance as of September 30, 2023

$ 1,074  

Balance as of end of period

$ 701 $ 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:

September 30,

Raw materials, net of reserve

$ 1,745  

$ 1,671  

Raw materials

$ 2,384 $ 2,063

Work-in-process

Total inventories

$ 2,306  

$ 2,267  

The reserve for obsolete inventory at September 30, 2023 and December 31, 2022 was $ 192 and $ 1,777 , respectively. 

The Company disposed of $ 1,707 related to Safe Space Solutions during the three month period ending September 

30, 2023, all of which was fully reserved at December 31, 2022. 

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

$ 3,065 $ 2,567

Impairment of Long-Lived Assets

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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 and Diluted Loss per Common Share

Basic and diluted 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 7,391,651  and 7,490,962  at September 30, 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.

Shares reserved for outstanding stock options, including stock options with performance restricted vesting, and warrants totaling approximately 6,222,800 and 7,339,582 at March 31, 2024 and 2023 , respectively, were excluded from the computation of loss 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.

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 September 30, 2023 and December 31, 2022 .

We had no uncertain tax positions as of March 31, 2024 and December 31, 2023 .

Goodwill and Intangible Assets

We follow the provisions of ASC 350,  

Goodwill and Other Intangible Assets .

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.

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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.

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.

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.

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.

On November 12, 2021, the Company, Reflect, and other parties, 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, 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 Merger Agreement requires the Company to pay to the former Reflect stockholders additional contingent 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 (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 has recorded contingent liabilities related to the Guaranteed Consideration to reflect the Company's 1 -for- 3 reverse stock split that occurred on March 23, 2023.

Accordingly, the amount of the Company's potential liability related to the contingent consideration is recorded at $ 19.20 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.

The Merger Agreement provides that 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.

FAIR VALUE MEASUREMENT

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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;

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.

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.

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, 2023 and 2022 :

September 30,

The following table disaggregates the Company’s revenue by major source for the three months ended March 31, 2024 and 2023 :

(in thousands)

$ 4,847  

$ 5,015  

$ 12,606  

$ 17,141  

Installation Services

Software Development Services

$ 4,144 $ 4,322

Managed Services

12,227  

10,435  

Installation Services

Other Services

Total Services

18,102  

15,719  

Total Hardware and Services

$ 11,568  

$ 11,180  

$ 30,708  

$ 32,860  

System hardware sales

$ 12,285 $ 9,944

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.

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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.

Software design and development services

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

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

Managed Services

Software as a service ( “ SaaS ” ) license sales

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.

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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.

Maintenance and support services

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.

The Company sells support services that 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 typically have autorenewal terms.

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.

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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 February 8, 2022 

and February 11, 2023, the "Merger Agreement") pursuant to which a direct, wholly owned subsidiary of Creative Realities, CRI Acquisition Corporation, 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 “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, 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 purchase price of Reflect consisted of the following items:

(in thousands)

Consideration

Cash consideration for Reflect stock

Cash consideration for Retention Bonus Plan

Common stock issued to Reflect stockholders

Common stock issued to Retention Bonus Plan

Secured Promissory Note

Earnout liability

Total consideration

36,360  

Vendor deposit with the Company

Cash acquired

Net consideration transferred

$ 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 initial issuances under the Retention Bonus Plan per Merger Agreement.

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 .

These amounts reduced consideration paid by the Company in accordance with ASC 805.

Represents the Reflect cash balance acquired at Closing.

The Company incurred $ 37 and $ 428 of direct transaction costs for the three  and nine months ended September 30, 2022, respectively.

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

Property and equipment

Operating right of use assets

Identified intangible assets:

Definite-lived trade names

Definite-lived Developed technology

Definite-lived Customer relationships

11,040  

Definite-lived Noncompete agreements

18,935  

Accounts payable

Accrued expenses

Customer deposits

Deferred revenues

Current maturities of operating leases

Long-term obligations under operating leases

Other liabilities

Net consideration transferred

$ 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.

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 in the table below.

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

(in thousands)

Amortization Period (in years)

Identifiable definite-lived intangible assets:

Developed technology

Customer relationships

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.

Installation Services

The Company performs installation services associated with system hardware sales to customers and recognizes revenue upon completion of the installations.

Installation services also include engineering and configuration services required to be performed to design and deploy a digital signage system that subsequently becomes an installation project.

When system hardware sales include installation services to be performed by the Company, the goods and services in the contract are, in certain instances, not distinct as the customer contract contemplates an installed solution, inclusive of system hardware.

