CREATIVE REALITIES, INC. - Quarter Report: 2008 September (Form 10-Q)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
o | 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
Wireless Ronin Technologies, Inc.
(Exact name of registrant as specified in its charter)
Minnesota | 41-1967918 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
5929 Baker Road, Suite 475, Minnetonka MN 55345
(Address of principal executive offices, including zip code)
(Address of principal executive offices, including zip code)
(952) 564-3500
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 month (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
As of November 3, 2008, the registrant had 14,764,454 shares of common stock outstanding.
WIRELESS RONIN TECHNOLOGIES, INC.
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EX-32.2 |
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
WIRELESS RONIN TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
(unaudited) | (audited) | |||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 10,576,983 | $ | 14,542,280 | ||||
Marketable securities available for sale |
6,928,129 | 14,657,635 | ||||||
Accounts receivable, net of allowance of $78,127 and $84,685 |
1,891,472 | 4,135,402 | ||||||
Income tax receivable |
109,805 | 231,328 | ||||||
Inventories |
925,209 | 539,140 | ||||||
Network equipment held for sale |
1,937,162 | | ||||||
Prepaid expenses and other current assets |
325,776 | 817,511 | ||||||
Total current assets |
22,694,536 | 34,923,296 | ||||||
Property and equipment, net |
2,168,931 | 1,780,390 | ||||||
Intangible assets, net |
2,593,124 | 3,174,804 | ||||||
Restricted cash |
450,000 | 450,000 | ||||||
Other assets |
37,768 | 40,217 | ||||||
TOTAL ASSETS |
$ | 27,944,359 | $ | 40,368,707 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES |
||||||||
Current maturities of capital lease obligations |
$ | 73,643 | $ | 100,023 | ||||
Accounts payable |
1,856,041 | 1,387,327 | ||||||
Deferred revenue |
443,835 | 1,252,485 | ||||||
Accrued purchase price consideration |
999,974 | 999,974 | ||||||
Accrued liabilities |
1,457,849 | 869,759 | ||||||
Total current liabilities |
4,831,342 | 4,609,568 | ||||||
Capital lease obligations, less current maturities |
15,413 | 70,960 | ||||||
TOTAL LIABILITIES |
4,846,755 | 4,680,528 | ||||||
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS EQUITY |
||||||||
Capital stock, $0.01 par value, 66,666,666 shares authorized |
||||||||
Preferred stock, 16,666,666 shares authorized, no shares issued
and outstanding |
| | ||||||
Common stock, 50,000,000 shares authorized; 14,764,454 and
14,537,705 shares issued and outstanding |
147,645 | 145,377 | ||||||
Additional paid-in capital |
80,194,295 | 78,742,311 | ||||||
Accumulated deficit |
(57,312,066 | ) | (43,520,098 | ) | ||||
Accumulated other comprehensive income |
67,730 | 320,589 | ||||||
Total shareholders equity |
23,097,604 | 35,688,179 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 27,944,359 | $ | 40,368,707 | ||||
See accompanying Notes to Consolidated Financial Statements.
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WIRELESS RONIN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Sales |
||||||||||||||||
Hardware |
$ | 738,166 | $ | 429,578 | $ | 1,997,546 | $ | 2,949,816 | ||||||||
Software |
432,430 | 119,179 | 734,658 | 472,018 | ||||||||||||
Services and other |
778,936 | 575,176 | 2,747,065 | 953,398 | ||||||||||||
Total sales |
1,949,532 | 1,123,933 | 5,479,269 | 4,375,232 | ||||||||||||
Cost of sales |
||||||||||||||||
Hardware |
665,723 | 263,961 | 1,751,653 | 1,999,669 | ||||||||||||
Software |
217,829 | 1,007 | 217,829 | 1,007 | ||||||||||||
Services and other |
963,705 | 444,797 | 2,946,912 | 685,376 | ||||||||||||
Total cost of sales |
1,847,257 | 709,765 | 4,916,394 | 2,686,052 | ||||||||||||
Gross profit |
102,275 | 414,168 | 562,875 | 1,689,180 | ||||||||||||
Operating expenses: |
||||||||||||||||
Sales and marketing expenses |
927,085 | 715,016 | 3,256,883 | 1,993,191 | ||||||||||||
Research and development expenses |
792,832 | 319,945 | 1,836,741 | 827,234 | ||||||||||||
General and administrative expenses |
3,134,171 | 2,210,632 | 9,801,140 | 5,486,439 | ||||||||||||
Termination of partnership agreement |
| | | 653,995 | ||||||||||||
Total operating expenses |
4,854,088 | 3,245,593 | 14,894,764 | 8,960,859 | ||||||||||||
Operating loss |
(4,751,813 | ) | (2,831,425 | ) | (14,331,889 | ) | (7,271,679 | ) | ||||||||
Other income (expenses): |
||||||||||||||||
Interest expense |
(5,135 | ) | (11,758 | ) | (18,892 | ) | (32,273 | ) | ||||||||
Interest income |
121,707 | 467,740 | 563,215 | 899,724 | ||||||||||||
Other |
(35 | ) | (7,081 | ) | (4,402 | ) | (8,572 | ) | ||||||||
Total other income |
116,537 | 448,901 | 539,921 | 858,879 | ||||||||||||
Net loss |
$ | (4,635,276 | ) | $ | (2,382,524 | ) | $ | (13,791,968 | ) | $ | (6,412,800 | ) | ||||
Basic and diluted loss per common share |
$ | (0.31 | ) | $ | (0.17 | ) | $ | (0.94 | ) | $ | (0.55 | ) | ||||
Basic and diluted weighted average shares
outstanding |
14,764,345 | 14,369,262 | 14,629,278 | 11,565,993 | ||||||||||||
See accompanying Notes to Consolidated Financial Statements.
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WIRELESS RONIN TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2008 | 2007 | |||||||
Operating Activities: |
||||||||
Net loss |
$ | (13,791,968 | ) | $ | (6,412,800 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities |
||||||||
Depreciation and amortization |
467,374 | 265,617 | ||||||
Amortization of acquisition-related intangibles |
416,273 | | ||||||
Allowance for doubtful receivables |
(6,286 | ) | 35,981 | |||||
Stock-based compensation expense |
901,998 | 880,903 | ||||||
Change in operating assets and liabilities: |
||||||||
Accounts receivable |
(214,740 | ) | (1,689,750 | ) | ||||
Income tax receivable |
109,761 | (13,734 | ) | |||||
Inventories |
(383,943 | ) | (404,620 | ) | ||||
Prepaid expenses and other current assets |
(97,032 | ) | (27,078 | ) | ||||
Other assets |
1,351 | 2,495 | ||||||
Accounts payable |
476,042 | 897,563 | ||||||
Deferred revenue |
223,142 | 339,257 | ||||||
Accrued liabilities |
645,721 | 409,964 | ||||||
Net cash used in operating activities |
(11,252,307 | ) | (5,716,202 | ) | ||||
Investing activities |
||||||||
Purchase of McGill-Investment in Subsidiary, net of cash acquired |
| (2,817,568 | ) | |||||
Purchases of property and equipment |
(884,566 | ) | (1,051,144 | ) | ||||
Purchases of marketable securities |
(19,467,885 | ) | (14,564,800 | ) | ||||
Sales of marketable securities |
27,186,607 | 16,422,597 | ||||||
Net cash provided by (used in) investing activities |
6,834,156 | (2,010,915 | ) | |||||
Financing activities |
||||||||
Change in restricted cash |
| (450,000 | ) | |||||
Payments on capital leases and other |
(81,700 | ) | (76,817 | ) | ||||
Proceeds from exercise of warrants and stock options |
370,899 | 904,721 | ||||||
Proceeds from issuance of common stock |
181,353 | 27,093,032 | ||||||
Net cash provided by financing activities |
470,552 | 27,470,936 | ||||||
Effect of exchange rate changes on cash |
(17,698 | ) | 32,279 | |||||
Increase (decrease) in cash and cash equivalents |
(3,965,297 | ) | 19,776,098 | |||||
Cash and cash equivalents, beginning of period |
14,542,280 | 8,273,388 | ||||||
Cash and cash equivalents, end of period |
$ | 10,576,983 | $ | 28,049,486 | ||||
Non-Cash
Items: |
||||||||
Collateral received for settlement of note receivable |
$ | 1,937,162 | $ | |
See accompanying Notes to Consolidated Financial Statements.
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WIRELESS RONIN TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Wireless Ronin Technologies, Inc. (the Company) has prepared the consolidated financial
statements included herein, without audit, pursuant to the rules and regulations of the United
States (U.S.) Securities and Exchange Commission (SEC). The consolidated financial statements
include all wholly-owned subsidiaries. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with U.S. generally accepted accounting
principles have been condensed or omitted pursuant to such rules and regulations. However, the
Company believes that the disclosures are adequate to ensure the information presented is not
misleading. These unaudited consolidated financial statements should be read in conjunction with
the audited financial statements and the notes thereto included in the Companys Annual Report on
Form 10-KSB for the year ended December 31, 2007.
The Company believes that all necessary adjustments, which consist only of normal recurring
items, have been included in the accompanying financial statements to present fairly the results of
the interim periods. The results of operations for the interim periods presented are not
necessarily indicative of the operating results to be expected for any subsequent interim period or
for the year ending December 31, 2008.
Nature of Business and Operations
The Company is a Minnesota corporation that provides dynamic digital signage solutions
targeting specific retail and service markets. The Company has designed and developed RoninCast®, a
proprietary content delivery system that manages, schedules and delivers digital content over a
wireless or wired network. The solutions, the digital alternative to static signage, provide
business customers with a dynamic and interactive visual marketing system designed to enhance the
way they advertise, market and deliver their messages to targeted audiences.
