PART 1. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis. [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and shareholders' equity, along with detailed notes explaining the company's accounting policies, financial condition, and specific transactions for the periods ended June 30, 2020 and 2019. [Condensed Consolidated Balance Sheets](index=3&type=section&id=CONDENSED%20CONSOLIDATED%20BALANCE%20SHEETS) This section presents the company's financial position, including assets, liabilities, and shareholders' equity, as of June 30, 2020, and December 31, 2019. Condensed Consolidated Balance Sheets (in thousands) | Item | June 30, 2020 | December 31, 2019 | Change (2020 vs 2019) | | :---------------------------------- | :------------ | :---------------- | :-------------------- | | Total Assets | $21,786 | $33,976 | -$12,190 | | Total Current Assets | $7,031 | $7,982 | -$951 | | Goodwill | $7,525 | $18,171 | -$10,646 | | Total Liabilities | $18,630 | $15,468 | +$3,162 | | Total Current Liabilities | $16,242 | $10,431 | +$5,811 | | Total Shareholders' Equity | $3,156 | $18,508 | -$15,352 | - Total assets decreased significantly by **$12,190 thousand**, primarily driven by a **$10,646 thousand** reduction in goodwill due to impairment[6](index=6&type=chunk) - Total liabilities increased by **$3,162 thousand**, with current liabilities seeing a substantial increase of **$5,811 thousand**, indicating a shift towards shorter-term obligations[6](index=6&type=chunk) - Shareholders' equity decreased by **$15,352 thousand**, largely due to the accumulated deficit increasing from **$(35,642) thousand** to **$(51,284) thousand**[6](index=6&type=chunk) [Condensed Consolidated Statements of Operations](index=4&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS) This section details the company's revenues, expenses, and net income or loss for the three and six months ended June 30, 2020, and 2019. Condensed Consolidated Statements of Operations (in thousands, except per share amounts) | Item | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | Change (YoY) | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | Change (YoY) | | :-------------------------------------- | :--------------------------- | :--------------------------- | :----------- | :--------------------------- | :--------------------------- | :----------- | | Total Sales | $3,656 | $9,314 | -60.7% | $7,360 | $18,798 | -60.9% | | Gross Profit | $1,817 | $4,228 | -57.0% | $3,424 | $7,909 | -56.7% | | Operating Income/(Loss) | $(1,644) | $495 | -432.1% | $(14,645) | $530 | -2863.2% | | Net Income/(Loss) | $(2,459) | $417 | -690.2% | $(15,642) | $233 | -6813.3% | | Basic EPS | $(0.25) | $0.04 | -725.0% | $(1.59) | $0.02 | -8050.0% | | Diluted EPS | $(0.25) | $0.04 | -725.0% | $(1.59) | $0.02 | -8050.0% | - Total sales decreased by approximately **61%** for both the three and six months ended June 30, 2020, primarily due to the non-recurrence of significant software license revenue from 2019 and reduced demand from the COVID-19 pandemic[8](index=8&type=chunk)[176](index=176&type=chunk)[187](index=187&type=chunk) - The company reported substantial net losses of **$(2,459) thousand** and **$(15,642) thousand** for the three and six months ended June 30, 2020, respectively, a significant decline from net incomes in the prior year periods, largely impacted by a goodwill impairment charge of **$10,646 thousand**[8](index=8&type=chunk)[91](index=91&type=chunk)[186](index=186&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=5&type=section&id=CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) This section outlines the company's cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2020, and 2019. Condensed Consolidated Statements of Cash Flows (in thousands) | Activity | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | Change (YoY) | | :-------------------------------- | :--------------------------- | :--------------------------- | :----------- | | Net Cash Used in Operating Activities | $(2,915) | $(736) | -296.0% | | Net Cash Used in Investing Activities | $(408) | $(172) | -137.2% | | Net Cash Provided by Financing Activities | $1,659 | $14 | +11750.0% | | Increase/(Decrease) in Cash and Cash Equivalents | $(1,664) | $(894) | -86.1% | | Cash and Cash Equivalents, End of Period | $870 | $1,824 | -52.3% | - Net cash used in operating activities increased significantly to **$(2,915) thousand** for the six months ended June 30, 2020, primarily due to the net loss and increased inventory, partially offset by non-cash charges and improved collections[12](index=12&type=chunk)[215](index=215&type=chunk) - Net cash provided by financing activities saw a substantial increase to **$1,659 thousand**, driven by a **$1,552 thousand** Paycheck Protection Program loan and warrant exercises[12](index=12&type=chunk)[218](index=218&type=chunk) [Consolidated Statements of Shareholders' Equity](index=6&type=section&id=CONSOLIDATED%20STATEMENTS%20OF%20SHAREHOLDERS'%20EQUITY) This section presents changes in the company's shareholders' equity, including common stock, additional paid-in capital, and accumulated deficit, for the six months ended June 30, 2020. Consolidated Statements of Shareholders' Equity (in thousands, except shares) | Item | Balance as of Dec 31, 2019 | 6 Months Ended June 30, 2020 | Balance as of June 30, 2020 | | :-------------------------------- | :------------------------- | :--------------------------- | :-------------------------- | | Common Shares Outstanding | 9,774,546 | +79,977 | 9,854,623 | | Common Stock Amount | $98 | $0 | $98 | | Additional Paid-in Capital | $54,052 | +$290 | $54,342 | | Accumulated Deficit | $(35,642) | $(15,642) | $(51,284) | | Total Shareholders' Equity | $18,508 | $(15,352) | $3,156 | - Total shareholders' equity decreased significantly by **$15,352 thousand** from December 31, 2019, to June 30, 2020, primarily due to a net loss of **$(15,642) thousand**[14](index=14&type=chunk) - Additional paid-in capital increased by **$290 thousand**, driven by stock-based compensation, shares issued to directors, and warrant exercises[14](index=14&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=7&type=section&id=NOTES%20TO%20CONDENSED%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements. [NOTE 1: Nature of Organization and Operations](index=7&type=section&id=NOTE%201:%20NATURE%20OF%20ORGANIZATION%20AND%20OPERATIONS) This note describes the company's core business in digital marketing technology, the impact of the COVID-19 pandemic on its operations and financial condition, and recent efforts to secure liquidity through capital markets and government programs. - Creative Realities, Inc. provides digital marketing technology and solutions to retail companies and organizations, with expertise in various digital marketing technologies and related software platforms[18](index=18&type=chunk) - The company experienced rapid and immediate deterioration in its short-term business due to the COVID-19 pandemic, leading to reduced demand, delayed projects, and slowed cash flows, particularly in theater, sports arena, and large entertainment markets[24](index=24&type=chunk)[158](index=158&type=chunk)[202](index=202&type=chunk) - To address liquidity concerns, the company implemented cost-cutting measures, launched a new AI-integrated non-contact temperature inspection kiosk (Thermal Mirror), secured a **$1,552 thousand** Paycheck Protection Program loan, and entered into a sales agreement with Roth Capital Partners for up to **$8,000 thousand** in common stock sales[25](index=25&type=chunk)[26](index=26&type=chunk)[28](index=28&type=chunk)[31](index=31&type=chunk)[160](index=160&type=chunk)[162](index=162&type=chunk)[165](index=165&type=chunk)[204](index=204&type=chunk)[205](index=205&type=chunk)[208](index=208&type=chunk) [NOTE 2: Summary of Significant Accounting Policies](index=11&type=section&id=NOTE%202:%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This note outlines the significant accounting policies applied in preparing the condensed consolidated financial statements, including revenue recognition, inventory valuation, impairment of long-lived assets, income taxes, goodwill, use of estimates, and lease accounting. - Revenue is recognized in accordance with ASC 606, applying a five-step model, allocating transaction price to performance obligations based on standalone selling prices, and recognizing revenue when control of goods or services is transferred[42](index=42&type=chunk)[44](index=44&type=chunk)[46](index=46&type=chunk) - Inventories are stated at the lower of cost or market (net realizable value) using the first-in, first-out (FIFO) method, consisting of raw materials, inventory on consignment, and work-in-process[49](index=49&type=chunk)[50](index=50&type=chunk) - The company accounts for leases under ASU No. 2016-02 (Topic 842), recognizing Right-of-Use (ROU) assets and liabilities at commencement based on the present value of remaining lease payments, using the incremental borrowing rate[57](index=57&type=chunk)[58](index=58&type=chunk) [NOTE 3: Recently Issued Accounting Pronouncements](index=14&type=section&id=NOTE%203:%20RECENTLY%20ISSUED%20ACCOUNTING%20PRONOUNCEMENTS) This note details the recently adopted and not yet adopted accounting pronouncements, including ASU 2018-15 and ASU 2018-13, which had no material impact, and ASU 2019-12 and ASU 2016-13, which are currently being evaluated for future impact. - The company adopted ASU 2018-15 (Cloud Computing Arrangement Costs) and ASU 2018-13 (Fair Value Measurement Disclosures) on January 1, 2020, with no material impact on its financial statements[61](index=61&type=chunk)[62](index=62&type=chunk) - The company is currently evaluating the impact of ASU 2019-12 (Simplifying Income Taxes), effective in Q1 2021, and ASU No. 2016-13 (Financial Instruments—Credit Losses), effective after December 15, 2022[63](index=63&type=chunk)[64](index=64&type=chunk) [NOTE 4: Revenue Recognition (Detailed)](index=14&type=section&id=NOTE%204:%20REVENUE%20RECOGNITION) This note disaggregates the company's revenue by major source, including hardware sales, installation services, software development, software as a service, and maintenance and support services, detailing their recognition methods. Revenue by Major Source (in thousands) | Revenue Source | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :-------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Hardware | $1,601 | $1,654 | $2,968 | $3,295 | | Installation Services | $463 | $1,791 | $1,332 | $4,163 | | Software Development Services | $37 | $4,259 | $179 | $8,235 | | Managed