In those instances, the arrangement is accounted for as a single performance obligation.

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

In these circumstances, 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.

Typically, in large scale deployments that include installation services, the contract terms segregate performance obligations related to hardware sales and installation services by providing for different legal transfer of title and risk of loss.

In those circumstances, installation services are deemed to be a separate performance obligation.

In each instance, installation services are recognized at the time of completion.

Installation services revenues are classified as “Installation Services” within our disaggregated revenue.

Other Services

Software design and development services

Software design and custom development sales represent fixed fee orders for work on a time and materials basis and are recognized as revenue when the application, feature, or custom software code 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.

Media revenues are derived from selling (i) promotion and sponsorship packages to monetize customer infrastructure assets, including mobile takeover or physical presence, or (ii) digital advertising inventory to advertisers on digital displays or other outdoor structures, owned or controlled by our customers, each within physical venues.

We generally do not own the physical structures on which digital advertising we sell is displayed but instead sell advertising or sponsorship opportunities on behalf of our media network owner customers to brands and advertisers.

The Company has concluded that it acts as an agent and reports media revenues on a net basis, with the Company recording its commission, which typically is between thirty percent ( 30 %) and forty percent ( 40 %) of the total media sales contract, as revenue in the consolidated financial statements.

The media sales contracts we facilitate on behalf of our customers range from a single day to eight years.

The Company facilitates billing advertisers on behalf of our customers and does not remit the net cash to our customer until the advertiser has paid the Company the fees owed for such advertising.

Media revenue services are recognized when the Company has completed its performance obligations under the contract with our customers, which typically has concluded upon facilitating execution of contracts between our customer and a brand/advertiser.

The Company applies time-based constraints in accordance with ASC 606 to evaluate the earned portion of the contract to record at execution.

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 Condensed Consolidated Statements of Operations within Sales and Marketing Expenses.

SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION

Nine Months Ended

September 30,

Three Months Ended

Supplemental non-cash investing activities

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

Supplemental non-cash financing activities

Conversion of liability warrant to equity warrants

Supplemental disclosure information for cash flow

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Intangible Assets

Intangible assets consisted of the following at 

September 30, 2023 and December 31, 2022 :

September 30,

Intangible assets consisted of the following at March 31, 2024 and December 31, 2023 :

Technology platform

$ 9,765  

$ 4,929  

$ 9,765  

$ 4,354  

Purchased and developed software

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Customer relationships

15,000  

Trademarks and trade names

37,648  

13,673  

35,151  

11,399  

Accumulated amortization

13,673  

11,399  

Net book value of amortizable intangible assets

$ 23,975  

$ 23,752  

For the three months ended September 30, 2023 and 2022 , amortization of intangible assets charged to operations was $ 766 and $ 848 , respectively.

For the nine months ended September 30, 2023 and 2022  amortization of intangible assets charged to operations was $ 2,274 and $ 1,959 , respectively.

For the three months ended March 31, 2024 and 2023 , amortization of intangible assets charged to operations was $ 790 and $ 754 , 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.

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, 2023.

The Company recognizes that any changes in our actual fourth quarter 2023 or projected 2024 results could potentially have a material impact on our assessment of goodwill impairment.

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 exceeded its carrying value, and accordingly, the goodwill associated with the reporting unit was not considered to be impaired at September 30, 2023.

No indicators of impairment were identified at March 31, 2024.

The Company recognizes that any changes in our projected 2024 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.

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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.

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 both macroeconomic and recent capital transaction factors including:

( 1 ) market wide recessionary fears, ( 2 ) a lack of comprehension by the markets of the contingent consideration issued in the Merger with Reflect, and ( 3 ) the Company’s recent execution of a public offering of 3,000,000 shares of our common stock at a discount to then-market prices, resulting in significant short-term negative volume and price pressure on our common 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, 2023.

However, should our market price remain at this level for an extended period of time, there could be potential future impairment.

Based on the relatively recent decline in our share price and market capitalization, along with improving Company fundamentals and a share price and market capitalization that was substantially higher prior to the Company’s public offering, we believe our implied fair value continues to exceed our total carrying value.

LOANS PAYABLE

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Further discussion of the debt follows.