The Companys wholly-owned subsidiary, Wireless Ronin Technologies (Canada), Inc., an Ontario,
Canada provincial corporation located in Windsor, Ontario, develops e-learning, e-performance
support and e-marketing solutions for business customers. E-learning solutions are software-based
instructional systems developed specifically for customers, primarily in sales force training
applications. E-performance support systems are interactive systems produced to increase product
literacy of customer sales staff. E-marketing products are developed to increase customer knowledge
of and interaction with customer products.
The Company and its subsidiary sell products and services primarily throughout North America.
Summary of Significant Accounting Policies
Further information regarding the Companys significant accounting policies can be found in
the Companys most recent Annual Report filed on Form 10-KSB for the year ended December 31, 2007.
1. Revenue Recognition
The Company recognizes revenue primarily from these sources:
| Software and software license sales | |
| System hardware sales | |
| Professional service revenue | |
| Software development services | |
| Software design and development services |
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| Implementation services | |
| Maintenance and support contracts |
The Company applies the provisions of American Institute of Certified Public Accountants
(AICPA) Statement of Position (SOP) 97-2, Software Revenue Recognition, (SOP 97-2) as amended
by SOP 98-9 Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions (SOP 98-9) to all transactions involving the sale of software licenses. In the
event of a multiple element arrangement, the Company evaluates if each element represents a
separate unit of accounting taking into account all factors following the guidelines set forth in
Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) Issue No. 00-21
(EITF 00-21) Revenue Arrangements with Multiple Deliverables.
The Company recognizes revenue when (i) persuasive evidence of an arrangement exists; (ii)
delivery has occurred, which is when product title transfers to the customer, or services have been
rendered; (iii) customer payment is deemed fixed or determinable and free of contingencies and
significant uncertainties; and (iv) collection is probable. The Company assesses collectability
based on a number of factors, including the customers past payment history and its current
creditworthiness. If it is determined that collection of a fee is not reasonably assured, the
Company defers the revenue and recognizes it at the time collection becomes reasonably assured,
which is generally upon receipt of cash payment. If an acceptance period is required, revenue is
recognized upon the earlier of customer acceptance or the expiration of the acceptance period.
Multiple-Element Arrangements the Company enters into arrangements with customers that
include a combination of software products, system hardware, maintenance and support, or
installation and training services. The Company allocates the total arrangement fee among the
various elements of the arrangement based on the relative fair value of each of the undelivered
elements determined by vendor-specific objective evidence (VSOE). In software arrangements for
which the Company does not have VSOE of fair value for all elements, revenue is deferred until the
earlier of when VSOE is determined for the undelivered elements (residual method) or when all
elements for which the Company does not have VSOE of fair value have been delivered.
The Company has determined VSOE of fair value for each of its products and services. The fair
value of maintenance and support services is based upon the renewal rate for continued service
arrangements. The fair value of installation and training services is established based upon
pricing for the services. The fair value of software and licenses is based on the normal pricing
and discounting for the product when sold separately.
Each element of the Companys multiple element arrangements qualifies for separate accounting
with the exception of undelivered maintenance and service fees. The Company defers revenue under
the residual method for undelivered maintenance and support fees included in the price of software
and amortizes fees ratably over the appropriate period. The Company defers fees based upon the
customers renewal rate for these services.
Software and software license sales
The Company recognizes revenue when a fixed fee order has been received and delivery has
occurred to the customer. The Company assesses whether the fee is fixed or determinable and free of
contingencies based upon signed agreements received from the customer confirming terms of the
transaction. Software is delivered to customers electronically or on a CD-ROM, and license files
are delivered electronically.
System hardware sales
The Company recognizes revenue on system hardware sales generally upon shipment of the product
or customer acceptance depending upon contractual arrangements with the customer. Shipping charges
billed to customers are included in sales and the related shipping costs are included in cost of
sales.
Professional service revenue
Included in services and other revenues is revenue derived from implementation, maintenance
and support contracts, content development, software development and training. The majority of
consulting and implementation services and accompanying agreements qualify for separate accounting.
Implementation and content development services are bid either on a fixed-fee basis or on a
time-and-materials basis. For time-and-materials contracts, the Company recognizes revenue as
services are performed. For fixed-fee contracts, the Company recognizes revenue upon
completion of specific contractual milestones or by using the percentage-of-completion method.
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Software development services
Software
development revenue is recognized monthly as services are performed per fixed-fee
contractual agreements.
Software design and development services
Revenue from contracts for technology integration consulting services where the Company
designs/redesigns, builds and implements new or enhanced systems applications and related processes
for clients are recognized on the percentage-of-completion method in accordance with AICPA SOP
81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP
81-1). Percentage-of-completion accounting involves calculating the percentage of services
provided during the reporting period compared to the total estimated services to be provided over
the duration of the contract. Estimated revenues for applying the percentage-of-completion method
include estimated incentives for which achievement of defined goals is deemed probable. This method
is followed where reasonably dependable estimates of revenues and costs can be made. Estimates of
total contract revenue and costs are continuously monitored during the term of the contract, and
recorded revenue and costs are subject to revision as the contract progresses. Such revisions may
result in increases or decreases to revenue and income and are reflected in the financial
statements in the periods in which they are first identified. If estimates indicate that a contract
loss will occur, a loss provision is recorded in the period in which the loss first becomes
probable and reasonably estimable. Contract losses are determined to be the amount by which the
estimated direct and indirect costs of the contract exceed the estimated total revenue that will be
generated by the contract and are included in cost of sales and classified in accrued expenses in
the balance sheet.
Revenue recognized in excess of billings is recorded as unbilled services. Billings in excess
of revenue recognized are recorded as deferred revenue until revenue recognition criteria are met.
Uncompleted contracts are as follows:
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
Cost incurred on uncompleted contracts |
$ | 130,690 | $ | 155,246 | ||||
Estimated earnings |
506,882 | 616,174 | ||||||
637,572 | 771,420 | |||||||
Less: billings to date |
(859,788 | ) | (932,021 | ) | ||||
Amount included in deferred revenue |
$ | 222,216 | $ | 160,601 | ||||
Implementation services
Implementation services revenue is recognized when installation is completed.
Maintenance and support contracts
Maintenance and support consists of software updates and support. Software updates provide
customers with rights to unspecified software product upgrades and maintenance releases and patches
released during the term of the support period. Support includes access to technical support
personnel for software and hardware issues.
Maintenance and support revenue is recognized ratably over the term of the maintenance
contract, which is typically one to three years. Maintenance and support is renewable by the
customer. Rates for maintenance and support, including subsequent renewal rates, are typically
established based upon a specified percentage of net license fees as set forth in the arrangement.
2. Accounts Receivable
Accounts receivable are usually unsecured and stated at net realizable value and bad debts are
accounted for using the allowance method. The Company performs credit evaluations of its customers
financial condition on an as-needed basis and generally requires no collateral. Payment is
generally due 90 days or less from the invoice date and accounts past due more than 90 days are
individually analyzed for collectability. In addition, an allowance is provided for other accounts
when a significant pattern of uncollectability has occurred based on historical experience and
managements evaluation of accounts
receivable. If all collection efforts have been exhausted, the account is written off against
the related allowance. See Note 9 for further information on certain outstanding receivables at
September 30, 2008.
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3. Software Development Costs
FASB Statement of Financial Accounting Standards (SFAS) No. 86 Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed requires certain software development
costs to be capitalized upon the establishment of technological feasibility. The establishment of
technological feasibility and the ongoing assessment of the recoverability of these costs requires
considerable judgment by management with respect to certain external factors such as anticipated
future revenue, estimated economic life, and changes in software and hardware technologies.
Software development costs incurred beyond the establishment of technological feasibility have not
been significant. No software development costs were capitalized during the three and nine months
ended September 30, 2008 or 2007. Software development costs have been recorded as research and
development expense.
4. Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with SFAS No. 123 (Revised
2004), Share-Based Payment, (SFAS 123R), which revised SFAS 123, Accounting for Stock-Based
Compensation (SFAS 123). Stock-based compensation expense recognized during the period is based
on the value of the portion of share-based awards that are ultimately expected to vest during the
period. The fair value of each stock option grant is estimated on the date of grant using the
Black-Scholes option pricing model. The fair value of restricted stock is determined based on the
number of shares granted and the closing price of the Companys common stock on the date of grant.
Compensation expense for all share-based payment awards is recognized using the straight-line
amortization method over the vesting period.
See Note 8 for further information regarding the Companys stock-based compensation.
5. Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles 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. Significant estimates of the Company are the allowance for doubtful accounts, valuation
allowance for deferred tax assets, deferred revenue, depreciable lives and methods of property and
equipment, valuation of warrants and other stock-based compensation and valuation of recorded
intangible assets. Actual results could differ from those estimates.
Recent Accounting Pronouncements
During September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (SFAS 157). This
statement defines fair value, establishes a framework for measuring fair value under generally
accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007,
however, during December 2007, the FASB proposed FASB Staff Position SFAS 157-2 which delays the
effective date of certain provisions of SFAS 157 until fiscal years beginning after November 15,
2008. Effective January 1, 2008, the Company adopted SFAS No. 157 for financial assets and
liabilities recognized at fair value on a recurring basis. The partial adoption of SFAS No. 157 for
financial assets and liabilities did not have a material impact on the Companys financial position
or results of operations. See Note 3 to the consolidated financial statements for further
discussion.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities-Including an Amendment of FASB Statement No 115. SFAS No. 159 permits an
entity to choose to measure many financial instruments and certain other items at fair value. Most
of the provisions of SFAS No. 159 are elective; however, the amendment of SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities, applies to all entities with
available-for-sale or trading securities. For financial instruments elected to be accounted for at
fair value, an entity will report the unrealized gains and losses in earnings. SFAS No. 159 was
effective for the Company beginning in the first quarter of fiscal 2008. The adoption of SFAS No.
