CREATIVE REALITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

CREATIVE REALITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

CREATIVE REALITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYCASH FLOWS

(In thousands)

(Unaudited)

(in thousands, except shares)

See accompanying notes to condensed consolidated financial statements.

CREATIVE REALITIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except shares)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

CREATIVE REALITIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(all currency in thousands, except shares and 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,“we,” “us,“us,” “our”“our” and “the Company”“the Company” refer to Creative Realities, Inc. and its subsidiaries.

Nature of the Company’sCompany’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. ("Allure), a Georgia corporation, Creative Realities Canada, Inc., a Canadian corporation, and Reflect Systems, Inc. ("Reflect"), a Delaware corporation.

Acquisition of ReflectReverse stock split

On November 12, 2021, March 23, 2023, the Company and Reflect Systems, Inc., or “Reflect,” entered into an Agreement and Planfiled Articles of Merger (as amended on as amended on February 8, 2022,Amendment with the “Merger Agreement”) pursuant to which a direct, wholly owned subsidiarySecretary of Creative Realities, CRI Acquisition Corporation, or “Merger Sub,” would merge with and into Reflect, with Reflect surviving as a wholly owned subsidiary of Creative Realities, and the surviving companyState of the merger, which transaction is referredState of Minnesota to herein as the “Merger.” On February 17, 2022, the parties consummated the Merger.

Reflect provides digital signage solutions, including software, strategic and media services to effectuate, effective March 27, 2023, a wide range of companies across the retail, financial, hospitality and entertainment, healthcare, and employee communications industries in North America. Reflect offers digital signage platforms, including ReflectView, a platform used by companies to power hundreds of thousands of active digital displays. Through its strategic services, Reflect assists its customers with designing, deploying and optimizing their digital signage networks, and through its media services, Reflect assists customers with monetizing their digital advertising networks.

Subject to the terms and conditions of the Merger Agreement, upon the closing of the Merger, Reflect stockholders as of the effective time of the Merger collectively received from the Company, in the aggregate, the following Merger consideration: (i) $16,166 in cash, (ii) 2,333,334 shares of common1-for-3 reverse stock of Creative Realities (valued based on an issuance price of $2 per share) (the “CREX Shares”), (iii) the Secured Promissory Note (as described below), and (iv) supplemental cash payments (the “Guaranteed Consideration”), if any, payable on or after the three-year anniversary of the effective time of the Merger (subject to the Extension Option described below, the “Guarantee Date”), in an amount by which the value of the CREX Shares on such anniversary is less than $6.40 per share, or if certain customers of Reflect collectively achieve over 85,000 billable devices online at any time on or before December 31, 2022, is less than $7.20 per share (such applicable amount, the “Guaranteed Price”), multiplied by the amount of CREX Shares held by the Reflect stockholders on the Guarantee Date (subject to the Extension Option described below), subject to the terms of the Merger Agreement.

Creative Realities may exercise an extension option (the “Extension Option”) to extend the Guarantee Date from the three-year anniversary of the Closing Date to six (6) months thereafter if (i) the Extension Threshold Price is greater than or equal to 70% of the Guaranteed Price described above, and (ii) Creative Realities provides written notice of its election to exercise the Extension Option at least ten (10) days prior to the three-year anniversary of the Closing. The “Extension Threshold Price” means the average closing price per share of Creative Realities Shares as reported on the Nasdaq Capital Market (or NYSE) in the fifteen (15) consecutive trading day period ending fifteen (15) calendar days prior to the three-year anniversary of the Closing Date. If the Extension Threshold Price is less than 80% of the Guaranteed Price, then the Guaranteed Price will be increased by $1.00 per share.