As of September 30, 2023

As of March 31, 2024

Debt Instrument

Interest Rate Information

$ 10,000  

833,334  

8.0% interest (1)

4.6% interest (2)

898,165  

10.0% interest (3)

Acquisition Term Loan

8% per annum through maturity

Consolidation Term Loan

10% per annum through maturity

Total debt, gross

16,777  

1,731,499  

Debt discount

( 1,992 )  

Total debt, net

$ 14,785  

Less current maturities

( 4,211 )  

Long term debt

$ 10,574  

As of December 31, 2023

Debt Instrument

Interest Rate Information

$ 10,000  

833,334  

8.0% interest (1)

0.59% interest (2)

898,165  

10.0% interest (3)

12.5% interest (4)

Acquisition Term Loan

8% per annum through maturity

Consolidation Term Loan

10% per annum through maturity

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

$ 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.

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.

12.5 % cash interest per annum through maturity at 

September 1, 2023 .

Secured Promissory Note

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.

Our largest shareholder and investor, Slipstream, a related party is the holder of all of our outstanding debt instruments, including two term loans, and has beneficial ownership of approximately 29 % of our common stock (on an as-converted, fully diluted basis including conversion of outstanding warrants, and assuming no other convertible securities, options and warrants are converted or exercised by other parties).

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.

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

The Borrowers include Reflect, which became a wholly owned subsidiary of the Company as a result of the closing of the Merger.

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 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.

On the first day of each month, commencing March 1, 2022 through February 1, 2025, the Borrowers will make interest 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 nine month period ending September 30, 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).

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 $ 363 and $ 1,077 for the three and nine months ended September 

30, 2023, 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 had 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.

At September 30, 2023, the Term Loan 2022 has been repaid in full to the Borrowers. 

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, 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.

The Company is not party to any 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”).

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

For the three and nine months ended September 

30, 2023, we reported tax (benefit) liability of ( 15 ) and 73 , respectively.

As of September 30, 2023 , the net deferred tax liabilities totaled 72 after valuation allowance, compared to net tax liabilities of $ 28 at 

December 31, 2022 .

A summary of outstanding warrants is included below:

Balance December 31, 2022

5,824,027  

$ 6.56  

Warrants expired

( 68,508 )  

Balance September 30, 2023

5,755,519  

$ 6.51  

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.

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 six months ended June 

30, 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 Warrants and concluded they do not meet the criteria to be classified within stockholders’

The Common Stock Warrants include provisions which could result in a different settlement value for the Common Stock Warrants 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 Warrants are not considered to be indexed to the Company’s own stock.

The Company recorded the Common Stock 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 Common Stock Warrants, resulting in a fair value of $ 3.2781 per Common Stock Warrant.

At June 

30, 2022, the Company reassessed the fair value of the Common Stock Warrants via Black Scholes valuation methodology and determined that the fair value of the Common Stock Warrants was $ 1.2057 per Common Stock Warrant, resulting in the Company recording a gain on the fair value of the Common Stock Warrants of $ 4,950  in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2022.

On February 

17, 2022, in connection with the Credit Agreement with Slipstream, the Company issued to Slipstream the Lender Warrants.

The Lender Warrants are not exercisable until 180 days after the issuance date.

The common shares underlying the Lender 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 Lender Warrants 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 Warrants and concluded that they do not meet the criteria to be classified within stockholders’

The Lender Warrants include provisions which could result in a different settlement value, for the Lender Warrants 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 Warrants are not considered to be indexed to the Company’s own stock.

The Company recorded the Lender 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 Lender Warrants, resulting in a fair value of $ 2.4387 per Lender Warrant.

In recording the Lender Warrants liability, the Company recorded an increase in debt discount in the Condensed Consolidated Balance Sheet associated with the issuance of the Lender 

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 June 30, 2022, the Company reassessed the fair value of the Lender Warrants via Black Scholes valuation methodology and determined that the fair value of the Lender Warrants was $ 1.1097 per Lender Warrant, resulting in the Company recording a gain on the fair value of the Lender Warrants of $ 2,302 in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2022.

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 Warrants”) 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 Warrants is equal to the waiver fee ($ 175 ) divided by $ 0.375  per share.

The exercise price of the Purchaser Warrants is $ 4.23 per share, and the Purchaser Warrants are 

not exercisable until August 

The Purchaser Warrants expire 

five years from the date of issuance.

The Company evaluated the Purchaser Warrants and concluded that they do not meet the criteria to be classified within stockholders’

The Purchaser Warrants include provisions which could result in a different settlement value, for the Purchaser Warrants 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 Warrants are not considered to be indexed to the Company’s own stock.

The Company recorded the Purchaser 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 Purchaser Warrants, resulting in a fair value of $ 2.5968 per Purchaser Warrant.