Services | $1,555 | $1,610 | $2,881 | $3,105 | | **Total Sales** | **$3,656** | **$9,314** | **$7,360** | **$18,798** | - Software Development Services revenue experienced a drastic decline, from **$4,259 thousand** to **$37 thousand** for the three months ended June 30, 2020, and from **$8,235 thousand** to **$179 thousand** for the six months ended June 30, 2020[65](index=65&type=chunk) - Installation Services revenue also significantly decreased, from **$1,791 thousand** to **$463 thousand** for the three months, and from **$4,163 thousand** to **$1,332 thousand** for the six months ended June 30, 2020[65](index=65&type=chunk) [NOTE 5: Fair Value Measurement](index=16&type=section&id=NOTE%205:%20FAIR%20VALUE%20MEASUREMENT) This note explains the company's fair value measurement hierarchy (Level 1, 2, 3) and its application to financial assets and liabilities, specifically detailing the valuation of warrant liabilities, earnout liabilities, and the Special Loan. - The company uses a three-level hierarchy for fair value measurements, with Level 3 valuations based on unobservable inputs and management judgment[77](index=77&type=chunk)[78](index=78&type=chunk)[83](index=83&type=chunk) - The fair value of warrant liabilities decreased to **$0** as of June 30, 2019, as all outstanding warrants classified as liabilities expired[79](index=79&type=chunk) - A **$551 thousand** and **$702 thousand** loss was recognized for the three and six months ended June 30, 2020, respectively, from the change in fair value of the Special Loan, which is a Level 3 liability[81](index=81&type=chunk) [NOTE 6: Supplemental Cash Flow Statement Information](index=16&type=section&id=NOTE%206:%20SUPPLEMENTAL%20CASH%20FLOW%20STATEMENT%20INFORMATION) This note provides supplemental cash flow information, including non-cash investing and financing activities and cash paid for interest and income taxes. Supplemental Cash Flow Information (in thousands) | Item | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :------------------------------------------------ | :--------------------------- | :--------------------------- | | Cash paid for Interest | $0 | $181 | | Cash paid for Income taxes, net | $2 | $0 | | Right of offset settlement of Amended and Restated Seller Note | $0 | $498 | - Cash paid for interest decreased significantly from **$181 thousand** in 2019 to **$0** in 2020 for the six-month period, reflecting changes in loan payment terms[82](index=82&type=chunk) [NOTE 7: Intangible Assets, Including Goodwill](index=17&type=section&id=NOTE%207:%20INTANGIBLE%20ASSETS,%20INCLUDING%20GOODWILL) This note details the company's intangible assets and goodwill, including their carrying amounts, amortization, and the significant goodwill impairment loss recognized due to the COVID-19 pandemic's impact on cash flow projections. Intangible Assets (in thousands) | Item | June 30, 2020 Net Book Value | December 31, 2019 Net Book Value | | :---------------------------------- | :--------------------------- | :--------------------------- | | Technology platform | $1,362 | $1,488 | | Customer relationships | $2,555 | $2,651 | | Trademarks and trade names | $173 | $268 | | **Total Net Book Value** | **$4,090** | **$4,407** | Goodwill (in thousands) | Item | Amount | | :---------------------------------- | :------- | | Balance as of December 31, 2019 | $18,171 | | Adjustments due to impairment loss | $(10,646) | | Balance as of June 30, 2020 | $7,525 | - A non-cash goodwill impairment loss of **$10,646 thousand** was recorded during the three months ended March 31, 2020, due to reduced cash flow projections and a significant decline in market capitalization resulting from the COVID-19 pandemic[87](index=87&type=chunk)[91](index=91&type=chunk) - The fair value of the reporting unit was estimated using the income approach with a discount rate of **15.3%** as of March 31, 2020[90](index=90&type=chunk) [NOTE 8: Loans Payable](index=18&type=section&id=NOTE%208:%20LOANS%20PAYABLE) This note provides a detailed breakdown of the company's various loan obligations, including the Paycheck Protection Program loan, the Loan and Security Agreement with Slipstream, and amendments that modified interest rates and conversion terms, as well as the disputed Amended and Restated Seller Note. Outstanding Debt (in thousands) | Debt Type | Principal (June 30, 2020) | Maturity Date | Interest Rate | | :------------------------------------------------ | :------------------------ | :------------ | :------------ | | Secured Disbursed Escrow Promissory Note | $264 | 6/30/2021 | 0.0% | | Secured Revolving Promissory Note | $1,032 | 6/30/2021 | 10.0% | | Term Loan | $3,096 | 6/30/2021 | 10.0% | | Amended and Restated Seller Note | $1,637 | 2/15/2020 | 3.5% | | Secured Convertible Special Loan Promissory Note | $2,773 | 6/30/2021 (Mandatory conversion by 10/1/2020) | 10.0% | | Paycheck Protection Program Loan | $1,552 | 4/27/2022 | 1.0% | | **Total Debt, Gross** | **$10,354** | | | - The company received a **$1,552 thousand** unsecured loan under the Paycheck Protection Program (PPP) on April 27, 2020, with a **1%** interest rate and potential for forgiveness[31](index=31&type=chunk)[100](index=100&type=chunk) - The Eighth Amendment to the Loan and Security Agreement, effective April 1, 2020, increased interest rates on Term, Revolving, and Special Loans from **8%** to **10%**, with interest on term and revolving loans payable in-kind until January 1, 2021, and special loan interest payable in-kind indefinitely[37](index=37&type=chunk)[103](index=103&type=chunk) - The Amended and Restated Seller Note of **$1,637 thousand**, due February 20, 2020, remains unpaid due to an arbitration demand filed by the company against the seller for breach of contract and fraudulent misrepresentation[95](index=95&type=chunk)[114](index=114&type=chunk)[118](index=118&type=chunk) [NOTE 9: Commitments and Contingencies](index=23&type=section&id=NOTE%209:%20COMMITMENTS%20AND%20CONTINGENCIES) This note outlines the company's legal proceedings, including lawsuits against a supplier and by a customer related to equipment installations, and details employee-related cost-cutting measures implemented in response to the COVID-19 pandemic. - The company is involved in litigation, including a suit filed against a supplier for breach of contract and a demand from an Allure customer for **$3,200 thousand** related to alleged hardware failures, with outcomes currently unclear[115](index=115&type=chunk)[116](index=116&type=chunk) - In response to COVID-19, the company implemented cost-control measures, including a **20%** salary reduction for its CEO and CFO for six months and a reduction-in-force resulting in **$135 thousand** in one-time termination benefits paid during Q2 2020[120](index=120&type=chunk)[122](index=122&type=chunk) [NOTE 10: Related Party Transactions](index=24&type=section&id=NOTE%2010:%20RELATED%20PARTY%20TRANSACTIONS) This note discloses transactions with 33 Degrees Convenience Connect, Inc., a related party, including sales of hardware and services and outstanding accounts receivable. Sales to 33 Degrees (Related Party) (in thousands) | Period | Sales to 33 Degrees | % of Consolidated Revenue | | :--------------------------- | :------------------ | :------------------------ | | 3 Months Ended June 30, 2020 | $291 | 8.0% | | 3 Months Ended June 30, 2019 | $275 | 3.0% | | 6 Months Ended June 30, 2020 | $791 | 10.7% | | 6 Months Ended June 30, 2019 | $470 | 2.5% | Accounts Receivable from 33 Degrees (in thousands) | Date | Accounts Receivable | % of Consolidated Accounts Receivable | | :--------------------------- | :------------------ | :------------------------------------ | | June 30, 2020 | $28 | 0.8% | | December 31, 2019 | $1 | 0.0% | - Sales to 33 Degrees, a related party, increased significantly as a percentage of consolidated revenue, reaching **8.0%** for the three months and **10.7%** for the six months ended June 30, 2020[125](index=125&type=chunk) [NOTE 11: Income Taxes](index=24&type=section&id=NOTE%2011:%20INCOME%20TAXES) This note discusses the company's deferred tax assets, primarily related to net operating loss (NOL) carryforwards, and the application of a full valuation allowance due to a history of losses and the impact of goodwill impairment. - The company has substantial net operating loss (NOL) carryforwards, but their usage is limited by IRC Section 382[127](index=127&type=chunk) - A full valuation allowance is maintained against the net deferred tax assets due to the company's history of losses[127](index=127&type=chunk) - The net deferred tax assets totaled **$0** as of June 30, 2020, after a valuation allowance, a reduction from **$175 thousand** at December 31, 2019, primarily due to the goodwill impairment adjusting the deferred tax impact[128](index=128&type=chunk) [NOTE 12: Warrants](index=24&type=section&id=NOTE%2012:%20WARRANTS) This note provides a summary of the company's outstanding equity warrants, including their number, weighted average exercise price, and remaining contractual life. Summary of Outstanding Equity Warrants | Item | Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | | :-------------------------- | :----------------- | :------------------------------ | :---------------------------------------- | | Balance January 1, 2020 | 4,733,028 | $4.83 | 3.41 years | | Warrants issued | (27,600) | $4.38 | - | | Warrants expired | (89,238) | $9.49 | - | | **Balance June 30, 2020** | **4,616,190** | **$4.74** | **2.97 years** | - The number of outstanding warrants decreased from **4,733,028** at January 1, 2020, to **4,616,190** at June 30, 2020, due to expirations and exercises[129](index=129&type=chunk) [NOTE 13: Stock-Based Compensation](index=25&type=section&id=NOTE%2013:%20STOCK-BASED%20COMPENSATION) This note details the company's stock-based compensation plans, including the granting of time-vesting and performance-vesting options, their valuation using the Black-Scholes model, and the associated compensation expense recognized. Summary of Outstanding Options (June 30, 2020) | Option Type | Number Outstanding | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life | | :-------------------------- | :----------------- | :------------------------------ | :---------------------------------------- | | Time Vesting Options | 1,893,809 | $3.44 | 9.25 years | | Performance Vesting Options | 800,000 | $2.53 | 9.93 years | Stock-Based Compensation Expense (in thousands) | Period | Amount | | :--------------------------- | :----- | | 3 Months Ended June 30, 2020 | $19 | | 6 Months Ended June 30, 2020 | $119 | | 3 Months Ended June 30, 