CREATIVE REALITIES, INC. - Quarter Report: 2014 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One) 

 

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2014

 

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

FOR THE TRANSITION PERIOD FROM ______________ TO ______________ 

Commission File Number 001-33169

 

Wireless Ronin Technologies, Inc.

(Exact name of registrant as specified in its charter)

 

 

5929 Baker Road, Suite 475, Minnetonka MN 55345

(Address of principal executive offices, including zip code)

 

(952) 564-3500

(Registrant’s telephone number, including area code)

 

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

 

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 (232.405 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

 

As of May 15, 2014, the registrant had 6,474,135 shares of common stock outstanding.

 

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WIRELESS RONIN TECHNOLOGIES, INC.

 

TABLE OF CONTENTS

 

 

 

 

 

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PART 1. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

WIRELESS RONIN TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

 

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

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WIRELESS RONIN TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)

 

 

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

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WIRELESS RONIN TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

 

 

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

 

 

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NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

Wireless Ronin Technologies, Inc. (the “Company”) has prepared the condensed consolidated financial statements included herein, without audit, pursuant to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (“SEC”). The condensed consolidated financial statements include the Company’s one wholly-owned subsidiary. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to ensure the information presented is not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

The Company believes that all necessary adjustments, which consist only of normal recurring items, have been included in the accompanying condensed consolidated financial statements to present fairly the results of the interim periods. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the year ending December 31, 2014.

 

Nature of Business and Operations

 

The Company is a Minnesota corporation that provides marketing technology solutions targeting specific verticals such as the food service, automotive,  and retail markets.  The Company provides leading expertise in content and emerging digital media solutions, including dynamic digital signage, interactive kiosk, mobile, social media and web, which enable its customers to transform how they engage with their customers.  The Company is able to provide an array of marketing technology solutions through its 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 the Company to develop custom solutions for specific customer applications.

The Company's wholly-owned subsidiary, Wireless Ronin Technologies (Canada), Inc., an Ontario, Canada Provincial Corporation located in Windsor, Ontario, maintains a vertical-specific focus in the automotive industry and houses the Company’s 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 the Company’s historical business to provide content solutions to all of its clients. 

The Company and its subsidiary sell products and services primarily throughout North America.

 

Summary of Significant Accounting Policies

 

A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:

 

1. Principles of Consolidation

 

The consolidated financial statements include the accounts of Wireless Ronin Technologies, Inc. and its wholly owned subsidiary. All inter-company balances and transactions have been eliminated in consolidation.

 

 

 

 

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2. Foreign Currency

During the first quarter of 2012, the Company reevaluated the reporting currency and determined that the functional currency for its operations in Canada is the U.S. Dollar. As a result, the Company is no longer recording translation adjustments related to assets and liabilities or income and expense items that are transacted in the local currency as a component of accumulated other comprehensive loss in shareholders' equity. Foreign exchange transaction gains and losses attributable to exchange rate movements related to transactions made in the local currency and on intercompany receivables and payables not deemed to be of a long-term investment nature are recorded in other income (expense).

 

3. Revenue Recognition

 

The Company recognizes 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

 

 

The Company applies 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, the Company evaluates 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.”

 

The Company recognizes revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred, which is when product title transfers to the customer, or services have been rendered; (iii) customer payment is deemed fixed or determinable and free of contingencies and significant uncertainties; and (iv) collection is reasonably assured. The Company assesses 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, the Company defers the revenue and recognizes it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period.  Sales and use taxes are reported on a net basis, excluding them from sales and cost of sales.

 

Multiple-Element Arrangements — The Company enters into arrangements with customers that include a combination of software products, system hardware, maintenance and support, or installation and training services. The Company allocates the total arrangement fee among the various elements of the arrangement based on the relative fair value of each of the undelivered elements determined by vendor-specific objective evidence (VSOE). In software arrangements for which the Company does not have VSOE of fair value for all elements, revenue is deferred until the earlier of when VSOE is determined for the undelivered elements (residual method) or when all elements for which the Company does not have VSOE of fair value have been delivered. The Company has determined VSOE of fair value for each of its products and services.