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

At June 30, 2022, the Company reassessed the fair value of the Purchaser Warrants via Black Scholes valuation methodology and determined that the fair value of the Purchaser Warrants was $ 1.2051 per Purchaser Warrant, resulting in the Company recording a gain on the fair value of the Purchaser Warrants of $ 650 in the Condensed Consolidated Statement of Operations for the nine months ended September 

Effective June 30, 2022, the Company amended the terms of the Common Stock Warrants ( 2,388,836 warrants), Lender Warrants ( 1,731,499 warrants) and Purchaser Warrants ( 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 had 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 Warrants will expire on February 3, 2028, and the Lender Warrants and Purchaser Warrants 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.

For the three months ended March 31, 2024 and 2023 , we reported tax liability of $ 9 and $ 43 , respectively.

At March 31, 2024 , the net deferred tax liabilities were $ 77 after valuation allowance, compared to net tax liabilities of $ 73 at December 31, 2023 .

The Company had outstanding warrants accounted for as equity instruments in the Company's Condensed Consolidated Financial Statements totaling 4,587,002 at March 31, 2024 and December 31, 2023 with a weighted average exercise price of $ 4.90 .

The weighted average remaining contractual life of the outstanding warrants was 3.86 and 4.11 at March 31, 2024 and December 31, 2023 , respectively.

STOCK-BASED COMPENSATION

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$4.01 - $8.00

566,673  

$ 7.42  

538,340  

$ 7.46  

96,125  

$ 25.22  

662,798  

$ 10.00  

634,465  

Performance Vesting Options

Range of Exercise

Prices between

566,673 6.38 $ 7.42 566,673 $ 7.42

240,000  

$ 7.59  

240,000  

$ 7.59  

240,000  

$ 7.59  

240,000  

Market Vesting Options

Range of Exercise

Prices between

95,791 1.78 25.06 95,791 $ 25.06

733,334  

$ 3.00  

733,334  

$ 3.00  

662,464 5.72 $ 9.97 662,464

Performance Vesting Options

Market Vesting Options

Performance Vesting

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Balance, December 31, 2023

633,334  

662,910  

$ 10.02  

240,000  

$ 7.59  

100,000  

Forfeited or expired

( 112 )  

162.00  

Balance, September 30, 2023

733,334  

662,798  

240,000  

$ 7.59  

The weighted average remaining contractual life for options exercisable is 6.28 years as of September 30, 2023 .

Valuation Information for Stock-Based Compensation

For purposes of determining estimated fair value under 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

excluded 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) included 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).

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 Options

On June 15, 2022, Messrs.

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 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 were 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 (in years)

Expected price volatility

Dividend yield

At September 30, 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  and nine month period ending 

September 

30, 2023 the Company recorded $ 3 and $ 10 of compensation expense, respectively.

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 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 1,632,242 options outstanding under the 2014 Stock Incentive Plan.

The 2014 Stock Incentive Plan expired in April 2023 ( other than with respect to outstanding options issued under the 2014 Stock Incentive Plan).

Balance, March 31, 2024

The weighted average remaining contractual life for options exercisable is 5.84 years as of March 31, 2024 .

Employee Awards

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

three and nine months ended September 

30, 2023 of $ 3  and $ 379 , respectively, was included in general and administrative expense in the Condensed Consolidated Financial Statements.

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

three and nine months ended September 

30, 2022 of $ 456 and $ 1,241 , respectively, was included in general and administrative expense in the Condensed Consolidated Financial Statements.

September 30, 2023 , there was $ 19 of total unrecognized compensation expense related to unvested share-based awards with performance vesting criteria for employees.

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

Stock-based compensation expense recognized for the issuance of stock options to employees for the three months ended March 31, 2024 and 2023 of $ 3 and $ 225 , respectively, was included in general and administrative expense in the Condensed Consolidated Financial Statements.

At March 31, 2024 , there was $ 12 of total unrecognized compensation expense related to unvested share-based awards with market vesting criteria for employees.

Compensation expense related to market vesting options will be recognized over the next 11 months and will be adjusted for any future forfeitures as they occur.

Non-Employee Awards

Compensation expense recognized for the issuance of stock options to our Board of Directors, for the three and nine month period ended September 

30, 2023 of $ 43  and $ 129 , was included in general and administrative expense in the Condensed Consolidated Financial Statements.

Compensation expense recognized for the issuance of stock options to our Board of Directors, for the three and nine month period ended September 

30, 2022 of $ 82 and $ 246 , was included in general and administrative expenses in the Condensed Consolidated Financial Statements.