159 in the first quarter of fiscal 2008 did not materially impact the Companys results of
operations or financial position.
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During December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations
(SFAS 141 (Revised 2007)). While this statement retains the fundamental requirement of SFAS 141
that the acquisition method of accounting
(which SFAS 141 called the purchase method) be used for all business combinations, SFAS 141
(Revised 2007) now establishes the principles and requirements for how an acquirer in a business
combination: recognizes and measures in its financial statements the identifiable assets acquired,
the liabilities assumed, and any noncontrolling interests in the acquiree; recognizes and measures
the goodwill acquired in the business combination or the gain from a bargain purchase; and
determines what information should be disclosed in the financial statements to enable the users of
the financial statements to evaluate the nature and financial effects of the business combination.
The Company will adopt SFAS 141 (Revised 2007) for acquisitions that occur on or after January 1,
2009.
During December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an Amendment of ARB No. 51 (SFAS 160). This statement establishes
accounting and reporting standards for noncontrolling interests in subsidiaries and for the
deconsolidation of subsidiaries and clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity in the consolidated
financial statements. This statement also requires expanded disclosures that clearly identify and
distinguish between the interests of the parent owners and the interests of the noncontrolling
owners of a subsidiary. SFAS 160 is effective for fiscal years beginning on or after December 15,
2008. The Company does not believe that the adoption of SFAS 160 will have a material effect on its
results of operations or financial position.
In December 2007, the SEC issued SAB 110, which provides interpretive guidance regarding the
use of a simplified method in developing an estimate of the expected term of plain vanilla
share options in accordance with SFAS No. 123(R), Share-Based Payments. Accordingly, the SEC
will continue to accept, under certain circumstances, the use of the simplified method beyond
December 31, 2007, The Company has concluded that its historical share option exercise experience
does not provide a reasonable basis upon which to estimate the expected term due to its limited
existence as a publicly traded company. Therefore, the Company will continue to use the
simplified method in developing its estimate of the expected term of plain vanilla options.
During March 2008, the FASB issued SFAS No. 161, Disclosures about Derivatives Instruments
and Hedging Activities, an Amendment of FASB Statement No. 133 (SFAS 161). This statement
changes the disclosure requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative instruments and related
hedged items affect an entitys financial position, financial performance, and cash flows. SFAS 161
is effective for fiscal years beginning on or after November 15, 2008. The Company does not
believe that the adoption of SFAS 161 will have a material effect on its results of operations or
financial position.
In April 2008, the FASB issued FASB Staff Position (FSP) No. FAS 142-3, Determination of
the Useful Life of Intangible Assets, which aims to improve consistency between the useful life of
a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets
and the period of expected cash flows used to measure the fair value of the asset under FAS 141(R),
especially where the underlying arrangement includes renewal or extension terms. The FSP is
effective prospectively for fiscal years beginning after December 15, 2008 and early adoption is
prohibited. The Company is currently evaluating the impact of this position on its financial
statements
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS 162). SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with generally accepted
accounting principles in the United States. SFAS 162 is effective
November 17, 2008. The Company does not believe that the adoption of this statement will have a
material effect on its results of operations or financial position.
In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance
Contracts An interpretation of FASB Statement No. 60 (SFAS 163). SFAS 163 requires that an
insurance enterprise recognize a claim liability prior to an event of default when there is
evidence that credit deterioration has occurred in an insured financial obligation. It also
clarifies how Statement 60 applies to financial guarantee insurance contracts, including the
recognition and measurement to be used to account for premium revenue and claim liabilities, and
requires expanded disclosures about financial guarantee insurance contracts. It is effective for
financial statements issued for fiscal years beginning after December 15, 2008, except for some
disclosures about the insurance enterprises risk-management activities. SFAS 163 requires that
disclosures about the risk-management activities of the insurance enterprise be effective for the
first period beginning after issuance. Except for those disclosures, earlier application is not
permitted. The Company does not believe that the adoption of this statement will have a material
effect on its results of operations or financial position.
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In May 2008, the FASB issued FASB FSP EITF No. 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities (EITF 03-6-1). EITF
03-6-1 addresses whether instruments granted in share-based payment transactions, with rights to
dividend equivalents, are participating securities prior to vesting and, therefore, need to be
included in the earnings allocation in computing earnings per share (EPS) under the two-class
method described in FASB Statement No. 128, Earnings Per Share. Unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of EPS pursuant to
the two-class method. In contrast, the right to receive dividends or dividend equivalents that the
holder will forfeit if the award does not vest does not constitute a participation right. EITF
03-6-1 is effective for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. All prior period EPS data presented shall be
adjusted retrospectively (including interim financial statements, summaries of earnings, and
selected financial data). Early adoption of EITF 03-6-1 is prohibited. The Company does not
believe that the adoption of this statement will have a material effect on its results of
operations or financial position.
NOTE 2: OTHER FINANCIAL STATEMENT INFORMATION
The following tables provide details of selected financial statement items:
INVENTORIES
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
Finished goods |
$ | 405,277 | $ | 318,451 | ||||
Work-in-process |
519,932 | 220,689 | ||||||
Total inventories |
$ | 925,209 | $ | 539,140 | ||||
No adjustments were made for the three or nine months ended September 30, 2008 or 2007,
respectively, to reduce inventory values to the lower of cost or market.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
Deferred project costs |
$ | | $ | 476,679 | ||||
Prepaid expenses |
325,776 | 340,832 | ||||||
Total prepaid expenses and other current assets |
$ | 325,776 | $ | 817,511 | ||||
Deferred project costs represent incurred costs to be recognized as cost of sales once all
revenue recognition criteria have been met. See Note 11 for additional information on amounts
reclassified related to our business with NewSight Corporation.
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PROPERTY AND EQUIPMENT
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
Leased equipment |
$ | 380,908 | $ | 380,908 | ||||
Equipment |
1,379,368 | 923,549 | ||||||
Leasehold improvements |
338,718 | 313,021 | ||||||
Demonstration equipment |
150,891 | 127,556 | ||||||
Purchased software |
539,906 | 226,003 | ||||||
Furniture and fixtures |
635,064 | 581,355 | ||||||
Total property and equipment |
$ | 3,424,855 | $ | 2,552,392 | ||||
Less: accumulated depreciation |
(1,255,924 | ) | (772,002 | ) | ||||
Net property and equipment |
$ | 2,168,931 | $ | 1,780,390 | ||||
OTHER ASSETS
Other assets consist of long-term deposits on operating leases.
DEFERRED REVENUE
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
Deferred customer billings |
$ | | $ | 950,066 | ||||
Deferred software maintenance |
65,347 | 90,197 | ||||||
Customer deposits |
227,778 | 166,162 | ||||||
Deferred project revenue |
150,710 | 46,060 | ||||||
Total deferred revenue |
$ | 443,835 | $ | 1,252,485 | ||||
See Note 11 for additional information on amounts reclassified related to our business with
NewSight Corporation.
ACCRUED LIABILITIES
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
Compensation |
$ | 1,103,197 | $ | 590,737 | ||||
Accrued remaining lease obligations |
107,051 | 170,793 | ||||||
Accrued rent |
87,143 | 79,131 | ||||||
Sales tax and other |
160,458 | 29,098 | ||||||
Total accrued liabilities |
$ | 1,457,849 | $ | 869,759 | ||||
See Note 6 for additional information on accrued remaining lease obligations.
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COMPREHENSIVE LOSS
Comprehensive loss for the Company includes net loss, foreign currency translation and
unrealized gain (loss) on investments. Comprehensive loss for the three and nine months ended
September 30, 2008 and 2007, respectively, was as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Net loss |
$ | (4,635,276 | ) | $ | (2,382,524 | ) | $ | (13,791,968 | ) | $ | (6,412,800 | ) | ||||
Foreign currency translation adjustment |
(106,458 | ) | 290,616 | (242,075 | ) | 290,616 | ||||||||||
Unrealized gain (loss) on investments |
(6,007 | ) | 7,563 | (10,784 | ) | (11,538 | ) | |||||||||
Comprehensive loss |
$ | (4,747,741 | ) | $ | (2,084,345 | ) | $ | (14,044,827 | ) | $ | (6,133,722 | ) | ||||
SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended | ||||||||
September 30, | ||||||||
2008 | 2007 | |||||||
Non-cash investing and financing activities |
||||||||
Cash paid for: |
||||||||
Interest |
$ | 18,892 | $ | 32,273 | ||||
Stock issued in acquisition of McGill Digital Solutions, Inc. |
312,000 | |||||||
Effect of foreign currency exchange rate changes on cash |
(17,698 | ) | 32,279 | |||||
Collateral received for note receivable |
1,937,162 | |
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NOTE 3: MARKETABLE SECURITIES AND FAIR VALUE MEASUREMENT
Short-term investments are classified as available-for-sale securities and are reported at
fair value as follows:
September 30, 2008 | ||||||||||||||||
Gross | Gross | Gross | Estimated | |||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | (Losses) | Value | |||||||||||||
Money market funds |
$ | 9,437,938 | $ | 26 | $ | (29 | ) | $ | 9,437,935 | |||||||
Total included in cash and cash equivalents |
9,437,938 | 26 | (29 | ) | 9,437,935 | |||||||||||
Government and agency securities |
6,921,700 | 11,222 | (4,793 | ) | 6,928,129 | |||||||||||
Total included in marketable securities |
6,921,700 | 11,222 | (4,793 | ) | 6,928,129 | |||||||||||
Total available-for-sale securities |
$ | 16,359,638 | $ | 11,248 | $ | (4,822 | ) | $ | 16,366,064 | |||||||
December 31, 2007 | ||||||||||||||||
Gross | Gross | Gross | Estimated | |||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | (Losses) | Value | |||||||||||||
Money market funds |
$ | 14,045,738 | $ | 43 | $ | (15 | ) | $ | 14,045,766 | |||||||
Total included in cash and cash equivalents |
14,045,738 | 43 | (15 | ) | 14,045,766 | |||||||||||
Government and agency securities |
14,651,501 | 7,797 | (1,663 | ) | 14,657,635 | |||||||||||
Total included in marketable securities |
14,651,501 | 7,797 | (1,663 | ) | 14,657,635 | |||||||||||
Total available-for-sale securities |
$ | 28,697,239 | $ | 7,840 | $ | (1,678 | ) | $ | 28,703,401 | |||||||
The Company measures certain financial assets, including cash equivalents and
available-for-sale securities, at fair value on a recurring basis. In accordance with SFAS No. 157,
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, SFAS No. 157 establishes a three-level hierarchy which prioritizes the inputs
used in measuring fair value. The three hierarchy levels are defined as follows:
Level 1 Valuations based on unadjusted quoted prices in active markets for identical assets.
