As filed with the Securities and Exchange Commission on
August 29, 2006
Registration
No.
333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Wireless Ronin Technologies, Inc.
(Name of Small Business Issuer in Its Charter)
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Minnesota
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7373
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41-1967918
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(State or Other Jurisdiction of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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14700 Martin Drive
Eden Prairie, Minnesota 55344
(952) 224-8110
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
Jeffrey C. Mack
Chairman of the Board of Directors, President and Chief
Executive Officer
Wireless Ronin Technologies, Inc.
14700 Martin Drive
Eden Prairie, Minnesota 55344
(952) 224-8110
(Name, Address and Telephone Number for Agent For Service)
Copies to:
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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, Minnesota 55402
(612) 977-8400 (phone)
(612) 977-8650 (fax)
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William M. Mower, Esq.
Alan M. Gilbert, Esq.
Maslon Edelman Borman & Brand, LLP
90 South 7th Street, Suite 3300
Minneapolis, Minnesota 55402
(612) 672-8200 (phone)
(612) 672-8397 (fax)
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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
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Proposed Maximum
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Proposed Maximum
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Title of Each Class of
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Dollar Amount
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Offering Price
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Aggregate
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Amount of
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Securities to be Registered
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to be Registered
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Per Unit
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Offering Price(1)
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Registration Fee
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Common Stock, $0.01 par value per share
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$25,875,000
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$5.00
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$25,875,000
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$2,768.63
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(1)
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Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(o) of the Securities Act of 1933,
as amended.
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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.
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PROSPECTUS
SUBJECT TO COMPLETION, DATED
AUGUST 29, 2006
4,500,000 Shares
Common Stock
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 $5.00 per share.
We intend to apply to list our common stock on The Nasdaq
Capital Market under the symbol “RNIN.”
The underwriter has an option to purchase a maximum of 675,000
additional shares of our common stock at the initial public
offering price, less underwriting discounts and commissions, to
cover over-allotments.
Investing in our common stock involves risks. See “Risk
Factors” on page 6.
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Underwriting
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Proceeds to
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Discounts and
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Wireless Ronin
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Price to Public
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Commissions
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Technologies
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Per Share
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$
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$
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$
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Total
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$
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$
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$
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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.
The date of this prospectus
is ,
2006.
TABLE OF CONTENTS
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.
PROSPECTUS SUMMARY
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:
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retail (including Sealy Corporation and Best Buy);
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hospitality (including Foxwoods Resort Casino);
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specialized services (including St. Mary’s Duluth
Clinic Health System); and
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public spaces (including Las Vegas Convention and Visitors
Authority and Minneapolis Convention Center).
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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.
1
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:
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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.
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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.
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Custom Solutions
— In many instances, our
customers require customized software solutions. Our sales team
and software engineers tailor solutions that meet our
customers’ needs.
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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.
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We were incorporated in the State of Minnesota on March 23,
2000. Our principal executive office is located at 14700 Martin
Drive, Eden Prairie, Minnesota 55344. 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.
2
The Offering
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Common stock offered by us
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4,500,000 shares
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Common stock outstanding prior to this offering
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866,035 shares
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Common stock to be outstanding after this offering
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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.
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Use of proceeds
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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:
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• approximately $7.6 million to repay
outstanding debt and accrued interest; and
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• the remainder for working capital and general
corporate purposes. See “Use of Proceeds” for more
information.
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Risk factors
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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.
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Proposed Nasdaq Capital Market symbol
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RNIN
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Except as otherwise indicated, all information in this
prospectus:
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gives effect to a one-for-six reverse stock split of our common
stock completed in April 2006;
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gives effect to the two-for-three reverse stock split of our
common stock completed in August 2006;
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assumes no exercise of the underwriter’s over-allotment
option or underwriter’s warrant; and
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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).
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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:
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2,160,748 shares of common stock issuable upon exercise of
outstanding warrants;
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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
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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.
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3
Recent Financing Transactions
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 $2,974,031 aggregate principal amount of additional
12% convertible bridge notes, together with warrants to purchase
594,806 shares of our common stock to purchasers of the
bridge notes, on the same terms as the notes and warrants issued
in the March 2006 offering.
4
Summary of Selected Financial Information
You should read the summary financial data below in conjunction
with our financial statements and the related notes and with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in
this prospectus. The statements of operations data for the years
ended December 31, 2005 and 2004 and the balance sheet data
as of December 31, 2005 and 2004 are derived from our
audited financial statements that are included elsewhere in this
prospectus.
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Unaudited
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Years Ended December 31,
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Six Months Ended June 30,
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2005
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2004
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2006
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2005
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Statement of Operations Data:
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Sales
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$
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710,216
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$
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1,073,990
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$
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934,226
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$
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384,104
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Cost of revenue(1)
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939,906
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1,029,072
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433,933
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230,343
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Selling, general and administrative
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2,889,230
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2,168,457
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2,520,745
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1,345,095
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Research and development expenses
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881,515
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687,398
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430,540
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471,544
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Other expenses
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789,490
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528,433
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1,707,302
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383,900
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Net loss
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(4,789,925
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(3,339,370
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(4,158,294
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(2,046,778
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Loss per common share
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$
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(7.18
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$
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(6.87
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$
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(5.27
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$
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(3.40
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Weighted average basic and diluted shares outstanding
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666,712
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486,170
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789,320
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602,263
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As of June 30, 2006
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December 31,
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December 31,
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Actual
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As
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2005
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2004
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(unaudited)
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Adjusted(2)
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Pro Forma(2)
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Balance Sheet Data:
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Current assets
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$
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768,187
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$
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364,924
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$
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658,596
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$
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2,151,727
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$
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11,638,062
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Total assets
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1,313,171
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701,598
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1,828,714
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3,686,814
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12,354,143
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Current liabilities
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7,250,478
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3,999,622
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9,082,269
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9,187,704
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1,427,612
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Non-current liabilities
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1,668,161
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1,397,563
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1,627,401
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1,627,401
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105,687
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Total liabilities
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8,918,639
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5,397,185
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10,709,670
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10,815,105
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1,533,299
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Shareholders equity (deficit)
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$
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(7,605,468
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$
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(4,695,587
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$
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(8,880,956
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)
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$
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(7,128,291
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)
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$
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10,820,844
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(1)
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Includes $390,247 in inventory write downs for the year ended
December 31, 2005 and $0 in inventory write-downs for the
year ended December 31, 2004.
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(2)
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The balance sheet data above sets forth summary financial data
as of June 30, 2006, December 31, 2005 and
December 31, 2004, on an actual basis, and as of
June 30, 2006:
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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
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as further adjusted on a pro forma basis to give effect to:
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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;
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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
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payment of certain outstanding indebtedness and accrued interest
totaling $7,551,665.
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5
RISK FACTORS
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
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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.
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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.
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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.
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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:
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our ability to demonstrate RoninCast’s economic and other
benefits;
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our customers becoming comfortable with using RoninCast; and
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the reliability of the software and hardware comprising
RoninCast and our other products.
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6
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.
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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.
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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:
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reduced need to upgrade existing visual marketing systems;
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introduction of products by our competitors;
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lower prices offered by our competitors; and
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changes in budgets and purchasing priorities.
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Our prospective customers routinely require education regarding
the use and benefit of our products. This may also lead to
delays in receiving customers’ orders.
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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.
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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.
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We depend on third party manufacturers, suppliers and
service providers.
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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
7
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.
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Reductions in hardware costs could adversely affect our
revenues.
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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.
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There are risks related to our need to obtain, and
reliance upon, strategic partners and resellers.
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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:
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we may not be able to adequately train our partners and
resellers to sell and service our products;
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they may emphasize competitors’ products or decline to
carry our products; and
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channel conflict may arise between other third parties and/or
our internal sales staff.
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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.
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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.
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Our future success depends on key personnel and our
ability to attract and retain additional personnel.
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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.
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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.
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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.
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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.
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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:
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pay substantial damages;
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cease the manufacture, use or sale of infringing products;
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discontinue the use of certain technology; or
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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.
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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.”
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If we are unable to successfully implement security
measures protecting our customers’ intellectual property
and other information, our business may be adversely
affected.
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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.
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We could have liability arising out of our previous sales
of unregistered securities.
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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.
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We compete with other companies that have more resources,
which may put us at a competitive disadvantage.
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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.
10
Risks Related to this Offering
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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:
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price and volume fluctuations in the overall stock market from
time to time;
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significant volatility in the market price and trading volume of
companies in our industry;
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actual or anticipated changes in our earnings or fluctuations in
our operating results or in the expectations of financial market
analysts;
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investor perceptions of our industry, in general, and our
company, in particular;
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the operating and stock performance of comparable companies;
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general economic conditions and trends;
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major catastrophic events;
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loss of external funding sources;
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sales of large blocks of our stock or sales by insiders; or
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departures of key personnel.
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If you purchase shares of common stock sold in this
offering, you will experience significant and immediate
dilution.
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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.
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Our directors, executive officers and the Spirit Lake
Tribe together may exercise significant control over our
company.
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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.
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Our articles of incorporation, bylaws and Minnesota law
may discourage takeovers and business combinations that our
shareholders might consider in their best interests.
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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.
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|
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.
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|
|
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
13
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.
14
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
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:
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•
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our estimates of future expenses, revenue and profitability;
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•
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trends affecting our financial condition and results of
operations;
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•
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our ability to obtain customer orders;
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•
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the availability and terms of additional capital;
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•
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our ability to develop new products;
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•
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our dependence on key suppliers, manufacturers and strategic
partners;
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•
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industry trends and the competitive environment;
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•
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the impact of losing one or more senior executive or failing to
attract additional key personnel; and
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•
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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.
15
USE OF PROCEEDS
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.
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.
16
CAPITALIZATION
The following table sets forth our capitalization as of
June 30, 2006, on an actual basis and as:
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•
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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
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•
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further adjusted on a pro forma basis to give effect to:
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•
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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;
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•
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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
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•
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the repayment of indebtedness, including principal and accrued
interest, totaling $7,551,665.
|
You should read the information below in conjunction with our
financial statements and the related notes and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in
this prospectus.
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June 30, 2006
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June 30, 2006
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Pro Forma As
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Actual
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As Adjusted
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Adjusted
|
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Current portion of notes payable(1)
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$
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2,852,259
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$
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3,166,725
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$
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0
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(2)
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Current portion of notes payable-related parties(1)
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4,036,990
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4,036,990
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Current portion of capital lease obligation
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44,701
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44,701
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44,701
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6,933,950
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7,248,416
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44,701
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Notes payable, net of current portion
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824,414
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824,414
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0
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(2)
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Notes payable, net of current portion-related parties
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697,300
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697,300
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Capital lease obligations, net of current portion
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105,687
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105,687
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105,687
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Shareholders’ equity:
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Undesignated preferred stock; authorized 16,666,666 shares;
no shares issued and outstanding
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0
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0
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0
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Common stock, $0.01 par value; authorized —
50,000,000 shares; issued and outstanding —
846,035 shares
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8,460
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8,743
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71,993
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(3)
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Additional paid-in capital
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13,914,854
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15,848,313
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41,391,493
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Accumulated deficit
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(22,804,270
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)
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(22,985,347
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)
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(30,642,642
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)
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Total shareholders’ equity
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|
(8,880,956
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)
|
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|
(7,128,291
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)
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10,820,844
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Total capitalization
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$
|
(7,253,555
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)
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$
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(5,500,890
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)
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$
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10,926,531
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(1)
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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.
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(2)
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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
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17
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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.
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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.
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(3)
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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.
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18
DILUTION
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 $3.00 per share (or 67% of
the initial offering price per share) to new investors. The
following table illustrates this per share dilution:
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Assumed initial public offering price per share
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$
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4.50
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Net tangible book value per share at June 30, 2006
|
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$
|
(11.03
|
)
|
|
|
|
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|
Pro forma increase in net tangible book value per share as of
June 30, 2006, 2005
|
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|
1.94
|
|
|
|
|
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|
Pro forma increase in tangible book value attributable to
conversion of convertible notes and convertible debentures
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6.79
|
|
|
|
|
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Increase in pro forma net tangible book value per share
attributable to new investors
|
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|
3.80
|
|
|
|
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|
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|
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|
Pro forma as adjusted net tangible book value per share after
this offering
|
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1.50
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|
|
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|
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Dilution per share to new investors
|
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$
|
3.00
|
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|
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|
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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.
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|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
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|
|
|
|
|
|
|
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|
Average Price Per
|
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
(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.
|
19
SELECTED FINANCIAL DATA
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.
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|
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|
Unaudited
|
|
|
|
|
Years Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
710,216
|
|
|
$
|
1,073,990
|
|
|
$
|
934,226
|
|
|
$
|
384,104
|
|
|
|
Cost of revenue(1)
|
|
|
939,906
|
|
|
|
1,029,072
|
|
|
|
433,933
|
|
|
|
230,343
|
|
|
|
Selling, general and administrative
|
|
|
2,889,230
|
|
|
|
2,168,457
|
|
|
|
2,520,745
|
|
|
|
1,345,095
|
|
|
|
Research and development expenses
|
|
|
881,515
|
|
|
|
687,398
|
|
|
|
430,540
|
|
|
|
471,544
|
|
|
|
Other expenses
|
|
|
789,490
|
|
|
|
528,433
|
|
|
|
1,707,302
|
|
|
|
383,900
|
|
|
|
Net loss
|
|
|
(4,789,925
|
)
|
|
|
(3,339,370
|
)
|
|
|
(4,158,294
|
)
|
|
|
(2,046,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share
|
|
$
|
(7.18
|
)
|
|
$
|
(6.87
|
)
|
|
$
|
(5.27
|
)
|
|
$
|
(3.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic and diluted shares outstanding
|
|
|
666,712
|
|
|
|
486,170
|
|
|
|
789,320
|
|
|
|
602,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Actual
|
|
|
As
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
(unaudited)
|
|
|
Adjusted(2)
|
|
|
Pro Forma(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
768,187
|
|
|
$
|
364,924
|
|
|
$
|
658,596
|
|
|
$
|
2,151,727
|
|
|
$
|
11,638,062
|
|
|
|
Total assets
|
|
|
1,313,171
|
|
|
|
701,598
|
|
|
|
1,828,714
|
|
|
|
3,686,814
|
|
|
|
12,354,143
|
|
|
|
Current liabilities
|
|
|
7,250,478
|
|
|
|
3,999,622
|
|
|
|
9,082,269
|
|
|
|
9,187,704
|
|
|
|
1,427,612
|
|
|
|
Non-current liabilities
|
|
|
1,668,161
|
|
|
|
1,397,563
|
|
|
|
1,627,401
|
|
|
|
1,627,401
|
|
|
|
105,687
|
|
|
|
Total liabilities
|
|
|
8,918,639
|
|
|
|
5,397,185
|
|
|
|
10,709,670
|
|
|
|
10,815,105
|
|
|
|
1,533,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity (deficit)
|
|
$
|
(7,605,468
|
)
|
|
$
|
(4,695,587
|
)
|
|
$
|
(8,880,956
|
)
|
|
$
|
(7,128,291
|
)
|
|
$
|
10,820,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes $390,247 in inventory write downs for the year ended
December 31, 2005 and $0 in inventory write-downs for the
year ended December 31, 2004.
|
|
|
|
(2)
|
The balance sheet data above sets forth summary financial data
as of June 30, 2006, December 31, 2005 and
December 31, 2004, on an actual basis, and as of
June 30, 2006:
|
|
|
|
|
|
|
•
|
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.
|
20
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
21
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.
We recognize revenue primarily from these sources:
|
|
|
|
|
|
•
|
technology license and royalties;
|
|
|
|
|
•
|
product and software license sales;
|
|
|
|
|
•
|
content development services;
|
|
|
|
|
•
|
training and implementation; and
|
|
|
|
|
•
|
maintenance and support contracts.
|
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.
22
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 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.
23
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months
|
|
|
|
|
Year ended
|
|
|
Year ended
|
|
|
ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(4,789,925
|
)
|
|
$
|
(3,339,370
|
)
|
|
$
|
(2,046,778
|
)
|
|
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
24
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
Six Months Ended June 30, 2006 Compared to Six Months
Ended June 30, 2005
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
25
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.
Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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.
26
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).
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 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
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.
27
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.
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 Company January 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
28
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.
29
BUSINESS
General
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
30
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
|
31
|
|
|
|
|
|
|
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.
|
32
|
|
|
|
|
|
•
|
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.
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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.
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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.
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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.
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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.
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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
1
1
/
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.
33
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
SealyTouch
TM
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:
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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.
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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
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International airport utilizing RoninCast with mobile
communications. Both in-house and off-site digital signage is
controlled from one central location.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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Wynn Las Vegas
— Content developed exclusively
by Wynn for its proprietary outdoor display is previewed, edited
and approved using our system.
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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.
35
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.
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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 of our solution include:
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User-Friendly Network Control
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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.
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.
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Intelligent Content Distribution
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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.
37
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.
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Enterprise-Level Compatibility
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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.
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.
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
38
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.
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.
39
Services
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
RONINCAST
tm
and
Design
tm.
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
40
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, Minnesota 55344. 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,
Minnesota 55344. 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.
41
MANAGEMENT
The following table sets forth the name, age and positions of
each of our directors and executive officers as of
August 28, 2006:
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Name
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Age
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Position
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Jeffrey C. Mack
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53
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Chairman, President, Chief Executive Officer and Director
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Christopher F. Ebbert
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40
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Executive Vice President and Chief Technology Officer
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John A. Witham
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54
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Executive Vice President and Chief Financial Officer
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Stephen E. Jacobs
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58
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Executive Vice President and Secretary
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Scott W. Koller
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44
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Senior Vice President, Sales and Marketing
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Henry B. May
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51
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Senior Vice President, Operations
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Dr. William F. Schnell
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50
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Director
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Carl B. Walking Eagle Sr.
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64
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Director
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Gregory T. Barnum
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51
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Director
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Thomas J. Moudry
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45
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Director
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Brett A. Shockley
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46
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Director
|
Executive Officers
Jeffrey C. Mack
has 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. Witham
has 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.
42
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.
Directors
Jeffrey C. Mack.
See
biography above.
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. Barnum
joined 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. Moudry
joined 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. Shockley
joined 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.
43
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.
44
Executive Compensation
Summary Compensation Table
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.
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Long-Term
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Annual Compensation
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Compensation
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Awards
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Securities
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Other Annual
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Underlying
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All Other
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Name and Principal Position
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Salary($)
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Bonus($)
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Compensation($)
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Options(#)(1)
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Compensation($)
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Jeffrey C. Mack
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139,766
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38,500
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—
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18,333
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—
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Chairman of the Board of Directors, President and Chief
Executive Officer
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Michael J. Hopkins
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105,692
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6,000
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—
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6,667
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—
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Executive Vice President
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Christopher F. Ebbert
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129,615
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12,000
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—
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61,308
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—
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Executive Vice President and Chief Technology Officer
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Scott W. Koller
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114,231
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6,000
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7,661
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(2)
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8,334
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—
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Senior Vice President Sales and Marketing
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(1)
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Represents the number of shares of common stock underlying
warrants granted.
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(2)
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Represents sales commissions paid to Mr. Koller.
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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.
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Individual Grants
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Percent of Total
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Exercise
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Number of Securities
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Options Granted
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or Base
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Underlying Options
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to Employees in
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Price
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Name
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Granted(#)(1)
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Fiscal Year
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($/share)
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Expiration Date
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Jeffrey C. Mack
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18,333
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6.67
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%
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6.75
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9/2/2010
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21,667
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7.88
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%
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13.50
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(2)
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3/31/2011
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Michael J. Hopkins
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6,667
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2.99
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%
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2.25
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1/26/2010
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6,944
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3.11
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9.00
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12/30/2010
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Christopher F. Ebbert
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3,889
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1.41
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%
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2.25
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1/26/2010
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27,778
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10.11
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%
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0.09
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1/26/2010
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1,864
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0.68
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%
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9.00
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4/22/2010
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13,889
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5.05
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%
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6.75
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9/3/2010
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13,889
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5.05
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%
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6.75
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9/3/2010
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15,000
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5.46
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%
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13.50
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(2)
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3/31/2011
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Scott W. Koller
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5,556
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2.02
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%
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6.75
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8/4/2010
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2,778
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1.01
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%
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11.25
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10/10/2010
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45
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(1)
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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.