At September 30, 2023, there was approximately $ 22  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 and nine months ended September 30, 2023 , the Company issued shares issuable in exchange for services in the amount of $ 0 and $ 55 , respectively. 

During the three and nine months ended September 

30, 2022, the Company issued shares issuable in exchange for services in the amount of $ 30 and $ 100 , respectively.

Stock-based compensation expense recognized for the issuance of stock options to our non-employee Board of Directors, for the three months ended March 31, 2024 and 2023 was $ 0 and $ 43 and included in general and administrative expense in the Condensed Consolidated Financial Statements.

At March 31, 2024 , there was no unrecognized compensation expense related to share-based awards for non-employee directors.

SIGNIFICANT CUSTOMERS/VENDORS

Significant Customers

We had one customer that accounted for 18.3 % of accounts receivable at September 30, 2023 

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

December 31, 2022 .

We had one customer that accounted for 19.7 % of revenue for the three months ended 

September 30, 2023 , compared to two customers that in the aggregate accounted for 36.1 % of revenue for the three months ended September 

We had one customer that accounted for 12.8 % of revenue for the nine months ended 

September 30, 2023 , compared to three customers that in the aggregate accounted for 49.2 % of revenue for the nine months ended September 30, 2022.

We had four customers that accounted for 19 %, 12 %, 12 %, and 11 % of accounts receivable at March 31, 2024 and three customers that accounted for 28 %, 25 %, and 11 % of accounts receivable at December 31, 2023 .

We had four customers that accounted for 13 %, 12 %, 11 %, and 10 % of revenue for the three months ended March 31, 2024 , compared to two customers that accounted for 31 % and 13 % of revenue for the three months ended March 31, 2023 .

Significant Vendors

We had one vendor that accounted for 43.3 % of outstanding accounts payable at 

September 30, 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

We had two vendors that accounted for 26 % and 13 % of outstanding accounts payable at March 31, 2024 , and one vendor that accounted for 38 % of outstanding accounts payable at December 31, 2023 .

Management ’ s Discussion and Analysis of Financial Condition and Results of Operations

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.

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.

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, 2023, as filed with the Securities and Exchange Commission on March 21, 2024.

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

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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:

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

12 unchanged sentences

Increased customer/guest engagement.

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

Through a combination of organically grown platforms and a series of strategic acquisitions, the Company assists customers 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.

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

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

Breadth of solutions – Creative Realities offers a wide breadth of solutions to our customers.

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 customers 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 of qualified and vetted field technicians available to service customers 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.

In-house creative resources – We assist customers in creating new content or repurposing existing content for digital signage experiences, an activity for which the Company has won several design awards in recent years.

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

Network scalability and reliability – Our 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.

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

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

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.

Media sales – Few digital signage solution providers offer their customers media sales as a service.

We have in-house media sales expertise to elevate conversations with our customers interested in better understanding network monetization.

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

Market sector expertise – Creative Realities has in-house experts in key market segments such as automotive, retail, QSRs, convenience stores, and DOOH advertising.

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

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

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

Our 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.

We simplify and improve end user support by leveraging our own NOC in Louisville, Kentucky.

The NOC resolves many issues remotely and when field support is required, it can be dispatched quickly 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.

We believe that interactive applications and integrations with other data sources will dominate the future.

From social media feeds, mobile integrations, corporate data stores, or point of sale systems, our proven ability to build scalable applications and integrations is a key advantage that customers 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 system.

We utilize a range of media players including Windows, Android and BrightSign to provide customers 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 our customers.

Our Sources of Revenue

The three primary sources of revenue for the Company are:

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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

Our platforms:

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

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;

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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:

Our Operating Expenses

Our operating expenses are primarily comprised of three categories:

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

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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 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.

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 and nine months ended September 30, 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.

The Company’s Condensed Consolidated Financial Statements are prepared in conformity with GAAP.

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.

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

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

The tables presented below compare our results of operations and present the results for each period and the change in those results from one period to another in both dollars and percentage change.

For the three months

ended September 30,

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 income (loss)

Other income/(expenses):

Interest expense

Change in fair value of equity guarantee

Gain on settlement of obligations

Other expense

Total other income/(expenses)

Net loss income before income taxes

Benefit from income taxes

Sales were $11,568, representing an increase of $388, or 3%, as compared to the same period in 2022.

Hardware revenues were $4,847, a decrease of $168, or 3%, as compared to the prior year, of which approximately $3.0 million were earned from customers new to the Company in 2023.

