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CREX Creative Realities

Filed: 16 Aug 21, 4:21pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2021

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ___________

  

Commission File Number 001-33169

 

 

 

Creative Realities, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Minnesota 41-1967918

State or Other Jurisdiction of

Incorporation or Organization

 I.R.S. Employer
Identification No.
   
13100 Magisterial Drive, Suite 100, Louisville KY 40223
Address of Principal Executive Offices Zip Code

 

(502) 791-8800

Registrant’s Telephone Number, Including Area Code

 

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.01 per share CREX The Nasdaq Stock Market LLC
Warrants to purchase Common Stock CREXW The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 Large accelerated filer ☐Accelerated filer ☐
 Non-accelerated filer ☒Smaller reporting company ☒
  Emerging growth company ☐  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of August 16, 2021, the registrant had 11,896,995 shares of common stock outstanding.

 

 

 

 

 

PART 1. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CREATIVE REALITIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

 

  June 30,  December 31, 
  2021  2020 
  (unaudited)    
ASSETS      
CURRENT ASSETS        
Cash and cash equivalents $3,004  $1,826 
Accounts receivable, net of allowance of $600 and $1,230, respectively  1,927   2,302 
Unbilled receivables  3   41 
Work-in-process and inventories, net  2,068   2,351 
Prepaid expenses and other current assets  1,635   507 
Total current assets $8,637  $7,027 
Operating lease right-of-use assets  755   931 
Property and equipment, net  1,135   1,340 
Intangibles, net  3,511   3,790 
Goodwill  7,525   7,525 
Other assets  12   5 
TOTAL ASSETS $21,575  $20,618 
LIABILITIES AND SHAREHOLDERS’ EQUITY        
CURRENT LIABILITIES        
Short-term seller note payable $-  $1,637 
Accounts payable  906   1,661 
Accrued expenses  1,832   2,142 
Deferred revenues  1,011   764 
Customer deposits  597   770 
Current maturities of operating and finance leases  277   359 
Total current liabilities $4,623  $7,333 
Long-term Payroll Protection Program note payable  -   1,552 
Long-term related party loans payable, net of $200 and $168 discount, respectively  4,470   4,436 
Long-term related party convertible loans payable, at fair value  2,190   2,270 
Long-term obligations under operating leases  478   584 
Long-term accrued expenses  108   108 
TOTAL LIABILITIES $11,869  $16,283 
SHAREHOLDERS’ EQUITY        
Common stock, $0.01 par value, 200,000 shares authorized; 11,877 and 10,924 shares issued and outstanding, respectively  118   109 
Additional paid-in capital  59,777   56,712 
Accumulated deficit  (50,189)  (52,486)
Total shareholders’ equity $9,706  $4,335 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $21,575  $20,618 

 

See accompanying notes to condensed consolidated financial statements

 

1

 

  

CREATIVE REALITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

  For the Three Months Ended  For the Six Months Ended 
  June 30,  June 30, 
  2021  2020  2021  2020 
Sales            
Hardware $1,296  $1,601  $4,112  $2,968 
Services and other  1,981   2,055   4,169   4,392 
Total sales  3,277   3,656   8,281   7,360 
Cost of sales                
Hardware  870   1,296   2,784   2,279 
Services and other  532   543   1,388   1,657 
Total cost of sales  1,402   1,839   4,172   3,936 
Gross profit  1,875   1,817   4,109   3,424 
Operating expenses:                
Sales and marketing expenses  169   371   504   798 
Research and development expenses  58   245   229   558 
General and administrative expenses  1,666   1,960   3,775   4,473 
Bad debt (recovery) / expense  49   505   (463)  848 
Depreciation and amortization expense  344   380   688   746 
Goodwill impairment  -   -   -   10,646 
Total operating expenses  2,286   3,461   4,733   18,069 
Operating loss  (411)  (1,644)  (624)  (14,645)
                 
Other income (expenses):                
Interest expense  (182)  (260)  (431)  (487)
Gain on settlement of obligations  1,628   1   3,193   41 
Change in fair value of Convertible Loan  -   (551)  166   (702)
Other expense  (3)  (1)  1   - 
Total other income / (expense)  1,443   (811)  2,929   (1,148)
Income/(loss) before income taxes  1,032   (2,455)  2,305   (15,793)
Benefit/(provision) for income taxes  (7)  (4)  (8)  151 
Net income/(loss) $1,025  $(2,459) $2,297  $(15,642)
Basic earnings/(loss) per common share $0.09  $(0.25) $0.20  $(1.59)
Diluted earnings/(loss) per common share $0.09  $(0.25) $0.20  $(1.59)
Weighted average shares outstanding - basic  11,854   9,837   11,588   9,815 
Weighted average shares outstanding - diluted  11,862   9,837   11,596   9,815 

 

See accompanying notes to condensed consolidated financial statements. 

 

2

 

 

CREATIVE REALITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

  Six Months Ended 
  June 30, 
  2021  2020 
Operating Activities:        
Net income/(loss) $2,297  $(15,642)
Adjustments to reconcile net income/(loss) to net cash used in operating activities        
Depreciation and amortization  688   746 
Amortization of debt discount  101   169 
Stock-based compensation  895   169 
Shares issued for services  

40

   - 
Gain on forgiveness of Paycheck Protection Program  (1,552)  - 
Gain on settlement of Seller Note  (1,538)  - 
Change in fair value of Convertible Loan  (166)  702 
Deferred tax provision  -   (175)
Allowance for doubtful accounts  (30)  744 
Increase in notes due to in-kind interest  310   199 
Loss on goodwill impairment  -   10,646 
Gain on settlement of obligations  (103)  (41)
Changes to operating assets and liabilities:        
Accounts receivable and unbilled receivables  443   1,631 
Inventories  283   (2,252)
Prepaid expenses and other current assets  (1,128)  (836)
Operating lease right-of-use assets, net  176   261 
Other assets  (7)  (6)
Accounts payable  (742)  713 
Deferred revenue  247   311 
Accrued expenses  (220)  (414)
Deposits  (173)  418 
Operating lease liabilities, non-current  (184)  (258)
Net cash used in operating activities  (363)  (2,915)
Investing activities        
Purchases of property and equipment  (10)  (59)
Capitalization of third-party labor for software development  (102)  (172)
Capitalization of internal labor for software development  (92)  (177)
Net cash used in investing activities  (204)  (408)
Financing activities        
Principal payments on finance leases  (4)  (14)
Proceeds from Paycheck Protection Program loan  -   1,552 
Issuance of common stock – warrant exercise  -   121 
Repayment of Seller Note  (100)  - 
Proceeds from sale of shares via registered direct offering, net  1,849   - 
Net cash provided by financing activities  1,745   1,659 
Increase/(decrease) in Cash and Cash Equivalents  1,178   (1,664)
Cash and Cash Equivalents, beginning of period  1,826   2,534 
Cash and Cash Equivalents, end of period $3,004  $870 

   

See accompanying notes to condensed consolidated financial statements.

 

3

 

  

CREATIVE REALITIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except shares)

 

        Additional       
  Common Stock  paid in  Accumulated    
  Shares   Amount  capital   (Deficit)   Total 
Three months ended June 30, 2021                   
Balance as of March 31, 2021  11,840,811  $118  $59,381  $(51,214) $8,285 
Shares issued for services  22,204   -   40   -   40 
Shares issued to directors as compensation  13,664   -   25   -   25 
Stock-based compensation  -   -   331   -   331 
Net income  -   -   -   1,025   1,025 
Balance as of June 30, 2021  11,876,679  $118  $59,777  $(50,189) $9,706 

 

        Additional       
  Common Stock  paid in  Accumulated    
 Shares  Amount  capital  (Deficit)  Total 
Six months ended June 30, 2021               
Balance as of December 31, 2020  10,924,287  $109  $56,712  $(52,486) $4,335 
Shares issued for services  22,204   -   40   -   40 
Shares issued to directors as compensation  33,044   -   50   -   50 
Stock-based compensation  -   -   845   -   845 
Conversion of Disbursed Escrow Loan  97,144   1   263   -   264 
Gain on Extinguishment of Special Loan  -   -   26   -   26 
Sales of Shares via registered direct offering, net of offering cost  800,000   8   1,841   -   1,849 
Net income  -   -   -   2,297   2,297 
Balance as of June 30, 2021  11,876,679  $118  $59,777  $(50,189) $9,706 

 

        Additional       
  Common Stock  paid in  Accumulated    
 Shares  Amount  capital  (Deficit)  Total 
Three months ended June 30, 2020               
Balance as of March 31, 2020  9,794,971  $98  $54,102  $(48,825) $5,375 
Stock-based compensation  -   -   100   -   100 
Shares issued to directors as compensation  32,052   -   19   -   19 
Exercise of warrants  27,600   -   121   -   121 
Net loss  -   -   -   (2,459)  (2,459)
Balance as of June 30, 2020  9,854,623  $98  $54,342  $(51,284) $3,156 

 

        Additional       
  Common Stock  paid in  Accumulated    
 Shares  Amount  capital  (Deficit)  Total 
Six months ended June 30, 2020               
Balance as of December 31, 2019  9,774,546  $98  $54,052  $(35,642) $18,508 
Stock-based compensation  -   -   119   -   119 
Shares issued to directors as compensation  52,477   -   50   -   50 
Exercise of warrants  27,600   -   121   -   121 
Net loss  -   -   -   (15,642)  (15,642)
Balance as of June 30, 2020  9,854,623  $98  $54,342  $(51,284) $3,156 

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

 

CREATIVE REALITIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(all currency in thousands, except per share amounts)

(unaudited)

 

NOTE 1: NATURE OF ORGANIZATION AND OPERATIONS

 

Unless the context otherwise indicates, references in these Notes to the accompanying condensed consolidated financial statements to “we,” “us,” “our” and “the Company” refer to Creative Realities, Inc. and its subsidiaries.

 

Nature of the Company’s Business

 

Creative Realities, Inc. is a Minnesota corporation that provides innovative digital marketing technology and solutions to retail companies, individual retail brands, enterprises and organizations throughout the United States and in certain international markets. The Company has expertise in a broad range of existing and emerging digital marketing technologies, as well as the related media management and distribution software platforms and networks, device management, product management, customized software service layers, systems, experiences, workflows, and integrated solutions. Our technology and solutions include: digital merchandising systems and omni-channel customer engagement systems, interactive digital shopping assistants, advisors and kiosks, and other interactive marketing technologies such as mobile, social media, point-of-sale transactions, beaconing and web-based media that enable our customers to transform how they engage with consumers. We have expertise in a broad range of existing and emerging digital marketing technologies, as well as the following related aspects of our business: content, network management, and connected device software and firmware platforms; customized software service layers; hardware platforms; digital media workflows; and proprietary processes and automation tools.