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(2)
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These warrants were subsequently repriced to $9.00 per
share as described under “Certain Relationships and Related
Party Transactions — Warrant Repricing” below.
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Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
The following table sets forth certain information concerning
unexercised warrants held by the named executive officers as of
December 31, 2005. No warrants were exercised by the named
executive officers during the fiscal year ended
December 31, 2005.
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Number of Securities
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Value of Unexercised
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Underlying Unexercised
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In-The-Money
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Options at
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Options at
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Fiscal Year-End(#)(1)
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Fiscal Year-End($)(2)
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Name
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Exercisable
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Unexercisable
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Exercisable
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Unexercisable
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Jeffrey C. Mack
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53,689
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21,667
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$
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159,099
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—
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Michael J. Hopkins
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16,167
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0
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$
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46,699
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—
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Christopher F. Ebbert
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77,061
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15,000
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$
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294,995
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—
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Scott W. Koller
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11,573
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0
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—
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—
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(1)
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Represents shares of common stock issuable upon exercise of
outstanding warrants.
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(2)
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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
46
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.
47
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:
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Michael Frank
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10,000 shares
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Carl B. Walking Eagle Sr.
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40,000 shares
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Barry W. Butzow
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10,000 shares
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Gregory T. Barnum
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40,000 shares
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Thomas J. Moudry
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40,000 shares
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Brett A. Shockley
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40,000 shares
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William F. Schnell
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40,000 shares
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Susan K. Haugerud
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10,000 shares
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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.
48
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
49
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
50
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.
51
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:
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Warrant
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Name
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Shares
|
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|
|
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|
Jeffrey C. Mack
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21,667
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Stephen E. Jacobs
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23,333
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Christopher F. Ebbert
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15,000
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Marshall Group
|
|
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4,444
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Barry W. Butzow
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|
|
16,667
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Michael Frank
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|
|
22,222
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|
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
52
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.
53
PRINCIPAL SHAREHOLDERS
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:
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•
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each person who is known by us to own beneficially more than 5%
of our common stock;
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•
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each current director;
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•
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each of our executive officers; and
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•
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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, Minnesota 55344.
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Beneficial Ownership
|
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Beneficial Ownership
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Prior to Offering
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After Offering(1)
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Name and Address of Beneficial Owner
|
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Shares
|
|
|
Percent
|
|
|
Shares
|
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|
Percent
|
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|
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Directors and Executive Officers
|
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Jeffrey C. Mack
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53,689
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(2)
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5.8
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%
|
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|
53,689
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*
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%
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Michael J. Hopkins
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33,944
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(3)
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3.9
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%
|
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|
33,944
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|
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*
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%
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|
Christopher F. Ebbert
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121,052
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(4)
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12.8
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%
|
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121,052
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1.7
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%
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John A. Witham
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22,222
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(5)
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2.5
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%
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22,222
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|
|
|
*
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%
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Stephen E. Jacobs
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133,933
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(6)
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13.5
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%
|
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133,933
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|
|
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1.8
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%
|
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Scott W. Koller
|
|
|
11,574
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(7)
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|
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1.3
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%
|
|
|
11,574
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|
|
|
*
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%
|
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Henry B. May
|
|
|
—
|
|
|
|
—
|
|
|
|
—
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—
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Dr. William F. Schnell
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74,769
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(8)
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8.3
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%
|
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|
74,769
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|
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|
1.0
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%
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Carl B. Walking Eagle Sr.
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1,305,525
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(9)
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61.4
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%
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1,305,525
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18.1
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%
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Gregory T. Barnum
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|
|
—
|
(10)
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|
—
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|
—
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|
|
—
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Thomas J. Moudry
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|
|
—
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(10)
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|
|
—
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|
—
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|
|
—
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Brett A. Shockley
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|
|
—
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(10)
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—
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—
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—
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5% Beneficial Owners
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Spirit Lake Tribe
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1,305,525
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(11)
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61.4
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%
|
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|
1,305,525
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18.1
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%
|
|
Barry W. Butzow
|
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467,850
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(12)
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36.6
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%
|
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|
467,850
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6.3
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%
|
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Jack Norqual
|
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|
311,428
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(13)
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27.7
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%
|
|
|
311,428
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|
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4.3
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%
|
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Galtere International
|
|
|
104,245
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(14)
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|
11.0
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%
|
|
|
104,245
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|
|
|
1.4
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%
|
|
R.A. Stinski
|
|
|
197,957
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(15)
|
|
|
19.3
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%
|
|
|
197,957
|
|
|
|
2.7
|
%
|
|
Jill Jensen-Behr
|
|
|
72,729
|
(16)
|
|
|
8.1
|
%
|
|
|
72,729
|
|
|
|
1.0
|
%
|
|
Steve Meyer
|
|
|
66,806
|
(17)
|
|
|
7.3
|
%
|
|
|
66,806
|
|
|
|
*
|
%
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial Ownership
|
|
|
Beneficial Ownership
|
|
|
|
|
Prior to Offering
|
|
|
After Offering(1)
|
|
|
|
|
|
|
|
|
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|
Name and Address of Beneficial Owner
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Shares
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Percent
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Shares
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Percent
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|
|
|
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|
|
|
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|
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C. Donald Dorsey
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163,148
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(18)
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16.0
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%
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163,148
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2.3
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%
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SHAG LLC
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64,352
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(19)
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7.2
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%
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64,352
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*
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%
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All executive officers and directors as a
group (11 persons)
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1,756,708
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(20)(21)
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71.0
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%
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|
1,756,708
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23.4
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%
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*
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Less than 1%
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(1)
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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.
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(2)
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Represents shares issuable upon exercise of warrants. Excludes
55,555 shares issuable upon exercise of options granted subject
to shareholder approval.
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(3)
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Includes 16,167 shares issuable upon exercise of warrants.
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(4)
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Includes 6,213 shares issuable upon conversion of
convertible notes and 77,061 shares issuable upon exercise
of warrants.
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(5)
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Represents shares issuable upon exercise of warrants. Excludes
22,222 shares issuable upon exercise of options granted
subject to shareholder approval.
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(6)
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Includes 18,519 shares issuable upon conversion of
convertible notes and 109,859 shares issuable upon exercise
of warrants.
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(7)
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Represents shares issuable upon exercise of warrants.
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(8)
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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.
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(9)
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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.
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(10)
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Excludes 13,333 shares issuable upon exercise of options
granted subject to shareholder approval.
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(11)
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Includes 1,261,081 shares issuable upon conversion of a
convertible debenture.
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(12)
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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.
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(13)
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Includes 133,970 shares issuable upon conversion of
convertible notes and 124,236 shares issuable upon exercise
of warrants.
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(14)
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Includes 55,634 shares issuable upon conversion of
convertible notes and 29,167 shares issuable upon exercise
of warrants.
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(15)
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Includes 66,093 shares issuable upon conversion of
convertible notes and 92,698 shares issuable upon exercise
of warrants.
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(16)
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Includes 29,029 shares issuable upon exercise of warrants.
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(17)
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Includes 23,148 shares issuable upon conversion of
convertible notes and 31,157 shares issuable upon exercise
of warrants.
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55
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(18)
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Includes 92,593 shares issuable upon conversion of
convertible notes and 59,444 shares issuable upon exercise
of warrants.
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(19)
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Includes 19,907 shares issuable upon conversion of a
promissory note and 11,111 shares issuable upon exercise of
warrants.
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(20)
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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.
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(21)
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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.
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56
DESCRIPTION OF CAPITAL STOCK
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:
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•
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have the right to receive ratably any dividends from funds
legally available therefor, when, as and if declared by our
board of directors;
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•
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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
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•
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are entitled to one vote per share on all matters which
shareholders may vote on at all meetings of shareholders.
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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
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.
57
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.
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Spirit Lake Tribe Debenture
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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:
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•
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the total outstanding shares of common stock;
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•
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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
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•
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all shares of common stock that can be acquired pursuant to
warrants or options issued to employees pursuant to existing
employment contracts.
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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.
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.
58
Warrants
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.
59
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.”
60
SHARES ELIGIBLE FOR FUTURE SALE
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:
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1% of the number of shares of common stock then outstanding, or
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•
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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.
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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:
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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
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•
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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,
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61
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.
62
UNDERWRITING
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.
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Payable by Us
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No exercise
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Full Exercise
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Per share
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$
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Total
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$
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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
63
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
64
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.
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.
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 site
http://www.sec.gov.
65
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004 (AUDITED)
AND THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(UNAUDITED)
F-1
|
|
|
|
|
|
|
|
|
|
|
F-3
|
|
|
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
F-6
|
|
|
|
|
|
|
F-9
|
|
|
|
|
|
|
F-10
|
|
F-2
Report of Independent Registered Accounting Firm
The Board of Directors and Shareholders
Wireless
Ronin
®
Technologies, Inc.
Eden Prairie, Minnesota
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.
|
|
|
|
|
/s/ Virchow, Krause &
Company, LLP
|
Minneapolis, Minnesota
March 30, 2006 (except Note R, for which the date is
August 28, 2006)
F-3
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
BALANCE SHEETS
DECEMBER 31, 2005 AND 2004 AND JUNE 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
ASSETS
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
134,587
|
|
|
$
|
99,644
|
|
|
$
|
214,338
|
|
|
|
Accounts receivable, net
|
|
|
216,380
|
|
|
|
27,548
|
|
|
|
123,395
|
|
|
|
Inventories
|
|
|
391,503
|
|
|
|
211,228
|
|
|
|
284,582
|
|
|
|
Prepaid expenses and other current assets
|
|
|
25,717
|
|
|
|
26,504
|
|
|
|
36,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
768,187
|
|
|
|
364,924
|
|
|
|
658,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, net
|
|
|
384,221
|
|
|
|
302,429
|
|
|
|
462,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred financing costs, net
|
|
|
143,172
|
|
|
|
20,139
|
|
|
|
454,037
|
|
|
|
Other assets
|
|
|
17,591
|
|
|
|
14,106
|
|
|
|
253,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,763
|
|
|
|
34,245
|
|
|
|
707,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,313,171
|
|
|
$
|
701,598
|
|
|
$
|
1,828,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank lines of credit and notes payable
|
|
$
|
844,599
|
|
|
$
|
450,000
|
|
|
$
|
2,475,764
|
|
|
|
Short-term notes payable — related parties
|
|
|
64,605
|
|
|
|
—
|
|
|
|
421,196
|
|
|
|
Current maturities of long-term obligations
|
|
|
1,402,616
|
|
|
|
1,702,917
|
|
|
|
1,036,990
|
|
|
|
Current maturities of long-term obligations — related
parties
|
|
|
3,000,000
|
|
|
|
47,300
|
|
|
|
3,000,000
|
|
|
|
Accounts payable
|
|
|
306,528
|
|
|
|
167,528
|
|
|
|
778,331
|
|
|
|
Deferred revenue
|
|
|
1,087,426
|
|
|
|
1,080,833
|
|
|
|
568,384
|
|
|
|
Accrued liabilities
|
|
|
544,704
|
|
|
|
551,044
|
|
|
|
801,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
7,250,478
|
|
|
|
3,999,622
|
|
|
|
9,082,269
|
|
|
LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable, less current maturities
|
|
|
970,861
|
|
|
|
747,563
|
|
|
|
930,101
|
|
|
|
Notes payable — related parties, less current
maturities
|
|
|
697,300
|
|
|
|
650,000
|
|
|
|
697,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
1,668,161
|
|
|
|
1,397,563
|
|
|
|
1,627,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,918,639
|
|
|
|
5,397,185
|
|
|
|
