CREATIVE REALITIES, INC. - Annual Report: 2013 (Form 10-K)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

(Mark one)

OR

 

Commission File Number 001-33169

Wireless Ronin Technologies, Inc.

(Exact name of registrant as specified in its charter)

 

5929 Baker Road, Suite 475, Minnetonka MN  55345

(Address of principal executive offices)     ( Zip Code)

 

(952) 564-3500

(Registrant’s telephone  number, including area code)

 

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

 

 

Securities registered pursuant to Section 12(b) of the Exchange Act:    None

Securities registered pursuant to Section 12(g) of the Exchange Act:  Common Stock, Par Value $0.01

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.   Yes ☐ No ☒

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 the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ¨ 

 

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):

 

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

 

The aggregate market value of the common equity held by non-affiliates of the issuer as of June 30, 2013, was approximately $4,011,705, based upon the last sale price of one share on such date.

 

As of March 1, 2014, the issuer had outstanding 6,474,135 shares of common stock.

   

 

 

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PART I

ITEM 1BUSINESS

Overview

Wireless Ronin Technologies, Inc. (“RNIN”, “we”, “our” and “us”) is a Minnesota corporation incorporated on March 23, 2000.  We are a marketing technologies company with leading expertise in content and emerging digital media solutions, including dynamic digital signage, interactive kiosk, mobile, social media and web, that enable our customers to transform how they engage with their customers.  We are able to provide an array of marketing technology solutions to our customers through our proprietary suite of software applications marketed as RoninCast®.  RoninCast software and associated applications provide an enterprise, web-based or hosted content delivery system that manages, schedules and delivers digital content over wireless or wired networks. Additionally, RoninCast® software’s flexibility allows us to develop custom solutions for specific customer applications.

In August 2007, we acquired privately held McGill Digital Solutions, Inc. (now known as Wireless Ronin Technologies (Canada), Inc. (“RNIN Canada”)).  Based in Windsor, Ontario Canada, RNIN Canada provides custom interactive software solutions, content engineering / creative services, and is home to our automotive business development team.  Through e-learning and e-marketing, RNIN Canada develops the competencies and knowledge of the people who most influence product sales – sales associates and their customers.

Due to losses suffered from operations for the year ended December 31, 2013, our independent registered public accounting firm expressed substantial doubt about our ability to continue as a going concern. We do not currently have sufficient capital resources to fund our operations beyond April 2014. We continue to experience operating losses. Management continues to seek financing on favorable terms; however, there can be  no assurance that any such financing can be obtained on favorable terms, if at all. At present, we have no commitments for any additional financing. If we are unable to generate sufficient revenue, find financing, or adjust our operating expenses so as to maintain positive working capital, then we likely will be forced to cease operations and investors will likely lose their entire investment.

 

Recent Developments

On March 5, 2014, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Broadcast Acquisition Co., a wholly owned subsidiary of RNIN (“Merger Sub”), and Broadcast International, Inc.  Broadcast International is a provider of managed video solutions, including digital signage, OTT (Over the Top) networks, IPTV, and live/on-demand content distribution for the enterprise. 

The Merger Agreement contemplates a reverse triangular merger with Broadcast International surviving the merger with Merger Sub and thereby becoming a wholly owned operating subsidiary of Wireless Ronin (the “Merger”).   As a result of the Merger, the holders of Broadcast International common stock and securities convertible or exercisable into shares of Broadcast common stock outstanding immediately prior to the effective time of the Merger (the “Effective Time”), will be entitled to receive a number of shares of Wireless Ronin common stock (together with securities issuable for shares of Wireless Ronin common stock) equivalent to approximately 36.5% of Wireless Ronin common stock outstanding immediately after the Merger, calculated on a modified fully diluted basis.

The completion of the Merger is contingent upon customary closing conditions in addition to (i) the approval of Merger by the shareholders of Broadcast International, (ii) subject to certain materiality-based exceptions, the accuracy of the representations and warranties made by, and the compliance or performance of the obligations of, each of Wireless Ronin and Broadcast International set forth in the Merger Agreement, and (iii) the declaration of the effectiveness by the Securities and Exchange Commission of a Registration Statement on Form S-4 to be filed by Wireless Ronin in connection with the Merger.

 

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The Merger Agreement contains customary representations, warranties and covenants, including covenants obligating each of Wireless Ronin and Broadcast International to continue to conduct their respective businesses in the ordinary course, and to provide reasonable access to each other’s information.  

 

Business Strategy

Our objective is to provide marketing technology solutions and services to customers in our targeted retail and service markets. We believe our marketing technology solutions can help our customers increase revenues and improve operating efficiencies in the execution of their marketing initiatives. To achieve our objective, we are pursuing the following strategies:

Focus on Vertical Markets.  Our direct sales force focuses primarily on the following vertical market segments: (1) automotive, (2) food service, which includes quick serve restaurant (“QSR”), fast casual and managed food services, and (3) branded retail.  Commencing April 2013, we began to target the QSR and “pump topper” markets through our license agreement with Delphi Display Systems, Inc.  Within retail, we focus on branded services with bricks and mortar locations, and “consumer goods manufacturers,” such as brands being carried within a retail environment.    To attract and influence customers, all three of these key vertical markets continue to seek new mediums that provide greater flexibility in influencing the customer purchase cycle through the implementation of our marketing technology solutions.   We focus on markets in which we believe our solution offers the greatest advantages in functionality, implementation and deployment over traditional media advertising.

Leverage Strategic Relationships.  We seek to develop and leverage relationships with market participants, such as merchandising consultants, who are able to provide an effective strategy around the use of our marketing technology solutions. We believe that such relationships will broaden the overall level of how our customers engage with us in implementing their marketing technology strategy.  We continue our outreach of business development strategic alliances with agencies, hardware, fixturing and signage companies, architects and individuals who can also generate additional interest and opportunity in our key vertical markets.

Market and Brand Our Marketing Solutions and Services Effectively.  Our key marketing objective is to provide marketing technology solutions and services to our customers by establishing RoninCast® software application as an industry standard.  Our marketing initiatives convey the distinguishing and proprietary features of our products, including wireless networking, centralized content management and custom software solutions.

Outsource Operating Functions.  When appropriate we outsource certain support functions such as system installations, fixturing, integration, software development and technical field support.  In addition, we purchase from manufacturers such items as stands, mounts, custom enclosures, monitors and computer hardware.   We believe that our experience in managing complex outsourcing relationships improves the efficiency of our digital signage solutions and allows us to focus on developing software solutions.

Participate in Relevant Trade Shows.  During 2013 we participated in the International Retail Design Conference (IRDC), Fast Casual Executive Summit, and Dine America. IRDC is the premier educational and networking event for the store design and merchandising community, drawing speakers and attendees from throughout the U.S. and abroad. Fast Casual Executive Summit is a gathering that brings together a select group of top executives from the fast casual restaurant industry for networking, workgroup sessions and an exchange of ideas and innovations on the industry’s top strategic issues. Dine America is a food service conference for industry executives to exchange ideas and participate in networking events and educational sessions. In addition, we take advantage of speaking opportunities at GlobalShop and publish a number of industry white papers to support our position in the digital signage industry.

Create Custom Solutions.  Although RoninCast® is an “out-of-box” solution, meaning it is designed for an array of standard applications, we also develop custom systems that meet the specific business needs of our customers. As digital signage technology continues to evolve, we believe that creating custom solutions for our customers is one of the primary differentiators of our value proposition.

Create Content Solutions.  We continue to expand our strategic planning, creative design and content engineering abilities.  Our creative team develops strategies for both internal and external initiatives. We continue to

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produce award-winning work both for our clients and for our own use. Since 2009, a majority of our marketing and sales material have been created in-house.

Develop New Products.  Developing new products and technologies is critical to our success. Increased acceptance of digital signage will require technological advancements to integrate it with other systems such as inventory control, point-of sale and database applications. In addition, digital media content is becoming richer and we expect customers will continue to demand more advanced requirements for their digital signage networks. We listen to our customers, analyze the competitive landscape and continually improve our products.

Industry Background

Since the advent of the internet and most recently the introduction of social networks, companies are exploiting the rapid advancements in technologies as a way to directly market to their customers.  As a result, companies are now able to cost effectively build a one-to-one relationship by specifically addressing the individual needs of their customers.  Our customers feel this is key to any sales environment, especially where sales staff turnover is high and product knowledge is low.  Companies are accomplishing their strategies by implementing various marketing technology solutions we now offer our customers:

 

 

 

 

The RoninCast® Solution

RoninCast® solutions offer a digital alternative to static signage that provides our customers with a dynamic visual marketing system designed to enhance the way they advertise, market, deliver and update their messages to targeted audiences. Our technology can be combined with interactive touch screens to create new platforms for assisting with product selection and conveying marketing messages. For example, we designed Chrysler’s iShowroom which launched in the 2009 in both a desktop version and an interactive touch screen kiosk for auto shoppers at Chrysler dealerships. 

RoninCast® software enables us to deliver a turn-key solution that includes project planning, innovative design services, network deployment, software training, equipment, hardware configuration, content engineering/development, implementation, maintenance, 24/7 help desk support and a full-service network operations center, or NOC.

Our software manages, schedules, and delivers dynamic digital content over wired or wireless networks. Our solution integrates proprietary software components and delivers content over proprietary communication protocols.

RoninCast® is an enterprise, web-based or hosted software solution which addresses changes in advertising dynamics and other traditional methods of delivering content. We believe our product provides benefits over traditional static signage and assists our customers in meeting their objectives for a successful marketing campaign.  Our most significant iteration of RoninCast®  was released in the fourth quarter of 2010 followed by a significant release of omnichannel RoninCast® 4.2.  We continue to add new feature functionality to our software to ensure we remain competitive within the industry.

RNIN offers a full service network operations center, manned 24/7, in Minnetonka, Minnesota, supported by a redundant center. Our operators send schedules and content, gather data from the field, flag and elevate field issues and handle customer calls. The servers in both locations communicate in real time with the devices deployed at our customer locations.

Features and benefits of the RoninCast® system include:

Industry Recognition

Over the years, we have been recognized with both Apex and Content awards for various projects during the Digital Signage Expo (DSE) & Interactive Technology Expo (ITE) and other leading tradeshows in our industry.  In February 2013, a customer of ours was awarded a bronze Apex Award in the Food and Beverage category for a solution we deployed at their stores.  Also in 2013, we received a “Best Restaurant Deployment-Digital Signage” DSE industry excellence award for a solution we deployed for Burgerville. We continue to be recognized as a thought leader in the digital signage industry as our white papers are routinely published in industry leading websites, including Digital Signage Today.

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Our Markets

We generate revenue through system sales, license fees and separate service fees for consulting, hosting, training, content development and implementation services, and for ongoing customer support and maintenance. We currently market and sell our marketing technology solutions through our direct sales force. Select strategic partnerships and business alliances also drive business to the company through a highly targeted business development initiative.

We market to companies that seek marketing solutions across multiple devices. We target companies that deploy point-of-purchase advertising or visual display systems and whose business model incorporates marketing, advertising, infotainment or delivery of messages. Typical applications are retail and service business locations that depend on traditional static point-of-purchase advertising. We believe that any retail businesses promoting a brand or advertisers seeking to reach consumers at public venues are also potential customers. We believe that our primary vertical market segments for adopting marketing technology solutions include:

Select Customers 

Historically, our business has been dependent upon a few customers. Our goal is to broaden and diversify our customer base. Our client base has grown organically and through our acquisition of RNIN Canada from 99 clients at the end of 2007 to over 200 clients at the end of 2013.  Detail on key customers is as follows:

 

 

Product Description

RoninCast® is a dynamic digital signage solution that combines scalable, secure, enterprise compliant, proprietary software with off-the-shelf or customer-owned hardware. This integrated solution creates a network capable of controlling, managing, scheduling and delivering content from a single location to an enterprise-level system.

 

 

 

RoninCast® software is built in two main software suites: the Server Software Suite and the Client Software Suite.

 

RoninCast® Server Software Suite

 

The RoninCast® Server Software Suite is a secure web-based, distributed server which provides control over the network. The Server Software Suite includes the following components:

 

Web-Based Management System (WBMS) – the WBMS suite is the central hub of RoninCast®, it provides the digital signage operators with a single point for controlling the entire digital signage network through an Internet browser over an SSL secured connection.

 

The WBMS provides access to the standard RoninCast® functions as well as client customized features  and custom reporting. RoninCast implements user access through a role based concept.  Each user has, upon login, all the features in which they have access rights to control their own networks. WBMS hosted functions are:

 

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Distribution Server - the distribution server is a scalable robust server which provides content delivery to all screens. Utilizing a  secure connection, it delivers schedules, data and content to subscribed screens.
 

Data Processing Server - players across the network upload different types of data to the server. Such data includes device health data, proof of plays and log data. The data processing server acts on all these data sources and processes them in an optimized database for further processing into reports, raw data feeds and decision analytics.
 

Software Update Server - the software update server ensures that all devices in the network are up-to-date. Once software updates are available, the software update server delivers these updates to all subscribed devices. All out-of-date disconnected devices are brought up-to-date once connected.

Integration Services - Integration services provides external systems with a secured application programming interface (API) for the RoninCast® Server Suite through secured web services. External systems can access all RoninCast® features through the Integration Services API. Such features include network management, content scheduling, content management, data request and reporting.

 

RoninCast® Client Software Suite

The RoninCast® client software suite bundles all the software components required to operate the device players (PCs). This software suite communicates with the server suite over SSL secured HTTP port 80. The client suite main components are:

 

Media Player - media player enables the playback of a wide range of content formats from Flash, movies, and images to TV tuners and MS Power Point.

 

Macromedia Flash – is a multimedia platform used to add animation, video, and interactivity to web pages.

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Catalog Manager - the catalog manager manages content libraries on player devices. It uses the device schedule to determine expired assets and perform content cleanup to ensure proper disk space usage.

 

Data Integration Layer (DIL) - the DIL allows the player to leverage external data sources for different services. External data sources can be used to drive content, schedules and other functions as needed. As an example, electronic menu board content can be driven by a point-of-sale (POS) data source and/or inventory data source. 

Device Health, Diagnosis and Repair Modules - these modules monitor both the player hardware and software. Monitoring data is uploaded to the server for reporting purposes and used to diagnose and repair common failures. These modules ensure proper player performance and higher player availability.

Software and Content Updates Modules - these modules ensure that the client software suite is always up-to-date. They also ensure timely delivery of content and schedule updates over  a secured connection.
   

External Player Services - a secured set of services allows external systems to interact with the player and perform certain actions. Such actions include displaying certain content based on an externally triggered event.

 

Key Components

Key components of our solution include:

User-Friendly Network Control

When managing the RoninCast® network, the ability to easily and intuitively control the network is critical to the success of the system and the success of the customer. Customer input has been, and continues to be, invaluable in the design of the RoninCast® WBMS. Everything from simple design decisions, such as menu layout, to advanced network communication, such as seeing the content play on a remote screen, is designed to be user-friendly and intuitive.

Diverse Media and Authoring Choices

With the myriad of media design tools available today, it is vital that RoninCast® software stay current with the tools and technologies available. RoninCast® software started with Macromedia Flash, and while Flash remains a large percentage of content created and deployed, we have continued to innovate and expand the content options available. Today we offer video (MPEG1, MPEG2, MPEG4, WMV, AVI, QT, MOV), Macromedia Flash (SWF), still images (JPEG, BMP), and audio (MP3, WAV). Additionally, raw data feeds (from internal or Internet sources) can be processed and displayed as tickers that can be integrated into any screen layout.  As media technologies continue to emerge and advance, we plan to expand the media choices for RoninCast® solutions.

Intelligent Content Distribution

The size and complexity of the content being sent to digital displays are growing. In order for RoninCast® software to maintain network friendliness across wired and wireless connections, it is important that as few bytes as possible are sent. There are several ways that we enable this.

The system utilizes a locally installed librarian that takes advantage of unused space on the hard-drive to track and manage content. Only files that are needed at the player are transferred, saving on network bandwidth.  

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RoninCast® software supports content transfer technologies other than one-to-one connections. One such technology is multicast satellite distribution. This technology is widely used in corporations such as big-box retailers that distribute large quantities of data to many locations.

Often it is not the content itself that needs to be changed, but the information within the content that needs to be changed. If information updates are needed, instead of creating and sending a new content file, RoninCast® software can facilitate the information swap. Through Macromedia Flash and the data integration library, changing content information (instead of the content itself) can be facilitated through mechanisms such as RSS feeds, POS systems, etc. This reduces updates from mega-bytes to the few bytes required to display a new piece of data (such as a price).

Distributed Management

In order for RoninCast® solutions to be scalable to large organizations, it is necessary that each individual installation not burden the server with everyday tasks that are required to manage a complex network. To this end, the master controller offloads much of its work and monitoring to the site server. On the local network, the site monitor oversees the players, distributes content, and collects data. The only task that is required of the server is to monitor and communicate with the site server. In this way, expansion of the RoninCast® network by adding an installation does not burden the master controller by the number of screens added, but only by the single installation.

Enterprise-Level Compatibility 

RoninCast® software is designed to easily integrate into large enterprises and become part of the suite of tools that are used every day. The RoninCast® WBMS runs under Windows (2K, XP and 2K+ Server). In order to accommodate our customers’ network administrators, our software supports the ability to use web services to create controlled, closed-loop interfaces for the RoninCast® system.

Flexible Network Design

One of the strengths of the RoninCast® network is the ease and flexibility of implementation and expansion. RoninCast® software is designed to intelligently and successfully manage myriad connection options simultaneously, both internally to an installation and externally to the Internet.

RoninCast® solutions can be networked using wired LAN and/or wireless LAN technology. With wireless LAN, time and costs associated with installing or extending a hardwired network are eliminated. Wireless LAN offers customers freedom of installations and reconfigurations without the high costs of cabling. Additionally, a new installation can be connected to the Internet through dial-up/DSL telephone modems, wireless data communications or high-throughput enterprise data-pipes.

In order to communicate with the WBMS, a new installation can be connected to the Internet through dial-up/DSL telephone modems, digital mobile communication (such as CDMA or GPRS), or high-throughput enterprise data-pipes.