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

Retention Bonus Plan

On February 17, 2022, in connection with the closing of the Merger (the “Closing”), the Company adopted a Retention Bonus Plan, pursuant to which the Company is required to pay to key members of Reflect’s management team an aggregate of $1,333 in cash, which was paid 50% at the Closing, and subject to continuous employment with Reflect or Creative Realities, 25% on the one-year anniversary of Closing and 25% on the two-year anniversary of the Closing. The future cash payments due on the one-year and two-year anniversaries of the Closing have been deposited into an escrow agreement. The Retention Bonus Plan also requires the Company to issue Common Stock having an aggregate value of $667 to the plan participants as follows: 50% of the value of such shares were issued at the Closing, and subject to continuous employment with Reflect or Creative Realities, 25% of the value of such shares will be issued on the one-year anniversary of Closing and the remaining 25% of the value of such shares will be issued on the two-year anniversary of the Closing. The shares issued on the Closing were valued at $2.00 per share, and the shares to be issued after the Closing will be determined based on dividing the value of shares issuable on such date divided by the trailing 10-day volume weighted average price (VWAP)split of the shares as of such date as reported on the Nasdaq Capital Market.

Upon the resignation of a participant’s employment for “good reason,” or termination of the employment of a participant without “cause,” each as defined in the Retention Bonus Plan, the participant will be fully vested and will receive all cash and shares allocated to such participant under the Retention Bonus Plan. Any amounts unpaid by reason of a lapse in continuous employment or otherwise will be reallocated among the remaining Retention Bonus Plan participants.

Equity Financing

On February 3, 2022, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with a purchaser (the “Purchaser”), pursuant to which the Company agreed to issue and sell to the Purchaser, in a private placement priced at-the-market under Nasdaq rules, (i) 1,315,000 shares (the “Shares”) of the Company’sCompany's common stock, par value $0.01 per share.  All share (the “Common Stock”) and accompanying warrantsper share information (including share and per share information related to purchase an aggregateshare-based compensation) has been retroactively adjusted to reflect the reverse stock split within this Quarterly Report on Form 10-Q.

As a result of 1,315,000the reverse stock split, effective 12:01 am on March 27, 2023, every three shares of Common Stock,common stock then-issued and (ii) pre-funded warrants to purchaseoutstanding automatically combined into one share of common stock, with no change in par value per share.  No fractional shares were outstanding following the reverse stock split and any fractional shares resulting from the reverse split were rounded up to an aggregatethe nearest whole share of 5,851,505common stock.  In connection with the reverse stock split, the total number of shares of Common Stock (the “Pre-Funded Warrants”) and accompanying warrantscommon stock authorized for issuance was reduced from 200,000,000 shares to purchase an aggregate66,666,666 shares in proportion to the reverse stock split.

Effective as of 5,851,505the same time as the reverse stock split, the number of shares of Common Stock (collectively,common stock available for issuance under the “Private Placement”). The accompanying warrants to purchase Common Stock are referred to herein collectively as the “Common Stock Warrants.” Under the Securities Purchase Agreement, each Share and accompanying warrants to purchase Common StockCompany's equity compensation plans were sold together at a combined price of $1.535, and each Pre-Funded Warrant and accompanying warrants to purchase Common Stock were sold together at a combined price of $1.5349, for gross proceeds of approximately $11,000 before deducting placement agent fees and offering expenses payable by the Company. Net proceedsreduced in proportion to the Company were $10,160.reverse stock split.  The remainingreverse stock split also resulted in reductions in the number of shares of common stock issuable upon exercising or vesting of equity awards in proportion to the reverse stock split and proportionate increases in exercise price foror share-based performance criteria, if any, applicable to such awards. Similarly, the Pre-Funded Warrant was $0.0001. Collectively, we refernumber of shares of common stock issuable upon exercise of outstanding warrants were reduced in proportion to this transaction throughout this filingthe reverse stock split, and the exercise prices of outstanding warrants were proportionately increased.

Liquidity and Financial Condition

In accordance with Accounting Standards Update (“ASU”) No.2014-15,Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40) (“ASU 205-40”), the “Equity Financing”. The net proceeds from the Private Placement were used to fund, in part, payment of the closing cash considerationCompany has evaluated whether there are certain conditions and events, considered in the Merger.aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the Condensed Consolidated Financial Statements are issued.

Effective At June 30, 2022, 2023, the Company amendedhas an accumulated deficit of $52,834, negative working capital of $6,071, including current debt obligations of $4,197, and cash of $3,264. For the terms of Common Stock Warrants to remove the holder’s option to exercise such warrants on a cashless basis utilizing the volume weighted average price (“VWAP”) of the Company’s common stock on the trading day immediately preceding the date of a notice of cashless exercise in certain circumstances, and removes the condition to exercising such warrants that the Company’s shareholders approve the exercise thereof (which has already been obtained). The amendments to the Common Stock Warrants also extend the term of such warrants for an additional one year, The foregoing amendments to the warrants are intended to cause such warrants to be accounted for as equity instruments on the Company’s financial statements.