10,709,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital stock, $0.01 par value, 66,666,666 shares
authorized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, 16,666,666 shares authorized, no shares
issued and outstanding at December 31, 2005 and 2004 and
June 30, 2006
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
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
|
|
|
7,840
|
|
|
|
5,837
|
|
|
|
8,460
|
|
|
|
Additional paid-in capital
|
|
|
11,032,668
|
|
|
|
9,154,627
|
|
|
|
13,914,854
|
|
|
|
Accumulated deficit
|
|
|
(18,645,976
|
)
|
|
|
(13,856,051
|
)
|
|
|
(22,804,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ deficit
|
|
|
(7,605,468
|
)
|
|
|
(4,695,587
|
)
|
|
|
(8,880,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
$
|
1,313,171
|
|
|
$
|
701,598
|
|
|
$
|
1,828,714
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
F-4
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2005 AND 2004 AND SIX MONTH
PERIODS ENDED
JUNE 30, 2006 AND 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
|
|
$
|
576,566
|
|
|
$
|
847,859
|
|
|
$
|
568,082
|
|
|
$
|
320,413
|
|
|
|
Software
|
|
|
66,572
|
|
|
|
83,918
|
|
|
|
301,546
|
|
|
|
37,916
|
|
|
|
Services and other
|
|
|
67,078
|
|
|
|
142,213
|
|
|
|
64,598
|
|
|
|
25,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
|
710,216
|
|
|
|
1,073,990
|
|
|
|
934,226
|
|
|
|
384,104
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware
|
|
|
517,503
|
|
|
|
892,217
|
|
|
|
396,471
|
|
|
|
221,111
|
|
|
|
Software
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
338
|
|
|
|
Services and other
|
|
|
32,156
|
|
|
|
136,855
|
|
|
|
37,462
|
|
|
|
8,894
|
|
|
|
Inventory lower of cost or market adjustment
|
|
|
390,247
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
939,906
|
|
|
|
1,029,072
|
|
|
|
433,933
|
|
|
|
230,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(229,690
|
)
|
|
|
44,918
|
|
|
|
500,293
|
|
|
|
153,761
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses
|
|
|
1,198,629
|
|
|
|
594,085
|
|
|
|
778,817
|
|
|
|
557,457
|
|
|
|
Research and development expenses
|
|
|
881,515
|
|
|
|
687,398
|
|
|
|
430,540
|
|
|
|
471,544
|
|
|
|
General and administrative expenses
|
|
|
1,690,601
|
|
|
|
1,574,372
|
|
|
|
1,741,928
|
|
|
|
787,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,770,745
|
|
|
|
2,855,855
|
|
|
|
2,951,285
|
|
|
|
1,816,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(4,000,435
|
)
|
|
|
(2,810,937
|
)
|
|
|
(2,450,992
|
)
|
|
|
(1,662,878
|
)
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(804,665
|
)
|
|
|
(525,546
|
)
|
|
|
(1,714,349
|
)
|
|
|
(383,077
|
)
|
|
|
Interest income
|
|
|
1,375
|
|
|
|
1,425
|
|
|
|
6,488
|
|
|
|
1,091
|
|
|
|
Other
|
|
|
13,800
|
|
|
|
(4,312
|
)
|
|
|
559
|
|
|
|
(1,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(789,490
|
)
|
|
|
(528,433
|
)
|
|
|
(1,707,302
|
)
|
|
|
(383,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,789,925
|
)
|
|
$
|
(3,339,370
|
)
|
|
$
|
(4,158,294
|
)
|
|
$
|
(2,046,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(7.18
|
)
|
|
$
|
(6.87
|
)
|
|
$
|
(5.27
|
)
|
|
$
|
(3.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic and diluted shares outstanding
|
|
|
666,712
|
|
|
|
486,170
|
|
|
|
789,320
|
|
|
|
602,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
F-5
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
STATEMENTS OF SHAREHOLDERS’ DEFICIT
YEARS ENDED DECEMBER 31, 2005 AND 2004 AND SIX MONTHS
ENDED JUNE 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Shareholders’
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2003
|
|
|
503,067
|
|
|
$
|
5,031
|
|
|
$
|
8,889,260
|
|
|
$
|
(10,516,681
|
)
|
|
$
|
(1,622,390
|
)
|
|
|
Common stock issued for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable at $1.80 per share
|
|
|
68,593
|
|
|
|
686
|
|
|
|
122,804
|
|
|
|
—
|
|
|
|
123,490
|
|
|
|
|
Deferred financing costs at $1.80 per share
|
|
|
11,111
|
|
|
|
111
|
|
|
|
19,889
|
|
|
|
—
|
|
|
|
20,000
|
|
|
|
Warrants issued to related parties for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
10,769
|
|
|
|
—
|
|
|
|
10,769
|
|
|
|
|
Services
|
|
|
—
|
|
|
|
—
|
|
|
|
6,054
|
|
|
|
—
|
|
|
|
6,054
|
|
|
|
Warrants issued for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
45,303
|
|
|
|
—
|
|
|
|
45,303
|
|
|
|
|
Services
|
|
|
—
|
|
|
|
—
|
|
|
|
50,557
|
|
|
|
—
|
|
|
|
50,557
|
|
|
|
Conversion of note payable into common stock
|
|
|
888
|
|
|
|
9
|
|
|
|
9,991
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,339,370
|
)
|
|
|
(3,339,370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
|
583,659
|
|
|
$
|
5,837
|
|
|
$
|
9,154,627
|
|
|
$
|
(13,856,051
|
)
|
|
$
|
(4,695,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
F-6
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
STATEMENTS OF SHAREHOLDERS’ DEFICIT
YEARS ENDED DECEMBER 31, 2005 AND 2004 AND SIX MONTHS
ENDED JUNE 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Shareholders’
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2004
|
|
|
583,659
|
|
|
$
|
5,837
|
|
|
$
|
9,154,627
|
|
|
$
|
(13,856,051
|
)
|
|
$
|
(4,695,587
|
)
|
|
|
Sales of equity instruments for cash consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity units sold at $9.00 per unit
|
|
|
113,884
|
|
|
|
1,139
|
|
|
|
1,023,861
|
|
|
|
—
|
|
|
|
1,025,000
|
|
|
|
|
Common stock sold at $9.00 per share
|
|
|
9,998
|
|
|
|
100
|
|
|
|
89,900
|
|
|
|
—
|
|
|
|
90,000
|
|
|
|
|
Common stock sold at $4.50 per share
|
|
|
22,222
|
|
|
|
222
|
|
|
|
99,778
|
|
|
|
—
|
|
|
|
100,000
|
|
|
|
Common stock issued to related parties for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term notes payable to related parties at $2.19 per
share
|
|
|
33,332
|
|
|
|
333
|
|
|
|
72,799
|
|
|
|
—
|
|
|
|
73,132
|
|
|
|
|
Payment of accrued interest to related party at $9.00 per
share
|
|
|
19,443
|
|
|
|
194
|
|
|
|
174,806
|
|
|
|
—
|
|
|
|
175,000
|
|
|
|
Common stock issued for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services at $1.80 per share
|
|
|
833
|
|
|
|
8
|
|
|
|
1,492
|
|
|
|
—
|
|
|
|
1,500
|
|
|
|
|
Services at $9.00 per share
|
|
|
666
|
|
|
|
7
|
|
|
|
5,993
|
|
|
|
—
|
|
|
|
6,000
|
|
|
|
Warrants issued to related parties for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term notes payable — related parties
|
|
|
—
|
|
|
|
—
|
|
|
|
65,925
|
|
|
|
—
|
|
|
|
65,925
|
|
|
|
|
Notes payable — related parties
|
|
|
—
|
|
|
|
—
|
|
|
|
33,954
|
|
|
|
—
|
|
|
|
33,954
|
|
|
|
|
Short-term borrowings — related parties
|
|
|
—
|
|
|
|
—
|
|
|
|
115,628
|
|
|
|
—
|
|
|
|
115,628
|
|
|
|
|
Deferred financing costs — related party
|
|
|
—
|
|
|
|
—
|
|
|
|
28,479
|
|
|
|
—
|
|
|
|
28,479
|
|
|
|
Warrants issued for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
12,465
|
|
|
|
—
|
|
|
|
12,465
|
|
|
|
|
Notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
48,409
|
|
|
|
—
|
|
|
|
48,409
|
|
|
|
|
Deferred financing costs
|
|
|
—
|
|
|
|
—
|
|
|
|
25,782
|
|
|
|
—
|
|
|
|
25,782
|
|
|
|
|
Services
|
|
|
—
|
|
|
|
—
|
|
|
|
78,770
|
|
|
|
—
|
|
|
|
78,770
|
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,789,925
|
)
|
|
|
(4,789,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
784,037
|
|
|
$
|
7,840
|
|
|
$
|
11,032,668
|
|
|
$
|
(18,645,976
|
)
|
|
$
|
(7,605,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
F-7
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
STATEMENTS OF SHAREHOLDERS’
DEFICIT — (Continued)
YEARS ENDED DECEMBER 31, 2005 AND 2004 AND SIX MONTHS
ENDED JUNE 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Shareholders’
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
784,037
|
|
|
$
|
7,840
|
|
|
$
|
11,032,668
|
|
|
$
|
(18,645,976
|
)
|
|
$
|
(7,605,468
|
)
|
|
|
Stock issued to related parties for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense to related party at $9.00 per share
(unaudited)
|
|
|
16,666
|
|
|
|
167
|
|
|
|
149,833
|
|
|
|
—
|
|
|
|
150,000
|
|
|
|
Stock issued to related parties for short-term notes payable
(unaudited)
|
|
|
45,332
|
|
|
|
453
|
|
|
|
202,192
|
|
|
|
—
|
|
|
|
202,645
|
|
|
|
Warrants issued to related parties for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term notes payable — related parties (unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
268,872
|
|
|
|
—
|
|
|
|
268,872
|
|
|
|
|
Deferred issuance costs — related parties (unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
39,499
|
|
|
|
—
|
|
|
|
39,499
|
|
|
|
Warrants issued for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable (unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
18,697
|
|
|
|
—
|
|
|
|
18,697
|
|
|
|
|
Bridge notes (unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
923,428
|
|
|
|
—
|
|
|
|
923,428
|
|
|
|
|
Compensation expense (unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
261,910
|
|
|
|
—
|
|
|
|
261,910
|
|
|
|
|
Directors (unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
186,638
|
|
|
|
—
|
|
|
|
186,638
|
|
|
|
Beneficial conversion of short-term notes payable (unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
749,991
|
|
|
|
—
|
|
|
|
749,991
|
|
|
|
Repricing of warrants (unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
81,126
|
|
|
|
—
|
|
|
|
81,126
|
|
|
|
Net loss (unaudited)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,158,294
|
)
|
|
|
(4,158,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2006 (unaudited)
|
|
|
846,035
|
|
|
$
|
8,460
|
|
|
$
|
13,914,854
|
|
|
$
|
(22,804,270
|
)
|
|
$
|
(8,880,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
F-8
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 AND 2004 AND SIX MONTH
PERIODS ENDED
JUNE 30, 2006 AND 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Net loss
|
|
$
|
(4,789,925
|
)
|
|
$
|
(3,339,370
|
)
|
|
$
|
(4,158,294
|
)
|
|
$
|
(2,046,778
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
151,830
|
|
|
|
50,060
|
|
|
|
310,959
|
|
|
|
80,217
|
|
|
|
Loss on disposal of property and equipment
|
|
|
7,355
|
|
|
|
4,595
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Allowance for doubtful receivables
|
|
|
2,500
|
|
|
|
—
|
|
|
|
21,000
|
|
|
|
2,500
|
|
|
|
Inventory lower of cost or market adjustment
|
|
|
390,247
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Debt discount amortization
|
|
|
63,647
|
|
|
|
177,974
|
|
|
|
538,509
|
|
|
|
35,331
|
|
|
|
Debt discount amortization — related party
|
|
|
37,617
|
|
|
|
33,070
|
|
|
|
428,107
|
|
|
|
33,954
|
|
|
|
Common stock issued for interest expense — related
party
|
|
|
175,000
|
|
|
|
—
|
|
|
|
150,000
|
|
|
|
—
|
|
|
|
Common stock issued for services
|
|
|
7,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,500
|
|
|
|
Issuance of warrants for short-term borrowings —
related parties
|
|
|
115,628
|
|
|
|
—
|
|
|
|
39,499
|
|
|
|
39,415
|
|
|
|
Issuance of warrants for services
|
|
|
78,770
|
|
|
|
56,611
|
|
|
|
—
|
|
|
|
5,546
|
|
|
|
Issuance of warrants as compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
448,548
|
|
|
|
—
|
|
|
|
Repricing of warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
81,126
|
|
|
|
—
|
|
|
|
Change in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(191,332
|
)
|
|
|
(5,368
|
)
|
|
|
71,985
|
|
|
|
(138,303
|
)
|
|
|
|
Inventories
|
|
|
(52,289
|
)
|
|
|
(75,062
|
)
|
|
|
102,898
|
|
|
|
(59,971
|
)
|
|
|
|
Prepaid expenses and other current assets
|
|
|
787
|
|
|
|
(26,504
|
)
|
|
|
(10,564
|
)
|
|
|
399
|
|
|
|
|
Other assets
|
|
|
(3,485
|
)
|
|
|
(9,140
|
)
|
|
|
(2,495
|
)
|
|
|
(7,210
|
)
|
|
|
|
Accounts payable
|
|
|
154,000
|
|
|
|
(6,524
|
)
|
|
|
471,803
|
|
|
|
15,306
|
|
|
|
|
Deferred revenue
|
|
|
6,593
|
|
|
|
1,080,833
|
|
|
|
(519,042
|
)
|
|
|
(2,825
|
)
|
|
|
|
Accrued liabilities
|
|
|
460,683
|
|
|
|
571,554
|
|
|
|
256,751
|
|
|
|
98,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(3,384,874
|
)
|
|
|
(1,487,271
|
)
|
|
|
(1,769,210
|
)
|
|
|
(1,942,657
|
)
|
|
Cash flows used in investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(272,114
|
)
|
|
|
(257,634
|
)
|
|
|
(157,447
|
)
|
|
|
(182,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(272,114
|
)
|
|
|
(257,634
|
)
|
|
|
(157,447
|
)
|
|
|
(182,285
|
)
|
|
Cash flows provided by financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from bank lines of credit and short-term notes
payable
|
|
|
400,000
|
|
|
|
450,000
|
|
|
|
2,775,000
|
|
|
|
(150,000
|
)
|
|
|
Payment for deferred financing costs
|
|
|
(100,000
|
)
|
|
|
—
|
|
|
|
(525,202
|
)
|
|
|
(100,000
|
)
|
|
|
Payment for prepaid offering costs
|
|
|
—
|
|
|
|
—
|
|
|
|
(233,367
|
)
|
|
|
—
|
|
|
|
Proceeds from short-term notes payable — related
parties
|
|
|
200,000
|
|
|
|
—
|
|
|
|
400,000
|
|
|
|
59,837
|
|
|
|
Proceeds from long-term notes payable
|
|
|
—
|
|
|
|
1,634,740
|
|
|
|
93,319
|
|
|
|
—
|
|
|
|
Proceeds from long-term notes payable — related parties
|
|
|
3,000,000
|
|
|
|
113,750
|
|
|
|
—
|
|
|
|
2,000,000
|
|
|
|
Payments on long-term notes payable
|
|
|
(1,023,069
|
)
|
|
|
(372,653
|
)
|
|
|
(503,342
|
)
|
|
|
(579,718
|
)
|
|
|
Proceeds from issuance of common stock and equity units
|
|
|
1,215,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,025,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
3,691,931
|
|
|
|
1,825,837
|
|
|
|
2,006,408
|
|
|
|
2,255,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
34,943
|
|
|
|
80,932
|
|
|
|
79,751
|
|
|
|
130,177
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
99,644
|
|
|
|
18,712
|
|
|
|
134,587
|
|
|
|
99,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
134,587
|
|
|
$
|
99,644
|
|
|
$
|
214,338
|
|
|
$
|
229,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Financial Statements.
F-9
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED)
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
|
|
|
|
Nature of Business and Operations
|
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:
The Company recognizes revenue primarily from these sources:
|
|
|
|
|
|
•
|
Technology license and royalties
|
|
|
|
|
•
|
Product and software license sales
|
|
|
|
|
•
|
Content development services
|
|
|
|
|
•
|
Training and implementation
|
|
|
|
|
•
|
Maintenance and support contracts
|
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
F-10
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
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.
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.
F-11
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
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.
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.
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:
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
|
|
|
|
Equipment
|
|
|
3-5 years
|
|
|
|
Demonstration equipment
|
|
|
3-5 years
|
|
|
|
Furniture and fixtures
|
|
|
7 years
|
|
|
|
Purchased software
|
|
|
3 years
|
|
|
|
Leased equipment
|
|
|
3 years
|
|
|
|
Leasehold improvements
|
|
|
5 years
|
|
|
Intangible assets
|
|
|
|
|
|
|
Deferred financing costs
|
|
|
1-5 years
|
|
F-12
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
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.
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.
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
F-13
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
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
F-14
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES — (Continued)
|
|
|
|
10.
|
Accounting for Stock-Based
Compensation — (Continued)
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Six Months
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Ended
|
|
|
|
|
2005
|
|
|
2004
|
|
|
June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(4,789,925
|
)
|
|
$
|
(3,339,370
|
)
|
|
$
|
(2,046,778
|
)
|
|
|
|
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.
F-15
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
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.
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
F-16
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
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.
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.
F-17
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
NOTE B — CONCENTRATION OF CREDIT RISK
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.
NOTE C — INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Finished goods
|
|
$
|
143,483
|
|
|
$
|
41,295
|
|
|
$
|
65,414
|
|
|
Product components and supplies
|
|
|
248,020
|
|
|
|
48,878
|
|
|
|
219,168
|
|
|
Software licenses
|
|
|
—
|
|
|
|
121,055
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
391,503
|
|
|
$
|
211,228
|
|
|
$
|
284,582
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
F-18
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
NOTE D — PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Equipment
|
|
$
|
139,953
|
|
|
$
|
42,277
|
|
|
$
|
167,758
|
|
|
Demonstration equipment
|
|
|
59,738
|
|
|
|
14,278
|
|
|
|
94,987
|
|
|
Furniture and fixtures
|
|
|
24,598
|
|
|
|
10,271
|
|
|
|
24,598
|
|
|
Purchased software
|
|
|
66,573
|
|
|
|
51,288
|
|
|
|
70,246
|
|
|
Leased equipment
|
|
|
180,756
|
|
|
|
180,756
|
|
|
|
231,581
|
|
|
Leasehold improvements
|
|
|
100,430
|
|
|
|
53,085
|
|
|
|
144,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
572,048
|
|
|
|
351,955
|
|
|
|
734,015
|
|
|
Less: accumulated depreciation and amortization
|
|
|
(187,827
|
)
|
|
|
(49,526
|
)
|
|
|
(271,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
384,221
|
|
|
$
|
302,429
|
|
|
$
|
462,628
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE E — OTHER ASSETS
Other assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Deferred financing costs
|
|
$
|
143,172
|
|
|
$
|
20,139
|
|
|
$
|
454,037
|
|
|
Prepaid offering costs
|
|
|
—
|
|
|
|
—
|
|
|
|
233,367
|
|
|
Deposits
|
|
|
17,591
|
|
|
|
14,106
|
|
|
|
20,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
160,763
|
|
|
$
|
34,245
|
|
|
$
|
707,490
|
|
|
|
|
|
|
|
|
|
|
|
|
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
F-19
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
NOTE E — OTHER
ASSETS — (Continued)
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Lines of credit — bank
|
|
$
|
750,000
|
|
|
$
|
300,000
|
|
|
$
|
750,000
|
|
|
Short term note payable — shareholder
|
|
|
94,599
|
|
|
|
—
|
|
|
|
107,500
|
|
|
Bridge notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
1,618,264
|
|
|
Short term note payable — bank
|
|
|
—
|
|
|
|
150,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
844,599
|
|
|
$
|
450,000
|
|
|
$
|
2,475,764
|
|
|
|
|
|
|
|
|
|
|
|
|
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
F-20
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
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.
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.
F-21
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
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.
F-22
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
NOTE H — DEFERRED REVENUE
Deferred revenue consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Gaming industry license
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
Restaurant industry license
|
|
|
236,659
|
|
|
|
569,866
|
|
|
|
—
|
|
|
Customer deposits
|
|
|
332,236
|
|
|
|
5,185
|
|
|
|
45,177
|
|
|
Deferred maintenance
|
|
|
18,531
|
|
|
|
5,782
|
|
|
|
23,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,087,426
|
|
|
$
|
1,080,833
|
|
|
$
|
568,384
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
NOTE I — ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Interest
|
|
$
|
380,798
|
|
|
$
|
365,874
|
|
|
$
|
631,377
|
|
|
Compensation
|
|
|
102,380
|
|
|
|
102,672
|
|
|
|
121,239
|
|
|
Deferred gain on sale leaseback
|
|
|
50,455
|
|
|
|
76,780
|
|
|
|
43,985
|
|
|
Sales tax and other
|
|
|
11,071
|
|
|
|
5,718
|
|
|
|
5,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
544,704
|
|
|
$
|
551,044
|
|
|
$
|
801,604
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
F-23
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
NOTE J — LONG-TERM NOTES PAYABLE
Long-term notes payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Convertible bridge notes payable
|
|
$
|
1,438,923
|
|
|
$
|
1,543,325
|
|
|
$
|
1,436,650
|
|
|
Non-convertible notes payable
|
|
|
221,273
|
|
|
|
587,019
|
|
|
|
161,671
|
|
|
Note payable to customer
|
|
|
384,525
|
|
|
|
168,750
|
|
|
|
218,383
|
|
|
Note payable to supplier
|
|
|
232,193
|
|
|
|
—
|
|
|
|
—
|
|
|
Capital lease obligations
|
|
|
96,563
|
|
|
|
151,386
|
|
|
|
150,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,373,477
|
|
|
|
2,450,480
|
|
|
|
1,967,091
|
|
|
Less: current maturities
|
|
|
(1,402,616
|
)
|
|
|
(1,702,917
|
)
|
|
|
(1,036,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
970,861
|
|
|
$
|
747,563
|
|
|
$
|
930,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible bridge notes payable
|
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
F-24
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
NOTE J — LONG-TERM
NOTES PAYABLE — (Continued)
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.
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.
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.
F-25
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
NOTE J — LONG-TERM
NOTES PAYABLE — (Continued)
Other information relating to capital lease equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Cost
|
|
$
|
180,756
|
|
|
$
|
180,756
|
|
|
$
|
231,581
|
|
|
Less: accumulated amortization
|
|
|
(92,874
|
)
|
|
|
(32,622
|
)
|
|
|
(129,969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
87,882
|
|
|
$
|
148,134
|
|
|
$
|
101,612
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
Year Ending December 31,
|
|
Amount
|
|
|
|
|
|
|
|
2006
|
|
$
|
1,402,616
|
|
|
2007
|
|
|
148,334
|
|
|
2008
|
|
|
9,027
|
|
|
2009
|
|
|
768,500
|
|
|
2010
|
|
|
45,000
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,373,477
|
|
|
|
|
|
|
F-26
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
NOTE K — LONG-TERM NOTES PAYABLE —
RELATED PARTIES
Long-term notes payable — related parties consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Convertible debenture payable
|
|
$
|
3,000,000
|
|
|
$
|
—
|
|
|
$
|
3,000,000
|
|
|
Convertible bridge notes payable
|
|
|
683,550
|
|
|
|
683,550
|
|
|
|
683,550
|
|
|
Non-convertible notes payable
|
|
|
13,750
|
|
|
|
13,750
|
|
|
|
13,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,697,300
|
|
|
|
697,300
|
|
|
|
3,697,300
|
|
|
Less: current maturities
|
|
|
(3,000,000
|
)
|
|
|
(47,300
|
)
|
|
|
(3,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
697,300
|
|
|
$
|
650,000
|
|
|
$
|
697,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debenture payable
|
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.
F-27
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
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.
F-28
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
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
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.
F-29
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
NOTE M — SHAREHOLDERS’
DEFICIT — (Continued)
Warrant transactions with non-employees during the years ended
December 31, 2005 and December 31, 2004 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
|
Common
|
|
|
Average
|
|
|
Common
|
|
|
Average
|
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
412,446
|
|
|
$
|
9.57
|
|
|
|
131,765
|
|
|
$
|
10.59
|
|
|
Granted
|
|
|
183,637
|
|
|
|
8.45
|
|
|
|
287,228
|
|
|
|
8.96
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
(28,483
|
)
|
|
|
3.38
|
|
|
|
(6,547
|
)
|
|
|
8.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at end of year
|
|
|
567,600
|
|
|
$
|
9.25
|
|
|
|
412,446
|
|
|
$
|
9.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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).
F-30
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
NOTE M — SHAREHOLDERS’
DEFICIT — (Continued)
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.
Warrant transactions with employees during the years ended
December 31, 2005 and December 31, 2004 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
|
Common
|
|
|
Average
|
|
|
Common
|
|
|
Average
|
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
Stock
|
|
|
Exercise
|
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
137,522
|
|
|
$
|
3.08
|
|
|
|
34,444
|
|
|
$
|
0.87
|
|
|
Granted
|
|
|
191,815
|
|
|
|
8.63
|
|
|
|
103,078
|
|
|
|
3.82
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at end of year
|
|
|
329,337
|
|
|
$
|
6.31
|
|
|
|
137,522
|
|
|
$
|
3.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
F-31
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
NOTE O — INCOME TAXES
There is no current or deferred tax provision or benefit for the
years ended December 31, 2005 and December 31, 2004.
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.
F-32
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
NOTE O — INCOME
TAXES — (Continued)
The components of income tax expense (benefit) consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
Income tax provision:
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,617,000
|
)
|
|
$
|
(1,135,000
|
)
|
|
|
|
State
|
|
|
(307,000
|
)
|
|
|
(216,000
|
)
|
|
|
Change in valuation allowance
|
|
|
1,924,000
|
|
|
|
1,351,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
Federal statutory rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
|
State taxes
|
|
|
(6.5
|
)
|
|
|
(6.5
|
)
|
|
Other
|
|
|
0.3
|
|
|
|
0.0
|
|
|
Change in valuation allowance
|
|
|
40.2
|
|
|
|
40.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
|
|
|
|
|
|
F-33
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
NOTE P — SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
424,329
|
|
|
$
|
77,569
|
|
|
$
|
243,317
|
|
|
$
|
208,129
|
|
|
Noncash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related parties
|
|
$
|
73,132
|
|
|
$
|
—
|
|
|
$
|
202,645
|
|
|
$
|
—
|
|
|
|
|
Non-related parties
|
|
|
—
|
|
|
|
123,490
|
|
|
|
—
|
|
|
|
—
|
|
|
|
Warrants issued for notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related parties
|
|
|
99,879
|
|
|
|
45,303
|
|
|
|
268,873
|
|
|
|
33,954
|
|
|
|
|
Non-related parties
|
|
|
60,874
|
|
|
|
10,769
|
|
|
|
942,125
|
|
|
|
27,156
|
|
|
|
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
F-34
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
NOTE Q — RELATED PARTY
TRANSACTIONS — (Continued)
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
F-35
WIRELESS
RONIN
®
TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 30,
2006
AND 2005 IS UNAUDITED) — (Continued)
NOTE R — SUBSEQUENT
EVENTS — (Continued)
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.
F-36
Prospectus
,
2006
Wireless Ronin Technologies, Inc.
Shares
Common Stock
Dealer Prospectus Delivery Obligation
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.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
|
|
|
|
Item 24.
|
Indemnification of Directors and Officers
|
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.
|
|
|
|
|
|
|
|
SEC registration fee
|
|
$
|
2,769
|
|
|
NASD filing fee
|
|
|
3,088
|
|
|
Nasdaq listing fee
|
|
|
30,000
|
|
|
Legal fees and expenses
|
|
|
*
|
|
|
Accounting fees and expenses
|
|
|
*
|
|
|
Blue sky qualification fees and expenses
|
|
|
*
|
|
|
Printing and engraving expenses
|
|
|
*
|
|
|
Transfer agent and registrar fees and expenses
|
|
|
*
|
|
|
Director and officer liability insurance premiums
|
|
|
*
|
|
|
Miscellaneous expenses
|
|
|
*
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
To be filed by amendment.
|
II-1
|
|
|
|
Item 26.
|
Recent Sales of Unregistered Securities
|
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
II-2
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.”