Security

Essential to the design of RoninCast® software is the security of the network and hence the security of our customers. In order to provide the most secure installation possible, we address security at every level of the system: RoninCast® communication, operating system hardening, network security and user interaction.

RoninCast® software utilizes standard HTTP or HTTPS to communicate with members of the system. Using HTTPS, RoninCast® is able to deliver content securely.

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In order for computers to be approved for use on the RoninCast® network, their operating systems go through a rigorous hardening process. This hardening removes or disables extraneous programs that are not required for the core operation of RoninCast® applications. The result is a significantly more stable and secure base for the system as a whole.

Wireless and wired LAN each pose different levels of security exposure. Wireless LAN has the most exposure to potential intruders. However, both can be accessed. In order to create a secure network, we utilize high-level industry-standard wireless LAN equipment and configure it with the highest level of security. When necessary, we work with our customers, analyze their network security and recommend back-end computer security hardware and software that will help make both their network and the RoninCast® network as secure as possible.

RoninCast® also uses a username/password mechanism with one-way encryption to protect the system.   RoninCast® also utilizes an access control layer that allows the administrator to give access or limit access to every part of the system all the way down to the object level. 

Our Suppliers

Our principal suppliers include the following:

We have no long-term agreements with any of our suppliers.

Ongoing Development

Ongoing product development is essential to our ability to stay competitive in the marketplace as a solution provider.  We believe that the functionality and capabilities of our product offerings are competitive advantages and that we must continue to invest in them to maintain our competitive position.  The market for our products and services is subject to rapid technological change, including new communication technologies, new computer hardware and display technologies, as well as the expansion of media display options.  Client requirements are also evolving rapidly.  To remain successful, we must continually adapt to these and other changes.  We incurred research and development expenses of $0.9 million in 2013, $1.8 million in 2012 and $2.1 million in 2011.

Services

Our services are integral to our ability to provide customers with successful digital signage solutions.  We offer a wide range of services from consulting, project planning, design, content development, training, hosting and implementation services, to ongoing customer support and maintenance. Generally, we charge our customers for services on a fee-for-service basis. 

We also offer existing and prospective clients robust and turn-key content creation capabilities.  Our graphic shops in Windsor, Ontario, Canada and Minnetonka, Minnesota are staffed with competent and experienced artists who excel at converting existing assets into appealing digital assets.

Consulting: We work with clients to determine the ultimate hardware and software solution tailored to the specific requirements for their environment.

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Creative: With design experience and an outstanding record of customer satisfaction, our creative team helps make our clients’ marketing and advertising initiatives a reality.

Content Engineering: Our content engineering group is tasked with the architecture, production and development of advanced interactive content as well as all e-learning content creation that engage and motivate customers and consumers alike.

Content Deployment: Our content deployment group offers robust content creation and deployment capabilities for non-interactive applications, which includes planning, re-purposing of existing content and the development of visual communications.

Project Management: Our project management team has experience with large-scale implementations and installations — keeping the goals of timeliness, effectiveness and customer satisfaction in mind.

Fixturing: Whether our clients have their own partners or need our assistance, we work with clients to incorporate the RoninCast® technology into their environments.

Installation: Our third-party installers have the experience to roll out large-scale projects and single location installations without unexpected delays or expenses.

Training: We provide training with every purchase of RoninCast® software.

Hosting: For clients requiring assistance with operating their networks, we offer the service of a NOC for any network hosting needs.

Maintenance and Support: Our support staff is available 24/7 for assistance with any issue.  Standard maintenance, including software upgrades, is included under the annual maintenance agreement.

Intellectual Property

Patents: As of March 1, 2014, we had received one design patent, had one U.S. patent application pending and had one Canadian patent application pending relating to various aspects of our RoninCast® delivery system. Highly technical patents can take up to six years to issue and we cannot assure you that any patents will be issued, or if issued, that the same will provide significant protection to us.  We may abandon patent applications if we determine that the patent is unlikely to be granted, it is unlikely to provide significant protection or it is impractical to continue the application process after correspondence with the appropriate patent office or examiner.

Trademarks:  As of March 1, 2014, we had the following trademark registrations:

U.S. federal trademark registrations for:

 

Canadian trademark registrations for:

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European Union trademark registrations for:

   

         Federal trademark registrations continue indefinitely so long as the trademarks are in use and periodic renewals and other required filings are made.  We review our trademarks and registration requirements with the help of trademark legal counsel and may, from time to time, abandon registered trademarks or file new applications for trademarks if then-current registrations no longer accurately reflect our use of those trademarks.

Competition

We compete with ComQi and Stratacache as digital signage providers.  Within our primary verticals of automotive, food service and branded retail, our competitors include Broadsign, Scala, Omnivex, Hughes, Texas Digital Systems (acquired by Radiant Systems, who in turn was acquired by NCR, both in 2011), c-nario, Harris-Infocaster and Cisco Systems.  Touch-screen competitors include Netkey (acquired by NCR in 2009) and Nanonation. Some or all of our competitors may have significantly greater financial, technical and marketing resources than we do and may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements.  We believe that our direct sales force, our full service network operations center, our complete marketing technology solutions and our brand awareness are the primary factors affecting our competitive position. We also compete with standard advertising media, including print, television and billboards. 

Territories

Our company sells products and services primarily throughout North America. For the year ended December 31, 2013, we derived 93% of net sales in the U.S., 6% of net sales in Canada and 1% in other countries, based on the location of the end customer.  For more information, see Note 8 to our Consolidated Financial Statements (“Segment Information and Major Customers”). 

Regulation

We are subject to regulation by various federal and state governmental agencies. Such regulation includes radio frequency emission regulatory activities of the U.S. Federal Communications Commission, the consumer protection laws of the U.S. Federal Trade Commission, product safety regulatory activities of the U.S. Consumer Product Safety Commission, and environmental regulation in areas in which we conduct business. Some of the hardware components which we supply to customers may contain hazardous or regulated substances, such as lead. A number of U.S. states have adopted or are considering “takeback” bills which address the disposal of electronic waste, including CRT style and flat panel monitors and computers. Electronic waste legislation is developing. Some of the bills passed or under consideration may impose on us, or on our customers or suppliers, requirements for disposal of systems we sell and the payment of additional fees to pay costs of disposal and recycling. As of March 1, 2014, we have not determined that such legislation or proposed legislation will have a material adverse impact on our business.

Employees

We often refer to our employees as associates.  As of March 1, 2014, we had a full-time workforce of 47, of which 43 were employees (associates) and 4 were full-time contractors.  Twenty-seven members of our workforce operate out of our headquarters located in Minnetonka, Minnesota.  The others operate out of our office located in Windsor, Ontario, Canada.  Our workforce is engaged in programming, networking, designing, training, sales/marketing and administration.    

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ITEM 1aRISK FACTORS

The following are certain risk factors that could affect our business, financial condition, operating results and cash flows.  These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K because these risk factors could cause our actual results to differ materially from those expressed in any forward-looking statement.  The risks we have highlighted below are not the only ones we face.  If any of these events actually occur, our business, financial condition, operating results or cash flow could be negatively affected.  We caution you to keep in mind these risk factors and to refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of this report.

Risks Related to Our Business

Our registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.

In its report dated March 11, 2014, our independent registered public accounting firm, Baker Tilly Virchow Krause, LLP, stated that our financial statements for the fiscal year ended December 31, 2013, were prepared assuming that we would continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should our company be unable to continue as a going concern. However, our auditor also expressed substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is an issue raised as a result of losses suffered from operations. We do not currently have sufficient capital resources to fund operations beyond April 2014. We continue to experience operating losses. At present, we have no commitments for any additional financing. Because we have received an opinion from our auditor that substantial doubt exists as to whether our company can continue as a going concern, it may be more difficult for our company to attract investors, secure debt financing or bank loans, or a combination of the foregoing, on favorable terms, if at all. Our future depends upon our ability to obtain financing and upon future profitable operations. If we are unable to generate sufficient revenue, find financing, or adjust our operating expenses so as to maintain positive working capital, then we likely will be forced to cease operations and investors will likely lose their entire investment. We can give no assurance as to our ability to generate adequate revenue, raise sufficient capital, sufficiently reduce operating expenses or our ability to continue as a going concern.  In addition, concerns about our financial viability  have had and may continue to have an adverse effect on current and potential customers’ willingness to enter into long term relationships with us, including relationships where we provide hosting services for their display information.

Our operations and business are subject to the risks of an early stage company with limited revenue and a history of losses, operating in a developing industry. We have incurred losses since inception, and we have had only limited revenue. We may not ever become or remain profitable.

Since inception, we have had limited revenue from the sale of our products and services, and we have incurred net losses. We incurred net losses of $3.6 million and $5.4 million for the years ended December 31, 2013 and 2012, respectively. As of December 31, 2013, we had an accumulated deficit of $98.0 million. We have not been profitable in any year of our operating history and anticipate incurring additional losses into the foreseeable future. We do not know whether or when we will become profitable. Even if we are able to achieve profitability in future periods, we may not be able to sustain or increase our profitability in successive periods.

 

We have formulated our business plans and strategies based on certain assumptions regarding the acceptance of our business model and the marketing of our products and services. However, our assessments regarding market size, market share, market acceptance of our products and services and a variety of other factors may prove incorrect. Our future success will depend upon many factors, including factors which may be beyond our control or which cannot be predicted at this time.

Adequate funds for our operations may not be available, requiring us to curtail our activities significantly.

Our current cash position is insufficient to meet our working capital needs beyond April 2014. We will likely be required to raise additional funding through public or private financings, including equity financings. Any additional equity financings may be dilutive to shareholders and may be completed at a discount to market price.

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Debt financing, if available, would likely involve restrictive covenants similar to or more restrictive than those contained in the security and loan agreement we currently have with Silicon Valley Bank.  Those covenants include maintaining minimum tangible net worth, which we have not been able to satisfy since September 2013.  As a result of the contractually-imposed limits on our borrowing base, the amount available to us under the agreement, based on  calculations as of January 31, 2014, was approximately $0.5 million. There can be no assurance we will successfully complete any future equity or debt financing. Adequate funds for our operations, whether from financial markets, collaborative or other arrangements, may not be available when needed or on terms attractive to us, especially from markets which continue to be risk averse. If adequate funds are not available, our plans to operate our business may be adversely affected and we could be required to curtail our activities significantly and/or cease operating.

Our future success will depend in significant measure on our ability to create a successful strategy for growth through business combinations with other companies, or through other strategic and financial initiatives.  If we do not successfully identify and consummate these combinations, that failure would have a severe adverse impact on our access to financing, customers, technology, and human resources.  We may experience difficulties identifying or consummating strategic or financial alternatives, and any such alternatives may not achieve desired results.

In light of our financial condition and potential for continued net losses, we are evaluating strategic and financial alternatives. Such alternatives may include licensing our product for use in one or more specific industries, acquiring other entities to enable us to gain sufficient mass to regain meaningful access to the capital markets and/or become a more attractive acquisition candidate, and/or selling substantially all of our assets or engaging in some other business combination transaction. Pursuing such alternatives may disrupt operations, distract management and create uncertainties regarding the future direction of our business, products and services that could result in the loss of current or prospective customers, suppliers, employees and other business partners. In addition, we cannot provide assurance that we will identify one or more suitable third parties for any such transaction. Even if we identify one or more suitable third parties, we may not successfully negotiate or consummate any such transaction. If such a transaction is consummated, there can be no assurance that it will resolve our short-term liquidity issues. Furthermore, when pursuing such a transaction we may incur substantial legal and other fees whether or not such a transaction is consummated. If we are unable to consummate such a transaction, we may be required to discontinue certain products or services or otherwise exit all or certain portions of our business. If we divest or otherwise exit certain portions of our business, our business, financial condition and results of operations could be adversely affected. We also may incur certain liabilities and costs in connection with any divestiture or discontinuation of products or services, such as workforce reduction costs, costs associated with closing facilities and disposing of or writing off excess inventory and equipment, and contract termination costs. Any decision we make regarding our strategic and financial alternatives will necessarily involve risks and uncertainties and present challenges in implementation and integration. As a result, pursuit of any such alternatives may not lead to increased shareholder value and, whether or not we pursue such alternatives, the value of our shares may decrease.

If we are unable to successfully complete our pending merger with Broadcast International or maintain its business after the merger, including Broadcast’s current and prospective customers, our profitability may suffer..

On March 5, 2014, we entered into an agreement in which our subsidiary will merge with Broadcast International, Inc. and Broadcast International will become our subsidiary.  Failure to consummate this transaction, or to successfully integrate Broadcast with our company could adversely impact our access to profitability or ability to obtain further financing..  Assuming the consummation of the merger, the success of the merger depends in large measure upon our ability to maintain and develop relationships with Broadcast’s significant current and prospective customers, and our ability to extract value from the other assets of Broadcast, particularly its intellectual property.  Our failure to do so in a timely fashion may destroy much of the potential value of the merger.  Additionally, closing of the merger is subject to customary closing conditions set forth in the merger agreement.  There is no assurance the merger will close as anticipated.

We expect that there will be significant consolidation in our industry.  Our failure or inability to lead that consolidation would have a severe adverse impact on our access to financing, customers, technology, and human resources.

 

Our industry is currently composed of a large number of relatively small businesses, no one of which is dominant or which provides integrated solutions and product offerings incorporating much of the available technology. 

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Accordingly, we believe that substantial consolidation may occur in our industry in the near future.  If we do not play a positive role in that consolidation, either as a leader or as a participant whose capability is merged in a larger entity, we may be left out of this process, with only product offerings of limited value, compared with those of our competitors.  Moreover, even if we lead the consolidation process, the market may not validate the decisions we make in that process.

 

Our success depends on our marketing technologies, RoninCast® software and our other products and services achieving and maintaining widespread acceptance in our targeted markets. If our products contain errors or defects, our business reputation may be harmed.

Our success will depend to a large extent on broad market acceptance of our marketing technologies, RoninCast® software and our other products and services among our prospective customers. Our prospective customers may still not use our solutions for a number of other reasons, including preference for static advertising, lack of familiarity with our technology, preference for competing technologies or perceived lack of reliability. We believe that the acceptance of our marketing technologies, RoninCast® software and our other products and services by our prospective customers will depend on the following factors:

 

 

 

Our software is complex and must meet stringent user requirements. Our products could contain errors or defects, especially when first introduced or when new models or versions are released, which could cause our customers to reject our products, result in increased service costs and warranty expenses and harm our reputation. Unanticipated warranty and other costs for defective products could adversely affect our business. We must develop our products quickly to keep pace with the rapidly changing digital signage and communications market. In the future, we may experience delays in releasing new products as problems are corrected. In addition, some undetected errors or defects may only become apparent as new functions are added to our products. The need to repair or replace products with design or manufacturing defects could temporarily delay the sale of new products and adversely affect our reputation. Delays, costs and damage to our reputation due to product defects could harm our business.

Difficult and volatile conditions in the capital, credit and commodities markets and general economic uncertainty have prompted companies to cut capital spending worldwide and could continue to materially adversely affect our business.

Disruptions in the economy and constraints in the capital, credit and commodities markets have caused companies to reduce or delay capital investment. Some of our prospective customers may cancel or delay spending on the development or roll-out of capital and technology projects with us due to continuing economic uncertainty. Our financial position, results of operations and cash flow could continue to be materially adversely affected by continuing difficult economic conditions and significant volatility in the capital, credit and commodities markets and in the overall worldwide economy. The continuing impact that these factors might have on us and our business is uncertain and cannot be predicted at this time. Such economic conditions have accentuated each of the risks we face and magnified their potential effect on us and our business. The difficult conditions in these markets and the overall economy affect our business in a number of ways. For example:

 

 

 

 

 

 

 

If the markets in which we participate experience subsequent economic downturns or slow recovery, this could continue to negatively impact our sales and revenue generation, margins and operating expenses, and consequently have a material adverse effect on our business, financial condition and results of operations. While we have down-sized our operations to reflect decreased demand, we may not be successful in mirroring current demand. If customer demand were to decline further, we might be unable to adjust expense levels rapidly enough in response to falling demand or without changing the way in which we operate. If revenue were to decrease further and we were unable to adequately reduce expense levels, we might incur significant losses that could adversely affect our overall financial performance and the market price of our common stock.

Our license agreement with Delphi Display Systems, Inc. may limit our future revenue opportunities and, if we become bankrupt or insolvent, Delphi would obtain the source code for our RoninCast software.

In April 2013, we entered into a license agreement with Delphi Display Systems, Inc. pursuant to which we granted Delphi an exclusive, worldwide, perpetual license to use and sublicense RoninCast® software in two specified target markets, namely quick-service restaurants or food service providers that have a substantial number of drive-through locations, and pump toppers (displays located on fuel dispensing devices). The license is exclusive in the target markets for five years from the date of the license agreement, unless earlier terminated pursuant to the license agreement. During this exclusivity period, we have agreed not to market, sell or otherwise promote, either directly or indirectly, any product with substantially similar functionality to the software to the target markets.

 

Under the license agreement, Delphi paid us a one-time license fee for the first 7,500 installed nodes, which represents approximately 1,500 locations based on an assumption of five installed nodes per location. We also agreed to certain node license fees for additional nodes and monthly hosting and support service fees, including certain minimums. These fees may not adequately compensate us for the limitations we have agreed to as the target markets develop. Over the life of the exclusivity period, especially in markets that grow larger or faster than anticipated, our revenue under the license agreement may be less than what we could have achieved in such markets directly.

In addition, Delphi may fail to devote sufficient resources to promoting our software or may otherwise be unsuccessful in identifying new users in the target markets, which would adversely affect the amount of any incremental revenue over the minimum that we receive under the license agreement. We have no control over

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Delphi’s actions under the license agreement other than its covenant to use its best efforts to market, promote, and sublicense the software, and we are now dependent on Delphi to realize the full potential of the software in the target markets.

Finally, as part of the license agreement, we entered into an escrow arrangement pursuant to which Delphi would have the right to obtain the source code for the software if we cease to carry on business, become bankrupt, insolvent or the subject of receivership, or upon certain material breaches of the license agreement by us. Therefore, if those events occur, we would lose control over our software, which would have a material adverse effect on our business and operating results.