Services and other revenues were $6,721, an increase of $556, or 9%, driven by year over year increases of (1) $543 in media sales attributable to the addition of sales resources and restructuring of third party selling contracts to expand its access to such agents, and (2) $420 in managed services revenue as a result of increasing SaaS license counts which drive annual recurring revenue on a per device per month basis. 

These increases in services revenue were partially offset by a $505 decrease in installation services revenue as deployment of hardware sold during the quarter associated with multiple advertising networks did not begin installation activities until the fourth quarter of 2023.

Gross profit increased $789, or 17% driven by enhanced margins on hardware revenues and an increase in services revenue.

Gross profit margin increased to 46% from 40% driven by (1) favorable revenue mix during the period as managed services, which includes higher margin SaaS and other services revenues, increased to 37% of total revenue as compared to 35% of total revenues in the three months ended September 30, 2022, and (2) a 6% margin expansion associated with hardware revenues generated in the current year primarily generated from sales of custom manufactured kiosks purchased for deployment of an advertising network.

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 $583, or 81%, driven primarily by the Company’s enhanced investments into sales and marketing activities.

Following the Merger, the Company adopted certain tools, technology, and processes –

particularly with respect to lead generation and brand marketing –

that were historically undercapitalized by the Company and have since accelerated new customer acquisition.

Through completion of the Merger, the Company also acquired a media sales business unit that serves to monetize customer networks via the direct sale of advertising 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.

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.

The Company capitalizes certain of these expenses and amortizes those costs through the Condensed Consolidated Statement of Operations on a straight-line basis over the economic useful life of the software feature or functionality. Research and development expenses increased by $155, or 65%, for the three month period ended September 30, 2023 as compared to the same period in 2022 driven primarily by incremental headcount added via completion of the Merger on February 17, 2022 and a higher rate of bug and maintenance work as compared to capitalized activities during the quarter ended September 30, 2023.

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 integrated the development teams which has enhanced speed to market on new feature and functionality development activities.

General and Administrative Expenses

General and administrative expenses decreased $215, or 8% during the three months ended September 30, 2023 as compared to the same period in 2022 driven by a decrease of $492 in stock compensation expense as outstanding performance awards were fully expensed as of December 31, 2022.

This decrease was partially offset by increased personnel costs as a result of higher headcount following the Merger and scaled up operations in response to an increase in customer acquisition and associated planned deployments.

Depreciation and Amortization Expenses

Depreciation and amortization expenses were effectively flat, decreasing $68, or 8%, in the three months ended September 30, 2023 compared to the same period in 2022.

The Company currently expects depreciation and amortization expense to be approximately $800 per quarter for the remainder of 2023.

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 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.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 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 Nine Months

Ended September 30,

ended March 31,

Cost of sales

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Depreciation and amortization expense

Deal and transaction expenses

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 debt waiver consent

Loss on warrant amendment

Loss on settlement of debt

Total other income/(expenses)

Net (loss) income before income taxes

Provision from income taxes

Net (loss) income

Sales were $30,708, representing a decrease of $2,152, or 7%, as compared to the same period in 2022.

Hardware revenues were $12,606 for the nine month period ended September 30, 2023 as compared to $17,141 for the nine month period ended September 30, 2022, a decrease of $4,535, or 26%, with prior year results driven by  two customers executing cyclical refreshes of their digital infrastructure throughout their entire geographic footprint.

Hardware revenues generated in the current year were driven by new standard existing customer expansion activities and supplemented by new customer deployments, with no existing customers executing a similar large scale refresh during the nine months ended September 30, 2023. Those refresh activities represented $8,919 in incremental hardware revenue during the nine months ended September 30, 2022.

Services and other revenues were $18,102 for the nine month period ended September 30, 2023, an increase of $2,383, or 15%, driven by growth in managed services revenue. Managed services revenue, which includes both SaaS and help desk technical subscription services, as well as non-contracted recurring content management services, were $12,227 in the nine months ended September 30, 2023 as compared to $10,435 in the same period in 2022, driven by expansion in the Company's SaaS license counts, which drive annual recurring revenue on a per device per month basis, and the inclusion of Reflect revenue for a full nine months in the current year as compared to approximately seven and one half months during the nine months ended September 30, 2022 as a result of the Merger closing on February 17, 2022.

This represents a year-over-year growth rate of 17% in our higher margin, primarily subscription-based, managed services revenue.

Gross profit increased by $1,622, or 12% during the nine months ended September 30, 2023 as compared to the same period in 2022 driven by improvements in hardware gross margins as a result of a significant deployment with gross margin of approximately 25%.