The fair value of available-for-sale securities included in the Level 1 category is based on quoted
prices that are readily and regularly available in an active market. The Level 1 category at
September 30, 2008 includes money market funds of $9.4 million, which are included in cash and cash
equivalents in the consolidated balance sheets, and government agency securities of $6.9 million,
which are included in marketable securities in the consolidated balance sheets.
Level 2 Valuations based on observable inputs (other than Level 1 prices), such as quoted
prices for similar assets at the measurement date; quoted prices in markets that are not active; or
other inputs that are observable, either directly or indirectly. The Company had no Level 2
financial assets measured at fair value on the consolidated balance sheets as of September 30,
2008.
Level 3 Valuations based on inputs that are unobservable and involve management judgment and
the reporting entitys own assumptions about market participants and pricing. The Company had no
Level 3 financial assets measured at fair value on the consolidated balance sheets as of September
30, 2008.
The hierarchy level assigned to each security in the Companys available-for-sale portfolio is
based on its assessment of the transparency and reliability of the inputs used in the valuation of
such instrument at the measurement date. The Company did not have any financial liabilities that
were covered by SFAS No. 157 as of September 30, 2008.
NOTE 4: TERMINATION OF PARTNERSHIP AGREEMENT
On February 13, 2007, the Company terminated its strategic partnership agreement with Marshall
Special Assets Group, Inc. (Marshall) by signing a mutual termination, release and agreement. By
entering into the mutual termination, release and agreement, the Company regained the rights to
directly control its sales and marketing process within the gaming industry and will obtain
increased margins in all future digital signage sales in such industry. Pursuant to the terms of
the mutual termination, release and agreement, the Company paid Marshall $653,995 in consideration
of the termination of all of Marshalls rights under the strategic partnership agreement and in
full satisfaction of any future obligations to Marshall under the strategic partnership agreement.
Pursuant to the mutual termination, release and agreement, the
Company will pay Marshall a fee in
connection with sales of the Companys software and hardware to customers, distributors and
resellers for use exclusively in the ultimate operations of or for use in a lottery (End Users).
Under such agreement, the Company will pay Marshall (i) 30% of the net invoice price for the sale
of the Companys software to End Users, and (ii) 2% of the net invoice price for sale of hardware
to End Users, in each case collected by the Company on or before February 12, 2012, with a minimum
payment of $50,000 per year for the first three years. Marshall will pay 50% of the costs and
expenses incurred by the Company in relation to any test installations involving sales or
prospective sales to End Users.
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NOTE 5: ACQUISITIONS AND INTANGIBLE ASSETS
On August 16, 2007, the Company closed the transaction contemplated by the Stock Purchase
Agreement by and between the Company, and Robert Whent, Alan Buterbaugh and Marlene Buterbaugh (the
Sellers). Pursuant to such closing, the Company purchased all of the Sellers stock in holding
companies that owned McGill Digital Solutions, Inc. (McGill), based in Windsor, Ontario, Canada.
The holding companies acquired from the Sellers and McGill were amalgamated into one wholly-owned
subsidiary of the Company. The results of operations of McGill (now renamed Wireless Ronin
Technologies (Canada), Inc., (WRT Canada)) have been included in the Companys consolidated
financial statements since August 16, 2007. The Company acquired McGill for its custom interactive
software solutions used primarily for e-learning and digital signage applications. Most of WRT
Canadas revenue is derived from products and solutions provided to the automotive industry.
The Company acquired the shares from the Sellers for cash consideration of $3,190,563, subject
to potential adjustments, and 50,000 shares of the Companys common stock. The Company also
incurred $178,217 in direct costs related to the acquisition. In addition, the Company agreed to
pay earn-out consideration to the Sellers of up to $1,000,000 (CAD) and 50,000 shares of the
Companys common stock if specified earn-out criteria are met. The earn-out criteria for 2007 was
at least $4,100,000 (CAD) gross sales and a gross margin equal to or greater than 50%. If the 2007
earn-out criteria had been met, 25% of the earn-out consideration would have been paid. The 2007
earn-out criteria were not met and no 2007 earn-out was paid. The earn-out criteria for 2008
consists of gross sales of at least $6,900,000 (CAD) and a gross margin equal to or greater than
50%. The Company has accrued the 2008 earn-out consideration of $999,974 as part of its valuation
analysis which was completed in the fourth quarter of 2007.
The purchase price of the acquisition consisted of the following:
Cash payment to sellers |
$ | 3,190,563 | ||
Transaction costs |
178,217 | |||
Accrued purchase price consideration |
999,974 | |||
Stock issuance |
312,000 | |||
Total purchase price |
$ | 4,680,754 | ||
The Company has allocated the cost of the acquisition, as follows:
August 16, | ||||
2007 | ||||
Current assets |
$ | 1,392,391 | ||
Intangible assets |
3,221,652 | |||
Property and equipment |
236,878 | |||
Total assets acquired |
4,850,921 | |||
Current liabilities |
151,075 | |||
Long-term liabilities |
19,092 | |||
Total liabilities assumed |
170,167 | |||
Net assets acquired |
$ | 4,680,754 | ||
Pro Forma Operating Results (Unaudited)
The following unaudited pro forma information presents a summary of consolidated results of
operations of the Company as if the acquisition of McGill had occurred at January 1, 2007. The
historical consolidated financial information has been adjusted to give effect to a decrease in
interest income related to the amount paid as the purchase price to the former shareholders of
McGill.
15
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Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Sales |
$ | 1,949,532 | $ | 1,740,811 | $ | 5,479,269 | $ | 6,575,337 | ||||||||
Loss from operations |
(4,751,813 | ) | (2,687,388 | ) | (14,331,889 | ) | (7,399,328 | ) | ||||||||
Net loss |
(4,635,276 | ) | (2,394,112 | ) | (13,791,968 | ) | (6,788,985 | ) | ||||||||
Basic and diluted loss per common share |
$ | (0.31 | ) | $ | (0.17 | ) | $ | (0.94 | ) | $ | (0.58 | ) | ||||
Basic and diluted weighted average shares outstanding |
14,764,345 | 14,419,262 | 14,629,278 | 11,615,993 | ||||||||||||
The unaudited pro forma condensed consolidated financial information is presented for
informational purposes only. The pro forma information is not necessarily indicative of what the
financial position or results of operations actually would have been had the acquisition been
completed on the dates indicated. In addition, the unaudited pro forma condensed consolidated
financial information does not purport to project the future financial position or operating
results of the Company after completion of the acquisition.
NOTE 6: CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under three capital lease arrangements with imputed
interest of 16% to 22% per year. The leases require monthly payments of $11,443 through May 2008,
$7,151 through July 2009 and $5,296 through November 2009.
Other information relating to the capital lease equipment is as follows:
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
Cost |
$ | 380,908 | $ | 380,908 | ||||
Less: accumulated amortization |
(310,987 | ) | (260,950 | ) | ||||
Total |
$ | 69,921 | $ | 119,958 | ||||
Amortization expense for capital lease assets was $16,679 and $26,825 for the three months
ended September 30, 2008 and 2007, respectively, and $50,037 and $80,476 for the nine months ended
September 30, 2008 and 2007, respectively, and is included in depreciation expense.
NOTE 7: COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases approximately 19,089 square feet of office and warehouse space under a
lease that extends through January 31, 2013. In addition, the Company leases office space of
approximately 14,930 square feet to support its Canadian operations at a facility located at 4510
Rhodes Drive, Suite 800, Windsor, Ontario under a lease that extends through June 30, 2009.
The Company also leases equipment under a non-cancelable operating lease that requires minimum
monthly payments of $769 through October 2012.
Rent expense under the operating leases was $120,077 and $71,854 for the three months ended
September 30, 2008 and 2007, respectively, and $357,215 and $121,269 for the nine months ended
September 30, 2008 and 2007, respectively. The amounts for 2007 are exclusive of the lease accrual
for our former office space explained below.