 

Our main operations are conducted directly through Creative Realities, Inc., and under our wholly owned subsidiaries Allure Global Solutions, Inc., a Georgia corporation (“Allure”), and Creative Realities Canada, Inc., a Canadian corporation. Our other wholly owned subsidiaries, Creative Realities, LLC, a Delaware limited liability company, and ConeXus World Global, LLC, a Kentucky limited liability company, are effectively dormant.

 

Liquidity and Financial Condition

 

The accompanying Condensed Consolidated Financial Statements have been prepared on the basis of the realization of assets and the satisfaction of liabilities and commitments in the normal course of business and do not include any adjustments to the recoverability and classifications of recorded assets and liabilities as a result of uncertainties.

 

For the three months ended June 30, 2021 and 2020 we have recognized/(incurred) net income/(losses) of $1,025 and ($2,459), respectively. For the six months ended June 30, 2021 and 2020, we recognized/(incurred) net income/(losses) of $2,297 and ($15,642), respectively. As of June 30, 2021, we had cash and cash equivalents of $3,004 and a working capital surplus of $4,014.

 

On January 11, 2021, we received a notice from Old National Bank regarding forgiveness of the loan in the principal amount of $1,552 (the “PPP Loan”) that was made pursuant to the Small Business Administration Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act of 2020. According to such notice, the full principal amount of the PPP Loan and the accrued interest have been forgiven, resulting in a gain of $1,552 during the three months ended March 31, 2021.

 

On February 18, 2021, the Company entered into a securities purchase agreement with an institutional investor which provided for the issuance and sale by the Company of 800,000 shares of the Company’s common stock (the “Shares”), in a registered direct offering (the “Offering”) at a purchase price of $2.50 per Share, for gross proceeds of $2,000. The net proceeds from the Offering after paying estimated offering expenses were approximately $1,849, which the Company intends to use for general corporate purposes. The closing of the Offering occurred on February 22, 2021.

 

5

 

 

On March 7, 2021, the Company and Slipstream entered into an agreement to refinance the Company’s Loan and Security Agreement, including (1) the extension of all maturity dates therein to March 31, 2023, (2) the conversion of the Disbursed Escrow Promissory Note into equity, (3) access to an additional $1,000 via a multi-advance line of credit facility, and (4) the removal of the three times liquidation preference with respect to the Company’s Secured Convertible Special Loan Promissory Note.

 

On May 13, 2021, the Company and Christie Digital Systems, Inc. (“Seller”) entered into a settlement agreement with respect to the Amended and Restated Seller Note wherein neither party admitted liability, and the Company agreed to pay, and Seller agreed to accept, $100 as settlement in full for the outstanding balance of principal and accrued interest under the Amended and Restated Seller Note and a mutual release of all claims related to the Seller Note and sale transaction under the Allure Purchase Agreement and all related agreements. The settlement resulted in the Company recording a gain on settlement of obligations of $1,624, representing $1,538 related to the Seller Note and $86 of related interest thereon, during the three months ended June 30, 2021.

 

Management believes that, based on (i) the forgiveness of our PPP Loan, (ii) the execution of the Offering and remaining availability for incremental offerings under our previously registered Form S-3 (including our current at-the-market offering), (iii) the refinancing of our debt, including extension of the maturity date on our term and convertible loans, as well as access to incremental borrowings under the new multi-advance line of credit, (iv) the settlement of the Seller Note, and (v) our operational forecast through 2022, we can continue as a going concern through at least August 16, 2022. However, given our history of net losses and cash used in operating activities, we obtained a continued support letter from Slipstream through August 16, 2022. We can provide no assurance that our ongoing operational efforts will be successful, which could have a material adverse effect on our results of operations and cash flows.

 

See Note 8 Loans Payable to the Consolidated Financial Statements for an additional discussion of the Company’s debt obligations and further discussion of the Company’s refinancing activities during the three and six months ended June 30, 2021.

 

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

1.  Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the applicable instructions to Form 10-Q and Regulation S-X and include all of the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”) for interim financial reporting. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes for the year ended December 31, 2020, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2021.

 

The results of operations for the interim periods are not necessarily indicative of results of operations for a full year. Management believes the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, including normal recurring items, considered necessary for a fair statement of results for the interim periods presented.

 

6

 

 

2.  Revenue Recognition

 

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

 

If an arrangement involves multiple performance obligations, the items are analyzed to determine the separate units of accounting, whether the items have value on a standalone basis and whether there is objective and reliable evidence of their standalone selling price. The total contract transaction price is allocated to the identified performance obligations based upon the relative standalone selling prices of the performance obligations. The standalone selling price is based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost plus margin approach.

 

The Company estimates the amount of total contract consideration it expects to receive for variable arrangements by determining the most likely amount it expects to earn from the arrangement based on the expected quantities of services it expects to provide and the contractual pricing based on those quantities. The Company only includes some or a portion of variable consideration in the transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company considers the sensitivity of the estimate, its relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to the overall arrangement. The Company receives variable consideration in very few instances.

 

Revenue is recognized when a customer obtains control of promised goods or services under the terms of a contract and is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. The Company does not have any material extended payment terms as payment is due at or shortly after the time of the sale, typically ranging between thirty and ninety days. Observable prices are used to determine the standalone selling price of separate performance obligations or a cost plus margin approach when one is not available. Sales, value-added and other taxes collected concurrently with revenue producing activities are excluded from revenue.

  

The Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced to the clients. Unbilled receivables are recorded as accounts receivable when the Company has an unconditional right to contract consideration. A contract liability is recognized as deferred revenue when the Company invoices clients in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the related performance obligation. 

 

The Company uses the practical expedient for recording an immediate expense for incremental costs of obtaining contracts, including certain design/engineering services, commissions, incentives and payroll taxes, as these incremental and recoverable costs have terms that do not exceed one year.

 

3. Inventories

 

Inventories are stated at the lower of cost or net realizable value, determined by the first-in, first-out (FIFO) method, and consist of the following:

 

  June 30,  December 31, 
  2021  2020 
Raw materials, net of reserve of $131 and $104, respectively $1,912  $1,920 
Inventory on consignment with distributors  11   208 
Work-in-process  145   223 
Total inventories $2,068  $2,351 

 

4. Impairment of Long-Lived Assets

 

We review the carrying value of all long-lived assets, including property and equipment, for impairment in accordance with ASC 360, Accounting for the Impairment or Disposal of Long-Lived Assets. Under ASC 360, impairment losses are recorded whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We evaluated whether there were any triggering events for consideration of impairment of long-lived assets as of June 30, 2021 and concluded there were none.

  

7

 

 

If the impairment tests indicate that the carrying value of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment loss would be recognized. The impairment loss is determined as the amount by which the carrying value of such asset exceeds its fair value. We generally measure fair value by considering sale prices for similar assets or by discounting estimated future cash flows from such assets using an appropriate discount rate. Assets to be disposed of are carried at the lower of their carrying value or fair value less costs to sell. Considerable management judgment is necessary to estimate the fair value of assets, and accordingly, actual results could vary significantly from such estimates.

 

5. Basic and Diluted Income/(Loss) per Common Share

 

Basic and diluted income/(loss) per common share for all periods presented is computed using the weighted average number of common shares outstanding. Basic weighted average shares outstanding includes only outstanding common shares. Diluted weighted average shares outstanding includes outstanding common shares and potential dilutive common shares outstanding in accordance with the treasury stock method. Shares reserved for outstanding stock options, including stock options with performance restricted vesting, and warrants totaling approximately 6,964,517 at June 30, 2021 were excluded from the computation of income/(loss) per share as the strike price on the options and warrants were higher than the Company’s market price and therefore anti-dilutive. Diluted weighted average shares outstanding for the three and six-months ended June 30, 2021 included 8,333 options which were both exercisable and in-the-money as of June 30, 2021. Those options were included in the calculation of diluted earnings per share as of the beginning of the calculation period. Shares reserved for outstanding stock options, including stock options with performance restricted vesting, and warrants totaling approximately 7,309,998 at June 30, 2020 were excluded from the computation of income/(loss) per share due to the net loss in the period.

 

In calculating diluted earnings per share for the three and six months ended June 30, 2021 and 2020, in accordance with ASC 260, Earnings per share, we excluded the dilutive effect of the potential issuance of common stock upon an assumed conversion of the Convertible Loan as we have the intent and ability to settle the debt in cash.

 

6. Income Taxes

 

Deferred income taxes are recognized in the financial statements for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates. Temporary differences arise from net operating losses, differences in basis of intangibles, stock-based compensation, reserves for uncollectible accounts receivable and inventory, differences in depreciation methods, and accrued expenses. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company accounts for uncertain tax positions utilizing an established recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We had no uncertain tax positions as of June 30, 2021 and December 31, 2020.

  

7. Goodwill

 

We follow the provisions of ASC 350, Intangibles – Goodwill and Other. Pursuant to ASC 350, goodwill acquired in a purchase business combination is not amortized, but instead tested for impairment at least annually. The Company uses a measurement date of September 30 (see Note 7 Intangible Assets and Goodwill). We evaluated whether there were any triggering events for consideration of impairment of our goodwill as of June 30, 2021 and concluded there were none.

 

8. Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Our significant estimates include: the allowance for doubtful accounts, valuation allowances related to deferred taxes, the fair value of acquired assets and liabilities, the fair value of liabilities reliant upon the appraised fair value of the Company, valuation of stock-based compensation awards and other assumptions and estimates used to evaluate the recoverability of long-lived assets, goodwill and other intangible assets and the related amortization methods and periods. Actual results could differ from those estimates.

 

8

 

 

9. Leases

 

We account for leases in accordance with ASC 842, Leases, as amended.

  

We determine if an arrangement is a lease at inception. Right of use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, we consider only payments that are fixed and determinable at the time of commencement. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our incremental borrowing rate is a hypothetical rate based on our understanding of what our credit rating would be. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.

 

Operating leases are included in operating lease right-of-use assets, current maturities of operating leases, and long-term obligations under operating leases on our condensed consolidated balance sheets. Finance leases are included in property and equipment, net, current maturities of finance leases, and long-term obligations under financing leases on our condensed consolidated balance sheets.

 

NOTE 3: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

Recently adopted

 

None.

 

Not yet adopted

 

In August 2020, the FASB issued Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. This guidance will be effective for us in the first quarter of 2024 on a full or modified retrospective basis, with early adoption permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses. The main objective is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this update replace the incurred loss methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to calculate credit loss estimates. For trade receivables and loans, entities will be required to estimate lifetime expected credit losses. The amendments are effective for public business entities that qualify as smaller reporting companies for fiscal years and interim periods beginning after December 15, 2022. We are currently evaluating the disclosure requirements related to adopting this guidance. 