Gross profit margin increased to 48% during the nine months ended September 30, 2023, from 40% in the same period in 2022 driven by (1) increased gross margin on hardware sales, partially offset by a reduction in total hardware sales, and (2) an increase in services revenue driven by expansion in SaaS license counts and associated subscription license revenue.

Other expenses (income):

Interest expense, including amortization of debt discount

Change in fair value of contingent consideration

Other expense (income)

Total other expenses (income)

Net loss before income taxes

Provision for income taxes

Sales increased $2,341, or 24%, for the three-month period ended March 31, 2024 as compared to the same period in 2023.

Hardware revenues were $4,144, a decrease of $178, or 4%, for the three-month period ended March 31, 2024 as compared to the same period in 2023.

While hardware revenues were effectively flat year over year, the composition in each period was substantially different, with the current period comprised of lower customer concentration (including no customer greater than 20% of hardware revenues) and an increasing number of customers making consistent, repeated purchases of similar solutions on a regular cadence.

The prior period included a single customer that represented 62% of hardware revenues.

Services and other revenues were $8,141, an increase of $2,519 or 45%, driven by increases in both installation and managed services revenues.

Installation services revenue increased $1,213, or 128%, as a result of significant installation deployment activity during the period.

Managed services revenue, which includes both SaaS and help desk technical subscription services were $4,774, an increase of $702, or 17%.

The increase was driven by a combination of an increase in the quantity of licenses subject to software subscriptions on our platforms and an expansion in the average price per subscription license per month.

The annual recurring run rate of our subscription license revenue, our highest margin service, grew 11% from $14,826 as of December 31, 2022 to $16,336 as of December 31, 2023 and has since expanded to $17,689 as of March 31, 2024.

Gross profit increased $675, or 13%, for the three-month period ended March 31, 2024 as compared to the same period in 2023 driven by a 17% increase in our managed service revenue, which is our highest margin, typically subscription-based revenue.

Gross profit margin decreased to 47% from 51% driven by revenue mix during the current period as installation services, which is historically our lowest margin service, increased to 18% of total revenue as compared to 10% of total revenues in the prior period.

Sales and Marketing Expenses

Sales and marketing expenses increased by $1,094, or 43%, driven primarily by (1) the acquisition of Reflect via the Merger on February 17, 2022, and (2) the Company’s enhanced investments into sales and marketing activities.

Following the Merger, the Company adopted certain tools, technology, and processes –

particularly with respect to lead generation and brand marketing –

that were historically undercapitalized by the Company and have since accelerated new customer acquisition.

Through completion of the Merger, the Company also acquired a media sales business unit that serves to monetize customer networks via the direct sale of advertising 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. We expect the sales and marketing expenses of the Company for the nine months ended September 30, 2023 to adequately reflect the normal spend in these areas in future reporting periods.

Sales and marketing expenses increased by $329, or 29%, for the three-month period ended March 31, 2024 as compared to the same period in 2023, driven primarily by the Company’s enhanced investments into sales and marketing activities, including incremental sales personnel and increased participation in industry trade show events.

Research and Development Expenses

The Company capitalizes certain of these expenses and amortizes those costs through the Condensed Consolidated Statement of Operations on a straight-line basis over the economic useful life of the software feature or functionality. Research and development expenses increased by $239, or 27%, for the nine month period ended September 30, 2023 as compared to the same period in 2022 driven primarily by incremental headcount added via completion of the Merger on February 17, 2022.

We integrated the development teams which has enhanced speed to market on new feature and functionality development activities.

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.

The Company capitalizes certain of these expenses and amortizes those costs through the Condensed Consolidated Statements of Operations on a straight-line basis over the economic useful life of the software feature or functionality.

Research and development expenses increased by $142, or 39%, for the three-month period ended March 31, 2024 as compared to the same period in 2023 driven primarily by incremental headcount and a higher rate of bug and maintenance work as compared to capitalized activities during the quarter ended March 31, 2024.

General and Administrative Expenses

General and administrative expenses were effectively flat, decreasing $144, or 2%. As compared to the nine months ended September 30, 2022, the Company experienced decreases of (1) $949 in stock compensation expense as outstanding performance awards were fully expensed 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) $594 in increased personnel costs as the Company scaled up operations in response to an increase in customer acquisitions, (2) $196 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, as well as settlement of two open litigation matters during the period, and (3) other operating costs, each primarily associated with the consolidation of Reflect for nine months in 2023, as compared to reporting consolidation of Reflect for only 226 days during the nine months ended September 30, 2022 as a result of completion of the Reflect Merger on February 17, 2022.