Our financial condition and potential for continued net losses negatively impact our relationships with customers, prospective customers and third-party suppliers.

Our current cash position is insufficient to meet our working capital needs beyond April 2014. We believe our financial condition and potential for continued net losses has caused and could continue to cause current and prospective customers to defer placing orders with us, to require terms that are less favorable to us, or to place their orders with marketing technology suppliers other than Wireless Ronin, which adversely affects our business, financial condition and results of operations. On the same basis, third-party suppliers may refuse to do business with us, or may do so only on terms that are unfavorable to us, which also could cause our revenue to decline.

Because we do not have long-term purchase commitments from our customers, the failure to obtain anticipated orders or the deferral or cancellation of commitments could have adverse effects on our business.

Our business is characterized by short-term purchase orders and contracts which do not require that purchases be made. This makes forecasting our sales difficult. The failure to obtain anticipated orders and deferrals or cancellations of purchase commitments because of changes in customer requirements, or otherwise, could have a material adverse effect on our business, financial condition and results of operations. We have experienced such challenges in the past and may experience such challenges in the future.

Most of our contracts are terminable by our customers with limited notice and without penalty payments, and early terminations could have a material effect on our business, operating results and financial condition.

 

Most of our contracts are terminable by our customers following limited notice and without early termination payments or liquidated damages due from them. In addition, each stage of a project often represents a separate contractual commitment, at the end of which the customers may elect to delay or not to proceed to the next stage of the project. We cannot assure you that one or more of our customers will not terminate a material contract or materially reduce the scope of a large project. The delay, cancellation or significant reduction in the scope of a large project or a number of projects could have a material adverse effect on our business, operating results and financial condition.

Due to our dependence on a limited number of customers, we are subject to a concentration of credit risk.

As of December 31, 2013, Chrysler and EWI accounted for 44.8% and 15.0%, respectively, of our accounts receivable. In the case of insolvency by one of our significant customers, an account receivable with respect to that customer might not be collectible, might not be fully collectible, or might be collectible over longer than normal terms, each of which could adversely affect our financial position. In one case in the past, we converted a customer’s account receivable into a secured note receivable then into the underlying collateral, which we ultimately wrote off. In the future, if we convert other accounts receivable into notes receivable or obtain the collateral underlying notes receivable, we may not be able to fully recover the amount due, which could adversely affect our financial position. Furthermore, the value of the collateral which serves to secure any such obligation is likely to deteriorate over time due to obsolescence caused by new product introductions and due to wear and tear suffered by those portions of the collateral installed and in use. There can be no assurance that we will not suffer credit losses in the future.

Our prospective customers often take a long time to evaluate our products and services and our customers may not make significant purchases even after their initial purchase, with this lengthy and variable sales cycle making it difficult to predict our operating results.

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It is difficult for us to forecast the timing and recognition of revenue from sales of our products and services because our prospective customers often take significant time to evaluate our products before purchasing them. Even after making their first purchases of our products and services, existing customers may not make significant purchases of those products and services for a long period of time following their initial purchases or at all. The period between initial customer contact and a purchase by a customer may be years with potentially an even longer period separating initial purchases and any significant purchases thereafter. During the evaluation period, prospective customers may decide not to purchase or may scale down proposed orders of our products for various reasons, including:

 

 

 

 

Our prospective customers routinely require education regarding the use and benefit of our products. This may also lead to delays in receiving customers’ orders.

Our results of operations may depend upon selling our products and services to customers requiring large-scale rollouts and large-scale monitoring and maintenance, which we have not previously conducted.

 

Our results of operations may depend upon selling our products and services to those companies, and within those industries, with many sites that could benefit from digital signage or marketing technologies solutions. Digital signage and marketing technologies systems installation projects deploying hundreds or even thousands of systems present significant technical and logistical challenges that we have not yet demonstrated our ability to overcome. Digital signage and marketing technologies systems employ sophisticated hardware and software that constantly evolves. Sites into which digital signage and marketing technologies systems may be installed vary widely, including such factors as interference with wireless networks, ambient light, extremes of temperature and other factors that may make each individual location virtually unique. Managing the process of installing hundreds or thousands of dynamic, complicated digital signage and marketing technologies systems into unique environments may present difficulties that we have not yet faced on projects performed to date with smaller numbers of installations. If our customers opt to engage us to provide system monitoring and maintenance services through our network operations center, or NOC, on one or more large-scale implementations, we may not successfully or profitably monitor and maintain the hardware, software and content in a manner satisfactory to our customers or in compliance with our contractual obligations. The efficiency and effectiveness of NOC monitoring and maintenance are directly affected by our software and that software’s ability to monitor our customers’ systems. For large-scale implementations, we may need to further develop our software to facilitate efficient and effective system monitoring and maintenance. We cannot assure you that we will succeed in developing our software, digital signage systems, project management and infrastructure to successfully implement, monitor, manage and maintain large-scale implementation projects or ongoing operations. Our failure to do so could harm our business and financial condition.

Difficulty in developing and maintaining relationships with third party manufacturers, suppliers and service providers could adversely affect our ability to deliver our products and meet our customers’ demands.

We rely on third parties to manufacture and supply parts and components for marketing technologies and digital signage systems we provide, and to provide order fulfillment, installation, repair services and technical and customer support. Our strategy to rely on third party manufacturers, suppliers and service providers involves a number of significant risks, including the loss of control over the manufacturing process, the potential absence of adequate capacity, the unavailability of certain parts and components used in our products and reduced control over delivery schedules, quality and costs. For example, we do not generally maintain a significant inventory of parts or components, but rely on suppliers to deliver necessary parts and components to third party manufacturers, in a timely manner, based on our forecasts. If delivery of our products and services to our customers is interrupted, or if our products experience quality problems, our ability to meet customer demands would be harmed, causing a loss of revenue and harm to our reputation. Increased costs, transition difficulties and lead times involved in developing additional or new third party relationships could adversely affect our ability to deliver our products and services and meet our customers’ demands, and harm our business.

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Reductions in hardware costs will likely decrease hardware pricing to our customers and would reduce our per unit revenue.

Our pricing includes a standard percentage markup over our cost of digital signage systems and other marketing technologies, such as computers and display monitors. As such, any decrease in our costs to acquire such components from third parties will likely be reflected as a decrease in our hardware pricing to our customers. Therefore, reductions in such hardware costs could potentially reduce our revenue.

 

Because our sales approach currently includes strategic partners and business alliance relationships, we expect to face risks not faced by companies with only internal sales forces.

We currently sell most of our marketing technology offerings, which include digital signage systems and software licenses, through an internal sales force. We believe our future success will depend on such sales force and our ability to attract and form relationships with strategic partners and business alliances. We may not, however, be successful in forming these types of relationships, which could result in us being unable to expand our sales network to generate revenue. Our anticipated reliance on strategic partners and business alliances involves several risks, including the following:

 

 

 

 

 

 

Hardware companies may include digital signage software with functionality similar to RoninCast® software as an integrated hardware and software solution, which could have a material adverse effect on our business.

We have provided digital signage content management software to NEC. Our software development agreement with NEC provided that NEC would own the software that we wrote. NEC intends to bundle this software with hardware that it sells to its digital signage customers. While the software developed for NEC does not encompass all of the features and functions of our proprietary RoninCast® software, the NEC software enables digital signage customers to implement basic digital signage applications. While we believe that a certain number of those NEC customers beginning with the NEC software may come to want or need enhanced functionality of the RoninCast® software product, there is a risk that bundled software will cannibalize the demand for more fully featured products like RoninCast® digital signage software. If bundling digital signage content management software with hardware becomes an industry standard, we could risk losing software licensing sales. It is difficult for us to predict whether, when or the extent to which bundling digital signage content management software with hardware will become customary. It is also difficult to predict the functionality of the software that hardware manufacturers may bundle with hardware. If more sophisticated and fully featured software is bundled with hardware, that bundling may negatively impact our RoninCast® software license sales and adversely affect our business.

Our industry is characterized by frequent technological change. If we are unable to adapt our products and services and develop new products and services to keep up with these rapid changes, we will not be able to obtain or maintain market share.

 

The market for our products and services is characterized by rapidly changing technology, evolving industry standards, changes in customer needs, heavy competition and frequent new product and service introductions. If we fail to develop new products and services or modify or improve existing products and services in response to these changes in technology, customer demands or industry standards, our products and services could become less competitive or obsolete.

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We must respond to changing technology and industry standards in a timely and cost-effective manner. We may not be successful in using new technologies, developing new products and services or enhancing existing products and services in a timely and cost effective manner. Our pursuit of necessary technology may require substantial time and expense as experienced with our software product, RoninCast®. We may need to license new technologies to respond to technological change. These licenses may not be available to us on commercially reasonable terms or at all. We may not succeed in adapting our products and services to new technologies as they emerge. Furthermore, even if we successfully adapt our products and services, these new technologies or enhancements may not achieve market acceptance.

Our ability to execute our business strategy depends on our ability to protect our intellectual property, and if any third parties make unauthorized use of our intellectual property, or if our intellectual property rights are successfully challenged, our competitive position and business could suffer.

Our success and ability to compete depends substantially on our proprietary technologies. We regard our copyrights, service marks, trademarks, trade secrets and similar intellectual property as critical to our success, and we rely on trademark and copyright law, trade secret protection and confidentiality agreements with our employees, customers and others to protect our proprietary rights. Despite our precautions, unauthorized third parties might copy certain portions of our software or reverse engineer and use information that we regard as proprietary. In addition, confidentiality agreements with employees and others may not adequately protect against disclosure of our proprietary information.

As of March 1, 2014, we had received one design patent, had one U.S. patent application pending and had one Canadian patent application pending relating to various aspects of our RoninCast® delivery system. We cannot provide assurance that any additional patents will be granted. Even if they are granted, our patents may be successfully challenged by others or invalidated. In addition, any patents that may be granted to us may not provide us a significant competitive advantage. Although we have been granted patents and trademarks, they could be challenged in the future. If future trademark registrations are not approved because third parties own these trademarks, our use of these trademarks would be restricted unless we enter into arrangements with the third party owners, which might not be possible on commercially reasonable terms or at all. If we fail to protect or enforce our intellectual property rights successfully, our competitive position could suffer. We may be required to spend significant resources to monitor and protect our intellectual property rights. We may not be able to detect infringement and may lose competitive position in the market. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture market share.  Our acquisition of Broadcast, if consummated, will include 14 additional patents and other intellectual property, all of which would be subject to these risks.

Our industry is characterized by frequent intellectual property litigation, and we could face claims of infringement by others in our industry. Such claims are costly and add uncertainty to our business strategy.

 

The digital media and communications industry is characterized by uncertain and conflicting intellectual property claims and frequent intellectual property litigation, especially regarding patent rights. We could be subject to claims of infringement of third party intellectual property rights, which could result in significant expense and could ultimately result in the loss of our intellectual property rights. From time to time, third parties may assert patent, copyright, trademark or other intellectual property rights to technologies that are important to our business. In addition, because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which relate to our industry of which we are not aware. We have in the past and may in the future receive notices of claims that our products infringe or may infringe intellectual property rights of third parties. Any litigation to determine the validity of these claims, including claims arising through our contractual indemnification of our business partners, regardless of their merit or resolution, would likely be costly and time consuming and divert the efforts and attention of our management and technical personnel. If any such litigation resulted in an adverse ruling, we could be required to:

 

 

 

 

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Our business may be adversely affected by malicious applications that interfere with, or exploit security flaws in, our products and services.

Our business may be adversely affected by malicious applications that make changes to our customers’ computer systems and interfere with the operation and use of our products. These applications may attempt to interfere with our ability to communicate with our customers’ devices. The interference may occur without disclosure to or consent from our customers, resulting in a negative experience that our customers may associate with our products. These applications may be difficult or impossible to uninstall or disable, may reinstall themselves and may circumvent other applications’ efforts to block or remove them. In addition, we offer a number of products and services that our customers download to their computers or that they rely on to store information and transmit information over the Internet. These products and services are subject to attack by viruses, worms and other malicious software programs, which could jeopardize the security of information stored in a customer’s computer or in our computer systems and networks. The ability to reach customers and provide them with a superior product experience is critical to our success. If our efforts to combat these malicious applications fail, or if our products and services have actual or perceived vulnerabilities, there may be claims based on such failure or our reputation may be harmed, which would damage our business and financial condition.

We rely on computer systems and information technology to run our business. Any material failure, interruption or security breach of our computer systems or information technology may adversely affect the operation of our business and our results of operations.

Computer viruses or terrorism may disrupt our operations and adversely affect our operating results. Despite our implementation of security measures, including a co-location center that can be used in case our primary computer center location is disabled or destroyed, all of our technology systems are vulnerable to disability or failures due to hacking, viruses, acts of war or terrorism, and other causes. If our technology systems were to fail and we were unable to recover in a timely manner, we would be unable to fulfill critical business functions, which could have a material adverse effect on our business, operating results, and financial condition.

 

We compete with other companies that have more resources, which puts us at a competitive disadvantage.

The market for marketing technologies, including digital signage, is highly competitive and we expect competition to increase in the future. Some of our competitors or potential competitors may have significantly greater financial, technical and marketing resources than our company. These competitors may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements. They may also devote greater resources to the development, promotion and sale of their products than our company.

We expect competitors to continue to improve the performance of their current products and to introduce new products, services and technologies. Successful new product and service introductions or enhancements by our competitors could reduce sales and the market acceptance of our products and services, cause intense price competition or make our products and services obsolete. To be competitive, we must continue to invest significant resources in research and development, sales and marketing and customer support. If we do not have sufficient resources to make these investments or are unable to make the technological advances necessary to be competitive, our competitive position will suffer. Increased competition could result in price reductions, fewer customer orders, reduced margins and loss of market share. Our failure to compete successfully against current or future competitors could adversely affect our business and financial condition.

We may experience fluctuations in our quarterly operating results.

We may experience variability in our total sales on a quarterly basis as a result of many factors, including the condition of the marketing technologies, electronic communication and digital signage industries in general, shifts in demand for software and hardware products, technological changes and industry announcements of new products and upgrades, absence of long-term or large-scale commitments from customers, timing and variable lead-times of customer orders, delays in or cancellations of customer orders, variations in component costs and/or adverse changes in the supply of components, variations in operating expenses, changes in our pricing policies or

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those of our competitors, the ability of our customers to pay for products and services, effectiveness in managing our operations and changes in economic conditions in general. We may not consider it prudent to adjust our spending levels on the same timeframe; therefore, if total sales decline for a given quarter, our operating results may be materially adversely affected. As a result of the potential fluctuations in our quarterly operating results, we believe that period-to-period comparisons of our financial results should not be relied upon as an indication of future performance. Further, it is possible that in future quarters our operating results will be below the expectations of public market analysts and investors. In such event, the price of our common stock would likely be materially adversely affected.

Our future success depends on key personnel and our ability to attract and retain additional personnel.

Our key personnel include:

 

 

If we fail to retain our key personnel or to attract, retain and motivate other qualified employees, our ability to maintain and develop our business may be adversely affected. Our future success depends significantly on the continued service of our key technical, sales and senior management personnel and their ability to execute our growth strategy. The loss of the services of our key employees could harm our business. We may be unable to retain our employees or to attract, assimilate and retain other highly qualified employees who could migrate to other employers who offer competitive or superior compensation packages.

 

We may be subject to sales and other taxes, which could have adverse effects on our business.

In accordance with current federal, state and local tax laws, and the constitutional limitations thereon, we currently collect sales, use or other similar taxes in state and local jurisdictions where we have a physical presence that we understand to be sufficient to require us to collect and remit such taxes. One or more state or local jurisdictions may seek to impose sales tax collection obligations on us and other out-of-state companies which engage in commerce with persons in that state. Several U.S. states have taken various initiatives to prompt more sellers to collect local and state sales taxes. Furthermore, tax law and the interpretation of constitutional limitations thereon are subject to change. In addition, new or expanded business operations in states where we do not currently have a physical presence sufficient to obligate us to collect and remit taxes could subject shipments of goods into or provision of services in such states to sales tax under current or future laws. If our company grows, increased sales of our products and services to locations in various states and municipalities may obligate us to collect and remit sales tax and to pay state income and other taxes based upon increased presence in those jurisdictions. We will endeavor to collect, remit and pay those state and local taxes that we owe according to applicable law. State and local tax laws are, however, subject to change, highly complex and diverse from jurisdiction to jurisdiction. If one or more state or local jurisdictions successfully asserts that we must collect sales or other taxes beyond our current practices or that we owe unpaid sales or other taxes and penalties, it could adversely affect our business and financial condition.

We may be subject to U.S. and international tax authorities challenging our transfer price allocation, which could have adverse effects on our business.

Currently a significant portion of our revenue is generated within the United States from products and services provided through our Canadian operations. As a result, we are required to prepare a transfer price allocation between our U.S. and Canadian entities. This allocation involves assumptions and estimates which may be challenged by the I.R.S. or Canadian tax authorities. In the event one of these tax authorities successfully challenges our transfer price allocation, it may result in us being subject to corporate taxes and penalties.

Our results of operations could be adversely affected by changes in foreign currency exchange rates, particularly fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar.

Since a portion of our operations and revenue occur outside the United States and in currencies other than the U.S. dollar, our results could be adversely affected by changes in foreign currency exchange rates. Additionally, given our ownership of Wireless Ronin Technologies (Canada), Inc., changes in the exchange rate

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between the U.S. dollar and the Canadian dollar can significantly affect inter-company balances and our results of operations.

We are subject to various restrictive covenants under our loan and security agreement with Silicon Valley Bank which may prevent us from taking actions that could be beneficial to our shareholders without Silicon Valley Bank’s consent, including mergers, acquisitions and the incurrence of additional indebtedness.

Pursuant to our loan and security agreement with Silicon Valley Bank, we generally require the prior written consent of Silicon Valley Bank to, among other things:

 

 

 

 

 

 

 

 

 

If we determine that taking one of these actions would be in our best interests and we were unable to obtain the prior written consent of Silicon Valley Bank to do so, we would be required to repay the amount owing Silicon Valley Bank at that time, which may not be advisable or even practical, or forgo taking the action for which we sought consent. In such scenario, we would be unable to borrow additional sums under the agreement with Silicon Valley Bank which could adversely affect our liquidity and capital resources. Additionally, we are required to maintain a certain minimum tangible net worth level at either the time of an advancement or while there is an outstanding balance owed to Silicon Valley Bank. As of December 31, 2013, we had failed to meet the minimum tangible net worth requirement, which precludes us from drawing on such line of credit. Our inability to take actions due to the restrictive covenants or our need to repay amounts borrowed and effective loss of the line of credit could have a material adverse effect on our business and financial condition.