  

9

 

 

NOTE 4: REVENUE RECOGNITION

 

The Company applies ASC 606 for revenue recognition. The following table disaggregates the Company’s revenue by major source for the three and six months ended June 30, 2021 and 2020:

 

(in thousands) Three Months
Ended
June 30,
2021
  Three Months
Ended
June 30,
2020
  Six Months
Ended
June 30,
2021
  Six Months
Ended
June 30,
2020
 
Hardware $1,296  $1,601  $4,112  $2,968 
                 
Services:                
Installation Services  497   463   1,072   1,332 
Software Development Services  93   37   367   179 
Managed Services  1,391   1,555   2,730   2,881 
Total Services  1,981   2,055   4,169   4,392 
                 
Total Hardware and Services $3,277  $3,656  $8,281  $7,360 

 

System hardware sales

 

System hardware revenue is recognized generally upon shipment of the product or customer acceptance depending upon contractual arrangements with the customer in instances in which the sale of hardware is the sole performance obligation. Shipping charges billed to customers are included in hardware sales and the related shipping costs are included in hardware cost of sales. The cost of freight and shipping to the customer is recognized in cost of sales at the time of transfer of control to the customer. System hardware revenues are classified as “Hardware” within our disaggregated revenue. 

 

Installation services

 

The Company performs outsourced installation services for customers and recognizes revenue upon completion of the installations. Installation services also includes engineering services performed as part of an installation project.

 

When system hardware sales include installation services to be performed by the Company, the goods and services in the contract are not distinct, so the arrangement is accounted for as a single performance obligation. Our customers control the work-in-process and can make changes to the design specifications over the contract term. Revenues are recognized over time as the installation services are completed based on the relative portion of labor hours completed as a percentage of the budgeted hours for the installation. Installation services revenues are classified as “Installation Services” within our disaggregated revenue.

 

The aggregate amount of the transaction price allocated to installation service performance obligations that are partially unsatisfied as of June 30, 2021 and 2020 were $0.

 

Software design and development services

 

Software and software license sales are recognized as revenue when a fixed fee order has been received and delivery has occurred to the customer. Revenue is recognized generally upon customer acceptance (point-in-time) of the software product and verification that it meets the required specifications. Software is delivered to customers electronically. Software design and development revenues are classified as “Software Development Services” within our disaggregated revenue.

 

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Software as a service

 

Software as a service includes revenue from software licensing and delivery in which software is licensed on a subscription basis and is centrally hosted. These services often include software updates which provide customers with rights to unspecified software product upgrades and maintenance releases and patches released during the term of the support period. Contracts for these services are generally 12-36 months in length. We account for revenue from these services in accordance with ASC 985-20-15-5 and recognize revenue ratably over the performance period. Software as a service revenues are classified as “Managed Services” within our disaggregated revenue. 

  

Maintenance and support services

 

The Company sells maintenance and support services which include access to technical support personnel for software and hardware troubleshooting and monitoring of the health of a customer’s network, access to a sophisticated web-portal for managing the end-to-end hardware and software digital ecosystem, and hosting support services through our network operations center, or NOC. These services provide either physical or automated remote monitoring which support customer networks 7 days a week, 24 hours a day.

 

These contracts are generally 12-36 months in length and generally automatically renew for additional 12-month periods unless cancelled by the customer. Rates for maintenance and support contracts are typically established based upon a fee per location or fee per device structure, with total fees subject to the number of services selected. Revenue is recognized ratably and evenly over the term of the agreement. Maintenance and Support revenues are classified as “Managed Services” within our disaggregated revenue.

 

The Company also performs time and materials-based maintenance and repair work for customers. Revenue is recognized at a point in time when the performance obligation has been fully satisfied.

  

NOTE 5: FAIR VALUE MEASUREMENT

 

We measure certain financial assets, including cash equivalents, at fair value on a recurring basis. In accordance with ASC 820-10-30, fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820-10-35 establishes a three-level hierarchy that prioritizes the inputs used in measuring fair value. The three hierarchy levels are defined as follows:

 

Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets.

 

Level 2 — Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly.

 

Level 3 — Valuations based on inputs that are unobservable and involve management judgment and the reporting entity’s own assumptions about market participants and pricing.

  

As discussed in Note 7 Intangible Assets, Including Goodwill, the calculation of the weighted average cost of capital and management’s forecast of future financial performance utilized within our discounted cash flow model for the impairment of goodwill contains inputs which are unobservable and involve management judgment and are considered Level 3 estimates.

 

As discussed in Note 8 Loans Payable, the Convertible Loan is reported at fair value. This liability is deemed to be a Level 3 valuation. Certain unobservable inputs into the calculation of the fair value of this liability include an estimate of the fair value of the Company at a future date using a discounted cash flow model, discount rate assumptions, and an estimation of the likelihood of conversion of the Convertible Loan. As of June 30, 2021, we utilized a discounted cash flow analysis in updating our fair value analysis of the Convertible Loan, resulting in recognition of a $0 and $166 gain during the three and six-months ended June 30, 2021, respectively, from the change in fair value of the liability and a corresponding increase in the debt balance recorded in the Condensed Consolidated Balance Sheet. The Company recorded a $551 and $702 loss during the same periods in 2020, respectively, related to the fair value of the Special Loan.

 

11

 

  

NOTE 6: SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION

 

  Six Months Ended 
  June 30, 
  2021  2020 
Supplemental Cash Flow Information      
Cash paid during the period for:      
Interest $-  $- 
Income taxes, net $20  $2 

 

NOTE 7: INTANGIBLE ASSETS, INCLUDING GOODWILL

 

Intangible Assets

 

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

 

  June 30,  December 31, 
  2021  2020 
  Gross     Gross    
  Carrying  Accumulated  Carrying  Accumulated 
  Amount  Amortization  Amount  Amortization 
Technology platform $4,635   3,526  $4,635   3,400 
Customer relationships  3,960   1,596   5,330   2,870 
Trademarks and trade names  640   602   1,020   925 
   9,235   5,724   10,985   7,195 
Accumulated amortization  5,724       7,195     
Net book value of amortizable intangible assets $3,511      $3,790     

 

For the three months ended June 30, 2021 and 2020, amortization of intangible assets charged to operations was $139 and $158, respectively. For the six months ended June 30, 2021 and 2020 amortization of intangible assets charged to operations was $279 and $317, respectively.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is subject to an impairment review at a reporting unit level, on an annual basis as of the end of September of each fiscal year, or when an event occurs, or circumstances change that would indicate potential impairment. The Company has only one reporting unit, and therefore the entire goodwill is allocated to that reporting unit. There were no indicators of impairment as of or during the three and six months ended June 30, 2021.

 

Interim Impairment Assessment – March 31, 2020

 

Despite the excess fair value identified in our 2019 annual impairment assessment, we determined that the reduced cash flow projections and the significant decline in our market capitalization as a result of the COVID-19 pandemic during the three months ended March 31, 2020 indicated that an impairment loss may have been incurred during the first quarter. As a result of our qualitative assessment, we concluded that indicators of impairment were present and that a quantitative interim impairment assessment of our goodwill was necessary, resulting in us recording a non-cash impairment loss of $10,646 as of March 31, 2020. We recorded the estimated impairment losses in the caption “Goodwill impairment” in our Consolidated Statement of Operations.

 

12

 

 

NOTE 8: LOANS PAYABLE

 

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

 

As of June 30, 2021
Debt Type Issuance
Date
 Principal  Maturity
Date
 Warrants  Interest Rate Information
G 3/7/2021  4,670  3/31/2023  649,965  8.0% interest(1)
H 3/7/2021  2,356  3/31/2023  -  10.0% interest(1)
  Total debt, gross  7,026     649,965   
  Fair value (H)  (166)        
  Total debt, gross  6,860         
  Debt discount  (200)        
  Total debt, net $6,660         
  Less current maturities  -         
  Long term debt $6,660         

 

As of December 31, 2020
Debt Type Issuance
Date
 Principal  Maturity
Date
 Warrants  Interest Rate Information
A 6/30/2018 $264  N/A  -  0.0% interest
B 1/16/2018  1,085  3/31/2023  61,729  10.0% interest
C 8/17/2016  3,255  3/31/2023  588,236  10.0% interest
D 11/19/2018  1,637  2/15/2020  -  3.5% interest
E 12/30/2019  2,177  3/31/2023  -  10.0% interest
F 4/27/2020  1,552  4/27/2022  -  1.0% interest
  Total debt, gross  9,970     649,965   
  Fair value (E)  93         
  Total debt, gross  10,063         
  Debt discount  (168)        
  Total debt, net $9,895         
  Less current maturities  (1,637)        
  Long term debt $8,258         

 

A – Secured Disbursed Escrow Promissory Note with related party

B – Secured Revolving Promissory Note with related party

C – Term Loan with related party

D – Amended and Restated Seller Note from acquisition of Allure

E – Secured Convertible Special Loan Promissory Note, at fair value

F – Paycheck Protection Program Loan from Small Business Administration

G – New Term Loan with related party

H – Convertible Loan with related party, at fair value

 

(1)Interest is paid-in-kind (“PIK”) through October 2021, at which point interest becomes payable in cash.

 

SBA Paycheck Protection Program Loan

 

On April 27, 2020, the Company entered into a Promissory Note with Old National Bank (the “Promissory Note”), which provided for an unsecured loan of $1,552 (the “PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”). The Promissory Note had a term of two years with a 1% per annum interest rate.

 

On January 11, 2021, the Company received a notice from Old National Bank that the full principal amount of the PPP Loan and the accrued interest have been forgiven, resulting in a gain of $1,552 during the six months ended June 30, 2021.

 

13

 

 

Amended and Restated Loan and Security Agreement

 

On March 7, 2021, the Company refinanced their current debt facilities with Slipstream Communications, LLC (“Slipstream”), pursuant to an Amended and Restated Credit and Security Agreement (the “Credit Agreement”). The debt facilities continue to be fully secured by all assets of the Company. The maturity date (“Maturity Date”) on the outstanding debt and new debt was extended to March 31, 2023. The Credit Agreement (i) provides $1,000 of availability under a line of credit (the “Line of Credit”), (ii) consolidates our existing term and revolving line of credit facilities into a new term loan (the “New Term Loan”) having an aggregate principal balance of approximately $4,550 (including a 3.0% issuance fee capitalized into the principal balance), (iii) increases the outstanding special convertible term loan (the “Convertible Loan”) to approximately $2,280 (including a 3.0% issuance fee capitalized into the principal balance), and (iv) extinguishes the outstanding obligations owed with respect to a $264 existing disbursed escrow loan in exchange for shares of the Company’s common stock (the “Disbursed Escrow Conversion Shares”), valued at $2.718 per share (the trailing 10-day VWAP as reported on the Nasdaq Capital Market as of the date of execution of the Credit Agreement). The Line of Credit and Convertible Loan accrue interest at 10% per year, and the New Term Loan accrues interest at 8% per year.

 

The New Term Loan requires no principal payments until the Maturity Date, and interest payments are payable on the first day of each month until the Maturity Date. All interest payments owed prior to October 1, 2021 are payable as PIK payments, or increases to the principal balance of the New Term Loan only.