Debt Financing

On February 17, 2022, six months ended June 30, 2023, the Company incurred an operating loss of $790 and its subsidiaries (collectively, the “Borrowers”) refinanced their current debt facilities with Slipstream Communications, LLC (“Slipstream”),generated positive net cash flows from operations of $6,344. In addition, pursuant to athe Second Amended and Restated Credit and Security Agreement (the “Credit Agreement”"Credit Agreement"), made between the Company and raised $10,000 in gross proceeds with a maturity dateSlipstream Communications ("Slipstream") the Company is required to make monthly repayments of February 1, 2025. The Credit Agreement also provides thatprincipal on the Company’s outstanding loans from Slipstream, consisting of its pre-existing $4,767 senior secured term loan and $2,418 secured convertible loan, with an aggregate of $7,185 in outstanding principal and accrued and unpaid interest under such loans, were consolidated into a Consolidation Term Loan with a maturity date of Februarybeginning on September 1, 2025. Collectively, we refer to this transaction throughout this filing as the “Debt Financing”. The net proceeds from the Credit Agreement were used to fund, in part, payment of the closing cash consideration in the Merger, 2023 and the cash payable under the terms of the Retention Bonus Plan at the Closing.

On February 17, 2022, in connection with the closing of the acquisition of Reflect, the Company issued to the representative of Reflect stockholders, RSI Exit Corporation (“Stockholders’ Representative”), a $2,500 Note and Security Agreement (the “Secured Promissory Note”). The Secured Promissory Note accrues interest at 0.59% (the applicable federal rate) and requires the Company and Reflect to pay equal monthly principal installments of $104 on the fifteenth (15th)first day of each month commencingthereafter until the Maturity Date on March 15, 2022, Any remaining or unpaid principal is due and payable on February 17, 2023. 2025.  The Secured Promissory Note represents consideration inmonthly principal payment beginning on September 1, 2023 is approximately $399, or total principal repayments for the Merger and is included as part of the purchase price.

See Note 9 Loans Payable twelve months subsequent to the Consolidated Financial Statements for an additional discussionreporting date of the Company’s debt obligations and further discussion of the Company’s refinancing activities subsequent to December 31, 2021.

Liquidity and Financial Condition

The accompanyingthese 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$4,389. As a result of uncertainties.

For the three months ended June 30, 2022 and 2021 we have recognized net income of $1,262 and $1,025, respectively. For the six months ended June 30, 2022 and 2021, we recognized net income of $3,764 and $2,297, respectively. As of June 30, 2022, we had cash and cash equivalents of $2,840 and a working capital surplus of $649.

Management believes that, basedprincipal debt service payments required to be paid on (i) the refinancing of our debt as partaccount of the Debt Financing, including extensionConsolidation Term Loan, the Company does not currently have cash on hand or committed available liquidity to repay all of its outstanding debt due within one year after the maturity date on our term loans,that these financial statements are issued. These conditions and (ii) our operational forecast through 2022 and 2023 following completion ofevents raise substantial doubt about the Merger, that we canCompany's ability to continue as a going concern through at least August 15, 2023.under the technical framework within ASU 205-40.

In response to these conditions, management plans to either refinance or recapitalize the debt. However, given our historical net lossesthese plans have not been finalized and cash used in operating activities, we obtainedare not completely within the Company's control, and therefore cannot be deemed probable under ASU 205-40.  We have been unable to obtain a continuedcontinuing support letter from Slipstream through August 15, 2023. We can provide no assurancebeyond the period ending May 31, 2024. Obtaining a continuing support letter from Slipstream beyond one year of the date our financial statements were issued was a factor that previously alleviated the substantial doubt about our ongoing operational efforts will be successful which could haveability to continue as a material adverse effect on our results of operations and cash flows.going concern. As a result, the Company has concluded that management's plans do not alleviate substantial doubt about the Company's ability to continue as a going concern.  