II-3
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.
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
|
|
|
|
1
|
|
|
Form of Underwriting Agreement by and between the Registrant and
Feltl and Company (including form of warrant).*
|
|
|
3
|
.1
|
|
Articles of Incorporation, as amended of the Registrant.
|
|
|
3
|
.2
|
|
Bylaws, as amended of the Registrant.
|
|
|
4
|
.1
|
|
See exhibits 3.1 and 3.2.
|
|
|
4
|
.2
|
|
Specimen form of common stock certificate of the Registrant.
|
|
|
4
|
.3
|
|
Form of Current Warrant to Purchase Common Stock of the
Registrant.
|
|
|
4
|
.4
|
|
Form of Previous Warrant to Purchase Common Stock of the
Registrant.
|
|
|
4
|
.5
|
|
Form of Convertible Debenture Note issued to lenders, including
related parties (including the extension thereto).
|
|
|
4
|
.6
|
|
Convertible Debenture Note issued to Steve Meyer in the amount
of $100,000 dated March 12, 2004.
|
|
|
4
|
.7
|
|
Promissory Note issued to SHAG LLC in the amount of $100,000
dated November 11, 2005.
|
|
|
4
|
.8
|
|
Promissory Note issued to Jack Norqual in the amount of $300,000
dated December 27, 2005.
|
|
|
4
|
.9
|
|
Promissory Note issued to Barry Butzow in the amount of $300,000
dated December 27, 2005.
|
|
|
4
|
.10
|
|
Form of Note Conversion Agreement by and between the
Registrant and certain lenders (including the addendum thereto).
|
|
|
4
|
.11
|
|
Note Conversion Agreement by and between the Registrant and
Galtere International Master Fund L.P., dated March 3, 2006.
|
|
|
4
|
.12
|
|
Note Conversion Agreement by and between the Registrant and
SHAG LLC, dated March 9, 2006.
|
|
|
4
|
.13
|
|
Letter regarding Note Extension by Barry Butzow dated
June 27, 2006.
|
|
|
4
|
.14
|
|
Letter regarding Note Extension by Jack Norqual dated
June 27, 2006.
|
|
|
5
|
|
|
Opinion of Briggs and Morgan, Professional Association.*
|
|
|
10
|
.1
|
|
Wireless Ronin Technologies, Inc. 2006 Equity Incentive Plan.
|
II-4
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
|
|
|
|
10
|
.2
|
|
Wireless Ronin Technologies, Inc. 2006 Non-Employee Director
Stock Option Plan.
|
|
|
10
|
.3
|
|
Form of Loan and Subscription Agreement by and between the
Registrant and each purchaser of 12% Convertible Bridge
Notes.
|
|
|
10
|
.4
|
|
Form of the Registrant’s 12% Convertible Bridge Notes.
|
|
|
10
|
.5
|
|
Form of Warrant to Purchase Shares of Common Stock issued by the
Registrant to purchasers of 12% Convertible Bridge Notes.
|
|
|
10
|
.6
|
|
Employment Agreement, dated as of April 1, 2006, between
the Registrant and Jeffrey C. Mack.
|
|
|
10
|
.7
|
|
Employment Agreement, dated as of April 1, 2006, between
the Registrant and Christopher F. Ebbert.
|
|
|
10
|
.8
|
|
Employment Agreement, dated as of April 1, 2006, between
the Registrant and Stephen E. Jacobs.
|
|
|
10
|
.9
|
|
Employment Agreement, dated as of April 1, 2006, between
the Registrant and Scott W. Koller.
|
|
|
10
|
.10
|
|
Employment Agreement, dated as of April 1, 2006, between
the Registrant and John A. Witham.
|
|
|
10
|
.11
|
|
Strategic Partnership Agreement, dated May 28, 2004,
between the Registrant and The Marshall Special Assets Group,
Inc., as amended.
|
|
|
10
|
.12
|
|
Factoring Agreement, dated May 23, 2005, by and between the
Registrant and Barry W. Butzow and Stephen E. Jacobs.
|
|
|
10
|
.13
|
|
Lease, dated November 15, 2004, between the Registrant and
The Brastad/Lyman Partnership.
|
|
|
10
|
.14
|
|
Convertible Debenture Purchase Agreement between the Registrant
and the Spirit Lake Tribe dated January 5, 2005.
|
|
|
10
|
.15
|
|
10% Convertible Debenture in principal amount of $3,000,000
dated September 7, 2005.
|
|
|
10
|
.16
|
|
Amended and Restated Convertible Debenture Purchase Agreement
between the Registrant and the Spirit Lake Tribe dated
September 7, 2005.
|
|
|
10
|
.17
|
|
Amendment No. 1 to Amended and Restated Convertible
Debenture Purchase Agreement between the Registrant and the
Spirit Lake dated February 27, 2006.
|
|
|
10
|
.18
|
|
Guaranty by and between Stephen E. Jacobs and Winmark
Corporation dated December 8, 2004.
|
|
|
10
|
.19
|
|
Commercial Guaranty by and between the Registrant, as Borrower,
Signature Bank, as Lender and Michael J. Hopkins, as Guarantor
dated January 12, 2006.
|
|
|
10
|
.20
|
|
Commercial Guaranty by and between the Registrant, as Borrower,
Signature Bank, as Lender and Barry Butzow, as Guarantor dated
November 10, 2005.
|
|
|
10
|
.21
|
|
Commercial Guaranty by and between the Registrant, as Borrower,
Signature Bank, as Lender and Barry Butzow, as Guarantor dated
November 2, 2004.
|
|
|
10
|
.22
|
|
Lease by and between Dennis P. Dirlam and the Registrant dated
April 18, 2006.
|
|
|
10
|
.23
|
|
Sale and Purchase Agreement, dated July 11, 2006, between
Sealy Corporation and the Registrant.
|
|
|
10
|
.24
|
|
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.
|
|
|
10
|
.26
|
|
Form of Note Amendment Agreement by and between the Registrant
and certain lenders dated July 27, 2006.
|
|
|
10
|
.27
|
|
Form of option agreement granted under the 2006 Equity Incentive
Plan.
|
|
|
10
|
.28
|
|
Employment Agreement, dated as of June 19, 2006, between
the Registrant and Henry B. May.
|
|
|
21
|
|
|
Subsidiaries of the Registrant.
|
|
|
23
|
.1
|
|
Consent of Virchow, Krause & Company, LLP.
|
|
|
23
|
.2
|
|
Consent of Briggs and Morgan, Professional Association (included
in Exhibit 5).*
|
|
|
24
|
|
|
Power of Attorney (included on signature page).
|
|
|
|
|
|
*
|
|
To be filed by amendment.
|
II-5
The undersigned registrant hereby undertakes:
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.
II-6
SIGNATURES
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.
|
|
|
|
|
WIRELESS RONIN TECHNOLOGIES, INC.
|
|
|
|
|
|
|
|
|
Jeffrey C. Mack
|
|
|
President and Chief Executive Officer
|
POWER OF ATTORNEY
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.
|
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
/s/
Jeffrey C. Mack
Jeffrey
C. Mack
|
|
Chairman of the Board of Directors, President and Chief
Executive Officer (Principal Executive Officer and Director)
|
|
August 29, 2006
|
|
|
/s/
John A. Witham
John
A. Witham
|
|
Executive Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)
|
|
August 29, 2006
|
|
|
/s/
Dr. William F.
Schnell
Dr.
William F. Schnell
|
|
Director
|
|
August 29, 2006
|
|
|
/s/
Carl B. Walking Eagle
Sr.
Carl
B. Walking Eagle Sr.
|
|
Director
|
|
August 29, 2006
|
|
|
/s/
Gregory T. Barnum
Gregory
T. Barnum
|
|
Director
|
|
August 29, 2006
|
II-7
|
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
/s/
Thomas J. Moudry
Thomas
J. Moudry
|
|
Director
|
|
August 29, 2006
|
|
|
/s/
Brett A. Shockley
Brett
A. Shockley
|
|
Director
|
|
August 29, 2006
|
II-8
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
|
|
|
|
1
|
|
|
Form of Underwriting Agreement by and between the Registrant and
Feltl and Company (including form of warrant).*
|
|
|
3
|
.1
|
|
Articles of Incorporation, as amended of the Registrant.
|
|
|
3
|
.2
|
|
Bylaws, as amended of the Registrant.
|
|
|
4
|
.1
|
|
See exhibits 3.1 and 3.2.
|
|
|
4
|
.2
|
|
Specimen form of common stock certificate of the Registrant.
|
|
|
4
|
.3
|
|
Form of Current Warrant to Purchase Common Stock of the
Registrant.
|
|
|
4
|
.4
|
|
Form of Previous Warrant to Purchase Common Stock of the
Registrant.
|
|
|
4
|
.5
|
|
Form of Convertible Debenture Note issued to lenders, including
related parties (including the extension thereto).
|
|
|
4
|
.6
|
|
Convertible Debenture Note issued to Steve Meyer in the amount
of $100,000 dated March 12, 2004.
|
|
|
4
|
.7
|
|
Promissory Note issued to SHAG LLC in the amount of $100,000
dated November 11, 2005.
|
|
|
4
|
.8
|
|
Promissory Note issued to Jack Norqual in the amount of $300,000
dated December 27, 2005.
|
|
|
4
|
.9
|
|
Promissory Note issued to Barry Butzow in the amount of $300,000
dated December 27, 2005.
|
|
|
4
|
.10
|
|
Form of Note Conversion Agreement by and between the
Registrant and certain lenders (including the addendum thereto).
|
|
|
4
|
.11
|
|
Note Conversion Agreement by and between the Registrant and
Galtere International Master Fund L.P., dated March 3, 2006.
|
|
|
4
|
.12
|
|
Note Conversion Agreement by and between the Registrant and
SHAG LLC, dated March 9, 2006.
|
|
|
4
|
.13
|
|
Letter regarding Note Extension by Barry Butzow dated
June 27, 2006.
|
|
|
4
|
.14
|
|
Letter regarding Note Extension by Jack Norqual dated
June 27, 2006.
|
|
|
5
|
|
|
Opinion of Briggs and Morgan, Professional Association.*
|
|
|
10
|
.1
|
|
Wireless Ronin Technologies, Inc. 2006 Equity Incentive Plan.
|
|
|
10
|
.2
|
|
Wireless Ronin Technologies, Inc. 2006 Non-Employee Director
Stock Option Plan.
|
|
|
10
|
.3
|
|
Form of Loan and Subscription Agreement by and between the
Registrant and each purchaser of 12% Convertible Bridge
Notes.
|
|
|
10
|
.4
|
|
Form of the Registrant’s 12% Convertible Bridge Notes.
|
|
|
10
|
.5
|
|
Form of Warrant to Purchase Shares of Common Stock issued by the
Registrant to purchasers of 12% Convertible Bridge Notes.
|
|
|
10
|
.6
|
|
Employment Agreement, dated as of April 1, 2006, between
the Registrant and Jeffrey C. Mack.
|
|
|
10
|
.7
|
|
Employment Agreement, dated as of April 1, 2006, between
the Registrant and Christopher F. Ebbert.
|
|
|
10
|
.8
|
|
Employment Agreement, dated as of April 1, 2006, between
the Registrant and Stephen E. Jacobs.
|
|
|
10
|
.9
|
|
Employment Agreement, dated as of April 1, 2006, between
the Registrant and Scott W. Koller.
|
|
|
10
|
.10
|
|
Employment Agreement, dated as of April 1, 2006, between
the Registrant and John A. Witham.
|
|
|
10
|
.11
|
|
Strategic Partnership Agreement, dated May 28, 2004,
between the Registrant and The Marshall Special Assets Group,
Inc., as amended.
|
|
|
10
|
.12
|
|
Factoring Agreement, dated May 23, 2005, by and between the
Registrant and Barry W. Butzow and Stephen E. Jacobs.
|
|
|
10
|
.13
|
|
Lease, dated November 15, 2004, between the Registrant and
The Brastad/Lyman Partnership.
|
|
|
10
|
.14
|
|
Convertible Debenture Purchase Agreement between the Registrant
and the Spirit Lake Tribe dated January 5, 2005.
|
|
|
10
|
.15
|
|
10% Convertible Debenture in principal amount of $3,000,000
dated September 7, 2005.
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description
|
|
|
|
|
|
|
10
|
.16
|
|
Amended and Restated Convertible Debenture Purchase Agreement
between the Registrant and the Spirit Lake Tribe dated
September 7, 2005.
|
|
|
10
|
.17
|
|
Amendment No. 1 to Amended and Restated Convertible
Debenture Purchase Agreement between the Registrant and the
Spirit Lake dated February 27, 2006.
|
|
|
10
|
.18
|
|
Guaranty by and between Stephen E. Jacobs and Winmark
Corporation dated December 8, 2004.
|
|
|
10
|
.19
|
|
Commercial Guaranty by and between the Registrant, as Borrower,
Signature Bank, as Lender and Michael J. Hopkins, as Guarantor
dated January 12, 2006.
|
|
|
10
|
.20
|
|
Commercial Guaranty by and between the Registrant, as Borrower,
Signature Bank, as Lender and Barry Butzow, as Guarantor dated
November 10, 2005.
|
|
|
10
|
.21
|
|
Commercial Guaranty by and between the Registrant, as Borrower,
Signature Bank, as Lender and Barry Butzow, as Guarantor dated
November 2, 2004.
|
|
|
10
|
.22
|
|
Lease by and between Dennis P. Dirlam and the Registrant dated
April 18, 2006.
|
|
|
10
|
.23
|
|
Sale and Purchase Agreement, dated July 11, 2006, between
Sealy Corporation and the Registrant.
|
|
|
10
|
.24
|
|
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.
|
|
|
10
|
.26
|
|
Form of Note Amendment Agreement by and between the Registrant
and certain lenders dated July 27, 2006.
|
|
|
10
|
.27
|
|
Form of option agreement granted under the 2006 Equity Incentive
Plan.
|
|
|
10
|
.28
|
|
Employment Agreement, dated as of June 19, 2006, between
the Registrant and Henry B. May.
|
|
|
21
|
|
|
Subsidiaries of the Registrant.
|
|
|
23
|
.1
|
|
Consent of Virchow, Krause & Company, LLP.
|
|
|
23
|
.2
|
|
Consent of Briggs and Morgan, Professional Association (included
in Exhibit 5).*
|
|
|
24
|
|
|
Power of Attorney (included on signature page).
|
EXHIBIT 10.11
Amendment To The Strategic Partnership Agreement
The Strategic Partnership Agreement dated May 28, 2004 between Wireless Ronin
®
Technologies, Inc.
and The Marshall Special Assets Group, Inc. is hereby amended as follows:
Section 3.3
Distribution of Profit on Sales By MG
. For each RoninCast™ System that is sold
by MG and installed at an End User location within the Territory, MG will pay to WRT thirty-five
percent (35%) for the first 12 months of the Agreement and thirty-eight percent (38%) thereafter of
the sum of the Gross Profit on WRT Products and the Gross Profit on Technical and Support Services
generated from the sale of such RoninCast™ System and Technical Support Services. Payments under
this Section 3.3 will be due and payable by MG to WRT within ten (10) days after receipt of payment
from the End User for the applicable RoninCast™ System.
Section 3.4
Distribution of Profit on Sales by WRT
. For any fees or payments received by
WRT from the End User located in the Territory for Technical and Support Services, WRT will pay to
MG sixty-five percent (65%) for the first 12 months of the Agreement and sixty-two percent (62%)
thereafter of the Gross Profit on Technical and Support Services. Payments under this Section 3.4
will be due and payable by WRT to MG within ten (10) days after WRT’s receipt of fees or payment
for the applicable Technical and Support Services. It is the intent of the parties that MG will
attempt to sell Technical and Support Services and related installation services in connection with
MG’s sale of each RoninCast™ System, and that WRT will enter into an applicable Maintenance and
Support Agreement with the End User(s) as described in Section 4.2 or another appropriate
agreement, as applicable and as approved by MG. If MG collects the fees or payments for Technical
and Support Services directly from the End User(s), then the payment mechanism in Section 3.3
applies. If WRT collects the fees or payments for Technical and Support Services directly from the
End User(s), then the payment mechanism in this Section 3.4 applies.
Dated: October, 6 2004
Signed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless Ronin® Technologies, Inc.
|
|
|
|
The Marshall Special Assets Group, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By
|
|
/s/ Steve Jacobs
|
|
|
|
By
|
|
/s/ Scott H. Anderson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Its
|
|
CFO
|
|
|
|
Its
|
|
President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Amendment to Strategic Partnership Agreement
This First Amendment to that certain Strategic Partnership Agreement dated June 7, 2004
between Wireless Ronin® Technologies, Inc., a Minnesota corporation (“WRT”) and The Marshall
Special Assets Group, Inc., a Delaware corporation (“MG”) (the “Strategic Partnership Agreement”)
is made effective this 29
th
day of September 2004 (“Effective Date”) between WRT and MG.
Recitals:
WHEREAS, WRT and MG entered into the Strategic Partnership Agreement to grant MG the rights to
resell WRT Products and to grant MG a license to the WRT Intellectual Property Rights and
RoninCast™ Technology in the Territory (all as defined in the Strategic Partnership Agreement) on
an exclusive basis, and
WHEREAS, WRT and MG have agreed to amend the Strategic Partnership Agreement to clarify the
definition of “
Gaming Industry and Related Complexes
” in Section 1.1.
NOW, THEREFORE, in consideration of the respective covenants of WRT and MG as set forth in
this First Amendment and other good and valuable consideration, the receipt and sufficiency of
which WRT and MG each acknowledge, WRT and MG hereby agree as follows:
|
|
I.
|
|
Capitalized Terms
. All capitalized words used herein shall have the same
meaning ascribed to them in the Strategic Partnership Agreement unless said words are
otherwise defined in this First Amendment.
|
|
|
|
|
II.
|
|
Amendment of Strategic Partnership Agreement
. The Strategic Partnership
Agreement is hereby amended as follows:
|
|
|
|
|
|
|
Section 1.1
of the Strategic Partnership Agreement is hereby amended in its entirety
to provide:
|
“
Gaming Industry and Related Complexes
” shall mean: (1) any gaming facility operated
by any individual, entity or Native American Sovereign Nation or Tribal Community, or any facility
owned or operated by a Native American enterprise, including any and all aspects of the gaming
facility and related complex, (2) when the customer is in the United Kingdom or any other of the
European Union member states as of November 11, 2003, Switzerland or Norway, any casino facility
operated by any individual, entity or Native American Sovereign Nation or Tribal Community or any
facility owned or operated by a Native American enterprise, including in each case the operation or
management of a casino and attached casino complexes and (3) any lottery or game of chance operated
by any individual, entity, governmental entity (including without limitation a state, provincial or
national government or any subdivision or authority thereof), Native American Sovereign Nation or
Tribal Community or any individual or other entity (including without limitation GTECH Corporation
and British American Bingo Ltd.) which provides infrastructure or technical services with respect
to any gaming facility, casino facility, lottery or game of chance.
A.
Complete Agreement
. This First Amendment together with the Strategic Partnership
Agreement constitute the entire Agreement of the parties with respect to the subject matter hereof
and supersede all previous proposals, oral or written, and all negotiations, conversations or
discussions heretofore had between the parties related to the subject matter of this First
Amendment, the Strategic Partnership Agreement remains in full force and effect.
B.
Severability
. In the event than any provision of this First Amendment shall be
illegal or otherwise unenforceable, such provision shall be severed and the entire First Amendment
will not fail on account thereof and the balance of this First Amendment will continue in full
force and effect.