 

The Line of Credit and Convertible Loan require payments of accrued interest payable on the first day of each month through April 1, 2022. All such interest payments made prior to October 1, 2021 are payable as PIK payments, or increases to the principal balances under the Line of Credit and Convertible Loan only. No principal payments are owed under the Line of Credit or Convertible Loan until April 1, 2022, at which time all principal and interest on each of the Line of Credit and Convertible Loan will be paid in monthly installments until the Maturity Date to fully amortize outstanding principal by the Maturity Date.

  

All payments of interest (other than PIK payments) and principal on the Line of Credit and Convertible Loan may be paid, in the Company’s sole discretion, in shares of the Company’s Common Stock (the “Payment Shares,” and together with the Disbursed Escrow Conversion Shares, the “Shares”). The Payment Shares will be valued on a per-Share basis at 70% of the VWAP of the Company’s shares of common stock as reported on the Nasdaq Capital Market for the 10 trading days immediately prior to the date such payment is due; provided that the Payment Shares shall not be valued below $0.50 per Share (the “Share Price”).

 

The Credit Agreement limits the Company’s ability to issue Shares as follows (the “Exchange Limitations”): (1) The total number of Shares that may be issued under the Credit Agreement will be limited to 19.99% of the Company’s outstanding shares of common stock on the date the Credit Agreement is signed (the “Exchange Cap”), unless stockholder approval is obtained to issue shares in excess of the Exchange Cap; (2) if Slipstream and its affiliates (the “Slipstream Group”) beneficially own the largest ownership position of shares of Company common stock immediately prior to the proposed issuance of Payment Shares and such shares are less than 19.99% of the then-issued and outstanding shares of Company common stock, the issuance of such Payment Shares will not cause the Slipstream Group to beneficially own in excess of 19.99% of the issued and outstanding shares of Company common stock after such issuance unless stockholder approval is obtained for ownership in excess of 19.99%; and (3) if the Slipstream Group does not beneficially own the largest ownership position of shares of Company common stock immediately prior to the proposed issuance of Payment Shares, the Company may not issue Payment Shares to the extent that such issuance would result in Slipstream Group beneficially owning more than 19.99% of the then issued and outstanding shares of Company common stock unless (A) such ownership would not be the largest ownership position in the Company, or (B) stockholder approval is obtained for ownership in excess of 19.99%. On May 17, 2021, the Company’s stockholders approved the issuance of Shares in excess of the Exchange Limitations.

 

We evaluated the instruments within the Credit Agreement separately for purposes of concluding on whether the amendment represented a modification or extinguishment in accordance with ASC 470 Debt.

 

The Convertible Loan was deemed to have had a substantive conversion feature both added and removed via the Credit Agreement, one which the holder is reasonably willing and able to exercise their rights under the agreement, resulting in extinguishment accounting for the Convertible Loan during the three months ended March 31, 2021. Pursuant to ASC 825-10-25-1, Fair Value Option, we made an irrevocable election to report the Convertible Loan at fair value, with changes in fair value recorded through the Company’s Condensed Consolidated Statement of Operations in each reporting period.

 

14

 

 

We evaluated the Credit Agreement in accordance with ASC 470 Debt. The New Term Loan was accounted for as a modification, resulting in recording of $133 of incremental debt discount which will be amortized straight-line over the remaining life of the debt. We recorded a net gain of $26 via the extinguishment of the Special Loan, which was recorded as additional paid in capital in the Statement of Shareholders Equity given the transaction was with a related party, Slipstream. We expensed $69 of costs incurred with third parties as a result of extinguishment of the Special Loan, modification of the New Term Loan, and extinguishment of the Disbursed Escrow Loan.

 

Loan and Security Agreement History

 

Ninth, Tenth, Eleventh, Twelfth, and Thirteenth Amendment; Modification of Conversion Date of Special Loan under Loan and Security Agreement

 

On February 28, 2021, January 31, 2021, December 31, 2020, November 30, 2020, and September 29, 2020, the Company entered into amendments to Loan and Security Agreement with its subsidiaries and Slipstream to amend the automatic conversion date of the Special Loan. Each amendment extended the automatic conversion date of the Special Loan. The Company paid no fees in exchange for these extensions.

 

Secured Disbursed Escrow Promissory Note

 

The Fourth Amendment to the Loan and Security Agreement included entry into a Secured Disbursed Escrow Promissory Note between the Company and Slipstream, and, effective June 30, 2018, we drew $264 in conjunction with our exit from a previously leased operating facility. The principal amount of the Secured Disbursed Escrow Promissory Note bears no interest. Upon entry into the Credit Agreement on March 7, 2021, this note was converted into Disbursed Escrow Conversion Shares, with elimination of the debt recorded as an equity issuance with the Statement of Shareholders Equity during the three months ended March 31, 2021.

 

Amended and Restated Seller Note from acquisition of Allure

 

The Amended and Restated Seller Note represented a note payable due from Allure to Seller, under a pre-existing Seller Note which was amended and restated to a reduced amount of $1,637 through the Stock Purchase Agreement and a subsequent net working capital adjustment. That debt accrued interest at 3.5% per annum, and required us to make quarterly payments of interest only through February 19, 2020, on which date the promissory note matured and all remaining amounts owing thereunder became due.

 

On February 20, 2020, Creative Realities, Inc. and Allure made a demand for arbitration against Seller for (1) breach of contract, (2) indemnification, and (3) fraudulent misrepresentation under the Allure Purchase Agreement.

 

On May 13, 2021, the Company and Seller entered into a settlement agreement wherein neither party admitted liability, and the Company agreed to pay, and Seller agreed to accept, $100 as settlement in full for the outstanding balance of principal and accrued interest under the Amended and Restated Seller Note and a mutual release of all claims related to the Amended and Restated Seller Note and sale transaction under the Allure Purchase Agreement and all related agreements.

 

As a result of this settlement, the full principal amount of the Seller Note and the accrued interest have been eliminated, resulting in a gain in the Condensed Consolidated Financial statements of $1,624, representing $1,538 related to the Seller Note and $86 of related interest thereon, during the three months ended June 30, 2021

 

15

 

 

NOTE 9: COMMITMENTS AND CONTINGENCIES

 

Litigation

 

On August 2, 2019, the Company filed suit in Jefferson Circuit Court, Kentucky, against a supplier of Allure for breach of contract, breach of warranty, and negligence with respect to equipment installations performed by such supplier for an Allure customer. 

 

On October 10, 2019, the Allure customer that is the basis of our claim above sent a demand to the Company for payment of $3,200 as settlement for an alleged breach of contract related to hardware failures of equipment installations performed by Allure between November 2017 and August 2018. The suits filed by and against Allure have been adjoined in the Jefferson Circuit Court, Kentucky in January 2020. These suits remain in the early stages of litigation and, as a result, the outcome of the suit and the allocation of liability, if any, remain unclear, so the Company is unable to reasonably estimate the possible liability, recovery, or range of magnitude for either the liability or recover, if any, at the time of this filing.

 

The Company has notified its insurance company on notice of potential claims and continues to evaluate both the claim made by the customer and potential avenues for recovery against third parties should the customer prevail.

 

Except as noted above, the Company is not party to any other material legal proceedings, other than ordinary routine litigation incidental to the business, as of August 16, 2021, and there were no other such proceedings pending during the period covered by this Report.

 

Settlement of obligations

 

During the six months ended June 30, 2021, (i) the full principal amount of the PPP Loan and the accrued interest of $1,552 were forgiven and recorded as a gain on settlement, and (ii) the Company settled the Amended and Restated Seller Note and related accrued interest for $100, recording a gain on settlement of $1,624, representing $1,538 related to the Amended and Restated Seller Note and $86 of related interest thereon, during the three months ended June 30, 2021.

 

During the three and six months ended June 30, 2021 and 2020, the Company settled and/or wrote off obligations of $15 and $59, respectively, for aggregate cash payments of $2 and $19, respectively, resulting in recognition of a gain on settlement of $13 and $40, respectively.

 

Employee-related Expenses

 

During the three months ended March 31, 2020, we completed a reduction-in-force and accrued one-time termination benefits related to severance to the affected employees of $135, the total of which was paid during the three months ended June 30, 2020. There were no comparable activities during the three or six months ended June 30, 2021.

 

NOTE 10: RELATED PARTY TRANSACTIONS

 

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

 

33 Degrees Convenience Connect, Inc., a related party that is approximately 17.5% owned by a member of our senior management (“33 Degrees”), is a customer of both equipment and services from the Company. For the three and six months ended June 30, 2021, the Company had sales to 33 Degrees of $171, or 5.2%, and $282, or 3.4%, respectively, of consolidated revenue. For the three and six months ended June 30, 2020, the Company had sales to 33 Degrees of $291, or 8.0%, and $791, or 10.7%, respectively, of consolidated revenue.

 

Accounts receivable due from 33 Degrees was $21, or 0.9%, and $40, or 1.2% of consolidated accounts receivable at June 30, 2021 and December 31, 2020, respectively.

 

16

 

 

NOTE 11: INCOME TAXES

 

Our deferred tax assets are primarily related to net federal and state operating loss carryforwards (NOLs). We have substantial NOLs that are limited in usage by IRC Section 382. IRC Section 382 generally imposes an annual limitation on the amount of NOLs that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership within a statutory testing period. We have performed a preliminary analysis of the annual NOL carryforwards and limitations that are available to be used against taxable income. Based on the history of losses of the Company, there continues to be a full valuation allowance against the net deferred tax assets of the Company with a definite life.

 

For the three and six-months ended June 30, 2021, we reported tax expense of $7 and $8, respectively. As of June 30, 2021, the net deferred tax assets totaled $0 after valuation allowance, consistent with December 31, 2020.

 

NOTE 12: WARRANTS

 

A summary of outstanding warrants is included below:

 

  Warrants (Equity) 
  Amount  Weighted Average Exercise Price  Weighted Average Remaining Contractual Life 
Balance January 1, 2021  4,426,900  $4.62   2.83 
Warrants issued  -   -   - 
Warrants expired  (67,859)  5.76   - 
Balance June 30, 2021  4,359,041  $4.56   2.11 

 

NOTE 13: STOCK-BASED COMPENSATION

 

A summary of outstanding options is included below:

 

Time Vesting Options    Weighted          
     Average  Weighted     Weighted 
     Remaining  Average     Average 
Range of Exercise Number  Contractual  Exercise  Options  Exercise 
Prices between Outstanding  Life  Price  Exercisable  Price 
$0.01 - $3.00  1,525,000   8.92  $2.52   508,333  $2.52 
$3.01 - $7.50  184,830   4.85  $6.72   168,163  $6.64 
$7.51+  103,979   3.95   11.74   99,187  $11.89 
   1,813,809   8.22  $3.48   775,683     

 

Performance Vesting Options    Weighted          
     Average  Weighted     Weighted 
     Remaining  Average     Average 
Range of Exercise Number  Contractual  Exercise  Options  Exercise 
Prices between Outstanding  Life  Price  Exercisable  Price 
$0.01 - $3.00  800,000   8.93  $2.53   -  $- 
   800,000   8.93  $2.53   -     

 

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  Time Vesting Options  Performance Vesting Options 
     Weighted     Weighted 
     Average     Average 
  Options  Exercise  Options  Exercise 
Date/Activity Outstanding  Price  Outstanding  Price 
Balance, December 31, 2020  1,813,809  $3.48   800,000  $2.53 
Granted  -   -   -   - 
Exercised  -   -   -   - 
Forfeited or expired  -   -   -   - 
Balance, June 30, 2021  1,813,809   3.48   800,000  $2.53 

 

The weighted average remaining contractual life for options exercisable is 7.5 years as of June 30, 2021.