 

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

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Each element of the Company’s multiple element arrangements qualifies for separate accounting.   However, when a sale includes both software and maintenance, the Company defers 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. The Company defers maintenance and support fees based upon the customer’s renewal rate for these services.

 

Software and software license sales

 

The Company recognizes revenue when a fixed fee order has been received and delivery has occurred to the customer. The Company assesses whether the fee is fixed or determinable and free of contingencies based upon signed agreements received from the customer confirming terms of the transaction. Software is delivered to customers electronically or on a CD-ROM, and license files are delivered electronically.

 

System hardware sales

 

The Company recognizes revenue on system hardware sales generally upon shipment of the product or customer acceptance depending upon contractual arrangements with the customer. Shipping charges billed to customers are included in sales and the related shipping costs are included in cost of sales.

 

Professional service revenue

 

Included in services and other revenues is revenue derived from implementation, maintenance and support contracts, content development, software development and training. The majority of consulting and implementation services and accompanying agreements qualify for separate accounting. Implementation and content development services are bid either on a fixed-fee basis or on a time-and-materials basis. For time-and-materials contracts, the Company recognizes revenue as services are performed. For fixed-fee contracts, the Company recognizes revenue upon completion of specific contractual milestones or by using the percentage-of-completion method.

 

Software design and development services

 

Revenue from contracts for technology integration consulting services where the Company designs/redesigns, builds and implements new or enhanced systems applications and related processes for clients are recognized on the percentage-of-completion method in accordance with “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 from 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. The Company measures its 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 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.  The Company’s presentation of revenue recognized on a contract completion basis has been consistently applied for all periods presented.

 

The Company classifies 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 the Company applies the contract method of accounting, the Company’s only deliverable is professional services, thus, the Company believes presenting the revenue on a single line is appropriate.

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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. The Company also offers a hosting service through its network operations center, or NOC, allowing the ability to monitor and support its 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. The Company’s hosting support agreement fees are based on the level of service provided to its customers, which can range from monitoring the health of a customer’s network to supporting a sophisticated web-portal.

 

4. Cash and Cash Equivalents

 

Cash equivalents consist of commercial paper and all other liquid investments with original maturities of three months or less when purchased. As of March 31, 2014 and December 31, 2013, the Company had substantially all cash invested in a commercial paper sweep account. The Company maintains the majority of its cash balances in one financial institution located in Chicago.

 

5. Restricted Cash

 

In connection with the Company’s bank’s credit card program, the Company was required to maintain a cash balance of $50 at both March  31, 2014 and December 31, 2013.  

 

6. Accounts Receivable

 

Accounts receivable are usually unsecured and stated at net realizable value and bad debts are accounted for using the allowance method. The Company performs credit evaluations of its customers’ financial condition on an as-needed basis and generally requires no collateral. Payment is generally due 90 days or less from the invoice date and accounts past due more than 90 days are individually analyzed for collectability. In addition, an allowance is provided for other accounts when a significant pattern of un-collectability has occurred based on historical experience and management’s evaluation of accounts receivable. If all collection efforts have been exhausted, the account is written off against the related allowance. No interest is charged on past due accounts. The allowance for doubtful accounts was $37 and $35 at March 31, 2014 and December 31, 2013, respectively.

 

7. Inventories

 

The Company records inventories using the lower of cost or market on a first-in, first-out (FIFO) method. Inventories consist principally of finished goods, product components and software licenses. Inventory reserves are established to reflect slow-moving or obsolete products. The Company had an inventory reserve of $52 and $85 at March 31, 2014 and December 31, 2013, respectively. 

8. Impairment of Long-Lived Assets

 

The Company reviews the carrying value of all long-lived assets, including property and equipment, for impairment in accordance with “FASB ASC 360-10-05-4,” Accounting for the Impairment or Disposal of Long-Lived Assets. Under FASB ASC

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360-10-05-4, impairment losses are recorded whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable.