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Future minimum lease payments for operating leases are as follows:
At September 30, 2008 | Lease Obligations | |||
2008 |
$ | 99,560 | ||
2009 |
332,634 | |||
2010 |
204,730 | |||
2011 |
196,022 | |||
2012 |
192,472 | |||
Thereafter |
15,398 | |||
Total future minimum obligations |
$ | 1,040,816 | ||
Remaining Lease Obligation
On July 9, 2007, the Company moved from its former office space at 14700 Martin Drive in Eden
Prairie to its new office space at 5929 Baker Road in Minnetonka. Due to the move occurring during
the third quarter of 2007, a liability for the costs that will continue to be incurred under the
prior lease for its remaining term without economic benefit to the Company was recognized and
measured at the fair value on the cease use date, July 9, 2007. The lease accrual was charged to
rent in general and administrative expenses. The remaining liability at September 30, 2008 was
$107,051. The prior lease termination date is November 30, 2009. Since the prior lease is an
operating lease, the fair value of the liability is based on the remaining lease rentals, reduced
by estimated sublease rentals that could be reasonably obtained for the property, even though the
Company has not entered into a sublease to date. Other costs included in the fair value measurement
are the amortization of the remaining book values of the leasehold improvements on the premises and
the listing agent fee paid on the property. The existing rental obligations, additional costs
incurred and expected sublease receipts are as follows:
December 31, | Adjustments | September 30, | ||||||||||
2007 | to Estimates | 2008 | ||||||||||
Costs to be incurred: |
||||||||||||
Existing rental payments |
$ | 148,787 | $ | (58,221 | ) | $ | 90,566 | |||||
Expected operating costs |
$ | 63,365 | $ | (24,795 | ) | $ | 38,570 | |||||
Unamortized leasehold improvements |
$ | 79,967 | $ | (31,292 | ) | $ | 48,675 | |||||
Listing agent fee |
$ | 30,429 | $ | (11,907 | ) | $ | 18,522 | |||||
Sublease receipts |
||||||||||||
Expected sublease rental income |
$ | 74,394 | $ | (29,111 | ) | $ | 45,283 | |||||
Expected reimbursement of operating costs |
$ | 63,365 | $ | (24,795 | ) | $ | 38,570 |
As of September 30, 2008, the Company had incurred costs of $95,349 in rent for the former
office space since vacating the property. Also, the former office space had not been subleased as
of September 30, 2008, but the Company is attempting to sub-lease this facility. The Company
calculated the present value based on a straight line allocation of the above costs and receipts
over the term of the prior lease and a credit-adjusted risk-free rate of 8 percent. The costs
listed above have been aggregated in the general and administrative line of the consolidated
statements of operations.
Litigation
The Company was not party to any material legal proceedings as of November 1, 2008.
17
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NOTE 8: STOCK-BASED COMPENSATION AND BENEFIT PLANS
Expense Information under SFAS 123R
On January 1, 2006, the Company adopted SFAS 123R, which requires measurement and recognition
of compensation expense for all stock-based payments including warrants, stock options and
restricted stock grants based on estimated fair values. A summary of compensation expense
recognized for the issuance of stock options and warrants follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Stock-based compensation costs included in: |
||||||||||||||||
Cost of sales |
$ | 30,787 | $ | | $ | 30,787 | $ | | ||||||||
Sales and marketing expenses |
51,599 | 27,732 | 148,050 | 85,158 | ||||||||||||
Research and development expenses |
33,035 | 18,767 | 70,811 | 68,811 | ||||||||||||
General and administrative expenses |
85,448 | 102,045 | 652,350 | 726,934 | ||||||||||||
Total stock-based compensation expenses |
$ | 200,869 | $ | 148,544 | $ | 901,998 | $ | 880,903 | ||||||||
At September 30, 2008, there was approximately $1,528,082 of total unrecognized compensation
expense related to unvested share-based awards. Generally, the expense will be recognized over the
next four years and will be adjusted for any future changes in estimated forfeitures.
Valuation Information under SFAS 123R
For purposes of determining estimated fair value under SFAS 123R, the Company computed the
estimated fair values of stock options using the Black-Scholes model. The weighted average
estimated fair value of stock options granted was $3.12 and $4.56 per share for the three months
ended September 30, 2008 and 2007, respectively. These values were calculated using the following
weighted average assumptions:
Three Months Ended | ||||||||
September 30, | ||||||||
2008 | 2007 | |||||||
Expected life |
3.25 years | 3.45 to 3.75 years | ||||||
Dividend yield |
0 | % | 0 | % | ||||
Expected volatility |
98.4 | % | 97.0 to 97.2 | % | ||||
Risk-free interest rate |
2.5 | % | 5.0 | % |
The risk-free interest rate assumption is based on observed interest rates appropriate for the
term of the Companys stock options. The expected life of stock options represents the
weighted-average period the stock options are expected to remain outstanding. The Company used
historical closing stock price volatility for a period equal to the period its common stock has
been trading publicly. The Company used a weighted average of other publicly traded stock
volatility for the remaining expected term of the options granted. The dividend yield assumption is
based on the Companys history and expectation of future dividend payouts.
2007 Associate Stock Purchase Plan
In November 2007, the Companys shareholders approved the 2007 Associate Stock Purchase Plan,
under which 300,000 shares were originally reserved for purchase by the Companys associates. The
purchase price of the shares under the plan is the lesser of 85% of the fair market value on the
first or last day of the offering period. Offering periods are every six months ending on June 30
and December 31. Associates may designate up to ten percent of their compensation for the
purchase of shares under the plan. The first purchase date under the plan took place June 30, 2008,
on which date approximately 74,000 shares were purchased.
Employee Benefit Plan
In 2007, the Company began to offer a defined contribution 401(k) retirement plan for eligible
associates. Associates may contribute up to 15% of their pretax compensation to the plan. There is
currently no plan for an employer contribution match.
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NOTE 9: SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company views its operations and manages its business as one reportable segment, providing
digital signage solutions to a variety of companies, primarily in its targeted vertical markets.
Factors used to identify the Companys single operating segment include the financial information
available for evaluation by the chief operating decision maker in making decisions about how to
allocate resources and assess performance. The Company markets its products and services through
its headquarters in the United States and its wholly-owned subsidiary operating in Canada.
Net sales per geographic region, based on the billing location of end customer, are summarized
as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
United States |
$ | 1,816,657 | $ | 1,013,008 | $ | 4,702,912 | $ | 4,175,291 | ||||||||
Canada |
132,875 | 110,925 | 772,218 | 199,941 | ||||||||||||
Mexico |
| | 4,139 | | ||||||||||||
Total Sales |
$ | 1,949,532 | $ | 1,123,933 | $ | 5,479,269 | $ | 4,375,232 | ||||||||
Geographic segments of property and equipment and intangible assets are as follows:
September 30, | December 31, | |||||||
2008 | 2007 | |||||||
Property and equipment, net: |
||||||||
United States |
$ | 1,436,918 | $ | 1,425,351 | ||||
Canada |
732,013 | 355,039 | ||||||
Total |
$ | 2,168,931 | $ | 1,780,390 | ||||
Intangible assets, net: |
||||||||
United States |
$ | | $ | | ||||
Canada |
2,593,124 | 3,174,804 | ||||||
Total |
$ | 2,593,124 | $ | 3,174,804 | ||||
A significant portion of the Companys revenue is derived from a few major customers.
Customers with greater than 10% of total sales are represented on the following table:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Customer | 2008 | 2007 | 2008 | 2007 | ||||||||||||
NewSight Corporation |
* | * | * | 56.1 | % | |||||||||||
Chrysler (BBDO Detroit/Windsor) |
17.3 | % | 32.8 | % | 32.4 | % | * | |||||||||
KFC |
22.9 | % | * | 21.2 | % | * | ||||||||||
Dimensional Innovations |
26.6 | % | * | * | * | |||||||||||
66.8 | % | 32.8 | % | 53.6 | % | 56.1 | % | |||||||||
* | Sales to these customers were less than 10% of total sales for the period reported. |
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Financial instruments which potentially subject the Company to concentrations of credit risk
consist principally of accounts receivable. As of September 30, 2008 and 2007, a significant
portion of the Companys accounts receivable was concentrated with a few customers:
September 30, | September 30, | |||||||
Customer | 2008 | 2007 | ||||||
NewSight Corporation |
* | 56.7 | % | |||||
Dimensional Innovations |
22.5 | % | * | |||||
KFC |
19.6 | % | * | |||||
Chrysler (BBDO Detroit/Windsor) |
18.1 | % | 12.0 | % | ||||
58.7 | % | 68.7 | % | |||||
* | Accounts receivable from these customers were less than 10% of total accounts receivable for the period reported. |
NOTE 10: NET LOSS PER SHARE
In accordance with SFAS No. 128, Earnings Per Share, (SFAS 128), basic net income (loss)
per share for the three and nine months ended September 30, 2008 and 2007 is computed by dividing
net income (loss) by the weighted average common shares outstanding during the periods presented.
Diluted net income per share is computed by dividing income by the weighted average number of
common shares outstanding during the period, increased to include dilutive potential common shares
issuable relating to outstanding restricted stock, and upon the exercise of stock options and
awards that were outstanding during the period. For all net loss periods presented, diluted net
loss per share is the same as basic net loss per share because the effect of outstanding restricted
stock, options and warrants is antidilutive.
The following table presents the computation of basic and diluted net income (loss) per share:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Net loss |
$ | (4,635,276 | ) | $ | (2,382,524 | ) | $ | (13,791,968 | ) | $ | (6,412,800 | ) | ||||
Shares used in computing basic net loss per share |
14,764,345 | 14,369,262 | 14,629,278 | 11,565,993 | ||||||||||||
Outstanding dilutive stock options |
| | | | ||||||||||||
Shares used in computing diluted net loss per share |
14,764,345 | 14,369,262 | 14,629,278 | 11,565,993 | ||||||||||||
Basic net loss per share |
$ | (0.31 | ) | $ | (0.17 | ) | $ | (0.94 | ) | $ | (0.55 | ) | ||||
Diluted net loss per share |
$ | (0.31 | ) | $ | (0.17 | ) | $ | (0.94 | ) | $ | (0.55 | ) |
Shares reserved for outstanding stock warrants and options totaling 3,147,933 and 3,364,258 at
September 30, 2008 and 2007, respectively, were excluded from the computation of net loss per share
as their effect was antidilutive.