 

Valuation Information for Stock-Based Compensation

 

For purposes of determining estimated fair value under FASB ASC 718-10, Stock Compensation, the Company computed the estimated fair values of stock options using the Black-Scholes model.

 

On June 1, 2020 the Board of Directors of the Company granted 10-year options to purchase an aggregate of 2,380,000 shares of its common stock to employees of the Company subject to shareholder approval of an increase in the reserve of shares authorized for issuance under the Company’s 2014 Stock Incentive Plan (as amended, the “Plan”). On July 10, 2020, the Company held a special meeting of the Company’s shareholders at which the shareholders approved the amendment to the Plan, which increased the reserve of shares authorized for issuance thereunder to 6,000,000 shares.

 

Of the 2,380,000 options awarded, 1,580,000 vest over 3 years and have an exercise price of $2.53, the market value of the Company’s common stock on the grant date. The fair value of the options on the grant date was $1.87 and was determined using the Black-Scholes model. These values were calculated using the following weighted average assumptions:

 

Risk-free interest rate  0.66%
Expected term  6.25 years 
Expected price volatility  89.18%
Dividend yield  0%

 

The remaining 800,000 options awarded vest in equal installments over a three-year period subject to satisfying the Company revenue target and earnings before interest, taxes, depreciation and amortization (“EBITDA”) target for the applicable year. In each of calendar years 2020, 2021 and 2022, one-third of the total shares may vest (if the revenue and EBITDA targets are met), and the shares that are subject to vesting each year are allocated equally to each of the revenue and EBITDA targets for such year.

 

These performance options include a catch-up provision, where any options that did not vest during a prior year due to the Company’s failure to meet a prior revenue or EBITDA target may vest in a subsequent vesting year if the revenue or EBITDA target, as applicable, is met in the future year. The revenue and EBITDA targets for the following three years are as follows:

 

Calendar Year Revenue Target EBITDA Target
2020 $32 million $2.2 million
2021 $35 million $3.1 million
2022 $38 million $3.5 million

 

The exercise price of the foregoing options is $2.53 per share, the closing price of the Company’s common stock on the date of issuance. The options were issued from the Plan. The fair value of the options on the grant date was $1.87 and was determined using the Black-Scholes model. These values were calculated using the same weighted average assumptions as the time vesting options issued. Performance against the identified revenue and EBITDA targets will be assessed quarterly by the Company in order to determine whether any compensation expense should be recorded.

 

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During the three months ended March 31, 2021, the Company deemed it probable that the Company would achieve the EBITDA target for Calendar Year 2021 and recorded catch-up compensation expense in the Consolidated Statement of Operations with respect to these awards of $263 during the three months ended March 31, 2021. These awards have not yet vested and are subject to actual results for the full fiscal year 2021. Should this target not be achieved, amounts recorded as expense in the Condensed Consolidated Statement of Operations would be reversed. The Company recorded $79 during the three months ended June 30, 2021 and anticipates recording $79 in each subsequent quarter of 2021 related to the EBITDA target for Calendar Year 2020 and 2021 portion of these awards.

 

Stock Compensation Expense Information

 

ASC 718-10, Stock Compensation, requires measurement and recognition of compensation expense for all stock-based payments including warrants, stock options, restricted stock grants and stock bonuses based on estimated fair values. Under the Amended and Restated 2006 Equity Incentive Plan, the Company reserved 1,720,000 shares for purchase by the Company’s employees and under the Amended and Restated 2006 Non-Employee Director Stock Option Plan the Company reserved 700,000 shares for purchase by the Company’s employees. There are 12,135 options outstanding under the 2006 Equity Incentive Plan.

 

In October 2014, the Company’s shareholders approved the 2014 Stock Incentive Plan, under which 7,390,355 shares were reserved for purchase by the Company’s employees. In August 2018, a special meeting of shareholders was held in which the shareholders voted to amend the Company’s 2014 Stock Incentive Plan to increase the reserve of shares authorized for issuance thereunder, from 7,390,355 shares to 18,000,000 shares. Following a 1-for-30 reverse stock split, the shares authorized for issuance under the Company’s 2014 Stock Incentive Plan was reduced to 600,000. On July 10, 2020, the Company’s shareholders approved an amendment to the Company’s 2014 Stock Incentive Plan to increase the reserve of authorized for issuance thereunder to 6,000,000.

 

Employee Awards

 

Compensation expense recognized for the issuance of stock options, inclusive of performance-restricted stock options, for the three and six months ended June 30, 2021 of $356 and $895, respectively, was included in general and administrative expense in the Condensed Consolidated Financial Statements. Compensation expense recognized for the issuance of stock options for the three and six months ended June 30, 2020 of $19 and $119, respectively, was included in general and administrative expense in the Condensed Consolidated Financial Statements. Amounts recorded include stock compensation expense for awards granted to directors of the Company in exchange for services at fair value.

 

As of June 30, 2021, there was approximately $1,861 and $1,157 of total unrecognized compensation expense related to unvested share-based awards with time vesting and performance vesting criteria, respectively. As of June 30, 2020, there was approximately $3,014 and $1,499 of total unrecognized compensation expense related to unvested share-based awards with time vesting and performance vesting criteria, respectively. Generally, expense related to the time vesting options will be recognized over the next two- and one-half years and will be adjusted for any future forfeitures as they occur. Compensation expense related to performance vesting options will be recognized if it becomes probable that the Company will achieve the identified performance metrics.

 

Non-Employee Awards

 

During the three months ended June 30, 2021, the Company engaged certain consultants to perform services in exchange for Company common stock. Shares issued for services were calculated based on the ten (10) day volume weighted average price (“VWAP”) for the last ten (10) days during the month of service provided. The Company recorded $40 in compensation expense during the period in exchange for issuance of 22,204 shares.

 

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NOTE 14: SIGNIFICANT CUSTOMERS/VENDORS

 

Significant Customers

 

We had 2 (2) customers that in the aggregate accounted for 32.9% and 42.6% of accounts receivable as of June 30, 2021 and December 31, 2020, respectively.

 

We had 3 (3) and 2 (2) customers that accounted for 44.0% and 27.0% of revenue for the three months ended June 30, 2021 and 2020, respectively. We had 2 (2) customers that accounted for 37.4% and 22.5% of revenue for the six months ended June 30, 2021 and 2020, respectively.

 

Significant Vendors

 

We had 2 (2) vendors that accounted for 22.7% and 47.0% of outstanding accounts payable at June 30, 2021 and December 31, 2020, respectively.

 

NOTE 15: LEASES

 

We have entered into various non-cancelable operating lease agreements for certain of our offices and office equipment. Our leases have original lease periods expiring between 2021 and 2025. Many leases include one or more options to renew. We do not assume renewals in our determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

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

 

(in thousands) Six Months Ended
June 30,
2021
  Six Months Ended
June 30,
2020
 
Finance lease cost      
Amortization of right-of-use assets $4  $12 
Interest  -   1 
Operating lease cost  179   343 
Total lease cost $183  $356 
         
Weighted Average Remaining Lease Term        
Operating leases  3.3 years   3.0 years 
Finance leases  -   1.0 years 
         
Weighted Average Discount Rate        
Operating leases  10.0%  10.0%
Finance leases  -   14.0%

 

The following is a schedule, by years, of maturities of lease liabilities as of June 30, 2021:

 

(in thousands) Operating
Leases
 
The remainder of 2021 $151 
2022  300 
2023  297 
2024  87 
Thereafter  79 
Total undiscounted cash flows  914 
Less imputed interest $(159)
Present value of lease liabilities $755 

  

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Supplemental cash flow information related to leases are as follows:

 

(in thousands) Six Months Ended
June 30,
2021
  Six Months Ended
June 30,
2020
 
Cash paid for amounts included in the measurement of lease liabilities:      
Operating cash flows from operating leases $176  $171 
Operating cash flows from finance leases  4   2 
Financing cash flows from finance leases  (4)  12 

 

NOTE 16: EMPLOYEE RETENTION CREDITS

 

The CARES Act provides an employee retention credit (“ERC”) that is a refundable tax credit against certain employer taxes. On December 27, 2020, Congress enacted the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which amended and extended ERC availability under Section 2301 of the CARES Act. Before the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, businesses who were provided SBA PPP Loans under the CARES Act were ineligible for the ERC. Following enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, such businesses became retroactively eligible for the ERC.

 

As a result of the foregoing legislation, the Company is eligible to claim a refundable tax credit against the employer share of Social Security taxes equal to seventy percent (70%) of the qualified wages that the Company pays to employees between December 31, 2020 and June 30, 2021. Qualified wages are limited to $10 per employee per calendar quarter in 2021 for a maximum ERC per employee of $7 per calendar quarter in 2021.

 

As a result of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the Company is now eligible to make ERC claims for each quarter in 2020 and 2021, subject to the other eligibility requirements.

 

The ERC was extended and expanded in March 2021 through December 31, 2021, as part of the American Rescue Plan Act of 2021 (“ARPA”). Under the CARES Act, the amount of credit was fifty percent (50%) of qualified wages paid to the employee plus the employer cost to provide health benefits. Under the Consolidated Appropriations Act of 2021, eligible employers can claim a refundable tax credit against the employer share of Social Security taxes equal to seventy percent (70%) of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. The ARPA allows employers to retain a seventy percent (70%) credit for qualified wages paid between July 1, 2021, and December 31, 2021, including the cost to provide health benefits. 

 

The Company qualified for the ERC beginning on March 13, 2020 (the earliest eligibility date) through June 30, 2021 (the most recent assessment date).

 

During the three months ended June 30, 2021, the Company recorded an ERC totaling $1,237, representing $396, $412, and $429 for credits earned for wages paid in 2020, the first quarter of 2021, and the second quarter of 2021, respectively. The Company filed Form 941-X with the IRS for each quarter of 2020 and the first quarter of 2021. Credits for the second quarter of 2021 were claimed on the Company’s original Form 941. The Company has recorded these amounts as receivable within prepaid and other currents assets within the Condensed Consolidated Balance Sheet as of June 30, 2021.