 

If the impairment tests indicate that the carrying value of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment loss would be recognized. The impairment loss is determined by the amount by which the carrying value of such asset exceeds its fair value. We generally measure fair value by considering sale prices for similar assets or by discounting estimated future cash flows from such assets using an appropriate discount rate. Assets to be disposed of are carried at the lower of their carrying value or fair value less costs to sell. Considerable management judgment is necessary to estimate the fair value of assets, and accordingly, actual results could vary significantly from such estimates. There were no impairment losses for long-lived assets recorded for the three months ended March 31, 2014 and 2013.

 

9. Depreciation and Amortization

 

Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over the estimated service lives, principally using straight-line methods. Leased equipment is depreciated over the term of the capital lease. Leasehold improvements are amortized over the shorter of the life of the improvement or the lease term, using the straight-line method.

 

 

The estimated useful lives used to compute depreciation and amortization are as follows:

 

 

 

 

Depreciation and amortization expense was $41 and $61 at March 31, 2014 and 2013, respectively. 

 

10. Research and Development and Software Development Costs

 

Research and development expenses consist primarily of development personnel and non-employee contractor costs related to the development of new products and services, enhancement of existing products and services, quality assurance and testing. “FASB ASC 985-20-25,” Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, requires certain software development costs to be capitalized upon the establishment of technological feasibility. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs require considerable judgment by management with respect to certain external factors such as anticipated future revenue, estimated economic life, and changes in software and hardware technologies. Software development costs incurred beyond the establishment of technological feasibility have not been significant. No software development costs were capitalized during the three months ended March 31, 2014 and 2013.  Software development costs have been recorded as research and development expense. The Company incurred research and development expenses of $224 and $318 during the three months ended March 31, 2014 and 2013, respectively.  

 

11. 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. For the three months ended March 31, 2014 and 2013, shares reserved for outstanding stock warrants and options totaling 2,496 and 1,247, respectively, were excluded from the computation of loss per share as their effect was antidilutive due to the Company’s net loss.

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12. 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 receivable and inventory, differences in depreciation methods, and accrued expenses. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

13. Accounting for Stock-Based Compensation

 

The Company accounts for stock-based compensation in accordance with FASB ASC 718-10,  which requires the measurements and recognition of compensation expense for all stock-based payments including warrants, stock options, restricted stock grants and stock bonuses based on estimated fair value. For purposes of determining estimated fair value under FASB ASC 718-10-30, the Company computes the estimated fair values of stock options using the Black-Scholes option pricing model. The fair value of restricted stock and stock award grants are determined based on the number of shares granted and the closing price of the Company’s 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 of $84 was charged to expense during the three months ended March 31, 2014, compared to stock-based compensation expense of $159 for the same period in the prior year.  No tax benefit has been recorded due to the full valuation allowance on deferred tax assets that the Company has recorded.

 

The Company applies the guidance of FASB 718-10-S99-1 for purposes of determining the expected term for stock options.  The Company calculates the estimated expected life based upon historical exercise data.  The Company uses historical closing stock price volatility for a period equal to the period its common stock has been trading publicly. The dividend yield assumption is based on the Company’s 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.  The Company applied a pre-vesting forfeiture rate from 18.3% to 24.2% based on upon actual historical experience for all employee option awards. The Company continues to apply a zero forfeiture rate to those options granted to members of its board of directors.

 

The Company accounts 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 the Company’s common stock, or warrants or options to purchase shares of the Company’s common stock. These shares, warrants or options are fully vested and exercisable at the date of grant or vest over a certain period during which services are provided. The Company expenses the fair market value of these securities over the period in which the related services are received.  During the three months ended March 31, 2014 and 2013, the Company recognized $10 of stock-based compensation expense related to the fair market value of stock issued to non-employee directors for services rendered.

 

See Note 5 for further information regarding stock-based compensation and the assumptions used to calculate the fair value of stock-based compensation.

 

14. Fair Value of Financial Instruments

 

“FASB ASC 820-10,” Fair Value Measurements and Disclosures, requires disclosure of the estimated fair value of an entity’s financial instruments. Such disclosures, which pertain to the Company’s financial instruments, do not purport to represent the aggregate net fair value of the Company. The carrying value of cash and cash equivalents, accounts receivable and accounts payable

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approximates fair value because of the short maturity of those instruments. The fair value of capital lease obligations approximates carrying value based on the interest rate in the lease compared to current market interest rates.