NOTE 11: OTHER EVENTS
Agreements with NewSight
As previously reported, effective October 8, 2007, NewSight Corporation (NewSight) issued
the Company a Secured Promissory Note (the Note) for goods provided and services rendered. In
connection with the issuance of the Note, the Company also entered into a Security Agreement, dated
October 12, 2007, with NewSight pursuant to which the Company acquired a security interest in
certain collateral of NewSight, consisting of all existing and after-acquired video screens and
monitors and other equipment for digital signage then or thereafter provided by the Company to
NewSight, including all such equipment located in the Fashion Square Mall in Saginaw, Michigan and
the Asheville Mall in Asheville, North Carolina, and any grocery store premises operated by Meijer,
Inc. (Meijer) and its affiliates (the Meijer Network) and all related hardware, software and
parts used in connection with such equipment or the Meijer Network and all proceeds from such
personal property, but not including any intellectual property of NewSight (the Collateral).
The Note, as amended, matured on August 15, 2008. NewSights aggregate indebtedness to the
Company, including the Note, accrued interest, and all accrued warehousing fees and expenses and
network operating and maintenance expenses, totaled $2,761,608 at such date (the Aggregate
Indebtedness). Given NewSights inability to obtain financing that would have allowed it to repay
this obligation and given the termination of NewSights business relationship with Meijer regarding
the Meijer Network, the Company entered into negotiations with NewSight and its principal creditor,
Prentice Capital Management, L.P. (Prentice), to obtain ownership of the Collateral (other than
the Released Collateral (as defined below)) (the Surrendered Collateral) in recognition of the
Companys rights as a secured creditor. The Released Collateral represented Collateral presently
installed at the stores operated by CBL Associated at the Fashion Square Mall and the Asheville
Mall.
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On August 21, 2008, the Company entered into a Turnover and Surrender Agreement with NewSight
(the Turnover and Surrender Agreement) under which NewSight surrendered, transferred and turned
over to the Company, and the Company accepted, the Surrendered Collateral in full satisfaction of
the Aggregate Indebtedness. The Company agreed that, except for the obligations under the Turnover
and Surrender Agreement, NewSight has no further obligations to the Company. The Surrendered
Collateral was turned over and surrendered to the Company on an as is and where is basis.
Under the Turnover and Surrender Agreement, NewSight granted the Company an irrevocable
license and consent to enter into any properties licensed to or leased by NewSight for the purpose
of taking possession and control of such collateral. NewSight further agreed to indemnify and hold
the Company and its subsidiary, and all of its shareholders, agents, officers and directors
harmless against any and all claims, losses and expenses (including attorneys fees) related to any
claims against the Company as a result of a breach of any covenant, representation or warranty by
NewSight in the Turnover and Surrender Agreement, and claims by any creditor, shareholder or
trustee of NewSight relating to the transfer and surrender under the Turnover and Surrender
Agreement. The Company and NewSight also agreed to a mutual release of all claims except
obligations arising under the Turnover and Surrender Agreement.
In addition, the Company entered into a Consent Agreement with Prentice on August 21, 2008 (the
Consent Agreement) pursuant to which Prentice consented to the terms and conditions of the
Turnover and Surrender Agreement. The Consent Agreement also provides for the allocation of any
future proceeds received or paid to the Company in connection with the Surrendered Collateral or
the Meijer Network. In general, such funds would be applied in the following manner: (1) first to
payment of the Companys expenses in connection with the turnover and surrender, (2) second to
payment of the Companys expenses in connection with replacing, modifying or enhancing the
Surrendered Collateral, (3) third to the Company in payment of the Aggregate Indebtedness,
(4) fourth the next $100,000 of proceeds would be allocated 70% to the Company and 30% to Prentice,
and (5) fifth all remaining proceeds would be allocated 50% to the Company and 50% to Prentice.
These allocations also apply in the event of the sale or contribution by the Company of the
Surrendered Collateral or the Meijer Network. However, such allocations do not apply to amounts
paid or payable to the Company in payment or reimbursement of its monthly costs to operate or
service the Meijer Network. The rights and interests granted by the Company to Prentice under the
Consent Agreement expire on the third anniversary of the Consent Agreement. The Company and
Prentice also generally agreed to a mutual release of all claims.
On August 21, 2008, the Company also entered into an Interim Operating Agreement with ABC
National Television Sales, Inc. (ABC) and Met/Hodder, Inc. (MH) pursuant to which the parties
will continue to operate the Meijer Network through October 31,
2008 (the Interim Operating Agreement). The Company will operate the monitors in Meijer
stores, monitoring content and providing certain advertisement tracking services. MH will provide
programming content, manage content play lists and perform certain monitoring tasks. ABC will
provide sales representation services. The Company entered into the Interim Operating Agreement to
continue to run the Meijer Network for an interim period necessary to establish a more permanent
arrangement with respect to the Meijer Network ownership and placement in Meijer stores. To the
extent that such funds are available from advertising revenues on the Meijer Network, the Company
will receive $51,000 to compensate it for expenses incurred to operate and monitor the Meijer
Network on this interim basis.
Meijer
sent a request for proposal to several national network providers,
including the Company, to build out the remaining network of
82 stores and continue to support the existing network of
102 stores in which the Company presently owns the network
hardware. The Company expects Meijer to choose one of these network
providers in the fourth quarter of 2008, with which to move forward.
As of September 30, 2008, the Company reclassified the NewSight account receivable balance of
$2,429,884, deferred revenue of $1,029,796, deferred costs of $585,538, and the accrued finders
fees of $48,464 to Network equipment held for sale totaling $1,937,162. This asset appears as a
separate line on the balance sheet as a current asset.
Reduction in Work Force
On November 3, 2008, the Company announced that it had reduced its workforce by 35
individuals, including both employees and contractors across all areas of the organization. This
workforce reduction results in an approximately 22 percent decrease in the Companys staff. This workforce
reduction is intended to align the Companys expense base with the current level of sales and projects, and
improve the overall efficiency of the organization.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion contains various forward-looking statements within the meaning of
Section 21E of the Exchange Act. Although we believe that, in making any such statement, our
expectations are based on reasonable assumptions, any such statement may be influenced by factors
that could cause actual outcomes and results to be materially different from those projected. When
used in the following discussion, the words anticipates, believes, expects, intends,
plans, estimates and similar expressions, as they relate to us or our management, are intended
to identify such forward-looking statements. These forward-looking statements are subject to
numerous risks and uncertainties that could cause actual results to differ materially from those
anticipated. Factors that could cause actual results to differ materially from those anticipated,
certain of which are beyond our control, are set forth herein and in our Form 10-Q for the period
ended March 31, 2008 under the caption Cautionary Statement.
Our actual results, performance or achievements could differ materially from those expressed
in, or implied by, forward-looking statements. Accordingly, we cannot be certain that any of the
events anticipated by forward-looking statements will occur or, if any of them do occur, what
impact they will have on us. We caution you to keep in mind the cautions and risks described in
this document and to refrain from attributing undue certainty to any forward-looking statements,
which speak only as of the date of the document in which they appear. We do not undertake to update
any forward-looking statement.
Overview
Wireless Ronin Technologies, Inc. is a Minnesota corporation that has designed and developed
application-specific visual marketing solutions. We provide dynamic digital signage solutions
targeting specific retail and service markets through a suite of software applications collectively
called RoninCast®. RoninCast® is an enterprise-level content delivery system that manages,
schedules and delivers digital content over wireless or wired networks. Our solutions, digital
alternatives to static signage, provide our customers with a dynamic visual marketing system
designed to enhance the way they advertise, market and deliver their messages to targeted
audiences. Our technology can be combined with interactive touch screens to create new platforms
for conveying marketing messages.
Our Sources of Revenue
We generate revenues through system sales, license fees and separate service fees, including
consulting, content development and implementation services, as well as ongoing customer support
and maintenance, including product upgrades. We currently market and sell our software and service
solutions through our direct sales force and value added resellers.
Our Expenses
Our expenses are primarily comprised of three categories: sales and marketing, research and
development and general and administrative. Sales and marketing expenses include salaries and
benefits for our sales associates and commissions paid on sales. This category also includes
amounts spent on the hardware and software we use to prospect new customers, including those
expenses incurred in trade shows and product demonstrations. Our research and development expenses
represent the salaries and benefits of those individuals who develop and maintain our software
products including RoninCast® and other software applications we design and sell to our customers.
Our general and administrative expenses consist of corporate overhead, including administrative
salaries, real property lease payments, salaries and benefits for our corporate officers and other
expenses such as legal and accounting fees.
Significant Accounting Policies and Estimates
A discussion of the Companys significant accounting policies was provided in Item 7 of our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007. There were no significant
changes to these accounting policies during the first nine months of 2008.