 

During the three months ended June 30, 2021, the $1,237 of ERCs were included as a reduction in payroll taxes within the Condensed Consolidated Statement of Operations and allocated to the financial statement caption from which the employee taxes were originally incurred. As a result, the Company recorded a reduction in expenses of $400, $182, $147, and $508 in Cost of Goods – Services, Sales and Marketing Expenses, Research and Development Expenses, and General and Administrative Expenses, respectively, for the three months ended June 30, 2021.

 

The Company would qualify for an ERC for each remaining quarter during 2021 in which the Company experiences a “significant decline in gross receipts,” defined as quarterly gross receipts that are less than eighty percent (80%) of its gross receipts for the same calendar quarter in 2019.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements

 

The following discussion contains various forward-looking statements within the meaning of Section 21E of the Exchange Act of 1934, as amended. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. When used in the following discussion, the words “anticipates,” “believes,” “expects,” “intends,” “plans,” “estimates,” “projects,” should,” “may,” “propose,” and similar expressions (or the negative versions of such words or expressions), as they relate to us or our management, are intended to identify such forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated, and many of which are beyond our control. Factors that could cause actual results to differ materially from those anticipated are set forth under the caption “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2020 and Form 10-Q for the quarter ended March 31, 2021, as filed with the Securities and Exchange Commission on March 10, 2021 and May 17, 2021, respectively.

 

Our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking statements. Accordingly, we cannot be certain that any of the events anticipated by forward-looking statements will occur or, if any of them do occur, what impact they will have on us. We caution you to keep in mind the cautions and risks described in this document and to refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of this report. We do not undertake to update any forward-looking statement.

 

Overview

 

Creative Realities, Inc. is a Minnesota corporation that provides innovative digital marketing technology solutions to a broad range of companies, individual brands, enterprises, and organizations throughout the United States and in certain international markets. We have expertise in a broad range of existing and emerging digital marketing technologies across a variety of strategic vertical markets, as well as the related media management and distribution software platforms and networks, device and content management, product management, customized software service layers, systems, experiences, workflows, and integrated solutions. Our technology and solutions include: digital merchandising systems and omni-channel customer engagement systems; content creation, production and scheduling programs and systems; a comprehensive series of recurring maintenance, support, and field service offerings; interactive digital shopping assistants, advisors and kiosks; and, other interactive marketing technologies such as mobile, social media, point-of-sale transactions, beaconing and web-based media that enable our customers to transform how they engage with consumers.

 

Our main operations are conducted directly through Creative Realities, Inc., and under our wholly owned subsidiaries Allure Global Solutions, Inc., a Georgia corporation (“Allure”), and Creative Realities Canada, Inc., a Canadian corporation. Our other wholly owned subsidiaries, Creative Realities, LLC, a Delaware limited liability company, and ConeXus World Global, LLC, a Kentucky limited liability company, are effectively dormant.

 

We primarily generate revenue in our business by:

 

 consulting with our customers to determine the technologies and solutions required to achieve their specific goals, strategies and objectives;

 

 designing our customers’ digital marketing experiences, content and interfaces;

 

 engineering the systems architecture delivering the digital marketing experiences we design – both software and hardware – and integrating those systems into a customized, reliable and effective digital marketing experience;

 

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 managing the efficient, timely and cost-effective deployment of our digital marketing technology solutions for our customers;

 

 delivering and updating the content of our digital marketing technology solutions using a suite of advanced media, content and network management software products; and

 

 maintaining our customers’ digital marketing technology solutions by: providing content production and related services; creating additional software-based features and functionality; hosting the solutions; monitoring solution service levels; and responding to and/or managing remote or onsite field service maintenance, troubleshooting and support calls.

 

These activities generate revenue through: bundled-solution sales; consulting services, experience design, content development and production, software development, engineering, implementation, and field services; software license fees; and maintenance and support services related to our software, managed systems and solutions.

 

Recent Developments

 

COVID-19 Pandemic

 

In January 2020, an outbreak of a new strain of coronavirus, COVID-19, was identified in Wuhan, China. Through the first quarter of 2020, the disease became widespread around the world, and on March 11, 2020, the World Health Organization declared a pandemic. Thereafter, state and local authorities in the United States and worldwide have forced many businesses to temporarily reduce or cease operations to slow the spread of the COVID-19 pandemic.

 

As a result of the COVID-19 pandemic, we have experienced rapid and immediate deterioration in our business in each of our key vertical markets. The elective and forced closures of, and implementation of social distancing policies on, businesses across the United States has resulted in materially reduced demand for our services by our customers, as our customers purchase our products and services to engage with their end customers in a physical space through digital technology, particularly in our theater, sports arena and large entertainment markets. The reduced demand has resulted in customer orders being delayed. These conditions have resulted in downward revisions of our internal forecasts on current and future projected earnings and cash flows, resulting in a non-cash impairment loss of $10,646 recorded during the first quarter of 2020 and reduced liquidity as described below.

 

While we have experienced an intense curtail in current customer demand, our long-term outlook for the digital signage industry remains strong. We are seeing the digital signage industry experiencing continued consolidation, and believe that those companies able to scale and enhance profitability will emerge as the enterprise-level providers within our industry after the COVID-19 pandemic and consolidations.

 

Semiconductor Chip Shortage

 

The Company’s suppliers of digital displays, the primary hardware component in the Company’s digital systems, have informed the Company that, due to semiconductor chip shortages in the industry, such suppliers expect delays and potentially increased costs for the Company to obtain digital displays necessary to fulfill and install the Company’s digital solutions. Historically, such digital displays have been readily available for purchase and delivery, to be purchased by the Company from distributors from such distributor’s existing inventory. Such delays will likely result in a longer sales cycles and prolonged periods in which the Company will be able to recognize revenues compared to historical time periods. The increased costs for such displays may also reduce the margins in which the Company has received on account of the purchase and installation of such displays as part the Company’s digital signage product offerings. Although we believe that such shortage will be alleviated by the end of the calendar year, the Company is unable to confirm how long such delays may exist, the effect such delays and increased demand may have on the cost to procure such digital screens, or the adverse impacts on our financial results.

 

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Safe Space Solutions

 

On April 28, 2020, we announced the joint launch of an AI-integrated non-contact temperature inspection kiosk known as the Thermal Mirror with our partner, InReality, LLC (“InReality”), for use by businesses as COVID-19 related workplace restrictions are reduced or eliminated. Although we have experience in providing customers digital integration solutions, our launch of the Thermal Mirror involves the development, marketing and sale of a new product to new customers involving a joint effort with InReality. The product also uses hardware and technologies that have not been used with our other customers. Throughout the course of the remainder of 2020 and thus far through 2021, the Company and InReality have continued to develop incremental use cases and have launched a suite of Safe Space Solutions products addressing this market, each of which operate consistently with our primary business model in that they represent a sale of hardware and a SaaS-based subscription license services contract. During the three and six months ended June 30, 2021, the Company generated revenue of $419 and $1,438, respectively, from our Safe Space Solutions products and services (inclusive of the portion of revenue recognized during the three and six months ended June 30, 2021 related to annual contracts sold in prior periods). During the three and six months ended June 30, 2020, the Company generated revenue of $529 and $529, respectively, from of our Safe Space Solutions products and services (inclusive of the portion of revenue recognized during the three and six months ended June 30, 2020 related to annual contracts sold in prior periods).

 

Although these products and our launch have been successful, the Company retains some level of risk related to the ultimate recovery of our initial investment into the inventory acquired to launch and support these products.

 

Settlement of Seller Note

 

On May 13, 2021, the Company and Seller entered into a settlement agreement wherein neither party admitted liability, and the Company agreed to pay, and Seller agreed to accept, $100 as settlement in full for the outstanding balance of principal and accrued interest under the Amended and Restated Seller Note and a mutual release of all claims related to the Amended and Restated Seller Note and sale transaction under the Allure Purchase Agreement and all related agreements. See Note 8 Loans Payable to the Condensed Consolidated Financial Statements for additional details with respect to the transaction and related accounting.

 

Our Sources of Revenue

 

We primarily generate revenue through digital marketing solution sales, which include system hardware, professional and implementation services, software design and development, software licensing, deployment, and maintenance and support services. 

 

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We currently market and sell our technology and solutions primarily through our sales and business development personnel, but we also utilize agents, strategic partners, and lead generators who provide us with access to additional sales, business development and licensing opportunities.

 

Our Expenses

 

Our expenses are primarily comprised of three categories: sales and marketing, research and development, and general and administrative. Sales and marketing expenses include salaries and benefits for our sales, business development, solution management and marketing personnel, and commissions paid on sales. This category also includes amounts spent on marketing networking events, promotional materials, hardware and software to prospective new customers, including those expenses incurred in trade shows and product demonstrations, and other related expenses. Our research and development expenses represent the salaries and benefits of those individuals who develop and maintain our proprietary software platforms and other software applications we design and sell to our customers. Our general and administrative expenses consist of corporate overhead, including administrative salaries, real property lease payments, salaries and benefits for our corporate officers and other expenses such as legal and accounting fees.

 

Critical Accounting Policies and Estimates

 

The Company’s significant accounting policies are described in Note 2 Summary of Significant Accounting Policies of the Company’s Condensed Consolidated Financial Statements included elsewhere in this filing. The Company’s Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States. Certain accounting policies involve significant judgments, assumptions, and estimates by management that could have a material impact on the carrying value of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Our actual results could differ from those estimates. 

 

Results of Operations

 

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

 

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020 

 

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

 

  For the three months
ended June 30,
  Change 
  2021  2020     % 
Sales $3,277  $3,656  $(379)  -10%
Cost of sales  1,402   1,839   (437)  -24%
Gross profit  1,875   1,817   58   3%
Sales and marketing expenses  169   371   (202)  -54%
Research and development expenses  58   245   (187)  -76%
General and administrative expenses  1,666   1,960   (294)  -15%
Bad debt expense  49   505   (456)  -90%
Depreciation and amortization expense  344   380   (36)  -9%
Total operating expenses  2,286   3,461   (1,175)  -34%
Operating (loss)  (411)  (1,644)  1,233   -75%
Other income/(expenses):                
Interest expense  (182)  (260)  78   -30%
Change in fair value of Convertible Loan  -   (551)  551   -100%
Gain on settlement of debt  1,628   1   1,627   162,700%
Other income/(expense)  (3)  (1)  (2)  200%
Total other income/(expense)  1,443   (811)  2,254   278%
Net income/(loss) before income taxes  1,032   (2,455)  3,487   -142%
Provision from income taxes  (7)  (4)  (3)  75%
Net income/(loss) $1,025  $(2,459)  3,484   -142%

 

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Sales

 

Sales decreased by $379, or 10%, during the three months ended June 30, 2021 as compared to the same period in 2020 primarily driven by a reduction of $305 in hardware sales resulting from limited supply chain availability of semiconductor chips delaying the delivery of digital displays and media players to the Company. The supply disruption for digital displays prevented the Company from delivery of hardware and execution of installation activities during the quarter. As of June 30, 2021, the Company had customer purchase orders for equipment and installation activities in excess of $1,800 which were delayed as a result of product availability. The Company expects to experience continued disruptions and delays related to fulfillment of inventory purchases from vendors throughout the remainder of 2021, which may impact our results for the remainder of 2021. We expect a full recovery in the timely availability of equipment during the first half of 2022. During the three months ended June 30, 2021 and 2020, of our Safe Space Solutions products and services (inclusive of the portion of revenue recognized during the three months ended June 30, 2021 related to annual contracts sold in prior periods), were $419 and $529, respectively.