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

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-Q10-Q and Article 10 of Regulation S-XS-X and include all of the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”) for interim financial reporting. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes for the year ended December 31, 2021,2022, included in the Company’s Annual Report on Form 10-K10-K filed with the Securities and Exchange Commission on March 22, 2022.30, 2023.

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

2. Recently Issued and Adopted Accounting Pronouncements

Credit Losses. In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No.2016-13,Financial Instruments—Credit Losses, which requires entities to estimate expected lifetime credit losses on financial assets and provide expanded disclosures. The ASU replaced the incurred loss methodology with one that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We adopted ASU No.2016-13 on January 1, 2023. The adoption of this guidance did not have a material impact on the Company's Condensed Consolidated Financial Statements, as the Company's primary financial assets are its trade accounts receivable, which are short-term financings under industry standard credit and trade terms.

Debt. In August 2020, the FASB issued Accounting Standards Update No.2020-06,Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity(ASU 2020-06), which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. This guidance will be effective for us in the first quarter of 2024 on a full or modified retrospective basis, with early adoption permitted. We do not intend to early adopt this standard, nor do we expect the adoption of this guidance to have a material impact on our Consolidated Financial Statements.

2.

3. Revenue Recognition

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

If an arrangement involves multiple performance obligations, the items are analyzed to determine the separate units of accounting, whether the items have value on a standalone basis and whether there is objective and reliable evidence of their standalone selling price. The total contract transaction price is allocated to the identified performance obligations based upon the relative standalone selling prices of the performance obligations. The standalone selling price is based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost plus margin approach. See Note 4 Revenue Recognition for additional detail and discussion of the Company’s performance obligations.

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

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

The Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced to the clients. A contract liability is recognized as deferred revenue when the Company invoices clients in advance of performing the related services under the terms of a contract. 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.

4. Allowance for Credit Losses

The allowance for credit losses is the Company's best estimate of the amount of expected lifetime credit losses in the Company's accounts receivable. The Company regularly reviews the adequacy of its allowance for credit losses. The Company estimates losses over the contractual life using assumptions to capture the risk of loss, even if remote, based principally on how long a receivable has been outstanding. Account balances are charged off against the allowance for credit losses after all reasonable means of collection have been exhausted and the potential for recovery is considered remote. Other factors considered include historical write-off experience, current economic conditions, customer credit, and past transaction history with the customer. The allowance for credit losses is included in accounts receivable, net in the accompanying Condensed Consolidated Balance Sheets.

The Company had the following activity for its allowance for credit losses from December 31, 2022 to June 30, 2023:

5. Inventories

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

The reserve for obsolete inventory at June 30, 2023 and December 31, 2022 was $1,895 and $1,777, respectively, of which $1,707 related to Safe Space Solutions.  The Company is no longer actively promoting the sale of our Safe Space Solutions or purchasing inventory to support such solutions.

4.

6. Impairment of Long-Lived Assets

We review the carrying value of all long-lived assets, including property and equipment, for impairment annually as of September 30 in accordance with ASC 360, Accounting for the Impairment or Disposal of Long-Lived Assets. Under ASC 360, impairment losses are recorded whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We evaluated whether there were any triggering events for consideration of impairment of long-lived assets as of June 30, 2022 and concluded there were none.

If the impairment tests indicate that the carrying value of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment loss would be recognized. 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.

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

Basic and diluted income/(loss)/earnings per common share for all periods presented is computed using the weighted average number of common shares outstanding. Basic weighted average shares outstanding includes only outstanding common shares. Diluted weighted average shares outstanding includes outstanding common shares and potential dilutive common shares outstanding in accordance with the treasury stock method. Shares reserved for outstanding stock options, including stock options with performance restricted vesting, and warrants totaling approximately 22,472,886 at June 30, 2022 were excluded from the computation of income per share as the strike price on the options and warrants were higher than the Company’s market price and therefore anti-dilutive.

Shares reserved for outstanding stock options, including stock options with performance restricted vesting, and warrants totaling approximately 6,964,5177,391,651 and 7,490,962 at June 30, 20212023 and 2022, respectively, were excluded from the computation of income(loss)/earnings per share as the strike price on the options and warrants were higher than the Company’sCompany'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.