 

15. Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates of the Company are the allowance for doubtful accounts, recognition of revenue under fixed price contracts, deferred tax assets, deferred revenue, depreciable lives and methods of property and equipment, valuation of warrants and other stock-based compensation. Actual results could differ from those estimates.

 

16. Recently Issued Accounting Pronouncements

 

In March 2013, the FASB issued ASU No. 2013-05, "Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity." This ASU addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The guidance outlines the events when cumulative translation adjustments should be released into net income and is intended by FASB to eliminate some disparity in current accounting practice. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 and should be applied prospectively. The adoption of this standard did not have a material impact to the Company's consolidated financial statements.

 

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740), which clarifies the presentation requirements of unrecognized tax benefits when a net operating loss carry forward, a similar tax loss, or a tax credit carry forward exists at the reporting date. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 and should be applied prospectively. The adoption of this standard did not have a material impact to the Company's consolidated financial statements.

 

 

NOTE 2: OTHER FINANCIAL STATEMENT INFORMATION

 

The following tables provide details of selected financial statement items:

 

 

INVENTORIES

 

 

 

 

 

 

 

 

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NOTE 3: FAIR VALUE MEASUREMENT

 

As of March 31, 2014 and December 31, 2013, cash equivalents consisted of the following:

 

 

 

 

 

 

 

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

 

Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets. The Level 1 category at March 31, 2014 and December 31, 2013 primarily represents funds held in a commercial paper sweep account totaling $482 and $1,377, respectively, which are included in cash and cash equivalents in the consolidated balance sheet.

 

Level 2 — Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. At March 31, 2014 and December 31, 2013, the Company had no Level 2 financial assets on its consolidated balance sheet.

 

Level 3 — Valuations based on inputs that are unobservable and involve management judgment and the reporting entity’s own assumptions about market participants and pricing. At March 31, 2014 and December 31, 2013, the Company had no Level 3 financial assets on its consolidated balance sheet.

 

The hierarchy level assigned to each security in the Company’s cash equivalents is based on its assessment of the transparency and reliability of the inputs used in the valuation of such instruments at the measurement date. The Company did not have any financial liabilities that were covered by FASB ASC 820-10-30 as of March 31, 2014 and December 31, 2013.

 

 

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NOTE 4: COMMITMENTS AND CONTINGENCIES

 

 

Operating Leases

 

During the three month period ended March 31, 2014, there were no changes in any existing commitments, contingencies or borrowings related to operating leases involving the Company’s U.S. or Canadian operations.

 

Rent expense under the operating leases was $88 for the three months ended March 31, 2014, compared to $88 for the same period in the prior year.    

 

Litigation

 

The Company was not party to any material legal proceedings as of May 15, 2014, and there were no such proceedings pending during the period covered by this report.

 

 

Plan of Merger and Reorganization

 

On March 5, 2014, we entered into a non-binding 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.

 

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.  

 

 

Revolving Line-of-Credit

 

In March 2010, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (the “Loan and Security Agreement”), which was most recently amended effective March 12, 2014.  The Loan and Security Agreement provides the Company 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) $1,500, or (b) the amount available under the Company’s borrowing base (75% of the Company’s eligible accounts receivable plus 50% of the Company’s 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

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advances.  In connection with the July 2010 lease amendment for the Company's corporate offices, Silicon Valley Bank issued a letter of credit that as of September 30, 2013 was in the amount of $180, along with a letter of credit issued to a vendor for $50. 

 

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).    

 

As of March 31, 2014, the Company was not in compliance with the tangible net worth requirement and therefore not eligible to draw down on the line of credit. The Company had no outstanding balance under this loan agreement (other than our letter of credits) as of March 31, 2014.

 

Under the Loan and Security Agreement, the Company is 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 the Company’s shareholders who were not shareholders immediately prior to such transaction own more than 40% of the Company’s 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 assets of the Company.

 

Convertible Debt

 

In January 2014, the Company received exercise notices from various holders of the convertible notes payable electing to convert the notes payable into common stock. The total principal amount was $250, including $1 of accrued interest, which converted into 501 shares of the Company's common stock.