2019 | $41 | | 6 Months Ended June 30, 2019 | $83 | - On June 1, 2020, the company granted **2,380,000** options, including **1,580,000** time-vesting options and **800,000** performance-vesting options, with an exercise price of **$2.53** and a fair value of **$1.87** per option, valued using the Black-Scholes model[134](index=134&type=chunk)[135](index=135&type=chunk)[137](index=137&type=chunk)[138](index=138&type=chunk) - As of June 30, 2020, there was **$3,014 thousand** of unrecognized compensation expense for time-vesting awards and **$1,499 thousand** for performance-vesting awards, with performance-based expense recognized only if targets are probable[141](index=141&type=chunk) [NOTE 14: Significant Customers/Vendors](index=26&type=section&id=NOTE%2014:%20SIGNIFICANT%20CUSTOMERS/VENDORS) This note highlights the company's concentration risk by identifying significant customers and vendors that account for a material portion of accounts receivable, revenue, and accounts payable. Significant Customers (Revenue Concentration) | Period | Number of Customers | % of Revenue | | :--------------------------- | :------------------ | :----------- | | 3 Months Ended June 30, 2020 | 2 | 27% | | 3 Months Ended June 30, 2019 | 2 | 51% | | 6 Months Ended June 30, 2020 | 2 | 22% | | 6 Months Ended June 30, 2019 | 2 | 41% | Significant Vendors (Accounts Payable Concentration) | Date | Number of Vendors | % of Outstanding Accounts Payable | | :--------------------------- | :------------------ | :-------------------------------- | | June 30, 2020 | 1 | 22% | | December 31, 2019 | 1 | 50% | - Revenue concentration with two significant customers decreased from **51%** to **27%** for the three months ended June 30, 2020, and from **41%** to **22%** for the six months ended June 30, 2020[142](index=142&type=chunk) - One vendor accounted for **22%** of outstanding accounts payable at June 30, 2020, a decrease from **50%** at December 31, 2019[144](index=144&type=chunk) [NOTE 15: Leases](index=28&type=section&id=NOTE%2015:%20LEASES) This note provides details on the company's operating and finance lease agreements, including lease costs, weighted average remaining lease terms, discount rates, and a schedule of lease liability maturities. Lease Costs (in thousands) | Lease Type | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :-------------------------- | :--------------------------- | :--------------------------- | | Finance lease cost | $13 | $19 | | Operating lease cost | $343 | $393 | | **Total Lease Cost** | **$356** | **$412** | Weighted Average Lease Terms and Discount Rates (June 30, 2020) | Lease Type | Remaining Lease Term | Discount Rate | | :-------------------------- | :------------------- | :------------ | | Operating leases | 3.0 years | 10.0% | | Finance leases | 1.0 years | 14.0% | Maturities of Lease Liabilities (in thousands, June 30, 2020) | Period | Operating Leases | Finance Leases | | :-------------------------- | :--------------- | :------------- | | Remainder of 2020 | $342 | $9 | | 2021 | $630 | $4 | | 2022 | $377 | $1 | | 2023 | $375 | $0 | | Thereafter | $0 | $0 | | **Total Undiscounted Cash Flows** | **$1,724** | **$14** | | Present Value of Lease Liabilities | $1,487 | $13 | - Total lease costs decreased from **$412 thousand** in the first six months of 2019 to **$356 thousand** in the same period of 2020[147](index=147&type=chunk) - The weighted average remaining lease term for operating leases is **3.0 years** with a **10.0%** discount rate, while finance leases have a **1.0-year** term with a **14.0%** discount rate as of June 30, 2020[147](index=147&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=29&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations, including an overview of its business, recent developments, detailed analysis of revenue and expenses, and a discussion of liquidity and capital resources, with a focus on the impact of the COVID-19 pandemic. [Forward-Looking Statements](index=29&type=section&id=Forward-Looking%20Statements) This section cautions readers that the report contains forward-looking statements subject to risks and uncertainties that may cause actual results to differ. - The discussion contains forward-looking statements subject to numerous risks and uncertainties that could cause actual results to differ materially from projections, as detailed in the company's SEC filings[149](index=149&type=chunk)[150](index=150&type=chunk) [Overview](index=29&type=section&id=Overview) This section provides a general description of the company's business, its digital marketing technology solutions, and its revenue generation model. - Creative Realities, Inc. specializes in innovative digital marketing technology solutions for various industries, offering expertise in digital merchandising, omni-channel customer engagement, content management, and interactive marketing technologies[151](index=151&type=chunk) - The company generates revenue through bundled-solution sales, consulting, design, software development, engineering, implementation, field services, software license fees, and maintenance and support services[156](index=156&type=chunk) [Recent Developments](index=30&type=section&id=Recent%20Developments) This section highlights key events and changes impacting the company, including the COVID-19 pandemic's effects and liquidity initiatives. - The COVID-19 pandemic caused a rapid and immediate deterioration in business, leading to reduced demand, delayed customer orders, and a **$10,646 thousand** non-cash goodwill impairment loss as of March 31, 2020[158](index=158&type=chunk) - The company jointly launched the AI-integrated Thermal Mirror kiosk with InReality on April 28, 2020, as a new product for businesses adapting to COVID-19 workplace restrictions[160](index=160&type=chunk) - To enhance liquidity, the company entered into a Sales Agreement with Roth Capital Partners on June 19, 2020, to sell up to **$8,000 thousand** of common stock through an at-the-market offering, and secured a **$1,552 thousand** Paycheck Protection Program loan on April 27, 2020[162](index=162&type=chunk)[165](index=165&type=chunk) [Our Sources of Revenue](index=31&type=section&id=Our%20Sources%20of%20Revenue) This section describes the various ways the company generates revenue, including hardware sales, services, and software licensing. - Revenue is generated from digital marketing solution sales, including system hardware, professional and implementation services, software design and development, software licensing, deployment, and maintenance and support services[168](index=168&type=chunk) - The company markets and sells its solutions primarily through its sales and business development personnel, supplemented by agents, strategic partners, and lead generators[169](index=169&type=chunk) [Our Expenses](index=32&type=section&id=Our%20Expenses) This section categorizes and explains the company's primary operating expenses, such as sales and marketing, research and development, and general and administrative costs. - Expenses are categorized into sales and marketing (salaries, commissions, promotional activities), research and development (salaries for software development), and general and administrative (corporate overhead, administrative salaries, legal, and accounting fees)[170](index=170&type=chunk) [Critical Accounting Policies and Estimates](index=32&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section discusses the significant accounting policies and estimates that require management judgment and can materially affect the financial statements. - The company's financial statements are prepared in conformity with GAAP, requiring significant judgments, assumptions, and estimates that could materially impact asset and liability carrying values, and reported revenues and expenses[171](index=171&type=chunk) [Results of Operations](index=32&type=section&id=Results%20of%20Operations) This section provides a comparative analysis of the company's financial performance for the periods presented, detailing revenue, gross profit, and net income changes. [Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019](index=32&type=section&id=Three%20Months%20Ended%20June%2030,%202020%20Compared%20to%20Three%20Months%20Ended%20June%2030,%202019) For the three months ended June 30, 2020, the company experienced a significant decline in sales and gross profit, leading to an operating loss, primarily due to the non-recurrence of a large software license transaction in 2019 and reduced business activity from the COVID-19 pandemic. Financial Performance (3 Months Ended June 30, in thousands) | Item | 2020 | 2019 | Change ($) | Change (%) | | :-------------------------------------- | :--- | :--- | :--------- | :--------- | | Sales | $3,656 | $9,314 | $(5,658) | -61% | | Gross Profit | $1,817 | $4,228 | $(2,411) | -57% | | Operating Income/(Loss) | $(1,644) | $495 | $(2,139) | -432% | | Net Income/(Loss) | $(2,459) | $417 | $(2,876) | -690% | | Sales and Marketing Expenses | $371 | $610 | $(239) | -39% | | Research and Development Expenses | $245 | $394 | $(149) | -38% | | General and Administrative Expenses | $2,465 | $2,421 | $44 | 2% | | Depreciation and Amortization Expense | $380 | $308 | $72 | 23% | | Change in fair value of Special Loan | $(551) | $0 | $(551) | -100% | - Sales decreased by **$5,658 thousand (61%)** due to the non-recurrence of a **$3,797 thousand** software license revenue from 2019 and a general reduction in sales and installation activity caused by the COVID-19 pandemic[176](index=176&type=chunk) - Gross profit decreased by **$2,411 thousand (57%)**, despite an increase in gross profit margin to **49.7%** (from **45.4%**), driven by higher services revenue margin percentage (**73.6%** from **50.7%**) and a shift in sales mix towards hardware[177](index=177&type=chunk) - General and administrative expenses increased by **$44 thousand (2%)**, primarily due to a **$468 thousand** incremental reserve for bad debts, partially offset by a **$647 thousand** reduction in employee-related expenses from cost-cutting measures[180](index=180&type=chunk) [Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019](index=34&type=section&id=Six%20Months%20Ended%20June%2030,%202020%20Compared%20to%20Six%20Months%20Ended%20June%2030,%202019) For the six months ended June 30, 2020, the company reported a substantial net loss and operating loss, driven by a significant decline in sales, a goodwill impairment charge, and increased bad debt expenses, largely attributable to the COVID-19 pandemic's impact. Financial Performance (6 Months Ended June 30, in thousands) | Item | 2020 | 2019 | Change ($) | Change (%) | | :-------------------------------------- | :--- | :--- | :--------- | :--------- | | Sales | $7,360 | $18,798 | $(11,438) | -61% | | Gross Profit | $3,424 | $7,909 | $(4,485) | -57% | | Operating Income/(Loss) | $(14,645) | $530 | $(15,175) | -2863% | | Net Income/(Loss) | $(15,642) | $233 | $(15,875) | -6813% | | Goodwill Impairment | $10,646 | $0 | $10,646 | 100% | | General and Administrative Expenses | $5,321 | $4,711 | $610 | 13% | | Change in fair value of Special Loan | $(702) | $0 | $(702) | -100% | - Sales decreased by **$11,438 thousand (61%)** due to the non-recurrence of **$5,671 thousand** in software license revenue and a **$2,083 thousand** software development project from 2019, coupled with reduced activity from the COVID-19 pandemic[187](index=187&type=chunk) - Gross profit decreased by **$4,485 thousand (57%)**, despite an increase in gross profit margin to **46.5%** (from **42.1%**), driven by improved hardware and services margins and a shift in sales mix[188](index=188&type=chunk) - General and administrative expenses increased by **$610 thousand (13%)**, primarily due to a **$750 thousand** incremental reserve for bad debts and **$200 thousand** in legal/accounting costs, partially offset by **$614 thousand** in employee-related expense reductions[191](index=191&type=chunk) [Summary Unaudited Quarterly Financial Information](index=36&type=section&id=Summary%20Unaudited%20Quarterly%20Financial%20Information) This section presents a condensed overview of the company's unaudited financial performance across recent quarters. Unaudited Quarterly Financial Information (in thousands) | Quarter Ended | June 30, 2020 | March 31, 2020 | December 31, 2019 | September 30, 2019 | June 30, 2019 | | :---------------------------------------------------------------------------------------------------------------- | :------------ | :------------- | :---------------- | :----------------- | :------------ | | Net Sales | $3,656 | $3,704 | $6,077 | $6,723 | $9,314 | | Gross Profit | $1,817 | $1,607 | $2,524 | $3,306 | $4,228 | | Operating (Loss)/Income | $(1,644) | $(13,001) | $(726) | $86 | $495 | | Net (Loss)/Income | $(2,459) | $(13,183) | $563 | $242 | $417 | | Goodwill Impairment | $0 | $10,646 | $0 | $0 | $0 | - Net sales consistently declined from **$9,314 thousand** in Q2 2019 to **$3,656 thousand** in Q2 2020[196](index=196&type=chunk) - The company reported significant net losses in Q1 and Q2 2020, with Q1 2020 including a **$10,646 thousand** goodwill impairment[196](index=196&type=chunk) [Supplemental Operating Results on a Non-GAAP Basis](index=36&type=section&id=Supplemental%20Operating%20Results%20on%20a%20Non-GAAP%20Basis) This section provides non-GAAP financial measures, such as EBITDA and Adjusted EBITDA, to offer additional insights into the company's operating performance. Non-GAAP Operating Results (in thousands) | Quarter Ended | June 30, 2020 | March 31, 2020 | December 31, 2019 | September 30, 2019 | June 30, 2019 | | :-------------------------- | :------------ | :------------- | :---------------- | :----------------- | :------------ | | GAAP Net Loss | $(2,459) | $(13,183) | $563 | $242 | $417 | | EBITDA | $(1,716) | $(12,695) | $1,304 | $801 | $871 | | Adjusted EBITDA | $(1,147) | $(1,907) | $(547) | $426 | $1,093 | | Loss on goodwill impairment | $0 | $10,646 | $0 | $0 | $0 | - EBITDA and Adjusted EBITDA turned negative in Q1 and Q2 2020, reflecting the significant GAAP net losses and the impact of the goodwill impairment[199](index=199&type=chunk) - Adjusted EBITDA for Q2 2020 was **$(1,147) thousand**, a substantial decrease from **$1,093 thousand** in Q2 2019[199](index=199&type=chunk) [Liquidity and Capital Resources](index=37&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's liquidity position, highlighting its history of net losses and negative operating cash flows, the impact of the COVID-19 pandemic, and the measures taken to secure funding, including a PPP loan and an at-the-market equity offering. - As of June 30, 2020, the company had cash and cash equivalents of **$870 thousand** and a working capital deficit of **$9,211 thousand**, continuing a history of net losses and negative cash flows from operating activities[201](index=201&type=chunk) - The COVID-19 pandemic caused rapid business deterioration, leading to reduced demand, delayed projects, slowed cash flows, and downward revisions of internal forecasts[202](index=202&type=chunk) - Management believes it can continue as a going concern through at least August 15, 2021, based on the **$1,552 thousand** PPP funding, operational forecasts, access to capital markets via the Roth agreement, and continued support from Slipstream[213](index=213&type=chunk) [Item 4. Controls and Procedures](index=40&type=section&id=Item%204.%20Controls%20and%20Procedures) This section reports on the effectiveness of the company's disclosure controls and procedures and any changes in internal control over financial reporting. [Evaluation of Disclosure Controls and Procedures](index=40&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section reports on management's assessment of the effectiveness of the company's disclosure controls and procedures. - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[221](index=221&type=chunk) [Changes in Internal Control over Financial Reporting](index=40&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) This section discloses any material changes in the company's internal control over financial reporting during the reporting period. - There were no changes in internal control over financial reporting during the quarter ended June 30, 2020, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[222](index=222&type=chunk) PART II. OTHER INFORMATION This section includes disclosures on legal proceedings, risk factors, sales of equity securities, defaults, mine safety, and other relevant information. [Item 1. Legal Proceedings](index=41&type=section&id=Item%201.%20Legal%20Proceedings) This section states that there are no material legal proceedings to report under this item. - No material legal proceedings are reported under this item[224](index=224&type=chunk) [Item 1A. Risk Factors](index=41&type=section&id=Item%201A.%20Risk%20Factors) This section highlights additional risks, specifically concerning the sufficiency and limitations of funding from the company's at-the-market (ATM) facility due to SEC 'baby shelf rules'. - Funding from the at-the-market (ATM) facility may be insufficient to fund operations or implement strategy[226](index=226&type=chunk) - The company's ability to sell shares under the ATM facility is limited by SEC 'baby shelf rules' to no more than one-third of its public float in any 12-month period, as its public float remains below **$75 million**[227](index=227&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=41&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section indicates that there were no unregistered sales of equity securities or use of proceeds to report. - No unregistered sales of equity securities or use of proceeds were reported[228](index=228&type=chunk) [Item 3. Defaults Upon Senior Securities](index=41&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section states that there were no defaults upon senior securities to report. - No defaults upon senior securities were reported[229](index=229&type=chunk) [Item 4. Mine Safety Disclosures](index=41&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section indicates that mine safety disclosures are not applicable to the company. - Mine safety disclosures are not applicable[230](index=230&type=chunk) [Item 5. Other Information](index=41&type=section&id=Item%205.%20Other%20Information) This section states that there is no other information to report. - No other information was reported[231](index=231&type=chunk) [Item 6. Exhibits](index=42&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO, and XBRL-related documents. - Exhibits include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and XBRL instance and taxonomy documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[233](index=233&type=chunk) [SIGNATURES](index=43&type=section&id=SIGNATURES) This section contains the signatures of the registrant's authorized officers, certifying the filing of the report. - The report is signed by Richard Mills, Chief Executive Officer, and Will Logan, Chief Financial Officer, on August 13, 2020[237](index=237&type=chunk)

Creative Realities, Inc. (NASDAQ:CREX) Q1 2020 Earnings Conference Call May 15, 2020 9:00 AM ET Company Participants Rick Mills - Chief Executive Officer Will Logan - Chief Financial Officer Conference Call Participants Brian Kinstlinger - Alliance Global Partners Will Logan Good morning and welcome to the Creative Realities First Quarter 2020 Earnings Call. All lines have been placed on mute to prevent any background noise. After the Company’s remarks, there will be a question-and-answer session. [Operator ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, par value $0.001 per share CREX The Nasdaq Stock Market LLC Warrants to purchase Common Stock CREXW The Nasdaq Stock Market LLC 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 March 31, 2020 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ...

Creative Realities, Inc. (NASDAQ:CREX) Q4 2019 Earnings Conference Call March 12, 2020 9:00 AM ET Company Participants Rick Mills - Chief Executive Officer Will Logan - Chief Financial Officer Conference Call Participants Jacob Silverman - JPMorgan Will Logan Good morning and welcome to the Creative Realities 2019 Financial Results and Earnings Call. All lines have been placed on mute to prevent any background noise. After the company’s remarks, there will be a question-and-answer session. [Operator Instruc ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark one) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2019 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 Stat ...

Creative Realities, Inc. (NASDAQ:CREX) Q3 2019 Earnings Conference Call November 8, 2019 9:00 AM ET Company Participants Richard Mills - CEO Will Logan - CFO Conference Call Participants William Sutherland - Benchmark Company Jacob Silverman - JPMorgan Will Logan Good morning everyone and welcome to the Creative Realities Third Quarter 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. After the company’s remarks there will be a question-and-answer session. [Operator Ins ...

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 September 30, 2019 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) | --- | |----- ...

Financial Data and Key Metrics Changes - Revenues for Q2 2019 were $9.3 million, an increase of $2.1 million or 30% compared to Q2 2018 [8] - Gross profit was $4.2 million for the quarter, an increase of $1.1 million or 37% compared to the prior year [9] - EBITDA was $0.8 million for Q2 2019, compared to $0.5 million for the same period in 2018 [10] - Adjusted EBITDA was $1.1 million for Q2 2019, compared to $0.4 million in the same period in 2018 [10] Business Line Data and Key Metrics Changes - Hardware revenue decreased by approximately $1.2 million or 42% in Q2 2019, primarily due to a $1.7 million hardware-only project in Q2 2018 that did not recur [8] - Services and other revenue grew approximately $3.3 million or 77% in Q2 2019 compared to the same period in the prior year [9] - Managed services revenue, including SAS and help desk technical subscriptions, represented approximately $1.6 million in Q2 2019, an increase of $1.1 million or 211% compared to the same period in the prior year [9] Market Data and Key Metrics Changes - The company is focused on competing for national accounts in key verticals such as QSR, branded retail, and large venues, including sports venues [4] - The integration of Allure Global is complete, allowing the company to service all customers through its network operation center [5] Company Strategy and Development Direction - The company is pursuing a consolidation strategy to accompany organic growth and is in talks with multiple potential acquisition candidates [6] - A new agreement with FCA was executed, generating approximately $1 million a year in SAS fees, transitioning the application to the company's AWS platform [13] - The launch of a new content management system, Clarity, is underway, with expectations to migrate over 2,000 players to the solution by year-end [15] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about significant revenue growth and enhanced earnings in 2020 and beyond [5] - The company anticipates the back half of 2019 will show significant growth over the back half of 2018, with several projects in the pipeline ranging from $3 million to $28 million [29] - Management emphasized a commitment to organic growth and a nimble structure that allows for competitive positioning in the market [18] Other Important Information - A settlement from the Allure transaction resulted in a cash payment of $210,000 [11] - The outstanding principal balance of the seller note related to the Allure acquisition has been reduced to $1,637,000 as of June 30, 2019 [11] - A new board member, Steve Nesbitt, has joined, bringing extensive experience in digital signage and advertising [14] Q&A Session Summary Question: Any impacts from the back half of '18 on comps for the next two quarters? - Management noted that the second quarter of 2018 was the strongest, leading to expected headwinds in the second half of 2018 [20] Question: Insights on the deferred revenue line and its implications? - Management explained that revenue recognition challenges from prior periods were resolved in the first half of 2019, impacting cash flow positively [22] Question: Incremental impact of the FCA agreement? - The FCA agreement includes a 30% price increase and is expected to add approximately $0.5 million compared to the prior year [26][27] Question: Outlook for the back half of the year? - Management is optimistic about significant year-over-year growth, with several large projects in the final stages of negotiation [29]

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the company's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and shareholders' equity, along with detailed notes explaining significant accounting policies, business combinations, debt, and other financial disclosures [Condensed Consolidated Balance Sheets](index=3&type=section&id=CREATIVE%20REALITIES,%20INC.%20CONDENSED%20CONSOLIDATED%20BALANCE%20SHEETS) **Condensed Consolidated Balance Sheets (in thousands):** | Metric | June 30, 2019 (unaudited) | December 31, 2018 | | :------------------------------------- | :------------------------ | :---------------- | | Total Assets | $35,877 | $37,728 | | Total Liabilities | $18,290 | $20,907 | | Total Shareholders' Equity | $17,587 | $16,821 | | Cash and cash equivalents | $1,824 | $2,718 | | Working capital deficit | $3,930 | N/A | [Condensed Consolidated Statements of Operations](index=4&type=section&id=CREATIVE%20REALITIES,%20INC.%20CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20OPERATIONS) **Condensed Consolidated Statements of Operations (in thousands, except per share amounts):** | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Sales | $9,314 | $7,179 | $18,798 | $11,245 | | Total Cost of Sales | $5,086 | $4,089 | $10,889 | $6,646 | | Gross Profit | $4,228 | $3,090 | $7,909 | $4,599 | | Operating Income/(Loss) | $495 | ($7) | $530 | ($1,826) | | Net Income/(Loss) | $417 | ($612) | $233 | ($2,850) | | Basic Earnings/(Loss) Per Common Share | $0.04 | ($0.27) | $0.02 | ($1.12) | - For the three months ended June 30, 2019, total sales increased by **30%** and gross profit increased by **37%** compared to the same period in 2018. The company reported net income of **$417 thousand**, a significant improvement from a net loss of **($612) thousand** in the prior year[10](index=10&type=chunk)[186](index=186&type=chunk)[187](index=187&type=chunk)[188](index=188&type=chunk) - For the six months ended June 30, 2019, total sales increased by **67%** and gross profit increased by **72%** compared to the same period in 2018. The company reported net income of **$233 thousand**, a significant improvement from a net loss of **($2,850) thousand** in the prior year[10](index=10&type=chunk)[200](index=200&type=chunk)[202](index=202&type=chunk)[203](index=203&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=5&type=section&id=CREATIVE%20REALITIES,%20INC.%20CONDENSED%20CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) **Condensed Consolidated Statements of Cash Flows (in thousands):** | Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :------------------------------------- | :----------------------------- | :----------------------------- | | Net Income/(Loss) | $233 | ($2,850) | | Net Cash Provided by Operating Activities | $736 | $2,565 | | Net Cash Used in Investing Activities | ($798) | ($95) | | Net Cash Provided by/(Used in) Financing Activities | ($172) | $2,100 | | Cash and Cash Equivalents at End of Period | $1,824 | $5,461 | [Consolidated Statements of Shareholders' Equity](index=6&type=section&id=CREATIVE%20REALITIES,%20INC.%20CONSOLIDATED%20STATEMENTS%20OF%20SHAREHOLDERS'%20EQUITY) **Consolidated Statements of Shareholders' Equity (in thousands, except shares):** | Metric | June 30, 2019 | | :------------------------------------- | :------------ | | Total Shareholders' Equity (March 31, 2019) | $16,849 | | Net Income (Three months ended June 30, 2019) | $417 | | Total Shareholders' Equity (June 30, 2019) | $17,587 | | Total Shareholders' Equity (December 31, 2018) | $16,821 | | Net Income (Six months ended June 30, 2019) | $233 | | Shares Issued for Services (Six months ended June 30, 2019) | 17,960 | | Stock-based Compensation (Six months ended June 30, 2019) | $82 | [Notes to Condensed Consolidated Financial Statements](index=7&type=section&id=NOTES%20TO%20CONDENSED%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) [NOTE 1: Nature of Organization and Operations](index=7&type=section&id=NOTE%201:%20NATURE%20OF%20ORGANIZATION%20AND%20OPERATIONS) Creative Realities, Inc. provides digital marketing technology and solutions, expanding its operations and customer base through the Allure Global Solutions acquisition. Despite historical net losses and a working capital deficit, management believes the company can continue as a going concern through August 2020 due to loan extensions and operational forecasts - The company provides innovative digital marketing technology and solutions to retail companies, brands, enterprises, and organizations across the United States and in certain international markets[21](index=21&type=chunk) - The acquisition of Allure Global Solutions, Inc. on **November 20, 2018**, expanded operations, geographical footprint, and customer base, while enhancing existing product offerings[22](index=22&type=chunk)[30](index=30&type=chunk) - The company incurred net losses for the years ended December 31, 2018 and 2017, and had negative cash flows from operating activities as of December 31, 2018. As of June 30, 2019, cash and cash equivalents were **$1,824 thousand** and working capital deficit was **$3,930 thousand**[25](index=25&type=chunk) - Management believes the company can continue as a going concern through at least **August 15, 2020**, based on the extension of term and revolving loans and operational forecasts, supported by a continued support letter from Slipstream[27](index=27&type=chunk)[28](index=28&type=chunk) [NOTE 2: Summary of Significant Accounting Policies](index=9&type=section&id=NOTE%202:%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This note outlines the company's key accounting policies, including the adoption of ASC 606 for revenue recognition and ASU 2016-02 for leases, which led to the recognition of right-of-use assets and lease liabilities. It also covers policies for inventories, impairment, EPS, income taxes, goodwill, business combinations, and the impact of a 1-for-30 reverse stock split in October 2018 - The company adopted ASC 606, Revenue from Contracts with Customers, effective **January 1, 2018**, using the modified retrospective method[39](index=39&type=chunk)[66](index=66&type=chunk) **Inventories (in thousands):** | Category | June 30, 2019 | December 31, 2018 | | :--------------- | :------------ | :---------------- | | Raw materials | $128 | $220 | | Work-in-process | $640 | $159 | | **Total** | **$768** | **$379** | - A **1**-for-**30** reverse stock split of outstanding common stock was effectuated on **October 17, 2018**, with financial statements and notes adjusted for all periods presented[48](index=48&type=chunk) - On **January 1, 2019**, the company adopted ASU No. 2016-02, Leases (Topic 842), recognizing total Right-of-Use (ROU) assets and corresponding liabilities of **$2,319 thousand** on the condensed consolidated balance sheets[51](index=51&type=chunk)[54](index=54&type=chunk) [NOTE 3: Recently Issued Accounting Pronouncements](index=11&type=section&id=NOTE%203:%20RECENTLY%20ISSUED%20ACCOUNTING%20PRONOUNCEMENTS) This note details recently adopted accounting pronouncements, including ASU 2016-02 (Leases), ASU 2018-16 (Derivatives and Hedging), SEC Release No. 33-10532 (Disclosure Update and Simplification), and ASU 2017-04 (Goodwill Impairment). It also lists pronouncements not yet adopted, such as ASU 2018-15 (Cloud Computing), ASU 2018-13 (Fair Value Measurement), and ASU 2016-13 (Credit Losses), which are currently being evaluated for their impact - The company adopted ASU No. 2016-02, Leases (Topic 842), on **January 1, 2019**, which requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets[57](index=57&type=chunk) - ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, was adopted on **January 1, 2019**, removing