Risks Related to Our Securities

Our common stock has been delisted from the NASDAQ Stock Market, which may in the future adversely affect the trading price of our common stock and potentially subject trading in our shares to application of the SEC’s “penny stock” rules.

On May 31, 2013, our common stock was delisted from the NASDAQ Capital Market, due to our failure to meet the $2.5 million minimum shareholders’ equity requirement for continued listing. Since such delisting, our common stock has been traded on the OTCQB tier of the OTC Markets, an inter-dealer, over-the-counter market. As compared to securities quoted on a national exchange such as NASDAQ, selling our common stock could be more difficult because smaller quantities of shares are likely to be bought and sold, transactions could be delayed, security analysts’ coverage of us may be reduced, and our common stock may trade at a lower market price than it otherwise would.

In addition, as a result of the delisting of our common stock, trading in our shares may become subject to the SEC’s “penny stock” rules and therefore subject to the requirements of Rule 15g-9 under the Exchange Act. Under this rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker-dealer must make an individualized written suitability determination for the purchaser and receive the purchaser’s written consent prior to the transaction. SEC regulations also require additional disclosure in connection with any trades involving a penny stock, including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny

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stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few broker-dealers are likely to undertake these compliance activities.

 

As a result of the NASDAQ delisting, we are no longer eligible to use Form S-3, which could impair our ability to raise capital to continue our operations, and NASDAQ’s dilution-inhibiting rules will no longer apply, which could adversely affect trading in our common stock.

As a result of the delisting of our common stock from the NASDAQ Capital Market, we are no longer eligible to use Form S-3 either to file shelf registration statements or to register resales of our securities. We have relied on shelf registration statements on Form S-3 for most of our financings in recent years, and accordingly these limitations may harm our ability to raise the capital that we need. Under these circumstances, we will be required to use a registration statement on Form S-1 to register securities with the SEC, or issue such securities in a private placement. These limitations are expected to increase our costs of raising capital.

Furthermore, our shareholders will no longer have the benefit of restrictions on dilution and other rules imposed by national exchanges, and we may engage in potentially dilutive transactions without complying with shareholder approval rules imposed by national exchanges. These factors could have a material adverse effect on the trading price, liquidity, volatility, value and marketability of our common stock and could have a material adverse effect on our ability to obtain financing for the continuation of our operations.

We are subject to financial reporting and other requirements for which our accounting, other management systems and resources may not be adequately prepared.

As a public company, we incur significant legal, accounting and other expenses, including costs associated with reporting requirements and corporate governance requirements, including requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Sarbanes-Oxley Act of 2002, and rules implemented by the SEC, which are subject to change from time to time. If we identify significant deficiencies or material weaknesses in our internal control over financial reporting that we cannot remediate in a timely manner, investors and others may lose confidence in the reliability of our financial statements, and the trading price of our common stock and our ability to obtain any necessary equity or debt financing could suffer. In addition, the foregoing regulatory requirements could make it difficult or costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on board committees or as executive officers.

The market price of our stock may be subject to wide fluctuations.

The price of our common stock may fluctuate, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause our investors to lose part or all of their investment in our shares of common stock. Factors that could cause fluctuations include, but are not limited to, the following:

 

 

 

 

 

 

 

 

 

 

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Our articles of incorporation, bylaws and Minnesota law may discourage takeovers and business combinations that our shareholders might consider to be in their best interests.

Anti-takeover provisions of our articles of incorporation, bylaws, and Minnesota law could diminish the opportunity for shareholders to participate in acquisition proposals at a price above the then current market price of our common stock. For example, while we have no present plans to issue any preferred stock, our board of directors, without further shareholder approval, may issue up to approximately 16.7 million shares of undesignated preferred stock and fix the powers, preferences, rights and limitations of such class or series, which could adversely affect the voting power of our common stock. In addition, our bylaws provide for an advance notice procedure for nomination of candidates to our board of directors that could have the effect of delaying, deterring or preventing a change in control. Further, as a Minnesota corporation, we are subject to provisions of the Minnesota Business Corporation Act, or MBCA, regarding “control share acquisitions” and “business combinations.” We may, in the future, consider adopting additional anti-takeover measures. The authority of our board of directors to issue undesignated preferred stock and the anti-takeover provisions of the MBCA, as well as any future anti-takeover measures adopted by us, may, in certain circumstances, delay, deter or prevent takeover attempts and other changes in control of our company not approved by our board of directors.

We do not anticipate paying cash dividends on our shares of common stock in the foreseeable future.

We have never declared or paid any cash dividends on our shares of common stock. We intend to retain any future earnings to fund the operation and expansion of our business and, therefore, we do not anticipate paying cash dividends on our shares of common stock in the foreseeable future. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for investors in our common stock for the foreseeable future. Furthermore, our loan and security agreement with Silicon Valley Bank contains a restrictive covenant that precludes us from paying dividends without Silicon Valley Bank’s consent.

 

ITEM 1bUNRESOLVED STAFF COMMENTS

None.

ITEM 2PROPERTIES

 We conduct our U.S. operations from a leased facility located at 5929 Baker Road in Minnetonka, Minnesota.  We lease approximately 19,000 square feet of office and warehouse space under a lease that extends through January 2018 as part of an amendment we entered into in July 2010.   In consideration for this extension, the landlord provided us with a leasehold improvement allowance totaling $0.2 million and an initial reduction in base rent per square foot.   The amendment also contains a rent escalation provision, along with a requirement to maintain a letter of credit  as collateral which can, in the discretion of the landlord, be reduced or released  The amount of the letter of credit as of December 31, 2013 was $180,000.

 

 In addition, we lease office space of approximately 10,000 square feet to support our Canadian operations at a facility located at 4510 Rhodes Drive, Suite 800, Windsor, Ontario under a lease that, as amended, extends through June 30, 2014.

   

We believe the facilities used in our operations are suitable for their respective uses and are adequate to meet our current needs.

ITEM 3LEGAL PROCEEDINGS

We were not party to any material legal proceedings as of March 1, 2014. 

ITEM 4MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is currently traded on the OTC Bulletin Board under the symbol “RNIN.”   In November 2012, our board of directors approved a one-for-five reverse stock split of all outstanding common shares, which became effective on December 14, 2012.  A proportionate adjustment also was made to our outstanding derivative securities.  The following table sets forth, for the periods indicated, the high and low closing prices for our common stock as reported by the OTC Bulletin Board, and represents prices between dealers, does not include retail markups, markdowns or commissions, and may not represents actual transactions.  All share and per share information set forth in this report has  been adjusted to reflect such reverse stock split.

 

Shareholders

As of March 1, 2014, we had 86 holders of record of our common stock. 

Dividend Policy

We have never declared or paid cash dividends on our common stock.  We currently intend to retain future earnings, if any, to operate and expand our business, and we do not anticipate paying cash dividends on our common stock in the foreseeable future.  Any payment of cash dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, earnings, capital requirements, contractual restrictions and other factors deemed relevant by our board of directors.  Furthermore, our loan and security agreement with Silicon Valley Bank contains a restrictive covenant that precludes us from paying dividends without Silicon Valley Bank’s consent. 

Securities Authorized for Issuance Under Equity Compensation Plans

See “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in Item 12 for information regarding securities authorized for issuance under our equity compensation plans. 

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Sales of Unregistered Securities During the Fourth Quarter of Fiscal Year 2013

In December 2013, the Company issued an aggregate of $1,075,000 in unsecured convertible promissory notes, along with warrants to purchase an aggregate of 1,075,000 shares of the Company’s common stock, in a private placement transaction with certain accredited investors. 

ITEM 6SELECTED FINANCIAL DATA

The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included in Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below.

(in thousands, except per share amounts.)

 

 

 

* The Statement of Operation data for the years ended December 31, 2010 and 2009 and the Balance Sheet data at December 31, 2011, 2010 and 2009 have been derived from our audited financial statement which are not contained or incorporated by reference in this document.

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ITEM 7MANAGEMENT’S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements 

The following discussion contains various forward-looking statements within the meaning of Section 21E of the Exchange Act. 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 in Item 1A under the caption “Risk Factors.”

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

 

We provide marketing technology solutions, which include digital signage, interactive kiosks, mobile messaging, social networking and web development solutions, to customers who use our products and services in certain retail and service markets.  Through our proprietary RoninCast® software, we provide enterprise, web-based and hosted content delivery systems that manage, schedule and deliver digital content over wireless and wired networks.  We also provide custom interactive software solutions, content engineering and creative services to our customers.

 

While our marketing technology solutions have application in a wide variety of industries, we focus on three primary markets: (1) automotive, (2) food service (including QSR, fast casual and managed food services markets), and (3) branded retail.  Commencing April 2013, we began to target the QSR and “pump topper” markets through our license agreement with Delphi Display Systems, Inc.  The industries in which we sell goods and services are not new but their application of marketing technology solutions is relatively new and participants in these industries only recently started considering adopting these types of technologies as part of their overall marketing strategies.  As a result, we remain an early stage company without an established history of profitability, or substantial or steady revenue.  We believe this characterization applies to our competitors as well, which are working to promote broader adoption of marketing technology solutions and to develop profitable, substantial and steady sources of revenue.

 

We believe that the adoption of marketing technology solutions will increase substantially in years to come both in industries on which we currently focus and in other industries. We also believe that adoption of our marketing technology solutions, which includes digital signage, depends not only upon the software and services that we provide but upon the cost of hardware used to process and display content in digital signage systems. Digital media players and flat panel displays constitute a large portion of the expenditure customers make relative to the entire cost of digital signage systems. Costs of these digital media players and flat panel displays have historically decreased and we believe will continue to do so, though we do not manufacture either product and do not substantially affect the overall markets for these products. In addition, we have been developing our next generation of RoninCast software in such a way as to allow it to function on significantly lower cost media players than the ones in use today. With the  launch of our next generation RoninCast during the first half of 2013, we are now able to deploy our software on lower cost media players with this capability, coupled with a continued decline in costs for flat panel displays, we believe that adoption of digital signage and other marketing technology solutions is likely to increase, though we cannot predict the rate at which such adoption will occur.

 

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Management focuses on a wide variety of financial measurements to assess our financial health and prospects but principally upon (1) sales, to measure the adoption of our marketing technology solutions by our customers, (2) cost of sales and gross profit, particularly expressed as gross profit percentage, to determine if sales have been made at levels of profit necessary to cover operating expenses on a long-term basis (based upon assumptions regarding adoption), (3) sales of hardware relative to software and services, understanding that hardware typically provides a lower gross profit margin than do software license fees and services, (4) operating expenses so that management can appropriately match those expenses with sales, and (5) current assets, especially cash and cash equivalents used to fund operating losses thus far incurred.

 

Our wholly-owned subsidiary, Wireless Ronin Technologies (Canada), Inc. (“RNIN Canada”), an Ontario, Canada provincial corporation located in Windsor, Ontario, maintains a vertical specific focus in the automotive industry and houses our content engineering operation. RNIN Canada develops digital content and sales support systems to help retailers train their sales staff and educate their customers at the point of sale. Today, the capabilities of this operation are integrated with our historical business to provide content solutions to all of our clients.

 

Our company and our subsidiary sell products and services primarily throughout North America.

 

In November 2012, our board of directors approved a one-for-five reverse stock split of all outstanding common shares, which became effective on December 14, 2012.  A proportionate adjustment also was made to our outstanding derivative securities.  All share and per share information set forth in this report has been adjusted to reflect such reverse stock split.

 

Our Sources of Revenue

We generate revenue 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 primarily through our direct sales force, but we also utilize strategic partnerships and business alliances.  In addition, in April 2013, we entered into a license agreement with Delphi Display Systems, Inc. (“Delphi”) (the “License Agreement”) pursuant to which we granted Delphi an exclusive, worldwide, perpetual license to use and sublicense our RoninCast® 4.0 HTML5-based software, as revised from time to time (the “Software”), in specified target markets. Under the License Agreement, these target markets are (1) quick-service restaurants or food service providers that have a substantial number of drive-through locations, (2) pump toppers (displays located on fuel dispensing devices) and (3) other markets as subsequently mutually agreed upon between us and Delphi.

The license is exclusive in the target markets for five years from the date of the License Agreement, unless earlier terminated pursuant to the License Agreement. During this exclusivity period, we have agreed not to market, sell or otherwise promote, either directly or indirectly, any product with substantially similar functionality to the Software to the target markets. Delphi has agreed to use its best efforts to market, promote, and sublicense the Software within the target markets. Although Delphi may develop its own software to facilitate interface with the Software for application in Delphi’s own business or in the businesses of Delphi’s sublicensees, Delphi may not form an agreement with a third party to develop or resell software to compete with the Software in any market during the term of the License Agreement. Should Delphi elect to develop software that would compete with the Software for a specific customer or market application (“the Competing Software”), prior to Delphi developing such software, Delphi will grant us a right of first refusal to develop the Competing Software at a cost equal or less than Delphi’s reasonable, documented costs to develop the Competing Software.

In consideration of such license, Delphi paid us in April 2013 a one-time license fee of $750,000 for the first 7,500 installed nodes, which represents approximately 1,500 locations based on an assumption of five installed nodes per location. We also agreed to certain node license fees for additional nodes. Delphi has agreed to pay us monthly hosting and support service fees on installed nodes, including hosting and support service fees that increase each year over a five-year period and aggregate to a minimum of $1.3 million over such period.  Based on our review, we determined all the criteria to recognize the $750,000 had been properly met during the second quarter of 2013.  This included the delivery of a master version of our RoninCast® software to allow Delphi the ability to replicate 7,500 copies as they resell our software.   In addition, the $750,000 license fee is a fixed amount and not subject to change regardless of how many copies of our software, up to 7,500 copies, are ultimately resold.  Lastly,

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the collectability of the license fee was determined to be probable as the amount was paid to us during the second quarter of 2013.

 

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.

Critical Accounting Policies and Estimates

   The preparation of financial statements in conformity with accounting principles generally accepted in the U.S., or GAAP, requires us 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 period. Actual results could differ from those estimates. In recording transactions and balances resulting from business operations, we use estimates based on the best information available. We use estimates for such items as depreciable lives, volatility factors in determining fair value of options and warrants, tax provisions, recognition of revenue under fixed price contracts, provisions for uncollectible receivables and deferred revenue.  We revise the recorded estimates when better information is available, facts change or we can determine actual amounts. These revisions can affect operating results. We have identified below the following accounting policies that we consider to be critical.

 

Revenue Recognition

We recognize revenue primarily from these sources:

·Software and software license sales

·System hardware sales

·Professional service revenue

·Software design and development services

·Implementation services

·Maintenance and hosting support contracts

We apply the provisions of Accounting Standards Codification subtopic 605-985, Revenue Recognition: Software (or ASC 605-35) to all transactions involving the sale of software licenses. In the event of a multiple element arrangement, we evaluate if each element represents a separate unit of accounting, taking into account all factors following the guidelines set forth in “FASB ASC 605-985-25-5.”

 

We recognize 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 reasonably assured. We assess collectability based on a number of factors, including the customer’s past payment history and its current creditworthiness. If it is determined that collection of a fee is not reasonably assured, we defer the revenue and recognize 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.  Sales and use taxes are reported on a net basis, excluding them from revenue and cost of revenue.

 

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Multiple-Element Arrangements — We enter into arrangements with customers that include a combination of software products, system hardware, maintenance and support, or installation and training services. We allocate 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 we do 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 we do not have VSOE of fair value have been delivered.

 

The VSOE for maintenance and support services is based upon the renewal rate for continued service arrangements. The VSOE of installation and training services is established based upon pricing for the services. The VSOE of software and licenses is based on the normal pricing and discounting for the product when sold separately.

 

Each element of our multiple element arrangements qualifies for separate accounting.  However, when a sale includes both software and maintenance, we defer revenue under the residual method of accounting.  Under this method, the undelivered maintenance and support fees included in the price of software is amortized ratably over the period the services are provided. We defer maintenance and support fees based upon the customer’s renewal rate for these services.

 

Software and software license sales

 

We recognize revenue when a fixed fee order has been received and delivery has occurred to the customer. We assess 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

 

We recognize 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, we recognize revenue as services are performed. For fixed-fee contracts, we recognize revenue upon completion of specific contractual milestones or by using the percentage-of-completion method.

 

Software design and development services

 

Revenue from contracts for technology integration consulting services where we design/redesign, build and implement new or enhanced systems applications and related processes for clients are recognized on the percentage-of-completion method in accordance with “FASB ASC 605-985-25-88 through 107.”  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. We measure our progress for completion based on either the hours worked as a percentage of the total number of hours of the project or by delivery and customer acceptance of specific milestones as outlined per the terms of the agreement with the customer.  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

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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.  Our presentation of revenue recognized on a contract completion basis has been consistently applied for all periods presented.

 

We classify the revenue and associated cost on the “Services and Other” line within the “Sales” and “Cost of Sales” sections of the Consolidated Statement of Operations.  In all cases where we apply the contract method of accounting, our only deliverable is professional services, thus, we believe presenting the revenue on a single line is appropriate. 

 

Costs and estimated earnings recognized in excess of billings on uncompleted contracts are recorded as unbilled services and are included in accounts receivable on the balance sheet. Billings in excess of costs and estimated earnings on uncompleted contracts are recorded as deferred revenue until revenue recognition criteria are met. 

 

Implementation services

 

Implementation services revenue is recognized when installation is completed.

 

Maintenance and hosting support contracts

 

Maintenance and hosting 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. We also offer a hosting service through our network operations center, or NOC, allowing the ability to monitor and support our customers’ networks 7 days a week, 24 hours a day. 

 

Maintenance and hosting 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.  Our hosting support agreement fees are based on the level of service we provide to our customers, which can range from monitoring the health of our customer’s network to supporting a sophisticated web portal.