 

 

 

NOTE 5: STOCK-BASED COMPENSATION AND BENEFIT PLANS

 

Stock Compensation Expense Information

 

FASB ASC 718-10 requires measurement and recognition of compensation expense for all stock-based payments including warrants, stock options, restricted stock grants and stock bonuses based on estimated fair values. In June 2013, the Company’s shareholders approved an amendment to increase the number of shares reserved under the Amended and Restated 2006 Equity Incentive Plan to 1,720 and an amendment to increase the number of shares reserved under the Amended and Restated 2006 Non-Employee Director Stock Option Plan to 700.  Compensation expense recognized for the issuance of warrants, stock options, restricted stock grants and stock bonuses for the three months ended March 31, 2014 and 2013 was as follows:  

 

 

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At March 31, 2014, there was approximately $371 of total unrecognized compensation expense related to unvested share-based awards. Generally, this expense will be recognized over the next two years and will be adjusted for any future changes in estimated forfeitures.

 

Valuation Information for Stock-Based Compensation

 

For purposes of determining estimated fair value under FASB ASC 718-10, the Company computed the estimated fair values of stock options using the Black-Scholes model.  The weighted average estimated fair value of stock options granted during the three months ended March 31, 2014 and 2013 was $0.79 and $1.24 per share, respectively.  The values set forth above were calculated using the following weighted average assumptions:

 

 

 

The Company calculates the estimated expected life based upon historical exercise data. The risk-free interest rate assumption is based on observed interest rates appropriate for the term of the Company’s stock options.    The Company uses historical closing stock price volatility for a period equal to the expected life of the respective award.    The dividend yield assumption is based on the Company’s 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.  The Company applied a pre-vesting forfeiture rate of 18.3% to 24.2% based on upon actual historical experience for all employee option awards. The Company continues to apply a zero forfeiture rate to those options granted to members of its board of directors.

 

In January 2014 and February 2013, the Company granted stock options for the purchase of an aggregate of 320 and 173 shares to two executive officers and certain key employees, respectively.  In addition, each of the Company’s non-employee board members received stock options to purchase 60 and 20 shares of the Company’s stock in January 2014 and February 2013, respectively.

Stock options and warrants for the purchase of approximately 76 shares were cancelled or expired during the three month period ended March 31, 2014. 

 

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2007 Associate Stock Purchase Plan

 

In November 2007, the Company’s shareholders approved the 2007 Associate Stock Purchase Plan, under which 60 shares were originally reserved for purchase by the Company’s associates (employees). In June 2010, the Company’s shareholders approved an amendment to increase the number of shares reserved for issuance to 80. In June 2011, the Company’s shareholders approved an amendment to increase the number of shares reserved for issuance from 80 to 120. The purchase price of the shares under the plan was the lesser of 85% of the fair market value on the first or last day of the offering period. Offering periods were every six months ending on June 30 and December 31. Associates may designate up to ten percent of their compensation for the purchase of shares under the plan. Total shares purchased by associates under the plan through termination of the Associate Stock Purchase Plan totaled 96.  In June 2013, the Company’s board of directors terminated the Associate Stock Purchase Plan effective July 1, 2013. 

 

Registered Direct Offering

 

In March 2013, the Company 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.  The Company determined the warrants are permanent equity.  The Company obtained approximately $1,374 in net proceeds as a result of this registered direct offering. 

 

Reverse Stock Split

 

In November 2012, the Company’s board of directors approved a one-for-five reverse stock split of all outstanding common shares, which became effective December 14, 2012. A proportionate adjustment also was made to the Company’s outstanding derivative securities. All share and per share information in these financial statements are restated to reflect such reverse

stock split.

 

 

Employee Benefit Plan

 

In 2007, the Company began to offer a defined contribution 401(k) retirement plan for eligible associates. Associates may contribute up to 15% of their pretax compensation to the plan. There is currently no plan for an employer contribution match.

 

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NOTE 6: SEGMENT INFORMATION AND MAJOR CUSTOMERS

 

Segment Information

 

The Company currently operates in one business segment, marketing technology solutions. All fixed assets are located at the Company’s offices in the United States and Canada, and a data center located in the United States. All sales for the three months ended March 31, 2014 and 2013, were in the United States and Canada.