the second step of the goodwill impairment test. No impact on condensed consolidated financial statements resulted from this adoption[61](index=61&type=chunk) - The company is currently evaluating the impact of ASU 2018-15 (Cloud Computing), ASU 2018-13 (Fair Value Measurement), and ASU 2016-13 (Financial Instruments—Credit Losses), all effective for fiscal years beginning after **December 15, 2019**[62](index=62&type=chunk)[63](index=63&type=chunk)[64](index=64&type=chunk) [NOTE 4: Revenue Recognition](index=13&type=section&id=NOTE%204:%20REVENUE%20RECOGNITION) The company recognizes revenue under ASC 606, identifying contracts, performance obligations, and allocating transaction prices. Revenue is generated from hardware sales, professional implementation, software design and development, Software as a Service (SaaS), and maintenance and support services, with detailed disaggregation provided for the three and six months ended June 30, 2019 - Revenue is recognized when a customer obtains control of promised goods or services, measured as the consideration expected in exchange for transferring goods or providing services[69](index=69&type=chunk) - Key revenue sources include system hardware sales, professional implementation and installation services, software design and development services, Software as a Service (SaaS), and maintenance and support services[74](index=74&type=chunk) **Disaggregated Revenue by Major Source (in thousands):** | Category | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :------------------------ | :------------------------------- | :----------------------------- | | Hardware | $1,654 | $3,295 | | Installation Services | $1,791 | $4,163 | | Software Development Services | $4,259 | $8,235 | | Managed Services | $1,610 | $3,105 | | **Total Hardware and Services** | **$9,314** | **$18,798** | [NOTE 5: Business Combination](index=16&type=section&id=NOTE%205:%20BUSINESS%20COMBINATION) This note details the Allure Global Solutions acquisition on November 20, 2018, with a total purchase price of $8,450 thousand. The preliminary purchase price allocation was updated following a working capital settlement in May 2019, resulting in a net consideration transferred of $8,047 thousand and the recognition of $3,253 thousand in goodwill, attributed to strategic and synergistic benefits - The Allure Global Solutions acquisition was completed on **November 20, 2018**, with an initial total purchase price of **$8,450 thousand**[88](index=88&type=chunk) - A settlement agreement on **May 10, 2019**, finalized net working capital, resulting in a net cash payment of **$210 thousand** from the Seller and a reduction of **$666 thousand** in accounts receivable and the Amended and Restated Seller Note[89](index=89&type=chunk)[93](index=93&type=chunk) **Revised Preliminary Purchase Price Allocation (in thousands):** | Asset/Liability Category | Total | | :------------------------------------- | :---- | | Accounts receivable | $1,543 | | Identified intangible assets (Total) | $4,980 | | Goodwill | $3,253 | | Accounts payable | ($331) | | Deferred revenues | ($276) | | **Net Consideration Transferred** | **$8,047** | - Goodwill of **$3,253 thousand** was recognized, reflecting expected strategic and synergistic benefits such as a comprehensive customer portfolio, complementary product offerings, enhanced national footprint, and value creation[97](index=97&type=chunk)[103](index=103&type=chunk) [NOTE 6: Fair Value Measurement](index=20&type=section&id=NOTE%206:%20FAIR%20VALUE%20MEASUREMENT) This note describes the company's use of a three-level fair value hierarchy for measuring financial assets and liabilities. It specifically highlights the warrant liabilities, which decreased from $21 thousand to $0, and the earnout liability of $250 thousand, both classified as Level 3 due to reliance on unobservable inputs and management judgment - The company uses a three-level hierarchy (Level 1, 2, 3) to prioritize inputs for fair value measurements, with Level 3 valuations based on unobservable inputs and management judgment[107](index=107&type=chunk)[108](index=108&type=chunk) **Change in Level 3 Fair Value of Warrant Liability (in thousands):** | Metric | Amount | | :------------------------------------- | :----- | | Warrant liability as of December 31, 2018 | $21 | | Decrease in fair value of warrant liability | ($21) | | **Ending warrant liability as of June 30, 2019** | **$0** | - The earnout liability of **$250 thousand**, related to the Allure Acquisition, is classified as Level 3, based on management's revenue projections and estimates[109](index=109&type=chunk) [NOTE 7: Supplemental Cash Flow Statement Information](index=21&type=section&id=NOTE%207:%20SUPPLEMENTAL%20CASH%20FLOW%20STATEMENT%20INFORMATION) This note provides supplemental cash flow details, including non-cash investing and financing activities and cash payments for interest and income taxes for the six months ended June 30, 2019 and 2018 **Supplemental Cash Flow Information (in thousands):** | Category | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :------------------------------------- | :----------------------------- | :----------------------------- | | Issuance of common stock upon conversion of preferred stock | $0 | $125 | | Issuance of warrants with term loan extensions / revolver draws | $0 | $809 | | Right of offset settlement of Amended and Restated Seller Note | $498 | $0 | | Cash paid for Interest | $181 | $359 | | Cash paid for Income taxes, net | $0 | $0 | [NOTE 8: Intangible Assets and Goodwill](index=21&type=section&id=NOTE%208:%20INTANGIBLE%20ASSETS%20AND%20GOODWILL) This note details the company's intangible assets and goodwill. As of June 30, 2019, net book value of amortizable intangible assets was $4,757 thousand, with amortization expense decreasing compared to the prior year. Goodwill decreased to $18,242 thousand due to adjustments from the preliminary purchase price allocation of the Allure Acquisition **Intangible Assets (in thousands):** | Asset Type | Gross Carrying Amount (June 30, 2019) | Accumulated Amortization (June 30, 2019) | Net Book Value (June 30, 2019) | | :--------------------- | :------------------------------------ | :--------------------------------------- | :----------------------------- | | Technology platform | $4,635 | $3,021 | | | Customer relationships | $5,330 | $2,583 | | | Trademarks and trade names | $1,020 | $624 | | | **Total** | **$10,985** | **$6,228** | **$4,757** | - Amortization of intangible assets charged to operations was **$147 thousand** for the three months ended June 30, 2019, and **$303 thousand** for the six months ended June 30, 2019, representing a decrease from the prior year periods[112](index=112&type=chunk) **Goodwill Rollforward (in thousands):** | Metric | Total | | :----------------------------------------------------------------------------------- | :------ | | Balance as of January 1, 2019 | $18,900 | | Adjustments due to adjustments to preliminary purchase price allocation (Note 5) | ($658) | | **Balance as of June 30, 2019** | **$18,242** | [NOTE 9: Loans Payable](index=22&type=section&id=NOTE%209:%20LOANS%20PAYABLE) This note details the company's outstanding debt, totaling $5,901 thousand in principal as of June 30, 2019, primarily consisting of term and revolving loans from a related party (Slipstream) and an Amended and Restated Seller Note from the Allure Acquisition. The cash interest rate on related party loans increased to 10% from July 1, 2019, and the Seller Note is convertible into common stock **Outstanding Debt (in thousands, except warrants):** | Debt Type | Principal | Maturity Date | Warrants | Interest Rate Information | | :------------------------------------- | :-------- | :------------ | :------- | :------------------------ | | Secured Disbursed Escrow Promissory Note | $264 | 6/30/2021 | - | 0.0% interest | | Revolving Loan | $1,000 | 8/16/2020 | 61,729 | 8.0% interest | | Term Loan | $3,000 | 8/16/2020 | 588,236 | 8.0% interest | | Amended and Restated Seller Note | $1,637 | 2/15/2020 | - | 3.5% interest | | **Total Debt Principal** | **$5,901**| | **649,965** | | | Debt discount | ($717) | | | | | **Total Debt (Net)** | **$5,184**| | | | | Long term debt | $3,547 | | | | - The maturity date of the term loan and revolving loan with Slipstream (a related party) was extended to **August 16, 2020**. The cash portion of the interest rate for these loans increased from **8.0% to 10.0%** per annum effective **July 1, 2019**[124](index=124&type=chunk)[218](index=218&type=chunk) - The Amended and Restated Seller Note, with an outstanding principal balance of **$1,637 thousand** as of June 30, 2019, is convertible into shares of Creative Realities common stock at the seller's option or mandatorily under certain conditions[128](index=128&type=chunk)[130](index=130&type=chunk) [NOTE 10: Commitments and Contingencies](index=25&type=section&id=NOTE%2010:%20COMMITMENTS%20AND%20CONTINGENCIES) This note covers the company's commitments and contingencies, including a gain on lease termination in 2018, gains from settlement of other obligations in 2019, ongoing litigation, and termination benefits accrued and paid following the Allure Acquisition - The company recognized a gain on settlement of **$39 thousand** in the three months ended June 30, 2018, from exiting a previously leased operating facility[132](index=132&type=chunk)[198](index=198&type=chunk) - Gains on settlement of obligations were **$6 thousand** for the three months ended June 30, 2019, and **$13 thousand** for the six months ended June 30, 2019[133](index=133&type=chunk)[197](index=197&type=chunk)[210](index=210&type=chunk) - The company accrued **$386 thousand** for one-time termination benefits related to severance in December 2018. **$211 thousand** was paid during the six months ended June 30, 2019, with **$144 thousand** remaining as a liability[135](index=135&type=chunk) - The company is involved in various legal proceedings but believes their aggregate outcome will not have a material adverse effect on its business, financial condition, liquidity, or operating results[134](index=134&type=chunk) [NOTE 11: Related Party Transactions](index=26&type=section&id=NOTE%2011:%20RELATED%20PARTY%20TRANSACTIONS) This note details transactions with related parties, including financing arrangements with Slipstream Communications, LLC, and sales and accounts receivable with 33 Degrees Convenience Connect, Inc. Sales to 33 Degrees decreased in 2019, while accounts receivable from them remained significant - The company has financing transactions with Slipstream Communications, LLC, a related party, including term and revolving loans with warrants[137](index=137&type=chunk)[140](index=140&type=chunk)[142](index=142&type=chunk) **Sales to 33 Degrees Convenience Connect, Inc. (Related Party):** | Period | Sales ($ thousands) | % of Consolidated Revenue | | :------------------------------------- | :------------------ | :------------------------ | | Three months ended June 30, 2019 | $275 | 3.0% | | Six months ended June 30, 2019 | $470 | 2.5% | | Three months ended June 30, 2018 | $618 | 8.6% | | Six months ended June 30, 2018 | $1,035 | 9.2% | - Accounts