C.
Applicable Law
. This First Amendment will be governed and construed in accordance
with the laws of the State of Minnesota except with respect to the rules relating to conflicts of
law.
D.
Confidentiality
. The parties hereto confirm their obligations under the
Non-Disclosure Agreement and agree that such agreement shall survive and control the confidential
treatment of all information disclosed to either party whether prior, during or after the term of
this First Amendment.
IN WITNESS WHEREOF, WRT and MG each caused this First Amendment to Strategic Partnership
Agreement to be executed by their duly authorized representatives as of the date set forth in the
first paragraph.
|
|
|
|
|
|
|
|
|
|
|
Wireless Ronin® Technologies, Inc.
|
|
|
|
The Marshall Special Assets Group, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Jeffrey Mack
|
|
|
|
/s/ Scott Anderson
|
|
|
|
|
|
|
|
|
|
Jeffrey Mack
|
|
|
|
|
|
Scott Anderson
|
|
|
|
President
|
|
|
|
|
|
President
|
2
Strategic Partnership Agreement
This Strategic Partnership Agreement (the “Agreement”) is made effective this 28
th
day of May, 2004 (“Effective Date”) between Wireless Ronin® Technologies, Inc., a Minnesota
corporation with its principal office at 510 First Ave. N., Minneapolis MN 55403 (“WRT”) and The
Marshall Special Assets Group, Inc., a Delaware corporation with its principal offices at Suite
3000, 150 South 5th Street, Minneapolis, Minnesota 55402 (“MG”).
Recitals
:
WHEREAS, WRT develops, manufactures, sells, supports and maintains wireless software and
hardware computer products and services (the “WRT Products,” which are defined below),
WHEREAS, WRT and MG agree, among other things, to grant MG the rights to resell WRT Products
and to grant MG a license to the WRT Intellectual Property Rights and RoninCast™ Technology in the
Territory (all as defined below) on an exclusive basis,
NOW, THEREFORE, in consideration of the respective covenants of WRT and MG as set forth in
this Agreement and other good and valuable consideration, the receipt and sufficiency of which WRT
and MG each acknowledge, WRT and MG hereby agree as follows:
1. Definitions.
The defined terms used in this Agreement shall have the meanings designated below or as set
forth elsewhere herein:
1.1 “
Gaming Industry and Related Complexes
” shall have two meanings: (1) any gaming
facility operated by any individual, entity or Native American Sovereign Nation or Tribal
Community, or any facility owned or operated by a Native American enterprise, including any and all
aspects of the gaming facility and related complex or (2) when the customer is in the United
Kingdom, the European Union member states as of November 11, 2003, Switzerland or Norway, any
individual, entity or Native American Sovereign Nation or Tribal Community operating casino
facilities or any facility owned or operated by a Native American enterprise, including the
operation or management of a casino and attached casino complexes.
1.2 “
RoninCast™ Technology
” shall mean the technology that enables the transmission,
on a wired or wireless basis, of visual messages and information from a central server to receivers
connected to remote video display monitors, all as further described on the RoninCast™ Dynamic
Visual Marketing and Communication System Schematic and Description attached hereto as Attachment
I, and further including all modifications, improvements, new versions and new releases of the
RoninCast™ Technology made by or for WRT.
1.3 “
Territory
” shall mean all Gaming Industry and Related Complexes located anywhere
in the world.
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1.4 “
Intellectual Property Rights
” shall mean on a world wide basis, any and all now
known or hereafter known tangible and intangible (a) rights associated with works of authorship
including, without limitation, copyrights, moral rights, semiconductor topography rights, database
rights and mask works, (b) trademark and trade names rights and similar rights, (c) trade secret
rights, (d) patents, designs, algorithms and other industrial property rights, (e) all other
intellectual and industrial property rights of every kind and nature and however designated,
whether arising by operation of law, contract, license or otherwise, and (f) all registrations,
applications, renewals, extensions, continuations, divisions or reissues hereof now or hereafter in
force (including any rights in any of the foregoing), including all modifications, improvements,
new versions and new releases thereto.
1.5 “
WRT Intellectual Property Rights
” shall mean all Intellectual Property Rights
owned or controlled by WRT, including without limitation, that certain U.S. Patent Application
dated October 10, 2003, Docket No. 74334-297084 which may be identified in the United States Patent
Office by Serial No. 10/683,573, filed May 10, 2004.
1.6 “
WRT Products
” shall mean the hardware, software, services (including the
Technical and Support Services) and other tangible and intangible components necessary to
implement, support and maintain the RoninCast™ Technology at a particular installation. A current
listing of the WRT Products as of the Effective Date is attached as Attachment II. As new WRT
Products are introduced they will be deemed to be added to Attachment II.
1.7 “
Maintenance and Support Agreement
” shall mean the Maintenance and Support
Agreement referred to herein in Section 4.2 and attached hereto as Attachment III as the same shall
be changed and modified from time to time or any other similar agreement that provides for the
rendition of Technical and Support Services, other services or modifications, improvements, new
versions and new releases relative to the WRT Intellectual Property Rights and RoninCast™
Technology.
1.8 “
Technical and Support Services
” shall mean any installation or other services, or
any services rendered pursuant to any Maintenance and Support Agreement, which relate to the
installation, customization, maintenance, support or the like of a RoninCast™ System.
1.9 “
End User
” shall mean all end-user customers who purchase the WRT Products from MG
(or, with respect to Technical and Support Services, from WRT) within the Territory.
1.10 “
RoninCast™ System
” shall mean a grouping and configuration of the tangible and
intangible WRT Products as a unified system, so as to implement the WRT Intellectual Property
Rights and RoninCast™ Technology at a particular End User location.
1.11 “
Specifications
” shall mean the particular specifications for a RoninCast™
System.
1.12 “
Selling Price
” shall mean the price charged and the cash or cash equivalents
received by MG for any WRT Products, less the sum of the following actual and customary deductions
where applicable: cash, trade, or quantity discounts; sales, use, tariff,
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import/export duties, or other excise taxes imposed upon particular sales; transportation
charges; and bona fide allowances or credits to End-Users because of rejections or returns.
1.13 “
Gross Sales
” shall mean the total amount of the Selling Prices for all sales of
the WRT Products to End Users located within the Territory.
1.14 “
Cost of WRT Products
” shall, except with respect to the Technical and Support
Services, mean the actual cost of the WRT Products to WRT or any affiliated entity or individual as
evidenced by an invoice from a third party non-affiliated vendor or supplier of the hardware,
software and other tangible and intangible components necessary to implement the RoninCast™
Technology at a particular installation.
1.15 “
Cost of Technical And Support Services
” shall mean an amount equal to fifty
percent (50%) of any charges or amounts invoiced to an End User for any Technical and Support
Services.
1.16 “
Gross Profit on WRT Products
“ shall, except with respect to the Technical and
Support Services, mean the Selling Price for WRT Products less the Cost of WRT Products.
1.17 “
Gross Profit on Technical And Support Services
” shall mean an amount equal to
fifty percent (50%) of any charges or amounts invoiced to and paid by an End User for any Technical
and Support Services.
1.18 “
Assumed Gross Margin on WRT Products
” shall mean an amount equal to twenty-two
and 23/100ths percent (22.23%) of the Selling Price for the WRT Products.
1.19 “
Source Materials
” shall mean the source code and other information for all
software, firmware or other technology included in or required for use with the WRT Products,
RoninCast™ System or RoninCast™ Technology including all documentation and other materials
necessary for a reasonably skilled programmer or engineer to modify and support such software or
technology, and/or to build, modify and support a RoninCast™ System or the RoninCast™ Technology
included in such RoninCast™ System.
1.20 “
WRE
” shall mean Wireless Ronin Europe and/or if applicable, its European
Reseller.
2. Authorization.
2.1
WRT Authorization
. WRT hereby grants MG the right to be its exclusive distributor
of the WRT Products in the Territory. WRT acknowledges that it shall not use, market, sell, have
sold, import or otherwise distribute any of the WRT Products or RoninCast™ Technology for use in
the Territory, or permit any third party to do so except for the transactions described in Section
3.5 or the Technical and Support Services as described in Section 4.2.
2.2
Other Licenses and Resellers
. MG acknowledges that WRT has entered or may enter
into other agreements that grant resale rights in WRT Products to other third parties in other
industries and/or territories (other than to a Gaming Industry and Related Complex or in the
Territory), provided, no such agreements shall conflict with the rights granted herein.
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2.3
License
. WRT hereby grants to MG an exclusive license in the Territory, under all
WRT Intellectual Property Rights, to use, make, have made, market, sell, have sold, import or
otherwise distribute the RoninCast™ System, WRT Products and/or the RoninCast™ Technology pursuant
to the terms of this Agreement. Except for the transactions described in Section 3.5 or 4.2, WRT
shall not transfer, assign, license, sublicense or otherwise distribute the RoninCast™ System, WRT
Products or the RoninCast™ Technology in the Territory, whether as part of the WRT Products or in
any other manner. Nothing in this Agreement shall prohibit WRT from licensing the RoninCast™
Technology or selling any of the WRT Products for use outside the Territory.
2.4
Sublicenses
. MG may, at its discretion, sublicense the rights granted to it under
Sections 2.1 and 2.3 to third parties.
2.5
No Competing Products
. MG shall not market or sell any products that compete with
the WRT Products for use in the Territory, provided that WRT is in compliance with the terms of
this Agreement.
3. Purchase Price, Fees and Distribution of Profit
3.1
Initial Purchase Price
. The initial purchase price for the rights transferred to
MG to be WRT’s exclusive distributor of the WRT Products in the Territory pursuant to Section 2.1
and the grants to MG of an exclusive license in the Territory under all WRT Intellectual Property
Rights pursuant to Section 2.3 hereunder shall be Three Hundred Thousand and 00/100 Dollars
($300,000) payable on the signing by both Parties of this Agreement.
3.2
Additional Purchase Price
. An additional purchase price for the rights
transferred and licenses granted to MG hereunder in the amount of Two Hundred Thousand and 00/100
Dollars ($200,000) shall become due and payable upon the completion of the installation of, and
MG’s receipt of the Selling Price for, three (3) RoninCast™ Systems at an average per RoninCast™
System total Selling Price of $270,000.
3.3
Distribution of Profit on Sales By MG
. For each RoninCast™ System that is sold by
MG and installed at an End-User location within the Territory, MG will pay to WRT thirty-eight
percent (38%) of the sum of the Gross Profit on WRT Products and the Gross Profit on Technical and
Support Services generated from the sale of such RoninCast™ System and Technical and Support
Services. Payments under this Section 3.3 will be due and payable by MG to WRT within ten (10)
days after MG’s receipt of payment from the End User for the applicable RoninCast™ System.
3.4
Distribution of Profit on Sales By WRT
. For any fees or payments received by WRT
from an End User located in the Territory for Technical and Support Services, WRT will pay to MG
sixty-two percent (62%) of the Gross Profit on Technical and Support Services. Payments under this
Section 3.4 will be due and payable by MG to WRT within ten (10) days after MG’s receipt of fees or
payment for the applicable Technical and Support Services. It is the intent of the parties that MG
will attempt to sell Technical and Support Services and related installation services in connection
with MG’s sale of each RoninCast™ System, and that WRT will enter into an applicable Maintenance
and Support Agreement with the End User(s) as
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described in Section 4.2 or another appropriate agreement, as applicable and as approved by
MG. If MG collects the fees or payments for Technical and Support Services directly from the End
User(s), then the payment mechanism in Section 3.3 applies. If WRT collects the fees or payments
for Technical and Support Services directly from the End User(s), then the payment mechanism in
this Section 3.4 applies.
3.5
Purchasing in Europe
. All WRT Products for MG’s European customers will be
purchased directly from WRE, WRT, or WRT’s duly appointed European Reseller, and will be governed
by the terms of this Agreement. WRT acknowledges that its duly appointed European Reseller does
not and shall not have the right to distribute the WRT Products, RoninCast™ System or the
RoninCast™ Technology in the Territory to any party other than MG or its designees. WRT shall
ensure that such reseller complies with and supplies the WRT Products in accordance with the terms
of this Agreement.
4. Supply Agreement.
4.1
WRT Supply
. WRT or WRE as per Section 3.5, shall supply to MG, and MG shall
purchase from WRT or WRE, such quantities of the WRT Products as MG may order from time to time
from WRT in accordance with the terms and conditions of this Agreement. Subject to Section 5.1, MG
is not required to purchase any particular levels of WRT Products hereunder. WRT and WRE, as
applicable, are required to accept any purchase orders submitted by MG, under the term of this
Agreement. WRT and WRE, as applicable, shall use their best efforts to ship the WRT Products to MG
or a third party, as designated by MG, in the quantities and at times requested by MG, and will
promptly advise MG of any delays in shipping. Time is of the essence in WRT’s and WRE’s
performance of its obligations under this Agreement.
4.2
Technical and Support Services
. WRT will provide Technical and Support Services
directly to MG’s End Users located in the Territory pursuant to a Maintenance and Support Agreement
or other appropriate agreement, as applicable and as approved by MG. However, MG agrees to
cooperate and assist in supporting the End Users located in the Territory as reasonably needed.
WRT agrees that the fees charged End Users for Technical and Support Services pursuant to the
Maintenance and Support Agreement shall be ten percent (10%) of the Selling Price of the RoninCast™
System purchased by such End User.
4.3
Purchase Orders
. MG may submit purchase orders to WRT or WRE, as applicable, and
WRT or WRE, as applicable, shall accept all such purchase orders, that include:
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(a)
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an identification of the WRT Products ordered;
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(b)
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the quantity of WRT Products ordered;
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(c)
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requested delivery dates;
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(d)
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shipping instructions; and
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(e)
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if applicable, any relevant export control information or
documentation to enable WRT or WRE to comply with applicable U.S. export
control laws.
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4.4
Modification of Orders
. MG may, without cost or liability, increase or decrease
the quantity of WRT Products ordered under any particular purchase order or reschedule the delivery
of any or all WRT Products under any particular purchase order if MG makes that request at least 30
days prior to the delivery date in effect immediately prior to MG’s change request.
4.5
Delivery Terms
. All deliveries shall be F.O.B. origin, unless otherwise agreed in
writing by both parties. “F.O.B.” shall be construed in accordance with the Uniform Commercial
Code. All risk of damage to or loss or delay of items ordered shall pass to MG upon delivery of
the items to (a) a common carrier; or (b) an agent or any other person specified by MG and acting
on behalf of MG. WRT or WRE shall use the common carriers specified by MG in its purchase orders.
MG is responsible for acquiring any appropriate or desired transit insurance.
4.6
Inspection of Shipments
. MG shall promptly inspect the delivery and in the event
of any shortage, damage, or discrepancy in a shipment, MG shall promptly report the same to WRT and
furnish to WRT such written evidence or other documentation as is obtained by MG to substantiate
such shortage, damage, or discrepancy.
4.7
Quality Performance
. In no event shall a minimum Acceptance Quality Level of 10%
(“AQL”) for non-conforming or rejected items be exceeded. WRT’s or WRE’s, as applicable,
responsibility for non-conforming items or rightly rejected items shall be to promptly repair or
replace such items and to implement reasonable preventative measures at WRT’s or WRE’s expense to
insure that the AQL is maintained. In the event a minimum Acceptance Quality Level of 10% (“AQL”)
for non-conforming or rejected items is exceeded, MG shall have the right exercisable in its sole
discretion to return all of the items described in the purchase order at WRT’s cost. All items
shipped under this Agreement may be inspected pursuant to Section 4.8 below.
4.8
Inspection
. MG reserves the right to perform a quality review or to inspect any
items prior to shipment by giving WRT reasonable written notice to that effect. In such event, the
WRT shall reasonably cooperate with MG and its representatives in their inspection of the items.
4.9
Price Schedule
. All items ordered pursuant to this Agreement shall be sold to MG
for an amount equal to the Cost of WRT Products and the Cost of Technical and Support Services.
The Cost of WRT Products and the Cost of Technical and Support Services shall include all charges,
including without limitation, packaging, packing, labeling and all taxes except sales, use and
other such taxes imposed upon the sale or transfer of the WRT Products. If MG is liable to pay
these taxes they must be specifically listed on WRT’s invoice.
4.10
Payment Terms
. Invoices for all items sold to End Users under this Agreement
shall be by written invoice. Invoices will be stated and payable in U.S. dollars. Payment terms
for such Invoices will be net thirty (30) days.
4.11
Controlling Agreement
. WRT, WRE and MG agree that this Agreement shall supersede
all terms and conditions contained in any purchase order, order confirmation or
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other document exchanged by the Parties in connection with the purchase of WRT Products as
contemplated hereunder.
4.12
Changes to WRT Products
. WRT shall not make any changes to the WRT Products
(including the related Specifications) without written notice to MG provided that any such changes
shall not diminish the functionality of the WRT Products, RoninCast™ System or the RoninCast™
Technology.
5. Term and Termination.
5.1
Term
. The term of this Agreement shall commence on the date set forth in the first
paragraph and be for a term of two years. Thereafter, this Agreement shall automatically renew on
an annual basis in perpetuity provided that MG in any given year during the renewal term produces
either (a) Gross Sales of WRT Products in the amount of at least $1,750,000 per year, or (b)
produces Gross Sales in an amount less than $1,750,000 per year and makes an additional payment to
WRT in an amount equal to thirty-eight percent (38%) of the Assumed Gross Margin on the amount by
which the Gross Sales in such year are less than $1,750,000; provided, however, that MG shall be
excused from meeting the foregoing requirements in any year to the extent that WRT fails to fulfill
its obligations hereunder, including, without limitation, fails to deliver WRT Products when and as
ordered by MG, fails to provide Technical and Support Services or fails to provide WRT Products
that meet the warranties stated herein.
5.2
Termination
.
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(a)
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Notwithstanding Paragraph 5.1 hereof, this Agreement may be
terminated as follows:
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(i)
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Failure by either Party to comply with any
material terms or conditions under this Agreement shall entitle the
other Party to give the Party a default notice requiring it to cure
such default. If the Party in default has not cured such default
within sixty (60) days after the receipt of written notice of default,
the notifying Party shall be entitled, in addition to any other rights
it may have under this Agreement or otherwise under law, to terminate
this Agreement by giving notice to take effect immediately.
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(ii)
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By MG at any time with sixty (60) days prior
written notice to WRT.
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(iii)
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By either Party upon the breach of the
Non-Disclosure Agreement and failure to cure such breach within sixty
(60) days.
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(iv)
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By MG with thirty (30) days prior written
notice to WRT if the Source Materials are released to MG pursuant to
Section 6.6.
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(b)
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In the event of termination or expiration of this Agreement for
any reason, the Parties shall have the following rights and obligations:
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(i)
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All orders accepted prior to the termination or
expiration of this Agreement shall be completed.
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(ii)
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All amounts then or thereafter due or payable
under this Agreement shall be paid by the Parties.
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(iii)
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Both Parties’ duty of confidentiality under
this Agreement shall survive such termination or expiration.
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(iv)
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If the Source Materials have been released to
MG pursuant to Section 6.6, then MG shall retain its right and license
to use such Source Materials and the WRT trademarks as provided in
Sections 6.1-6.3, in order to make, have made, sell, use, import,
distribute, maintain and support the WRT Products, RoninCast™ Systems
or the RoninCast™ Technology whether installed prior to or after the
effective date of termination of this Agreement.
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(v)
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Unless otherwise agreed by WRT and MG, WRT
shall continue to support each End-User’s use of the WRT Products so
long as such End-User desires to obtain such support.
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(vi)
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If this Agreement is terminated by MG pursuant
to Section 5.2(a)(i), (iii) or (iv) prior to the payment becoming due
and payable under Section 3.2, then WRT shall refund to MG the $300,000
previously paid by MG pursuant to Section 3.1 within 10 days of the
date of termination.
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(c)
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Sections 3.4, 4.1-4.12, 5.2(b), 6.4-6.6, 7, 8, 9, 10, 11 and 12
shall survive any termination or expiration of this Agreement.
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6. Intellectual Property Rights.