 

Major Customers

 

At March 31, 2014 and December 31, 2013,  three and two customers accounted for 54.8% and 59.8% of the outstanding accounts receivable, respectively.

 

For the three months ended March 31, 2014 and 2013,  two customers accounted for 51.5% and 48.8% of total revenue, respectively.

 

 

NOTE 7 - SUBSEQUENT EVENTS

 

On April 2, 2014, Wireless Ronin entered into an Executive Employment Agreement with John Walpuck, pursuant to which Mr. Walpuck serves as the Company’s Chief Operating Officer and Chief Financial Officer.  The agreement is effective for a one-year term, which automatically renews for additional one-year periods unless either the Company or Mr. Walpuck elects not to extend the employment term.  The agreement provides for an initial annual base salary of $240,000, subject to annual increases but generally not subject to decreases.  Under the agreement, Mr. Walpuck is eligible to participate in performance-based cash bonus or equity award plans for the Company’s senior executives.  Mr. Walpuck will participate in employee benefit plans, policies, programs, perquisites and arrangements to the extent he meets eligibility and other requirements.  The Company filed a Current Report on Form 8-K on April 2, 2014 disclosing the material terms and conditions of the Executive Employment Agreement and related compensation arrangements with Mr. Walpuck.

 

 

On April 15, 2014, the Company filed with the Securities and Exchange Commission a Registration Statement on Form S-4 in connection with the pending merger between the Company and Broadcast International.  As of May 15, 2014, the Form S-4 was not declared effective by the Securities and Exchange Commission.  

 

 

On April 18, 2014, the Company engaged Merriman Capital, Inc. to help us explore strategic alternatives for the Company, specifically including combination transactions (e.g., mergers, consolidations, share exchanges, etc.). In this regard, on May 5, 2014, we entered into a non-binding letter of intent with a private company in our industry and have begun our due-diligence examination of that company.  The private company has similarly begun its own due-diligence examination of our Company.  The letter of intent contains no binding provisions that are material to us, and presently contemplates a combination transaction in which shareholders of the private company would obtain a majority of the Company’s stock through the issuance of newly issued public common stock. In the event we enter into a binding commitment, or a more definitive status emerges from the due-diligence phase, we will provide updated disclosure.

 

The Company has also engaged a broker-dealer to assist the Company in connection with a planned private placement under Section 4(2) of the Securities Act of 1933, as amended.  The securities proposed to be offered in this financing will not be registered under the Securities Act of 1933, as amended, and will be eligible for re-offer or re-sale in the United States absent subsequent registration or the availability of an exemption from such registration requirements.

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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 the Cautionary Statement set forth in our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 23, 2013. 

     

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 the Cautionary Statement set forth in our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 23, 2013 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 quick serve restaurants (QSR), fast casual and managed food services markets), and (3) retail. 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 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.

 

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.

 

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Recent Developments

On March 5, 2014, we entered into a Merger Agreement with 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 the 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.

 

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.  

 

On April 18, 2014, the Company engaged Merriman Capital, Inc. to help us explore strategic alternatives for the Company, specifically including combination transactions (e.g., mergers, consolidations, share exchanges, etc.). In this regard, on May 5, 2014, we entered into a non-binding letter of intent with a private company in our industry and have begun our due-diligence examination of that company.  The private company has similarly begun its own due-diligence examination of our Company.  The letter of intent contains no binding provisions that are material to us, and presently contemplates a combination transaction in which shareholders of the private company would obtain a majority of the Company’s stock through the issuance of newly issued public common stock. In the event we enter into a binding commitment, or a more definitive status emerges from the due-diligence phase, we will provide updated disclosure.

 

The Company has also engaged a registered broker-dealer to assist the Company in connection with a planned private placement under Section 4(2) of the Securities Act of 1933, as amended. The securities proposed to be offered in this financing will not be registered under the Securities Act of 1933, as amended, and will be eligible for re-offer or re-sale in the United States absent subsequent registration or the availability of an exemption from such registration requirements.

 

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 a company pursuant to which we granted the licensee 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.

 

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

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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

 

A discussion of our critical accounting policies was provided in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013.  There were no significant changes to these accounting policies during the three months ended March 31, 2014. 

 

 

 

Results of Operations

 

All dollar amounts reported in Item 2 are in thousands, except per share information.

 

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

 

The following discussions are based on the consolidated balance sheets as March 31, 2014 (unaudited) and March 31, 2013 and statement of Operations as of March 31, 2014 (unaudited) and March 31, 2013 and notes thereto.

 

The tables presented below which compare the Company’s results of operations from one period to another, present the results for each period and the change in those results from one period to another in both dollars and percentage change. The columns present the following:

 

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Sales

 

Sales decreased by $144 or 10.2% in the first quarter of 2014 compared to the first quarter of 2013, primarily reflecting reductions of $90 in hardware, $25 in software, and $30  in recurring monthly maintenance and support project or contract work with certain customers.

 

 

Gross Profit

 

Gross profit margin on a percentage basis increased from 53.0% to 56.5% in the first quarter of 2014 compared to the first quarter of 2013, but gross profit decreased in absolute dollars by $33 during the same period.  Both the increase in gross profit margin and decrease in gross profit are primarily a result of the decrease in sales overall, but in particular the result of the decrease in generally lower profit margin hardware sales by $90 in the first quarter of 2014 compared to the same quarter in 2013.  

 

 

Sales and Marketing Expenses

 

Sales and marketing expenses decreased by $59 in the first quarter of 2014 compared to the first quarter of 2013. The decrease is mainly due to a decrease of $65 in payroll related expenses due to a decreased number of employees in this department, offset by an increase of $11 in certain event related marketing expenses. 

 

 

Research and Development Expenses

 

Research and development expenses decreased by $94 in the first quarter of 2014 compared to the first quarter of 2013. The decrease is primarily due to a decrease in payroll related expenses of $76 in the research and development department, resulting from the reorganization that occurred in August 2013.

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General and Administrative Expenses

 

General and administrative expenses have decreased by $262 in the first quarter of 2014 compared to the first quarter of 2013. The decrease is mainly a result of a decrease of at least $250 in payroll related expenses involving different departments resulting from the reorganization that occurred in August 2013.

 

Depreciation and Amortization Expenses

 

Depreciation decreased by $20 in the first quarter of 2014 compared to the first quarter of 2013 primarily as a result of reduced capital expenditures and certain equipment becoming fully depreciated over the past twelve months.

 

Other Expenses

 

Interest expense increased by $72 in the first quarter of 2014 compared to the same quarter of 2013 as a result of the convertible notes issued to investors in December 2013.

 

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 and the three months ended March 31, 2014 and 2013.  At March 31, 2014, we had cash, cash equivalents and restricted cash of $725 and working capital of $389. The cash used in operating activities for the three months ended March 31, 2014 was $782.  At March 31, 2014, we had no outstanding balance and no borrowing capability on our line of credit with Silicon Valley Bank (See Note 4).

 

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. 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 May 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.

 

In light of our financial condition and potential for continued net losses, we continue to evaluate strategic and financial alternatives, and have engaged Merriman Capital, Inc. to assist us in that process, specifically including combination transactions (e.g., mergers, consolidations, share exchanges, etc.). On May 5, 2014, we entered into a non-binding letter of intent with a private company in our industry and have begun our due-diligence examination of that company.  The private company has similarly begun its own due-diligence examination of our Company.  The letter of intent contains no binding provisions that are material to us, and presently contemplates a combination transaction in which shareholders of the private company would obtain a majority of the Company’s stock through the issuance of newly issued public common stock. In the event we enter into a binding commitment, or a more definitive status emerges from the due-diligence phase, we will provide updated disclosure.

 

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The Company has also engaged a registered broker-dealer to assist the Company in connection with a planned private placement under Section 4(2) of the Securities Act of 1933, as amended. The securities proposed to be offered in this financing will not be registered under the Securities Act of 1933, as amended, and will be eligible for re-offer or re-sale in the United States absent subsequent registration or the availability of an exemption from such registration requirements. While there can be no assurance that any of the foregoing efforts will be successful or resolve our liquidity issues, the Company believes that the private placement will raise sufficient investment capital to bridge the Company to a business combination or restructuring to cash flow breakeven.

 

 

Operating Activities 

 

We do not currently generate positive cash flow. Our operational costs have been greater than sales generated to date. As of March 31, 2014, we had an accumulated deficit of $99,102. The cash flow used in operating activities was $782 and $563 for the three months ended March 31, 2014 and 2013, respectively. The majority of the cash consumed by operations for both periods was attributed to our net losses of $1,083 and $1,412 for the three months ended March 31, 2014 and 2013, respectively.  Included in our net losses were non-cash charges consisting of depreciation, stock compensation expense and amortization of warrants issued for debt issuance costs totaling $212 and $230 for the three months ended March 31, 2014 and 2013, respectively.  Additionally, cash provided by changes in our working capital accounts for both periods totaled $89 and $619 for the three months ended March 31, 2014 and 2013, respectively.

 

Investing Activities

 

Net cash used in investing activities during the three months ended March 31, 2014  was  $27 compared to $20 during the same period in the prior year. The increase in cash used in investing activities was due to fewer purchases of related computer hardware and software purchases during the three months ended March 31, 2014 compared to the same period in the prior year.  We currently do not have any material commitments for capital expenditures, nor do we anticipate any significant expenditures for the remainder of 2014. 

 

Financing Activities 

 

Net cash provided by financing activities during the three months ended March 31, 2014 was $0, compared to $1,391 for the same period in the prior year.  The decrease in this section is due to the total sale of 868 units at a price of $1.80 per unit on the first quarter of 2013, 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 $1,377 in net proceeds as a result of this registered direct offering. 

 

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 12, 2014.  At March 31, 2014, we had no outstanding balance and no borrowing capability on our line of credit with Silicon Valley Bank (See Note 4).

   

To assist us as we assess how to improve our liquidity, increase our capital resources, and consider strategic options, we have engaged a registered broker-dealer to assist the Company in connection with a planned private placement under Section 4(2) of the Securities Act of 1933, as amended.  While there can be no assurance that any such private placement will be successful or resolve our liquidity issues, the Company believes that the private placement will raise sufficient investment capital to bridge the Company to a business combination or restructuring to cash flow breakeven.

 

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 rollout 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. While we have

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downsized our operations to reflect the decrease in 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 or ceasing operations.  

Our capital requirements depend on many factors, including our ability to successfully address our short-term liquidity and capital resource needs, market and sell our products and services, develop new products and services and establish and leverage our strategic partnerships and business alliance relationships. In order to meet our needs, 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 Loan and Security Agreement we currently have with Silicon Valley Bank. 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 May 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, obtain 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.

 

 

Contractual Obligations 

 

We have no material commitments for capital expenditures, and we do not anticipate any significant capital expenditures for the remainder of 2014. 

 

Off-Balance Sheet Arrangements

 

During the three months ended March 31, 2014, we did not engage in any off-balance sheet arrangements set forth in Item 303(a) (4) of Regulation S-K.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

 

As a smaller reporting company, we are not required to provide information required by this Item.

 

Item 4. Controls and Procedures 

 

Evaluation of Disclosure Controls and Procedures 

 

We maintain a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the 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)

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and 15d-15(e)). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of March 31, 2014, our disclosure controls and procedures were effective.

 

Changes in Internal Control Over Financial Reporting 

 

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION 

 

Item 1. Legal Proceedings 

     

We were not party to any material legal proceedings as of May 15, 2014, and there were no such proceedings pending during the period covered by this report. 

 

Item 1A. Risk Factors 

 

As a smaller reporting company, the Company is not required to provide the information required by this Item; however, the discussion of our business and operations should be read together with the Risk Factors set forth in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2014.  Such risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flow, strategies or prospects in a material and adverse manner.

     

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

 

None.

 

Item 3. Defaults Upon Senior Securities 

     

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable. 

 

Item 5. Other Information 

 

None.

 

Item 6. Exhibits 

 

 

 

 

 

 

 

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SIGNATURES

 

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

 

 

 

 

 

 

 

 

 

 

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