 

Basic and Diluted Loss per Common Share

Basic and diluted loss per common share for all periods presented is computed using the weighted average number of common shares outstanding. Basic weighted average shares outstanding include only outstanding common shares.   Diluted net loss per common share is computed by dividing net loss by the weighted average common and potential dilutive common shares outstanding computed in accordance with the treasury stock method.  Shares reserved for outstanding stock warrants and options totaling 2.1 million, 0.5 million and 0.5 million for 2013, 2012 and 2011, respectively, were excluded from the computation of loss per share as their effect was antidilutive due to our net loss in each of those years.

Deferred Income Taxes

   Deferred income taxes are recognized in the financial statements for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates. Temporary differences arise from net operating losses, reserves for uncollectible accounts receivables and inventory, differences in depreciation methods, and accrued expenses. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Accounting for Stock-Based Compensation

We account for stock-based compensation in accordance with “FASB ASC 718-10.”  Stock-based compensation expense recognized during the period is based on the value of the portion of share-based awards that

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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 our 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.   Stock-based compensation expense, including the amortization of warrants issued for debt issuance costs, of $0.4 million, $0.5 million and $0.8 million, respectively.  No tax benefit has been recorded due to the full valuation allowance on deferred tax assets that we have recorded. 

We apply the guidance of FASB 718-10-S99-1 for purposes of determining the expected term for stock options. We calculate the estimated expected life based upon historical exercise data. We calculate expected volatility for stock options and awards using historical volatility. The dividend yield assumption is based on our history and expectation of no future dividend payouts.

Stock-based compensation expense is based on awards ultimately expected to vest and is reduced for estimated forfeitures. FASB 718-10-55 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We applied a pre-vesting forfeiture rate of 18.3% to 25.2% based upon actual historical experience for all employee option awards. We continue to apply a zero forfeiture rate to those options granted to members of our board of directors.

 

We account for equity instruments issued for services and goods to non-employees under “FASB ASC 505-50-1” Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services and “FASB ASC 505-50-25” Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees. Generally, the equity instruments issued for services and goods are shares of our common stock, or warrants or options to purchase shares of our common stock. These shares, warrants or options are either fully-vested and exercisable at the date of grant or vest over a certain period during which services are provided. We expense the fair market value of these securities over the period in which the related services are received. During 2013 and 2012, we recognized $13,000 and $189,000, respectively, of stock-based compensation expense related to the fair market value of stock and warrants that were issued to outside vendors for professional services. We did not issue equity instruments to non-employees during the year ended 2011.   

See Note 7 in the Consolidated Financial Statements in this Form 10-K for further information regarding the impact of FASB ASC 718-10 and the assumptions we use to calculate the fair value of stock-based compensation.

 

 

 

 

 

 

 

 

 

 

 

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Results of Operations

Our results of operations for the years ended December 31, 2013, 2012 and 2011 were as follows:

 

 

Our results of operations as a percentage of sales for the years ended December 31, 2013, 2012 and 2011 were as follows:

 

 

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2013 compared to 2012

Sales

Our sales increased 1% to $6.8 million in 2013 from $6.7 million in 2012.  The year-over-year increase was primarily attributable to a $750,000 software license sale to Delphi.   In April 2013, we entered into an exclusive licensing and services agreement with Delphi to provide integrated technology solutions to the quick-serve restaurant (QSR) and “pump topper” gas station market.  In consideration for granting this license, we will receive a minimum of $2.0 million over five years, of which $750,000 was paid upon the execution of the contract.  Based on our review, we determined all the criteria to recognize the $750,000 had been properly met in 2013.  This included the delivery of a master version of our RoninCast® software to allow Delphi the ability to replicate 7,500 copies as they resell our software.  In addition, the $750,000 license fee is a fixed amount and not subject to change regardless of how many copies of our software, up to 7,500 copies, are ultimately resold.  Lastly, the collectability of the license fee was determined to be probable as the amount was paid in 2013.  Delphi will use our 24/7 network operations center exclusively to host Delphi’s digital signage applications, which will provide us recurring hosting and maintenance revenue over the next five years.  We believe this significantly extends our reach within the QSR and pump topper markets as Delphi has over 30,000 customers to which it can offer an integrated technology offering.

 

The remaining increase in sales when comparing 2013 to 2012 was due to an increase in orders from ARAMARK and Polaris Industries.  Total sales to ARAMARK in 2013 totaled $1.5 million, representing an increase of 40% from 2012.  We continued to expand the various ARAMARK branded food concepts to several colleges and universities during 2013, bringing the total number of ARAMARK locations being managed through our NOC to approximately 329 sites at the end of 2013.  Also during 2013, we started working with Polaris Industries by providing them with our digital marketing solutions in connection with the launch of Polaris’s Indian motorcycle.  Polaris is requiring all new Indian dealerships to install our solution, which includes a 46” display that is part of a Media Hearth playing a standard video loop with social media, local events and weather content zones.  Through 2013, we received orders from Polaris for a total of 75 dealerships, representing approximately $0.4 million of revenue.  We anticipate we will receive additional orders as Polaris continues to expand its Indian motorcycle dealer network.

 

Partially offsetting these increases was a decline in revenue from Chrysler and Fiat dealerships.  Revenue generated from Chrysler and the associated Fiat dealerships, along with orders received from a supplier for Chrysler’s iShowroom-branded towers totaled $2.4 million, which was down 29% from $3.4 million recognized for the prior year.  A significant portion of this decrease was attributable to fewer orders for our content and development services associated with e-learning course work and enhancement to iShowroom.  We do not believe this decline represents a trend, but was due to timing of when new projects are initiated by Chrysler.  In addition, we experienced a decline in kiosk orders received from individual Fiat dealerships when comparing  2013 to the prior year.  In 2013, we received a total of 29 kiosk orders for Fiat dealerships, compared to 89 in 2012.  We believe the rate of orders for our interactive kiosks being deployed to all the Fiat dealerships will continue to decline as most Fiat dealerships now have the application installed.  However, we continue to believe there is still an opportunity for us to deploy additional interactive branded tower kiosks to the remaining Chrysler dealerships, and we received  new orders for 56 units in 2013.  Since we do not have a contract with Chrysler requiring it to source all the various components of the solution through us and the purchase of the iShowroom branded towers remains within the discretion of the individual dealerships, we are unable to predict or forecast the timing or value of any future orders.

 

We continued to provide ongoing support to YUM!’s QSR brands in 2013, which includes KFC and KFC/Taco Bell combination stores.    Although we did not roll out new menu board deployments during 2013, we did receive an order from KFC to upgrade the existing stores to our latest version of RoninCast® software, which we successfully completed in 2013.  We continue to believe KFC will expand the number of locations which features our digital menu board solution, but currently do not have a commitment on timing.  The total number of YUM! brand stores we fully host and support through our NOC was 178 at the end of 2013. 

   

We continue to support through our NOC a network of approximately 294 sites we have deployed for Thomson Reuters, which feature its InfoPoint news service. In addition, during 2012, we announced a new partnership under which we are the exclusive provider of a Thomson Reuter branded offering, Thomson Reuters

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Digital Signage Knowledge Direct. Thomson Reuters is presently selling this offering through its sales team to the financial services industry, including many existing news service customers of Thomson Reuters.  

 

We continue to work for, and receive orders from, various customers in the food services industry as they come to realize the benefits of deploying digital signage for an array of different types of menu boards for both inside and outside applications.

 

In addition, since 2011 we have successfully deployed other marketing technology solutions within our three primary verticals, QSR, automotive and branded retail, as a way of creating unique customer experiences.  These technologies include interactive kiosks, iPad applications, mobile messaging, QR codes, SMS marketing, near field communications and the integration of social networks into our product offerings.  We believe these new technologies greatly expand the marketing solutions we are able to provide our existing and prospective customers and represent an opportunity to increase our revenue beyond traditional digital signage.

 

As of December 31, 2013, we had a total of $0.4 million of purchase orders for which we had not recognized revenue.

 

Lastly, our recurring hosting and support revenue remained at the same level of $2.0 million for both 2013 and 2012.  Although we expanded our customer base from the deployments referenced above, we did see a decline in recurring revenue from Thomson Reuters as a result of a number of locations featuring Thomson Reuters’ Info Point digital signage system being taken off line during 2013.

 

Although we are starting to see an increase of adoption for marketing technology solutions such as ours at the macro level, we are unable to predict or forecast our future revenue with any degree of precision at this time. 

Cost of Sales

    Our cost of sales decreased 7% to $2.8 million in 2013 from $3.0 million in 2012. The decrease in cost of sales was primarily due to the year-over-year decrease in services sales, which was primarily associated with a decline in content and development work performed primarily for Chrysler.  On a percentage basis, our overall gross margin increased to 59% in 2013 compared to 55% for the prior year.  The primary reason for this increase was due to the $750,000 software sale to Delphi Display Systems, which was at 100% gross margin.  Our overall software sales, which traditionally carry a higher gross margin percentage compared to our sales of hardware and services, were up 231% or $0.8 million when comparing 2013 to the prior year.  The increase in software revenue when comparing 2013 to 2012 resulted in a percentage improvement to 99% in 2013 from 80% in 2012.  On a percentage basis, our services gross margin were the same at 58% for both 2013 and 2012.  Our ability to maintain these levels of gross margin on a percentage basis can be impacted in any given quarter by shifts in our sales mix.  However, we believe over the long-term our gross margins on a percentage basis will continue to increase as our recurring revenue grows.

Operating Expenses

Sales and marketing expense includes the salaries, employee benefits, commissions, stock compensation expense, travel and overhead costs of our sales and marketing personnel, as well as trade show activities and other marketing costs.  Total sales and marketing expenses declined 4% to $1.5 million in 2013 from $1.6 million in 2012.  The decline in sales and marketing expense when comparing 2013 to 2012 was primarily due to lower commissions and employee travel related expenses of $26,000 and $21,000, respectively.  We continue to concentrate our marketing dollars on more forums and user groups instead of the larger national tradeshows such as Digital Signage Expo.  We traditionally incur higher levels of tradeshow expenditures in the first quarter of our fiscal year compared to the remaining three quarters.  Total stock compensation expense included in sales and marketing expense was approximately $0.1 million for both 2013 and 2012.  Any significant increase in our sales and marketing expenses in 2014 relative to 2013 would be the result of higher levels of commission expense resulting from an increase in our revenue, as we do not anticipate higher costs associated with tradeshows or marketing initiatives.

 

Research and development expense includes salaries, employee benefits, stock compensation expense, related overhead costs and consulting fees associated with product development, enhancements, upgrades, testing,

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quality assurance and documentation.  Total research and development expenses for 2013 decreased 47% to $0.9 million from $1.8 million in 2012.  The decrease when comparing 2013 to 2012 was primarily related to lower employee compensation costs of $0.4 million due to personnel changes made during 2013 and a $0.3 million decrease in consulting costs, along with receiving a one-time $0.1 million research and development state tax refund.  Although we experienced lower employee-related expenses for 2013 compared to 2012 due to lower headcount, the remaining decrease was attributable to a higher level of research and development costs being allocated to cost of goods sold related to billable development work performed for our customers.  Overall we had 9 developer employees and contractors as of December 31, 2013 compared to 13 as of the end of 2012. Total stock compensation expense included in research and development expense was approximately $31,000 and $55,000 for the years ended December 31, 2013 and 2012, respectively.  Although we currently have no intention of increasing our staff levels in 2013, we continue to believe it is critical for our success to make further enhancements to our RoninCast® software as the requirements for a more sophisticated multi-marketing technology platform continue to evolve.  

 

General and administrative expense includes the salaries, employee benefits, stock compensation expense and related overhead cost of our finance, information technology, human resources and administrative employees, as well as legal and accounting expenses, consulting and contractor fees and bad debt expense. Total general and administrative expenses for 2013 decreased 9% to $4.9 million from $5.4 million in 2012.  The decrease when comparing 2013 to 2012 was the result of lower employee compensation and related travel expenses of $0.4 million and a decline in general office and other public company related expenses of $88,000 and $59,000, respectively. Partially offsetting these declines was a $0.2 million increase in stock-based compensation expense attributable to the stock and warrants issued to outside vendors for professional services during the year ended 2012, which we only incurred $13,000 of related expense in 2013.   Additionally, we recognized stock based-compensation expense associated with stock awards and options to our employees and six non-employee board members as part of their compensation for board service during 2013 and 2012 of $0.3 million and $0.4 million for the periods presented.  We currently believe our general and administrative costs will remain at a similar level to that experienced during 2013 for 2014.

 

 Depreciation and amortization expense.  Our depreciation and amortization expense consists primarily of depreciation of computer equipment and office furniture and the amortization of purchased software and leasehold improvements made to our leased facilities.  Depreciation and amortization expense decreased 26% to $0.2 million in 2013 from $0.3 million in 2012. The decrease was primarily due to the limited number of capital acquisitions made from 2011 through 2013.

   

Interest Expense

Interest expense increased to $25,000 in 2013 from $8,000 in 2012.  The increase was primarily the result of the interest expense associated with our line of credit with Silicon Valley Bank.  During 2013, we expensed a total of approximately $19,000, compared to $5,000 in the prior year of interest expense.  The reason for the increase was due to the advancement of $400,000 we had outstanding through September of 2013.  In addition, we issued unsecured convertible promissory notes in the aggregate of $1,075,000, along with warrants to purchase 1,075,000 shares of our commons stock in 2013.  The notes mature two years after issuance and require the payment of interest at the rate of 4% per year (payable on maturity), which we recognized interest expense of approximately $1,000 during 2013.  Using the Black-Scholes model, we determined the relative fair value of the warrants totaled $178,000.  In addition, we determined the notes had a beneficial conversion feature totaled $27,000.  Both amounts are being amortized through interest expense on a straight-line basis over the term of the notes payable resulting in a charge of interest expense of $4,000 in 2013.

 

During 2012, we included in interest expense a charge of $3,000 for the fair value of the warrants issued to Silicon Valley Bank as part of the loan and security agreement we entered into in March 2010.  The warrant vested 100% on date of grant and we began recognizing the fair value, as determined using the Black-Scholes model, of $66,000 over the original life of the agreement on a straight-line basis. The loan and security agreement modification in January 2011 included a provision to reduce the exercise price of the warrant, resulting in an incremental increase in fair value of approximately $8,000. The fair value remaining as of the date of the modification totaled $19,000 and was amortized on a straight-line basis through the then renewed expiration date of March 2012.   See Note 6 to our consolidated financial statements regarding the assumptions used in determining the

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fair value of these warrants.  Also included in interest expense for 2012 associated with the capital lease we entered into in July 2010.

 

2012 compared to 2011

Sales

Our sales decreased 28% to $6.7 million in 2012 from $9.3 million in 2011.  The year-over-year decrease in revenue was primarily attributable to revenue related to the prior year deployments of Chrysler’s iShowroom-branded tower application into Chrysler and Fiat dealerships.  Revenue generated from Chrysler and the associated Fiat dealerships totaled $3.4 million in 2012, which was down 34% from $5.1 million recognized for the prior year.  In addition to assisting Chrysler with its ongoing development needs related to the iShowroom initiative during 2012, we continued to receive additional orders for interactive kiosks from Fiat dealerships utilizing the iShowroom application.  During 2012, we received a total of 83 kiosks orders for Fiat dealerships, compared to 178 in 2011. Chrysler continues to require that all Fiat Dealerships adopt the iShowroom interactive application, which is being featured in the Fiat Style Center of the new Fiat Studio Facilities.  We received no orders for kiosks for Chrysler dealerships during 2012 compared to kiosk orders for 400 Chrysler dealerships in 2011. 

 

The remaining decrease in sales when comparing 2012 to 2011 was due to a decrease in orders from ARAMARK.  Total sales to ARAMARK in 2012 totaled $1.1 million, representing a decrease of 34% from 2011.  Although we continued to expand the various ARAMARK branded food concepts to several colleges and universities during 2012, ARAMARK deployed fewer new food concepts which incorporate our digital menu board solutions in 2012 than in 2011.  Upon completing the installation for orders received through December 31, 2012, the total number of ARAMARK locations being managed through our NOC will increase to approximately 299 sites, compared to 250 sites at the end of 2011.

 

Partially offsetting the decrease in our revenue when comparing 2012 to 2011 was an increase in revenue generated in 2012 with a new customer, Buffalo Wild Wings.  In March 2012, we rolled out an initial five store deployment of our marketing technology solutions and subsequently received an order for 54 additional stores. The initial five store solution deployed had an emphasis on creating a new guest experience through the interaction of a touchscreen photo booth application, which displays both consumer-generated and client-branded content. Additionally, the solution uses unique QR codes and email to allow customers to share their photos with their social networks, extending the content beyond the restaurant’s locations to further promote its brand. In 2012, we recognized revenue from this customer totaling $387,000 which includes the development of various customer-engagement applications featuring our RoninCast® software installed at a total of 59 Buffalo Wild Wings stores as of December 31, 2012.

 

We continued to provide ongoing support to YUM!’s QSR brands in 2012, which includes KFC and KFC/Taco Bell combination stores.    Although we did not roll out new menu board deployments during 2012, we did receive an order from KFC to upgrade the existing stores to our latest version of RoninCast® software.  The total number of YUM! brand stores we fully host and support through our NOC was 188 at the end of 2012. 

   

We continue to support through our NOC a network of approximately 300 sites we have deployed for Thomson Reuters, which feature its InfoPoint news service. In addition, during 2012, we announced a new partnership under which we are the exclusive provider of a Thomson Reuter branded offering, Thomson Reuters Digital Signage Knowledge Direct. Thomson Reuters is presently selling this offering through its sales team to the financial services industry, including many existing news service customers of Thomson Reuters.  

 

We continue to work for, and receive orders from, various customers in the QSR and fast casual restaurant industry as they come to realize the benefits of deploying digital signage for an array of different types of menu boards for both inside and outside applications.

 

In addition, since 2011 we have successfully deployed other marketing technology solutions within our three primary verticals, QSR, automotive and branded retail, as a way of creating unique customer experiences.  These technologies include interactive kiosks, iPad applications, mobile messaging, QR codes, SMS marketing, near field communications and the integration of social networks into our product offerings.  We believe these new

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technologies greatly expand the marketing solutions we are able to provide our existing and prospective customers and represent an opportunity to increase our revenue beyond traditional digital signage.

 

As of December 31, 2012, we had a total of $0.9 million of purchase orders for which we had not recognized revenue.

 

Lastly, our recurring hosting and support revenue increased 22% in 2012 to $2.0 million when compared to 2011 as a result of the expansion of our customer base from the deployments referenced above. 

 

 

Cost of Sales

     Our cost of sales decreased 42% to $3.0 million in 2012 from $5.2 million in 2011. The decrease in cost of sales was primarily due to the year-over-year decrease in hardware sales, which was primarily associated with the lack of kiosk sales to Chrysler and the decrease in kiosk sales to Fiat dealerships.   On a percentage basis, our overall gross margin increased to 55% in 2012 compared to 44% for the prior year.  The primary reason for this increase was that sales of hardware, which traditionally carry a lower gross margin percentage, accounted for a lower percentage of our overall sales in 2012 when compared to 2011.  Additionally, our services gross margin on a percentage basis continues to improve to 58% in 2012, which was up 13 percentage points from 45% in 2011 as a result of the increase in recurring hosting and support fees.   Partially offsetting these increases was a decline in our RoninCast® software gross margin as a result of fewer seat licenses sold when comparing 2012 to 2011.  During 2012 our software margin on a percentage basis was 80%, compared to 88% in 2011. 

Operating Expenses

    Sales and marketing expense includes the salaries, employee benefits, commissions, stock compensation expense, travel and overhead costs of our sales and marketing personnel, as well as trade show activities and other marketing costs.  Total sales and marketing expenses declined 26% to $1.6 million in 2012 from $2.1 million in 2011.  The decline in sales and marketing expense when comparing 2012 to 2011 was primarily due to a decrease in tradeshow costs and related advertising expenses by $0.2 million as a result of concentrating our marketing dollars on more forums and user groups instead of the larger national tradeshows such as Digital Signage Expo.  In addition,  compensation and employee-related expenses were $0.2 million lower than in 2011 as a result of personnel changes made during first quarter of 2012 and lower commission expense as a result of lower revenue when comparing 2012 to 2011.  We traditionally incur higher levels of tradeshow expenditures in the first quarter of our fiscal year compared to the remaining three quarters.  Total stock compensation expense included in sales and marketing expense was approximately $0.1 million for both 2012 and 2011. 

 

Research and development expense includes salaries, employee benefits, stock compensation expense, related overhead costs and consulting fees associated with product development, enhancements, upgrades, testing, quality assurance and documentation.  Total research and development expenses for 2012 decreased 15% to $1.8 million from $2.1 million in 2011.  The decrease when comparing 2012 to 2011 was primarily related to lower employee compensation costs due to personnel changes made during the first quarter of 2012 and a decrease in consulting costs.  Although we experienced lower employee-related expenses for 2012 compared to 2011, the decrease was primarily attributable to a higher level of research and development costs being allocated to cost of goods sold related to billable development work performed for our customers and lower outside consultant expense.  Overall we had 13 developer employees and contractors as of December 31, 2012 compared to 16 as of the end of 2011. Total stock compensation expense included in research and development expense was approximately $0.1 million for both 2012 and 2011. 

 

General and administrative expense includes the salaries, employee benefits, stock compensation expense and related overhead cost of our finance, information technology, human resources and administrative employees, as well as legal and accounting expenses, consulting and contractor fees and bad debt expense. Total general and administrative expenses for 2012 decreased 11% to $5.4 million from $6.1 million in 2011.  The decrease when comparing 2012 to 2011 was the result of lower employee-related stock-based compensation expense of $0.2 million, a reduction in employee compensation and related travel expenses of $0.1 million and a decline in fees paid for professional services and other public company related expenses of $0.2 million and $0.1 million, respectively.

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Partially offsetting these declines was a $0.2 million increase in stock-based compensation expense attributable to the stock and warrants issued to outside vendors for professional services during the year ended 2012.   Additionally, we recognized stock based-compensation expense associated with stock awards and options to our employees and six non-employee board members as part of their compensation for board service during 2012 and 2011 of $0.4 million and $0.6 million, respectively. 

 

 Depreciation and amortization expense.  Our depreciation and amortization expense consists primarily of depreciation of computer equipment and office furniture and the amortization of purchased software and leasehold improvements made to our leased facilities.  Depreciation and amortization expense decreased 39% to $0.3 million in 2012 from $0.5 million in 2011. The decrease was primarily due to the limited number of capital acquisitions made from 2010 through 2012.

Interest Expense

Interest expense decreased to $8,000 in 2012 from $30,000 in 2011.  The decrease was primarily the result of lower expense recognized related to the fair value of the warrant issued to Silicon Valley Bank as additional consideration for the loan and security agreement we originally entered into in March 2010 and modified in October 2012.   During 2012, we included in interest expense a charge of $3,000 for the fair value of the warrants, compared to $21,000 in 2011.  The warrant vested 100% on date of grant and we began recognizing the fair value, as determined using the Black-Scholes model, of $66,000 over the original life of the agreement on a straight-line basis. The loan and security agreement modification in January 2011 included a provision to reduce the exercise price of the warrant, resulting in an incremental increase in fair value of approximately $8,000. The fair value remaining as of the date of the modification totaled $19,000 and was amortized on a straight-line basis through the then renewed expiration date of March 2012.   See Note 6 to our consolidated financial statements regarding the assumptions used in determining the fair value of this warrant.  Also included in interest expense for 2012 and 2011 was $3,000 and $9,000, respectively, associated with the capital lease we entered into in July 2010.

Liquidity and Capital Resources

Going Concern    

 

 

We incurred net losses and negative cash flows from operating activities for the years ended December 31, 2013, 2012 and 2011.  At December 31, 2013, we had cash, cash equivalents and restricted cash of $1.5 million and working capital of $1.3 million.  The cash used in operating activities for the year ended December 31, 2013 was $2.8 million.  At December 31, 2013, we had no outstanding balance and no borrowing capability on our line of credit with Silicon Valley Bank.  Silicon Valley Bank has issued a letter of credit in the amount of $180,000 as collateral to the landlord of our corporate office and another letter of credit to a vendor in the amount of $50,000. As of December 31, 2013, we were unable to meet the minimum tangible net worth requirements per the terms of the loan and security agreement with Silicon Valley bank, and therefore we are currently unable to drawn down on the line of credit.  As of December 31, 2013, our tangible net worth totaled $1.6 million or $0.6 million below the minimum required amount per the terms of the loan and security agreement with Silicon Valley Bank. The line of credit is secured by all of our assets and matures on  July 15, 2014. Starting with the month ending March 31, 2014 and on the last day of each following month, our new tangible net worth requirement has been reduced to $150,000 and, commencing with the quarter ending March 31, 2014, the minimum tangible net worth requirement increases, commencing with the quarter ending March 31, 2014 and each quarter thereafter, by the sum of (a) fifty-percent (50%) of our quarterly net income (without reduction for any losses) for such quarter, plus (b) fifty-percent (50%) of all proceeds received from the issuance of equity during such quarter and/or the principal amount of all subordinated debt incurred during such quarter.  We must comply with this tangible net worth minimum in order to draw down on such line of credit and also while there are outstanding credit extensions (other than our existing lease letter of credit).

   

The financial statements for the fiscal year ended December 31, 2013 were prepared on a going concern basis, meaning that they do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should our company be unable to continue as a going concern.  However, our auditor also expressed substantial doubt about our ability to continue as a going concern.

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Our ability to continue as a going concern is an issue raised as a result of losses suffered from operations.  Although we believe we extended our ability to fund our operations as a result of the restructuring we initiated on July 29, 2013 (see “Restructuring” below), even after the savings we expect to achieve and the additional funds received from the unsecured promissory notes issued in December 2013, we do not currently have sufficient capital resources to fund operations beyond April 2014. We continue to experience operating losses. Management continues to seek financing on favorable terms; however, there can be no assurance that any such financing can be obtained on favorable terms, if at all. At present, we have no commitments for any additional financing. Because we have received an opinion from our auditor that substantial doubt exists as to whether our company can continue as a going concern, it may be more difficult for our company to attract investors, secure debt financing or bank loans, or a combination of the foregoing, on favorable terms, if at all. Our future depends upon our ability to obtain financing and upon future profitable operations. If we are unable to generate sufficient revenue, find financing, or adjust our operating expenses so as to maintain positive working capital, then we will be forced to cease operations and investors will lose their entire investment. We can give no assurance as to our ability to generate adequate revenue, raise sufficient capital, sufficiently reduce operating expenses or continue as a going concern.

 

Restructuring 

  

In July 2013, we implemented a restructuring plan designed to conserve our cash resources and to further align our ongoing expenses with our business by focusing sales efforts on high-potential customers and prospects, preserving the research and development staff required to maintain and enhance our RoninCast® software, and consolidating certain positions.  We incurred a  one-time charge in 2013 aggregating approximately $0.2 million, consisting primarily of severance payments.   We believe this restructuring will reduce our annual operating costs by approximately $1.3 million.  

   

Operating Activities

We do not currently generate positive cash flow. Our investments in infrastructure have been greater than sales generated to date. As of December 31, 2013, we had an accumulated deficit of $98.0 million. The cash flow used in operating activities was $2.8 million, $4.8 million and $4.6 million for the years ended December 31, 2013, 2012 and 2011, respectively.  In 2013, net cash used by operating activities was attributable to our net loss, partially offset by an overall decrease in changes to our operating assets and liability accounts of $0.1 million and $0.7 million of depreciation and amortization and stock compensation expense.  Included in the changes to our operating accounts were decreases in accounts receivable, inventory and other assets all of which were due to lower sales during the fourth quarter of 2013 when compared to the same period in the prior year.  In addition, accounts payable and accrued liabilities balances were lower by $0.3 million and $0.1 million at the end of December 31, 2013 when compared to the prior year end balances.  This was primarily the result of lower operating costs incurred during the fourth quarter of 2013 when compared to the same period in the prior year.  Changes in our deferred revenue balances when comparing December 31, 2013 to December 31, 2012 increased $0.2 million as a result of additional uncompleted projects and higher levels of deferred maintenance contracts as our installation base continues to grow.  

 

In 2012, net cash used by operating activities was attributable to our net loss, along with an overall increase in changes to our operating assets and liability accounts of $0.3 million, partially offset by depreciation and amortization and stock compensation expense.  Included in the changes to our operating accounts were decreases in inventory, prepaid expenses, accounts payable, deferred revenue and accrued liabilities, all of which were primarily due to lower operating costs incurred during the fourth quarter of 2012 when compared to the same period in the prior year.  The accounts receivable balance at the end of 2012 increased from the prior year balance as a result of an increase in sales during the fourth quarter of 2012 when compared to the same period in the prior year.

 

Disruptions in the economy and constraints in the credit markets have caused companies to reduce or delay capital investment.  Some of our prospective customers may cancel or delay spending on the development or roll-out of capital and technology projects with us due to continuing economic uncertainty.  Difficult economic conditions have adversely affected certain industries in particular, including the automotive and restaurant industries, in which we have major customers.  We could also experience lower than anticipated order levels from current customers, cancellations of existing but unfulfilled orders, and extended payment or delivery terms.  Economic conditions could also materially impact us through insolvency of our suppliers or current customers.  As of December 31, 2013, Chrysler and EWI accounted for 44.8% and 15.0%, respectively, of our total receivables.  In the case of insolvency

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by one of our significant customers, an account receivable with respect to that customer might not be collectible, might not be fully collectible, or might be collectible over longer than normal terms, each of which could adversely affect our financial position.  There can be no assurance that we will not suffer credit losses in the future.

 

In addition, our financial condition and potential for continued net losses could cause current and prospective customers to defer placing orders with us, to require terms that are unfavorable to us, or to place their orders with marketing technology suppliers other than ourselves, which could adversely affect our business, financial condition and results of operations. On the same basis, third-party suppliers may refuse to do business with us, or may do so only on terms that are unfavorable to us, which also could cause our revenue to decline.

 

 Investing Activities

Net cash used in investing activities was $29,000, $47,000 and $149,000 for the years ended December 31, 2013, 2012 and 2011, respectively.  Net cash used in investing activities for the periods presented was attributable to the purchases of property and equipment.  We believe capital investments for 2014 will be similar to 2013 as our current infrastructure has the capacity to service additional deployments.

Financing Activities

We have financed our operations primarily through sales of common stock and the issuance of notes payable to vendors, shareholders and investors. For the years ended December 31, 2013, 2012 and 2011, we generated a net $2.1 million, $1.6 million and $3.2 million from financing activities, respectively.

In March 2013, we sold a total of 868 units at a price of $1.80 per unit, each unit consisting of one share of common stock and one –five year warrant to purchase 0.50 of a share of common stock, with exercisability commencing six months and one day after issuance, at an exercise price of $2.73 per share, pursuant to a registration statement on Form S-3 which was declared effective by the Securities and Exchange Commission in January 2013.  We obtained approximately $1.4 million in net proceeds as a result of this registered direct offering. 

In December 2013, we sold an aggregate of $1.1 million in unsecured convertible promissory notes, along with warrants to purchase 1.1 million shares of our common stock, in a private placement transaction with certain accredited investors.  The notes mature two years after issuance, require the payment of interest at the rate of 4% per year (payable on maturity), and are convertible, at the holder’s option, into unregistered shares of our common stock at a conversion price of $0.50 per share.  The warrants are immediately exercisable, expire three years after issuance, have a cashless exercise feature, and may be exercised to purchase unregistered shares of our common stock at an exercise price of $0.75 per share.

During 2013, we received proceeds of $21,000 from the issuance of 19,000 shares under our associate (employee) stock purchase plan, which was terminated effective July 2013.  Also during 2013, we made a repayment of the line of credit with Silicon Valley Bank of $0.4 million. 

In September 2012, we sold approximately 348,000 shares of our common stock at $4.05 per share pursuant to a registration statement on Form S-3 which was declared effective by the SEC in September 2009.  We obtained approximately $1.2 million in net proceeds as a result of this registered direct offering.  During 2012, we also received $51,000 from the sale of approximately 12,000 shares of common stock to our associates (employees) through our 2007 Associate Stock Purchase Plan.  We also received a $0.4 million advance on our line of credit with Silicon Valley Bank in 2012.

In December 2011, we sold approximately 664,000 shares of our common stock at $5.00 per share pursuant to a registration statement on Form S-3 which was declared effective by the SEC in September 2009.  We obtained approximately $2.9 million in net proceeds as a result of this registered direct offering. During 2011, we received $68,000 from the sale of approximately 14,000 shares of common stock to our associates (employees) through our 2007 Associate Stock Purchase Plan and we received approximately $0.2 million from the exercise of outstanding stock options.  We used $36,000 for the payment of capital leases during 2011. 

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We will likely be required to raise additional funding through public or private financings, including equity financings. Any additional equity financings may be dilutive to shareholders and may be completed at a discount to market price. Debt financing, if available, would likely involve restrictive covenants similar to or more restrictive than those contained in the security and loan agreement we currently have with Silicon Valley Bank. Those covenants include maintaining minimum tangible net worth, which we may not satisfy. There can be no assurance we will successfully complete any future equity or debt financing. Adequate funds for our operations, whether from financial markets, collaborative or other arrangements, may not be available when needed or on terms attractive to us, especially from markets which continue to be risk averse. If adequate funds are not available, our plans to operate our business may be adversely affected and we could be required to curtail our activities significantly and/or cease operating.

 

Due to losses suffered from operations, for the year ended December 31, 2013, our independent registered public accounting firm expressed substantial doubt about our ability to continue as a going concern. We do not currently have sufficient capital resources to fund our operations beyond April 2014. We continue to experience operating losses. Management continues to seek financing on favorable terms; however, there can be  no assurance that any such financing can be obtained on favorable terms, if at all. At present, we have no commitments for any additional financing. If we are unable to generate sufficient revenue, find financing, or adjust our operating expenses so as to maintain positive working capital, then we likely will be forced to cease operations and investors will likely lose their entire investment.

 

Line of Credit 

 

In March 2010, we entered into a Loan and Security Agreement with Silicon Valley Bank (the “Loan and Security Agreement”), which was most recently amended effective March 6, 2014.  The Loan and Security Agreement provides us with a revolving line-of-credit at an annual interest rate of prime plus 1.5%, the availability of which is the lesser of (a) $1.5 million, or (b) the amount available under our borrowing base (75% of our eligible accounts receivable plus 50% of our eligible inventory) minus (1) the dollar equivalent amount of all outstanding letters of credit, (2) 10% of each outstanding foreign exchange contract, (3) any amounts used for cash management services, and (4) the outstanding principal balance of any advances.  In connection with the July 2010 lease amendment for our corporate offices, Silicon Valley Bank issued a letter of credit which as of December 31, 2013 was in the amount of $180,000 along with a letter of credit issued to a vendor for $50,000.   

 

   

As of December 31, 2013, we were not in compliance with the tangible net worth requirement and therefore not eligible to draw down on the line of credit.  As of December 31, 2013, our tangible net worth totaled $1.6 million or $0.6 million below the minimum required amount per the terms of the Loan and Security Agreement.  We had no outstanding balance under this loan agreement (other than our letter of credits) as of December 31, 2013.

   

Under the Loan and Security Agreement, we are generally required to obtain the prior written consent of Silicon Valley Bank to, among other things, (a) dispose of assets, (b) change its business, (c) liquidate or dissolve, (d) change CEO or COO (replacements must be satisfactory to the lender), (e) enter into any transaction in which our shareholders who were not shareholders immediately prior to such transaction own more than 40% of our voting stock (subject to limited exceptions) after the transaction, (f) merge or consolidate with any other person, (g) acquire all or substantially all of the capital stock or property of another person, or (h) become liable for any indebtedness (other than permitted indebtedness). The line of credit is secured by all our assets and matures on July 15, 2014.  Starting with the month ending March 31, 2014, our new tangible net worth requirement has been reduced to $150,000 as of the end of each month and, commencing with the quarter ending March 31, 2014, the minimum tangible net worth requirement increases, commencing with the quarter ending March 31, 2014 and each quarter thereafter, by the sum of (a) fifty-percent (50%) of our quarterly net income (without reduction for any losses) for such quarter, plus (b) fifty-percent (50%) of all proceeds received from the issuance of equity during such quarter and/or the principal amount of all subordinated debt incurred during such quarter.  We must comply with this tangible net worth minimum in order to draw down on such line of credit and also while there are outstanding credit extensions (other than our existing lease letter of credit).

 

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Off Balance Sheet Arrangements

It is not our business practice to enter into off-balance sheet arrangements.

Contractual Obligations

We have no material commitments for capital expenditures.  Unless we experience a significant increase in our revenue, we expect our 2014 operating expenses will remain at levels similar to 2013 as we continue to control expenses in the current economic environment. 

Operating and Capital Leases

At December 31, 2013, our principal commitments consisted of long-term obligations under operating leases.  We conduct our U.S. operations from a leased facility located at 5929 Baker Road in Minnetonka, Minnesota.  We lease approximately 19,000 square feet of office and warehouse space under a lease that extends through January 31, 2018.  In addition, we lease office space of approximately 10,000 square feet to support our Canadian operations at a facility located at 4510 Rhodes Drive, Suite 800, Windsor, Ontario, Canada under a lease, as amended, that extends through June 30, 2014.

The following table summarizes our obligations under contractual agreements as of December 31, 2013 and the time frame within which payments on such obligations are due (in thousands):

 

 

Our internal source of liquidity solely consists of our cash balance, which as of December 31, 2013 was $1.5 million. Of this amount, $1.4 million is invested in a daily sweep commercial paper account with Silicon Valley Bank.   We monitor the credit rating of this financial institution and have determined there is a low level of risk of the funds not settling on a daily basis.   

Based on our working capital position at December 31, 2013, we believe we have sufficient working capital to meet our current obligations through April 2014.  

 

ITEM 7A 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 principally at one major bank. As of December 31, 2013, our cash was primarily invested in a commercial paper sweep account as the interest rate yield was more favorable than those of United States government securities and money market funds.  The commercial paper sweep account had a triple A rating from Standard and Poor’s, Moody’s and Fitch as of February 28, 2014.  We have not experienced any significant losses on our deposits of our cash, cash equivalents, or marketable securities.

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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 in income.

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Index to Consolidated Financial Statements on Page F-1.

ITEM 9CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9ACONTROLS 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 SEC’s 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 December 31, 2013, our disclosure controls and procedures were effective. 

Management’s Annual Report On Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  All internal control systems, no matter how well designed, have inherent limitations. 

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Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013.  In making this assessment, our management used the criteria set forth in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management believes that as of December 31, 2013, our internal control over financial reporting is effective based on those criteria.

This annual report does not include an attestation report of the company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the company, as a smaller reporting company, to provide only management's report in its annual report.

 

Changes in Internal Control Over Financial Reporting 

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9BOTHER INFORMATION

    On March 6, 2014, we entered into a seventh amendment to our loan and security agreement with Silicon Valley Bank, effective as of March 12, 2014.  The amendment extended the maturity date of our line of credit to July 15, 2014.  Starting with the month ending March 31, 2014, our new tangible net worth requirement has been reduced to $150,000 as of the end of each month and, commencing with the quarter ending March 31, 2014, the minimum tangible net worth requirement increases, commencing with the quarter ending March 31, 2014 and each quarter thereafter, by the sum of (a) fifty-percent (50%) of our quarterly net income (without reduction for any losses) for such quarter, plus (b) fifty-percent (50%) of all proceeds received from the issuance of equity during such quarter and/or the principal amount of all subordinated debt incurred during such quarter.  We must comply with this tangible net worth minimum in order to draw down on such line of credit and also while there are outstanding credit extensions (other than our existing lease letter of credit).    

 

The foregoing description is qualified in its entirety by reference to the seventh amendment to our loan and security agreement with Silicon Valley Bank, which is attached hereto as Exhibit 10.42 and incorporated by reference herein.

 

PART III

ITEM 10DIRECTORS, EXECUTIVE OFFICERS and corporate governance

The following table sets forth the names, ages and positions of our executive officers and directors:

Business Experience

Stephen F. Birke became our Chairman of the Board in January 2011.  Mr. Birke joined our board of directors in July 2008 and served as our Interim Chief Executive Officer from September 2008 to December 2008.  Mr. Birke served for 38 years at Target Corporation in various roles, most recently as Vice President and General Merchandise Manager until his retirement from Target in May 2008.  From October 2009 to September 2010, Mr. Birke served as President and Chief Executive Officer of Lawrence Merchandising, a provider of retail merchandising services.  Mr. Birke is also the founder and President of Birch Tree International, LLC, a retail/wholesale consulting company, which was organized in August 2008.  Mr. Birke brings retail experience to our board, which is one of our key vertical market segments.  He also brings strong leadership and organizational effectiveness to our board.

Scott W. Koller became our President and Chief Executive Officer in January 2011 and was elected to our board in March 2011.  Mr. Koller served as our President and Chief Operating Officer from May 2010 to December 2010 and as our Executive Vice President and Chief Operating Officer from March 2009 until May 2010.  Mr. Koller joined our company in November 2004.  He served as our Senior Vice President of Sales and Marketing from November 2004 through January 2007, our Executive Vice President of Sales and Marketing from February 2007 through October 2008, and our Executive Vice President of Sales and Project Management from October 2008 through March 2009.  From December 2003 to November 2004, Mr. Koller served as Vice President of Sales and Marketing for Rollouts Incorporated, a provider of field services for large-scale implementations.  From August 1998 to November 2003, Mr. Koller served in various roles with Walchem Corporation, a manufacturer of metering pumps and analytical controllers, including the last three years as Vice President of Sales and Marketing.  Mr. Koller served in the U.S. Naval Nuclear Power Program from 1985 to 1992.  As our President and Chief Executive Officer, Mr. Koller brings management’s perspective to our board.

Kent O. Lillemoe joined our board of directors in August 2011.  Mr. Lillemoe served as Chief Financial Officer of MinuteClinic, Inc., a health services provider, from January 2006 until its acquisition by CVS Caremark in April 2009.  Prior to MinuteClinic, Mr. Lillemoe was Chief Financial Officer of Envoy Medical Corporation, a medical device developer, from January 2003 to November 2005; Chief Operating Officer of Avanti Optics Corp.,

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an early stage technology company, from June 2000 until January 2003; Chief Financial Officer of Fargo Electronics, Inc., a publicly-held technology company, from March 1998 to June 2000; and Chief Financial Officer of CyberOptics Corporation, also a publicly-held technology company, from September 1985 to September 1996.  Mr. Lillemoe serves on the board of directors of AEI Core Property Income Trust, Inc., a real estate investment trust (REIT) (since August 2011), and Digitiliti, Inc., a developer of cloud-based software products (since August 2011), where he is also chair of the audit committee.  He also serves on the boards of directors of Exos Medical Corporation, Vast Enterprises, LLC and Mobi, LLC, all privately-held companies.  He also served as a director of Fargo Electronics, Inc. beginning in July 2000, including as Chairman of the Audit Committee starting in September 2003, until it was acquired in August 2006.  Mr. Lillemoe brings early stage company experience and public company chief financial officer experience to our board.

Howard P. Liszt joined our board of directors in August 2011.  From 2001-2011 Mr. Liszt served a Senior Fellow at the University of Minnesota, where he lead a number of education initiatives for students interested in strategic communications careers.  From 1994 until his retirement in 2000, Mr. Liszt was Chief Executive Officer of Campbell Mithun, Inc., a national marketing communications agency he joined in 1976.  He also serves on the Board of Directors – Advisory Board of Land O’ Lakes, Inc., a national food and agricultural cooperative (since 2006) and the Board of Advisors of Kalypso, a consulting firm (since November 2010), and as Director of OCO Holdings, Inc., a communications service company (since 2009).  He previously served as a director of Restore Medical, Inc., a publicly-held medical device company, from May 2006 until its acquisition by Medtronic, Inc. in July 2008; Zomax Inc., a publicly-held company which provided outsourced supply chain management services, from 1996 until its acquisition in October 2006; Ocular Sciences, Inc., a manufacturer and marketer of specialty healthcare products, from 2001 until its acquisition in 2004; and Shuffle Master, Inc., a publicly-held gaming supply company, from 2000 to 2003.  Mr. Liszt brings corporate communications experience and advertising experience to our board.

Darin P. McAreavey became our Senior Vice President and Chief Financial Officer in January 2011.  Mr. McAreavey served as our Vice President and Chief Financial Officer from March 2009 to December 2010.  Mr. McAreavey worked for Xiotech Corporation, a computer storage company, from September 2007 to March 2009 as its Chief Financial Officer.  From February 2007 to September 2007, Mr. McAreavey worked for Global Capacity Group, a telecom logistics provider, as its Chief Financial Officer.  Mr. McAreavey was the Chief Financial Officer, Executive Vice President and Treasurer for Stellent, Inc., a content management software company, from May 2006 to February 2007 and that company’s Corporate Controller from September 2004 to May 2006.  Mr. McAreavey worked at Computer Network Technology, a provider of storage networking solutions, from August 1995 to September 2004 where he held several management-level finance positions including Director of Finance.  From November 1993 to August 1995, Mr. McAreavey was a Supervising Senior for KPMG LLP.  Mr. McAreavey began his professional career as a Staff Accountant at Eide Helmeke & Co., where he served from July 1991 to November 1993.

Our directors generally serve until the next annual or special meeting of shareholders held for the purpose of electing directors.  Our officers generally serve at the discretion of the board of directors.  One of our directors, Mr. Koller, is an employee who serves as our president.  The employment service of Mr. Koller is governed by the terms of his employment contracts.  See “Employment Contracts” in Item 11 below.

Board and Committee Matters

We maintain an audit committee, a compensation committee, a corporate governance and nominating committee, and an executive committee.  With the exception of our executive committee, each committee consists solely of members who are independent as defined in Rule 5605(a)(2) of the Marketplace Rules of the NASDAQ Stock Market.  Further information regarding the independence of our directors for service on our board’s committees appears in the committee discussions below.

Audit Committee and Financial Expert

Our audit committee currently includes Messrs. Birke, Liszt and Lillemoe.  Mr. Lillemoe serves as chairman of the audit committee.  Our audit committee was established in accordance with Section 3(a)(58)(A) of

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the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Each member of our audit committee is independent as defined in Rule 5605(a)(2) of the Marketplace Rules of the NASDAQ Stock Market and Exchange Act Rule 10A-3.  Further, no member of our audit committee participated in the preparation of the financial statements of our company or any current subsidiary of our company at any time during the past three years.

Each member of our audit committee is able to read and understand fundamental financial statements, including an issuer’s balance sheet, income statement, and cash flow statement, and at least one member of the committee has past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background which results in the individual’s financial sophistication.  In addition, our board of directors has determined that Kent O. Lillemoe is an audit committee financial expert as such term is defined by Item 407(d)(5) of Regulation S-K.

The functions of the audit committee include oversight of the integrity of our financial statements, our compliance with legal and regulatory requirements, and the performance, qualifications and independence of our independent auditors.  Our audit committee is directly responsible for the appointment, retention, compensation, evaluation, termination and oversight of the work of any independent auditor engaged for the purpose of preparing or issuing an audit report or related work.  The audit committee met four times during the year ended December 31, 2013.

Compensation Committee

Our compensation committee currently includes Messrs. Birke, Liszt and Lillemoe.  Mr. Birke is chairman of the committee.  Our compensation committee is responsible for discharging the board’s responsibilities relating to compensation of the company’s executives.  Our compensation committee is also responsible for overseeing and advising the board on the adoption of policies that govern our compensation programs, including stock and benefit plans.  The compensation committee met four times during the year ended December 31, 2013.

Each member of our compensation committee is independent as defined in Rule 5605(a)(2) of the Marketplace Rules of the NASDAQ Stock Market, is a non-employee director as defined in Exchange Act Rule 16b-3 and is an outside director as defined under Section 162(m) of the Internal Revenue Code.

Our compensation committee has the resources and authority necessary to discharge its duties and responsibilities.  Our compensation committee has sole authority to retain and terminate, and approve fees and other retention terms for, its outside counsel, compensation consultants, and other experts or consultants as it deems appropriate.

Our compensation committee looks to certain executive officers, including our named executive officers, for assistance with the design and assessment of our executive compensation program and other personnel issues.  For example, our named executive officers assist in the development of corporate succession plans for our Chief Executive Officer and other senior corporate officers, and provide periodic reports on matters relating to the company’s personnel appointments and practices.  The committee reviews the performance of the Chief Executive Officer, whereas our Chief Executive Officer assists the committee with its annual review of the performance of the other executive officers.  Named executive officers also assist the committee by providing insight on our company’s business goals and results, defining objectives for individual executives, and assessing the effect on our culture and personnel of suggested changes to our compensation programs.  No executive officer is involved in assessing or setting his or her own compensation.

In April 2009, our compensation committee engaged Financial Concepts, Inc. as its outside compensation consultant.  Financial Concepts was selected based on its ability to meet the committee’s needs at the most effective cost.  In May 2009, Financial Concepts presented to the committee a compensation analysis along with its recommendations, which included a market review involving base salary, non-equity incentive awards and equity incentive awards for the company’s executives.  The committee gave consideration to the consultant’s analysis and recommendations when establishing the company’s executive compensation program.  The committee expects to continue to utilize an outside compensation consultant when it deems appropriate for purposes of evaluating and analyzing the compensation provided to the company’s executives.

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Compensation Committee Report

The compensation committee has reviewed and discussed the Compensation Discussion and Analysis referred to in Item 402(b) of Regulation S-K with management, and based upon such review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis set forth in this Annual Report on Form 10-K be included herein.

 

Corporate Governance and Nominating Committee

Our corporate governance and nominating committee currently consists of Messrs. Birke, Liszt and Lillemoe.  Mr. Liszt is chairmen of the committee.  Each member of our corporate governance and nominating committee is independent as defined in Rule 5605(a)(2) of the Marketplace Rules of the NASDAQ Stock Market.

The functions of the corporate governance and nominating committee include identifying individuals qualified to become members of our board, overseeing our corporate governance principles, and completing an annual evaluation of our board.  The corporate governance and nominating committee did not meet during the year ended December 31, 2013.

The corporate governance and nominating committee identifies, reviews and evaluates candidates for election as director who meet the standards set forth in our company’s corporate governance guidelines.  The committee does not evaluate proposed nominees differently depending upon who has made the recommendation; however, the committee may consider, as one of the factors in its evaluation of shareholder recommended nominees, the size and duration of the interest of the recommending shareholder or shareholder group in the equity of our company.

The corporate governance and nominating committee may consider nominees suggested by directors, management and shareholders.  It is the committee’s view that the continuing service of qualified incumbents promotes stability and continuity in the boardroom.  However, prior to nominating an existing director for re-election to the board, the committee will consider and review an existing director’s qualifications and performance.  Where there is no qualified and available incumbent, or where there is a vacancy or a desire to increase the size of the board, the committee will identify and evaluate new candidates.  The committee will solicit recommendations for nominees from persons that it believes are likely to be familiar with qualified candidates.  These persons may include members of the board and management.  The committee may also determine to engage a third-party search firm; however, the committee has not to date paid any third party a fee to assist in identifying or evaluating potential

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nominees to the board.  Based upon all available information, the committee recommends to the board candidates who, in the view of the committee, are most suited for board membership.

In making its selections, the corporate governance and nominating committee will also evaluate candidates proposed by shareholders.  The committee may choose not to consider an unsolicited recommendation if no vacancy exists on the board and the committee does not perceive a need to increase the size of the board.  The committee will consider only those director candidates recommended in accordance with the procedures set forth below.

Shareholder Nomination Procedures

To submit a recommendation of a director candidate to the corporate governance and nominating committee, a shareholder must submit a written notice, addressed to the Chairman of the corporate governance and nominating committee, in care of the Corporate Secretary, at the principal executive office of Wireless Ronin Technologies, Inc., containing the information set forth below.

Under our amended and restated bylaws, a notice from a shareholder who desires to nominate a director (the “Nominating Person”) must include the following: (a) as to each person whom the shareholder proposes to nominate for election as a director (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) all information with respect to such person that would be required to be set forth in a shareholder’s notice as set forth in (b) below, (iv) any other information relating to such person that would be required to be disclosed in a proxy statement or other filing required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act, (v) a description of all direct and indirect compensation and other material agreements, arrangements and understandings and any other material relationships during the past three years, between or among any Nominating Person, on the one hand, and such proposed nominee, his or her respective affiliates and associates, or others acting in concert therewith, on the other hand, and (vi) all other information that would be required to be disclosed pursuant to Item 404 of Regulation S-K promulgated by the SEC if such Nominating Person were the “registrant” for purposes of such rule and such proposed nominee were a director or executive officer of such registrant; and (b) as to each Nominating Person, (i) the “Shareholder Information and Disclosable Interests” defined in Section 2.3 of our amended and restated bylaws, which requires detailed information about their ownership of our capital stock, including all derivative securities or hedging transactions, as well as any proxies, understandings, or relationships pursuant to which the person has given or received a right to vote, directly or indirectly, any of our securities, hedging or similar agreements to which they are a party, any rights to dividends and any performance-related fees to which they may be entitled, and (ii) any other information relating to such Nominating Person that would be required to be disclosed in a proxy statement or other filing required to be made in connection with solicitations of proxies for the election of directors in a contested election pursuant to Section 14 of the Exchange Act.  Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected.  In addition, the shareholder must update and supplement such notice to reflect any changes as of (i) the record date for the meeting and (ii) ten business days prior to the meeting or any adjournment or postponement thereof.

In order for a director candidate to be considered for nomination at the annual meeting of shareholders, the recommendation must be received by  no later than December 31 for the next year’s annual meeting of shareholders.

Minimum Qualifications

The corporate governance and nominating committee believes that members of the board must possess certain basic personal and professional qualities in order to properly discharge their fiduciary duties to shareholders, provide effective oversight of management, and monitor adherence to principles of sound corporate governance.  It is therefore the policy of the committee that all persons nominated to serve as a director of our company should possess the following minimum qualifications:  personal integrity and ethical character; absence of conflicts of interest; fair and equal representation of our company’s constituencies; demonstrated achievement in one or more fields; ability to function effectively in an oversight role; business understanding; and availability.

In approving candidates, the corporate governance and nominating committee will also assure that: at least a majority of the directors are independent; as many as possible of the directors satisfy the financial literacy requirements for service on the audit committee; at least one of the directors qualifies as an audit committee

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financial expert; at least some of the independent directors have experience as senior executives of a public or substantial private company; and at least some of the independent directors have general familiarity with our company’s industry.

Although we have no specific policy regarding diversity, the corporate governance and nominating committee will seek to promote through the nomination process an appropriate diversity on the board of professional background, experience, expertise, perspective, gender, ethnicity and country of citizenship.

Executive Committee Matters

Our executive committee consists of Messrs. Birke, Liszt and Lillemoe, who are all independent directors as defined in Rule 5605(a)(2) of the Marketplace Rules of the NASDAQ Stock Market, and Mr. Koller, who is the Company’s President and Chief Executive Officer and therefore is not an independent director.  Pursuant to our amended and restated bylaws, the executive committee may exercise all of the powers of the board of directors in the management of our business and affairs when the board is not in session.  The executive committee did not meet during the year ended December 31, 2013.

 Communications with Board Members

Our board of directors has provided the following process for shareholders and interested parties to send communications to our board and/or individual directors.  All communications should be addressed to Wireless Ronin Technologies, Inc., Baker Technology Plaza, 5929 Baker Road, Suite 475, Minnetonka, Minnesota 55345, Attention: Corporate Secretary.  Communications to individual directors may also be made to such director at our company’s address.  All communications sent to a member of the audit committee or to any individual director will be received directly by such individuals and will not be screened or reviewed by any company personnel.  Any communications sent to the board in the care of the Corporate Secretary will be reviewed by the Corporate Secretary to ensure that such communications relate to the business of the company before being reviewed by the board.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Exchange Act requires our officers, directors and persons who own more than 10 percent of a registered class of our equity securities to file reports of ownership and changes in ownership with the SEC.  Such officers, directors and shareholders are required by the SEC to furnish us with copies of all such reports.  To our knowledge, based solely on a review of copies of reports filed with the SEC during 2013 and written representations from such persons that no other reports were required, all applicable Section 16(a) filing requirements were met.

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Code of Ethics

We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers (including our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions) and directors.  Our Code of Business Conduct and Ethics satisfies the requirements of Item 406(b) of Regulation S-K and applicable NASDAQ Marketplace Rules.  Our Code of Business Conduct and Ethics is posted on our Internet website at www.wirelessronin.com and is available, free of charge, upon written request to our Corporate Secretary at Baker Technology Plaza, 5929 Baker Road, Suite 475, Minnetonka, Minnesota 55345.  We intend to disclose any amendment to or waiver from a provision of our Code of Business Conduct and Ethics that requires disclosure on our website at www.wirelessronin.com.

 

ITEM 11EXECUTIVE COMPENSATION

 

Executive Compensation

 Summary Compensation Table

The following table sets forth information concerning the compensation of our named executive officers for 2013 and 2012:

 

 

(a)The 2013 annual base salaries of Messrs. Koller and McAreavey remained at 2012 levels, namely $265,000 and $215,000, respectively.

(b)Represents the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.  The assumptions made in the valuation are those set forth in Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2013.  The company used a 25.19 percent forfeiture rate assumption for its executive officer options in 2013 based on actual historical experience for all employee option awards.  Details regarding the terms of such awards appear under the caption “Outstanding Equity Awards at Fiscal Year-End.”

(c)Based on the company’s performance in 2013 or 2012, no non-equity incentive awards were paid to our named executive officers under our Senior Management Bonus Plan for that year.

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(d)Represents premiums we paid for long-term disability insurance.

The material terms of employment agreements and payments to be made upon a change in control are discussed below, in the narrative following “Potential Payments upon Termination or Change in Control.”

Our named executive officers are eligible for retirement benefits on the same terms as non-executives under the company’s defined contribution 401(k) retirement plan.  Employees may contribute up to 15% of their pretax compensation to the plan.  There is currently no plan for an employer contribution match.

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth certain information concerning outstanding stock options and restricted stock awards held by our named executive officers as of December 31, 2013:

 

 

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(a)Unless otherwise indicated, represents shares issuable upon the exercise of stock options granted under our Amended and Restated 2006 Equity Incentive Plan.

(b)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on April 27, 2009, with additional increments of 25 percent becoming exercisable annually thereafter.

(c)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on March 17, 2011, with additional increments of 25 percent becoming exercisable annually thereafter.

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(d)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on March 23, 2012, with additional increments of 25 percent becoming exercisable annually thereafter.

(e)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on February 16, 2013, with additional increments of 25 percent becoming exercisable annually thereafter.

(f)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on February 13, 2014, with additional increments of 25 percent becoming exercisable annually thereafter.

(g)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on March 9, 2009, with additional increments of 25 percent becoming exercisable annually thereafter.

(h)This restricted stock award vests in three equal annual installments commencing on March 17, 2013, assuming continued employment.

(i)Determined by multiplying the number of shares subject to the restricted stock award by the per share closing price of our common stock on December 31, 2013.

Potential Payments upon Termination or Change in Control

Upon the termination of a named executive officer or change in control of the company, a named executive officer may be entitled to payments or the provision of other benefits, depending on the triggering event.

The potential payments for each named executive officer who is currently employed with our company were determined as part of the negotiation of each of their employment agreements, and the compensation committee believes that the potential payments for the triggering events are in line with current compensation trends.  The events that would trigger a current named executive officer’s entitlement to payments or other benefits upon termination or a change in control, and the value of the estimated payments and benefits, based on annual base salaries in effect as of January 1, 2014, are described in the following table, assuming a termination date and, where applicable, a change in control date of December 31, 2013, and a stock price of $0.60 per share, which was the closing price of one share of our common stock on December 31, 2013.

 

 

(a)Our Amended and Restated 2006 Equity Incentive Plan provides that, unless otherwise provided by our compensation committee in an award agreement, any options outstanding as of the date of a change in control which are not then exercisable and vested shall become fully exercisable and vested, and the restrictions and deferral limitations applicable to any restricted stock or restricted stock units shall lapse and the restricted stock or restricted stock units shall become free of all restrictions and become fully vested.

We have an amended and restated executive employment agreement with Scott W. Koller pursuant to which he became our President and Chief Executive Officer, effective January 1, 2011.  We also have an executive employment agreement, as amended, with Darin P. McAreavey pursuant to which he began serving as our Senior Vice President and Chief Financial Officer, effective January 1, 2011.

These agreements had terms ending December 31, 2013; however, they will be automatically extended for successive one-year periods unless either our company or the executive elects not to extend employment.  Mr. Koller’s agreement provides for an annual base salary of $265,000 and Mr. McAreavey’s agreement provides for an annual base salary of $215,000.  Under the agreements, the executives are eligible to participate in performance-based cash bonus or equity award plans for our senior executives.  In general, the annual base salaries payable under these agreements may be increased, but not decreased, in the sole discretion of our board.  Pursuant to these agreements, each executive participates in our employee benefit plans, policies, programs, perquisites and arrangements to the extent he meets eligibility and other requirements.  Each executive is entitled to 22 business days of paid time off per year.  Upon any termination of employment, each executive will receive base salary for services performed, accrued and unpaid paid time off, and any interest he may have as a terminated employee in our 401(k) plan or other plans in which he participated.  Upon a termination of employment for good reason (as defined), without cause (as defined), or within 12 months following a change in control (as defined) other than by death, disability or for cause, then, in addition to the foregoing amounts, Mr. Koller will be entitled to receive a severance payment equal to one year of base salary.  With respect to Mr. McAreavey, in addition to the amounts set forth above, upon a termination of employment for good reason (as defined) or without cause (as defined), then, he will be entitled to receive a severance payment

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equal to six months of base salary, or upon a termination of employment within 12 months following a change in control (as defined) other than by death, disability or for cause, then, he will be entitled to receive a severance payment equal to one year of base salary.  These amounts would generally be paid in equal monthly installments over the non-competition period specified below.  In addition, in a termination without cause or for good reason, Mr. McAreavey is entitled to a payment equal to the non-equity incentive plan award paid in the prior year, if any, subject to certain limitations.  Furthermore, if the executive is eligible for and elects COBRA coverage, and continues to pay his portion of the monthly medical insurance premiums, we will continue to pay our company’s portion of the monthly medical insurance premiums for COBRA coverage for the executive and his eligible dependents for a period ending on the earlier of one year after termination of employment or until such officer is eligible to be covered by another plan providing medical benefits.  Messrs. Koller and McAreavey have agreed to certain non-disparagement and non-competition provisions during the term of employment and for two years thereafter, certain non-disclosure and inventions provisions during the term of employment and thereafter, and certain non-interference and non-recruitment provisions during the term of employment and for a certain period of time thereafter (two years for Mr. Koller and one year for Mr. McAreavey).

Non-Employee Director Compensation

Standard Compensation Arrangements

Our compensation committee periodically reviews and makes recommendations to our board regarding the components and amount of non-employee director compensation.  Directors who are employees of our company receive no fees for their services as director.

During 2013, non-employee members of our board of directors received the following cash compensation:

$10,000 in annual compensation for each director;

An additional $24,000 in annual compensation for the Chairman of the Board;

An additional $2,000 annually, per committee, for service on each of the audit committee, compensation committee, and corporate governance and nominating committee; and

An additional $2,000 annually for the chairmen of each of the audit committee, compensation committee, and corporate governance and nominating committee.

The foregoing amounts are payable 50 percent in cash and 50 percent in the form of a stock bonus.  The cash component is paid quarterly in arrears.  The equity component is granted on the last trading day of each fiscal quarter during which the Chairman of the Board, board member, committee member, and committee chairman served our company in such capacity.  Such stock bonuses are issued pursuant to our Amended and Restated 2006 Equity Incentive Plan.

Non-employee members of our board also receive additional equity-based compensation.  Upon election to the board, non-employee directors generally receive a ten-year option for the purchase of 8,000 shares of common stock under our Amended and Restated 2006 Non-Employee Director Stock Option Plan.  Such options become exercisable to the extent of 25 percent of the shares purchasable thereunder on the date of grant with additional increments of 25 percent becoming exercisable on each anniversary of the date of grant until vested in full.

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In February 2013, our board of directors awarded each non-employee director a ten-year option for the purchase of 20,000 shares of common stock under our Amended and Restated 2006 Non-Employee Director Stock Option Plan.  Such options become exercisable to the extent of 25 percent of the shares purchasable thereunder on the date of grant with additional increments of 25 percent becoming exercisable annually thereafter.  In accordance with the terms of the Amended and Restated 2006 Non-Employee Director Stock Option Plan, the exercise price of each option is $1.80 per share, representing the closing price of our common stock on the NASDAQ Stock Market on February 13, 2013.  

Furthermore, in January 2014, our board of directors awarded each non-employee director a ten-year option for the purchase of 60,000 shares of common stock under our Amended and Restated 2006 Non-Employee Director Stock Option Plan. Such options become exercisable to the extent of 25 percent of the shares purchasable thereunder on the date of grant with additional increments of 25 percent becoming exercisable annually thereafter. In accordance with the terms of the Amended and Restated 2006 Non-Employee Director Stock Option Plan, the exercise price of each option is $0.79 per share, representing the closing price of our common stock on the OTC Bulletin Stock Market on January 14, 2014.

Director Compensation Table

Compensation of our non-employee directors during 2013 appears in the following table.  Because Mr. Koller also served as our Chief Executive Officer in 2013, his compensation, including information regarding his unexercised stock options, is instead presented in the Summary Compensation Table:

 

 

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(a)Represents the grant date fair value of restricted stock granted during the year calculated as the closing price of our common stock on the date of grant, in accordance with ASC Topic 718.

(b)Represents the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.  The assumptions made in the valuation are those set forth in Note 7 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2013.  The company used a zero percent forfeiture rate assumption for its non-employee director options in 2013 as it does not expect significant turnover on its board.

(c)Mr. Howe resigned from our board on October 18, 2013. 

Those who served as non-employee directors during 2013 held the following unexercised stock options at December 31, 2013:

 

 

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(a)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on February 2, 2009, with additional increments of 25 percent becoming exercisable annually thereafter.

(b)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on March 17, 2011, with additional increments of 25 percent becoming exercisable annually thereafter.

(c)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on March 23, 2012, with additional increments of 25 percent becoming exercisable annually thereafter.

(d)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on February 16, 2012, with additional increments of 25 percent becoming exercisable annually thereafter.

(e)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on February 13, 2013, with additional increments of 25 percent becoming exercisable annually thereafter.

(f)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on August 17, 2011, with additional increments of 25 percent becoming exercisable annually thereafter.

(g)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on February 16, 2012, with additional increments of 25 percent becoming exercisable annually thereafter.

(h)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on February 13, 2013, with additional increments of 25 percent becoming exercisable annually thereafter.

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(i)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on August 15, 2011, with additional increments of 25 percent becoming exercisable annually thereafter.

(j)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on February 16, 2012, with additional increments of 25 percent becoming exercisable annually thereafter.

(k)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on February 13, 2013, with additional increments of 25 percent becoming exercisable annually thereafter.

(l)This option became exercisable in full as of June 9, 2011, pursuant to the terms of our consulting agreement with Howe Associates, Inc.

(m)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on July 1, 2011, with additional increments of 25 percent becoming exercisable annually thereafter.

(n)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on February 16, 2012, with additional increments of 25 percent becoming exercisable annually thereafter.

(o)This stock option became exercisable to the extent of 25 percent of the shares purchasable thereunder on February 13, 2013, with additional increments of 25 percent becoming exercisable annually thereafter.

(p)Mr. Howe resigned from our board on October 18, 2013, at which time vesting ceased on Mr. Howe’s unexercisable options. 

 

ITEM 12SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth certain information known to us regarding beneficial ownership of our common stock as of March 1, 2014, by (1) each person who is known to us to own beneficially more than five percent of our common stock, (2) each director, (3) each executive officer named in the Summary Compensation Table below, and (4) all directors and executive officers as a group.  The percentage of beneficial ownership is based on 6,474,135 shares outstanding as of March 1, 2014.  As indicated in the footnotes, shares issuable pursuant to warrants and options are deemed outstanding for computing the percentage of the person holding such warrants or options but are not deemed outstanding for computing the percentage of any other person.  Except as otherwise noted below or pursuant to applicable community property laws, each person identified below has sole voting and investment power with respect to the listed shares and none of the listed shares has been pledged as security.  Except as otherwise noted below, we know of no agreements among our shareholders that relate to voting or investment power with respect to our common stock.  Unless otherwise indicated, the address for each listed shareholder is c/o Wireless Ronin Technologies, Inc., Baker Technology Plaza, 5929 Baker Road, Suite 475, Minnetonka, Minnesota 55345.

 

 

 

 

 

 

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth, as of December 31, 2013, information regarding our equity compensation plans under which shares of our common stock are authorized for issuance:

 

 

 

 

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ITEM 13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Review and Approval of Transactions with Related Persons

In February 2009, our board of directors adopted a written policy for the review and approval of related person transactions requiring disclosure under Rule 404(a) of Regulation S-K.  This policy states that the audit committee is responsible for reviewing and approving or disapproving all interested transactions, which are defined as any transaction, arrangement or relationship in which (a) the amount involved may be expected to exceed $120,000 in any fiscal year, (b) our company will be a participant, and (c) a related person has a direct or indirect material interest.  A related person is defined as an executive officer, director or nominee for director, or a greater than five percent beneficial owner of our company’s common stock, or an immediate family member of the foregoing.  The policy deems certain interested transactions to be pre-approved, including the employment and compensation of executive officers.

Unsecured Convertible Promissory Notes

On December 18, 2013, we entered into notes and warrant purchase agreements pursuant to which we sold an aggregate of $250,000 in unsecured convertible promissory notes, along with warrants to purchase 250,000 shares of our common stock, in a private placement transaction with Perkins Capital Management, who was an affiliate of ours due to its beneficial ownership of 31.7% of our outstanding common stock prior to such agreements.  Since Perkins Capital Management was deemed to be a related party, the board of directors approved the transaction prior to entering into the agreements.   In January 2014, Perkins Capital Management exercised its right to convert $250,000, along with accrued interest of $516 of accrued interest into 501,028 of our common stock.

Employment Agreements

The terms of the employment agreements between our company and our executive officers are set forth in the Executive Compensation section of this proxy statement under the caption “Potential Payments upon Termination or Change in Control.”

 

 

ITEM 14PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table presents fees for audit and other services provided by Baker Tilly Virchow Krause, LLP for 2013 and 2012:

 

 

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(a)Audit fees consisted of fees for services provided in connection with the audit of our financial statements, reviews of our quarterly financial statements, and for professional services in connection with our registered direct offerings.

(b)Audit-related fees consisted of fees for the issuance of a comfort letter in connection with our September 2012 and March 2013 issuance of common stock pursuant to shelf registration statements.

(c)Tax fees consisted of the aggregate fees billed for tax compliance, tax advice, and tax planning.

Our audit committee reviewed the audit and non-audit services rendered by Baker Tilly Virchow Krause, LLP during 2013 and concluded that such services were compatible with maintaining the auditor’s independence.

Pre-Approval Policies and Procedures of Audit Committee

All services provided by our independent registered public accounting firm, Baker Tilly Virchow Krause, LLP, are subject to pre-approval by our audit committee.  The audit committee has authorized each of its members to approve services by our independent registered public accounting firm in the event there is a need for such approval prior to the next full audit committee meeting.  Any interim approval given by an audit committee member must be reported to the audit committee no later than its next scheduled meeting.  Before granting any approval, the audit committee (or a committee member if applicable) gives due consideration to whether approval of the proposed service will have a detrimental impact on the independence of our independent registered public accounting firm.  The audit committee pre-approved all services provided by Baker Tilly Virchow Krause, LLP in 2013.

 

PART IV

ITEM 15EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Minnetonka, State of Minnesota, on March 11, 2014.

Wireless Ronin Technologies, Inc.

 

By   /s/  Scott W. Koller

Scott W. Koller

President, Chief Executive Officer and Director

(Principal Executive Officer)

 

 

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant, and in the capacities and on the date indicated.