receivable due from 33 Degrees was **$872 thousand** (**13.0%** of consolidated accounts receivable) at June 30, 2019, and **$1,933 thousand** (**30.0%**) at December 31, 2018[139](index=139&type=chunk) - A payment agreement with 33 Degrees for **$2,567 thousand** of aged accounts receivable, bearing **12%** simple interest, matures on **December 31, 2019**, with **$867 thousand** remaining as of June 30, 2019[138](index=138&type=chunk) [NOTE 12: Income Taxes](index=27&type=section&id=NOTE%2012:%20INCOME%20TAXES) This note explains that the company's deferred tax assets are primarily from net operating loss (NOL) carryforwards, which are subject to IRC Section 382 limitations. A full valuation allowance is maintained against net deferred tax assets due to a history of losses, though a tax benefit was reported for the three and six months ended June 30, 2019 - Deferred tax assets are primarily related to net federal and state operating loss carryforwards (NOLs), with usage limited by IRC Section 382[144](index=144&type=chunk) - A full valuation allowance is established against the net deferred tax assets with a definite life due to the company's history of losses[144](index=144&type=chunk) - The company reported a tax benefit of **$107 thousand** for the three months ended June 30, 2019, and **$86 thousand** for the six months ended June 30, 2019[145](index=145&type=chunk) [NOTE 13: Convertible Preferred Stock](index=27&type=section&id=NOTE%2013:%20CONVERTIBLE%20PREFERRED%20STOCK) This note details the conversion of all Series A Convertible Preferred Stock into common stock on November 5, 2018, contingent on a successful public offering. Following the conversion and issuance of additional common shares as incentives, the preferred stock class was eliminated from the company's Articles of Incorporation in March 2019 - On **November 5, 2018**, holders of Series A Convertible Preferred Stock agreed to convert the entire class into common stock at an exchange ratio of **$7.65 per share**, contingent on a successful public offering[147](index=147&type=chunk) - The company issued **723,561** common shares at the stated conversion rate and an additional **1,123,367** common shares as a one-time incentive for lock-up agreements[148](index=148&type=chunk) - Effective **March 18, 2019**, the Series A Convertible Preferred Stock and Series A-1 Convertible Preferred Stock classes were eliminated from the company's Articles of Incorporation, with no shares outstanding as of **December 31, 2018**[148](index=148&type=chunk)[149](index=149&type=chunk) [NOTE 14: Warrants](index=28&type=section&id=NOTE%2014:%20WARRANTS) This note provides details on warrants issued in connection with revolving loans from Slipstream, including their fair values and valuation methodology using the Black Scholes option pricing model. It also summarizes outstanding liability and equity warrants as of June 30, 2019 - Warrants were issued in connection with revolving loans from Slipstream, including **61,729 shares** (fair value **$266 thousand**) on **January 16, 2018**, and **143,791 shares** (fair value **$543 thousand**) on **April 27, 2018**[152](index=152&type=chunk)[153](index=153&type=chunk) - The fair value of warrants is calculated using a probability weighted Black Scholes option pricing model[154](index=154&type=chunk) **Summary of Outstanding Warrants (June 30, 2019):** | Category | Amount (Warrants) | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | | :--------------- | :---------------- | :------------------------------ | :-------------------------------------------------- | | Equity Warrants | 4,815,047 | $4.90 | 3.84 | | Liability Warrants | 216,255 | $7.34 | 0.14 | [NOTE 15: Stock-Based Compensation](index=29&type=section&id=NOTE%2015:%20STOCK-BASED%20COMPENSATION) This note outlines the company's stock-based compensation, including outstanding stock options and the recognition of compensation expense. Total stock-based compensation expense for the three and six months ended June 30, 2019, was $291 thousand and $333 thousand, respectively, with a significant portion attributed to the vesting of performance restricted stock units (PRSUs) **Summary of Outstanding Options (June 30, 2019):** | Metric | Amount (Options) | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | | :------------------------------------- | :--------------- | :------------------------------ | :-------------------------------------------------- | | Balance, June 30, 2019 | 288,860 | $8.59 | 6.53 | **Stock-Based Compensation Expense (in thousands):** | Category | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :------------------------------------- | :------------------------------- | :----------------------------- | | General and administrative expense | $291 | $333 | | **Total Stock-Based Compensation Expense** | **$291** | **$333** | - During the three months ended June 30, 2019, the company recorded **$250 thousand** in non-cash, non-recurring compensation expense due to the vesting of previously issued performance restricted stock units (PRSUs) granted to the CEO[165](index=165&type=chunk) - As of June 30, 2019, there was approximately **$196 thousand** of total unrecognized compensation expense related to unvested share-based awards, expected to be recognized over the next three years[163](index=163&type=chunk) [NOTE 16: Significant Customers](index=30&type=section&id=NOTE%2016:%20SIGNIFICANT%20CUSTOMERS) This note highlights the concentration of the company's accounts receivable and revenue from a limited number of significant customers, including related parties. As of June 30, 2019, four customers accounted for 51% of accounts receivable, and two customers accounted for 51% of revenue for the three months ended June 30, 2019 - As of June 30, 2019, **four customers**, including 33 Degrees, accounted for **51%** of accounts receivable[166](index=166&type=chunk) - For the three months ended June 30, 2019, **two customers**, including related parties, accounted for **51%** of revenue[167](index=167&type=chunk) - For the six months ended June 30, 2019, **two customers** accounted for **41%** of revenue[167](index=167&type=chunk) [NOTE 17: Leases](index=31&type=section&id=NOTE%2017:%20LEASES) This note provides details on the company's operating and finance lease agreements, including lease costs, weighted average remaining lease terms, and discount rates. It also presents a schedule of lease liability maturities and supplemental cash flow information related to leases **Components of Lease Costs (in thousands):** | Category | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :------------------------------------- | :------------------------------- | :----------------------------- | | Finance lease cost (Amortization) | $8 | $16 | | Finance lease cost (Interest) | $1 | $3 | | Operating lease cost | $197 | $393 | | **Total Lease Cost** | **$206** | **$412** | **Weighted Averages (June 30, 2019):** | Metric | Operating Leases | Finance Leases | | :------------------------------------- | :--------------- | :------------- | | Remaining Lease Term (Years) | 3.83 | 1.4 | | Discount Rate | 10.0% | 13.5% | **Present Value of Lease Liabilities (in thousands, June 30, 2019):** | Category | Amount | | :--------------- | :----- | | Operating Leases | $2,127 | | Finance Leases | $38 | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=32&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations, including an overview of its business, revenue sources, expenses, critical accounting policies, and a detailed comparison of financial performance for the three and six months ended June 30, 2019, against prior periods. It also includes non-GAAP financial measures and a discussion of liquidity and capital resources [Forward-Looking Statements](index=32&type=section&id=Forward-Looking%20Statements) - The discussion contains forward-looking statements subject to numerous risks and uncertainties that could cause actual outcomes to differ materially from projections[172](index=172&type=chunk)[173](index=173&type=chunk) - The company cautions against attributing undue certainty to forward-looking statements and does not undertake to update them[173](index=173&type=chunk) [Overview](index=32&type=section&id=Overview) - Creative Realities, Inc. provides innovative digital marketing technology solutions across **18 vertical markets**, including digital merchandising systems, content creation, and interactive technologies[174](index=174&type=chunk) - Revenue is generated through consulting, design, engineering, deployment management, content delivery, and maintenance/support services, leading to bundled-solution sales, software license fees, and service revenues[176](index=176&type=chunk)[178](index=178&type=chunk) [Our Sources of Revenue](index=33&type=section&id=Our%20Sources%20of%20Revenue) - The company generates revenue from digital marketing solution sales, including system hardware, professional and implementation services, software design and development, software licensing, deployment, and maintenance and support services[179](index=179&type=chunk) - Sales and marketing efforts are primarily conducted through internal personnel, supplemented by agents, strategic partners, and lead generators[180](index=180&type=chunk) [Our Expenses](index=33&type=section&id=Our%20Expenses) - Expenses are categorized into sales and marketing (salaries, commissions, events), research and development (salaries for software development), and general and administrative (corporate overhead, administrative salaries, lease payments, legal/accounting fees)[181](index=181&type=chunk) [Critical Accounting Policies and Estimates](index=33&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) - The company's financial statements are prepared in conformity with GAAP, and certain accounting policies involve significant management judgments, assumptions, and estimates that could materially impact reported amounts[182](index=182&type=chunk) [Results of Operations](index=34&type=section&id=Results%20of%20Operations) [Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018](index=34&type=section&id=Three%20Months%20Ended%20June%2030,%202019%20Compared%20to%20Three%20Months%20Ended%20June%2030,%202018) For the three months ended June 30, 2019, sales increased by 30% to $9,314 thousand, driven by new and legacy Allure customers. Gross profit rose 37% to $4,228 thousand, with gross margin improving to 45% due to product mix. Operating income significantly improved to $495 thousand from a prior-year loss, and net income reached $417 thousand, reversing a prior-year net loss **Financial Performance (Three Months Ended June 30, in thousands):** | Metric | 2019 | 2018 | Change (Dollars) | Change (%) | | :------------------------------------- | :--- | :--- | :--------------- | :--------- | | Sales | $9,314 | $7,179 | $2,135 | 30% | | Gross Profit | $4,228 | $3,090 | $1,138 | 37% | | Operating Income/(Loss) | $495 | ($7) | $502 | 7,171% | | Net Income/(Loss) | $417 | ($612) | $1,029 | 168% | - Sales increase was driven by **$1,328 thousand** from new customers and **$1,160 thousand** from legacy Allure customers, partially offset by a **$344 thousand** reduction