6.1
WRT Trademarks
. WRT hereby grants to MG, and MG hereby accepts from WRT, a
terminable, exclusive license to use the WRT Trademarks identified on Attachment IV solely in
connection with the distribution, promotion and maintenance of the WRT Products, RoninCast™ Systems
and/or RoninCast™ Technology pursuant to the terns of this Agreement. All such WRT Trademarks
shall be used by MG in accordance with WRT’s standards, specifications and instructions. WRT may
inspect and monitor the activities of MG to ensure that such use of the WRT Trademarks is in
accordance with such standards, specifications, and instructions. MG shall acquire no right,
title, or interest in WRT Trademarks, other than the foregoing limited license, and MG shall not
use any WRT Trademarks as part of MG’s corporate or trade name or permit any third party to do so
without the prior written consent of WRT which consent will not be unreasonably withheld or
delayed.
6.2
Trademark Infringement
. MG shall promptly notify WRT in writing of any
unauthorized use known to MG of the WRT Trademarks or similar marks which may constitute an
infringement of the WRT Trademarks. WRT reserves the right in its sole discretion to institute any
proceedings against such third parties. MG shall cooperate fully with WRT in any
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action taken by WRT against such third parties, provided that WRT shall pay all expenses of
such action and for MG’s assistance. All damages which may be awarded or agreed upon in settlement
of such action shall belong exclusively to WRT.
6.3
Trademark Conflicting Usage
. MG shall not adopt, use or register any words,
phrases, or symbols which are identical to or confusingly similar to any of WRT’s Trademarks. Upon
termination or expiration of this Agreement, and except as provided for in Section 5, MG shall
cease and desist from all use of the WRT Trademarks.
6.4
WRT Ownership
. The parties hereby acknowledge and agree that, as between WRT and
MG, (i) all right, title and interest in the RoninCast™ Technology, and all Source Materials
including, without limitation, all patents, copyrights, trade secrets and other intellectual
property rights, are the exclusive property of WRT; (ii) MG has no rights in the WRT Technology and
the Source Materials except as expressly granted herein; and (iii) MG shall not take any action
with respect to the WRT Technology and the WRT Source Materials inconsistent with the foregoing
acknowledgement, except as otherwise provided for in this Agreement.
6.5
MG Rights in the WRT Source Materials
. The Source Materials and any portions or
copies thereof shall at all times remain the property of WRT and MG shall have no right, title or
interest therein except for the rights and licenses expressly granted in this Agreement. Under no
circumstances shall this Agreement be considered or construed in any way as the sale of the Source
Materials or a sale of any copy thereof, whether such copy is made by WRT or MG. MG agrees to take
all actions reasonably requested by WRT at WRT’s expense to protect the rights of WRT in the Source
Materials and agrees to assign to WRT all rights to unauthorized modifications made to the Source
Materials by MG. MG shall own all authorized modifications that its makes or has made to the Source
Materials.
6.6
Source Materials Escrow
. WRT shall within ten (10) business days after the
Effective Date, establish and maintain in escrow the then-current version of the Source Materials
with a mutually acceptable third party escrow agent. The cost and expenses of such escrow shall be
paid by WRT. WRT shall maintain such escrow, and update the Source Materials, no less than
annually. WRT’s agreement to maintain such escrow and update the Source Materials is a material
provision of this Agreement. MG is hereby granted an exclusive, royalty-free license within the
Territory, under all WRT Intellectual Property, to use, copy, modify, display and create derivative
works of the Source Materials, in order to use, make, have made, sell, import, copy, display,
create derivative works of and otherwise distribute the WRT Products. The Source Materials shall
remain the Confidential Information of, and owned by, WRT. The Source Materials will be released
to MG by the third party escrow agent if (a) WRT fails to continue to do business in the ordinary
course or discontinues its support of the WRT Products; (b) WRT fails to provide Technical and
Support Services to End-Users as required, (c) MG terminates this Agreement due to an uncured
breach by WRT which has not been cured within ninety (90) days from notice thereof, or (d) (i) upon
commencement of a proceeding to liquidate WRT in bankruptcy, in which WRT is the named debtor; (ii)
an assignment for the benefit of its creditors, or (iii) the appointment of a receiver for WRT is
instituted by or against WRT.
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6.7
Bankruptcy
. THE PARTIES INTEND FOR THIS AGREEMENT AND THE LICENSES GRANTED HEREIN
TO COME WITHIN SECTION 365(n) OF THE U.S. BANKRUPTCY CODE AND, NOTWITHSTANDING THE BANKRUPTCY OR
INSOLVENCY OF WRT, THIS AGREEMENT AND THE LICENSES GRANTED HEREIN SHALL REMAIN IN FULL FORCE AND
EFFECT.
7. Taxes.
7.1
Responsibility for Payment
. Subject to Section 4.9, each party shall pay their
own income, franchise, sales, use, personal property, ad valorem, value added, stamp or other
taxes, levies, customs duties or other fees, together with all penalties, fines and interest
thereon that in any way arise out of this Agreement, whether on or measured by the price, the
products, the services furnished, or their use, however designated, levied or based.
8. Representations and Warranties.
8.1
WRT’s Representations and Warranties
. WRT represents and warrants to MG that WRT
has full corporate power to enter into this Agreement and to perform its obligations hereunder, and
that the person signing this Agreement on behalf of WRT has full authority to do so. WRT further
represents and warrants that this Agreement is legal, valid, and binding upon WRT and is
enforceable in accordance with its terms.
8.2
WRT’s Unencumbered Ownership of All Right, Title and Interest In the Intellectual
Property and WRT Intellectual Property Relative to WRT Products, the RoninCast™ System or the
RoninCast™ Technology
. WRT represents and warrants to MG that WRT has ownership of all right,
title and interest in all Intellectual Property (including the WRT Intellectual Property) that is
contained in or necessary for use of the WRT Products, the RoninCast™ System and the RoninCast™
Technology free of any liens or other encumbrances. WRT represents and warrants to MG that no
third party has any claim of ownership or rights in and to the WRT Intellectual Property.
8.3
MG’s Representations and Warranties
. MG represents and warrants to WRT that MG
has full corporate power to enter into this Agreement and to perform its obligations hereunder, and
that the person signing this Agreement on behalf of MG has full authority to do so. MG further
represents and warrants that this Agreement is legal, valid, and binding upon MG and is enforceable
in accordance with its terms.
9. Enforcement of Agreement.
9.1
Applicable Law
. This Agreement will be governed by and construed in accordance
with the laws of the State of Minnesota except with respect to the rules relating to conflicts of
laws. Both parties agree that courts in the State of Minnesota shall have jurisdiction over this
Agreement, and any controversies relating to or arising out of this Agreement, whether brought
during the term of this Agreement or at any time thereafter. Both parties hereby consent to the
jurisdiction of court(s) and to any appellate courts having jurisdiction over appeals from court(s)
in Minnesota.
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9.2
Force Majeure
. Upon written notice to the other party, a party affected by an
event of “Force Majeure” (as defined below) shall be suspended without any liability on its part
from the performance of its obligations under this Agreement, except for the obligation to pay any
amounts due and owing hereunder. Such notice shall include a description of the nature of the
event of Force Majeure, and its cause and possible consequences. The party claiming Force Majeure
shall also promptly notify the other party of the termination of such event. During the period
that the performance by one of the parties of its obligations under this Agreement has been
suspended by reason of any event of Force Majeure, the other party may likewise suspend the
performance of all or part of its obligations hereunder to the extent that such suspension is
commercially reasonable. “Force Majeure” shall mean acts of God, strikes, lockouts or other
industrial disturbances, war, riots, civil disturbances and other similar acts.
9.3
Mediation
. If a dispute arises out of or relates to this Agreement, or its
breach, and the parties have not been successful in resolving such dispute through negotiation, the
parties may mutually agree to attempt to resolve the dispute through non-binding mediation by
submitting the dispute to a sole mediator selected by the parties. Each party shall bear its own
expenses and an equal share of the expenses of the mediator unless otherwise assigned by the
mediator. The parties, their representatives, other participants and the mediator shall hold the
existence, content and result of the mediation in confidence. If such dispute is not resolved by
such mediation, the parties shall have the right to resort to any remedies permitted by law. All
defenses based on passage of time shall be tolled pending the termination of the mediation.
Nothing in this clause shall be construed to preclude any party from seeking injunctive relief in
order to protect its rights pending mediation. A request by a party to court for such injunctive
relief shall not be deemed a waiver of the obligation to mediate.
10. Warranties.
10.1
Warranty
. WRT warrants that:
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(a)
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the WRT Products shall strictly conform and perform in
accordance with the applicable manufacturer’s specifications and shall be free
from defects in materials and workmanship;
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(b)
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the WRT Products shall be free and clear of any lien or
encumbrance, be safe and effective for their intended use, and be new;
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(c)
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WRT has sufficient right to grant the rights and licenses it
grants hereunder, and the use of the WRT Products, the RoninCast™ System, the
RoninCast™ Technology and the WRT Intellectual Property Rights (including the
RoninCast™ trademarks licensed under Section 6.1) do not infringe upon,
violate, misappropriate or breach any Intellectual Property Rights of any third
party;
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(d)
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WRT is not a party to any agreement which would prevent WRT
from performing its obligations under this Agreement or from granting any of
the rights and licenses contemplated in this Agreement, and WRT
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covenants that, during the term of this Agreement, WRT will not enter into
such an agreement;
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(e)
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each RoninCast™ System will perform in accordance with the
representations of WRT and any of its agents or officers and the applicable
Specifications; and
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(f)
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WRT has all authority and rights necessary in order to ensure
compliance by WRE with the terms of this Agreement, including, without
limitation, WRE’s obligation to supply WRT Products hereunder.
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10.2
EXCLUSIONS
. EXCEPT AS PROVIDED IN SECTION 10.1 OR IN SECTION 8, NEITHER WRT NOR
MG MAKES ANY OTHER EXPRESS OR IMPLIED WARRANTY, STATUTORY OR OTHERWISE, INCLUDING WITHOUT
LIMITATION, NO WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, WARRANTIES OF MERCHANTABILITY, OR
WARRANTIES AS TO QUALITY OR CORRESPONDENCE WITH DESCRIPTION OR SAMPLE. UNLESS DIRECTLY CAUSED BY A
PARTY TO THIS AGREEMENT OR THEIR AUTHORIZED AGENTS OR SUBCONTRACTORS, SUCH PARTY MAKES NO WARRANTY
WITH RESPECT TO CONDITIONS RESULTING FROM ANY ACTIONS OR EVENTS CAUSED BY: (I) MODIFICATIONS, (II)
MISUSE, (III) NEGLECT, (IV) ACCIDENT, (V) IMPROPER INSTALLATION, (VI) IMPROPER REPAIRS, (VII)
IMPROPER APPLICATION, OR (VIII) END USER SITE CONDITIONS.
10.3
Remedies
. Subject to Section 10.2, without limiting any of MG’s remedies at law
or in equity, MG may return any defective or nonconforming WRT Products with written notice to WRT
and WRT shall, at MG’s election, promptly replace the same free of any additional charge or
reimburse MG for the total amount paid for such WRT Products. The costs of return and replacement
shall be borne by WRT.
10.4
Limitations and Conditions
. The warranties made under Section 10.1 of this
Agreement are subject to the following limitations and conditions:
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(a)
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The products must be used in the manner prescribed in the
related data sheet and applicable application notes.
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(b)
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The warranty shall commence on the date of shipment by WRT.
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11. Indemnity.
11.1
Indemnity
. Subject to WRT’s indemnification obligations to MG under this Section
11.1, MG shall indemnify, defend and hold harmless WRT and its affiliates, and their respective
officers, directors, employees, agents and customers, from any and all third party claims,
liabilities, judgments, losses, damages, costs and expenses (including, without limitation,
reasonable attorneys’ fees and all damages or expenses asserted against such party) as a result of
a breach of the representations or warranties in Section 8.3 of this Agreement, or (b) arising out
of any WRT Products made by MG subsequent to release of the Source Materials pursuant to Section
6.6. WRT shall indemnify, defend and hold harmless MG and its affiliates, and their respective
officers, directors, employees, agents and customers, from any and all third party
14
claims, liabilities, judgments, losses, damages, costs and expenses (including, without
limitation, reasonable attorneys’ fees and all damages or expenses asserted against such party) as
a result of (a) a breach of the representations or warranties made by WRT in Sections 8.1, 8.2 or
10 of this Agreement, (b) any claim of infringement or misappropriation related to the WRT
Products, RoninCast™ Technology, RoninCast™ System(s) or the WRT Intellectual Property Rights
(including, without limitation, the trademarks licensed pursuant to Section 6.1), or their use as
permitted hereunder, or (c) any Technical and Support Services or other services provided to End
Users. In addition, WRT will indemnify and hold harmless MG and its affiliates and their respective
officers, directors, employees, agents and customers, from any and all claims, liabilities,
judgments, losses, damages, costs and expenses (including, without limitation, reasonable
attorneys’ fees and all damages or expenses asserted against such party) as a result of any failure
of WRE to fulfill its obligations hereunder or to abide by the terms of this Agreement.
11.2
Notice
. Each party shall immediately provide; the other party with written
notice of any claims for which it desires to seek indemnity hereunder. The party seeking
indemnification under this Section 11 shall fully cooperate (and if necessary join in the action)
with the other party (the “Indemnifying Party”) in the defense of any such claims at the
Indemnifying Party’s expense. The Indemnifying Party shall control the defense and settlement of
any claim for which it is indemnifying the other party under this Section 11.
11.3
Third Party Infringer
. If either learns of an infringement within the Territory
of any of the WRT Intellectual Property Rights licensed under this Agreement or any WRT Products,
it shall give written notice thereof the other party. Each party shall then use its best efforts
in cooperation with the other party to terminate such infringement without litigation. If the
infringing activity is not terminated, MG may elect to commence suit against the infringing party
on its own account and at its own expense, and shall be entitled to retain all amounts recovered
from such suit. WRT may monitor or join such suit at his own expense. If MG elects not to
commence any such suit, then WRT is free to do so at its own expense. Each party shall provide
reasonable cooperation (including joining in such suit if necessary) to other party in any suit
contemplated under this Section 11.3, at the other party’s expense, including, without limitation,
testimony and the execution of any pleadings, affidavits or other legal documents reasonable
requested by the other party.
12. Miscellaneous.
12.1
Complete Agreement
. This Agreement, including the attached Schedules, which are
incorporated as an integral part of this Agreement, constitutes the entire Agreement of the parties
with respect to the subject matter hereof and supersedes all previous proposals, oral or written,
and all negotiations, conversations or discussions heretofore had between the parties related to
the subject matter of this Agreement. In particular, the Letter of Intent between the parties
dated April 19, 2004, shall be superseded and terminated by this Agreement.
12.2
Relationship of Parties
. Nothing in this Agreement shall be construed to make
the parties to this Agreement agents of each other; and neither party shall so represent itself as
agent of the other. Neither MG nor WRT shall have any authority to represent itself as any type of
agent of the other. Neither party shall have authority to enter into agreements of any kind
15
on behalf of the other party, nor shall either party have the power or authority to bind or
obligate the other party in any manner to any third party.
12.3
Assignment/Transferability
. MG may sell, assign, or otherwise transfer (by
operation of law or otherwise) any of its rights or obligations under this Agreement without the
prior written permission of WRT. Upon the acceptance of the assignment and assumption of the
obligations, duties and liabilities by assignee, MG shall be released and discharged, to the extent
of the assignment, from all further obligations, duties and liabilities under this Agreement solely
as to any products that are not ordered by MG prior to the effective date of the assignment.
12.4
Notices
. Any notice which either party is required or may desire to give the
other party under this Agreement shall be in writing and delivered via facsimile to the facsimile
number set forth below confirmed by the sender and followed by regular mail to the address set
forth below or by regular or certified mail addressed to the other party at the address set forth
below, unless subsequently changed by written notice to the other party. Postage shall be prepaid,
return receipt requested, and such notice shall be deemed given as of the date received or returned
by the U.S. Postal Service for nondelivery.
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If to Marshall:
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Scott Anderson
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President & COO
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The Marshall Group, Inc.
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Suite 3000
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150 South Fifth Street
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Minneapolis, Minnesota 55402
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Fax No. (612) 376-1412
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With a Copy To:
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John S. Jagiela, Esq.
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The Marshall Group, Inc.
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Suite 3000
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150 South Fifth Street
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Minneapolis, Minnesota 55402
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Fax No. (612) 376-1412
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If to Wireless Ronin:
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Mr. Jeffrey Mack
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President & CEO
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Wireless Ronin Technologies
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Suite 301
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510 First Avenue North
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Minneapolis, Minnesota 55403
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With a Copy To:
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Thor Christensen, Esq.
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Vice President Corporate Counsel
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Wireless Ronin Technologies
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Suite 301
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510 First Avenue North
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Minneapolis, Minnesota 55403
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12.5
Waiver
. No waiver of any breach of any provision of this Agreement shall
constitute a waiver of any prior, concurrent or subsequent breach of the same or any other
provision hereof, and no waiver shall be effective unless made in writing.
12.6
Amendment
. This Agreement shall not be modified, amended, rescinded, terminated
or waived, in whole or in part, except by written amendment signed by both parties hereto.
12.7
Publicity
. This Agreement is confidential and no party shall issue press
releases or engage in other types of publicity of any nature dealing with the commercial and legal
details of this Agreement without the other party’s prior written approval, which approval shall
not be unreasonably withheld.
12.8
Severability
. In the event that any provision of this Agreement shall be illegal
or otherwise unenforceable, such provision shall be severed and the entire Agreement will not fail
on account thereof and the balance of this Agreement will continue in full force and effect.
12.9
Confidentiality
. The parties hereto confirm their obligations under the
Non-Disclosure Agreement and agree that such agreement shall survive and control the confidential
treatment of all information disclosed to either party whether prior, during or after the term of
this Agreement.
12.10
Solicitation of Employees
. During the term of this Agreement and for a period
of two (2) years thereafter, each party agrees not to solicit or hire any employee of the other
party, either directly or indirectly, for employment or consulting, provided however that the
foregoing restriction shall not apply in the event of a release of the Source Materials to MG
pursuant to Section 6.6.
IN WITNESS WHEREOF, WRT and MG each caused this Agreement to be executed by their duly
authorized representatives as of the date set forth in the first paragraph.
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Wireless Ronin Technologies, Inc.
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The Marshall Special Assets Group, Inc.
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/s/ Jeffrey Mack
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/s/ Scott H. Anderson
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Scott Anderson
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President
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President
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17
Attachment I
Description of RoninCast™ Technology
18
Attachment II
List of WRT Products
Tbox; Sbox; Hbox; End Point Controller; End Point Controller Software; Site Control Software;
Master Control Software; Graphic Design; System Installation and Maintenance; Software Support and
Maintenance;
19
Attachment III
Maintenance and Support Agreement
This agreement is between Wireless Ronin Technologies (“WRT”) whose primary place of business is
situated at 510 First Ave. N. Suite 304 Minneapolis, MN 55403 and
(Company)
with their primary business situated at
.
This agreement is to be read in conjunction with the WRT License Agreement. The terms and
conditions of the License Agreement and all amendments thereto are hereby acknowledged and
reaffirmed.
NOW, THEREFORE, in consideration of the premises set forth above and the mutual covenants contained
herein, and intending to be legally bound hereby, the parties agree as follows:
1.
Maintenance Services
. WRT will provide the following Maintenance Services for 1 year
from the date of this agreement as an inclusion in the purchase price of the WRT software,
(ALL
LICENSES MUST BE COVERED IN ORDER FOR ANY LICENSES TO BE COVERED)
, after which WRT will furnish the
following maintenance, support and other services (“Services”) for the Licensed Software under the
terms listed in this agreement:
1.1. All updates, enhancements, upgrades or releases of the Licensed Software and related
information and documentation (“Updates”); not to be less than one update per calendar year.
1.2. Reasonable access by telephone and/or Internet to
technical staff (not to exceed
four hours per month) for consultation in the use and operation of the Licensed Software.
2.
Maintenance Fee
.
In consideration for the Services, Licensee shall pay WRT the monthly
fee set forth on Exhibit A hereto (“Maintenance Fee”) beginning in the second year of this
agreement. Licensee shall pay WRT the Maintenance Fee on or before the first day of each month for
that month. WRT shall have the right to change the Maintenance Fee upon no less than thirty (30)
days prior written notice to Licensee; provided, however, that WRT shall change the Maintenance Fee
no more than once each twelve (12) months during the Term hereof.
3
.
Term
.
The initial term (“Initial Term”) of this Agreement shall be for a period of
twenty four (24) months. After the Initial Term, Licensee shall have the option of renewing this
Agreement for additional one (1) year terms (each, a “Renewal Term” and together with the Initial
Term, the “Term”) by giving WRT notice no less than thirty (30) days prior written notice of such
renewal. WRT may terminate this Agreement (i) immediately upon breach of this Agreement by
Licensee, which breach remains uncured fifteen (15) days after written notice thereof from WRT, or
(ii) upon no less than ninety (90) days prior written notice to Licensee. Notwithstanding anything
to the contrary herein, this Agreement shall automatically terminate upon termination of the
License Agreement.
20
4.
License
.
All Services provided to Licensee hereunder shall be deemed to be a part of
the Licensed Software as that expression is used in the License Agreement, and all terms and
conditions of the License Agreement, including without limitation those relating to use, copying,
return of materials, assignments, ownership, copyright, trade secret and patent protection and
applicable law.
5.
Limited Warranty
.
WRT warrants the media on which the Updates are provided to be free
from defects in materials and workmanship for ninety (90) days after delivery. Defective media may
be returned for replacement without charge during the ninety (90) day warranty period unless the
media have been damaged by accident or misuse. WRT warrants, for ninety (90) days after purchase,
that any unaltered Update will substantially conform to the documentation that accompanies it (WRT
expressly reserves the right to provide the documentation on the same media as the Updates). Any
implied warranties are limited to the duration of the express warranties stated in this Section 5.
WRT does not warrant that: (a) operation of any of the Updates shall be uninterrupted or error
free, (b) that functions contained in the Updates shall operate in combinations which may be
selected for use by Licensee or meet Licensee’s requirements, or (c) that the Updates will detect
all viruses, Trojan horses, worms or other software routines or hardware components designed to
permit unauthorized access to or to disable, erase or otherwise harm any software, hardware or
data. WRT’s entire liability and your exclusive remedy shall be, at the option of WRT, either (a)
return of the price paid or (b) repair or replacement of any Update that does not meet the
foregoing warranty, when returned to WRT. This limited warranty is void if failure of the Update
has resulted from accident, abuse or misapplication. Any replacement software will be warranted for
the remainder of the original warranty period or thirty (30) days, whichever is longer.
THE FOREGOING EXPRESS LIMITED WARRANTIES ARE IN LIEU OF AND, TO THE MAXIMUM EXTENT PERMITTED BY
APPLICABLE LAW, WRT SPECIFICALLY DISCLAIMS ANY AND ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE, WITH REGARD TO THE SERVICES AND THE PROVISION OF OR FAILURE TO PROVIDE SUCH SERVICES.
TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, IN NO EVENT WILL WRT OR ITS DISTRIBUTORS OR
DEALERS BE LIABLE FOR SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES WHATSOEVER (INCLUDING,
WITHOUT LIMITATION, DAMAGES FOR LOSS OF INCOME, PROFITS, USE OF INFORMATION OR ANY OTHER PECUNIARY
LOSS) ARISING OUT OF OR IN CONNECTION WITH THE SERVICES OR THE USE OF OR INABILITY TO USE ANY
UPDATE, EVEN IF WRT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. WRT’S ENTIRE LIABILITY
UNDER ANY PROVISION OF THIS AGREEMENT SHALL BE LIMITED TO THE MAINTENANCE FEES PAID BY LICENSEE
HEREUNDER.
21
Consumer Rights
: For personal, family or household use of the Services, some states
and provinces do not allow the exclusion or limitation of incidental or consequential
damages or limitations on how long an implied warranty lasts, so the above limitations or
exclusions may not apply to you. These warranties give you specific legal rights and
remedies; you may also have other rights and remedies which arise from operation of law and
vary from state to state or province to province.
6.
Force Majeure
.
WRT shall not be liable to Licensee for any failure or delay caused by
events beyond WRT’s reasonable control, including, without limitation, Licensee’s failure to
furnish necessary information; sabotage; failure or delays in transportation or communication;
failures or substitutions of equipment; labor disputes; accidents; shortages of labor, fuel, raw
materials or equipment; or technical failures.
7.
Non-Assignment
. Licensee shall have the right to assign this Agreement to a successor
by merger or a purchaser of all or substantially all of its assets relating to the business of
which the use or sale of the Licensed Software are a part if the successor agrees in writing to be
bound by this license. WRT shall have the right to assign this Agreement, in whole or in part,
and/or to subcontract its performance obligations hereunder, at any time and from time to time in
its sole discretion.
8.
Entire Agreement
.
This Agreement, together with the License Agreement and any and all
exhibits, schedules and appendices attached hereto and thereto, constitute the entire agreement
between the parties and supersede all prior oral or written representations, agreements, promises,
or other communications, which pertain to the covered subject matter. This Agreement may not be
amended or modified except by a written agreement signed by authorized representatives of each
party.
9.
Governing Law
. This Agreement is made under and shall be governed by and construed in
accordance with the laws of the state of Minnesota. Any dispute arising out of or in connection
with this Agreement shall be adjudicated exclusively in the state or federal courts of Minnesota,
and all parties consent to personal jurisdiction and venue therein.
10.
Notices
.
Any notice required under this Agreement shall be given in writing and
delivered by registered or certified mail, return receipt requested, or overnight delivery service
to the parties at their addresses noted above or such other addresses as shall have been designated
to each other in writing. All notices to WRT shall be directed to the attention of Thor
Christensen, CEO/President. All notices to Licensee shall be directed to the attention of Thor
Christensen.
11.
Severability
.
If any provision of this Agreement shall be held unenforceable or
invalid, the remaining parts shall remain in full force and effect.
22
12.
Enforcement
.
The failure of either party in any one or more instances to insist upon
strict performance of any of the terms or provisions of this Agreement shall not be construed as a
waiver or relinquishment, to any extent, of the right to assert or rely upon any such terms or
provisions on any future occasion. The headings are for convenience only and do not affect the
meaning of this Agreement.
13.
Counterparts
.
The parties may execute this Agreement in one or more counterpart
copies, each of which shall be deemed an original.
IN WITNESS WHEREOF
, the parties hereto, each by a duly authorized representative, have executed
this Agreement as of the date first written above.
WRT, INC.
(“WRT”)
(“Licensee”)
23
Attachment IV
WRT TRADEMARKS
RoninCast™
Wireless Ronin®
24
EXHIBIT 10.14
WIRELESS RONIN® TECHNOLOGIES, INC.
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
JANUARY 5, 2005
SPIRIT LAKE TRIBE
Spirit Lake Tribal Council Office
P.O. Box 359
Main Street
Fort Totten, ND 58335
Ladies and Gentlemen:
In consideration of the agreement of the Spirit Lake Tribe (the “Purchaser”) to purchase the
$2,000,000 10% fixed rate Convertible Debentures due 2009 as provided for herein, the undersigned
WIRELESS RONIN® TECHNOLOGIES, INC., a Minnesota corporation (the “Company”), hereby agrees with the
Purchaser as follows:
1.
Authorization of Securities
. The Company proposes to authorize, issue and sell an
aggregate of $2,000,000 principal amount of its convertible debentures, to be in substantially the
form set forth in Exhibit A to this Agreement (the “Form of Debenture”). The term Debenture as
used herein shall mean the Convertible Debenture attached hereto as Exhibit A and all of the rights
to convert the Debenture.
The Convertible Debenture is convertible into fully paid and nonassessable shares of Common
Stock of the Company in whole or in part at any time prior to its payment at the option of the
Holder on the terms set forth in the Debenture.
The Convertible Debenture is convertible in whole at any time prior to its payment at the
option of the Purchaser into fully paid and nonassessable shares of Common Stock of the Company
constituting twenty percent (20%) of all classes of the Common Stock of the Company on a fully
diluted basis, as further explained in paragraph 3(b) of the Convertible Debenture. In addition,
as further explained in paragraph 3(b) of the Convertible Debenture, the Convertible Debenture is
convertible in part at any time prior to its payment at the option of the Purchaser into fully paid
and nonassessable shares of Common Stock of the Company constituting a proportionate percentage of
twenty percent (20%) of all classes of the Common Stock of the Company on a fully diluted basis in
the ratio that the amount of the Convertible Debenture being converted bears to the total amount of
the Convertible Debenture acquired by the Purchaser. Under no circumstances shall paragraph 3(b)
of the Convertible Debenture be read to entitle the Purchaser to shares of Common Stock of the
Company constituting less than 20% of all classes
of the Common Stock of the Company on a fully diluted basis upon conversion in full of the
Convertible Debenture.
2.
Sale and Purchase of Securities
. Subject to the terms and conditions hereof, the
Company agrees to sell to the Purchaser, and the Purchaser agrees to purchase from the Company, the
Convertible Debenture in the aggregate principal amount of $2,000,000.
3.
Closing
. The closing of the sale to, and purchase by, the Purchaser of the
Debenture (the “Closing’) shall occur at the offices of the Marshall Group, Inc. at the hour of
P.M., Central Standard Time, on January 5, 2005 or on such other day or at such other time or
place as the Purchaser and the Company shall agree upon (the “Closing Date”).
At the Closing, the Company will deliver to the Purchaser the Debenture being purchased by the
Purchaser, registered in its name, against delivery to the Company of its funds in the amount of
$2,000,000 in payment of the total purchase price of the Debenture being purchased by the
Purchaser.
4.
Restriction on Transfer of Securities
.
4.1
Restrictions
. The Debenture is transferable only pursuant to (a) a
public offering registered under the Securities Act of 1933, as amended (the
“Securities Act”), (b) Rule 144 (or any similar rule then in effect) adopted under the
Securities Act, if such rule is available, and (c) subject to the conditions elsewhere
specified in this Section 4, any other legally available means of transfer.
4.2 (a)
Legend
. The Debenture shall be endorsed with the following legend:
THIS CONVERTIBLE DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY
BE EFFECTED EXCEPT IN COMPLIANCE WITH AN EFFECTIVE REGISTRATION STATEMENT RELATED
THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER, SATISFACTORY TO PAYOR, THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE ACT.
Upon the conversion of the Debenture, unless the Company receives an opinion of counsel from
the holder of such a security satisfactory to the Company to the effect that a sale, transfer,
assignment, pledge or distribution of the Conversion Stock issuable upon such conversion may be
made without registration, or unless such Conversion Stock is being disposed of pursuant to
registration under the Securities Act and any applicable state act, the same legend shall be
endorsed on the certificate evidencing such Conversion Stock.
The aforesaid legend shall be removed with respect to securities held for at least three years
(including, with respect to the Conversion Stock, the period during which the related converted
Debenture had been held) by a person who has not been an affiliate of the Company (as defined in
Rule 144 under the Securities Act) during the three months preceding the request
2
for removal of
such legend. The foregoing legend removal requirement is based on Rule 144(k)
under the Securities Act as currently in force, and assumes that such Rule (or a successor
thereto) in substantially its current form shall be in effect at the time of any such request for
legend removal.
(b)
Stop Transfer Order
. A stop transfer order shall be
placed with the Company’s transfer agent preventing transfer of any of the
securities referred to in paragraph (a) above pending compliance with the
conditions set forth in any such legend (except as otherwise provided in
paragraph (a) above).
4.3
Removal of Legend
. Any legend endorsed on a certificate or instrument
evidencing a security pursuant to Section 4.2 hereof shall be removed, and the Company
shall issue a certificate or instrument without such legend to the holder of such
security, (a) in accordance with Section 4.2(a) hereof, (b) if such security is being
disposed of pursuant to registration under the Securities Act and any applicable state
acts or pursuant to Rule 144 or any similar rule then in effect, or (c) if such holder
provides the Company with an opinion of counsel satisfactory to the Company to the
effect that a sale, transfer, assignment, offer, pledge or distribution for value of
such security may be made without registration and that such legend is not required to
satisfy the applicable exemption from registration.
4.4
Register of Securities
. The Company or its duly appointed agent shall
maintain a separate register for the Debenture in which it shall register the issuance
and transfer of the Debenture. All transfers of the Debenture shall be recorded on the
register maintained by the Company or its agent, and the Company shall be entitled to
regard the registered holder of such securities as the actual owner of the securities
so registered until the Company or its agent is required to record a transfer of such
securities on its register. The Company or its agent shall be required to record any
such transfer when it receives (a) the security to be transferred duly and properly
endorsed by the registered holder thereof or by its attorney duly authorized in
writing, and (b) the opinion of counsel referred to in Sections 4.2 and 4.3 hereof or
evidence of compliance with the registration provisions referred to in those Sections.
5.
Representations and Warranties by Company
. Except as disclosed in Exhibit C
hereto, the Company represents and warrants to the Purchaser that:
5.1
Organization, Standing, etc
. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Minnesota, and has the requisite corporate power and authority to own its properties
and to carry on its business in all material respects as it is now being conducted.
The Company has the requisite corporate power and authority to issue the Debenture and
the Conversion Stock, and to otherwise perform its obligations under this Agreement and
the Debenture. The copies of the Articles of Incorporation and Bylaws (as such Bylaws
were amended on May 28, 2004) of the Company delivered to the Purchaser or their agents
prior to the execution of this Agreement are true and complete copies of the duly and
legally adopted Articles of Incorporation and Bylaws of the Company in effect as of the
date of
this Agreement. The Company does not have any direct or indirect equity interest in
any other firm, corporation, partnership, joint venture association or other
business organization.
3
5.2
Qualification
. The Company is duly qualified or licensed as a foreign
corporation in good standing in each jurisdiction wherein the nature of its activities
or of its properties owned or leased makes such qualification or licensing necessary
and failure to be so qualified or licensed would have a material adverse impact on its
business.
5.3
Financial Statements
. Attached hereto as Exhibit B are unaudited
balance sheets at March 31, 2004 and September 30, 2004 (the “Balance Sheet Date”),
together with the related statements of operations, stockholders’ equity and cash flow
for the fiscal year ended March 31, 2004 and the related statements of operations and
stockholders’ equity for the six months ended September 30, 2004, prepared by the
Company. Such financial statements (i) are in accordance with the books and records of
the Company, (ii) present fairly the financial condition of the Company at the balance
sheet dates and the results of its operations for the periods therein specified, and
(iii) have, in all material respects, been prepared in accordance with generally
accepted accounting principles applied on a basis consistent with prior accounting
periods (except, with respect to the interim financial statements, the absence of
footnotes). Specifically, but not by way of limitation, the respective balance sheets
disclose all of the debts, liabilities and obligations of any nature (whether absolute,
accrued or contingent and whether due or to become due) of the Company at March 31,
2004 and September 30, 2004, which, individually or in the aggregate, are material and
which, in accordance with generally accepted accounting principles, would be required
to be disclosed in such balance sheets, and the omission of which would, in the
aggregate, have a material adverse impact on the Company. The balance sheets include
appropriate reserves for all taxes and other liabilities accrued at such date but not
yet payable.
5.4
Tax Returns and Audits
. All required federal, state and local tax
returns or appropriate extension requests of the Company have been filed, and all
federal, state and local taxes required to be paid with respect to such returns have
been paid or due provision for the payment thereof has been made. The Company is not
delinquent in the payment of any such tax or in the payment of any assessment or
governmental charge. The Company has not received notice of any tax deficiency
proposed or assessed against it, and has not executed any waiver of any statute of
limitations on the assessment or collection of any tax. None of the Company’s tax
returns have been audited by governmental authorities. in a manner to bring such
audits to the Company’s attention. The Company does not have any tax liabilities
except those incurred in the ordinary course of business since the Balance Sheet Date.
5.5
Changes, Dividends, etc
. Except for the transactions contemplated by
this Agreement, since the Balance Sheet Date the Company has not: (a) incurred any
debts, obligations or liabilities, absolute, accrued or contingent and whether due
or to become due, except current liabilities incurred in the ordinary course of
business, which (individually or in the aggregate) will not materially and adversely
affect the business, properties or prospects of the Company; (b) paid any obligation
or liability other than, or discharged or satisfied any liens or encumbrances other
than those securing, current liabilities, in each case in the ordinary course of
business; (c) declared or made any payment or distribution to its stockholders as
such, or purchased or redeemed any of its shares of capital stock or other
securities, or obligated itself to do so; (d) mortgaged, pledged or subjected to
lien, charge, security interest or other encumbrance any of its assets, tangible or
intangible, except in the ordinary course of business; (e) sold, transferred or
leased any of its assets except in the ordinary course of business; (f) cancelled or
4
compromised any debt or claim, or waived or released any right of material value;
(g) suffered any physical damage, destruction or loss (whether or not covered by
insurance) materially and adversely affecting the properties, business or prospects
of the Company; (h) entered into any transaction other than in the ordinary course
of business; (i) encountered any labor difficulties or labor union organizing
activities; (j) issued or sold any shares of capital stock or other securities or
granted any options, warrants or other purchase rights with respect thereto other
than as contemplated by this Agreement; (k) made any acquisition or disposition of
any material assets or become involved in any other material transaction, other than
for fair value in the ordinary course of business; (l) increased the compensation
payable, or to become payable, to any of its directors or employees, or made any
bonus payment or similar arrangement with any directors or employees or increased
the scope or nature of any fringe benefits provided for its employees or directors;
or (m) agreed to do any of the foregoing other than pursuant hereto. There has been
no material adverse change in the financial condition, operations, results of
operations or business of the Company since the Balance Sheet Date.
5.6
Title to Properties and Encumbrances
. The Company has good and
marketable title to all of its owned properties and assets, and the properties and
assets used in the conduct of its business, except for property disposed of in the
ordinary course of business since the Balance Sheet Date, which properties and assets
are not subject to any mortgage, pledge, lease, lien, charge, security interest,
encumbrance or restriction, except Permitted Liens (as hereinafter defined). The
plant, offices and equipment owned and leased by the Company have been kept in good
condition and repair in the ordinary course of business, and the Company has not been
threatened with any action or proceeding under any building or zoning ordinance, law or
regulation.
5.7
Litigation; Governmental Proceedings
. There are no legal actions,
suits, arbitrations or other legal, administrative or governmental proceedings or
investigations pending or, to the knowledge of the Company, threatened against the
Company, its properties, assets or business, and the Company is not aware of any facts
which are likely to result in or form the basis for any such action, suit or other
proceeding. The Company is not in default with respect to any judgment, order or
decree of any court or any governmental agency or instrumentality. The
Company has not been threatened with any action or proceeding under any business or
zoning ordinance, law or regulation.
5.8
Compliance with Applicable Laws and Other Instruments
. The business
and operations of the Company have been and are being conducted in accordance with all
applicable laws, rules and regulations of all governmental authorities. Neither the
execution nor delivery of, nor the performance of or compliance with, this Agreement or
the Debenture nor the consummation of the transactions contemplated hereby or thereby
will conflict with, or, with or without the giving of notice or passage of time, result
in any breach of, or constitute a default under, or result in the imposition of any
lien or encumbrance upon any asset or property of the Company pursuant to, any
applicable law, administrative regulation or judgment, order or decree of any court or
governmental body, any agreement or other instrument to which the Company is a party or
by which it or any of its properties, assets or rights is bound or affected, and will
not violate the Articles of Incorporation or Bylaws of the Company. The Company is not
in violation of its Articles of Incorporation or its Bylaws nor in violation of, or in
default under, any
5
lien, indenture, mortgage, lease, agreement, instrument, commitment
or arrangement in any material respect.