In calculating diluted earnings per share for the three and six months ended June 30, 2021, 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 had the intent and ability to settle the debt in cash.

6.8. 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 a number of matters including, but not limited to, net operating losses, differences in basis of intangibles, stock-based compensation, reserves for uncollectible accounts receivable and inventory, differences in depreciation methods, and accrued expenses. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company accounts for uncertain tax positions utilizing an established recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We had no uncertain tax positions as of June 30, 20222023 and December 31, 2021.2022.

7. Goodwill

9. Goodwill and Intangible Assets

We follow the provisions of ASC 350, Goodwill and Other Intangible Assets. Pursuant to ASC 350, goodwill acquired in a purchase business combination is not amortized, but instead tested for impairment at least annually. The Company uses an annual measurement date of September 30 (see Note 7 Intangible Assetsto assess impairment of goodwill and Goodwill).indefinite-lived intangible assets, or as indicators are identified.

Definite-lived intangible assets are amortized straight-line in accordance with their identified useful lives. Pursuant to ASC 350, these intangible assets are evaluated for impairment at least annually, or as indicators of impairment are identified.

8.

10. Use of Estimates

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

9. Leases

We account for leases in accordance with ASU No. 2016-02, Leases (Topic 842), as amended.

We determine if an arrangement is a lease at inception. Right of use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, we consider only payments that are fixed and determinable at the time of commencement. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. 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.

10.11. Business Combinations

Accounting for acquisitions requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations. Refer to Note 5, Business Combination for a discussion of the accounting for the Merger.

11.12. Contingent Consideration

The Company has contingent consideration arrangements related to certain acquisitions to potentially pay additional cash amounts in future periods based on the lack of achievement of certain share price performance goals of our common stock. Such contingent consideration arrangements are recorded at fair value and are classified as liabilities on the acquisition date and are remeasured at each reporting period in accordance with ASC 805-30-35-1805-30-35-1 using a Monte Carlo simulation model.

NOTE 3: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS FAIR VALUE MEASUREMENT

Recently adoptedWe 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:

On January Level 1 2022, we adopted early Accounting Standards Update (“ASU”) No. 2021-08, Business Combinations (Topic 805): Accounting — Valuations based on unadjusted quoted prices in active markets for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08), which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606). The adoption of this new standard did not have a material impact on our condensed consolidated financial statements.identical assets.

Not yet adoptedLevel 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.

In August 2020,Level 3 — Valuations based on inputs that are unobservable and involve management judgment and the FASB issued Accounting Standards Update No. 2020-06, Debt—Debt with Conversionreporting entity’s own assumptions about market participants 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 usepricing.

The calculation of the if-converted method. This guidance will be effective for us infair value of the first quarter of 2024contingent consideration contains inputs which are unobservable and involve management judgment and are considered Level 3 estimates. Additionally, the separately identifiable intangible assets rely on a full or modified retrospective basis, with early adoption permitted. Wediscounted cash flow model which utilizes inputs including the calculation of the weighted average cost of capital and management’s forecast of future financial performance which are currently evaluating the disclosure requirementsunobservable and potential impact on our consolidated financial statements.involve management judgment and are considered Level 3 estimates.

In June 2016,The calculation of the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses. The main objective is to provideweighted average cost of capital and management’s forecast of future financial statement users with more decision-useful information aboutperformance utilized within our discounted cash flow model for the expected credit losses on financial instrumentsimpairment of goodwill contains inputs which are unobservable 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 lossesinvolve management judgment and requires consideration of a broader range of reasonable and supportable information to calculate credit lossare considered Level 3 estimates. For trade receivables and loans, entities will be required to estimate lifetime expected credit losses. The amendments are effective for public business entities that qualify as smaller reporting companies for fiscal years and interim periods beginning after December 15, 2022. We are currently evaluating the disclosure requirements related to adopting this guidance.

The calculation of the fair value of the warrant liability contains valuation inputs which are based on observable inputs (other than Level 1 prices) and are considered Level 2 estimates. The liability warrants were converted to equity warrants effective June 30, 2022.

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, 2022 2023 and 2021:2022: