Document/ExhibitDescriptionPagesSize 1: SB-2 Registration of Securities of a Small-Business HTML 924K Issuer
47: COVER ¶ Comment-Response or Cover Letter to the SEC HTML 4K
2: EX-3.1 Articles of Incorporation/Organization or By-Laws HTML 31K
3: EX-3.2 Articles of Incorporation/Organization or By-Laws HTML 73K
12: EX-4.10 Form of Note Conversion Agreement HTML 45K
13: EX-4.11 Note Conversion Agreement - Galtere International HTML 43K
Master Fund L.P.
14: EX-4.12 Note Conversion Agreement - Shag LLC HTML 40K
15: EX-4.13 Letter Regarding Note Extension - Barry Butzow HTML 18K
16: EX-4.14 Letter Regarding Note Extension - Jack Norqual HTML 18K
4: EX-4.2 Specimen Form of Common Stock Certificate HTML 25K
5: EX-4.3 Form of Current Warrant to Purchase Common Stock HTML 41K
6: EX-4.4 Form of Previous Warrant to Purchase Common Stock HTML 43K
7: EX-4.5 Form of Convertible Debenture Note HTML 22K
8: EX-4.6 Convertible Debenture Note HTML 31K
9: EX-4.7 Promissory Note - Shag LLC HTML 17K
10: EX-4.8 Promissory Note - Jack Norqual HTML 21K
11: EX-4.9 Promissory Note - Barry Butzow HTML 21K
17: EX-10.1 2006 Equity Incentive Plan HTML 145K
26: EX-10.10 Employment Agreement - John A. Witham HTML 94K
27: EX-10.11 Strategic Partnership Agreement HTML 104K
28: EX-10.12 Factoring Agreement HTML 35K
29: EX-10.13 Lease HTML 78K
30: EX-10.14 Convertible Debenture Purchase Agreement HTML 151K
31: EX-10.15 10% Convertible Debenture HTML 95K
32: EX-10.16 Amended and Restated Convertible Debenture HTML 124K
Purchase Agreement
33: EX-10.17 Amendment to Amended and Restated Convertible HTML 42K
Debenture Purchase Agreement
34: EX-10.18 Guaranty by and Between Stephen E. Jacobs and HTML 19K
Winmark Corporation
35: EX-10.19 Commercial Guaranty - Michael J. Hopkins HTML 49K
18: EX-10.2 2006 Non-Employee Director Stock Option Plan HTML 52K
36: EX-10.20 Commercial Guaranty - Barry Butzow HTML 53K
37: EX-10.21 Commercial Guaranty - Barry Butzow HTML 48K
38: EX-10.22 Lease HTML 106K
39: EX-10.23 Sale and Purchase Agreement HTML 97K
40: EX-10.24 Amendment No. 2 to Amended and Restated HTML 39K
Convertible Debenture
41: EX-10.25 Note Amendment Agreement HTML 26K
42: EX-10.26 Form of Note Amendment Agreement HTML 57K
43: EX-10.27 Form of Option Agreement - Equity Incentive Plan HTML 42K
44: EX-10.28 Employment Agreement - Henry B. May HTML 89K
19: EX-10.3 Form of Loan and Subscription Agreement HTML 117K
20: EX-10.4 Form of 12% Convertible Promissory Notes HTML 46K
21: EX-10.5 Form of Warrant to Purchase Shares of Common Stock HTML 48K
22: EX-10.6 Employment Agreement - Jeffrey C. Mack HTML 90K
23: EX-10.7 Employment Agreement - Christopher F. Ebbert HTML 91K
24: EX-10.8 Employment Agreement - Stephen E. Jacobs HTML 91K
25: EX-10.9 Employment Agreement - Scott W. Koller HTML 92K
45: EX-21 Subsidiaries HTML 12K
46: EX-23.1 Consent of Virchow, Krause & Company, LLP HTML 14K
(Name, Address and Telephone Number for Agent For Service)
Copies to:
Avron L. Gordon, Esq.
Brett D. Anderson, Esq.
Alec C. Sherod, Esq.
Briggs and Morgan, P.A.
2200 IDS Center
80 South Eighth Street Minneapolis, Minnesota55402
(612) 977-8400 (phone)
(612) 977-8650 (fax)
William M. Mower, Esq.
Alan M. Gilbert, Esq.
Maslon Edelman Borman & Brand, LLP
90 South 7th Street, Suite 3300 Minneapolis, Minnesota55402
(612) 672-8200 (phone)
(612) 672-8397 (fax)
Approximate Date of Commencement of Proposed Sale to the
Public: As soon as practicable after
this Registration Statement becomes effective.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering: o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering: o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering: o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following
box: o
CALCULATION OF REGISTRATION FEE
Proposed Maximum
Proposed Maximum
Title of Each Class of
Dollar Amount
Offering Price
Aggregate
Amount of
Securities to be Registered
to be Registered
Per Unit
Offering Price(1)
Registration Fee
Common Stock, $0.01 par value per share
$25,875,000
$5.00
$25,875,000
$2,768.63
(1)
Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(o) of the Securities Act of 1933,
as amended.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not
complete and may be changed. We may not sell these securities
until the registration statement filed with the Securities and
Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer
to buy these securities in any state where the offer or sale is
not permitted.
This is a firm commitment initial public offering of
4,500,000 shares of common stock of Wireless Ronin
Technologies, Inc. Prior to this offering, there has been no
public market for our common stock. We are selling all of the
shares of common stock being offered by means of this
prospectus. The initial public offering price of our common
stock is expected to be between $4.00 and $5.00 per share.
We intend to apply to list our common stock on The Nasdaq
Capital Market under the symbol “RNIN.”
The underwriter has an option to purchase a maximum of 675,000
additional shares of our common stock at the initial public
offering price, less underwriting discounts and commissions, to
cover over-allotments.
Investing in our common stock involves risks. See “Risk
Factors” on page 6.
Underwriting
Proceeds to
Discounts and
Wireless Ronin
Price to Public
Commissions
Technologies
Per Share
$
$
$
Total
$
$
$
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The underwriter expects to deliver the shares of our common
stock on or
about ,
2006.
The underwriter may also purchase up to 675,000 additional
shares of our common stock at the initial offering price less
underwriting discounts and commissions within 45 days from
the date of this prospectus to cover over-allotments.
You should rely only on the information contained in this
document or to which we have referred you. We have not
authorized anyone to provide you with information that is
different. This document may only be used where it is legal to
sell these securities. The information in this document may only
be accurate on the date of this document.
WIRELESS
RONIN®,
RONINCAST®
and RONIN
CAST®
are our registered trademarks. This prospectus also makes
references to trademarks and tradenames that are owned by other
entities.
For investors outside the United States: Neither we nor the
underwriter have done anything that would permit this offering
or the possession or distribution of this prospectus in any
jurisdiction where action for that purpose is required, other
than in the United States. You are required to inform yourselves
about and to observe any restrictions relating to this offering
and the distribution of this prospectus.
The items in the following summary are described in more
detail later in this prospectus. This summary provides an
overview of selected information and does not contain all the
information you should consider. Therefore, you should also read
the more detailed information set out in this prospectus,
including the financial statements. You should read this
prospectus carefully, especially the risks and uncertainties
described under “Risk Factors.” The terms
“Wireless Ronin,”“we” or “us”
refer to Wireless Ronin Technologies, Inc.
Business Summary
General
We provide dynamic digital signage solutions targeting specific
retail and service markets. Through a suite of software
applications marketed as
RoninCast®,
we provide an enterprise-level content delivery system that
manages, schedules and delivers digital content over wireless or
wired networks. Additionally, RoninCast’s flexibility
allows us to develop custom solutions for specific customer
applications.
RoninCast is a digital alternative to static signage that
provides our customers with a dynamic visual marketing system
designed to enhance the way they advertise, market and deliver
their messages to targeted audiences. For example, our
technology can be combined with interactive touch screens to
create new platforms for assisting with product selection and
conveying marketing messages. RoninCast enables us to deliver a
turn-key solution that includes project planning, innovative
design services, network deployment, software training,
equipment, hardware configuration, content development,
implementation, maintenance and 24/7 help desk support.
We have installed digital signage systems in over 200 locations
since the introduction of RoninCast in January 2003. Our
customers include, among others, Best Buy, Coca-Cola, Foxwoods
Casino Resort, Sealy Corporation, Showtickets.com and the
University of Akron. We generate revenues through system sales,
license fees and separate service fees, including consulting,
training, content development and implementation services, as
well as ongoing customer support and maintenance. We currently
market and sell our software and service solutions primarily
through our direct sales force and value added resellers.
Business Strategy
Our objective is to be the premier provider of dynamic digital
signage solutions to customers in our targeted markets. To
achieve this objective, we intend to pursue the following core
strategies:
Focus on Vertical Markets. Our direct sales force focuses
primarily on the following market segments:
•
retail (including Sealy Corporation and Best Buy);
•
hospitality (including Foxwoods Resort Casino);
•
specialized services (including St. Mary’s Duluth
Clinic Health System); and
•
public spaces (including Las Vegas Convention and Visitors
Authority and Minneapolis Convention Center).
We market to companies that deploy
point-of-purchase
(POP) advertising or visual display systems and whose
business model incorporates marketing, advertising, or delivery
of messages. We believe that any businesses promoting a brand or
advertisers seeking to reach consumers at public venues are also
potential customers.
Marketing and Branding Initiatives. Our marketing
initiatives convey our products’ distinguishing and
proprietary features — wireless networking,
centralized content management and custom software solutions.
Leverage Strategic Partnerships and Reseller
Relationships. We seek to establish and leverage
relationships with market participants to integrate
complementary technologies with our solutions. We believe that
strategic partnerships will enable access to emerging new
technologies and standards and increase our market presence.
Outsource Essential Operating Functions. We intend to
outsource certain operating functions such as system
installation, integration and technical field support. In
addition, we contract with manufacturers for items such as
stands, mounts, custom enclosures, monitors and computer
hardware.
Custom Solutions. Although RoninCast is an enterprise
solution designed for an array of standard applications, we also
develop custom solutions in which we retain rights derived from
our development activities.
New Product Development. Developing new products and
technologies is critical to our success. We intend to integrate
our solutions with other enterprise systems such as inventory
control, point-of-sale
(POS) and database applications.
Our Competitive Advantages
Our key competitive advantages are:
•
Patent-Pending Wireless Delivery System — By
utilizing wireless technology, our dynamic digital signage
system can be securely implemented and operated in a variety of
different venues, resulting in lower installation costs.
•
Centralized Content Management Software — Our
enterprise software controls and manages a digital signage
network from one centralized location. Delivery of required
content is assured and recorded, making our customers’
marketing programs easier to implement.
•
Custom Solutions — In many instances, our
customers require customized software solutions. Our sales team
and software engineers tailor solutions that meet our
customers’ needs.
•
Turn-Key Operation — In addition to our
RoninCast software, we provide the necessary hardware,
accessories, deployment/installation support and service to
ensure our customers have all the necessary components for a
successful digital signage solution.
We were incorporated in the State of Minnesota on March 23,2000. Our principal executive office is located at 14700 Martin
Drive, Eden Prairie, Minnesota55344. Our telephone number at
that address is (952) 224-8110. We maintain a website at
www.wirelessronin.com. Our website, and the information
contained therein, is not a part of this prospectus.
Common stock to be outstanding after this offering
7,199,329 shares, including 1,824,961 shares that will
be issued at the closing of this offering upon conversion of
certain of our convertible debentures and notes and
8,333 shares to be issued to the Spirit Lake Tribe in lieu
of the September 30 cash interest payment due on their
convertible debenture.
Use of proceeds
At an assumed initial public offering price of $4.50 per
share, we expect the net proceeds to us from this offering will
be approximately $17.0 million, or approximately
$19.7 million if the underwriter exercises its
over-allotment option in full. We expect to use the net proceeds
from this offering as follows:
• approximately $7.6 million to repay
outstanding debt and accrued interest; and
• the remainder for working capital and general
corporate purposes. See “Use of Proceeds” for more
information.
Risk factors
You should read the “Risk Factors” section of this
prospectus beginning on page 6 for a discussion of factors
to consider carefully before deciding to invest in shares of our
common stock.
Proposed Nasdaq Capital Market symbol
RNIN
Except as otherwise indicated, all information in this
prospectus:
•
gives effect to a one-for-six reverse stock split of our common
stock completed in April 2006;
•
gives effect to the two-for-three reverse stock split of our
common stock completed in August 2006;
•
assumes no exercise of the underwriter’s over-allotment
option or underwriter’s warrant; and
•
assumes 1,824,961 shares of common stock will be issued at
the closing of this offering upon conversion of an aggregate
principal amount of $5,029,973 of our convertible debentures and
notes (assuming an initial public offering price of
$4.50 per share).
In this prospectus, the number of shares of common stock
outstanding after this offering is based on the number of shares
outstanding as of August 28, 2006, and excludes:
•
2,160,748 shares of common stock issuable upon exercise of
outstanding warrants;
•
450,000 shares of common stock issuable upon exercise of a
warrant to be issued to the underwriter of this offering at a
per share exercise price of 120% of the initial public offering
price; and
•
1,510,000 shares of common stock reserved for future
issuance pursuant to options under our equity incentive plan and
non-employee director stock option plan, of which 493,333 have
been issued subject to shareholder approval.
Our $3,000,000 convertible debenture issued to the Spirit Lake
Tribe is presently convertible into 30 percent of our
issued and outstanding shares of common stock determined on a
fully diluted basis. In February and July 2006, the debenture
was amended to provide for automatic conversion of the
debenture, simultaneous with the closing of this offering, into
30 percent of our issued and outstanding shares on a fully
diluted basis, but determined without giving effect to shares
issued and issuable: (i) in this offering, including shares
issuable upon exercise of the warrant to be issued to the
underwriter or (ii) upon conversion of the
12% convertible bridge notes we sold in March, July and
August 2006 and exercise of warrants issued to the purchasers of
such notes. Based on our current capitalization, we will issue
1,261,081 shares of common stock to the Spirit Lake Tribe
at the closing of this offering upon conversion of this
convertible debenture.
In February and March 2006, we entered into agreements with the
holders of $2,029,973 of our outstanding convertible notes to
provide, among other things, that the outstanding principal
balances (plus, at the option of each holder, interest accrued
through the closing of this offering) will be automatically
converted into shares of our common stock simultaneously with
the closing of this offering at a per share amount equal to the
lower of: (i) $9.00 or (ii) 80% of the initial public
offering price. The information contained in this prospectus
assumes that accrued interest on these convertible notes will be
paid in cash upon the closing of this offering out of the
proceeds therefrom.
In March 2006, we sold to a group of accredited investors
12% convertible bridge notes in a principal amount of
$2,775,000, together with warrants to purchase an aggregate of
555,000 shares of our common stock. The notes mature on the
earlier of 30 days following completion of this offering or
March 10, 2007. The notes are convertible and the warrants
exercisable by the holders thereof at $7.20 per share or,
following this offering, at 80% of the initial public offering
price per share. The holders of these notes or warrants are not
obligated to convert or exercise them.
In July and August 2006 we sold to a group of accredited
investors $2,974,031 aggregate principal amount of additional
12% convertible bridge notes, together with warrants to purchase
594,806 shares of our common stock to purchasers of the
bridge notes, on the same terms as the notes and warrants issued
in the March 2006 offering.
You should read the summary financial data below in conjunction
with our financial statements and the related notes and with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in
this prospectus. The statements of operations data for the years
ended December 31, 2005 and 2004 and the balance sheet data
as of December 31, 2005 and 2004 are derived from our
audited financial statements that are included elsewhere in this
prospectus.
adjusted for the issuance of $2,974,031 principal amount of
12% convertible bridge notes, 8,333 shares of common
stock issued to the Spirit Lake Tribe in lieu of cash interest
payable under its convertible debenture; and
•
as further adjusted on a pro forma basis to give effect to:
•
the sale by us of 4,500,000 shares of common stock at an
assumed initial public offering price of $4.50 per share in
this offering and the receipt of the estimated proceeds from
this offering, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, of
$17,038,000;
•
the conversion of an aggregate of $5,029,973 principal amount of
debentures and notes upon the completion of this offering into
1,824,961 shares of common stock; and
•
payment of certain outstanding indebtedness and accrued interest
totaling $7,551,665.
Investing in our common stock involves a high degree of risk.
You should carefully consider the risks described below before
participating in this offering. You should also refer to the
other information in this prospectus, including our financial
statements and the related notes. If any of the following risks
actually occurs, our business, financial condition, operating
results or cash flows could be materially harmed. As a result,
the trading price of our common stock could decline, and you
might lose all or part of your investment.
Risks Related to Our Business
Our operations and business are subject to the risks of an
early stage company with limited revenue and a history of
operating losses. The report of our independent registered
public accounting firm included in this prospectus contains an
explanatory paragraph expressing substantial doubt about our
ability to continue as a going concern. We have incurred losses
since inception, and we have had only nominal revenue. We cannot
assure you that we will become or remain profitable.
Since inception, we have had limited revenue from the sale of
our products and services, and we have had losses. We had net
losses of $4,789,925 and $3,339,370, respectively, for the years
ended December 31, 2005 and 2004 and $4,158,294 for the six
months ended June 30, 2006. As of June 30, 2006, we
had an accumulated deficit of $22,804,270. We expect to increase
our spending significantly as we continue to expand our
infrastructure. We need the proceeds from this offering to
expand our sales and marketing efforts and continue research and
development. The report of our independent registered public
accounting firm related to our financial statements as of and
for the years ended December 31, 2004 and 2005 contains an
explanatory paragraph expressing substantial doubt about our
ability to continue as a going concern.
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
because of the significant uncertainties regarding our ability
to generate revenues. 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. Although
these assumptions are based on the best estimates of management,
we cannot assure you that our assessments regarding market size,
market share, or market acceptance of our services or a variety
of other factors will be correct. Our future success will depend
upon many factors, including factors which may be beyond our
control or which cannot be predicted at this time.
Our success depends on our RoninCast system 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 RoninCast and our other products and services
among our prospective customers. Even if we demonstrate the
effectiveness of our solutions and our business model, our
prospective customers may still not use our solutions for a
number of other reasons, including preference for static
signage, unfamiliarity with our technology and perceived lack of
reliability. We believe that the acceptance of RoninCast and our
other products and services by our prospective customers will
depend on the following factors:
•
our ability to demonstrate RoninCast’s economic and other
benefits;
•
our customers becoming comfortable with using RoninCast; and
•
the reliability of the software and hardware comprising
RoninCast and our other products.
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. 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.
Errors or defects in our products could result in the rejection
of our products, damage to our reputation, lost revenues,
diverted development resources and increased customer service
and support costs and warranty claims. In addition, some
undetected errors or defects may only become apparent as new
functions are added to our products. Delays, costs and damage to
our reputation due to product defects could harm our business.
Our prospective customers often take a long time to
evaluate our products, with this lengthy and variable sales
cycle making it difficult to predict our operating
results.
It is difficult for us to forecast the timing and recognition of
revenues from sales of our products because our prospective
customers often take significant time evaluating our products
before purchasing them. The period between initial customer
contact and a purchase by a customer may be more than one year.
During the evaluation period, prospective customers may decide
not to purchase or may scale down proposed orders of our
products for various reasons, including:
•
reduced need to upgrade existing visual marketing systems;
•
introduction of products by our competitors;
•
lower prices offered by our competitors; and
•
changes in budgets and purchasing priorities.
Our prospective customers routinely require education regarding
the use and benefit of our products. This may also lead to
delays in receiving customers’ orders.
While we anticipate that, based on our current expense
levels, the net proceeds from this offering will be adequate to
fund our operations through 2007, we may continue to require
significant capital in the future.
Based on our current expense levels, we anticipate that the net
proceeds from this offering will be adequate to fund our
operations through 2007. Our future capital requirements,
however, will depend on many factors, including our ability to
successfully market and sell our products, develop new products
and establish and leverage our strategic partnerships and
reseller relationships. In order to meet our needs beyond 2007,
we may be required to raise additional funding through public or
private financings, including equity financings. Any additional
equity financings may be dilutive to shareholders, and debt
financing, if available, may involve restrictive covenants.
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. If adequate
funds are not available, our plans to expand our business may be
adversely affected and we could be required to curtail our
activities significantly.
We depend on third party manufacturers, suppliers and
service providers.
We rely on third parties to manufacture and supply parts and
components for our products and 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.
Although we have the ability to add new manufacturers, suppliers
and service providers or replace existing ones, 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 meet our
customers’ demands and harm our business.
Reductions in hardware costs could adversely affect our
revenues.
Although we believe reductions in hardware costs will result in
demand growth in our industry, our product pricing includes a
standard percentage markup over our cost of product components,
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, in the absence of expected growth,
reductions in such hardware costs could potentially reduce our
revenues.
There are risks related to our need to obtain, and
reliance upon, strategic partners and resellers.
We currently sell most of our products through an internal sales
force. We anticipate that strategic partners and resellers will
become a larger part of our sales strategy. We may not, however,
be successful in forming relationships with qualified partners
and resellers. If we fail to attract qualified partners and
resellers, we may not be able to expand our sales network, which
may have an adverse effect on our ability to generate revenues.
Our reliance on partners and resellers involves several risks,
including the following:
•
we may not be able to adequately train our partners and
resellers to sell and service our products;
•
they may emphasize competitors’ products or decline to
carry our products; and
•
channel conflict may arise between other third parties and/or
our internal sales staff.
Our industry is characterized by frequent technological
changes, and if we are unable to adapt our products and develop
new products to keep up with these rapid changes, we may not be
able to obtain or maintain market share.
The market for our products is characterized by rapidly changing
technology, evolving industry standards, changes in customer
needs, heavy competition and frequent new product introductions.
If we fail to develop new products or modify or improve existing
products in response to these changes in technology, customer
demands or industry standards, our products could become less
competitive or obsolete.
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 or enhancing
existing products in a timely and cost effective manner. These
new technologies or enhancements may not achieve market
acceptance. Our pursuit of necessary technology may require
substantial time and expense. We may need to license new
technologies to respond to technological change. These licenses
may not be available to us on terms that we can accept. Finally,
we may not succeed in adapting our products to new technologies
as they emerge.
Our future success depends on key personnel and our
ability to attract and retain additional personnel.
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. Although we
provide compensation packages that include incentives and other
employee benefits, we may in the future 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.
Our ability to succeed 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. No U.S. or international patents have been
granted to us. We have applied for three U.S. patents, but
we cannot assure you that they 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. We have
been granted trademarks, but 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 police 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 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.
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. Our industry is characterized by
uncertain and conflicting intellectual property claims and
frequent intellectual property litigation, especially regarding
patent 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 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. We cannot assure you that we would
prevail in litigation given the complex technical issues and
inherent uncertainties in intellectual property litigation. If
the litigation resulted in an adverse ruling, we could be
required to:
•
pay substantial damages;
•
cease the manufacture, use or sale of infringing products;
•
discontinue the use of certain technology; or
•
obtain a license under the intellectual property rights of the
third party claiming infringement, which license may not be
available on reasonable terms, or at all.
MediaTile Company USA has informed us that it filed a patent
application in 2004 related to the use of cellular technology
for delivery of digital content. We currently use cellular
technology to deliver digital content on a limited basis. While
MediaTile has not alleged that our products infringe its rights,
they may do so in the future. For further information, please
review “Business — Intellectual Property.”
If we are unable to successfully implement security
measures protecting our customers’ intellectual property
and other information, our business may be adversely
affected.
It is possible that the RoninCast system could be subject to
security risks once it is deployed in the field. To reduce this
risk, we have implemented security measures throughout RoninCast
to protect our system and our customers’ intellectual
property and information delivered by RoninCast. If these
security measures fail, unauthorized access to our
customers’ content could adversely affect our business and
financial condition.
We could have liability arising out of our previous sales
of unregistered securities.
Since our inception, we have financed our development and
operations from the proceeds of the sale to accredited investors
of debt and equity securities. These securities were not
registered under federal or state securities laws because we
believed such sales were exempt under Section 4(2) of the
Securities Act of 1933, as amended (the “Act”) and
under Regulation D under the Act. In addition, we issued
stock purchase warrants to independent contractors and
associates as compensation or as incentives for future
performance. We have received no claim that such sales were in
violation of securities registration requirements under such
laws, but should a claim be made, we would have the burden of
demonstrating that sales were exempt from such registration
requirements. In addition, it is possible that a purchaser of
our securities could claim that disclosures to them in
connection with such sales were inadequate, creating potential
liability under the anti-fraud provisions of federal and state
securities or other laws. Should any such claims arise, we
intend to vigorously defend against them, but can give no
assurance that an investor in such an action would not prevail.
Claims under such laws could result in actions for damages,
rescission, interest on amounts invested and attorneys’
fees and costs. Depending upon the magnitude of a judgment
against us in any such actions, our financial condition and
prospects could be materially and adversely affected.
We compete with other companies that have more resources,
which may put us at a competitive disadvantage.
If we are not able to compete effectively with existing or new
competitors, we may lose our competitive position, which may
result in fewer customer orders and loss of market share or
which may require us to lower our prices, reducing our profit
margins.
The market for digital signage software is highly competitive
and we expect competition to increase in the future. Some of our
competitors or potential competitors 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 introductions or
enhancements by the competition could reduce sales and the
market acceptance of our products, cause intense price
competition or make our products obsolete. To be competitive, we
must continue to invest significant resources in research and
development, sales and marketing and customer support. We cannot
be sure that we will have sufficient resources to make these
investments or that we will be able to make the technological
advances necessary to be competitive. 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
seriously harm our business.
As a result of becoming a public company, we must
implement additional finance and accounting systems, procedures
and controls in order to satisfy such requirements, which will
increase our costs and divert management’s time and
attention.
As a public company, we will incur significant legal, accounting
and other expenses that we did not incur as a private company,
including costs associated with public company reporting
requirements and corporate governance requirements, including
requirements under the Sarbanes-Oxley Act of 2002, as well as
new rules implemented by the Securities and Exchange Commission
and Nasdaq.
As an example of reporting requirements, we are evaluating our
internal control systems in order to allow management to report
on, and our independent registered public accounting firm to
attest to, our internal control over financing reporting, as
required by Section 404 of the Sarbanes-Oxley Act of 2002.
As a company with limited capital and human resources, we
anticipate that more of management’s time and attention
will be diverted from our business to ensure compliance with
these regulatory requirements than would be the case with a
company that has established controls and procedures. This
diversion of management’s time and attention could have an
adverse effect on our business, financial condition and results
of operations.
In the event we identify significant deficiencies or material
weaknesses in our internal control over financial reporting that
we cannot remediate in a timely manner, or if we are unable to
receive a positive attestation from our independent registered
public accounting firm with respect to our internal control over
financial reporting, investors and others may lose confidence in
the reliability of our financial statements and the trading
price of our common stock and ability to obtain any necessary
equity or debt financing could suffer. In addition, in the event
that our independent registered public accounting firm is unable
to rely on our internal control over financial reporting in
connection with its audit of our financial statements, and in
the further event that it is unable to devise alternative
procedures in order to satisfy itself as to the material
accuracy of our financial statements, and related disclosures,
it is possible that we would be unable to file our annual report
with the Securities and Exchange Commission, which could also
adversely affect the trading price of our common stock and our
ability to secure any necessary additional financing, and could
result in the delisting of our common stock from The Nasdaq
Capital Market and the ineligibility of our common stock for
quotation on the Over-the Counter Bulletin Board. Due to
the lack of an active trading market, the liquidity of our
common stock would be severely limited and the market price of
our common stock would likely decline significantly.
In addition, the new rules could make it more difficult or more
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.
Our management has broad discretion over the use of
proceeds from this offering and may apply the proceeds in ways
that do not improve our operating results or increase the value
of your investment.
Our management will have significant discretion in the use of a
substantial portion of the proceeds of this offering.
Accordingly, our investors will not have the opportunity to
evaluate the economic, financial and other relevant information
that we may consider in the application of the net proceeds.
Therefore, it is possible that we may allocate the proceeds in
this offering in ways that fail to improve our operating
results, increase the value of your investment or otherwise
maximize the return on these proceeds.
If we fail to comply with requirements for continued
listing after this offering, our common stock could be delisted
from The Nasdaq Capital Market, which could hinder your ability
to obtain timely quotations on the price of our common stock, or
dispose of our common stock in the secondary market.
Although we have applied to list our common stock on The Nasdaq
Capital Market, we cannot guarantee that once our stock is
listed that an active public market for our common stock will
develop or continue to exist. In connection with our listing on
The Nasdaq Capital Market, we must register at least one bid for
our common stock at a price that equals or exceeds
$4.00 per share on the day our common stock is first quoted
on The Nasdaq Capital Market. Thereafter, our common stock must
sustain a minimum bid price of at least $1.00 per share and
we must satisfy the other requirements for continued listing on
The Nasdaq Capital Market. In the event our common stock is
delisted from The Nasdaq Capital Market, trading in our common
stock could thereafter be conducted in the
over-the-counter
markets in the so-called pink sheets or the National Association
of Securities Dealer’s OTC Bulletin Board. In such
event, the liquidity of our common stock would likely be
impaired, not only in the number of shares which could be bought
and sold, but also through delays in the timing of the
transactions, and there would likely be a reduction in the
coverage of our company by securities analysts and the news
media, thereby resulting in lower prices for our common stock
than might otherwise prevail.
We cannot assure you that a market will develop for our
common stock or what the market price of our common stock will
be. The market price of our stock may be subject to wide
fluctuations because our stock has not been publicly traded
before this offering.
The initial public offering price for our common stock will be
arbitrarily determined through our negotiations with the
underwriter and may not bear any relationship to the market
price at which it will trade after this offering. Before this
offering, there was no public trading market for our common
stock, and we cannot assure you that one will develop or be
sustained after this offering. If a market does not develop or
is not sustained, it may be difficult for you to sell your
shares of common stock at an attractive price or at all. We
cannot predict the prices at which our common stock will trade.
It is possible that in some future quarter our operating results
may be below the expectations of financial market analysts and
investors and, as a result of these and other factors, the price
of our common stock may fall.
The price of our common stock after this offering may be higher
or lower than the price you pay, depending on many factors, some
of which are beyond our control and may not be related to our
operating performance. These fluctuations could cause you to
lose part or all of your investment in our shares of common
stock. Those factors that could cause fluctuations include, but
are not limited to, the following:
•
price and volume fluctuations in the overall stock market from
time to time;
•
significant volatility in the market price and trading volume of
companies in our industry;
•
actual or anticipated changes in our earnings or fluctuations in
our operating results or in the expectations of financial market
analysts;
•
investor perceptions of our industry, in general, and our
company, in particular;
•
the operating and stock performance of comparable companies;
•
general economic conditions and trends;
•
major catastrophic events;
•
loss of external funding sources;
•
sales of large blocks of our stock or sales by insiders; or
If you purchase shares of common stock sold in this
offering, you will experience significant and immediate
dilution.
If you purchase shares of our common stock in this offering, you
will experience significant and immediate dilution because the
price that you pay will be substantially greater than the net
tangible book value per share of the shares you acquire. The
dilution will be $3.00 per share in the net tangible book
value per share of common stock from an assumed $4.50 initial
public offering price. This dilution is due in large part to our
significant accumulated losses since inception. You will
experience additional dilution upon the exercise of options or
warrants to purchase common stock and the conversion of
convertible debt into common stock.
Our directors, executive officers and the Spirit Lake
Tribe together may exercise significant control over our
company.
Our directors, executive officers and the Spirit Lake Tribe will
beneficially own approximately 23.4% of the outstanding shares
of our common stock after this offering. As a result, these
shareholders, if acting together, may be able to influence or
control matters requiring approval by our shareholders,
including the election of directors and the approval of mergers
or other extraordinary transactions. They may also have
interests that differ from yours and may vote in a way with
which you disagree and which may be adverse to your interests.
The concentration of ownership may have the effect of delaying,
preventing or deterring a change of control of our company,
could deprive our shareholders of an opportunity to receive a
premium for their common stock as part of a sale of our company
and might ultimately affect the market price of our common stock.
Our articles of incorporation, bylaws and Minnesota law
may discourage takeovers and business combinations that our
shareholders might consider 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 16,666,666 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 your shares. 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 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 the 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 your sole
source of gain for the foreseeable future.
A substantial number of shares will be eligible for future
sale by our current investors and the sale of those shares could
adversely affect our stock price.
Based on shares outstanding as of August 28, 2006, upon
completion of this offering, we will have 7,199,329 shares
of common stock outstanding. Following this offering, our shares
offered hereby will be
freely tradable, without restriction, in the public market and
approximately 104,402 shares will be eligible for sale in
the public market pursuant to Rule 144 under the Securities
Act of 1933, as amended (the “Securities Act”). Ninety
days from the date of this prospectus approximately
108,922 shares of our common stock will be eligible for
sale in the public market pursuant to Rule 144. Immediately
following the sale of 4,500,000 shares of our common stock
in this offering, our current investors will own approximately
37% of the outstanding shares of our common stock.
Our directors, executive officers and certain other shareholders
have agreed not to sell, offer to sell, contract to sell,
pledge, hypothecate, grant any option to purchase, transfer or
otherwise dispose of, grant any rights with respect to, or file
or participate in the filing of a registration statement with
the Securities and Exchange Commission, or establish or increase
a put equivalent position or liquidate or decrease a call
equivalent position within the meaning of Section 16 of the
Exchange Act, or be the subject of any hedging, short sale,
derivative or other transaction that is designed to, or
reasonably expected to lead to, or result in, the effective
economic disposition of, or publicly announce his, her or its
intention to do any of the foregoing with respect to, any shares
of common stock, or any securities convertible into, or
exercisable or exchangeable for, any shares of common stock for
a period of 360 days, or 180 days in the case of
shareholders other than our directors and executive officers,
after the date of the final prospectus related to this offering,
without the prior written consent of the underwriter.
If our existing shareholders sell, or indicate an intention to
sell, substantial amounts of our common stock in the public
market after the contractual
lock-up and other legal
restrictions on resale discussed in this prospectus lapse, the
trading price of our common stock could be adversely effected.
Subject to volume limitations under Rule 144, 806,270
shares of our common stock will be eligible for sale in the
public market upon the 180 day expiration of our
shareholder lockup agreements and 1,659,735 additional shares
will become eligible for sale upon the 360 day expiration
of our lockup agreements with our directors and executive
officers. In addition, 1,000,000 shares reserved for future
issuance under the 2006 Equity Incentive Plan and
510,000 shares reserved for future issuance under the 2006
Non-Employee Director Stock Option Plan may become eligible for
sale in the public market to the extent permitted by the
provisions of various award agreements, the
lock-up agreements and
Rules 144 and 701 under the Securities Act.
We currently have outstanding warrants that entitle the holders
thereof to purchase 2,160,748 shares of our common stock. In
addition, upon the closing of this offering, we will grant to
the underwriter a warrant to purchase up to 450,000 shares
of our common stock at a per share exercise price equal to 120%
of the initial public offering price, which warrant will become
exercisable on the one year anniversary of the date of this
prospectus. If these additional shares are sold, or if it is
perceived that they will be sold, in the public market, the
trading price of our common stock could be adversely affected.
This prospectus contains forward-looking statements. The
forward-looking statements are contained principally in the
sections entitled “Prospectus Summary,”“Risk
Factors,”“Use of Proceeds,”“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and
“Business.” These statements involve known and unknown
risks, uncertainties and other factors which may cause our
actual results, performance or achievements to be materially
different from any future results, performances or achievements
expressed or implied by the forward-looking statements.
Forward-looking statements include statements about:
•
our estimates of future expenses, revenue and profitability;
•
trends affecting our financial condition and results of
operations;
•
our ability to obtain customer orders;
•
the availability and terms of additional capital;
•
our ability to develop new products;
•
our dependence on key suppliers, manufacturers and strategic
partners;
•
industry trends and the competitive environment;
•
the impact of losing one or more senior executive or failing to
attract additional key personnel; and
•
other factors referenced in this prospectus, including those set
forth under the caption “Risk Factors.”
In some cases, you can identify forward-looking statements by
terms such as “anticipates,”“believes,”“could,”“estimates,”“expects,”“intends,”“may,”“plans,”“potential,”“predicts,”“projects,”“should,”“will,”“would,” and similar expressions intended to identify
forward-looking statements. Forward-looking statements reflect
our current views with respect to future events, are based on
assumptions and are subject to risks and uncertainties. We
discuss many of these risks in this prospectus in greater detail
under the heading “Risk Factors.” Given these
uncertainties, you should not attribute undue certainty to these
forward-looking statements. Also, forward-looking statements
represent our estimates and assumptions only as of the date of
this prospectus. You should read this prospectus and the
documents that we reference in this prospectus and have filed as
exhibits to the registration statement, of which this prospectus
is a part, completely and with the understanding that our actual
future results may be materially different from what we expect.
Except as required by law, we assume no obligation to update any
forward-looking statements publicly, or to update the reasons
actual results could differ materially from those anticipated in
any forward-looking statements, even if new information becomes
available in the future.
The net proceeds from the sale of the 4,500,000 shares of
common stock offered by us are estimated to be approximately
$17.0 million, after deducting the underwriting discount
and estimated offering expenses and assuming an initial public
offering price of $4.50, or approximately $19.7 million if
the over-allotment option is exercised by the underwriter in
full.
At the completion of this offering we anticipate repaying
principal debt and note obligations of approximately
$1.0 million, excluding the promissory notes discussed in
the next paragraph. These obligations include $750,000 accruing
interest at an annual rate of 1.5% over the current prime rate
with maturity dates of November 2006 and January 2007, $125,671
accruing interest at an annual rate of 10% with a maturity date
of December 2006, $72,483 accruing interest at an annual rate of
8% with a maturity date of January 2008, and $13,750 accruing
interest at an annual rate of 10% with a maturity date of
December 2009. The proceeds from this debt being repaid were
used for working capital and for general corporate purposes.
In addition to the use of proceeds set forth above we anticipate
repaying our outstanding 12% convertible bridge notes sold
in March, July and August 2006 in the principal amount of
$5.7 million. This assumes the holders of such notes do not
elect to convert the principal and accrued interest into shares
of our common stock. These notes mature on the earlier of
30 days following completion of this offering or
March 10, 2007. To the extent the March, July and August
2006 bridge notes are converted, we will not be required to use
the proceeds of this offering to retire them and such funds will
be available for working capital and general corporate purposes,
including payment of associate and management compensation. We
will also be repaying $840,730 of accrued interest on our
outstanding debt, including $285,379 of accrued interest on the
March, July and August 2006 bridge notes, using proceeds from
this offering. The remainder of the net proceeds of this
offering of approximately $9.5 million will be used for
working capital and general corporate purposes, including
payments in the aggregate amount of $80,000 in management
compensation due upon the completion of this offering.
As of the date of this prospectus, we cannot predict with
certainty all of the particular uses for the net proceeds of
this offering or the amounts that we will actually spend on the
uses set forth above. The amount and timing of actual
expenditures may vary significantly depending on a number of
factors, such as the availability of debt financing on terms
advantageous to us, the pace of our growth in existing markets,
opportunities for expansion into new markets through acquisition
or otherwise and the amount of cash otherwise used by
operations. Accordingly, our management will have significant
flexibility and discretion in applying the net proceeds of this
offering. Until we use the proceeds for a particular purpose, we
plan to invest the net proceeds of this offering generally in
short-term, investment-grade instruments, interest-bearing
securities or direct or guaranteed obligations of the United
States, but we cannot assure you that these investments will
yield a favorable return.
C:
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common
stock. We currently intend to retain all future earnings for the
operation and expansion of our business and do not anticipate
declaring or paying any cash dividends on our common stock in
the foreseeable future. The payment of any 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, outstanding indebtedness
and other factors deemed relevant by our board.
The following table sets forth our capitalization as of
June 30, 2006, on an actual basis and as:
•
adjusted for the issuance of $2,974,031 principal amount of
12% convertible bridge notes, 8,333 shares of common
stock issued to the Spirit Lake Tribe in lieu of cash interest
payable under its convertible debenture; and
•
further adjusted on a pro forma basis to give effect to:
•
the sale by us of 4,500,000 shares of common stock at an
assumed initial public offering price of $4.50 per share in
this offering and the receipt of the estimated proceeds from
this offering, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, of
$17,038,000;
•
the conversion of an aggregate of $5,029,973 principal amount of
debentures and notes upon the completion of this offering into
1,824,961 shares of common stock; and
•
the repayment of indebtedness, including principal and accrued
interest, totaling $7,551,665.
You should read the information below in conjunction with our
financial statements and the related notes and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in
this prospectus.
Current portion of notes payable-related parties(1)
4,036,990
4,036,990
Current portion of capital lease obligation
44,701
44,701
44,701
6,933,950
7,248,416
44,701
Notes payable, net of current portion
824,414
824,414
0
(2)
Notes payable, net of current portion-related parties
697,300
697,300
Capital lease obligations, net of current portion
105,687
105,687
105,687
Shareholders’ equity:
Undesignated preferred stock; authorized 16,666,666 shares;
no shares issued and outstanding
0
0
0
Common stock, $0.01 par value; authorized —
50,000,000 shares; issued and outstanding —
846,035 shares
8,460
8,743
71,993
(3)
Additional paid-in capital
13,914,854
15,848,313
41,391,493
Accumulated deficit
(22,804,270
)
(22,985,347
)
(30,642,642
)
Total shareholders’ equity
(8,880,956
)
(7,128,291
)
10,820,844
Total capitalization
$
(7,253,555
)
$
(5,500,890
)
$
10,926,531
(1)
Includes debt discount resulting from a reduction in the face
value of the notes by the value of equity compensation
associated with the notes. Actual debt discount for the current
portion of notes payable and current portion of notes
payable-related parties was $1,156,736 and $178,804,
respectively. As adjusted to reflect the financings
after June 30, 2006, such amounts were $2,950,177 and
$178,804 respectively.
(2)
In addition to our 12% convertible bridge notes issued in
March, July and August 2006 and the convertible debenture issued
to the Spirit Lake Tribe, we have issued an aggregate of
$2,029,973
principal amount of convertible notes, convertible at the option
of the holders thereof into shares of our common stock. Except
for the notes issued in March, July and August 2006, all of
these convertible debentures and notes will be automatically
converted into shares of our common stock simultaneously with
the closing of this offering. The $3,000,000 convertible
debenture we issued to the Spirit Lake Tribe is convertible into
30% of our issued and outstanding shares of common stock
determined on a fully diluted basis, without giving effect to
shares issued and issuable in this offering including shares
issuable upon exercise of the warrant to the underwriter of this
offering or upon conversion of $5,749,031 principal amount of
12% convertible bridge notes and warrants issued in March,
July and August 2006.
With respect to the remaining $2,029,973 principal amount of
convertible notes, such conversion will be effected at a per
share amount equal to the lower of: (i) $9.00 or
(ii) 80% of the price per share in this offering. If a
closing of this offering has not occurred on or before
November 30, 2006, the convertible securities will be
convertible into shares of our common stock in accordance with
their current terms. Accrued interest will be payable to the
holders in cash (unless converted into shares of common stock at
the option of the holder) at the closing of this offering, or on
November 30, 2006, if a closing of our public offering has
not occurred on or before that date. Outstanding principal
payment obligations on the convertible securities which, by
their present terms, have matured or will mature prior to
November 30, 2006, have, with the exception of $200,000
principal amount of notes which were exchanged for the August
2006 12% convertible bridge notes, been extended to
November 30, 2006, subject to the mandatory and optional
conversion features described above. In addition, holders of the
convertible securities will be entitled to have the shares
issuable upon conversion of their convertible securities (the
“Registerable Securities”) included in a registration
statement which must be filed by us within 60 days
following the closing of this offering. The Registerable
Securities are subject to a
180-day (12 months
in the case Registerable Securities held by our directors and
officers) lock-up
effective upon the closing of this offering.
(3)
Assumes no exercise of: (i) warrants to purchase up to an
aggregate of 1,010,942 shares of our common stock granted
to directors, executive officers, key associates, holders of
convertible securities and other investors, (ii) options to
purchase 493,333 shares of our common stock issued to certain of
our directors and executive officers subject to shareholder
approval, (iii) warrants to
purchase 1,149,806 shares of our common stock held by
the purchasers of the 12% convertible bridge notes we
issued in March, July and August 2006, or (iv) warrants
issued to the underwriter of this offering to purchase up to an
aggregate of 450,000 shares of our common stock.
If you invest in our common stock, your interest will be diluted
to the extent of the difference between the initial offering
price per share of our common stock and our net tangible book
value as of this offering. Our net tangible book value per share
is equal to our total tangible assets (total assets less
intangible assets) less total liabilities, divided by the number
of shares of our outstanding common stock. As of June 30,2006, we had a net tangible book value of ($9,334,933), or
($11.03) per share of common stock. Our pro forma net
tangible book value as of June 30, 2006 was approximately
($7,947,297), or ($9.09) per share of common stock. Pro
forma net tangible book value per share represents the amount of
our total tangible assets less our total liabilities, divided by
the pro forma number of shares of common stock outstanding as of
June 30, 2006. After giving effect to the conversion of an
aggregate of $5,029,973 principal amount of outstanding
convertible debentures and notes into 1,824,961 shares of
common stock, we had a net tangible book value of ($6,217,156),
or ($2.30) per share of common stock.
Dilution in pro forma net tangible book value per share
represents the difference between the amount per share paid by
purchasers of shares of common stock in this offering and the
pro forma net tangible book value per share of common stock
immediately after the completion of this offering. After giving
effect to our sale of 4,500,000 shares of common stock in
this offering at an assumed initial public offering price of
$4.50 per share and after deducting estimated underwriting
discounts and commissions and offering expenses payable by us,
our adjusted pro forma net tangible book value as of
June 30, 2006 would have been $10,820,844, or
$1.50 per share. This amount represents an immediate
increase in pro forma net tangible book value of $3.80 per
share to our existing investors and an immediate dilution in pro
forma net tangible book value of $3.00 per share (or 67% of
the initial offering price per share) to new investors. The
following table illustrates this per share dilution:
Pro forma increase in net tangible book value per share as of
June 30, 2006, 2005
1.94
Pro forma increase in tangible book value attributable to
conversion of convertible notes and convertible debentures
6.79
Increase in pro forma net tangible book value per share
attributable to new investors
3.80
Pro forma as adjusted net tangible book value per share after
this offering
1.50
Dilution per share to new investors
$
3.00
The following table sets forth, on a pro forma basis as of
June 30, 2006, the total number of shares of common stock
issued by us, the total consideration paid to us and the average
price per share paid by existing investors and by new investors
purchasing shares in this offering. We have assumed an initial
public offering price of $4.50 per share and have not
deducted estimated underwriting discounts and commissions and
offering expenses payable by us. The data gives effect to the
conversion into common stock of all outstanding shares of our
convertible debentures and notes.
Shares Purchased
Total Consideration
Average Price Per
Number
Percent
Amount
Percent
Share
Existing investors(1)
2,699,329
37
%
$
22,637,320
53
%
$
8.39
New investors
4,500,000
63
%
20,250,000
47
%
$
4.50
Total
7,199,329
100
%
$
42,887,320
100
%
$
5.99
(1)
Includes holders of $5,029,973 of convertible debentures and
notes that will convert into 1,824,961 share of common
stock upon the closing of this offering.
You should read the summary financial data below in conjunction
with our financial statements and the related notes and with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in
this prospectus. The statements of operations data for the years
ended December 31, 2005 and 2004 and the balance sheet data
as of December 31, 2005 and 2004 are derived from our
audited financial statements that are included elsewhere in this
prospectus.
adjusted for the issuance of $2,974,031 principal amount of
12% convertible bridge notes, 8,333 shares of common
stock issued to the Spirit Lake Tribe in lieu of cash interest
payable under its convertible debenture;
•
as further adjusted on a pro forma basis to give effect to:
•
the sale by us of 4,500,000 shares of common stock at an
assumed initial public offering price of $4.50 per share in
this offering and the receipt of the estimated proceeds from
this offering, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, of
$17,038,000;
•
the conversion of an aggregate of $5,029,973 principal amount of
debentures and notes upon the completion of this offering into
1,824,961 shares of common stock; and
•
payment of outstanding indebtedness and accrued interest
totaling $7,551,665.
The following discussion of our historical results of
operations and our liquidity and capital resources should be
read in conjunction with the financial statements and related
notes that appear elsewhere in this prospectus. This discussion
contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a
result of various factors, including those discussed in
“Risk Factors” beginning on page 6 of this
prospectus.
Overview
Wireless Ronin Technologies, Inc. is a Minnesota corporation
that has designed and developed application-specific wireless
business solutions. Our innovative method of delivering wireless
data communications enables us to provide our customers with
significantly improved communication productivity.
Since inception, we have been developing solutions employing
wireless technology, culminating in the release and
commercialization of RoninCast. As of June 30, 2006, we had
an accumulated deficit of $22,804,270.
The Services We Provide
We provide dynamic digital signage solutions targeting specific
retail and service markets through a suite of software
applications collectively called RoninCast. RoninCast is an
enterprise-level content delivery system that manages, schedules
and delivers digital content over wireless or wired networks.
Our solution, a digital alternative to static signage, provides
our customers with a dynamic visual marketing system designed to
enhance the way they advertise, market and deliver their
messages to targeted audiences. Our technology can be combined
with interactive touch screens to create new platforms for
conveying marketing messages. We have installed digital signage
systems in approximately 200 locations since the introduction of
RoninCast in January 2003.
Our Sources of Revenue
We generate revenues through system sales, license fees and
separate service fees, including consulting, training, content
development and implementation services, as well as ongoing
customer support and maintenance, including product upgrades. We
currently market and sell our software and service solutions
through our direct sales force and value added resellers. We
generated revenues of $710,216 and $1,073,990 in calendar years
ended December 31, 2005 and 2004, respectively. Also for
the six months ended June 30, 2006, we generated $934,226
compared to $384,104 for the comparable period in 2005.
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
successful 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 option grants,
tax provisions and provisions for uncollectible receivables. 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:
We applied the provisions of Statement of Position
(“SOP”) 97-2, “Software Revenue
Recognition,” as amended by SOP 98-9 “Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions” to all transactions involving the sale of
software license. 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 Emerging Issues Task Force Issue
No. 00-21 (“EITF 00-21”) “Revenue
Arrangements with Multiple Deliverables”. We recognize
revenue when (i) persuasive evidence of an arrangement
exists; (ii) delivery has occurred or services have been
rendered; (iii) the sales price is fixed or determinable;
and (iv) the ability to collect is reasonably assured.
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). The fair value of maintenance and support services is
based upon the renewal rate for continued service arrangements.
The fair value of installation and training services is
established based upon pricing for the services. We have
determined that it does not have VSOE for its technology
licenses. In software arrangements for which we do not have
vendor-specific objective evidence of fair value for all
elements, revenue is deferred until the earlier of when
vendor-specific objective evidence is determined for the
undelivered elements (residual method) or when all elements for
which we do not have vendor-specific objective evidence of fair
value have been delivered.
Software
and technology license sales. Software is delivered to
customers electronically or on a CD-ROM, and license files are
delivered electronically. We assess whether the fee is fixed or
determinable based on the payment terms associated with the
transaction. Standard payment terms are generally less than
90 days. In instances where payments are subject to
extended payment terms, revenue is deferred until payments
become due. We assess collectibility 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.
Product
sales. We recognize revenue on product sales generally upon
delivery of the product to 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 professional service revenues
are revenues derived from implementation, maintenance and
support contracts, content 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.
Substantially all of our contracts are on a time-and-materials
basis. For time-and-materials contracts, we recognize revenue as
services are performed. For a fixed-fee contract, we recognize
revenue upon completion of specific contractual milestones or by
using the percentage of completion method.
Training revenue is recognized when training is provided.
Maintenance
and support revenue. Included in support services revenues
are revenues derived from maintenance and support. Maintenance
and support revenue is recognized ratably over the term of the
maintenance contract, which is typically one year. Maintenance
and support is renewable by the customer on an annual basis.
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.
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. Shares
reserved for outstanding stock warrants and convertible notes
are not considered because the impact of the incremental shares
is antidilutive.
Deferred Income Taxes
Deferred income taxes are recognized in the financial statements
for the tax consequences in future years of differences between
the tax bases 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
In the first quarter of 2006, we adopted Statement of Financial
Accounting Standards No. 123R, “Share-Based
Payment” (SFAS 123R), which revises SFAS 123,
“Accounting for Stock-Based Compensation”
(SFAS 123) and supersedes Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to
Employees” (APB 25). SFAS 123R requires that
share-based payment transactions with employees be recognized in
the financial statements based on their fair value and
recognized as compensation expense over the vesting period.
Prior to FAS 123R we disclosed the pro forma effects of
SFAS 123 under the minimum value method. We adopted
SFAS 123R effective January 1, 2006, prospectively for
new equity awards issued subsequent to January 1, 2006. The
adoption of SFAS 123R in the first quarter of 2006 resulted
in the recognition of additional stock-based compensation
expense of $448,548. No tax benefit has been recorded due the
full valuation allowance on deferred tax assets that we have
recorded.
Prior to January 1, 2006, we accounted for employee
stock-based compensation in accordance with provisions of APB
25, and Financial Accounting Standards Board Interpretation
No. 44, “Accounting for Certain Transactions Involving
Stock Compensation — an Interpretation of APB
No. 25”, and complies with the disclosure provisions
of SFAS 123 and SFAS No. 148, “Accounting
for Stock-Based Compensation — Transaction and
Disclosure” (SFAS 148). Under APB 25, compensation
expense is based on the difference, if any, on the date of the
grant, between the fair value of our stock and the exercise
price of the option. We amortized deferred stock-based
compensation using the straight-line method over the vesting
period.
SFAS No. 123, as amended by SFAS No. 148,
“Accounting for Stock Based Compensation —
Transition and Disclosure” (SFAS No. 148),
defines a fair value method of accounting for issuance of stock
options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on
the fair value of the award and is recognized over the service
period, which is usually the vesting period. Pursuant to
SFAS No. 123, companies were not required to adopt the
fair value method of accounting for employee stock-based
transactions. Companies were permitted to account for such
transactions under APB 25, but were required to disclose in a
note to the financial statements pro forma net loss and per
share amounts as if a company had applied the fair methods
prescribed by SFAS 123. We applied APB Opinion 25 and
related interpretations in accounting for its stock awards
granted to employees and directors and has complied with the
disclosure requirements of SFAS 123 and SFAS 148.
All stock awards granted by us have an exercise or purchase
price equal to or above market value of the underlying common
stock on the date of grant. Prior to the adoption for
SFAS 123R, had compensation cost for the grants issued by
us been determined based on the fair value at the grant dates
for grants consistent with the fair value method of
SFAS 123, our cash flows would have remained unchanged;
however, net loss and loss per common share would have been
reduced for the years ending December 31, 2005 and 2004 and
for the six months ended June 30, 2005 to the pro forma
amounts indicated below:
Add: Employee compensation expense included in net loss
—
—
—
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
(13,880
)
(2,239
)
(1,577
)
Pro forma
$
(4,803,805
)
$
(3,341,609
)
$
(2,048,355
)
Basic and diluted loss per common share:
As reported
$
(7.18
)
$
(6.87
)
$
(3.40
)
Pro forma
$
(7.21
)
$
(6.87
)
$
(3.40
)
For purposes of the pro forma calculations, the fair value of
each award is estimated on the date of the grant using the
Black-Scholes option-pricing model (minimum value method),
assuming no expected dividends and the following assumptions:
2005 Grants
2004 Grants
2006 Grants
Expected volatility factors
n/a
n/a
61.7
%
Approximate risk free interest rates
5.0
%
5.0
%
5.0
%
Expected lives
5 Years
5 Years
5 Years
The determination of the fair value of all awards is based on
the above assumptions. Because additional grants are expected to
be made each year and forfeitures will occur when employees
leave us, the above pro forma disclosures are not representative
of pro forma effects on reported net income (loss) for
future years.
We account for equity instruments issued for services and goods
to nonemployees under SFAS 123; EITF 96-18,
“Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services”; and EITF 00-18, “Accounting
Recognition for Certain
Transactions Involving Equity Instruments Granted to Other Than
Employees”. Generally, the equity instruments issued for
services and goods are for shares of our common stock or
warrants to purchase shares of our common stock. These shares or
warrants generally are fully-vested, nonforfeitable and
exercisable at the date of grant and require no future
performance commitment by the recipient. We expense the fair
market value of these securities over the period in
Our results of operations and changes in certain key statistics
for the six months ended June 30, 2006 and 2005 were as
follows:
Six Months Ended
June 30
Increase
2006
2005
(Decrease)
Sales
$
934,226
$
384,104
$
550,122
Cost of Sales
433,933
230,343
203,590
Gross Profit
500,293
153,761
346,532
Sales and marketing expenses
778,817
557,457
221,360
Research and development expenses
430,540
471,544
(41,004
)
General and administrative expenses
1,741,928
787,638
954,290
Operating expenses
2,951,285
1,816,639
1,134,646
Operating loss
(2,450,992
)
(1,662,878
)
(788,114
)
Other income (expenses):
Interest expense
(1,714,349
)
(383,077
)
1,331,272
Interest income
6,488
1,091
(5,397
)
Sundry
559
(1,914
)
(2,473
)
(1,707,302
)
(383,900
)
1,323,402
Net loss
$
(4,158,294
)
$
(2,046,778
)
$
(2,111,516
)
Sales
Our sales increased for the first six months of 2006 when
compared to the first six months of 2005 by $550,122. Included
in 2006 was $236,658 of previously deferred revenue from a
terminated alliance and almost $700,000 from new billing. The
continued increase in sales focus and the closing of prospects
from our backlog were the primary reasons for the increase.
Cost of Sales
Cost of sales for the first six months of 2006 was $433,933,
compared to $230,343 for the comparable 2005 period. The cost of
sales increase is due to increased revenues. After deducting the
deferred revenue from the terminated alliance the cost of sales
increased proportionately to the sales increase, with our gross
profit being 38% for the first six months of 2006.
Operating Expenses
Operating expenses for the first six months of 2006 were
$2,951,285 compared to $1,816,639 for the comparable period of
2005. The increase amounted to $1,134,646. Included in this
increase was $529,673 of compensation expense for incentive
warrants granted to key employees in 2006 with no similar
expense in 2005. Also included in the first six months of 2006
is $275,864 of professional fees for legal and
accounting expenses as the Company prepares to go public. The
remaining increase in operating cost of $329,109 are due to
staffing increases and higher spending in sales and marketing.
Interest Expense
Interest expense for the first six months of 2006 was
$1,714,349, an increase of $1,331,272 over the first six months
of 2005. This was primarily due to an increase in debt
outstanding. The additional debt issued in 2006 included equity
instruments which, when valued and expensed, are included in
interest expense.
Liquidity
For the first six months of 2006, the Company funded its
operations primarily through the issuance of additional debt, as
well as through increased sales. In the first six months of
2006, the Company added $3,268,319 of new debt. After deducting
debt discount of $1,275,939 from beneficial conversion and
warrant valuation, the balance sheet has $1,992,380 of new debt
for the first six months of 2006. Based on our current expense
levels, we anticipate that the net proceeds from this offering
will be adequate to fund our operations through 2007.
Operating Activities
The Company does not generate positive cash flow at the current
level of sales and gross profit. For the first six months of
2006 the Company used $1,769,210, which was primarily funded
through debt.
Our results of operations and changes in certain key statistics
for the calendar years ended 2005 and 2004 were as follows:
December 31
Increase
2005
2004
(Decrease)
Sales
$
710,216
$
1,073,990
$
(363,774
)
Cost of Sales
939,906
1,029,072
(89,166
)
Gross Profit
(229,690
)
44,918
(274,608
)
Sales and marketing expenses
1,198,629
594,085
604,544
Research and development expenses
881,515
687,398
194,117
General administrative expenses
1,690,601
1,574,372
116,229
Operating expenses
3,770,745
2,855,855
914,890
Operating loss
(4,000,435
)
(2,810,937
)
(1,189,498
)
Other income (expenses):
Interest expense
(804,665
)
(525,546
)
279,119
Interest Income
1,375
1,425
(50
)
Sundry
13,800
(4,312
)
(18,112
)
(789,490
)
(528,433
)
(261,057
)
Net loss
$
(4,789,925
)
$
(3,339,370
)
$
(1,450,555
)
Sales
Our sales decreased in 2005 from 2004 by $363,774, or 34%. The
reduction in revenue was attributable to reduced sales by our
strategic partner, AllOver Media. Sales generated by this
relationship decreased from $659,190 in 2004 to $27,581 in 2005.
This decrease was offset, in part, by sales to new customers of
over $260,000.
The cost of sales decreased in conjunction with the reduction of
sales. The cost of sales includes the actual prices of hardware
sold as well as the costs of maintenance and installation. The
cost of software incurred in the current period is presented in
operating expenses. Also included in cost of sales are inventory
write downs due to evaluation by management of lower of cost or
market and obsolescence. There were $390,247 of inventory write
downs in 2005, compared with no inventory write downs in 2004.
Therefore, the cost of sales reduction from 2004 to 2005 without
the inventory adjustment was $479,413. The decrease in cost of
sales exceeded the decrease in sales due to increased margins on
hardware sales and higher sales of software and content (which
do not have any costs in the cost of sales category).
Operating Expenses
Our operating costs increased in 2005 from 2004 by $914,890, or
32%. The single largest factor in this increase was salaries,
commissions and related costs totaling $565,218. Average head
count in 2004 was 18 associates, while in 2005 we averaged
27 associates, with 28 associates on December 31, 2005. We
refer to our employees as associates. We also increased our
advertising costs by $199,760 as a result of our installation at
a convention center, tradeshow participation and the marketing
launch of RoninCast. In the infrastructure area we moved into
new space and incurred higher costs with rent, depreciation and
utilities totaling $209,280. We also wrote off bad debts in 2005
of $77,862, or an increase of $70,600 over 2004. These increases
were partially offset by a reduction of costs paid to third
parties to help develop RoninCast of $98,771.
Interest Expense
Interest expense increased in 2005 from 2004 by $279,119, or
53%. This increase was due to the larger amount of debt
outstanding in 2005 by $3,382,201. This increase in debt was
used to fund current operations. The increase amount of debt
however was and its impact on interest expense was offset by a
lower average rate outstanding. The average interest rate for
2005 was 15.21% compared to 20.67% in 2004.
Interest in an Unconsolidated Affiliated Entity
On November 11, 2003, we entered into a Joint Venture
Agreement with Real Creative Solutions Limited, a company
registered in England, for the purpose of forming Wireless Ronin
(Europe) Limited, a limited liability company formed under the
laws of England. Wireless Ronin (Europe) was formed for the
purpose of marketing and selling our products in Europe. We
owned 50% of the capital shares in Wireless Ronin (Europe). On
March 18, 2005, in accordance with the terms of the Joint
Venture Agreement, we provided written notice to Real Create
Solutions of our intent to dissolve Wireless Ronin (Europe) and
cease doing business.
Liquidity and Capital Resources
Liquidity
We have financed our operations primarily from sales of common
stock and the issuance of notes payable to vendors, shareholders
and investors. For the years ended December 31, 2005 and
2004, we generated $3,691,931 and $1,825,837 from these
activities, respectively. These receipts were offset by the
operational needs that came from the continued development of
our products and services and well as the efforts to develop
customers and generate sales. Additionally, these funds have
been used for capital expenditures of $272,114 and $257,634 for
the years ended December 31, 2005 and 2004, respectively.
We do not currently generate positive cash flow. Our investments
in infrastructure have outweighed sales generated to date. The
cash flow used in operating activities was $3,384,874 and
$1,487,271 for the years ended December 31, 2005 and 2004,
respectively.
Financing Activities
With the completion of this offering we intend to use proceeds
to pay certain debt that was not converted. See “Use of
Proceeds.” At that time, we will not have any significant
debt on our books and our cash will be used to fund operations,
which include the continued development of our products,
infrastructure and attraction of customers. If we are able to
generate significant additional sales, we believe that
operational cash flows will improve based upon anticipated
margins and that we can generate positive cash flow from
operations.
Recent Accounting Pronouncements
In December 2004, (adopted by the CompanyJanuary 1, 2006)
the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (revised 2004 —
“Share-Based Payment”), that addresses the accounting
for share-based payment transactions in which an enterprise
receives employee services in exchange for equity instruments of
the enterprise or liabilities that are based on the fair value
of the enterprise’s equity instruments or that may be
settled by the issuance of such equity instruments.
SFAS 123R eliminates the ability to account for share-
based compensation transactions using the intrinsic value method
under APB 25, and generally would require instead that such
transactions be accounted for using a fair-value-based method.
SFAS 123R requires the use of an option pricing model for
estimating fair value, which is amortized to expense over the
service periods. In April 2005, the Securities and Exchange
Commission amended the compliance dates for SFAS 123R. In
accordance with this amendment, we will adopt the requirements
of SFAS 123R beginning January 1, 2006. We are
currently evaluating SFAS 123R and have not determined the
impact of this statement on our financial statements.
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs, an amendment of ARB No. 43,
Chapter 4” (SFAS 151). SFAS 151 amends the
guidance in Accounting Research Board (ARB) 43,
Chapter 4, Inventory Pricing, (ARB 43) to clarify the
accounting for abnormal amounts of idle facility expense,
freight, handling costs and spoilage. SFAS 151 requires
those items be recognized as current period charges regardless
of whether they meet the criterion of so abnormal which was the
criterion specified in ARB 43. In addition, SFAS 151
requires that allocation of fixed production overhead to the
cost of production be based on normal capacity of the production
facilities. We have adopted SFAS 151 effective
January 1, 2006. The adoption of SFAS 151 is not
expected to have a significant effect on our financial
statements.
Changes in Independent Accountants
In February 2006, we replaced Larson, Allen & Co. as
our independent accountants and, upon authorization by the audit
committee of our board of directors, engaged Virchow,
Krause & Company, LLP as our independent accountants.
Virchow, Krause & Company, LLP audited our financial
statements as of December 31, 2004 and 2005 and for the
years ended December 31, 2004 and 2005. Larson,
Allen & Co. did not have any disagreement with us on
any matter of accounting principles or practices, financial
statement disclosure of auditing scope or procedures, which
disagreement, if not resolved to the satisfaction of Larson,
Allen & Co., would have caused it to make reference to
the subject matter of the disagreement in connection with its
report on our financial statements. We did not consult with
Virchow, Krause & Company, LLP on any financial or
accounting matters in the period before its appointment.
Subsequent Financing Events
Effective January 1, 2006, we entered into a termination
agreement with AllOver Media (AOM), pursuant to which we
terminated our strategic partnership agreement with AOM. To
satisfy our remaining
obligations under the agreement, we executed a promissory note
in the principal amount of $384,525 in favor of AOM. The note
accrues interest at the rate of 10% per annum. Final
payment under the note is due in December 2006.
Our $3,000,000 convertible debenture issued to the Spirit Lake
Tribe is presently convertible into 30 percent of our
issued and outstanding shares of common stock determined on a
fully diluted basis. In February 2006 and again in July 2006,
the debenture was amended to provide for automatic conversion,
simultaneous with the closing of this offering, into
30 percent of our issued and outstanding shares on a fully
diluted basis, but determined without giving effect to shares
issued and issuable: (i) in this offering, including shares
issuable upon exercise of the warrant to be issued to the
underwriter, or (ii) upon conversion of $5,749,031,
aggregate principal amount of 12% convertible bridge notes
and exercise of warrants to purchase 1,149,806 shares of our
common stock issued to the purchasers of such notes. We estimate
that we will issue 1,261,081 shares of common stock to the
Spirit Lake Tribe at this closing of this offering upon
conversion of this convertible debenture.
As of January 31, 2006, we had outstanding $2,229,973
convertible notes. In February and March 2006, we entered into
agreements with the holders of our outstanding convertible
notes, other than a holder of a $200,000 convertible note, to
provide, among other things, that the outstanding principal
balances (plus, at the option of each holder, interest accrued
through the closing of this offering) will be automatically
converted into shares of our common stock simultaneously with
the closing of this offering at a per share amount equal to the
lower of: (i) $9.00 or (ii) 80% of the initial public
offering price. The remaining $200,000 convertible note was
exchanged for a 12% convertible bridge note and warrants in the
August 2006 offering discussed immediately below.
In private placement offerings completed in March, July and
August 2006, we sold to accredited investors our
12% convertible bridge notes in aggregate principal amount
of $5,749,031, together with warrants to purchase an aggregate
of 1,149,806 shares of our common stock. The notes mature
on the earlier of 30 days following completion of this
offering or March 10, 2007. The notes are convertible and
the warrants exercisable by the holders thereof at
$7.20 per share or, following this offering, at 80% of the
initial public offering price per share.
Wireless Ronin Technologies, Inc. provides dynamic digital
signage solutions targeting specific retail and service markets.
Through a suite of software applications marketed as
RoninCast®,
we provide an enterprise-level content delivery system that
manages, schedules and delivers digital content over wireless or
wired networks. Additionally, RoninCast’s flexibility
allows us to develop custom solutions for specific customer
applications.
RoninCast is a digital alternative to static signage that
provides our customers with a dynamic visual marketing system
designed to enhance the way they advertise, market and deliver
their messages to targeted audiences. For example, our
technology can be combined with interactive touch screens to
create new platforms for assisting with product selection and
conveying marketing messages. RoninCast enables us to deliver a
turn-key solution that includes project planning, innovative
design services, network deployment, software training,
equipment, hardware configuration, content development,
implementation, maintenance and 24/7 help desk support.
We have installed digital signage systems in over 200 locations
since the introduction of RoninCast in January 2003. Our
customers include, among others, Best Buy, Coca-Cola, Foxwoods
Casino Resort, Sealy Corporation, Showtickets.com and the
University of Akron. We generate revenues through system sales,
license fees and separate service fees, including consulting,
training, content development and implementation services, as
well as ongoing customer support and maintenance. We currently
market and sell our software and service solutions through our
direct sales force and value added resellers.
Business Strategy
Our objective is to be the premier provider of dynamic digital
signage systems to customers in our targeted retail and service
markets. To achieve this objective, we intend to pursue the
following strategies:
Focus on Vertical Markets. Our direct sales force focuses
primarily on the following vertical market segments: retail,
hospitality, specialized services and public spaces. To attract
and influence customers, these markets continue to seek new
mediums that provide greater flexibility and visual impact in
displaying messages. We focus in markets where we believe our
solution offers the greatest advantages in functionality,
implementation and deployment over traditional media advertising.
Marketing and Branding Initiatives. Our key marketing
objective is to establish RoninCast as an industry standard in
the dynamic digital signage industry. Our marketing initiatives
convey the distinguishing and proprietary features of our
products, including wireless networking, centralized content
management and custom software solutions.
Our strategy has included establishing a strong presence at
national trade shows, such as NADA (National Auto Dealership
Association), Globalshop and Digital Retailing. Both Globalshop
and Digital Retailing focus on retail markets and have attendees
from many countries. These trade shows provide an ideal venue
for product introduction and engaging with key retailers. We
continuously evaluate our strategies to determine which trade
show presence best serves our marketing objectives.
Leverage Strategic Partnerships and Reseller
Relationships. We seek to develop and leverage relationships
with market participants to integrate complementary technologies
with our solutions. We believe that strategic partnerships will
enable access to emerging new technologies and standards and
increase our market presence. These strategic partners obtain
the rights, in some cases exclusively, to sell and distribute
the RoninCast technology in a defined market segment by
purchasing a license for that particular vertical market. We
plan to continue developing and expanding reseller relationships
with firms or individuals who possess specific market positions
or industry knowledge.
Outsource Essential Operating Functions. We outsource
certain support functions such as system installation,
fixturing, integration 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 expertise in managing
complex outsourcing relationships improves the efficiency of our
digital signage solutions.
Custom Solutions. Although RoninCast is an enterprise
solution 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.
New Product Development. 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, POS
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 intend to continue to listen to our customers, watch the
competitive landscape and improve our products.
Industry Background
Digital Signage. We provide digital signage for use in
the advertising industry. Total advertising expenditures were
approximately $264 billion in 2004 according to Advertising
Age’s Special Report: Profiles Supplement —
50th Annual 100 Leading National Advertisers Report. Within
this industry, we participate in a digital signage segment
focusing primarily on marketing or advertising targeted to
specific retail and service markets.
The use of digital signage is expected to grow significantly
over the next several years. An industry source has estimated
that the size of the North American digital signage advertising
market, comprising advertising revenues from digital signage
networks, at $102.5 million in 2004 and forecasts the
market to reach $3.7 billion in 2011, a compound annual
growth rate of 67%. According to another industry source, the
digital signage market is expected to surpass $2 billion in
overall revenue by 2009.
It is estimated that expenditures for digital signage systems,
including displays, software, software maintenance, media
players, design, installation, and networking services, were
$148.9 million in 2004, and the market is forecast to reach
$856.9 million by 2011, a compound annual growth rate of
28%.
Growth of Digital Signage. We believe there are four
primary drivers to the growth of digital signage:
•
Compliance and effectiveness issues with traditional
point-of-purchase
(POP) signage. Our review of the current market
indicates that most retailers go through a tedious process to
produce traditional static POP and in-store signage. They create
artwork, send such artwork to a printing company, go through a
proof and approval process and then ship the artwork to each
store. One industry source estimates that less than 50% of all
static in-store signage programs are completely implemented once
they are delivered to stores. We believe our signage solution
can enable prompt and effective implementation of retailer
signage programs, thus significantly improving compliance.
•
Growing awareness that digital signage is more effective.
It is estimated that 70% of brand buying decisions are made
while in the retail store. Some sources report that digital
signage receives up to 10 times the eye contact of static
signage and, depending upon the market, may significantly
increase sales for new products that are digitally advertised. A
study by Arbitron, Inc. found that 29% of the consumers who have
seen video in a store say they bought a product they were not
planning on buying after seeing the product featured on the
in-store video display. We believe that our dynamic digital
signage solutions provide a valuable alternative to advertisers
currently using static signage.
•
Changes in the advertising landscape. With the
introduction of personal video recorders (PVRs) and satellite
radio, we believe retailers, manufacturers and advertising firms
are struggling with ways to present their marketing message
effectively. A recent article in Infomercial Media states that
PVRs (TiVo, for example) will be in over 30% of US homes within
the next five years. Although viewers are watching 20-30% more
television, they are using PVR technology to bypass as much as
70% of the commercials. In addition, satellite radio continues
to grow in popularity with limited and/or commercial free
programming. We believe the use of digital signage will continue
to grow as advertisers seek alternatives to traditional media.
•
Decreasing hardware costs associated with digital
signage. The high cost of monitors has been an obstacle of
digital signage implementation for a number of years. The price
of digital display panels has been falling due to increases in
component supplies and manufacturing capacity. As a result, we
believe that hardware costs are likely to continue to decrease,
resulting in continued growth in this market. We employ digital
displays from a variety of manufacturers. This independence
allows us to give our customers the hardware their system
requires while taking advantage of improvements in hardware
technology, pricing reductions and availability. We partner with
several key hardware vendors, including NEC, Richardson
Electronics (Pixelink), LG, Hewlett Packard and Dell.
The RoninCast Solution
We have developed a dynamic and interactive visual marketing and
communication system designed to change the way companies
advertise, market and deliver their message to targeted
audiences. Our software manages, schedules, and delivers dynamic
digital content over wired or wireless networks. Our suite of
software products has been trademarked RoninCast. Our solution
integrates proprietary software components and delivers content
over proprietary communication protocols.
RoninCast is an enterprise 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 the following objectives of a successful marketing
campaign.
Features and benefits of the RoninCast system
includes:
•
Effective Conveyance of Message. POP studies have shown
digital signs to be an effective means of attracting the
attention of customers and improving message recall. We believe
that the display of complex graphics and videos creates a more
appealing store environment.
•
Centrally Controlled. RoninCast empowers the end-user to
distribute content from one central location. As a result,
real-time marketing decisions can be managed in-house ensuring
retailers’ communication with customers is executed
system-wide at the right time and the right place. Our content
management software recognizes the receipt of new content,
displays the content, and reports back to the central
location(s) that the media player is working properly.
•
Wireless Delivery. RoninCast can distribute content
within an installation wirelessly. RoninCast is compatible with
current wireless networking technology and does not require
additional capacity within an existing network. RoninCast uses
Wireless Local Area Network (WLAN) or wireless data
connections to establish connectivity. By installing or using an
existing onsite WLAN, RoninCast can be incorporated throughout
the venue without any environmental network cabling. We also
offer our mobile communications solution for off-site signage
where WLAN is not in use or practical.
•
Network Control. Each remote media player is uniquely
identified and distinguished from other units as well as between
multiple locations. RoninCast gives the end-user the ability to
view the media player’s status to determine if the player
is functioning properly and whether the correct content is
playing. A list of all units on the system is displayed allowing
the end-user to view single units or clusters of units. The
system also allows the end-user to receive information regarding
the health of the network before issues occur. In addition,
display monitors can be turned on or off remotely.
Ease and Speed of Message Delivery. Changing market
developments or events can be quickly incorporated into our
system. The end-user may create entire content distributions on
a daily, weekly or monthly basis. Furthermore, the system allows
the end-user to interject quick daily updates to feature new or
overstocked items, and then automatically return to the previous
content schedule.
•
Scalability/ Mobility. By utilizing a wireless network,
the RoninCast system provides the ability to easily move signage
or “scale-up” to incorporate additional digital
signage. Displays can be moved to or from any location under a
wireless network. Customers are able to accommodate
adds/moves/changes within their environment without rewiring
network connections. And when the customer wants to add
additional digital signage, only electrical power needs to be
supplied at the new location.
•
Data Collection. Through interactive touch screen
technology, RoninCast software can capture user data and
information. This information can provide feedback to both the
customer and the marketer. The ability to track customer
interaction and data mine user profiles, in a non-obtrusive
manner, can provide customers feedback that would otherwise be
difficult to gather.
•
Integrated Applications. RoninCast can integrate digital
signage with other applications and databases. RoninCast is able
to use a database feed to change the content or marketing
message, making it possible for our customers to deliver
targeted messages. Data feeds can be available either internally
within a business or externally through the Internet. For
example, our customers can specify variable criteria or
conditions which RoninCast will analyze, delivering marketing
content relevant to the changing environment.
•
Compliance/ Consistency. RoninCast addresses compliance
and consistency issues associated with print media and
alternative forms of visual marketing. Compliance measures the
frequency of having the marketing message synchronized primarily
with product availability and price. Compliance issues cause
inconsistencies in pricing, product image and availability, and
store polices. RoninCast addresses compliance by allowing
message updates and flexible control of a single location or
multiple locations network-wide. RoninCast allows our customers
to display messages, pricing, images, and other information on
websites that are identical to those displayed at retail
locations.
Our Markets
We market to companies that deploy
point-of-purchase
(POP) advertising or visual display systems and whose
business model incorporates marketing, advertising, or delivery
of messages. Typical applications are retail and service
business locations that depend on traditional static POP
advertising. We believe that any retail businesses promoting a
brand or advertiser seeking to reach consumers at public venues
are also potential customers. We believe that the primary market
segments for digital signage include:
Retail. General retailers typically have large stores
offering a variety of goods and services. This vertical market
constantly faces the challenge of improving customer traffic as
the size of the stores increases. It is estimated that a typical
customer’s shopping cycle is once every two weeks for about
11/2 hours
per visit. Furthermore, they also understand the need to compete
with on-line shopping by offering a source for products that are
becoming more popular through that venue. Retailers are also
concerned about the demographic shopping cycle. Customers from
different demographic groups shop at different times of the day
and week. The challenge is to set the store and its promotions
to fit the demographic customer, their shopping pattern and
cycle, and to offer services that more effectively compete with
electronic venues. Retailers also have difficulty with POP
compliance. Once static signage is created, printed and shipped,
retailers face the challenge to get individual stores to install
the POP in the proper place and at the proper time, and to
remove it at the right time. In some instances, retailers see
less than 50% compliance on an individual store level.
Hospitality. Hospitality venues offer an array of
opportunities for digital signage. For example, in the gaming
and casino environment, entertainers and events often require
signage to be developed, installed and removed on a frequent
basis. RoninCast allows for centralized control and scheduling
of all content, which provides a more efficient and manageable
system. Additionally, casino and gaming facilities offer a
variety of non-gaming services, such as spas, restaurants,
shopping malls and convention halls. These facilities attempt to
raise guest awareness of multiple products and services in an
attractive and informative manner. Casinos may also have a need
for off-site advertising, such as at airports or arenas, to
drive traffic from these venues to their facilities. RoninCast
with mobile communications enables the use of in-house signage
to be used for off-site applications.
Restaurants also offer opportunities for digital signage. Indoor
advertising in restrooms, curbside pick-up, waiting areas and
menu boards are areas in which digital signage can be
incorporated. For example, most walk through restaurants use
backlit fixed menu systems. These are time consuming and
expensive to change, leaving the restaurant with a menu fare
that is fixed for a period of time. Additionally, restaurants
offer different menus at different times of the day making the
menu cluttered and difficult for the customer to follow.
RoninCast allows for “real-time” scheduling of menu
board items throughout the day with prices and selections
changing based on a user-defined schedule.
Specialized Services. The healthcare and banking
industries both have specific customer waiting areas and are
information-driven. By incorporating digital signage programs,
these institutions can promote products and disseminate
information more effectively. In addition, digital signage can
reduce perceived wait times by engaging patients or customers
with relevant marketing messages and information.
Public Spaces. Public spaces such as convention centers,
transportation locations and arenas present opportunities for
digital signage applications. Convention centers welcome
millions of visitors per year for a variety of events. Airports
offer another opportunity for digital signage. These potential
customers using RoninCast, along with mobile communications, can
control messages remotely from their central headquarters
without requiring an onsite communication network.
Our Customers
Historically, our business has been dependent upon a few
customers. Our goal is to broaden or diversify our customer base.
Sealy Corporation. We entered into a sale and purchase
agreement with Sealy Corporation in July 2006. During 2005,
we worked with Sealy to develop the
SealyTouchTM
system, which is an in-store, interactive shopping and training
aid for mattress customers and retail associates. Sealy
distributes its products through approximately 2,900 dealers at
approximately 7,000 locations. Sealy purchased 50 systems
in 2006. We have agreed to work with Sealy on an exclusive basis
in the bedding manufacture and retail field and will be
Sealy’s exclusive vendor for these systems during the
three-year term of the agreement, assuming Sealy’s
satisfaction of minimum order requirements described below, and
contingent upon the successful conclusion of Sealy’s system
beta testing and the parties entering into a master services
agreement and certain other related agreements. Our commitment
to work with Sealy on an exclusive basis is subject to Sealy
ordering either: (i) 250 SealyTouch systems per
calendar quarter beginning with the quarter ending
December 31, 2006, or (ii) a total of 2,000 systems
deliverable in quantities of at least 250 systems per calendar
quarter, commencing with the quarter ending December 31,2006. The agreement, however, does not obligate Sealy to
purchase a minimum number of systems.
The following are examples of other customers:
•
Best Buy — Best Buy is testing and evaluating
RoninCast software at their headquarters in Richfield,
Minnesota. We have also installed a test installation at a store
location in San Diego, California.
•
Canterbury Park — We have installed RoninCast
throughout the Canterbury Park gaming facility. In addition,
Canterbury installed digital signage twenty-five miles away at
the Minneapolis/ St. Paul
International airport utilizing RoninCast with mobile
communications. Both in-house and off-site digital signage is
controlled from one central location.
•
Coca-Cola — The Midwest region fountain
division provides RoninCast displays as a means of extending
their contracts with various customers, including restaurants,
theatres, C-stores and supermarkets. Coca-Cola also uses its
marketing co-op program with customers as a brand
awareness/reward tool.
•
GetServd.com — GetServd.com is a full service
digital advertising firm located in Calgary, Alberta, that runs
the
RoninCast®
digital signage network for many of North America’s leading
paint suppliers, including industry pace setters
Hirshfield’s in the Midwest and Miller Paint in the
Northwest. GetServd.com creates custom signage networks for
their customers to promote their various vendors, create related
sales opportunities and reduce perceived wait time for their
customers.
•
Foxwoods Resort Casino — Foxwoods is the
largest casino in the world, with 340,000 square feet of gaming
space in a complex that covers 4.7 million square feet.
More than 40,000 guests visit Foxwoods each day. Foxwoods
purchased
RoninCast®
to control, administer and maintain marketing content on its
property from its marketing headquarters in Norwich, Connecticut.
•
Las Vegas Convention and Visitors Authority —
By using our solution for wayfinding (touch screen technology),
advertising and event scheduling, this digital signage
installation exemplifies how digital signage can enhance an
environment while providing advanced technology to control,
administer and maintain marketing content from one centralized
location.
•
Mystic Lake Casino and Resort — We have
installed RoninCast displays for several applications, including
offsite advertising at the Mall of America, Wall of Winners,
promotion of casino winners, general kiosks and upcoming casino
events.
•
Showtickets.com — Showtickets uses the
RoninCast to control content in Las Vegas to promote ticket
sales for shows and events throughout Las Vegas. An example of
our scalability, Showtickets has continued to increase their
digital signage presence over the past three years.
•
University of Akron — The University uses
RoninCast as an information system for students and faculty.
Starting with a small installation footprint, the University
continues to grow their digital signage network with recurring
orders for expansion.
•
Wynn Las Vegas — Content developed exclusively
by Wynn for its proprietary outdoor display is previewed, edited
and approved using our system.
Product Description
RoninCast is a dynamic digital signage network 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
management, scheduling and delivery of content from a single
location to an enterprise-level system.
Master Controller (MC) — The MC is divided into
two discreet operational components: the Master Controller
Server (MCS) and the Master Controller Client (MCC). The
MCS provides centralized control over the entire signage network
and is controlled by operators through the MCC graphical user
interface. Content, schedules and commands are submitted by
users through the MCC to be distributed by the MCS to the
End-Point Controllers. Additionally, through the MCS, network
and content reports, and field data are viewed by operators
utilizing the MCC.
End-Point Controller (EPC) — The EPC receives
content, schedules and commands from the centralized MCS. It
then passes along the information to the End-Point Viewers in
its local environment. The EPC then sends content, executes
schedules and forwards commands that have been delivered.
Additionally, the EPC monitors the health of the local network
and sends status reports to the MCS.
End-Point Viewer (EPV) — The EPV software
displays the content that has been distributed to it from the
EPC or the Site Controller. It keeps track of the name of the
content that is currently playing, and when and how many times
it has played. This information is delivered back to the MCS
through the EPC.
Site Controller (SC) — The SC provides
localized control and operation of an installation. It is able
to deliver, broadcast, or distribute schedules and content. The
level of control over these operations can be set at specific
levels to allow local management access to some or all aspects
of the network. The SC also allows information to be reviewed
regarding the status of their local RoninCast network. It is
also used as an installation and diagnostic tool.
Network Builder (NB) — The NB allows operators
to set up virtual networks of signage that create groups for
specific content distribution. EPVs can be grouped by location,
type, audience, or whatever method the user chooses.
Schedule Builder (SB) — The SB provides
users the ability to create schedules for extended content
distribution. Schedules can be created a day, a week, a month or
a year at a time. These schedules are executed by the EPCs at
the local level.
Zone Builder (ZB) — The ZB allows screen space
to be dividing into discreet sections (zones) that can each play
separate content. This allows reuse of media created from other
sources, regardless of the pixel-size of the destination screen.
Additionally, each zone can be individually scheduled and
managed.
RoninCast Wall (RCW) — The RCW provides the
ability to synch multiple screens together to create complex
effects and compositions such as an image moving from one screen
to the next screen, or all screens playing new content at one
time.
Database Client (DBC) — The DBC allows for
automation of control of the RoninCast network. Information can
be retrieved from a database and sent to the EPVs automatically.
This software is best suited for implementation where
information changes on a regular basis, such as meeting room
calendars or arrival and departure times, or data feeds from the
Internet (for example, stock prices or sports scores).
Event Log Viewer (EVL) — The EVL allows the
user to easily analyze logs collected from the field in an
organized manner. Filtering and sorting of data in any aspect
further simplifies the analysis.
Software Development Kit (SDK) — The SDK is
provided so that customers can create their own custom
applications that can interface with the RoninCast network. This
provides the ultimate in flexibility for our customers who wish
to create their own look-and-feel.
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 Graphical User Interface. Everything from simple
design decisions (e.g. menu layout) to advanced network
communication (e.g. remote media file visualization —
seeing the content play on a remote screen), is designed to be
user-friendly and easily learned.
Diverse Content Choices
With the myriad media design tools available today, it is vital
that RoninCast stay current with the tools and technologies
available. RoninCast 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), Macromedia Flash (SWF), still images (JPEG, BMP), and
audio (MP3, WAV). As media technologies continue to emerge and
advance, we also plan to expand the media choices for RoninCast.
Intelligent Content Distribution
The size and complexity of the content being sent to be
displayed are growing. In order for RoninCast 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 make this possible.
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 End-Points are
transferred, saving on network bandwidth.
RoninCast supports content transfer technologies other than
one-to-one connections.
One such technology is multicast satellite distribution. This is
widely used in corporations, for example 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 can facilitate the changing of
that information. Through Macromedia Flash and the RoninCast
Database Client, changing content information (instead of the
content itself), can be facilitated through mechanisms such as
Active Server Pages or PHP. This reduces updates from mega-bytes
to the few bytes required to display a new time.
In order for RoninCast to be scalable to large organizations, it
is necessary that each individual installation not burden the MC
with everyday tasks that are required to manage a complex
network. To this end, the MC offloads much of its work and
monitoring to the EPCs. On the local network, the EPCs execute
schedules, monitor EPVs, distribute content, and collect data.
The only task that is required of the MC is to monitor and
communicate with the EPCs. In this way, expansion of the
RoninCast network by adding an installation does not burden the
central server (MC) 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 suite of tools that are used
every day. The RoninCast Server applications (MCS and EPC) run
under Windows (2K, XP and 2K+ Server), and Linux server
technology. In order to accommodate our customers’ network
administrators, our software supports the ability to use Active
Server Pages (or PHP) 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 is
designed to intelligently and successfully manage myriad
connection options simultaneously both internally to an
installation, and externally to the Internet.
RoninCast 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 MCS, 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 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 utilizes an unpublished proprietary communication
protocol to communicate with members of the system. All
information that is sent to or from a network member is
encrypted with an industry standard 256-bit encryption scheme
that is rated for government communication. This includes
content for display as well as commands to the system (for
maintenance, data retrieval, etc.). Additionally, all commands
are verified by challenge-response where the receiver of
communication challenges the sender to prove that in fact it was
sent from that sender, and not a potential intruder.
In order for computers to be approved for use on the RoninCast
network, their operating systems (whether Windows or Linux) 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
and 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 will recommend
back-end computer security hardware and software that will help
make both their network and RoninCast network as secure as
possible.
RoninCast also uses a username/ password mechanism with four
levels of control so that access and functionality can be
granted to a variety of users without having to give complete
control to everyone. The four levels are separated into Root
(the highest level of control with complete access to the
system), Administrators (access that allows management of the
RoninCast’s hardware and software), Operators (access that
allows the management of the media playing), and Auditors
(access that is simply a “looking glass” that allows
the viewing of device status, media playing, etc.).
Additionally, in order to facilitate efficient management of
access to the system, RoninCast will resolve usernames and
password with the same servers that already manage a
customer’s infrastructure.
Specialized Products
Typical hardware in our solution includes a screen and PC (with
wireless antenna), and may include certain specialized hardware
products including:
U-Box — A display form factor consisting of an
embedded processor with monitor for bathroom or other
advertising applications.
Table Sign — A form factor specifically
designed for displaying advertising and informational content on
gaming tables in a casino environment. The unit consists of an
embedded processor that can be used with a variety of display
sizes.
Touch Screen Kiosks — An integrated hardware
solution for interactive touch screen applications.
Agreement with Marshall Special Assets Group, Inc.
We intend to develop strategic alliances with various
organizations who desire to incorporate RoninCast Technology
into their products or services or who may market our products
and services. We entered into a strategic partnership agreement
with The Marshall Special Assets Group, Inc. in May 2004.
Marshall has experience in the gaming industry through its
business of providing financing to Native American casinos. We
have granted Marshall the right to be the exclusive distributor
of our products to entities and companies and an exclusive
license to our technology in the gaming and lottery industry
throughout the world for an initial two-year term. In connection
with such distribution arrangement, Marshall paid us $300,000 in
May 2004 and $200,000 in October 2004. Marshall will pay us 38%
of the gross profit on all products and technical and support
services generated by the sale of each RoninCast system and
related services. For any fees or payments received by us for
technical and support services, we will pay Marshall 62% of the
gross profit on such technical and support services. For
purposes of determining the gross profit on technical and
support services, such gross profit is assumed to be 50% of the
amounts invoiced and paid for such services. After its initial
term, the agreement automatically renews on an annual basis in
perpetuity provided that in each year there are either gross
sales of product or services in the gaming and lottery industry
in the amount of at least $1,750,000 or Marshall makes an
additional payment to us for 38% of the assumed gross margin on
the amount by which the gross sales are less than $1,750,000.
The assumed gross margin for this calculation is 22.2% of the
sales price. Marshall has the right to terminate the agreement
at any time with 60 days prior written notice to us.
Ongoing Development
Ongoing product development is essential to our ability to stay
competitive in the marketplace as a solution provider. From the
analysis and adoption of new communication technologies, to new
computer hardware and display technologies, to the expansion of
media display options, we are continually enhancing our product
offering. We incurred $687,398 in fiscal year 2004 and $881,515
in fiscal year 2005 on research and development activities.
We also offer consulting, project planning, design, content
development, training and implementation services, as well as
ongoing customer support and maintenance. Generally, we charge
our customers for services on a fee-for-service basis. Customer
support and maintenance typically is charged as a percentage of
license fees and can be renewed annually at the election of our
customers.
Our services are integral to our ability to provide customers
with successful digital signage solutions. Our
industry-experienced associates work with customers to design
and execute an implementation plan based on their business
processes. We also provide our customers with education and
training. Our training services include providing user
documentation.
We provide our customers with product updates, new releases, new
versions and updates as part of our support fees. We offer help
desk support through our support center, which provides
technical and product error reporting and resolution support.
Intellectual Property
We have three U.S. patent applications pending relating to
various aspects of our RONINCAST delivery system. One of these
applications was filed in October 2003 and two were filed in
September 2004. Highly technical patents can take up to six
years to issue and we cannot assure you that any patents will
issue, or if issued, that the same will provide significant
protection to us.
We currently have U.S. Federal Trademark Registrations for
WIRELESS
RONIN®
and RONIN
CAST®,
and have an approved U.S. Registration application for
RONINCASTtm
and
Designtm.
We also have pending in Europe a Community Trademark application
for RONINCAST.
On February 24, 2006, we received a letter from MediaTile
Company USA, advising us that it filed a patent application in
2004 relating solely and narrowly to the use of cellular
delivery technology for digital signage. The letter contains no
allegation of an infringement of MediaTile’s patent
application. MediaTile’s patent application has not been
examined by the U.S. Patent Office. Therefore, we have no
basis for believing our systems or products would infringe any
pending rights of MediaTile. We are also well aware of
alternative delivery technology, such as internet, available to
us. We asked MediaTile in a responsive letter to keep us
apprised of their patent application progress in the Patent
Office.
Competition
The Weinstock Media Analysis study defined digital signage as
server-based advertising over networked video displays. Using
that definition, we are aware of several competitors, including
3M (Mercury Online Solutions), Thomson (Technicolor), Clarity/
CoolSign, Paltronics, Scala, Nanonation, Infocast and Nexis.
Although we have no access to detailed information regarding
their respective operations, some or all of these entities 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 also compete with standard advertising
media, including print, television and billboards.
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 this date, we have not determined that such
legislation or proposed legislation will have a material adverse
impact on our business.
Employees
We refer to our employees as associates. We currently have
29 full-time associates employed in programming,
networking, designing, training, sales/marketing and
administration areas.
Properties
We conduct our principal operations in a leased facility located
at 14700 Martin Drive, Eden Prairie, Minnesota55344. We lease
approximately 8,610 square feet of office and warehouse
space under a five-year term lease that extends through
November 30, 2009. The monthly lease obligation is
currently $5,415 and adjusts annually after the second year with
monthly payments equaling $5,918 in the fifth year. In addition,
we lease additional warehouse space of approximately
2,160 square feet at 14793 Martin Drive, Eden Prairie,
Minnesota55344. This lease expires in September 2007 and has a
monthly payment obligation of $1,350.
Legal Proceedings
We are not party to any pending legal proceedings.
Jeffrey C. Mackhas served as a Director and our Chief
Executive Officer and President since February 2003. From
November 2000 through October 2002, Mr. Mack served as
Executive Director of Erin Taylor Editions, an art distribution
business. From July 1997 through September 2000, Mr. Mack
served as Chairman, CEO and President of Emerald Financial, a
recreational vehicle finance company. In January 1990,
Mr. Mack founded and became Chairman, CEO and President of
Arcadia Financial, LTD. (formerly known as Olympic Financial,
LTD.), one of the largest independent providers of automobile
financing in the United States. Mr. Mack left Olympic in
August 1996. Mr. Mack filed a voluntary bankruptcy petition
in the U.S. Bankruptcy Court, Division of Minnesota, on
February 16, 2001, and received a discharge on
January 4, 2002.
Christopher F. Ebbert has served as our Executive Vice
President and Chief Technology Officer since November 2000. From
April 1999 to November 2000, Mr. Ebbert served as Senior
Software Engineer for Digital Content, a 3D interactive gaming
business. From February 1998 to April 1999, he served as
Technical Director for Windlight Studios, a commercial 3D
animation company. From December 1994 to February 1998,
Mr. Ebbert served as Senior Software Engineer for Earth
Watch Communications, a broadcast weather technologies company.
From January 1990 to December 1994 he served as a Software
Engineer and designed simulators for military use for Hughes
Aircraft, an aerospace defense contractor.
John A. Withamhas served as Executive Vice President and
Chief Financial Officer since February 2006. From May 2002
through August 2004, Mr. Witham served as Chief Financial
Officer of Metris Companies Inc. Prior to joining Metris,
Mr. Witham was Executive Vice President, Chief Financial
Officer of Bracknell Corporation from November 2000 to October
2001. In November 2001, Adesta Communications Inc., a
wholly-owned subsidiary of Bracknell Corporation, voluntarily
commenced a case under Chapter 11 of the United States Code
in the United States Bankruptcy Court, District of Nebraska. In
January 2002, State Group LTD, a wholly-owned subsidiary of
Bracknell Corporation, filed bankruptcy in Toronto, Ontario,
Canada. Mr. Witham was Chief Financial Officer of Arcadia
Financial Ltd. from February 1994 to June 2000.
Stephen E. Jacobs has served as Executive Vice President
and Secretary since February 2006. From October 2003 through
February 2006, Mr. Jacobs served as our Executive Vice
President and Chief Financial Officer. From February 2001 to
November 2002, Mr. Jacobs was a Vice President for Piper
Jaffray Inc. specializing in providing investment research on
the transportation, manufacturing and industrial distribution
industries.
Scott W. Koller has served as Senior Vice President Sales
and Marketing since November 2004. From December 2003 to
November 2004, Mr. Koller served as Vice President of Sales
and Marketing for Rollouts Inc. From August 1998 to November
2003, Mr. Koller served in various roles with Walchem
Corporation, 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.
Henry B. May has served as Senior Vice President,
Operations since June 2006. From February 2001 until
May 2006, Mr. May served as the Regional Vice
President of Gartner Executive Programs, a leading membership
program for CIOs and senior IT managers.
William F. Schnell joined our board of directors in July
2005. Dr. Schnell also serves on the board of directors of
National Bank of Commerce. Since 1990, Dr. Schnell has been
an orthopedic surgeon with Orthopedic Associates of Duluth, and
currently serves as its President.
Carl B. Walking Eagle Sr. joined our board of directors
in July 2005. Since 1981, Mr. Walking Eagle has served as
Vice Chairman of the Spirit Lake Tribal Council. See
“Certain Relationships and Related Transactions.”
Gregory T. Barnumjoined our board of directors in
February 2006. Since February 2006, Mr. Barnum has been
Vice President of Finance and Chief Financial Officer for
Datalink Corporation. From July 1997 to June 2005,
Mr. Barnum was Chief Financial Officer and Secretary of CNT
Corporation. Prior to employment with CNT Corporation, he served
as Senior Vice President of Finance and Administration, Chief
Financial Officer and Secretary of Tricord Systems, Inc. and
held similar senior financial positions with Cray Computer
Corporation and Cray Research, Inc. Mr. Barnum is a member
of the Board of Directors of Electric City Corporation and
serves as a member of its Audit Committee.
Thomas J. Moudryjoined our board of directors in March
2006. Since December 2005, Mr. Moudry has been Chief
Executive Officer and Chief Creative Officer of Martin Williams
Advertising, Inc., a subsidiary of Omnicom Group, Inc., an
advertising and marketing company. Prior to his current position
at Martin Williams, Mr. Moudry served as President and
Executive Creative Director from June 2005 to December 2005 and
the Executive Vice President and Creative Director from July
2003 to June 2005. From April 2000 to May 2003, Mr. Moudry
was Executive Vice President and Executive Creative Officer of
Omnicom Group Inc.
Brett A. Shockleyjoined our board of directors in March
2006. Since January 2002, Mr. Shockley has been Chairman,
Chief Executive Officer and President of Spanlink
Communications. From August 2000 to December 2001,
Mr. Shockley was Vice President-General Manager of the
Customer Contact Business Unit of Cisco Systems.
There are no family relationships between our directors or
executive officers.
Board of Directors; Committees
Our board of directors currently consists of 6 members. The
members of our board of directors serve until the next annual
meeting of shareholders, or until their successors have been
elected.
Our board of directors has an executive committee, audit
committee, compensation committee and corporate governance and
nominating committee.
Executive Committee. Our executive committee consists of
Messrs. Mack, Barnum and Shockley and Dr. Schnell.
Pursuant to our 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 of directors is not in
session.
Audit Committee. Our audit committee consists of
Messrs. Moudry, Barnum and Shockley. The functions of the
audit committee include oversight of the integrity of our
financial statements, our compliance with legal and regulatory
requirements, the performance, qualifications and independence
of our independent auditors and the performance of our internal
audit function. Our audit committee is directly responsible,
subject to shareholder ratification, 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
purpose and responsibilities of our audit committee are set
forth in the Audit Committee Charter approved by our board of
directors on February 27, 2006. All of the members of the
audit committee are “independent” as defined by
applicable regulations of the Securities and Exchange Commission
and Nasdaq. Our board of directors has determined that Gregory
T. Barnum qualifies as an “audit committee financial
expert” as defined by applicable regulations of the
Securities and Exchange Commission.
Compensation Committee. Our compensation committee
consists of Messrs. Barnum and Moudry and Dr. Schnell.
The functions of the compensation committee include reviewing
and approving the goals and objectives relevant to compensation
of our Chief Executive Officer, evaluating the Chief Executive
Officer’s performance in light of those goals and
objectives and determining and approving the Chief Executive
Officer’s compensation level based on this evaluation. Our
compensation committee also approves and makes recommendations
to our board with respect to compensation of other executive
officers, incentive-compensation plans and equity-based plans.
The purpose and responsibilities of our compensation committee
are set forth in the Compensation Committee Charter approved by
our board of directors on February 27, 2006.
Corporate Governance and Nominating Committee. Our
corporate governance and nominating committee consists of
Messrs. Barnum and Shockley and Dr. Schnell. The
functions of the corporate governance and nominating committee
include identifying individuals qualified to become members of
our board and overseeing our corporate governance principles.
The purpose and responsibilities of our corporate governance and
nominating committee are set forth in the Corporate Governance
and Nominating Committee Charter approved by our board of
directors on February 27, 2006.
Limitation of Liability and Indemnification
Under the Minnesota Business Corporation Act, our articles of
incorporation provide that our directors shall not be personally
liable for monetary damages to us or our shareholders for a
breach of fiduciary duty to the full extent that the law permits
the limitation or elimination of the personal liability of
directors.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers and
controlling persons, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable.
Compensation of Directors
Subject to approval of our 2006 Non-Employee Director Stock
Option Plan by our shareholders, our board of directors has
authorized us to grant non-qualified stock options to each
non-employee director for the purchase of 40,000 shares of
our common stock at an exercise price equal to the per share
price of this offering. Each non-employee director option would
vest at the rate of 10,000 shares effective
February 27, 2006 for incumbent directors or upon election
to the board for new directors, and 10,000 shares upon
reelection to the board each year thereafter.
The following table shows, for our Chief Executive Officer and
each of our three other most highly compensated executive
officers, who are referred to as the named executive officers,
information concerning annual and long-term compensation earned
for services in all capacities during the fiscal year ended
December 31, 2005.
Chairman of the Board of Directors, President and Chief
Executive Officer
Michael J. Hopkins
105,692
6,000
—
6,667
—
Executive Vice President
Christopher F. Ebbert
129,615
12,000
—
61,308
—
Executive Vice President and Chief Technology Officer
Scott W. Koller
114,231
6,000
7,661
(2)
8,334
—
Senior Vice President Sales and Marketing
(1)
Represents the number of shares of common stock underlying
warrants granted.
(2)
Represents sales commissions paid to Mr. Koller.
Option Grants in Last Fiscal Year
The following table sets forth certain information concerning
warrants granted to the named executive officers during the
fiscal year ended December 31, 2005.
Each of the warrants granted in 2005 have a term of five years
and, except for the warrant grants to Mr. Mack and
Mr. Ebbert to purchase 21,667 shares and
15,000 shares respectively which vested on March 31,2006, are immediately exercisable.
(2)
These warrants were subsequently repriced to $9.00 per
share as described under “Certain Relationships and Related
Party Transactions — Warrant Repricing” below.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
The following table sets forth certain information concerning
unexercised warrants held by the named executive officers as of
December 31, 2005. No warrants were exercised by the named
executive officers during the fiscal year ended
December 31, 2005.
Represents shares of common stock issuable upon exercise of
outstanding warrants.
(2)
There was no public trading market for our common stock as of
December 31, 2005. Accordingly, the value of the
unexercised
in-the-money warrants
listed above have been calculated on the basis of the assumed
initial public offering price of $4.50 per share, less the
applicable exercise price per share, multiplied by the number of
shares underlying the warrants.
Executive Employment Agreements
We entered into Executive Employment Agreements with our current
officers, Messrs. Mack, Witham, Jacobs, Ebbert and Koller,
effective as of April 1, 2006 and Mr. May, effective
as of June 19, 2006. These officers will continue to be
employed in their current positions. Except for our agreement
with Mr. Jacobs, the agreements are all for an initial term
of two years, and will be automatically extended for successive
one year periods unless either we or the officer elects not to
extend employment. Mr. May’s employment is through
April 1, 2008 and Mr. Jacobs’ employment is for a
period of one year. The annual base salary payable under these
agreements may be increased, but not decreased, in the sole
discretion of our Board of Directors. The initial annual base
salaries are: Mr. Mack — $172,000;
Mr. Witham — $137,000;
Mr. Jacobs — $132,000;
Mr. Ebbert — $152,000;
Mr. Koller — $137,000; and
Mr. May — $130,000. Messrs. Mack, Jacobs and
Ebbert are entitled to one-time cash bonuses payable upon the
earlier of the completion of a public offering of our common
stock of $10,000,000 or more or the first time our company
operates with positive cash flow from operations on a
12-month annualized
basis, in the following amounts: Mr. Mack —
$25,000; Mr. Ebbert — $20,000; and
Mr. Jacobs — $15,000. Mr. Witham is entitled
to a one-time cash bonus payable upon the completion of this
offering in the amount of $20,000. These agreements prohibit
each officer from competing with us during his employment and
for a period of time thereafter, two years for Mr. Mack and
one year for each other officer. If we terminate the
officer’s employment without cause, the officer is entitled
to receive a severance payment based on his base salary. For
Mr. Mack, this payment is 2 times his base salary, and for
Mr. Witham, this payment is 1.5 times his base salary. For
each other officer, the payment is equal to his base salary. In
addition, in a termination without cause, Mr. Koller is
entitled to a payment equal to his earned commission, and each
other officer is entitled to a payment equal to the performance
bonus paid in the prior year, if any, except that
Mr. Witham would be entitled to 1.5 times the bonus earned
for the prior year. If there has been a change of control in our
company and the officer’s employment is involuntarily
terminated or the officer leaves for
good reason within 12 months following the change of
control, we would pay the officer the severance payments
described above, except that Mr. Witham’s severance
payment would be 2 times his base salary and 2 times the bonus
earned for the prior year.
2006 Equity Incentive Plan
On March 30, 2006, the Board of Directors adopted the 2006
Equity Incentive Plan which is subject to approval by our
shareholders. Participants in the plan may include our
employees, officers, directors, consultants, or independent
contractors who our compensation committee determines shall
receive awards under the plan. The plan authorizes the grant of
options to purchase common stock intended to qualify as
incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended (the “Code”), the
grant of options that do not qualify as incentive stock options,
restricted stock, restricted stock units, stock bonuses, cash
bonuses, stock appreciation rights, performance awards, dividend
equivalents, warrants and other equity based awards. The number
of shares of common stock reserved for issuance under the plan
is 1,000,000 shares. No awards have been made under the
plan. The plan expires on March 30, 2016.
The plan is administered by a committee appointed by our board
of directors. The compensation committee of our board of
directors serves as the committee. The committee has the sole
authority to determine which of the eligible individuals shall
be granted awards, authorize the grant and terms of awards, to
adopt, amend and rescind such rules and regulations as may be
advisable in the administration of the plan, construe and
interpret the plan and to make all determinations deemed
necessary or advisable for the administration of the plan.
Incentive options may be granted only to our officers and other
employees or our corporate affiliates. Non-statutory options may
be granted to employees, consultants, directors or independent
contractors who the committee determines shall receive awards
under the plan.
Generally, awards are non-transferable except by will or the
laws of descent and distribution, however, the committee may in
its discretion permit the transfer of certain awards to
immediate family members or trusts for the benefit of immediate
family members. If the employment of a participant is terminated
by the company for cause, then the committee shall have the
right to cancel any awards granted to the participant whether or
not vested under the plan.
In March 2006, the Board of Directors approved, subject to
shareholder approval of our plan, a grant to Mr. Mack of
options to purchase 166,667 shares of our common stock
and a grant to Mr. Witham of options to purchase
66,666 shares of our common stock. These options are
exercisable at the initial public offering price, and vest 25%
on the date of grant and 25% each year of the three-year period
thereafter.
2006 Non-Employee Director Stock Option Plan
Our Board of Directors has adopted the 2006 Non-Employee
Director Stock Option Plan which provides for the grant of
options to members of our Board of Directors who are not
employees of our company or its subsidiaries. This plan will be
effective if approved by our shareholders by April 14,2007. Our non-employee directors have been granted awards under
the 2006 Non-Employee Director Stock Option Plan which are
exercisable only if the plan is approved by our shareholders.
Under the plan, non-employee directors as of February 27,2006 and each non-employee director thereafter elected to the
Board is automatically entitled to a grant of an option for the
purchase of 40,000 shares of common stock, 10,000 of which
vest and become exercisable on the date of grant (if the plan is
approved by our shareholders), and additional increments of
10,000 shares become exercisable and vest upon each
director’s reelection to the board. The plan will be
administered by the Compensation Committee of our board. The
Compensation Committee is authorized to interpret the plan,
amend and modify rules and regulations relating to the plan and
amend the plan unless amendment is required to be approved by
our shareholders pursuant to rules of any stock exchange or The
Nasdaq Stock Market.
The number of shares reserved and available for awards under the
2006 Non-Employee Director Stock Option Plan will be
510,000 shares. Options are required to be granted at fair
market value. Subject to shareholder approval, outstanding
options granted to our current and former directors under the
2006 Non-Employee Director Stock Option Plan include the
following:
Mr. Frank, Mr. Butzow and Ms. Haugerud have
resigned from the Board since receiving a grant of options, but
would be entitled to exercise such options for
10,000 shares each if the plan is approved on or before
April 14, 2007. Options have been granted at an exercise
price equal to the initial public offering price.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Convertible Notes
Between May 2003 and March 31, 2006, we financed our
company primarily through the sale of convertible notes, some of
which were purchased by certain of our directors, executive
officers or their affiliates. We have entered into agreements
with each of the holders of our outstanding convertible notes to
provide, among other things, that the outstanding principal
balances (plus, at the option of each holder, interest through
the closing of this offering) will be automatically converted
into shares of our common stock simultaneously with the closing
of this offering. See “Debt Conversion Agreements”
below.
Between May 20, 2003 and November 24, 2003, we
borrowed an aggregate of $300,000 from Barry W. Butzow, our
former director and a beneficial owner of more than 5% of our
outstanding common stock, pursuant to four separate convertible
notes. The notes have various maturities ranging from
December 20, 2008 to June 26, 2009. Interest accrues
at the rate of 10% per annum and is payable quarterly.
Under the terms of the notes, Mr. Butzow had the option,
prior to the maturity date, to convert the principal amount, in
whole or in part, into shares of our capital stock at a price of
$1.00 per share or the then-current offering price,
whichever is less. We have the option to call the notes, in
whole or in part, prior to the maturity date. In connection with
the notes, we issued to Mr. Butzow 16,666 shares of
our common stock and a five-year warrant to
purchase 25,000 shares of our common stock at
$9.00 per share.
Between June 16, 2003 and November 24, 2003, we
borrowed an aggregate of $250,000 from Jack Norqual, a
beneficial owner of more than 5% of our outstanding common
stock, pursuant to three separate convertible notes. The notes
have five-year maturities ranging from September 10, 2009
to October 24, 2009. Interest accrues at the rate of
10% per annum and is payable quarterly. Under the terms of
the notes, Mr. Norqual had the option, prior to the
maturity date, to convert the principal amount, in whole or in
part, into shares of our capital stock at a price of
$1.00 per share or the then-current offering price,
whichever is less. We have the option to call the notes, in
whole or in part, prior to the maturity date. In connection with
the notes, we issued to Mr. Norqual 13,887 shares of
our common stock and a five-year warrant to
purchase 26,389 shares of our common stock at
$9.00 per share.
On July 11, 2003, we sold a convertible note in the
principal amount of $100,000 to Don Dorsey, a beneficial owner
of more than 5% of our outstanding common stock. The note
matures on June 14, 2009. Interest accrues at the rate of
10% per annum and is payable quarterly. Under the terms of
the note, Mr. Dorsey had the option, prior to the maturity
date, to convert the principal amount, in whole or in part, into
shares of our capital stock at a price of $1.00 per share
or the then-current offering price, whichever is less. We have
the option to call this note, in whole or in part, prior to the
maturity date. In connection with this note, we issued to
Mr. Dorsey 5,555 shares of our common stock and a
five-year warrant to purchase 8,333 shares of our
common stock at $9.00 per share.
On October 31, 2003, we sold a convertible note in the
principal amount of $100,000 to Stephen E. Jacobs, one of our
officers. The note matures on May 28, 2009 and accrues
interest at the rate of 10% per annum and is due quarterly.
Under the terms of the note, Mr. Jacobs had the option,
prior to the maturity date, to convert the principal amount, in
whole or in part, into shares of our capital stock at a price of
$1.00 per share or the then-current offering price,
whichever is less. We have the option to call this note, in
whole or in part, prior to the maturity date. In connection with
the note, we issued to Mr. Jacobs 5,555 shares of our
common stock and a five-year warrant to
purchase 8,333 shares of our common stock at
$9.00 per share.
On October 31, 2003, we sold a convertible note in the
principal amount of $25,000 to Steve Meyer, a beneficial owner
of more than 5% of our outstanding common stock. The note
matures on May 28, 2009. Interest accrues at the rate of
10% per annum and is payable quarterly. Under the terms of
the note, Mr. Meyer had the option, prior to the maturity
date, to convert the principal amount, in whole or in part, into
shares of our capital stock at a price of $1.00 per share
or the then-current offering price, whichever is less. We have
the option to call this note, in whole or in part, prior to the
maturity date. In connection
with this note, we issued to Mr. Meyer 1,388 shares of
our common stock and a five-year warrant to purchase
2,083 shares of our common stock at $9.00 per share.
On November 24, 2003, we sold a convertible note in the
principal amount of $100,000 to Mr. Dorsey. The note
matures on June 26, 2009. Interest accrues at the rate of
10% per annum and is payable quarterly. Under the terms of
the note, Mr. Dorsey had the option, prior to the maturity
date, to convert the principal amount, in whole or in part, into
shares of our capital stock at a price of $1.00 per share
or the offering price, whichever is less. We have the option to
call this note, in whole or in part, prior to the maturity date.
In connection with this note, we issued to Mr. Dorsey
5,555 shares of our common stock and a five-year warrant to
purchase 8,333 shares of our common stock at $9.00 per
share.
On March 12, 2004, we sold a convertible note in the
principal amount of $100,000 to Mr. Meyer. The maturity
date of the note was extended to September 30, 2006.
Interest accrues at the rate of 10% per annum and is
payable at maturity. Under the terms of the note, Mr. Meyer
had the option, prior to the maturity date, to convert the
principal amount, in whole or in part, into shares of our
capital stock at a price of $1.00 per share or the
then-current offering price, whichever is less. We have the
option to call this note, in whole or in part, prior to the
maturity date. In connection with this note, we issued to
Mr. Meyer 5,555 shares of our common stock and a
five-year warrant to purchase 8,333 shares of our common
stock at $9.00 per share.
On July 22, 2004, we sold a convertible note in the
principal amount of $200,000 to R.A. Stinski, a beneficial owner
of more than 5% of our outstanding common stock. The note
matured on July 22, 2006. In connection with this note, we
issued to Mr. Stinski 11,111 shares of our common
stock and a five-year warrant to
purchase 16,667 shares of our common stock at
$13.50 per share. On August 25, 2006, Mr. Stinski
exchanged this promissory note for $237,933.37 of our 12%
convertible bridge notes together with warrants to purchase
47,586 shares of our common stock. In connection with
this exchange, we also issued to Mr. Stinski
20,000 shares of our common stock.
On December 22, 2004, we sold a convertible note in the
principal amount of $33,550 to Christopher F. Ebbert, an officer
of our company. The note matures on July 22, 2010 and is
convertible into shares of our capital stock at a price of
$1.00 per share or the then-current offering price,
whichever is less. Interest accrues at the rate of 10% per
annum and is due quarterly. In connection with the note, we
issued to Mr. Ebbert a five-year warrant to
purchase 3,727 shares of our common stock at
$9.00 per share.
A description of a $3,000,000 convertible debenture issued to
the Spirit Lake Tribe is described below under “Description
of Capital Stock — Convertible Debt — Spirit
Lake Tribe.” Mr. Carl B. Walking Eagle, Sr., a
director, is an officer and member of the Spirit Lake Tribal
Council.
Non-Convertible Notes
On January 30, 2004, we entered into a note in the
principal amount of $26,700 with Mr. Butzow. As of
May 12, 2006, the balance of this non-convertible note was
$13,750 and it matures on December 31, 2009. Interest
accrues at the rate of 10% per annum and is due quarterly.
In connection with this note, we issued to Mr. Butzow a
five-year warrant to purchase 2,967 shares of our common
stock at $9.00 per share.
Other Financing Agreements
On November 2, 2004, we entered into a business loan
agreement with Signature Bank that provides us with a variable
rate revolving line of credit of $300,000. As of May 12,2006, we had borrowed $300,000 from Signature Bank under this
line. The amounts borrowed are due on November 2, 2006, and
our obligations are personally guaranteed by Barry W. Butzow.
Interest accrues at a variable interest rate of
1.5 percentage points over the U.S. Bank index rate
and is payable the first day of each month. We may prepay all or
a portion of the loan early without penalty. We executed a
promissory note and made customary representations, warranties,
and covenants in connection with this loan. In consideration for
Mr. Butzow’s personal guarantee, we issued to
Mr. Butzow a five-year warrant to
purchase 16,667 shares
of our common stock at $13.50 per share. These warrants
were subsequently repriced to $9.00 per share as described
under “Warrant Repricing” below.
On December 8, 2004, we entered into a
36-month lease
agreement with Winmark Capital Corporation for office equipment
and furniture. As of June 30, 2006, we had drawn $122,983
on a $150,000 lease line of credit. Our payment obligations
under the lease are approximately $4,200 per month. This
lease has been personally guaranteed by Stephen Jacobs, one of
our officers. In consideration for his personal guarantee, we
issued to Mr. Jacobs a five-year warrant to
purchase 8,333 shares of our common stock at
$13.50 per share. These warrants were subsequently repriced
to $9.00 per share as described under “Warrant
Repricing” below.
On November 10, 2005, we entered into a business loan
agreement with Signature Bank that provides us with a variable
rate revolving line of credit of $200,000. As of May 12,2006, we have borrowed $200,000 from Signature Bank under this
line. The amounts borrowed are due on November 10, 2006,
and our obligations are personally guaranteed by
Mr. Butzow. Interest accrues at a variable interest rate of
1.5 percentage points over the U.S. Bank index rate
and is payable the first day of each month. We may prepay all or
a portion of the loan early without penalty. We executed a
promissory note and made customary representations, warranties,
and covenants in connection with this loan. In consideration for
his personal guarantee, we issued to Mr. Butzow a five-year
warrant to purchase 5,556 shares of our common stock at
$9.00 per share.
On May 23, 2005, we entered into a factoring agreement with
Stephen E. Jacobs and Barry W. Butzow, whereby we agreed to
assign and sell to Mr. Jacobs and Mr. Butzow certain
of our receivables. They may limit their purchases to
receivables arising from sales to any one customer or a portion
of the net amount of the receivable. We have granted a
continuing security interest in all receivables purchased under
the agreement. This agreement expires on May 23, 2007, but
automatically renews from
year-to-year unless
terminated by us upon at least 60 days prior written
notice. Mr. Jacobs and Mr. Butzow have the right to
terminate the agreement at any time by giving us 60 days
prior written notice. We pay interest equal to two times the
prime rate of interest published by Signature Bank in effect at
the time of purchase. The interest rate applies to all
receivables purchased under the agreement. The interest amount
is based on the receivable balance until collected and is
subject to change based on changes in the prime rate. In
consideration for this agreement, we have agreed to issue to
Mr. Jacobs and Mr. Butzow five-year warrants to
purchase shares of our common stock at $9.00 per share in
an amount equal to 100% of the net dollar amount of receivables
sold to Mr. Jacobs and Mr. Butzow. As of May 12,2006, we had issued warrants to purchase an aggregate of
39,491 shares at $9.00 per share relating to this
agreement.
On November 11, 2005, we sold a
90-day promissory note
to SHAG LLC in the principal amount of $100,000.
Dr. William Schnell, one of our non-employee directors, is
a member of SHAG LLC. The interest rate of the note is
10% per year. As additional consideration, we issued to
SHAG LLC a five-year warrant to purchase 2,778 shares of
our common stock at $9.00 per share. We have agreed with
SHAG LLC to increase the amount of the note to $107,500 and
extend the term in exchange for the right to convert amounts
outstanding under the note into shares of our common stock at a
conversion rate equal to 80% of the initial public offering
price.
On December 27, 2005, we sold a
90-day promissory note
to Mr. Butzow in the principal amount of $300,000. The
interest rate of the note is 10% per year. As additional
consideration, we issued to Mr. Butzow a five-year warrant
to purchase 25,000 shares of our common stock at
$6.30 per share. On March 27, 2006, we extended the
maturity date of this note for 90 days. As additional
consideration, we issued to Mr. Butzow a six-year warrant
to purchase 25,000 shares of our common stock at
$6.30 per share. On June 27, 2006, Mr. Butzow
agreed to extend the maturity date of his promissory note to
July 31, 2006 and to exchange the promissory note for our
12% convertible bridge notes in the principal amount of the
promissory note, plus accrued interest, together with warrants
to purchase shares of our common stock. In consideration for the
extension, we agreed to issue to Mr. Butzow
22,666 shares of our common stock. On July 27, 2006,
we issued to Mr. Butzow 12% convertible bridge notes in the
principal amount of $315,625 and warrants to purchase 63,125
shares of our common stock in exchange for this promissory note.
On December 27, 2005, we sold a
90-day promissory note
to Mr. Norqual in the principal amount of $300,000. The
interest rate of the note is 10% per year. As additional
consideration, we issued to Mr. Norqual a five year warrant
to purchase 25,000 shares of our common stock at
$6.30 per share. On March 27, 2006, we extended the
maturity date of this note for 90 days. As additional
consideration, we issued to Mr. Norqual a six-year warrant
to purchase 25,000 shares of our common stock at
$6.30 per share. On June 27, 2006, Mr. Norqual agreed
to extend the maturity date of his promissory note to
July 31, 2006 and to exchange the promissory note for our
12% convertible bridge notes in the principal amount of the
promissory note, plus accrued interest, together with warrants
to purchase our common stock. In consideration for the
extension, we agreed to issue to Mr. Norqual 22,666 shares of
our common stock. On July 27, 2006, we issued to
Mr. Norqual 12% convertible bridge notes in the principal
amount of $315,472 and warrants to purchase 63,094 shares
of our common stock in exchange for this promissory note.
On January 12, 2006, we entered into a business loan
agreement with Signature Bank that provides us with a variable
rate revolving line of credit of $250,000. As of May 12,2006, we had borrowed $250,000 from under this line. The amounts
borrowed are due on January 12, 2007, and our obligations
are personally guaranteed by Michael J. Hopkins, one of our
officers and a former director. Interest accrues at a variable
interest rate of 1.5 percentage points over the
U.S. Bank index rate and is payable the first day of each
month. We may prepay all or a portion of the loan early without
penalty. We executed a promissory note and made customary
representations, warranties, and covenants in connection with
this loan. In consideration for his personal guarantee, we
issued to Mr. Hopkins a five-year warrant to
purchase 6,944 shares of our common stock at
$9.00 per share.
Warrant Repricing
In February 2006, our board of directors determined that $9.00
more properly reflected the market value of our common stock and
approved a repricing, from $13.50 per share to
$9.00 per share, of the following warrants:
The repricing was effected to provide ongoing incentives to the
named executive officers, executive officers, directors, our
strategic partner, the Marshall Group, and Michael Frank, a
former director. After the completion of this offering, our
policy will be not to reprice derivative securities.
Debt Conversion Agreements
Each of the individual holders of our outstanding convertible
notes, with the exception of our 12% convertible bridge notes,
has entered into an agreement to provide, among other things,
that the outstanding principal balances (plus, at the option of
each holder, interest accrued through the closing of this
offering) will be automatically converted into shares of our
common stock simultaneously with the closing of this offering.
Such conversion will be effected at a per share amount equal to
the lower of: (i) $9.00 or (ii) 80% of the offering
price. If this offering has not closed on or before
November 30, 2006, the convertible notes will be
convertible into shares of our common stock in accordance with
their current terms. Accrued interest will be payable to the
holders in cash (unless converted into shares of common stock at
the option of the holder) at the closing of this offering, or on
November 30, 2006 if a closing of this offering has not
occurred on or before that date. Outstanding principal payment
obligations which, by
their present terms, have matured or will mature prior to
November 30, 2006, will be extended to November 30,2006, subject to the mandatory and optional conversion features
described above. In addition, holders of the convertible notes
will be entitled to have the shares issuable upon conversion
included in a registration statement to be filed within
60 days following the closing of this offering. The holders
of an aggregate principal amount of $532,923 of short-term notes
have entered into similar debt conversion agreements. Persons
entering into debt conversion agreements have agreed to refrain
from selling any shares of our common stock for specified
periods following our initial public offering as described below
under “Shares Eligible For Future Sale — Lock-Up
Agreements.”
A $3,000,000 convertible debenture issued to the Spirit
Lake Tribe is presently convertible into 30% of our issued and
outstanding shares of common stock determined on a fully diluted
basis. The debenture has been amended to provide for automatic
conversion of the debenture, simultaneous with the closing of
this offering, into 30% of our issued and outstanding shares on
a fully diluted basis, but determined without giving effect to
shares issued and issuable: (i) in this offering, including
shares issuable upon exercise of the warrant to be issued to the
underwriter, or (ii) upon conversion of our outstanding
12% convertible notes and exercise of our outstanding
warrants issued to the purchasers of such notes.
The following table sets forth information with respect to the
beneficial ownership of our common stock as of August 28,2006, and after the sale of shares in this offering, by:
•
each person who is known by us to own beneficially more than 5%
of our common stock;
•
each current director;
•
each of our executive officers; and
•
all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission. In computing
percentage ownership of each person, shares of common stock
subject to options, warrants, rights, conversion privileges or
similar obligations held by that person that are currently
exercisable or convertible, or exercisable or convertible within
60 days of August 28, 2006, are deemed to be
beneficially owned by that person. These shares, however, are
not deemed outstanding for the purpose of computing the
percentage ownership of any other person.
Except as indicated in this table and pursuant to applicable
community property laws, each shareholder named in the table has
sole voting and investment power with respect to the shares set
forth opposite such shareholder’s name. Percentage of
ownership after this offering is based on 866,035 shares of
our common stock outstanding on August 28, 2006, which
assumes the conversion of all convertible debentures and notes
into common stock at the respective conversion ratios in effect
on that date. The address for each executive officer and
director is 14700 Martin Drive, Eden Prairie, Minnesota55344.
All executive officers and directors as a
group (11 persons)
1,756,708
(20)(21)
71.0
%
1,756,708
23.4
%
*
Less than 1%
(1)
Shares beneficially owned reflect a one-for-six reverse stock
split of our common stock effected in April 2006 and a
two-for-three reverse stock split effected in August 2006.
(2)
Represents shares issuable upon exercise of warrants. Excludes
55,555 shares issuable upon exercise of options granted subject
to shareholder approval.
(3)
Includes 16,167 shares issuable upon exercise of warrants.
(4)
Includes 6,213 shares issuable upon conversion of
convertible notes and 77,061 shares issuable upon exercise
of warrants.
(5)
Represents shares issuable upon exercise of warrants. Excludes
22,222 shares issuable upon exercise of options granted
subject to shareholder approval.
(6)
Includes 18,519 shares issuable upon conversion of
convertible notes and 109,859 shares issuable upon exercise
of warrants.
(7)
Represents shares issuable upon exercise of warrants.
(8)
Includes 2,083 shares issuable upon exercise of warrants
and 64,352 shares beneficially owned by SHAG LLC, which
includes 11,111 shares issuable upon exercise of warrants
and 19,907 shares issuable upon conversion of convertible
notes. Dr. Schnell is an owner of SHAG LLC and may be
deemed to beneficially own the shares held by SHAG LLC.
Dr. Schnell disclaims beneficial ownership of the shares
held by SHAG LLC except to the extent of his pecuniary interest
in such shares. Excludes 13,333 shares issuable upon exercise of
options granted subject to shareholder approval.
(9)
Includes 44,444 shares owned by Spirit Lake Tribe and
1,261,081 shares issuable upon conversion of the
convertible debenture owned by Spirit Lake Tribe. Carl B.
Walking Eagle Sr. is the Vice Chairman of the Spirit Lake Tribal
Council and may be deemed to beneficially own the shares held by
Spirit Lake Tribe. Mr. Walking Eagle disclaims beneficial
ownership of the shares owned by Spirit Lake Tribe except to the
extent of his pecuniary interest in such shares. Excludes 13,333
shares issuable upon exercise of options granted subject to
shareholder approval.
(10)
Excludes 13,333 shares issuable upon exercise of options
granted subject to shareholder approval.
(11)
Includes 1,261,081 shares issuable upon conversion of a
convertible debenture.
(12)
Includes 203,083 shares issuable upon conversion of
convertible notes and 208,767 shares issuable upon exercise
of warrants. Excludes 3,333 shares issuable upon exercise of
options granted subject to shareholder approval.
(13)
Includes 133,970 shares issuable upon conversion of
convertible notes and 124,236 shares issuable upon exercise
of warrants.
(14)
Includes 55,634 shares issuable upon conversion of
convertible notes and 29,167 shares issuable upon exercise
of warrants.
(15)
Includes 66,093 shares issuable upon conversion of
convertible notes and 92,698 shares issuable upon exercise
of warrants.
(16)
Includes 29,029 shares issuable upon exercise of warrants.
(17)
Includes 23,148 shares issuable upon conversion of
convertible notes and 31,157 shares issuable upon exercise
of warrants.
Includes 92,593 shares issuable upon conversion of
convertible notes and 59,444 shares issuable upon exercise
of warrants.
(19)
Includes 19,907 shares issuable upon conversion of a
promissory note and 11,111 shares issuable upon exercise of
warrants.
(20)
Includes 1,305,720 shares issuable upon conversion of
convertible debentures and notes and 303,766 shares
issuable upon exercise of warrants beneficially owned by our
executive officers and directors.
(21)
Includes 1,380,294 shares beneficially owned by entities
related to two of our directors. These directors may be deemed
to beneficially own the shares held by such entities, which
include 1,280,988 shares issuable upon conversion of
convertible debentures and notes and 13,194 shares issuable
upon exercise of warrants.
Our authorized capital stock consists of 66,666,666 shares,
par value $0.01 per share, consisting of
50,000,000 shares of common stock and
16,666,666 shares of preferred stock, par value
$0.01 per share. As of August 28, 2006, we had
866,035 shares of common stock outstanding held by 186
holders, and no outstanding shares of preferred stock.
Common Stock
The holders of our common stock:
•
have the right to receive ratably any dividends from funds
legally available therefor, when, as and if declared by our
board of directors;
•
are entitled to share ratably in all of our assets available for
distribution to holders of our common stock upon liquidation,
dissolution or winding up of the affairs of our company; and
•
are entitled to one vote per share on all matters which
shareholders may vote on at all meetings of shareholders.
All shares of our common stock now outstanding are fully paid
and nonassessable and the shares of common stock to be issued
upon completion of this offering will be fully paid and
nonassessable. There are no redemption, sinking fund, conversion
or preemptive rights with respect to the shares of our common
stock.
The holders of our common stock do not have cumulative voting
rights. Subject to the rights of any future series of preferred
stock, the holders of a plurality of outstanding shares voting
for the election of our directors can elect all of the directors
to be elected, if they so choose. In such event, the holders of
the remaining shares will not be able to elect any of our
directors.
Undesignated Preferred Stock
Under governing Minnesota law and our amended and restated
articles of incorporation, no action by our shareholders is
necessary, and only action of our board of directors is
required, to authorize the issuance of up to
16,666,666 shares of undesignated preferred stock. Our
board of directors is empowered to establish, and to designate
the name of, each class or series of the undesignated preferred
shares and to set the terms of such shares, including terms with
respect to redemption, sinking fund, dividend, liquidation,
preemptive, conversion and voting rights and preferences.
Accordingly, our board of directors, without shareholder
approval, may issue preferred stock having rights, preferences,
privileges or restrictions, including voting rights, that may be
greater than the rights of holders of common stock. It is not
possible to state the actual effect of the issuance of any
shares of preferred stock upon the rights of holders of our
common stock until our board of directors determines the
specific rights of the holders of such preferred stock. However,
the effects might include, among other things, restricting
dividends on our common stock, diluting the voting power of our
common stock, impairing the liquidation rights of our common
stock and delaying or preventing a change in control of our
company without further action by our shareholders. Our board of
directors has no present plans to issue any shares of preferred
stock.
Convertible Debt
Bridge Notes
In private placement transactions issued in March, July and
August 2006, we sold to accredited investors our
12% convertible bridge notes in an aggregate principal
amount of $5,749,031, together with warrants to purchase an
aggregate of 1,149,806 shares of our common stock. The
notes mature on the earlier of thirty days following completion
of this offering or March 10, 2007. The notes are
convertible and the warrants exercisable by the holders thereof
at $7.20 per share or, following this offering, at 80% of
the initial public offering price per share.
The notes are unsecured debt obligations and therefore any
holders of a security interest in our assets would have a prior
claim to such assets upon our liquidation With the prior consent
of the note holders, we may prepay the notes in whole or in part
at any time without premium or penalty. Any prepayments will be
applied pro rata on the basis of the proportion that the
then-outstanding balance of each note bears to the aggregate
then-outstanding balance of all notes. Upon any such prepayment,
the holders would be prevented from converting the outstanding
balances of the notes into shares of our common stock.
Spirit Lake Tribe Debenture
On January 5, 2005, in connection with a Convertible
Debenture Purchase Agreement, we sold $2,000,000 aggregate
principal amount of 10% fixed rate five-year Convertible
Debentures to the Spirit Lake Tribe, a federally recognized
Native American Indian Tribe. On September 7, 2005, Spirit
Lake Tribe purchased a $1,000,000 principal amount convertible
debenture from us and amended the terms of the $2,000,000
principal amount convertible debenture that it purchased from us
on January 5, 2005.
The debenture may be prepaid in whole at any time upon
60 days notice at our option. If we prepay a portion of the
debenture on or before January 5, 2008, we must pay a
penalty equal to 20% of the principal amount prepaid, and we
must pay a penalty equal to 10% of the principal amount prepaid
if we prepay after January 5, 2008. Interest on the unpaid
principal balance of the debenture will accrue at the rate of
10% per annum and is payable in quarterly installments in
arrears commencing on March 31, 2005. If not sooner
converted, the entire unpaid balance of principal and all
accrued and unpaid interest will be due and payable on
December 31, 2009.
The debenture is convertible in whole (or in part) at any time
prior to its payment at the option of the holder into fully paid
and nonassessable shares of our common stock constituting 30% of
our outstanding common stock calculated on a fully-diluted basis
as of the date of conversion. The fully-diluted outstanding
shares of common stock includes the aggregate, as of the date of
conversion, of:
•
the total outstanding shares of common stock;
•
all shares of common stock issuable upon conversion or exercise
in full of all outstanding options, warrants or other
convertible securities or other rights of any nature to acquire
shares of common stock or securities convertible into shares of
common stock; and
•
all shares of common stock that can be acquired pursuant to
warrants or options issued to employees pursuant to existing
employment contracts.
In each of February and July of 2006, the debenture was amended
to provide for automatic conversion of the conversion
simultaneous with the closing of this offering into 30% of our
issued and outstanding shares on a fully diluted basis, but
determined without giving effect to shares issued and issuable
to the investors or the underwriter in this offering and shares
issued or issuable upon conversion of our outstanding
12% convertible bridge notes or exercise of warrants issued
to investors in March, July and August of 2006. Spirit Lake
Tribe also agreed to waive our default under the debenture
purchase agreement, based on our failure to pay all principal
and interest due on our outstanding convertible debt securities,
until November 30, 2006.
Other Convertible Notes
We issued $2,229,973 principal amount of convertible notes with
maturities ranging from December 2008 to July 2010. Interest on
the unpaid principal balance of these notes accrues at the rate
of 10% per annum and is payable quarterly. Except with
respect to $200,000 of that principal amount, which has been
exchanged for our 12% convertible bridge notes and warrants to
purchase our common stock, we have entered into agreements with
each of the holders of our outstanding convertible notes to
provide, among other things, that the outstanding principal
balances (plus, at the option of each holder, interest through
the closing of this offering) will be automatically converted
into shares of our common stock simultaneously with the closing
of this offering. See “Certain Relationships and Related
Transactions — Debt Conversion Agreements” above.
In connection with convertible notes and other debt agreements
issued to private investors and to other individuals for
services rendered, we have issued five-year warrants to purchase
an aggregate of 2,654,081 shares of our common stock, as of
July 20, 2006. The warrants are currently exercisable at
prices ranging from $.09 to $56.25 per share, subject to
adjustment pursuant to antidilution provisions contained in the
warrant agreements.
Registration Rights
In connection with our sales of 12% convertible bridge
notes and warrants in March, July and August 2006, we agreed to
file a registration statement with the Securities and Exchange
Commission within 60 days following our initial public
offering to permit the resale of shares acquired by purchasers
upon conversion of the 12% convertible bridge notes and
exercise of the warrants. We have also agreed with the holders
of our convertible notes to have the shares issuable upon
conversion of such convertible notes included in such
registration statement. See “Certain Relationships and
Related Transactions — Debt Conversion
Agreements.”
As additional compensation in connection with this offering, we
have agreed to sell to Feltl and Company, for nominal
consideration, a warrant to purchase up to 450,000 shares
of our common stock. This warrant is eligible to participate on
a “piggy-back” basis in any registration by us for the
duration of the warrant and two years thereafter, and for a one
time “demand” registration if and when we are eligible
to use Form S-3.
We have been advised that Feltl and Company will elect to
participate in the above-referenced resale registration
statement as a selling shareholder. See “Underwriting.”
Anti-Takeover Provisions
Certain provisions of Minnesota law and our articles of
incorporation and bylaws described below could have an
anti-takeover effect. These provisions are intended to provide
management with flexibility in responding to an unsolicited
takeover offer and to discourage certain types of unsolicited
takeover offers for our company. However, these provisions could
have the effect of discouraging attempts to acquire us, which
could deprive our shareholders of opportunities to sell their
shares at prices higher than prevailing market prices.
Section 302A.671 of the Minnesota Business Corporation Act
applies, with certain exceptions, to any acquisition of our
voting stock from a person, other than us and other than in
connection with certain mergers and exchanges to which we are a
party, that results in the acquiring person owning 20% or more
of our voting stock then outstanding. Similar triggering events
occur at the one-third and majority ownership levels.
Section 302A.671 requires approval of any such acquisition
by a majority vote of our disinterested shareholders and a
majority vote of all of our shareholders. In general, shares
acquired in excess of the applicable percentage threshold in the
absence of such approval are denied voting rights and are
redeemable at their then fair market value by us during a
specified time period.
Section 302A.673 of the Minnesota Business Corporation Act
generally prohibits us or any of our subsidiaries from entering
into any business combination transaction with a shareholder for
a period of four years after the shareholder acquires 10% or
more of our voting stock then outstanding. An exception is
provided for circumstances in which, before the 10%
share-ownership threshold is reached, either the transaction or
the share acquisition is approved by a committee of our board of
directors composed of one or more disinterested directors.
The Minnesota Business Corporation Act contains a “fair
price” provision in Section 302A.675. This provision
provides that no person may acquire any of our shares within two
years following the person’s last purchase of our shares in
a takeover offer unless all shareholders are given the
opportunity to dispose of their shares to the person on terms
that are substantially equivalent to those in the earlier
takeover offer. This provision does not apply if the acquisition
is approved by a committee of disinterested directors before any
shares are acquired in the takeover offer.
Section 302A.553, subdivision 3, of the Minnesota
Business Corporation Act prohibits us from purchasing any voting
shares owned for less than two years from a holder of more than
5% of our outstanding voting stock for more than the market
value of the shares. Exceptions to this provision are provided
if the share purchase is approved by a majority of our
shareholders or if we make a repurchase offer of equal or
greater value to all shareholders.
Our articles of incorporation provide that the holders of our
common stock do not have cumulative voting rights. For the
shareholders to call a special meeting, our bylaws require that
at least 10% of the voting power must join in the request. Our
articles of incorporation give our board of directors the power
to issue any or all of the shares of undesignated preferred
stock, including the authority to establish one or more series
and to fix the powers, preferences, rights and limitations of
such class or series, without seeking shareholder approval. Our
board of directors also has the right to fill vacancies of the
board, including a vacancy created by an increase in the size of
the board of directors.
Our bylaws provide for an advance notice procedure for the
nomination, other than by or at the direction of the board of
directors, of candidates for election as directors, as well as
for other shareholder proposals to be considered at annual
meetings of shareholders. In general, notice of intent to
nominate a director or raise matters at such meetings will have
to be received by us not less than 90 days prior to the
date fixed for the annual meeting, and must contain certain
information concerning the persons to be nominated or the
matters to be brought before the meeting and concerning the
shareholders submitting the proposal.
Transfer Agent and Registrar
The transfer agent and registrar with respect to our common
stock will be Registrar and Transfer Company.
Listing
We have applied to list our shares of common stock on The Nasdaq
Capital Market under the symbol “RNIN.”
Upon the completion of this offering, based upon the number of
shares of common stock outstanding as of August 28, 2006,
and assuming the automatic conversion of all outstanding
convertible debt other than our 12% convertible bridge notes
into 1,824,961 shares of common stock upon the completion
of this offering, we will have 7,199,329 shares of common
stock outstanding. Of these shares, the 4,500,000 shares of
common stock sold in this offering will be freely tradable
without restriction under the Securities Act of 1933, except
that any shares of common stock purchased by our affiliates, as
that term is defined in Rule 144 under the Securities Act,
may generally only be sold in compliance with the limitations of
Rule 144 described below.
The remaining 2,699,329 shares of common stock outstanding
upon completion of this offering are deemed “restricted
securities” under Rule 144 or Rule 701 under the
Securities Act. Of these restricted shares, 104,402 shares
will be eligible for sale in the public market on the date of
this prospectus. Ninety days following the date of this
prospectus, 128,922 shares of common stock will be eligible
for sale in the public market pursuant to Rule 701 and
Rule 144. Upon expiration of the
lock-up agreements
described below after the date of this prospectus, an additional
2,466,005 shares of common stock will be eligible for sale
in the public market pursuant to Rule 144 or 701.
Rule 144. In general, under Rule 144 under the
Securities Act, a person, or persons whose shares are
aggregated, who owns shares that were acquired from the issuer
or an affiliate at least one year ago would be entitled to sell
within any three-month period a number of shares that does not
exceed the greater of:
•
1% of the number of shares of common stock then outstanding, or
•
the average weekly trading volume of our common stock during the
four calendar weeks preceding the date of filing of a notice on
Form 144 with respect to the sale.
Sales under Rule 144 are also generally subject to certain
manner of sale provisions and notice requirements and to the
availability of current public information about us.
Rule 144(k). Under Rule 144(k), a person, or
persons whose shares are aggregated, who is not deemed to have
been one of our affiliates at any time during the 90 days
preceding a sale and who owns shares that were acquired from the
issuer or an affiliate at least two years ago is entitled to
sell the shares without complying with the manner of sale,
public information, volume limitations or notice of sale
provisions of Rule 144. Therefore, unless otherwise
restricted, the shares eligible for sale under Rule 144(k)
may be sold immediately upon the completion of this offering.
Rule 701. Rule 701 permits resales of shares in
reliance upon Rule 144 but without compliance with some
restrictions of Rule 144, including the holding period
requirement. Most of our employees, officers, directors or
consultants who purchased shares under a written compensatory
plan or contract may be entitled to rely on the resale
provisions of Rule 701, but all holders of
Rule 701 shares are required to wait until
90 days after the date of this prospectus before selling
their shares pursuant to the rule.
Lock-Up Agreements. Our directors, executive officers and
certain shareholders have agreed that, during the period
beginning on the date of the final prospectus and continuing to
and including the date 360 days, in the case of our
directors and executive officers, or 180 days, in the case
of certain other shareholders, after the date of the final
prospectus, they will not, directly or indirectly:
•
offer, sell, offer to sell, contract to sell or otherwise
dispose of any shares of our common stock or any of our
securities which are substantially similar to the common stock,
including but not limited to any securities that are convertible
into or exchangeable for, or that represent the right to
receive, common stock or any such substantially similar
securities, or
•
enter into any swap, option, future, forward or other agreement
that transfers, in whole or in part, the economic consequence of
ownership of common stock or any securities substantially
similar to the common stock,
without the prior written consent of Feltl and Company. The
lock-up agreements
permit transfers of shares of common stock purchased in the open
market and, subject to certain restrictions, transfers of shares
as a gift, to trusts or immediate family members, or to certain
entities or persons affiliated with the shareholder.
Registration Rights. Following this offering, the holders
of 1,824,961 shares of our common stock and securities
convertible into or exercisable for 2,746,759 shares of
common stock will be entitled to rights with respect to the
registration of their shares under the Securities Act. Sales of
these shares pursuant to such registration would result in the
shares becoming freely tradable without restriction under the
Securities Act. See “Description of Capital
Stock — Registration Rights.”
Stock Options. Following this offering, we intend to file
with the Securities and Exchange Commission registration
statements under the Securities Act covering the shares of
common stock reserved for issuance under our stock option plans.
The registration statements are expected to be filed as soon as
practicable after the closing of this offering. Because these
registration statements will become effective upon filing,
shares registered under these registration statements will,
subject to Rule 144 volume limitations applicable to
affiliates and the
lock-up agreements
described above, be available for sale in the open market.
Under the terms and subject to the conditions in an underwriting
agreement
dated ,
2006 (the “Underwriting Agreement”) we have agreed to
sell the Underwriter 4,500,000 shares of our common stock.
Under the terms and subject to the conditions of the
Underwriting Agreement, the Underwriter has agreed to purchase
from us 4,500,000 shares of our common stock at the initial
public offering price, less the underwriting discounts and
commissions set forth on the cover page of this prospectus. The
Underwriting Agreement provides that the Underwriter’s
obligation to purchase our shares is subject to approval of
legal matters by counsel and to the satisfaction of other
conditions. The Underwriter is obligated to purchase all of the
shares (other than those covered by the over-allotment option
described below) if it purchases any shares.
Our officers and directors may, but are not obligated to,
purchase shares.
Commissions and Expenses
The Underwriter proposes to offer the shares to the public at
the initial public offering price set forth on the cover of this
prospectus. The Underwriter may offer the shares to securities
dealers at the price to the public less a concession not in
excess of
$ per
share. After the shares are released for sale to the public, the
Underwriter may vary the offering price and other selling terms
from time to time.
The following table shows the underwriting discounts and
commissions that we are to pay to the Underwriter in connection
with this offering. These amounts are shown assuming no exercise
and full exercise of the Underwriter’s over-allotment
option to purchase additional shares.
Payable by Us
No exercise
Full Exercise
Per share
$
Total
$
We estimate that the total expenses of this offering will be
approximately
$ ,
excluding underwriting discounts, commissions and a
non-accountable expense allowance of
$ .
The nonaccountable expense allowance will be increased to
$ if
the underwriters exercise the over-allotment option.
Warrant
As additional compensation, we have agreed to sell to the
Underwriter, for nominal consideration, a warrant (the
“Underwriter’s Warrant”) to purchase up to
450,000 shares of our common stock. The Underwriter’s
Warrant is not exercisable during the first year after the date
of the final prospectus and thereafter is exercisable at a price
per share equal to
$ (120%
of the offering price) for a period of four years. The
Underwriter’s Warrant contains customary anti-dilution
provisions and certain demand and participatory registration
rights. The Underwriter’s Warrant also includes a
“cashless” exercise provision entitling the holder to
convert the Underwriter’s Warrant into shares of our common
stock without the payment in cash of the exercise price. The
Underwriter’s Warrant may not be sold, transferred,
assigned or hypothecated for a period of one year from the date
of the final prospectus, except to officers or partners of the
Underwriter and members of the selling group and/or their
officers or partners.
Over-Allotment Option
We have granted to the Underwriter an option, exercisable not
later than 45 days after the date of the final prospectus
related to this offering, to purchase up to an aggregate of
675,000 additional shares at the initial public offering price
set forth on the cover page of this prospectus less the
underwriting discounts
and commissions. The Underwriter may exercise this option only
to cover over-allotments, if any, made in connection with the
sale of shares offered hereby.
Lock-Up Agreement
Except as noted below, our directors, executive officers and
certain shareholders have agreed with the Underwriter that for a
period of 360 days, in the case of our directors and
executive officers, or 180 days, in the case of certain
other shareholders, following the date of the final prospectus
related to this offering, they will not offer, sell, assign,
transfer, pledge, contract to sell or otherwise dispose of or
hedge any of our shares of common stock or any securities
convertible into or exchangeable for our shares of common stock.
We have entered into a similar agreement with the Underwriter
that we will not issue additional shares (with the exception of
shares pursuant to the over-allotment option) of our common
stock before the end of the
180-day period
following the date of the final prospectus related to this
offering, other than with respect to our issuing shares pursuant
to employee benefit plans, qualified option plans or other
employee compensation plans already in existence, or pursuant to
currently outstanding options, warrants or other rights to
acquire shares of our common stock. The Underwriter may, in its
sole discretion, at any time without prior notice, release all
or any portion of the shares from the restrictions in any such
agreements. In determining whether to release shares from the
restrictions, the Underwriter may consider, among other factors,
the financial circumstances applicable to a director’s,
executive officer’s or shareholder’s request to
release shares and the number of shares that such director,
executive officer or shareholder requests to be released. There
are no agreements between the Underwriter and us or any of our
directors, executive officers or shareholders releasing us or
them from such agreements before the expiration of the
applicable period.
Indemnification
We have agreed to indemnify the Underwriter against certain
civil liabilities, including liabilities under the Securities
Act and liabilities arising from breaches of representations and
warranties contained in the Underwriting Agreement, and to
contribute to payments the Underwriter may be required to make
in respect of any such liabilities.
Offering Price Determination
Before this offering, there was no market for our common stock.
The initial public offering price will be arbitrarily determined
between us and the Underwriter and may bear no relationship to
our earnings, book value, net worth or other financial criteria
of value and may not be indicative of the market price for the
common stock after this offering. After completion of this
offering, the market price of the common stock will be subject
to change as a result of market conditions and other factors.
The estimated initial public offering price range set forth on
the cover page of this preliminary prospectus is subject to
change as a result of market conditions and other factors.
Stabilization; Short Positions and Penalty Bids
In connection with the offering, the Underwriter may purchase
and sell shares of common stock in the open market. These
transactions may include short sales, purchases to cover
positions created by short sales, stabilizing transactions and
passive market making in accordance with Regulation M under
the Exchange Act. Short sales by an underwriter involve the sale
by the underwriter of a greater number of shares than it is
required to purchase in the offering. “Covered” short
sales are sales made in an amount not greater than an
underwriter’s option to purchase additional shares from the
issuer in the offering pursuant to its over-allotment option. An
underwriter may close out any covered short position by either
exercising its option to purchase additional shares through the
over-allotment option or purchasing shares in the open market.
In determining the source of shares to close out the covered
short position, an underwriter will consider, among other
things, the price of shares available for purchase in the open
market as compared to the price at which it may purchase
additional shares through the over-allotment option.
“Naked” short sales are any short sales of shares in
excess of the shares an underwriter may
purchase pursuant to the over-allotment option. An underwriter
must close out any naked short position by purchasing shares in
the open market. A naked short position is more likely to be
created if an underwriter is concerned that there may be
downward pressure on the price of the common stock in the open
market after pricing that could adversely affect investors who
purchase in the offering. Stabilizing transactions consist of
various bids for or purchases of common stock made by an
underwriter in the open market prior to the completion of the
offering. In passive market making, an underwriter may, subject
to certain limitations, make bids for or purchases of the shares
of common stock until the time, if any, at which a stabilizing
bid is made.
Stabilizing transactions to cover short sale positions may cause
the price of the shares of common stock to be higher than it
would otherwise be in the absence of these transactions. These
transactions may be commenced and discontinued at any time.
Discretionary Accounts
The Underwriter has advised us that it does not intend to
confirm sales of the shares to discretionary accounts.
C:
LEGAL MATTERS
The validity of the shares of common stock offered by this
prospectus and other legal matters will be passed upon for us by
Briggs and Morgan, Professional Association, Minneapolis,
Minnesota. Certain legal matters in connection with this
offering will be passed upon for the underwriters by Maslon
Edelman Borman & Brand, LLP.
EXPERTS
The audited financial statements of Wireless Ronin Technologies,
Inc. as of December 31, 2005 and 2004 and for the years
then ended, included herein and in the registration statement
have been audited by Virchow, Krause & Company, LLP,
independent registered public accounting firm. Such financial
statements have been so included in reliance upon the report of
such firm given upon their authority as experts in auditing and
accounting.
C:
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on
Form SB-2 with the
Securities and Exchange Commission for the shares we are
offering by this prospectus. This prospectus does not include
all of the information contained in the registration statement.
You should refer to the registration statement and its exhibits
for additional information. Statements in this prospectus as to
the contents of any contract, agreement or other document
referred to are materially complete. As a result of this
offering, we will also be required to file annual, quarterly and
current reports, proxy statements and other information with the
Securities and Exchange Commission.
You may read and copy all or any portion of the registration
statement or any reports, statements or other information that
we file at the Securities and Exchange Commission’s Public
Reference Room at 100 F Street, N.E., Washington, D.C.
20549. You can request copies of these documents, upon payment
of a duplicating fee, by writing to the Securities and Exchange
Commission. Please call the Securities and Exchange Commission
at 1-800-SEC-0330 for
further information on the operation of the Public Reference
Room. Our Securities and Exchange Commission filings, including
the registration statement, are also available to you on the
Securities and Exchange Commission’s web sitehttp://www.sec.gov.
We have audited the accompanying balance sheets of Wireless
Ronin®
Technologies, Inc. as of December 31, 2005 and 2004, and
the related statements of operations, shareholders’ deficit
and cash flows for the years then ended. These financial
statements are the responsibility of the company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Wireless
Ronin®
Technologies, Inc. as of December 31, 2005 and 2004 and the
results of its operations and its cash flows for the years then
ended, in conformity with U.S. generally accepted
accounting principles.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note A to the financial statements, the
Company has suffered recurring losses and negative cash flows
from operating activities and requires additional working
capital to support future operations. This raises substantial
doubt about the Company’s ability to continue as a going
concern. Management’s plans in regard to these matters are
also described in Note A. The financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.
Common stock, 50,000,000 shares authorized; 784,037,
583,659, and 846,035 shares issued and outstanding at
December 31, 2005 and 2004 and June 30, 2006,
respectively
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Business and Operations
Overview
Wireless Ronin Technologies, Inc. (the Company) is a Minnesota
corporation that has designed and developed application-specific
wireless business solutions.
The Company provides dynamic digital signage solutions targeting
specific retail and service markets. The Company has designed
and developed RoninCast, a proprietary content delivery system
that manages, schedules and delivers digital content over a
wireless or wired network. The solutions, the digital
alternative to static signage, provide customers with a dynamic
and interactive visual marketing system designed to enhance the
way they advertise, market and deliver their messages to
targeted audiences. The Company sells its products throughout
North America.
Summary of Significant Accounting Policies
A summary of the significant accounting policies consistently
applied in the preparation of the accompanying financial
statements follows:
1.
Revenue Recognition
The Company recognizes revenue primarily from these sources:
The Company applies the provisions of Statement of Position
(“SOP”) 97-2, “Software Revenue
Recognition,” as amended by SOP 98-9
“Modification of
SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions”
to all transactions involving the sale of software license. 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 Emerging Issues Task Force Issue
No. 00-21
(“EITF 00-21”)
“Revenue Arrangements with Multiple Deliverables”. The
Company recognizes revenue when (i) persuasive evidence of
an arrangement exists; (ii) delivery has occurred or
services have been rendered; (iii) the sales price is fixed
or determinable; and (iv) the ability to collect is
reasonably assured.
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). The fair value of maintenance and support
services is based upon the renewal rate for continued service
arrangements. The fair value of installation and training
services is established based upon pricing for the services. The
Company has determined that it does not have VSOE
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES — (Continued)
1.
Revenue Recognition — (Continued)
for its technology licenses. In software arrangements for which
the Company does not have vendor-specific objective evidence of
fair value for all elements, revenue is deferred until the
earlier of when vendor-specific objective evidence is determined
for the undelivered elements (residual method) or when all
elements for which the Company does not have vendor-specific
objective evidence of fair value have been delivered.
Software and technology license sales
Software is delivered to customers electronically or on a
CD-ROM, and license files are delivered electronically. The
Company assesses whether the fee is fixed or determinable based
on the payment terms associated with the transaction. Standard
payment terms are generally less than 90 days. In instances
where payments are subject to extended payment terms, revenue is
deferred until payments become due. The Company assesses
collectibility 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.
Product sales
The Company recognizes revenue on product sales generally upon
delivery of the product to 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 professional service revenues are revenues derived
from implementation, maintenance and support contracts, content
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. Substantially all of the
Company’s contracts are on a time-and-materials basis. For
time-and-materials contracts, the Company recognizes revenue as
services are performed. For a fixed-fee contract, the Company
recognizes revenue upon completion of specific contractual
milestones or by using the percentage of completion method.
Training revenue is recognized when training is provided.
Maintenance and support revenue
Included in support services revenues are revenues derived from
maintenance and support. Maintenance and support revenue is
recognized ratably over the term of the maintenance contract,
which is typically one year. Maintenance and support is
renewable by the customer on an annual basis. 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.
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES — (Continued)
2.
Cash and Cash Equivalents
Cash equivalents consist of certificates of deposit and all
other liquid investments with original maturities of Six months
or less when purchased. The Company maintains its cash balances
in several financial institutions in Minnesota. These balances
are insured by the Federal Deposit Insurance Corporation up to
$100,000.
3.
Accounts Receivable
Accounts receivable are 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
collectibility. In addition, an allowance is provided for other
accounts when a significant pattern of uncollectibility has
occurred based on historical experience and management’s
evaluation of accounts receivable. When all collection efforts
have been exhausted, the account is written off against the
related allowance. The allowance for doubtful accounts was
$2,500 and $0 and $23,500 at December 31, 2005,
December 31, 2004, and June 30, 2006, respectively.
4.
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.
5.
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. Intangible assets consist of deferred
financing costs for fees paid related to the financing of the
Company’s notes payable and are being amortized using the
straight-line method over the term of the associated financing
arrangement (which approximates the interest method).
The estimated useful lives used to compute depreciation and
amortization are as follows:
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES — (Continued)
5.
Depreciation and Amortization — (Continued)
Depreciation expense was $120,602 and $49,393 for the years
ended December 31, 2005 and December 31, 2004,
respectively. Amortization expense related to the deferred
financing costs was $31,228 and $667 for the years ended
December 31, 2005 and December 31, 2004, respectively
and is recorded as a component of interest expense.
6.
Advertising Costs
Advertising costs are charged to operations when incurred.
Advertising costs were $212,262 and $12,501 for the years ended
December 31, 2005 and December 31, 2004, respectively.
7.
Software Development Costs
Statement of Financial Accounting Standards
(SFAS) No. 86 “Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise
Marketed” requires certain software development costs to be
capitalized upon the establishment of technological feasibility.
The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs requires
considerable judgment by management with respect to certain
external factors such as anticipated future revenue, estimated
economic life, and changes in software and hardware
technologies. Software development costs incurred beyond the
establishment of technological feasibility have not been
significant. No software development costs were capitalized
during the years ended December 31, 2005 and 2004. Software
development costs have been recorded as research and development
expense.
8.
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. Shares
reserved for outstanding stock warrants and convertible notes
are not considered because the impact of the incremental shares
is antidilutive.
9.
Deferred Income Taxes
Deferred income taxes are recognized in the financial statements
for the tax consequences in future years of differences between
the tax bases 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.
10.
Accounting for Stock-Based Compensation
In the first quarter of 2006, the Company adopted Statement of
Financial Accounting Standards No. 123R, “Share-Based
Payment” (SFAS 123R), which revises SFAS 123,
“Accounting for Stock-Based Compensation”
(SFAS 123) and supersedes Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to
Employees” (APB 25). SFAS 123R requires that
share-based payment transactions with employees be recognized in
the financial statements based on their fair value and
recognized as compensation expense over the vesting period.
Prior to FAS 123R the Company disclosed
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES — (Continued)
10.
Accounting for Stock-Based
Compensation — (Continued)
the pro forma effects of SFAS 123 under the minimum value
method. The Company adopted SFAS 123R effective
January 1, 2006, prospectively for new equity awards issued
subsequent to January 1, 2006. The adoption of
SFAS 123R in the second quarter of 2006 resulted in the
recognition of additional stock-based compensation expense of
$448,548. No tax benefit has been recorded due the full
valuation allowance on deferred tax assets that the Company has
recorded.
Prior to January 1, 2006, the Company accounted for
employee stock-based compensation in accordance with provisions
of APB 25, and Financial Accounting Standards Board
Interpretation No. 44, “Accounting for Certain
Transactions Involving Stock Compensation — an
Interpretation of APB No. 25”, and complies with the
disclosure provisions of SFAS 123 and
SFAS No. 148, “Accounting for Stock-Based
Compensation — Transaction and Disclosure”
(SFAS 148). Under APB 25, compensation expense is
based on the difference, if any, on the date of the grant,
between the fair value of our stock and the exercise price of
the option. The Company amortized deferred stock-based
compensation using the straight-line method over the vesting
period.
SFAS No. 123, as amended by SFAS No. 148,
“Accounting for Stock Based Compensation —
Transition and Disclosure” (SFAS No. 148),
defines a fair value method of accounting for issuance of stock
options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on
the fair value of the award and is recognized over the service
period, which is usually the vesting period. Pursuant to
SFAS No. 123, companies were not required to adopt the
fair value method of accounting for employee stock-based
transactions. Companies were permitted to account for such
transactions under APB 25, but were required to disclose in
a note to the financial statements pro forma net loss and per
share amounts as if a company had applied the fair methods
prescribed by SFAS 123. The Company applied APB Opinion 25
and related interpretations in accounting for its stock awards
granted to employees and directors and has complied with the
disclosure requirements of SFAS 123 and SFAS 148.
All stock awards granted by the Company have an exercise or
purchase price equal to or above market value of the underlying
common stock on the date of grant. Prior to the adoption for
SFAS 123R, had compensation cost for the grants issued by
the Company been determined based on the fair value at the grant
dates for grants consistent with the fair value method of
SFAS 123, the Company’s cash flows would have remained
unchanged; however, net loss and loss per common share would
have been reduced
Add: Employee compensation expense included in net loss
—
—
—
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
(13,880
)
(2,239
)
(1,577
)
Pro forma
$
(4,803,805
)
$
(3,341,609
)
$
(2,048,355
)
Basic and diluted loss per common share:
As reported
$
(7.18
)
$
(6.87
)
$
(3.40
)
Pro forma
$
(7.21
)
$
(6.87
)
$
(3.40
)
For purposes of the pro forma calculations, the fair value of
each award is estimated on the date of the grant using the
Black-Scholes option-pricing model (minimum value method),
assuming no expected dividends and the following assumptions:
2005 Grants
2004 Grants
2006 Grants
Expected volatility factors
n/a
n/a
61.7
%
Approximate risk free interest rates
5.0
%
5.0
%
5.0
%
Expected lives
5 Years
5 Years
5 Years
The determination of the fair value of all awards is based on
the above assumptions. Because additional grants are expected to
be made each year and forfeitures will occur when employees
leave the Company, the above pro forma disclosures are not
representative of pro forma effects on reported net income
(loss) for future years. See Note N for more information
regarding the Company’s stock-based compensation plans.
The Company accounts for equity instruments issued for services
and goods to nonemployees under SFAS 123; EITF 96-18,
“Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services”; and
EITF 00-18,
“Accounting Recognition for Certain Transactions Involving
Equity Instruments Granted to Other Than Employees”.
Generally, the equity instruments issued for services and goods
are for shares of the Company’s common stock or warrants to
purchase shares of the Company’s common stock. These shares
or warrants generally are fully-vested, nonforfeitable and
exercisable at the date of grant and require no future
performance commitment by the recipient. The Company expenses
the fair market value of these securities over the period in
which the related services are received.
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES — (Continued)
11.
Fair Value of Financial Instruments
SFAS No. 107 “Disclosures about Fair Value of
Financial Instruments” (SFAS 107) 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 approximated fair value because of the
short maturity of those instruments. The carrying value of notes
payable approximates fair value based upon the Company’s
expected borrowing rate, evaluation of risk factors for debt
with similar remaining maturities and comparable risk.
12.
Unaudited Interim Results
The accompanying balance sheet as of June 30, 2006 and
statements of operations for the six months ended June 30,2006 and 2005 and the statements of cash flows for the six
months ended June 30, 2006 and 2005, and the statement of
shareholders’ deficit for the six months ended
June 30, 2006 are unaudited. The unaudited interim
financial statements have been prepared on the same basis as the
annual financial statements and, in the opinion of the
Company’s management, reflect all adjustments (consisting
of normal recurring adjustments) considered necessary to present
fairly the Company’s financial position as of June 30,2006 and results of operations for the six months ended
June 30, 2006 and 2005 and the results of cash flows for
the six months ended June 30, 2006 and 2005. The financial
data and other information disclosed in these notes to the
financial statements relative to the six month periods presented
are unaudited. The results for the six months ended
June 30, 2006 are not necessarily indicative of the results
to be expected for the year ending December 31, 2006 or any
other interim period or for any other future year.
13.
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, inventory
reserve, deferred tax assets, deferred revenue and depreciable
lives and methods of property and equipment. Actual results
could differ from those estimates.
14.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123 (revised 2004)
(“SFAS 123R”), “Share-Based Payment”,
that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services
in exchange for equity instruments of the enterprise or
liabilities that are based on the fair value of the
enterprise’s equity instruments or that may be settled by
the issuance of such equity instruments. SFAS 123R
eliminates the ability to account for share-based compensation
transactions using the intrinsic value method under APB 25,
and generally would require instead that such transactions be
accounted for using a fair-value-based method. SFAS 123R
requires the use of an option pricing model for estimating fair
value, which is amortized to expense over the service periods.
In April 2005, the Securities and Exchange Commission amended the
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES — (Continued)
14.
Recent Accounting
Pronouncements — (Continued)
compliance dates for SFAS 123R. In accordance with this
amendment, the Company adopted the requirements of
SFAS 123R beginning January 1, 2006.
In November 2004, the FASB issued SFAS No. 151,
“Inventory Costs, an amendment of ARB No. 43,
Chapter 4” (SFAS 151). SFAS 151 amends the
guidance in Accounting Research Board (ARB) 43,
Chapter 4, Inventory Pricing, (ARB 43) to clarify the
accounting for abnormal amounts of idle facility expense,
freight, handling costs and spoilage. SFAS 151 requires
those items be recognized as current period charges regardless
of whether they meet the criterion of so abnormal which was the
criterion specified in ARB 43. In addition, SFAS 151
requires that allocation of fixed production overhead to the
cost of production be based on normal capacity of the production
facilities. The Company adopted SFAS 151 effective
January 1, 2006. The adoption of SFAS 151 did not have
a significant effect on our financial statements.
15.
Going Concern
The accompanying financial statements are prepared assuming the
Company will continue as a going concern. During the years ended
December 31, 2005 and 2004, the Company incurred operating
losses of $4,000,435 and $2,810,937, respectively. During the
years ended December 31, 2005 and 2004, the Company used
$3,384,874 and $1,487,271 in operating activities, respectively.
As of December 31, 2005, the Company had an accumulated
deficit of $18,645,976 and total shareholders’ deficit of
$7,605,468.
Subsequent to December 31, 2005, the Company sold
$5,749,031 principal amount of 12% convertible bridge notes
and warrants to purchase 1,149,806 shares of common
stock. Proceeds, which included cash of $4,825,000, are being
used as working capital. In addition, the notes are payable on
the earlier of one year from the date of issuance or thirty days
following completion of an initial public offering. The notes
are convertible and the warrants are exercisable at the lesser
of $7.20 per share or, following the offering, at 80% of
the price at which the Company’s stock is sold to the
public. The Company also entered into agreements with the
holders of $2,029,973 of convertible notes payable to provide
for the automatic conversion thereof upon the Company’s
public offering at the lesser of the exercise price stated in
the note or 80% of the public offering price. Subsequent to
December 31, 2005, the holder of a $3,000,000 principal
amount convertible debenture has agreed to convert the debenture
into common stock of the Company upon its completion of an
initial public offering on or before September 30, 2006
(see note R for subsequent amendment of terms). Upon such
conversion, the holder will be issued common shares equal to
thirty percent of the Company’s common stock outstanding on
a fully diluted basis, excluding shares issuable upon conversion
of convertible notes and warrants issued in March 2006, and
shares issued or issuable as a result of securities sold in a
planned initial public offering.
The Company is marketing its digital signage systems. The
Company’s ability to continue as a going concern is
dependent on it achieving profitability and generating cash flow
to fund operations.
The Company is targeting $17,000,000 in net proceeds from an
initial public offering of the Company’s common stock. If
the Company raises these proceeds and continued to operate at
its current cost structure, it would have adequate cash for at
least the next twelve months.
The Company maintains its cash balances with several financial
institutions. At times, deposits may exceed federally insured
limits.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts
receivable. Concentrations of credit risk with respect to trade
receivables are limited due to the variety of customers
comprising the Company’s customer base.
A significant portion of the Company’s revenues are derived
from a few customers. For the year ended December 31, 2005,
seven customers accounted for 55% of the total sales. There were
four customers that accounted for 94% of total receivables at
December 31, 2005.
There were two customers that represented 83% of the total sales
for the year ended December 31, 2004 and there were two
customers that represented 94% of the total accounts receivable
at December 31, 2004.
There were four customers that represented 79% of the total
sales for the six months ended June 30, 2006 and there were
five customers that represented 88% of the total accounts
receivable at June 30, 2006.
There were six customers that represented 68% of the total sales
for the six months ended June 30, 2005 and there were six
customers that represented 91% of the total accounts receivable
at June 30, 2005.
During 2005, the Company recorded a lower of cost or market
adjustment on certain finished goods, product components and
software licenses. The Company recorded an expense of $390,247
related to this adjustment to cost of sales.
In December 2003, the Company engaged an investment banking firm
to assist the Company in raising additional capital through the
potential future issuance of the Company’s equity, debt or
convertible securities. The firm helped secure a $3,000,000
convertible debenture for the Company and received a fee of
$100,000 and 11,111 shares of the Company’s common
stock, which were valued at $1.80 per share at the time of
issuance. These costs are being amortized over the five year
term of the convertible debenture as additional interest expense.
During 2005, the Company issued a warrant for the purchase of
5,556 shares of the Company’s common stock at
$9.00 per share to a related party for the guarantee of a
bank line of credit. The fair value of the warrant granted was
calculated at $28,479 using the Black-Scholes model. The
following assumptions were used to calculate the value of the
warrant: dividend yield of 0%, risk-free interest rate of 5%,
expected life equal to the contractual life of five years, and
volatility of 61.718%. These costs are being amortized over the
one year term of the line of credit as additional interest
expense.
During 2005, the Company issued a warrant for the purchase of
6,945 shares of the Company’s common stock at
$9.00 per share to an employee for the guarantee of a bank
line of credit. The fair value
of the warrant granted was calculated at $25,782 using the
Black-Scholes model. The following assumptions were used to
calculate the value of the warrant: dividend yield of 0%,
risk-free interest rate of 5%, expected life equal to the
contractual life of five years, and volatility of 61.718%. These
costs are being amortized over the one year term of the line of
credit as additional interest expense.
In March 2006, the Company issued additional short-term debt
borrowings in connection with the Company’s planned initial
public offering of its common stock. The Company incurred
$505,202 of professional fees, commissions and other expenses in
connection with the borrowings. The Company capitalized these
costs and is amortizing them over the one year period of the
notes as additional interest expense.
Prepaid offering costs
During 2006, the Company incurred $233,367 of professional and
other expenses in connection with the Company’s planned
initial public offering of its common stock. The Company
capitalized these costs in other assets and will record them in
additional paid in capital against the proceeds of the offering
when completed.
NOTE F — BANK LINES OF CREDIT AND
NOTES PAYABLE
Bank lines of credit and notes payable consisted of the
following:
During 2005 and 2004, the Company entered into three unsecured
revolving line of credit financing agreements with a bank that
provide aggregate borrowings of up to $750,000. These agreements
expire at varying times during 2006. The lines are unsecured
with unlimited personal guarantees of three shareholders.
Interest is payable monthly at 1.5% over the bank’s base
rate (effective rate of 8.25% at December 31, 2005).
Short-term note payable — shareholder
During 2005, the Company entered into a short-term note payable
to a shareholder that provided for borrowings of $100,000. The
agreement requires interest payments of 10% at maturity. The
note matured in February 2006. As consideration for the note,
the shareholder received a warrant to purchase 2,778 shares
of the Company’s common stock at $9.00 per share
within five years of the note agreement date. The fair value of
the warrant granted was calculated at $12,465 using the
Black-Scholes model. The
NOTE F — BANK LINES OF CREDIT AND
NOTES PAYABLE — (Continued)
following assumptions were used to calculate the value of the
warrant: dividend yield of 0%, risk-free interest rate of 5%,
expected life equal to the contractual life of five years, and
volatility of 61.718%. The Company reduced the carrying value of
the notes by amortizing the fair value of warrants granted in
connection with the note payable over the original term of the
note as additional interest expense. The remaining debt discount
to be amortized was $5,401 at December 31, 2005.
In January 2006, the Company extended the note payable plus
accrued interest and penalty of $7,500. The extended note
provides for monthly interest at 10% and matures in September
2006. As consideration for extending the note, the Company
issued the note holder the right to convert amounts outstanding
under the note into shares of the Company’s common stock at
a conversion rate equal to 80% of the public offering price of
the Company’s common stock in the event of a public
offering. The Company must complete the initial public offering
of the Company’s stock by September 30, 2006 or the
note will revert to its prior terms (see note R for
subsequent amendment of terms). The inducement to convert the
debt will be recorded if and when the debt is converted into
common stock.
Bridge notes payable
In March 2006, the Company received an additional $2,775,000
proceeds from additional short-term debt borrowings and issuance
of warrants to purchase 555,000 shares of common
stock. The notes are convertible and the warrants exercisable
into common stock of the Company at the option of the lenders at
$7.20 per share until the Company completes the initial
public offering of its common stock. After the initial public
offering, the exercise price will be 80% of the price at which
the Company’s stock is sold to the public. Interest is
payable at 12% at maturity of the notes. The notes mature one
year from the date of issuance, or 30 days following the
closing of the initial public offering of the Company’s
common stock. The following assumptions were used to calculate
the value of the warrant: dividend yield of 0%, risk-free
interest rate of 5%, expected life equal to the contractual life
of five years, and volatility of 61.718%. The Company reduced
the carrying value of the notes by amortizing the fair value of
warrants granted in connection with the note payable over the
original term of the notes as additional interest expense. The
Company determined that there was a beneficial conversion
feature of $749,991 at the date of issuance which was recorded
as debt discount at date of issuance and will be amortized into
interest expense over the original term of the notes. The
remaining debt discount to be amortized was $1,156,736 at
June 30, 2006. The Company will record an additional amount
related to the beneficial conversion feature if and when the
initial public offering is completed.
Short-term note payable — bank
During 2004, the Company entered into a short-term note payable
with a financial institution that provided for borrowings of
$150,000. The agreement required monthly interest payments at
7%. The note was repaid in January 2005.
NOTE G — SHORT-TERM NOTES PAYABLE —
RELATED PARTIES
Short-term notes payable — related
parties
During 2005, the Company entered into two short-term notes
payable with different related parties. The agreements provide
for aggregate borrowings of up to $600,000. As of
December 31, 2005, $200,000 had been received on these
notes. The remaining $400,000 was received in January and
February 2006.
NOTE G — SHORT-TERM NOTES PAYABLE —
RELATED PARTIES — (Continued)
These agreements matured in March 2006 and were extended through
July 2006. Interest is payable monthly at 10%.
As consideration for entering into the agreements, the related
parties received a total of 33,332 shares of the
Company’s common stock valued at $240,000 and warrants to
purchase 50,000 shares of the Company’s common
stock at $6.30 per share within five years of the note
agreement date. The Company valued the common stock at
$7.20 per share. The fair value of the warrants granted was
calculated at $216,349 using the Black-Scholes model. The
following assumptions were used to calculate the value of the
warrant: dividend yield of 0%, risk-free interest rate of 5%,
expected life equal to the contractual life of six years, and
volatility of 61.718%. The Company allocated the value of the
warrants and common stock based on the debts based on their
relative fair value as the debt proceeds are received.
The Company reduced the carrying value of the notes by
amortizing the fair value of common stock and warrants granted
in connection with the notes payable over the term of each
original note as additional interest expense. The remaining debt
discount to be amortized was $135,395 at December 31, 2005.
In March and June 2006, the Company extended these notes. They
now provide for monthly interest at 10% and matured in July
2006. As consideration for extending the notes, the Company
issued 45,332 shares of the Company’s common stock and
six year warrants to purchase 50,000 shares of the
Company’s common stock at $6.30 per share. The
remaining debt discount to be amortized was $178,804 at
June 30, 2006.
During August 2006, the related parties converted the notes and
the interest accrued to date into bridge notes (see note R).
Short-term borrowings — related parties
During 2005 and 2006, the Company borrowed funds from two
related parties to fund short-term cash needs. The borrowings
are secured by specific accounts receivable balances. The
borrowings are due when those accounts receivables are paid and
require interest payments at twice the prime rate (16% at
June 30, 2006). The Company issued the related parties
warrants to purchase 39,492 shares of the
Company’s common stock at $9.00 per share within five
years from the advance date. The fair value of the warrants
granted was calculated at $155,127 using the Black-Scholes
model. The following assumptions were used to calculate the
value of the warrant: dividend yield of 0%, risk-free interest
rate of 5%, expected life equal to the contractual life of five
years, and volatility of 61.718%. Since the advances due upon
payment of accounts receivables, the Company expensed the value
of the warrants on the date of issuance. There were no amounts
due under these borrowings as of June 30, 2006.
During 2004, the Company signed a non-refundable licensing and
sales agreement with a customer for $500,000. The agreement
granted an exclusive two-year agreement for the customer to
market the Company’s products in the gaming industry. The
agreement also called for installation of three of the
Company’s systems in the future. As of December 31,2005, the Company had not met the system installation
requirement discussed in the agreement and continues to defer
revenue recognition until the systems are installed.
During 2004, the Company signed a licensing and sales agreement
with a customer for $925,000. The agreement granted an exclusive
perpetual agreement for the customer to market the
Company’s products in the restaurant industry. The
agreement also called for the future installation of
3,000 units of one on the Company’s products.
Subsequent agreements require the Company to refund the customer
for unsold units.
The remaining deferred revenue was recognized during the six
months ended June 30, 2006 as a result of the expiration of
the agreement. See note payable to customer in Note J.
During 2004, the Company entered into a sales leaseback
transaction with certain of its property and equipment. The
transaction resulted in a gain of $78,973. The Company has
deferred this gain and will recognize the gain ratably over the
three year term of the lease.
During 2006, the Company entered into a sales leaseback
transaction with certain of its property and equipment. The
transaction resulted in a gain of $7,649. The Company has
deferred this gain and will recognize the gain ratably over the
three year term of the lease.
The Company has issued bridge notes to individuals and
corporations. The notes are unsecured and have varying repayment
terms for principal and interest, with maturity dates through
March 2010. Interest accrues at interest rates ranging from 8%
to 16%. The notes are convertible at the discretion of the note
holder, into shares of common stock as specified in each
agreement, with a conversion rate of $9.00 per share or the
current offering price, whichever is less. At December 31,2005, notes payable totaling $1,438,923 were convertible into
159,891 shares of common stock. At December 31, 2004,
notes payable totaling $1,543,325 were convertible into
171,492 shares of common stock.
As consideration for entering into the agreements, the note
holders also received shares of the Company’s common stock
and warrants to purchase shares of the Company’s common
stock. As of December 31, 2005, the note holders had
received a total of 103,659 shares of the Company’s
common stock and warrants to purchase 208,209 shares
of the Company’s common stock at $9.00 per share
within terms ranging from two to five years from the note
agreement date. The Company valued the common stock at $186,630.
The fair value of the warrants granted was calculated at
$110,064 using the Black-Scholes model. The following
assumptions were used to calculate the value of the warrant:
dividend yield of 0%, risk-free interest rate of 5%, expected
life equal to the contractual life of five years, and volatility
of 61.718%.
The Company reduced the carrying value of the notes by
amortizing the fair value of common stock and warrants granted
in connection with the notes payable over the term of each
original note as additional interest expense. As of
December 31, 2005, all of the convertible bridge notes
payable have been extended to five year maturities without
consideration. The remaining debt discount to be amortized was
$0 and $8,175 at December 31, 2005 and 2004, respectively.
In March 2006, the holders of convertible bridge notes totaling
$1,438,923 agreed to convert their notes into shares of the
Company’s common stock in the event of an initial public
offering of the Company’s stock. The notes will convert at
the lesser of the exercise price stated in the note or 80% of
the initial public offering price. The Company must complete the
initial public offering of the Company’s stock by
September 30, 2006 or the notes will revert to their prior
terms (see note R for subsequent amendment
of terms). The Company will record a debt inducement expense if
and when the initial public offering is completed.
Non-convertible notes payable
The Company has various notes payable owed to individuals and
corporations. The notes are unsecured and have varying repayment
terms for principal and interest, with maturity dates through
January 2008. Interest accrues at interest rates ranging from 8%
to 12%.
As consideration for the loans, the lenders received warrants to
purchase shares of the Company’s common stock. As of
December 31, 2005, the note holders received warrants to
purchase 2,778 shares of the Company’s common
stock at $13.50 per share exercisable within five years
from the note agreement date. The fair value of the warrants
granted was calculated at $673 using the Black-Scholes model.
The following assumptions were used to calculate the value of
the warrant: dividend yield of 0%, risk-free interest rate of
5%, expected life equal to the contractual life of five years,
and volatility of 61.718%.
The Company reduced the carrying value of the notes by
amortizing the fair value of common stock and warrants granted
in connection with the notes payable over the term of each
original note as additional interest expense. As of
December 31, 2005, all of the non-convertible notes payable
has been extended to maturities of terms ranging from one to
five years without consideration. The remaining debt discount to
be amortized was $0 at December 31, 2005 and 2004.
Note payable to customer
In March 2006, the Company signed a note payable with the
counterparty in its restaurant industry license agreement (see
Note H) for repayment of $384,525 of fees the Company
collected and had recorded as deferred revenue. The note is
unsecured and has requires varying monthly payments, including
interest at 10%. The note matures in December 2006.
Note payable to supplier
The Company had a note payable owed to a supplier related to the
purchase of inventories during 2005. The note was unsecured and
required payments, including interest at 10%. The note was
repaid in March 2006.
Capital Lease Obligations
The Company leases certain equipment under two capital lease
arrangements. The leases require monthly payments of
approximately $6,100, including interest imputed at 7% to 16%
through December 2007.
Amortization expense for capital lease assets was $60,252 and
$26,987 for the years ended December 31, 2005 and
December 31, 2004, respectively and is included in
depreciation expense (see Note A.5).
Future lease payments under the capital leases are as follows:
Year Ending December 31,
Amount
2006
$
63,143
2007
48,319
Total payments
111,462
Less: portion representing interest
(14,899
)
Principal portion
96,563
Less: current portion
(52,006
)
Long-term portion
$
44,557
Future maturities of long-term notes payable, including capital
lease obligations, are as follows:
During 2005, the Company entered into a five-year convertible
debenture payable with a related party for $3,000,000 that
matures on December 31, 2009. The note is unsecured and
requires quarterly interest payments at 10%. Interest expense
can be paid with cash or in shares of the Company’s common
stock. The note holder has the option of converting the note
into 30% of the then outstanding fully diluted shares of common
stock. As of December 31, 2005, the note was convertible
into 798,107 shares of the Company’s common stock.
During 2005, the Company issued 19,445 shares of its common
stock to pay $175,000 of interest expense. Since the number of
shares to be received is contingent on the number of dilutive
sharers outstanding when the debt is converted, the Company will
determine if there is a beneficial conversion feature when and
if the debt is converted.
The Company is also subject to certain non-financial covenants
as specified in the note agreement. The Company was in violation
with certain covenants but has received a waiver for these
violations through September 30, 2006. As a result, the
Company has recorded the note as a current liability as of
December 31, 2005 and June 30, 2006.
In March 2006, the holder of a $3,000,000 convertible debenture
evidencing debt to a related party agreed to convert their
debenture into 30% of the Company’s common stock on a fully
diluted basis, excluding shares issuable upon conversion of
convertible notes and warrants issued in March 2006 and shares
issued or issuable as a result of securities sold in a planned
initial public offering, prior to the anticipated initial public
offering of the Company’s stock. If the Company does not
complete the initial public offering of its stock by
September 30, 2006, the debenture will be governed by its
prior terms (see note R for subsequent amendment of terms).
Convertible bridge notes payable
The Company has issued bridge notes to related parties. The
notes are unsecured, accrue interest at 10% and have varying
maturity dates through December 2009. The notes are convertible
at the discretion of the note holder, into shares of common
stock as specified in each agreement, with a conversion rate of
$9.00 per share or the current offering price, whichever is
less. At December 31, 2005 and 2004, notes payable totaling
$683,550 were convertible into 75,956 shares of common
stock.
NOTE K — LONG-TERM NOTES PAYABLE —
RELATED PARTIES — (Continued)
As consideration for the loans, the lenders received shares of
the Company’s common stock and warrants to purchase shares
of the Company’s common stock. As of December 31,2005, the note holders received a total of 36,106 shares of
the Company’s common stock and warrants to
purchase 82,895 shares of the Company’s common
stock at $9.00 per share within periods ranging from two to
five years from the note agreement date. The Company valued the
common stock at $65,000. The fair value of the warrant granted
was calculated at $30,374 using the Black-Scholes model. The
following assumptions were used to calculate the value of the
warrant: dividend yield of 0%, risk-free interest rate of 5%,
expected life equal to the contractual life of five years, and
volatility of 61.718%.
The Company reduced the carrying value of the notes by
amortizing the fair value of common stock and warrants granted
in connection with the notes payable over the term of each
original note. As of December 31, 2004, all of the
convertible bridge notes payable has been extended to five year
maturities without consideration. The remaining debt discount to
be amortized was $0 at both December 31, 2005 and 2004.
In March 2006, the holders of convertible bridge notes totaling
$683,330 agreed to convert their notes into shares of the
Company’s common stock in the event of an initial public
offering of the Company’s stock. The notes will convert at
the lesser of the exercise price stated in the note or 80% of
the initial public offering price. The Company must complete the
initial public offering of the Company’s stock by
September 30, 2006 or the notes will revert to their prior
terms (see note R for subsequent amendment of terms). The
Company will record a debt inducement expense if and when the
initial public offering is completed.
Non-convertible notes payable
The Company has issued a non-convertible note payable to a
related party. The note is unsecured and requires quarterly
interest payments at 10%. The note has a maturity date of
December 2009.
As consideration for the loan, the lender received a warrant to
purchase 2,967 shares of the Company’s common
stock at $9.00 per share within five years from the note
agreement date. The fair value of the warrant granted was
calculated at $1,071 using the Black-Scholes model. The
following assumptions were used to calculate the value of the
warrant: dividend yield of 0%, risk-free interest rate of 5%,
expected life equal to the contractual life of five years, and
volatility of 61.718%.
The Company reduced the carrying value of the notes by
amortizing the fair value of the warrant granted in connection
with the notes payable over the term of each original note as
additional interest expense. As of December 31, 2004, the
non-convertible note payable has been extended to a five year
maturity without consideration. The remaining debt discount to
be amortized was $0 at both December 31, 2005 and 2004.
NOTE K — LONG-TERM NOTES PAYABLE —
RELATED PARTIES — (Continued)
Future maturities of notes payable are as follows:
Year Ending December 31,
Amount
2006
$
3,000,000
2007
—
2008
100,000
2009
563,750
2010
33,550
Total
$
3,697,300
NOTE L — COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases storage and office space under a
non-cancelable operating lease that requires monthly payments of
$5,415 that escalate to $5,918 through November 2009. The lease
also requires payments of real estate taxes and other operating
expenses.
The Company also leases equipment under a non-cancelable
operating lease that requires monthly payments of $441 through
December 2008.
Rent expense under the operating leases was $98,179 and $55,849
for the years ended December 31, 2005 and December 31,2004, respectively.
Future minimum lease payments for operating leases are as
follows:
Year Ending December 31,
Amount
2006
$
70,458
2007
72,611
2008
74,727
2009
65,095
Total
$
282,891
NOTE M — SHAREHOLDERS’ DEFICIT
The Company has issued common stock purchase warrants to certain
debt holders, contractors, and investors in exchange for their
efforts to sustain the Company. The Company values the warrants
using the Black-Scholes pricing model and they are recorded
based on the reason for issuance.
As of December 31, 2005, the weighted average contractual
life of the outstanding warrants was 3.69 years.
The fair value of each warrant granted is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions.
2005
2004
Expected life
3-5 Years
5 Years
Dividend yield
0
%
0
%
Expected volatility
61.718
%
61.718
%
Risk-free interest rate
5.0
%
5.0
%
The Company issued common stock purchase warrants pursuant to
contractual agreements to certain non-employees. Warrants
granted under these agreements are expensed when the related
service or product is provided. Total expense recognized for
non-employee granted warrants for interest expense and other
services was $86,270 and $56,611 for the years ended
December 31, 2005 and December 31, 2004, respectively.
During 2005, the Company sold 113,889 equity units for
$1,025,000. Each unit contained one share of stock and a warrant
to purchase 25% of a share of the Company’s common
stock. The warrants can be exercised within five years from the
equity unit purchase date at an exercise price of $9.00 per
share.
As of December 31, 2005, the Company had employment
agreements with three key employees. Under these agreements,
upon a sale or merger transaction by the Company, the three
employees will receive warrants to
purchase 55,556 shares of the Company’s common
stock with an exercise price of $9.00 per share for all
three employees. These agreements expired March 31, 2006.
In March 2006, the holders of convertible notes totaling
$2,029,973 agreed to convert their notes into shares of the
Company’s common stock in the event of an initial public
offering of the Company’s stock. The notes will convert at
the lesser of the exercise price stated in the note or 80% of
the initial public offering price. The Company must complete the
initial public offering of the Company’s stock by
September 30, 2006 or the notes will revert to their prior
terms (see note R for subsequent amendment of terms).
In 2006, the Company issued 16,666 shares of common stock
to the holder of a $3,000,000 convertible debenture in payment
of interest due in the amount of $150,000.
NOTE N — STOCK-BASED COMPENSATION
The Company has issued common stock warrants to employees as
stock-based compensation. The Company values the warrants using
the Black-Scholes pricing model. The warrants vested immediately
and had exercise periods of five years.
Information with respect to employee common stock warrants
outstanding and exercisable at December 31, 2005 is as
follows:
Warrants Outstanding
Warrants Exercisable
Weighted-
Average
Weighted-
Weighted-
Remaining
Average
Average
Number
Contractual
Exercise
Number
Exercise
Range of Exercise Prices
Outstanding
Life
Price
Exercisable
Price
$ 0.09-$ 2.16
47,222
2.57 Years
$
0.13
47,222
$
0.13
$ 2.25-$ 6.66
67,411
3.74 Years
2.25
67,411
2.25
$ 6.75-$ 8.91
119,445
4.12 Years
6.75
119,445
6.75
$ 9.00-$11.25
42,481
4.95 Years
9.24
42,481
9.24
$13.50-$22.50
52,778
5.16 Years
13.69
1,111
22.50
329,337
4.09 Years
$
6.31
277,670
$
4.98
During 2005, the Company issued warrants to employees to
purchase 51,667 shares of the Company’s common
stock at an exercise price of $13.50 per share. Also during
2005, the Company issued warrants to non-employees to
purchase 51,667 shares of the Company’s common
stock at an exercise price of $13.50 per share. The
exercise price was changed to $9.00 per share during March
2006. The Company recognized $80,126 of expense during 2006
related to the repricing of these warrants.
Temporary differences between financial statement carrying
amounts and the tax basis of assets and liabilities and tax
credit and operating loss carryforwards that create deferred tax
assets and liabilities are as follows:
2005
2004
Current asset:
Allowance for doubtful accounts
$
1,000
$
—
Property and equipment
(29,000
)
(17,000
)
Accrued expenses
14,000
17,000
Non-current asset:
Net operating loss carryforwards
6,203,000
4,265,000
Deferred tax asset
6,189,000
4,265,000
Less: valuation allowance
(6,189,000
)
(4,265,000
)
Net deferred tax asset
$
—
$
—
Deferred tax liabilities and deferred tax assets reflect the net
tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The
valuation allowance has been established due to the uncertainty
of future taxable income, which is necessary to realize the
benefits of the deferred tax assets. As of December 31,2005, the Company had federal net operating loss
(NOL) carryforwards of approximately $15,600,000, which
will begin to expire in 2020. The Company also has various state
net operating loss carryforwards for income tax purposes of
$14,100,000, which will begin to expire in 2020. The utilization
of a portion of the Company’s NOLs and carryforwards is
subject to annual limitations under Internal Revenue Code
Section 382. Subsequent equity changes could further limit
the utilization of these NOLs and credit carryforwards.
Realization of the NOL carryforwards and other deferred tax
temporary differences are contingent on future taxable earnings.
The deferred tax asset was reviewed for expected utilization
using a “more likely than not” approach by assessing
the available positive and negative evidence surrounding its
recoverability. Accordingly, a full valuation allowance has been
recorded against the Company’s deferred tax asset.
The Company will continue to assess and evaluate strategies that
will enable the deferred tax asset, or portion there of, to be
utilized, and will reduce the valuation allowance appropriately
at such time when it is determined that the “more likely
than not” criteria is satisfied.
The Company’s provision for income taxes differs from the
expected tax benefit amount computed by applying the statutory
federal income tax rate of 34.0% to loss before taxes as a
result of the following:
Stock and warrants issued for deferred financing costs
Related parties
28,479
—
—
—
Non-related parties
25,782
20,000
—
—
Conversion of accounts payable into long-term notes payable
15,000
43,500
—
15,000
Conversion of accounts payable into long-term notes
payable — related party
—
33,550
—
—
Conversion of deferred revenue into long-term note payable
328,275
168,750
—
—
Conversion of accrued interest into long-term notes payable
112,423
—
7,500
90,000
Issuance of note payable in exchange for inventory
482,193
—
—
—
Long-term note payable converted into common stock
—
10,000
—
—
Non-cash purchase of fixed assets through capital lease
—
12,047
5,910
—
Non-cash deposit on capital lease
—
4,966
—
—
Beneficial conversion of short-term notes payable
—
—
749,991
—
NOTE Q — RELATED PARTY TRANSACTIONS
The Company has outstanding convertible notes payable to related
parties. Interest expense incurred to related parties was
$296,898 and $70,569 for the years ended December 31, 2005
and December 31, 2004, respectively. At December 31,2005 and December 31, 2004, the Company had unpaid interest
to shareholders and warrant holders of $169,675 and $99,106,
respectively.
During 2005 and 2006, the Company borrowed funds from two
related parties to fund short-term cash needs. The Company
issued the related parties warrants to
purchase 39,492 shares of the Company’s common
stock at $9.00 per share within five years from the advance
date. The fair value of the warrants
granted was calculated at $155,127 using the Black-Scholes
model. The following assumptions were used to calculate the
value of the warrant: dividend yield of 0%, risk-free interest
rate of 5%, expected life equal to the contractual life of five
years, and volatility of 61.718%. See Note G.
During 2004, two related parties guaranteed short-term notes of
the Company payable to a bank and equipment lease finance
company. The Company issued the related parties warrants to
purchase 25,000 shares of the Company’s common stock
at $13.50 per share within five years from the advance
date. The fair value of the warrant granted was calculated at
$6,054 using the Black-Scholes model. The following assumptions
were used to calculate the value of the warrant: dividend yield
of 0%, risk-free interest rate of 5%, expected life equal to the
contractual life of five years, and volatility of 61.718%.
NOTE R — SUBSEQUENT EVENTS
On April 14, 2006, at a Special Meeting of Shareholders of
the Company, the shareholders approved a one-for-six reverse
stock split of all outstanding common shares. On August 28,2006, the Company’s Board of Directors approved a
two-for-three reverse stock split of all outstanding common
shares. All shares and per share information in the accompanying
financial statements are restated to reflect the effect of these
stock splits.
During July 2006, the holders of convertible bridge notes
payable agreed to extend the date for which the Company was
required to complete the initial public offering of the
Company’s common stock from September 30, 2006 to
November 30, 2006.
During August 2006, the holder of a $200,000 convertible
bridge note payable (see note J) agreed to extend the maturity
through August 25, 2006. On August 25, 2006, the
holder converted the note and the interest accrued to date into
bridge notes.
During July and through August 25, 2006, the Company sold
an additional $2,974,031 principal amount of
12% convertible notes and warrants to
purchase 594,806 shares of common stock. The
convertible notes comprised of the following:
Amount
Cash proceeds
$
2,050,000
Conversion of short-term notes payable to related parties (note
G)
600,000
Conversion of long-term convertible bridge notes payable (note J)
200,000
Accrued interest
69,031
Accounts payable
55,000
Total
$
2,974,031
Cash proceeds are being used as working capital. The notes are
convertible and the warrants exercisable into common stock of
the Company at the option of the lenders at of $7.20 per
share until the Company completes the initial public offering of
its common stock. After the initial public offering, the
exercise price will be 80% of the price at which the
Company’s stock is sold to the public. Interest is payable
at 12% at maturity of the notes. The notes mature one year from
the date of issuance, or 30 days following the closing of
the initial public offering of the Company’s common stock.
The following assumptions were used to calculate the value of
the warrant: dividend yield of 0%, risk-free interest rate of
5%, expected life equal to the contractual life of five years,
and volatility of 61.718%. The Company reduced the carrying
value of the notes by amortizing the fair value of warrants
granted in connection with the note payable over the original
term of the notes as additional interest expense. The Company
determined that there was a beneficial conversion feature of
$803,782 at the date of issuance which was recorded as debt
discount at date of issuance and will be amortized into interest
expense over the original term of the notes. The Company will
record a debt discount of $989,659 during the quarter ending
September 30, 2006. The Company will record an additional
amount related to the beneficial conversion feature if and when
the initial public offering is completed.
Until ,
2006 (25 days after the commencement of the offering), all
dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers’ obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
Section 302A.521, subd. 2, of the Minnesota Statutes
requires that we indemnify a person made or threatened to be
made a party to a proceeding by reason of the former or present
official capacity of the person with respect to the company,
against judgments, penalties, fines, including, without
limitation, excise taxes assessed against the person with
respect to an employee benefit plan, settlements, and reasonable
expenses, including attorneys’ fees and disbursements,
incurred by the person in connection with the proceeding with
respect to the same acts or omissions if such person
(i) has not been indemnified by another organization or
employee benefit plan for the same judgments, penalties or
fines, (ii) acted in good faith, (iii) received no
improper personal benefit, and statutory procedure has been
followed in the case of any conflict of interest by a director,
(iv) in the case of a criminal proceeding, had no
reasonable cause to believe the conduct was unlawful, and
(v) in the case of acts or omissions occurring in the
person’s performance in the official capacity of director
or, for a person not a director, in the official capacity of
officer, board committee member or employee, reasonably believed
that the conduct was in the best interests of the company, or,
in the case of performance by a director, officer or employee of
the company involving service as a director, officer, partner,
trustee, employee or agent of another organization or employee
benefit plan, reasonably believed that the conduct was not
opposed to the best interests of the company. In addition,
Section 302A.521, subd. 3, requires payment by us,
upon written request, of reasonable expenses in advance of final
disposition of the proceeding in certain instances. A decision
as to required indemnification is made by a disinterested
majority of our board of directors present at a meeting at which
a disinterested quorum is present, or by a designated committee
of the board, by special legal counsel, by the shareholders, or
by a court.
Our articles of incorporation and by-laws provide that we shall
indemnify each of our directors, officers and employees to the
fullest extent permissible by Minnesota Statute, as detailed
above. We also maintain a director and officer liability
insurance policy.
The Underwriting Agreement filed as Exhibit 1 to this
Registration Statement provides for indemnification by the
underwriters of us and our officers and directors for certain
liabilities arising under the Securities Act, or otherwise.
Item 25.
Other Expenses of Issuance and Distribution
Expenses in connection with the issuance and distribution of the
shares of common stock being registered hereunder, other than
underwriting commissions and expenses, are estimated below.
Since March 31, 2003, we have issued and sold the following
unregistered securities:
(a) Between May 20, 2003 and February 10, 2005,
we issued $4,510,800 principal amount of
5-year convertible
debentures and notes to 17 investors. In March 2006, we entered
into note conversion agreements and addenda thereto with each of
these investors providing, among other things, for the extension
of payment of principal and interest due on these debt
securities to a date which will be the earlier of our completion
of this offering or September 30, 2006. In addition to
deferral of any payments of principal or interest due on these
debt securities, the note conversion agreements and addenda
thereto provided that the debt securities would be automatically
converted into our common stock at the lesser of the conversion
rate stated in the securities or 80% of the initial public
offering price in this offering. The note conversion agreements
also granted the holders the right to convert accrued interest
into our common stock effective upon the date we complete this
offering.
(b) Between May 16, 2003 and March 31, 2006, we
issued 374,683 shares of common stock to investors in
connection with various financing transactions and as
consideration for extending bridge loans and notes.
(c) Between May 20, 2003 and January 13, 2006, we
issued warrants for the purchase of an aggregate of
427,584 shares of common stock to the holders of our debt
securities, including certain holders of our short-term notes
(described below). The warrants were generally exercisable for a
five-year period at exercise prices ranging from $0.09 to
$13.50 per share.
(d) Between July 10, 2003 and July 22, 2004, we
issued short-term convertible notes to seven investors in
principal amounts aggregating $630,422. All but one of the notes
were convertible into our common stock at the option of the note
holder at $9.00 with the other note convertible at
$13.50 per share. All but one of these notes have been
continuously extended and all but one of the note holders have
entered into note conversion agreements described in
paragraph (a) above.
(e) On October 15, 2003, we issued a warrant to
purchase 1,666 shares of common stock to one of our
former directors. The warrant was for a five-year period at an
exercise price of $0.09 per share.
(f) Between July 1, 2004 and October 3, 2005, we
issued warrants for the purchase of an aggregate of
66,334 shares of common stock to various product
development and service providers. The warrants were generally
exercisable for a five-year period at exercise prices ranging
from $6.75 to $13.50 per share.
(g) Between July 12, 2004 and March 31, 2006, we
issued 64 warrants to 29 employees for the purchase of an
aggregate of 379,264 shares of common stock, exercisable at
prices ranging from $0.09 to $11.75 per share. Of the
warrants issued, five warrants were issued to our current chief
executive officer and five other executive officers, one of whom
is no longer with the Company.
(h) Between February 28, 2005 and December 30,2005, we issued warrants for the purchase of an aggregate of
37,500 shares of common stock to an officer, a non-employee
director and a former director in consideration for their
personal guarantees on loans to our company as described in
“Certain Relationships and Related Party
Transactions.” The warrants were exercisable for a
five-year period at exercise prices ranging from $9.00 to
$13.50. Thee warrants with the exercise price of $13.50 per
share were subsequently repriced to $9.00 per share as
described under “Warrant Repricing” above.
(i) Between June 16, 2005 and March 6, 2006, we
issued warrants for the purchase of an aggregate of
39,490 shares of common stock to one of our directors and
one of our executive officers in connection with a factoring
agreement as described in “Certain Relationships and
Related Party Transactions.” The warrants are exercisable
for a five-year period at an exercise price of $9.00 per
share.
(j) On January 5, 2005 and September 7, 2005, we
borrowed an aggregate of $3,000,000 from the Spirit Lake Tribe,
currently evidenced by a 10% convertible debenture which is
convertible into 30% of our common stock, calculated on a
fully-diluted basis. On March 7, 2006, we and the Spirit
Lake Tribe entered into an amendment to the convertible
debenture agreement providing, among other things, that the
principal amount of the debenture would be automatically
converted into our common stock upon completion of this
offering, equal to 30% of our common stock outstanding on a
fully diluted basis, excluding shares issuable to holders of our
12% convertible notes or as a result of the exercise of the
warrants issued in connection therewith, and shares of common
stock sold in this offering or as a result of the exercise of
the warrant issuable to the underwriter of this offering.
(k) On March 10, 2006, we issued to 53 investors
convertible promissory notes bearing interest at the rate of
12% per annum in an aggregate principal amount of
$2,775,000 and issued to the holders thereof, warrants to
purchase an aggregate of 555,000 shares of our common
stock. These convertible promissory notes are convertible into
our common stock at $7.20 per share, subject to
anti-dilution adjustments or, following this offering, at 80% of
the initial public offering price thereof, subject to adjustment
pursuant to anti-dilution provisions. The warrants issued to
such individuals are similarly exercisable at such exercise
prices. Unless converted or prepaid, these notes mature on the
earlier of March 10, 2007 or thirty days following the
closing of this offering. In connection with the private
placement described in this paragraph (k), we appointed
Feltl and Company our exclusive agent and paid Feltl and Company
commissions totaling $277,500, a nonaccountable expense
allowance of $83,250 and a reimbursement for fees of legal
counsel totaling $26,988.20.
(l) On March 27, 2006, we issued six-year warrants to
purchase an aggregate of 50,000 shares of our common stock
to two holders of our short-term promissory notes as described
in “Certain Relationships and Related Party
Transactions.” These warrants are exercisable at
$6.30 per share.
(m) On March 31, 2006, we issued five-year warrants
for the purchase of an aggregate of 51,667 shares of common
stock to three of our executive officers. These warrants are
exercisable at $9.00 per share.
(n) On June 30, 2006, we issued 8,333 shares of common
stock to Spirit Lake Tribe in connection with the quarterly
interest payment on their convertible debenture as described in
“Certain Relationships and Related Transactions.”
(o) On June 30, 2006, we issued an aggregate of
45,332 shares of common stock to two holders of our
short-term promissory notes as consideration for extending their
promissory notes as described in “Certain Relationships and
Related Transactions.”
(p) On July 27, 2006, we issued to 12 investors
convertible promissory notes bearing interest at the rate of 12%
per annum in an aggregate principal amount of $1,431,097 and
issued to the holders thereof warrants to purchase an aggregate
of 286,219 shares of our common stock. These convertible
promissory notes are convertible into our common stock at $7.20
per share, subject to anti-dilution adjustments or, following
this offering, at 80% of the initial public offering price
thereof, subject to adjustment pursuant to antidilution
provisions. The warrants issued to such individuals are
similarly exercisable at such exercise prices. Unless converted
or prepaid, these notes mature on the earlier of March 10,2007 or thirty days following the closing of this offering.
(q) On August 25, 2006, we issued to 20 investors
convertible promissory notes bearing interest at the rate of 12%
per annum in an aggregate principal amount of $1,542,934 and
issued to the holders thereof warrants to purchase an aggregate
of 308,587 shares of our common stock. These convertible
promissory notes are convertible into our common stock at $7.20
per share, subject to anti-dilution adjustments or, following
this offering, at 80% of the initial public offering price
thereof, subject to adjustment pursuant to antidilution
provisions. The warrants issued to such individuals are
similarly exercisable at such exercise prices. Unless converted
or prepaid, these notes mature on the earlier of March 10,2007 or thirty days following the closing of this offering.
(r) On August 25, 2006, we issued 20,000 shares of
common stock to a holder of our convertible promissory notes in
connection with such holder’s exchange of the promissory
note for our 12% convertible notes and warrants to purchase
common stock as described in “Certain Relationships and
Related Transactions.”
Except as noted in paragraph (k) above, we did not pay
or give, directly or indirectly, any commission or other
remuneration, including underwriting discounts or commissions,
in connection with any of the issuances of securities listed
above.
The sales of the securities identified in
paragraphs (a) through (r) above were made
pursuant to privately negotiated transactions that did not
involve a public offering of securities and, accordingly, we
believe that these transactions were exempt from the
registration requirements of the Securities Act pursuant to
Section 4(2) thereof and rules promulgated thereunder. Each
of the above-referenced investors represented to us in
connection with their investment that they were “accredited
investors” (as defined by Rule 501 under the
Securities Act) and were acquiring the securities for investment
and not distribution, that they could bear the risks of the
investment and could hold the securities for an indefinite
period of time. The investors received written disclosures that
the securities had not been registered under the Securities Act
and that any resale must be made pursuant to a registration or
an available exemption from such registration. All of the
foregoing securities are deemed restricted securities for
purposes of the Securities Act.
The issuance of warrants to our associates described in
paragraphs (e), (f), (g), (h), (i), (l) and (m) and
the common stock issuable upon the exercise of the warrants as
described in this Item 26 were issued pursuant to written
compensatory plans or arrangements with our associates,
officers, directors and advisors in reliance upon the exemption
provided by Rule 701 promulgated under Section 3(b) of
the Securities Act. All recipients either received information
about us or had access, through employment or other
relationships, to such information.
Amendment No. 2 to Amended and Restated Convertible
Debenture Agreement and Debenture between the Registrant and
Spirit Lake Tribe dated July 18, 2006.
10
.25
Note Amendment Agreement by and between the Registrant and
Galtere International Master Fund L.P. dated July 21, 2006.
To provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and
registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
For determining any liability under the Securities Act, to treat
the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by
the registrant under Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement
as of the time the Commission declared it effective.
For determining any liability under the Securities Act, to treat
each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in
the registration statement, and that offering of the securities
at that time as the initial bona fide offering of those
securities.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that,
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding ) is
asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
In accordance with the requirements of the Securities Act of
1933, the registrant certifies that it has reasonable grounds to
believe that it meets all the requirements for filing on
Form SB-2 and
authorized this registration statement to be signed on its
behalf by the undersigned in the City of Eden Prairie, State of
Minnesota, on August 29, 2006.
Each person whose signature appears below constitutes and
appoints Jeffrey C. Mack and John A. Witham, each or either of
them, such person’s true and lawful
attorney-in-fact and
agent with full power of substitution and resubstitution for
such person and in such person’s name, place and stead, in
any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration
statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said
attorney-in-fact and
agent full power and authority to do and perform each and every
act and thing necessary or desirable to be done in and about the
premises, as fully to all intents and purposes as such person,
hereby ratifying and confirming all that said
attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
Amendment No. 2 to Amended and Restated Convertible
Debenture Agreement and Debenture between the Registrant and
Spirit Lake Tribe dated July 18, 2006.
10
.25
Note Amendment Agreement by and between the Registrant and
Galtere International Master Fund L.P. dated July 21, 2006.