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Results of Operations
Three Months Ended September 30, 2008 and 2007
The following table sets forth, for the periods indicated, certain unaudited consolidated
statements of operations information:
Three Months Ended | ||||||||||||||||||||||||
September 30, | % of total | September 30, | % of total | $ Increase | % Increase | |||||||||||||||||||
2008 | sales | 2007 | sales | (Decrease) | (Decrease) | |||||||||||||||||||
Sales |
$ | 1,949,532 | 100 | % | $ | 1,123,933 | 100 | % | $ | 825,599 | 73 | % | ||||||||||||
Cost of sales |
1,847,257 | 95 | % | 709,765 | 63 | % | 1,137,492 | 160 | % | |||||||||||||||
Gross profit |
102,275 | 5 | % | 414,168 | 37 | % | (311,893 | ) | -75 | % | ||||||||||||||
Sales and marketing expenses |
927,085 | 47 | % | 715,016 | 64 | % | 212,069 | 30 | % | |||||||||||||||
Research and development expenses |
792,832 | 41 | % | 319,945 | 28 | % | 472,887 | 148 | % | |||||||||||||||
General and administrative expenses |
3,134,171 | 161 | % | 2,210,632 | 197 | % | 923,539 | 42 | % | |||||||||||||||
Termination of partnership agreement |
| 0 | % | | 0 | % | | 0 | % | |||||||||||||||
Total operating expenses |
4,854,088 | 249 | % | 3,245,593 | 289 | % | 1,608,495 | 50 | % | |||||||||||||||
Operating loss |
(4,751,813 | ) | -244 | % | (2,831,425 | ) | -252 | % | (1,920,388 | ) | -68 | % | ||||||||||||
Other income (expenses): |
||||||||||||||||||||||||
Interest expense |
(5,135 | ) | 0 | % | (11,758 | ) | -1 | % | (6,623 | ) | -56 | % | ||||||||||||
Interest income |
121,707 | 6 | % | 467,740 | 42 | % | (346,033 | ) | -74 | % | ||||||||||||||
Other |
(35 | ) | 0 | % | (7,081 | ) | -1 | % | (7,046 | ) | -100 | % | ||||||||||||
Total other income (expense) |
116,537 | 6 | % | 448,901 | 40 | % | (332,364 | ) | -74 | % | ||||||||||||||
Net loss |
$ | (4,635,276 | ) | -238 | % | $ | (2,382,524 | ) | -212 | % | $ | (2,252,752 | ) | -95 | % | |||||||||
Three Months Ended | ||||||||||||||||||||||||
September 30, | % of total | September 30, | % of total | $ Increase | % Increase | |||||||||||||||||||
2008 | sales | 2007 | sales | (Decrease) | (Decrease) | |||||||||||||||||||
United States |
$ | 1,816,657 | 93 | % | $ | 1,013,008 | 90 | % | $ | 803,649 | 79 | % | ||||||||||||
Canada |
132,875 | 7 | % | 110,925 | 10 | % | 21,950 | 20 | % | |||||||||||||||
Total Sales |
$ | 1,949,532 | 100 | % | $ | 1,123,933 | 100 | % | $ | 825,599 | 73 | % | ||||||||||||
Sales
Our sales increased $825,599, or 73%, to $1,949,532 for the three months ended September 30,
2008, compared to $1,123,933 for the same period in the prior year. The increase was due primarily
to increased sales of hardware and software as well as a full quarter of sales from our Canadian
operations. For the quarter, hardware sales and installations increased approximately $309,000,
software sales increased approximately $313,000, and network hosting and other services increased
$204,000, due primarily to our acquisition of McGill Digital Solutions, Inc. in August 2007.
Cost of Sales
Our cost of sales increased $1,137,492, or 160%, for the three months ended September 30,
2008, compared to the same period in the prior year. The increase in cost of sales for the quarter
was due to a higher mix of lower margin hardware sales and the
continued impact of prior investment in our Network Operations Center.
Operating Expenses
Our operating expenses increased 50%, or $1,608,495, to $4,854,088 for the three months ended
September 30, 2008, compared to $3,245,593 in the same period in the prior year. This increase
was driven by increases in operating expenses of $626,397 related to our acquisition of McGill
Digital Solutions, Inc., which is in our results for a full quarter in 2008 versus approximately
one-half a quarter in 2007. For our Minneapolis operations, salaries and benefits increased
approximately $830,327, which was directly related to our increase in headcount and severance
payments, while professional fees and other costs increased $151,771 for the three months ended
September 30, 2008, largely due to the expense of being a public entity and growth of our business.
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Interest Expense
Interest expense decreased by $6,623 to $5,135 for the three months ended September 30, 2008,
compared to $11,758 for the same period in the prior year. The
decrease was the result of reduced debt balances under our capital
leases.
Interest Income
Interest income decreased by $346,033 for the three months ended September 30, 2008 compared
to the same period in the prior year. Invested cash was lower for the quarter as a result of the
use of funds for operations from the follow-on public offering of securities we closed in June 2007.
Nine Months Ended September 30, 2008 and 2007
The following table sets forth, for the periods indicated, certain unaudited consolidated
statements of operations information:
Nine Months Ended | ||||||||||||||||||||||||
September 30 | % of total | September 30 | % of total | $ Increase | % Increase | |||||||||||||||||||
2008 | sales | 2007 | sales | (Decrease) | (Decrease) | |||||||||||||||||||
Sales |
$ | 5,479,269 | 100 | % | $ | 4,375,232 | 100 | % | $ | 1,104,037 | 25 | % | ||||||||||||
Cost of sales |
4,916,394 | 90 | % | 2,686,052 | 61 | % | 2,230,342 | 83 | % | |||||||||||||||
Gross profit |
562,875 | 10 | % | 1,689,180 | 39 | % | (1,126,305 | ) | -67 | % | ||||||||||||||
Sales and marketing expenses |
3,256,883 | 59 | % | 1,993,191 | 46 | % | 1,263,692 | 63 | % | |||||||||||||||
Research and development expenses |
1,836,741 | 34 | % | 827,234 | 19 | % | 1,009,507 | 122 | % | |||||||||||||||
General and administrative expenses |
9,801,140 | 179 | % | 5,486,439 | 125 | % | 4,314,701 | 79 | % | |||||||||||||||
Termination of partnership agreement |
| 0 | % | 653,995 | 15 | % | (653,995 | ) | -100 | % | ||||||||||||||
Total operating expenses |
14,894,764 | 272 | % | 8,960,859 | 205 | % | 5,933,905 | 66 | % | |||||||||||||||
Operating loss |
(14,331,889 | ) | -262 | % | (7,271,679 | ) | -166 | % | (7,060,210 | ) | -97 | % | ||||||||||||
Other income (expenses): |
||||||||||||||||||||||||
Interest expense |
(18,892 | ) | 0 | % | (32,273 | ) | -1 | % | (13,381 | ) | -41 | % | ||||||||||||
Interest income |
563,215 | 10 | % | 899,724 | 21 | % | (336,509 | ) | -37 | % | ||||||||||||||
Other |
(4,402 | ) | 0 | % | (8,572 | ) | 0 | % | (4,170 | ) | -49 | % | ||||||||||||
Total other income (expense) |
539,921 | 10 | % | 858,879 | 20 | % | (318,958 | ) | -37 | % | ||||||||||||||
Net loss |
$ | (13,791,968 | ) | -252 | % | $ | (6,412,800 | ) | -147 | % | $ | (7,379,168 | ) | -115 | % | |||||||||
Nine Months Ended | ||||||||||||||||||||||||
September 30 | % of total | September 30 | % of total | $ Increase | % Increase | |||||||||||||||||||
2008 | sales | 2007 | sales | (Decrease) | (Decrease) | |||||||||||||||||||
United States |
$ | 4,702,912 | 86 | % | $ | 4,175,291 | 95 | % | $ | 527,621 | 13 | % | ||||||||||||
Canada |
772,218 | 14 | % | 199,941 | 5 | % | 572,277 | 286 | % | |||||||||||||||
Mexico |
4,139 | 0 | % | | 0 | % | 4,139 | 413900 | % | |||||||||||||||
Total Sales |
$ | 5,479,269 | 100 | % | $ | 4,375,232 | 100 | % | $ | 1,104,037 | 25 | % | ||||||||||||
Sales
Our sales increased $1,104,037, or 25%, for the nine months ended September 30, 2008, compared
to the same period in the prior year. The overall increase in our sales was due primarily to our
acquisition of McGill Digital Solutions, Inc. For the nine months ended September 30, 2008,
hardware sales and installations decreased approximately $952,270 due primarily to the significant
sales of hardware to a single customer in the nine months ended September 30, 2007, software sales
increased approximately $262,640, due to the growth in our business, and network hosting and other
services increased $1,793,667, due primarily to our acquisition of McGill Digital Solutions, Inc.
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Cost of Sales
Our cost of sales increased $2,230,342, or 83%, for the nine months ended September 30, 2008,
compared to the same period in the prior year. The increase in cost of sales for was due to a
higher mix of lower margin hardware sales in the first nine months of
2008 as well as investments in our Network Operations
Center.
Operating Expenses
Operating expenses increased $5,933,905, or 66%, for the nine month period ended September 30,
2008. This increase was attributable to higher expenses to support
growth opportunities and investments in our Company. More
specifically, there was an increase in operating expenses of $2,544,767 related to our
acquisition of McGill Digital Solutions, Inc. and for our Minneapolis operations, there was an
increase of $2,606,181 in salaries and benefits related to an increase in headcount, our
professional fees and other costs increased by $1,247,892 largely due to the expense of being a
public entity and growth of our business, and our advertising costs increased by $189,060 as a
result of tradeshow participation and the continued marketing of RoninCast.
The increases described above for the nine months ended September 30, 2008 were partially
offset by a decrease of $653,995 related to the 2007 termination of a partnership agreement
described below and in Note 4, Termination of Partnership Agreement.