 

Gross Profit

 

Gross profit increased $58, or 3% during the three months ended June 30, 2021 as compared to the same period in 2020 driven by the decrease in sales but offset by an increase in gross profit margin. Gross profit margin increased to 57.2% in 2021 from 49.7% during the same period in 2020. The increase in gross profit margin is the result of a decrease in hardware revenue as a percentage of total revenue, which generates lower gross profit than services revenue. High gross profit margin from services revenues were driven by headcount reductions in personnel servicing customers as a result of cost reductions executed throughout 2020.

 

Sales and Marketing Expenses

 

Sales and marketing expenses generally include the salaries, taxes, and benefits of our sales and marketing personnel, as well as trade show activities, travel, and other related sales and marketing costs. Sales and marketing expenses decreased by $202, or 54%, in 2021 compared to 2020. The decrease was driven by $182 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the six months ended June 30, 2021. The remaining reduction was the result of reduced personnel costs, combined with reduced spend on trade show activity and related travel costs following the cancellation of several key industry events as a result of the COVID-19 pandemic. We anticipate our sales personnel will maintain a reduced level of travel costs as compared to 2019 during the extended COVID-19 pandemic period and utilize virtual meeting technology more commonly moving forward, but that these costs will increase as compared to 2020 during the second half of 2021.

  

Research and Development Expenses

 

Research and development expenses generally include personnel and development tools costs associated with the continued development of the Company’s content management systems and other related application development. Research and development decreased by $187, or 76%, in 2021 compared to 2020. The decrease was driven by $147 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the three months ended June 30, 2021. The remaining reduction was the result of reduced personnel costs.

  

General and Administrative Expenses

 

Total general and administrative expenses decreased by $294, or 15%, in 2021 compared to 2020. The decrease was driven by $508 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the six months ended June 30, 2021. Excluding the consideration of those tax credits recorded in the period, total general and administrative expenses increased $214, or 11%, during the six months ended June 30, 2021 as compared to the same period in 2020 driven primarily by an increase of $237 in non-cash stock compensation expenses from employee stock option awards with time and performance-based vesting.

 

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Bad Debt

 

Expenses related to the Company’s allowance for bad debts decreased by $456, or 90%, in 2021 compared to 2020. The 2020 increase was the result of recording a reserve of $502 related to a customer bankruptcy filing during the three months ended June 30, 2020. The Company ultimately recovered $555 from this customer during 2021.

 

Depreciation and Amortization Expenses

 

Depreciation and amortization expenses decreased by $36, or 9%, in 2021 compared to 2020. This decrease was the result of a trade name asset becoming fully amortized during 2020, while no amortization was recorded during the three months ended June 30, 2021.

 

Interest Expense; Change in fair value of Convertible Loan

 

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

 

As of June 30, 2021 and 2020, we updated our fair value analysis of the Convertible Loan, resulting in recognition of a $0 and $551 loss during the three months ended June 30, 2021 and 2020, respectively.

 

Gain on Settlement of Debt

 

On May 13, 2021, the Company and Seller entered into a settlement agreement wherein neither party admitted liability, and the Company agreed to pay, and Seller agreed to accept, $100 as settlement in full for the outstanding balance of principal and accrued interest under the Amended and Restated Seller Note and a mutual release of all claims related to the Amended and Restated Seller Note and sale transaction under the Allure Purchase Agreement and all related agreements.

 

As a result of this settlement, the full principal amount of the Amended and Restated Seller Note and the accrued interest have been eliminated, resulting in a gain in the Condensed Consolidated Financial statements of $1,624, representing $1,538 related to the Amended and Restated Seller Note and $86 of related interest thereon, during the three months ended June 30, 2021

 

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

 

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

 

  For the six months
ended June 30,
  Change 
  2021  2020     % 
Sales $8,281  $7,360  $921   13%
Cost of sales  4,172   3,936   236   6%
Gross profit  4,109   3,424   685   20%
Sales and marketing expenses  504   798   (294)  -37%
Research and development expenses  229   558   (329)  -59%
General and administrative expenses  3,775   4,473   (698)  -16%
Bad debt expense/(recovery)  (463)  848   (1,311)  -155%
Depreciation and amortization expense  688   746   (58)  -8%
Goodwill impairment  -   10,646   (10,646)  -100%
Total operating expenses  4,733   18,069   (13,336)  -74%
Operating (loss)  (624)  (14,645)  14,021   -96%
Other income/(expenses):                
Interest expense  (431)  (487)  56   -11%
Change in fair value of Convertible Loan  166   (702)  868   -124%
Gain on settlement of debt  3,193   41   3,152   7,688%
Other income/(expense)  1   -   1   100%
Total other income/(expense)  2,929   (1,148)  4,077   -355%
Net income/(loss) before income taxes  2,305   (15,793)  18,098   -115%
Provision from income taxes  (8)  151   (159)  -105%
Net income/(loss) $2,297  $(15,642)  17,939   -115%

 

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Sales

 

Sales increased by $921, or 13%, in the six months ended June 30, 2021 as compared to the same period in 2020 driven by sales of $1,438 during the six months ended June 30, 2021 of our Safe Space Solutions products and services (inclusive of the portion of revenue recognized during the six months ended June 30, 2021 related to annual contracts sold in prior periods), which launched in April 2020. Safe Space Solutions products had no sales in the three months ended March 31, 2020 and $529 during the three months ended June 30, 2020. The increase in sales during the period were constrained from further growth due to limited supply chain availability of semiconductor chips delaying the delivery of digital displays and media players to the Company. The supply disruption for digital displays prevented the Company from delivery of hardware and execution of installation activities during the quarter. As of June 30, 2021, the Company had customer purchase orders for equipment and installation activities in excess of $1,800 which were delayed as a result of product availability. The Company expects to experience continued disruptions and delays related to fulfillment of inventory purchases from vendors throughout the remainder of 2021, which may impact our results for the remainder of 2021. We expect a full recovery in the timely availability of equipment during the first half of 2022.

 

Gross Profit

 

Gross profit increased $685, or 20%, during the six months ended June 30, 2021 as compared to the same period in 2020, driven by both an increase in sales, which contributed $428 of incremental gross profit on a constant gross profit margin basis, and an increase in gross profit margin, which contributed $257 of incremental gross profit. Gross profit margin increased to 49.6% from 46.5% driven primarily by increased hardware margins of 32.3% in the six months ended June 30, 2021 as compared to 23.2% for the comparable period in 2020. The increases in hardware margin in the current year were driven by increased purchasing power with distributors as our purchases of digital displays have increased, driving a total increase in hardware revenue of $1,144, or 39%.

 

Sales and Marketing Expenses

 

Sales and marketing expenses generally include the salaries, taxes, and benefits of our sales and marketing personnel, as well as trade show activities, travel, and other related sales and marketing costs. Sales and marketing expenses decreased by $294, or 37%, in 2021 compared to 2020. The decrease was driven by $182 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the six months ended June 30, 2021. The remaining reduction was the result of reduced personnel costs, combined with reduced spend on trade show activity and related travel costs following the cancellation of several key industry events as a result of the COVID-19 pandemic. We anticipate our sales personnel will maintain a reduced level of travel costs as compared to 2019 during the extended COVID-19 pandemic period and utilize virtual meeting technology more commonly moving forward, but that these costs will increase as compared to 2020 during the second half of 2021.

  

Research and Development Expenses

 

Research and development expenses generally include personnel and development tools costs associated with the continued development of the Company’s content management systems and other related application development. Research and development decreased by $329, or 59%, in 2021 compared to 2020. The decrease was driven by $147 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the six months ended June 30, 2021. The remaining reduction was the result of reduced personnel costs following the reduction of personnel and salary reductions implemented throughout 2020.

  

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General and Administrative Expenses

 

Total general and administrative expenses decreased by $698, or 16%, in 2021 compared to 2020. The decrease was driven by $508 of Employee Retention Credits related to the retention and payment of salaries to sales personnel throughout 2020 and the six months ended June 30, 2021. Excluding the consideration of those Employee Retention Credits recorded in the period, total general and administrative expenses decreased $190, or 4%, during the six months ended June 30, 2021 as compared to the same period in 2020 because of reductions of (a) $335 in personnel costs, including salaries, benefits, and travel-related expenses, (b) $209 in rent expense following closure, downsizing, or restructuring of four leases during 2020, and (c) reductions in legal expenses of $152 following settlement of the Amended and Restated Seller Note, partially offset by an increase in stock compensation amortization expense of $726 related to incremental employee and directors’ awards granted during 2020 which are being amortized over a nineteen (19) month remaining vesting period based on the grant date fair value calculated using the Black Scholes method. Personnel costs were reduced following completion of a reduction-in-force and salary reductions for remaining personnel in March 2020.

 

Bad Debt

 

Expenses related to the Company’s allowance for bad debts decreased by $1,311, or 155%, for the six months ended June 30, 2021 compared to 2020. This decrease was primarily driven by a cash recovery of $555 related to a customer bankruptcy for which the Company previously recorded a reserve during the three months ended June 30, 2020.

 

Goodwill impairment

 

See Note 7 Intangible Assets, Including Goodwill to the Condensed Consolidated Financial Statements for a discussion of the Company’s interim impairment test and the non-cash impairment charge recorded.

 

Depreciation and Amortization Expenses

 

Depreciation and amortization expenses decreased by $58, or 8%, in 2021 compared to 2020. This decrease was the result of a trade name asset becoming fully amortized during 2020, while no amortization was recorded during the six months ended June 30, 2021.

 

Interest Expense; Change in fair value of Convertible Loan

 

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

 

As of June 30, 2021 and 2020, we updated our fair value analysis of the Convertible Loan, resulting in recognition of a $0 and $702 loss during the six months ended June 30, 2021 and 2020, respectively.

 

Gain on Settlement of Debt

 

On January 11, 2021, the Company received a notice from Old National Bank regarding forgiveness of the loan in the principal amount of $1,552 (the “PPP Loan”) that was made pursuant to the Small Business Administration Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act of 2020. According to such notice, the full principal amount of the PPP Loan and the accrued interest have been forgiven, resulting in a gain of $1,552 during the three months ended March 31, 2021.

 

On May 13, 2021, the Company and Seller entered into a settlement agreement wherein neither party admitted liability, and the Company agreed to pay, and Seller agreed to accept, $100 as settlement in full for the outstanding balance of principal and accrued interest under the Amended and Restated Seller Note and a mutual release of all claims related to the Amended and Restated Seller Note and sale transaction under the Allure Purchase Agreement and all related agreements.