in sales to related parties[187](index=187&type=chunk) - Gross profit margin increased to **45%** in Q2 2019 from **43%** in Q2 2018, primarily due to a product mix that was **82%** services, including software development services[188](index=188&type=chunk) - General and administrative expenses increased by **$483 thousand** (**25%**), primarily due to a **$189 thousand** increase in non-recurring stock-based compensation (including **$250 thousand** from PRSU vesting), **$110 thousand** in amortized retention bonus, and **$154 thousand** in increased rent expense[191](index=191&type=chunk)[192](index=192&type=chunk) [Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018](index=36&type=section&id=Six%20Months%20Ended%20June%2030,%202019%20Compared%20to%20Six%20Months%20Ended%20June%2030,%202018) For the six months ended June 30, 2019, sales surged by 67% to $18,798 thousand, fueled by new and legacy Allure customers. Gross profit increased by 72% to $7,909 thousand, with gross margin improving to 42% due to a higher proportion of services revenue. Operating income turned positive at $530 thousand, and net income reached $233 thousand, a substantial recovery from a significant net loss in the prior year **Financial Performance (Six Months Ended June 30, in thousands):** | Metric | 2019 | 2018 | Change (Dollars) | Change (%) | | :------------------------------------- | :--- | :--- | :--------------- | :--------- | | Sales | $18,798 | $11,245 | $7,553 | 67% | | Gross Profit | $7,909 | $4,599 | $3,310 | 72% | | Operating Income/(Loss) | $530 | ($1,826) | $2,356 | 129% | | Net Income/(Loss) | $233 | ($2,850) | $3,083 | 108% | - Sales increase was driven by **$3,605 thousand** from new customers, **$2,442 thousand** from legacy Allure customers, and growth in the pre-existing customer base, partially offset by a **$566 thousand** reduction in sales to related parties[202](index=202&type=chunk) - Gross profit margin increased to **42%** in H1 2019 from **41%** in H1 2018, primarily due to an increase in services revenue as a percentage of total revenue (from **64% to 83%**)[203](index=203&type=chunk) - General and administrative expenses increased by **$1,070 thousand** (**29%**), primarily due to increased stock-based compensation (**$166 thousand**), amortized retention bonus (**$165 thousand**), increased rent (**$273 thousand**), cloud migration costs (**$130 thousand**), and additional employment-related costs (**$154 thousand**)[206](index=206&type=chunk) - Depreciation and amortization expenses decreased by **$57 thousand** (**9%**) due to reduced amortization expense related to intangible assets (longer amortization periods for newly acquired assets), partially offset by increased depreciation of property and equipment from the Allure Acquisition[207](index=207&type=chunk) [Summary Quarterly Financial Information](index=39&type=section&id=Summary%20Quarterly%20Financial%20Information) **Summary Quarterly Financial Information (in thousands):** | Metric | June 30, 2019 | March 31, 2019 | December 31, 2018 | September 30, 2018 | June 30, 2018 | | :------------------------------------- | :------------ | :------------- | :---------------- | :----------------- | :------------ | | Net Sales | $9,314 | $9,484 | $5,229 | $6,001 | $7,179 | | Gross Profit | $4,228 | $3,681 | $1,883 | $3,741 | $3,090 | | Operating Income/(Loss) | $495 | $35 | ($2,148) | ($508) | ($7) | | Net Income/(Loss) | $417 | ($184) | ($6,892) | ($878) | ($612) | [Supplemental Operating Results on a Non-GAAP Basis](index=39&type=section&id=Supplemental%20Operating%20Results%20on%20a%20Non-GAAP%20Basis) - The company provides non-GAAP financial measures, EBITDA and Adjusted EBITDA, as useful information for investors to gauge results of operations on an ongoing basis, noting they should not be considered alternatives to GAAP measures[214](index=214&type=chunk) **EBITDA and Adjusted EBITDA (in thousands):** | Metric | June 30, 2019 | March 31, 2019 | December 31, 2018 | September 30, 2018 | June 30, 2018 | | :------------------------------------- | :------------ | :------------- | :---------------- | :----------------- | :------------ | | GAAP Net Income/(Loss) | $417 | ($184) | ($6,892) | ($878) | ($612) | | EBITDA | $831 | $327 | ($6,310) | $12 | $362 | | Adjusted EBITDA | $1,094 | $363 | ($742) | $921 | $430 | [Liquidity and Capital Resources](index=40&type=section&id=Liquidity%20and%20Capital%20Resources) - The company has incurred net losses and negative cash flows from operating activities in prior years, with a working capital deficit of **$3,930 thousand** as of June 30, 2019[217](index=217&type=chunk) - Cash and cash equivalents stood at **$1,824 thousand** as of June 30, 2019[217](index=217&type=chunk) - The maturity date of the term loan and revolving loan was extended to **August 16, 2020**, with an intent to refinance with an unrelated third party in the first half of 2019. The cash interest rate increased to **10.0%** per annum effective **July 1, 2019**[218](index=218&type=chunk) [Operating Activities](index=40&type=section&id=Operating%20Activities) - Cash flows provided by operating activities were **$2,565 thousand** for the six months ended June 30, 2018, and **$5,320 thousand** for the six months ended June 30, 2017, primarily driven by the recognition of deferred revenue[220](index=220&type=chunk) [Investing Activities](index=40&type=section&id=Investing%20Activities) - Net cash used in investing activities was **($207) thousand** for the six months ended June 30, 2018, primarily for the acquisition of capital assets related to software costs[221](index=221&type=chunk) - No material commitments for capital expenditures were present as of **June 30, 2018**, nor were significant expenditures anticipated for the remainder of 2018[221](index=221&type=chunk) [Financing Activities](index=40&type=section&id=Financing%20Activities) - Net cash provided by financing activities was **$2,100 thousand** for the six months ended June 30, 2018, compared to **($286) thousand** in 2017, primarily due to the issuance of debt in 2018[222](index=222&type=chunk) [Contractual Obligations](index=40&type=section&id=Contractual%20Obligations) - The company has no material commitments for capital expenditures and does not anticipate any significant capital expenditures for the remainder of 2019[223](index=223&type=chunk) [Off-Balance Sheet Arrangements](index=40&type=section&id=Off-Balance%20Sheet%20Arrangements) - The company did not engage in any off-balance sheet arrangements during the six months ended June 30, 2019[224](index=224&type=chunk) [Item 4. Controls and Procedures](index=41&type=section&id=Item%204.%20Controls%20and%20Procedures) Management's evaluation concluded that the company's disclosure controls and procedures were not effective as of June 30, 2019, due to a material weakness in the financial statement close process. Remedial actions are underway, including increased headcount, process documentation, and internal control testing, with an expectation to eliminate the weakness in 2019 [Evaluation of Disclosure Controls and Procedures](index=41&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) - Management concluded that the company's disclosure controls and procedures were not effective as of **June 30, 2019**[226](index=226&type=chunk) - A material weakness exists due to a deficient process to close monthly consolidated financial statements and prepare comprehensive and timely account analysis[226](index=226&type=chunk) [Planned Ongoing/Remedial Actions](index=41&type=section&id=Planned%20Ongoing/Remedial%20Actions) - Remedial actions include adding headcount in accounting and finance, creating a financial statement close checklist, documenting and adhering to a close process timeline, and performing a Sarbanes-Oxley Section 404a self-assessment of internal controls[228](index=228&type=chunk) - Testing of identified internal controls began in **Q2 2019** and is expected to continue through the remainder of **2019**, with management believing these actions will eliminate the material weakness during **2019**[228](index=228&type=chunk)[229](index=229&type=chunk) [Changes in Internal Control over Financial Reporting](index=41&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) - There were no changes in internal control over financial reporting during the quarter ended **June 30, 2019**, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[230](index=230&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=42&type=section&id=Item%201.%20Legal%20Proceedings) As of August 8, 2019, the company was not involved in any material legal proceedings beyond routine litigation incidental to its business - As of **August 8, 2019**, the company was not party to any material legal proceedings, other than ordinary routine litigation incidental to the business[233](index=233&type=chunk) [Item 1A. Risk Factors](index=42&type=section&id=Item%201A.%20Risk%20Factors) As a smaller reporting company, the company refers readers to the 'Risk Factors' section in its Annual Report on Form 10-K filed on March 28, 2019, for a comprehensive discussion of potential risks that could materially and adversely affect its prospects - The company refers readers to the 'Risk Factors' section in its Annual Report on Form 10-K filed on **March 28, 2019**, for a discussion of risks and uncertainties that could materially and adversely affect its prospects[234](index=234&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=42&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities or use of proceeds for the period - None[234](index=234&type=chunk) [Item 3. Defaults Upon Senior Securities](index=42&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities for the period - None[234](index=234&type=chunk) [Item 4. Mine Safety Disclosures](index=42&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[234](index=234&type=chunk) [Item 5. Other Information](index=42&type=section&id=Item%205.%20Other%20Information) The company reported no other information for the period - None[234](index=234&type=chunk) [Item 6. Exhibits](index=43&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including certifications from the Chief Executive Officer and Chief Financial Officer, and various XBRL taxonomy documents - Exhibits include Chief Executive Officer and Chief Financial Officer Certifications (31.1, 31.2, 32.1, 32.2) and XBRL Instance, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, and Presentation Linkbase documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[235](index=235&type=chunk) SIGNATURES - The report was duly signed on **August 8, 2019**, by Richard Mills, Chief Executive Officer, and Will Logan, Chief Financial Officer, on behalf of Creative Realities, Inc.[238](index=238&type=chunk)[239](index=239&type=chunk)

Creative Realities, Inc. (NASDAQ:CREX) Q1 2019 Earnings Conference Call May 10, 2019 9:00 AM ET Company Participants Richard Mills - CEO Will Logan - CFO Conference Call Participants Unidentified Analyst - Bill Sutherland - Benchmark Company Will Logan Good morning and welcome to the Creative Realities First Quarter 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]. Alternat ...