General and administrative expenses were effectively flat, increasing $130, or 4% during the three months ended March 31, 2024 as compared to the same period in 2023.

The change is driven by an increase of $408 in personnel costs in the current period as a result of higher headcount due to scaled up operations in response to an increase in customer acquisition and associated planned deployments.

This increase was partially offset by a $294 decrease in stock compensation expense in the current period as all outstanding time vested and performance awards for employees and directors were fully expensed as of December 31, 2023.

Depreciation and Amortization Expenses

Depreciation and amortization expenses increased $333, or 16%, in the nine months ended September 30, 2023 compared to the same period in 2022, driven primarily by incremental amortization expense generated from the addition of $17,160 in amortizing intangible assets on February 17, 2022, as a result of the Merger.

Depreciation and amortization expenses were effectively flat, increasing $60, or 8%, in the three months ended March 31, 2024 compared to the same period in 2023.

The Company currently expects depreciation and amortization expense to be approximately $800 per quarter for the remainder of 2024.

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;

Loss on warrant amendment

During the nine month period ended September 30, 2022, the Company recorded a gain of $7,902 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 had already been obtained).

The amendments to the warrants extended the term of such warrants for an additional one year (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

See Note 7 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 contingent consideration

The Company has a contingent consideration arrangement 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 debt waiver consent

During the nine months ended September 30, 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, 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 nine months ended September 30, 2022.

No such transactions occurred in the current period.

Loss on extinguishment of debt

During the nine months ended September 30, 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.

The change in the period represents the mark-to-market adjustment as of the balance sheet date.

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 loss

GAAP net (loss) income

Interest expense:

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Income tax (benefit) expense

Gain on settlement of obligations

Loss (Gain) on fair value of equity guarantee

Disposal of Safe Space Solutions inventory

Deal and transaction expenses

Other expense (income)

Stock-based compensation –

Director grants

Loss (Gain) on fair value of contingent consideration

Stock-based compensation – Director grants

Other (income) expense

Adjusted EBITDA

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Operating Activities

The net cash provided by operating activities during the nine months ended September 30, 2023 was $8,306 compared to net cash used in operating activities of $1,050 for the same period in 2022. Cash provided by operating activities in the nine month period ending September 30, 2023, was driven by a reduction in accounts receivable and prepaid assets of $2,080 and $859, respectively. 

In addition, deferred revenue and customer deposits increased $2,284 and $1,054 respectively.

The net cash provided by operating activities during the three months ended March 31, 2024, was $1,938, compared to $3,868 for the same period in 2023.

During the three-month period ending March 31, 2024, the Company generated a net loss of $100, which included depreciation and amortization expense (inclusive of amortization of debt discount) of $1,199 and a gain on the change in fair value of contingent consideration of $605.

The Company generated a $1,441 increase in cash provided by changes in operating assets and liabilities.

The decrease in accounts receivable of $2,952 was effectively offset by a decrease in accounts payable of $2,976.

Investing Activities

Net cash used in investing activities during the nine months ended September 30, 2023 was $3,138 compared to $20,268 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 September 30, 2023;

however, we anticipate a reduction in capital expenditures entering 2024 as we complete the modernization and internationalization of our automotive platform in 2023 in an effort to capture incremental SaaS-based revenue contracts.

Net cash used in investing activities during the three months ended March 31, 2024, was $830, compared to $1,034 during the same period in 2023.

We currently do not have any material commitments for capital expenditures as of March 31, 2024;

however, we anticipate a reduction in capital expenditures entering 2024 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 provided by financing activities during the nine months ended September 30, 2023 was $1,575 compared to net cash provided by financing activities of $19,254 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 provided by financing activities during the nine month period ended September 30, 2023, is primarily the result of a common stock offering completed in August 2023, generating cash of $5,454, net of offering expenses, partially offset by repayments made on the Consolidation Term Loan, Secured Promissory Note and Term Loan (2022) of $930, $935 and $2,000, respectively. 

Net cash used in financing activities during the three months ended March 31, 2024, was $1,119, compared $562 for the same period in 2023.

Net cash used in financing activities during the three-month period ended March 31, 2024, is primarily the result of repayments made on the Consolidation Term Loan of $1,109.

Off-Balance Sheet Arrangements

During the three and nine months ended September 30, 2023, we did not engage in any off-balance sheet arrangements set forth in Item 303(a)(4) of Regulation S-K.

During the three months ended March 31, 2024, 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