 

As a result of this settlement, the full principal amount of the Amended and Restated Seller Note and the accrued interest have been eliminated, resulting in a gain in the Condensed Consolidated Financial statements of $1,624, representing $1,538 related to the Amended and Restated Seller Note and $86 of related interest thereon, during the three months ended June 30, 2021.

 

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Summary Unaudited Quarterly Financial Information

 

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

 

  Quarters Ended 
Quarters ended June 30,
2021
  March 31,
2021
  December 31,
2020
  September 30,
2020
  June 30,
2020
 
Net sales $3,277  $5,004  $4,990  $5,107  $3,656 
Cost of sales  1,402   2,770   2,737   2,663   1,839 
Gross profit  1,875   2,234   2,253   2,444   1,817 
Operating expenses, excluding depreciation and amortization  1,942   2,103   2,886   2,489   3,081 
Depreciation/amortization  344   344   351   377   380 
Operating income (loss)  (411)  (213)  (1,002)  (422)  (1,644)
Other expenses/(income)  1,443   (1,486)  (379)  164   811 
Income tax expense/(benefit)  7   1   (6)  (1)  4 
Net income (loss)  1,025  $1,272  $(617) $(585)  (2,459)

 

Supplemental Operating Results on a Non-GAAP Basis

 

The following non-GAAP data, which adjusts for the categories of expenses described below, is a non-GAAP financial measure. Our management believes that this non-GAAP financial measure is useful information for investors, shareholders and other stakeholders of the Company in evaluating our results of operations on an ongoing basis. We believe that earnings before interest, taxes, depreciation, and amortization (“EBITDA”) is a performance measure and not a liquidity measure, and therefore a reconciliation between net loss/income and EBITDA and Adjusted EBITDA, which is calculated by removing the impact of non-recurring and primarily non-cash transactions from EBITDA, has been provided. Neither EBITDA nor Adjusted EBITDA should be considered as an alternative to net loss/income as an indicator of performance, or as an alternative to cash flows from operating activities as an indicator of cash flows, in each case as determined in accordance with GAAP, or as a measure of liquidity. In addition, neither EBITDA nor Adjusted EBITDA takes into account changes in certain assets and liabilities as well as interest and income taxes that can affect cash flows. We do not intend the presentation of these non-GAAP measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP. These non-GAAP measures should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. 

 

  Quarters Ended 
  June 30,  March 31,  December 31,  September 30,  June 30, 
Quarters ended 2021  2021  2020  2020  2020 
GAAP net income (loss) $1,025  $1,272  $(617) $(585) $(2,459)
Interest expense:                    
Amortization of debt discount  29   72   85   85   84 
Other interest, net  153   177   186   179   176 
Depreciation/amortization:                    
Amortization of intangible assets  139   140   139   161   158 
Amortization of finance lease assets  -   4   3   5   5 
Amortization of share-based awards  329   512   250   248   100 
Depreciation of property, equipment & software  205   200   209   212   216 
Income tax expense/(benefit)  7   1   (6)  (1)  4 
EBITDA $1,887   2,378   249  $304  $(1,716)
Adjustments                    
Change in fair value of Special Loan  -   (166)  (609)  -   551 
Gain on settlement of obligations  (1,628)  (1,565)  (54)  (114)  (1)
Loss on disposal of assets  -   -   -   13   - 
Loss on lease termination  -   -   18   -   - 
Stock-based compensation – Director grants  27   27   27   25   19 
Adjusted EBITDA $286   674   (369) $228  $(1,147)

  

Liquidity and Capital Resources

 

See Note 1 Nature of Organization and Operations to the accompanying Condensed Consolidated Financial Statements for a detailed discussion of liquidity and financial resources.

 

Operating Activities

 

The cash flows used in operating activities were $363 and $2,915 for the six months ended June 30, 2021 2020, respectively. We produced net income during the six months ended June 30, 2021 of $2,297, which was primarily reduced via addback of the gain on forgiveness of the Company’s PPP Loan in the amount of $1,552 and gain on the settlement of obligations in the amount of $1,624, representing $1,538 related to the Seller Note and $86 of related interest thereon, during the three months ended June 30, 2021.

 

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Investing Activities

 

Net cash used in investing activities during the six months ended June 30, 2021 was $204 compared to $408 during the same period in 2020. The use of cash in both periods represents payments made for capital assets, primarily related to the capitalization of both internal and external software development. We currently do not have any material commitments for capital expenditures as of June 30, 2021; however, we anticipate an increase in our capital expenditures of approximately $900 in excess of our historical trends throughout the balance of 2021 to maintain and enhance the software platform for our customers and to enhance revenue generating activities through the platform.

  

Financing Activities

 

Net cash provided by financing activities during the six months ended June, 2021 and 2020 were $1,745 and $1,659, respectively. On February 18, 2021, the Company entered into a securities purchase agreement with an institutional investor for the issuance and sale of the Company’s common stock. The net proceeds from the Offering after paying estimated offering expenses were approximately $1,849. These proceeds were partially offset by the settlement payment of $100 on the Seller Note. The 2020 proceeds were driven by the Company’s receipt of a $1,552 Paycheck Protection Program loan and the exercise of 27,600 warrants during the three months ended June 30, 2020.

 

On March 7, 2021, the Company refinanced its current debt facilities with Slipstream Communications, LLC (“Slipstream”), pursuant to an Amended and Restated Credit and Security Agreement (the “Credit Agreement”). The debt facilities continue to be fully secured by all assets of the Company. The maturity date (“Maturity Date”) on the outstanding debt and new debt was extended to March 31, 2023. The Credit Agreement (i) provides $1,000 of availability under a line of credit (the “Line of Credit”), (ii) consolidates our existing term and revolving line of credit facilities into a new term loan (the “New Term Loan”) having an aggregate principal balance of approximately $4,550 (including a 3.0% issuance fee capitalized into the principal balance), (iii) increases the outstanding special convertible term loan (the “Convertible Loan”) to approximately $2,280 (including a 3.0% issuance fee capitalized into the principal balance), and (iv) extinguishes the outstanding obligations owed with respect to a $264 existing disbursed escrow loan in exchange for shares of the Company’s common stock (the “Disbursed Escrow Conversion Shares”), valued at $2.718 per share (the trailing 10-day VWAP as reported on the Nasdaq Capital Market as of the date of execution of the Credit Agreement). The Line of Credit and Convertible Loan accrue interest at 10% per year, and the New Term Loan accrues interest at 8% per year.

 

The New Term Loan requires no principal payments until the Maturity Date, and interest payments are payable on the first day of each month until the Maturity Date. All interest payments owed prior to October 1, 2021 are payable as PIK payments, or increases to the principal balance of the New Term Loan only.

 

The Line of Credit and Convertible Loan require payments of accrued interest payable on the first day of each month through April 1, 2022. All such interest payments made prior to October 1, 2021 are payable as PIK payments, or increases to the principal balances under the Line of Credit and Convertible Loan only. No principal payments are owed under the Line of Credit or Convertible Loan until April 1, 2022, at which time all principal and interest on each of the Line of Credit and Convertible Loan will be paid in monthly installments until the Maturity Date to fully amortize outstanding principal by the Maturity Date.

  

All payments of interest (other than PIK payments) and principal on the Line of Credit and Convertible Loan may be paid, in the Company’s sole discretion, in shares of the Company’s Common Stock (the “Payment Shares,” and together with the Disbursed Escrow Conversion Shares, the “Shares”). The Payment Shares will be valued on a per-Share basis at 70% of the VWAP of the Company’s shares of common stock as reported on the Nasdaq Capital Market for the 10 trading days immediately prior to the date such payment is due; provided that the Payment Shares shall not be valued below $0.50 per Share (the “Share Price”).

 

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The Credit Agreement limits the Company’s ability to issue Shares as follows (the “Exchange Limitations”): (1) The total number of Shares that may be issued under the Credit Agreement will be limited to 19.99% of the Company’s outstanding shares of common stock on the date the Credit Agreement is signed (the “Exchange Cap”), unless stockholder approval is obtained to issue shares in excess of the Exchange Cap; (2) if Slipstream and its affiliates (the “Slipstream Group”) beneficially own the largest ownership position of shares of Company common stock immediately prior to the proposed issuance of Payment Shares and such shares are less than 19.99% of the then-issued and outstanding shares of Company common stock, the issuance of such Payment Shares will not cause the Slipstream Group to beneficially own in excess of 19.99% of the issued and outstanding shares of Company common stock after such issuance unless stockholder approval is obtained for ownership in excess of 19.99%; and (3) if the Slipstream Group does not beneficially own the largest ownership position of shares of Company common stock immediately prior to the proposed issuance of Payment Shares, the Company may not issue Payment Shares to the extent that such issuance would result in Slipstream Group beneficially owning more than 19.99% of the then issued and outstanding shares of Company common stock unless (A) such ownership would not be the largest ownership position in the Company, or (B) stockholder approval is obtained for ownership in excess of 19.99%. On May 17, 2021, the Company’s stockholders approved the issuance of Shares in excess of the Exchange Limitations.

 

Off-Balance Sheet Arrangements

 

During the three and six months ended June 30, 2021, we did not engage in any off-balance sheet arrangements set forth in Item 303(a)(4) of Regulation S-K.

  

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of June 30, 2021, and designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

As a smaller reporting company, we are not required to provide the information required by this Item; however, the discussion of our business and operations should be read together with the Risk Factors set forth in our Annual Report on Form 10-K filed with the SEC on March 10, 2021 and our Quarterly Report on Form 10-Q filed with the SEC on May 17, 2021. Such risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flow, strategies or prospects in a material and adverse manner.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Earnings Release

 

On August 16, 2021, the Company issued a press release announcing its financial condition and results of operations for the three months ended June 30, 2021. A copy of the press release is furnished as Exhibit 99.1 and is incorporated by reference into this Item 5 in lieu of separately furnishing such press release under Item 2.02 of Form 8-K. This disclosure, including Exhibit 99.1 hereto, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any of the Company’s filings under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.

 

Item 6. Exhibits

 

Exhibit No. Description
   
31.1 Chief Executive Officer Certification pursuant to Exchange Act Rule 13a-14(a).
   
31.2 Chief Financial Officer Certification pursuant to Exchange Act Rule 13a-14(a).
   
32.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350.
   
32.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350.
   
99.1 Press release dated August 16, 2021
   
101.INS Inline XBRL Instance Document
   
101.SCH Inline XBRL Taxonomy Extension Schema.
   
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase.
   
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase.
   
101.LAB Inline XBRL Taxonomy Extension Label Linkbase.
   
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase.
   
104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 Creative Realities, Inc.
   
Date: August 16, 2021By /s/ Richard Mills
  Richard Mills
  Chief Executive Officer

 

 By /s/ Will Logan
  Will Logan
  Chief Financial Officer

 

 

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