On February 13, 2007, we terminated a strategic partnership agreement with Marshall Special
Assets Group, Inc., a company that provides financing services to the Native American gaming
industry, by signing a Mutual Termination, Release and Agreement. We paid $653,995 in consideration
of the termination of all rights under the strategic partnership agreement and in full satisfaction
of any further obligations under the strategic partnership agreement. Going forward, we will pay a
fee in connection with sales of our software and hardware to customers, distributors and resellers
for use exclusively in the ultimate operations of or for use in a lottery (End Users). Under such
agreement, we will pay a percentage of the net invoice price for the sale of our software and
hardware to End Users, in each case collected by us on or before February 12, 2012, with a minimum
annual payment of $50,000 for three years. We will be reimbursed for 50% of the costs and expenses
incurred by us in relation to any test installations involving sales or prospective sales to End
Users.
Interest Expense
Interest expense decreased $13,381 to $18,892 for the nine months ended September 30, 2008,
compared to $32,273 for the same period in the prior year. The decrease was the result of reduced
debt balances under our capital leases.
Interest Income
Interest income decreased $336,509 for the nine months ended September 30, 2008, compared to
the same period in the prior year. Invested funds for the nine months ended September 30, 2008 were
lower than the same period in the previous year as a result of our use of funds for operations from
the follow-on public offering of securities we closed in June 2007.
Liquidity and Capital Resources
Operating Activities
We do not currently generate positive cash flows. Our investments in infrastructure have been
greater than sales generated to date. As of September 30, 2008, we had an accumulated deficit of
$57,312,066. The cash flow used in operating activities was $11,252,307 and $5,716,202 for the nine
months ended September 30, 2008 and 2007, respectively. The increase in cash used in operations was
due to the increase in our net loss during the nine months ended September 30, 2008 as compared to
the nine months ended September 30, 2007. Based on our existing capital resources and current expense levels, which we recently
aligned to the current level of sales and projects to improve the overall efficiency of the
organization, we anticipate that our cash will be adequate to fund
our operations for the next twelve months.
Investing Activities
Net cash provided by investing activities was $6,834,156 in the nine months ended September
30, 2008, compared to cash used in investing activities of $2,010,915 for the nine months ended
September 30, 2007. The increase in cash was primarily due to net sales of marketable securities of
$7,718,722 offset by purchases of capital equipment of $884,566 as
well as the use of funds to purchase McGill Digital Solutions, Inc. in the third quarter of
2007. Marketable securities consisted of
debt securities issued by federal government agencies with maturity dates in 2008.
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Financing Activities
We have financed our operations primarily through sales of common stock, exercise of warrants,
and the issuance of notes payable to vendors, shareholders and investors. For the nine months ended
September 30, 2008 and 2007, net cash provided by financing activities was $470,552 and
$27,470,936, respectively. Exercises of warrants and issuances of stock through our employee stock
purchase plan contributed funds in 2008, while funds for 2007 were the result of the follow-on
public offering of securities we closed in June 2007.
We believe we can continue to develop our sales to a level at which we will become cash flow
positive. Based on our existing capital
resources and our current expense levels, which we recently aligned to the current level of
sales and projects to improve the overall efficiency of the organization, we anticipate that our cash will be adequate to fund our operations for the next twelve
months.
Contractual Obligations
Although we have no material commitments for capital expenditures, we anticipate continued
capital expenditures consistent with our anticipated growth in operations, infrastructure and
personnel. We expect that our operating expenses will continue to grow as our overall business
grows and that they will be a material use of our cash resources.
Operating and Capital Leases
At September 30, 2008, our principal commitments consisted of long-term obligations under
operating leases. We lease approximately 19,089 square feet of office and warehouse space under a
lease that extends through January 31, 2013. In addition, we lease office space of approximately
14,930 square feet to support our Canadian operations at a facility located at 4510 Rhodes Drive,
Suite 800, Windsor, Ontario under a lease that extends through June 30, 2009. We also lease our
former headquarters facility of approximately 8,610 square feet at 14700 Martin Drive, Eden
Prairie, Minnesota. We do not occupy this building and are currently attempting to sub-lease this
facility through the expiration of our lease on November 30, 2009. In the third quarter of 2007, we
recognized a liability for anticipated remaining net costs on this lease obligation. The remaining
liability at September 30, 2008 was $107,051.
The following table summarizes our obligations under contractual agreements as of September
30, 2008 and the time frame within which payments on such obligations are due.
Payment Due by Period | ||||||||||||||||||||
Total | More | |||||||||||||||||||
Amount | Less Than | Than | ||||||||||||||||||
Contractual Obligations | Committed | 1 Year | 1-3 Years | 3-5 Years | 5 Years | |||||||||||||||
Capital Lease Obligations (including interest) |
$ | 89,056 | $ | 73,643 | $ | 15,413 | $ | | $ | | ||||||||||
Operating Lease Obligations |
1,040,816 | 99,560 | 733,386 | 207,870 | | |||||||||||||||
Total |
$ | 1,129,872 | $ | 173,203 | $ | 748,799 | $ | 207,870 | $ | | ||||||||||
Based on our working capital position at September 30, 2008, we believe we have sufficient
working capital to meet our current obligations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Financial instruments that potentially subject us to concentrations of credit risk consist
primarily of cash and cash equivalents, marketable securities, and accounts receivables. We
maintain our accounts for cash and cash equivalents and marketable securities principally at one
major bank. We invest our available cash in United States government securities and money market
funds. We have not experienced any significant losses on our deposits of our cash, cash
equivalents, or marketable securities.
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We currently have outstanding approximately $89,000 of capital lease obligations at fixed
interest rates. We do not believe our operations are currently subject to significant market risks
for interest rates or other relevant market price risks of a material nature.
Foreign exchange rate fluctuations may adversely impact our consolidated financial position as
well as our consolidated results of operations. Foreign exchange rate fluctuations may adversely
impact our financial position as the assets and liabilities of our Canadian operations are
translated into U.S. dollars in preparing our consolidated balance sheet. These gains or losses are
recognized as an adjustment to shareholders equity through accumulated other comprehensive income.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures that is designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms, and that such
information is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures.
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this
evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of
September 30, 2008, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
On
July 1, 2008, we converted to a new Microsoft Dynamics Great
Plains accounting package for our Canadian operations. This
accounting system enhances our financial accounting and reporting
controls over the previous package.
There
were no other changes in our internal control over financial reporting that occurred during
the quarter ended September 30, 2008, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We were not party to any material legal proceedings as of November 1, 2008.
Item 1A. Risk Factors
The discussion of our business and operations should be read together with the risk factors
set forth in our Cautionary Statement in our Form 10-Q for the period ended March 31, 2008. These
risks and uncertainties have the potential to affect our business, financial condition, results of
operations, cash flow, strategies or prospects in a material and adverse manner.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On the date shown below during the three months ended September 30, 2008, an accredited
investor who held warrants for the purchase of an aggregate of 10,000 shares of common stock
exercised such warrants. We obtained gross proceeds of $32,000 in connection with this warrant
exercise. The proceeds of the exercise were applied to working capital for general corporate
purposes. Details regarding this warrant exercise appear in the table below:
Exercise | ||||||||||||
Date | Shares | Price | Proceeds | |||||||||
7/3/2008 |
10,000 | $ | 3.20 | $ | 32,000 |
The foregoing issuance was made in reliance upon the exemption provided in Section 4(2) of the
Securities Act. The certificate representing such securities contains a restrictive legend
preventing the sale, transfer, or other disposition, absent registration or an applicable exemption
from registration requirements. The recipient of such securities received, or had access to,
material information concerning our company, including, but not limited to, our reports on Form
10-KSB, Form 10-Q and Form 8-K, as filed with the Securities and Exchange Commission. No discount
or commission was paid in connection with the issuance of common stock upon exercise of such
warrants.
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
See Exhibit Index.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
WIRELESS RONIN TECHNOLOGIES, INC. |
||||
Date: November 10, 2008 | By: | /s/ Brian S. Anderson | ||
Brian S. Anderson | ||||
Vice President, Interim Chief Financial Officer and Controller As Principal Financial Officer, Chief Accounting Officer and Duly Authorized Officer of Wireless Ronin Technologies, Inc. |
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EXHIBIT INDEX
Exhibit | ||
Number | Description | |
3.1
|
Articles of Incorporation of the Registrant, as amended (incorporated by reference to our Pre-Effective Amendment No. 1 to our Form SB-2 filed on October 12, 2006 (File No. 333-136972)). | |
3.2
|
Bylaws of the Registrant, as amended (incorporated by reference to our Quarterly Report on Form 10-QSB filed on November 14, 2007 (File No. 001-33169)). | |
4.1
|
See exhibits 3.1 and 3.2. | |
4.2
|
Specimen common stock certificate of the Registrant (incorporated by reference to Pre-Effective Amendment No. 1 to our Form SB-2 filed on October 12, 2006 (File No. 333-136972)). | |
10.1
|
Form of Non-Qualified Stock Option Agreement for Non-Employee Directors under the Registrants Amended and Restated 2006 Equity Incentive Plan. | |
10.2
|
Form of Non-Qualified Stock Option Agreement for Stephen F. Birke under the Registrants Amended and Restated 2006 Equity Incentive Plan. | |
10.3
|
Separation Agreement and General Release between the Registrant and Jeffrey C. Mack, dated September 23, 2008. | |
10.4
|
Turnover and Surrender Agreement by and between the Registrant and NewSight Corporation, dated August 21, 2008. | |
10.5
|
Consent Agreement by and between the Registrant and Prentice, dated August 21, 2008. | |
10.6
|
Interim Operating Agreement by and between the Registrant, ABC National Television Sales, Inc. and Met/Hodder, Inc., dated August 21, 2008. | |
31.1
|
Chief Executive Officer Certification pursuant to Exchange Act Rule 13a-14(a). | |
31.2
|
Chief Financial Officer Certification pursuant to Exchange Act Rule 13a-14(a). | |
32.1
|
Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350. | |
32.2
|
Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350. |
30