5.9
Conversion Stock
. The shares of Conversion Stock issuable upon
conversion of the Debenture have been reserved for issuance and when issued upon
conversion will be duly authorized, validly issued and outstanding, fully paid,
nonassessable and free and clear of all pledges, liens, encumbrances and restrictions,
except as set forth in Section 4 hereof. The certificates representing the Conversion
Stock to be delivered upon the conversion of the Debenture will be genuine, and the
Company has no knowledge of any fact which would impair the validity thereof.
5.10
Securities Laws
. Based in part upon the representations and warranties
contained in Section 6 hereof, no consent, authorization, approval, permit or order of
or filing with any governmental or regulatory authority is required under current laws
and regulations in connection with the execution and delivery of this Agreement or the
Debenture or the offer, issuance, sale or delivery of the Debenture or the offer of the
Conversion Stock other than the qualification thereof, if required, under applicable
state securities laws, which qualification has been or will be effected as a condition
of these sales. The Company has not, directly or through an agent, offered the
Debenture or the Conversion Stock or any similar securities for sale to, or solicited
any offers to acquire such securities from, persons other than the Purchaser and other
accredited investors. Under the circumstances contemplated hereby, the offer,
issuance, sale and delivery of the Debenture and the offer of the Conversion Stock will
not under current laws and regulations require compliance with the prospectus delivery
or registration requirements of the Securities Act.
5.11
Patents and Other Intangible Rights
. The Company (a) owns or has the
exclusive right to use, free and clear of all material liens, claims and restrictions,
all patents, trademarks, service marks, trade names, copyrights, licenses and rights
with respect to the foregoing, used in the conduct of its business as now conducted,
(b) is not obligated or under any liability whatsoever to make any payments of a
material nature by way of royalties, fees or otherwise to any owner of, licensor of,
or other claimant to, any patent, trademark, trade name, copyright or other
intangible asset, with respect to the use thereof or in connection with the conduct
of its business or otherwise (c) owns or has the unrestricted right to use all trade
secrets, including know-how, inventions, designs, processes, computer programs and
technical data necessary to the development, operation and sale of all products and
services sold or proposed to be sold by it, free and clear of any rights, liens or
claims of others, and (d) is not using any confidential information or trade secrets
of others. The Company is not, nor has it received notice with respect to,
infringing upon or otherwise acting adversely to any known right or claimed right of
any person under or with respect to any patents, trademarks, service marks, trade
names, copyrights, licenses or rights with respect to the foregoing.
5.12
Capital Stock
. The authorized capital stock of the Company consists of
75,000,000 common shares, of which 5,207,007 shares are issued and outstanding and
25,000,000 shares of preferred stock, none of which shares have ever been issued and
outstanding. All of the outstanding shares of capital stock of the Company were duly
authorized and validly issued and are fully paid and nonassessable. There are no
outstanding subscriptions, options, warrants, calls, contracts, demands, commitments,
Convertible Securities (as hereinafter
6
defined) or other agreements or arrangements of
any character or nature whatever, except as otherwise disclosed in the Private
Placement Memorandum attached hereto as Exhibit D hereto or as contemplated by this
Agreement, under which the Company is or may be obligated to issue capital stock or
other securities of any kind representing an ownership interest or contingent ownership
interest in the Company. Neither the offer nor the issuance or sale of the Debenture
or the Conversion Stock constitutes an event, under any anti-dilution provisions of any
securities issued or issuable by the Company or any agreements with respect to the
issuance of securities by the Company, which will either increase the number of shares
issuable pursuant to such provisions or decrease the consideration per share to be
received by the Company pursuant to such provisions. No holder of any security of the
Company is entitled to any preemptive or similar rights to purchase securities from the
Company, provided, however, that nothing in this Section 5.12 shall affect, alter or
diminish any right granted to the Purchaser in this Agreement. All outstanding
securities of the Company have been issued in full compliance with an exemption or
exemptions from the registration and prospectus delivery requirements of the Securities
Act and from the registration and qualification requirements of all applicable state
securities laws.
5.13
Outstanding Debt
. The Company has no Indebtedness for Borrowed Money
(as hereinafter defined) except as otherwise set forth in the financial statements
attached hereto as Exhibit B. The Company is not in default in the payment of the
principal of or interest or premium on any such Indebtedness for Borrowed Money, and no
event has occurred or is continuing under the provisions of any instrument, document or
agreement evidencing or relating to any such
Indebtedness for Borrowed Money which with the lapse of time or the giving of
notice, or both, would constitute an event of default thereunder.
5.14
Schedule of Assets and Contracts
. Attached hereto as Exhibit E is a
Schedule of Assets and Contracts containing:
(a) Annex A: a listing of all real properties owned by the
Company;
(b) Annex B: a listing of each indenture, lease, sublease, license
or other instrument under which the Company claims or holds a leasehold
interest in real property;
(c) Annex C: a listing of all written and oral contracts,
agreements, subcontracts, purchase orders, commitments and arrangements
involving payments remaining to or from the Company in excess of Twenty Five
Thousand and 00/100ths Dollars ($25,000.00) and other agreements material to
the Company’s business to which the Company is a party or by which it is bound,
under which full performance (including payment) has not been rendered by any
party thereto;
(d) Annex D: a listing of all employment agreements, consulting
agreements, noncompetition agreements, executive compensation plans, profit
sharing plans, bonus plans, deferred compensation agreements, employee pension
retirement plans and employee benefit stock option or stock purchase plans and
other employee benefit plans, entered into or adopted by the Company;
7
(e) Annex E: a listing of all deeds of trust, mortgages, security
agreements, pledge agreements and other agreements or arrangements whereby any
of the assets or properties of the Company are subject to any lien,
encumbrance, security interest or charge;
(f) Annex F: a listing of all leases of personal property
involving payment remaining to or from the Company in excess of Five Thousand
and 00/100ths Dollars ($5,000.00);
(g) Annex G: a listing of all bank accounts (or accounts with
other financial institutions) maintained by the Company, together with the
persons authorized to make withdrawals from such accounts;
(h) Annex H: the name of each employee of the Company whose annual
compensation is in excess of Fifty Thousand and 00/100ths Dollars ($50,000.00)
and the remuneration currently payable to each such employee;
(i) Annex I: the name of each stockholder of the Company and the
number of shares owned by such stockholder;
(j) Annex J: a listing of all insurance policies in force and
referred to in Section 5.19 hereof; and
(k) Annex K: a listing of all patents (including applications
therefor), royalty and license agreements, trademarks, trade names, service
marks and copyrights relating to Company products.
Prior to the Closing Date, the Company shall provide legal counsel for the Purchaser with a
true and complete copy of each document referred to above which such counsel requests to examine.
The Company shall also provide legal counsel for the Purchaser with a true and complete copy of the
Company’s current form of nondisclosure agreement.
The Company has in all material respects substantially performed all obligations required to
be performed by it to date and is not in default in any material respect under any of the
contracts, agreements, leases, documents, commitments or other arrangements to which it is a party
or by which it is otherwise bound. All instruments referred to above are in effect and enforceable
according to their respective terms (except as the enforceability thereof may be limited by
bankruptcy, insolvency, moratorium, reorganization or similar laws affecting the enforcement of
creditors’ rights generally, and except for judicial limitations on the enforcement of the remedy
of specific performance and other equitable remedies), and there is not under any of such
instruments any existing material default or event of default or event which, with notice or lapse
of time or both, would constitute an event of default thereunder. All parties having material
contractual arrangements with the Company are in substantial compliance therewith and none are in
material default in any respect thereunder. All plans or arrangements listed pursuant to clause
(d) above are fully funded to the extent that such funding is required by generally accepted
accounting principles.
5.15
Corporate Acts and Proceedings
. This Agreement has been duly
authorized by all necessary corporate action on behalf of the Company, and has been
duly
8
executed and delivered by authorized officers of the Company. All corporate
action necessary to the authorization, creation, issuance and delivery of the Debenture
and the Conversion Stock has been taken on the part of the Company, or will be taken by
the Company on or prior to the Closing Date. This Agreement is, and the Debenture when
issued pursuant to the terms of this Agreement will be, when executed and delivered
pursuant to the terms of this Agreement, a valid and binding agreement of the Company
enforceable in accordance with its terms, except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws
affecting the enforcement of creditors’ rights generally, and except for judicial
limitations on the enforcement of the remedy of specific enforcement and other
equitable remedies.
5.16
Accounts Receivable
. To the extent that they exceed the reserves for
doubtful accounts set forth in the financial statements attached hereto as Exhibit B
hereto, the accounts receivable of the Company which are reflected therein and all of
its accounts receivable which have arisen since the Balance Sheet Date (except such
accounts receivable as have been collected since the Balance Sheet Date) are valid and
enforceable claims, and the goods and services sold and delivered which
gave rise to such accounts were sold and delivered in conformity with the applicable
purchase orders, agreements and specifications. Such accounts receivable are
subject to no valid defense or offsets except routine customer complaints or
warranty demands of an immaterial nature. The reserve for doubtful accounts that is
included in Exhibit B hereto is adequate.
5.17
Inventories
. The inventories of the Company which are reflected in
Exhibit B hereto and all inventory items which have been acquired since the Balance
Sheet Date consist of raw materials, supplies, work-in-process and finished goods of
such quality and in such quantities as are currently useable or saleable in the
ordinary course of its business.
5.18
Purchase Commitments and Outstanding Bids
. No purchase commitment of
the Company is in excess of normal, ordinary and usual requirements of its business, or
was made at any price in excess of the then current market price, or contains terms and
conditions more onerous than those usual and customary in the industry. There is no
outstanding material bid, sales proposal, contract or unfilled order of the Company
which (a) will, or could if accepted, require the Company to supply goods or services
at a cost to the Company in excess of the revenues to be received therefrom, or (b)
quotes prices which do not include a mark-up over reasonably estimated costs consistent
with past mark-ups on similar business or market conditions current at the time.
5.19
Insurance Coverage
. There are in full force policies of insurance
issued by insurers of recognized responsibility insuring the Company, its properties
and business against such losses and risks, and in such amounts, as in the Company’s
best judgment, after advice from its insurance broker, are acceptable for the nature
and extent of its business and the Company’s resources.
5.20
No Brokers or Finders
. No person, firm or corporation has or will
have, as a result of any act or omission of the Company, any right, interest or valid
claim against or upon the Company or any Purchaser for any commission, fee or other
compensation as a finder or broker, or in any similar capacity, in connection with the
transactions contemplated by this
9
Agreement except for the fees agreed to be paid by
the Company to Marshall Investments Corporation. The Company will indemnify and hold
the Purchaser harmless against any and all liability with respect to any such
commission, fee or other compensation which may be payable or determined to be payable
in connection with the transactions contemplated by this Agreement.
5.21
Conflicts of Interest
. No officer, director or stockholder of the
Company or any affiliate (as such term is defined in Rule 405 under the Securities Act)
of any such person has any direct or indirect interest (a) in any entity which does
business with the Company, or (b) in any property, asset or right which is used by the
Company in the conduct of its business, or (c) in any contractual relationship with the
Company other than as an employee. For the purpose of this Section 5.21, there shall
be disregarded any interest which arises solely from the ownership of less than a 1%
equity interest in a corporation whose stock is
regularly traded on any national securities exchange or in the over-the-counter
market.
5.22
Licenses
. The Company possesses from the appropriate agency,
commission, board and government body and authority, whether state, local or federal,
all licenses, permits, authorizations, approvals, franchises and rights which (a) are
necessary for it to engage in the business currently conducted by it, and (b) if not
possessed by the Company would have an adverse impact on the Company’s business. The
Company has no knowledge that would lead it to believe that it will not be able to
obtain all licenses, permits, authorizations, approvals, franchises and rights that may
be required for any business the Company proposes to conduct.
5.23
Registration Rights
. The Company has not agreed to register any of its
authorized or outstanding securities under the Securities Act.
5.24
Retirement Plans
. The Company does not have any retirement plans in
which any employees of the Company participate that is subject to any provisions of the
Employee Retirement Income Security Act of 1974 and of the regulations adopted pursuant
thereto (“ERISA”).
5.25
Environmental and Safety Laws
. To the best of its knowledge, the
Company is not in violation of any applicable statute, law or regulation relating to
the environment or occupational health and safety, and no material expenditures are or
will be required in order to comply with any such existing statute, law or regulation.
The operations of the Company do not involve any asbestos, urea-formaldehyde foamed-in-place
insulation, polyclorinated biphenyls (“PCBs”) or any other hazardous substances or materials
including, but not limited to, hazardous substances or materials under the Comprehensive
Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and
Reauthorization Act, the Resource Conservation and Recovery Act, the Minnesota Environmental
Response and Liability Act, or any other federal, state or local statute, regulation, code or
ordinance.
5.26
Employees
. To the best of the Company’s knowledge, no officer of the
Company or employee of the Company whose annual compensation is in excess of $50,000.00
has any plans to terminate his or her employment with the Company. The Company has
complied in all material respects with all laws relating to the employment of labor,
including
10
provisions relating to wages, hours, equal opportunity, collective bargaining
and payment of Social Security and other taxes, and the Company has not encountered any
material labor difficulties. The Company does not have any worker’s compensation
liabilities, except those reflected in Exhibit B hereto.
5.27
Absence of Restrictive Agreements
. To the best of the Company’s
knowledge, no employee of the Company is subject to any secrecy or non-competition
agreement or any agreement or restriction of any kind that would
impede in any way the ability of such employee to carry out fully all activities of
such employee in furtherance of the business of the Company. To the best of the
Company’s knowledge, no employer or former employer of any employee of the Company
has any claim of any kind whatsoever in respect of any of the rights described in
Section 5.11 hereof.
5.28
Disclosure
. The Company has not knowingly withheld from the Purchaser
any material facts relating to the assets, business, operations, financial condition or
prospects of the Company. No representation or warranty in this Agreement or in any
certificate, schedule, statement or other document furnished or to be furnished to any
Purchaser pursuant hereto or in connection with the transactions contemplated hereby
contains or will contain any untrue statement of a material fact or omits or will omit
to state any material fact required to be stated herein or therein or necessary to make
the statements herein or therein not misleading.
6.
Representations and Warranties of Purchaser
. The Purchaser represents and warrants
that:
6.1
Purchaser
. Purchaser is a federally recognized Native American Indian
Tribe.
6.2
Investment Intent
. The Debenture being acquired by the Purchaser
hereunder is being purchased and the Conversion Stock acquired by the Purchaser upon
conversion of such Debentures will be acquired, for such Purchaser’s own account and
not with the view to, or for resale in connection with, any distribution or public
offering thereof within the meaning of the Securities Act. The Purchaser understands
that the Debenture and the Conversion Stock have not been registered under the
Securities Act or any applicable state laws by reason of their issuance or contemplated
issuance in a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act and such laws, and that the reliance of the Company
and others upon this exemption is predicated in part upon this representation and
warranty. The Purchaser further understands that the Debenture and Conversion Stock
may not be transferred or resold without (a) registration under the Securities Act and
any applicable state securities laws, or (b) an exemption from the requirements of the
Securities Act and applicable state securities laws.
The Purchaser understands that an exemption from such registration is not presently available
pursuant to Rule 144 promulgated under the Securities Act by the Securities and Exchange Commission
(the “Commission”) and that in any event the Purchaser may not sell any securities pursuant to Rule
144 prior to the expiration of a two-year period after the Purchaser has acquired the securities.
The Purchaser understands that any sales pursuant to Rule 144 may only be made in full compliance
with the provisions of Rule 144.
11
6.3
Qualification as Accredited Investor
. The Purchaser qualifies as an
accredited investor within the meaning of Rule 501 under the Securities Act. The
Purchaser has such knowledge and experience in financial and business matters that the
Purchaser is capable of evaluating the merits and risks of the investment
to be made hereunder by such Purchaser. The Purchaser has and has had access to all
of the Company’s material books and records and access to the Company’s executive
officers has been provided to the Purchaser or to the Purchaser’s qualified agents.
The state in which the Purchaser’s principal office is located is set forth in the
Purchaser’s address in Section 18(a) of this Agreement. The Purchaser’s principal
office is located within the Spirit Lake Reservation, which is located in the State
of North Dakota.
6.4
Acts and Proceedings
. This Agreement has been duly authorized by all
necessary action on the part of the Purchaser, has been duly executed and delivered by
the Purchaser, and is a valid and binding agreement upon the part of the Purchaser.
6.5
No Brokers or Finders
. No person, firm or corporation has or will
have, as a result of any act or omission by such Purchaser, any right, interest or
valid claim against the Company for any commission, fee or other compensation as a
finder or broker, or in any similar capacity, in connection with the transactions
contemplated by this Agreement. Such Purchaser will indemnify and hold the Company
harmless against any and all liability with respect to any such commission, fee or
other compensation which may be payable or determined to be payable as a result of the
actions of such Purchaser in connection with the transactions contemplated by this
Agreement.
6.6
Sovereign Immunity
. The Spirit Lake Tribe as Purchaser, being an
American Indian Tribe, is possessed with sovereign immunity. The Tribe hereby
proclaims its sovereign immunity, but does agree to a limited waiver of sovereign
immunity pursuant to the terms set forth herein and no expansion thereof. Purchaser
agrees to be subject to suit in United States District Court for the District of North
Dakota for injunctive relief in respect to any claim, crossclaim, or counterclaim
associated with any responsibility set forth herein or associated with its status as
purchaser and/or holder of the Convertible Debentures of the Company. Should the
United States District Court, District of North Dakota not have jurisdiction, then
Purchaser agrees to suit in the North Dakota District Court for the County of Benson.
No waiver of sovereign immunity is made as to Tribal assets beyond those committed for
the purchase of the Convertible Debenture of the Company. Specification of
jurisdiction wherein the Purchaser agrees to be sued as specified above does not limit
the jurisdictions in which Purchaser may initiate suit against the Company, should
Purchaser believe that such legal action may be warranted.
7.
Conditions of the Purchaser’s Obligation
. The obligation to purchase and pay for
the Debenture which the Purchaser has agreed to purchase on the Closing Date is subject to the
fulfillment prior to or on the Closing Date of the following conditions.
7.1
No Errors, etc
. The representations and warranties of the Company
under this Agreement shall be true in all material respects as of the Closing Date with
the same effect as though made on and as of the Closing Date.
12
7.2
Compliance with Agreement
. The Company shall have performed and
complied with all agreements or conditions required by this Agreement to be performed
and complied with by it prior to or as of the Closing Date.
7.3
Certificate of Officers
. The Company shall have delivered to the
Purchaser a certificate, dated the Closing Date, executed by the President and the
senior financial officer of the Company and certifying to the satisfaction of the
conditions specified in Sections 7.1, 7.2 and 7.5 hereof.
7.4
Opinion of Company’s Counsel
. (a) The Company shall have delivered to
the Purchaser an opinion or opinions of Faegre & Benson, counsel for the Company, dated
the Closing Date, to the effect that:
(i) The Company is a duly and validly organized and existing corporation in good standing
under the laws of the State of Minnesota; has the corporate power and authority to enter into this
Agreement and the Debenture, to issue and sell the Debenture and the Conversion Stock as
contemplated by this Agreement, and to carry out the provisions of this Agreement and the
Debenture, has the corporate power and authority to own and hold its properties owned and leased
and to carry on the business in which it is engaged.
(ii) This Agreement and the Debenture have been duly authorized, executed and delivered by the
Company, and are legal, valid and binding agreements of the Company enforceable in accordance with
their respective terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium, reorganization or similar laws affecting the enforcement of creditors’
rights generally, and except for judicial limitations on the enforcement of the remedy of specific
performance and other equitable remedies.
(iii) The Conversion Stock has been duly authorized and reserved for issuance upon conversion
of the Debenture based upon the initial Conversion calculations and when issued upon such
conversion in accordance with the terms and conditions of the Debenture, the Conversion Stock will
be duly authorized and issued and will be fully paid and nonassessable.
(iv) All corporate proceedings required by law or by the provisions of this Agreement to be
taken by the Board of Directors and the stockholders of the Company on or prior to the Closing Date
in connection with the execution and delivery of this Agreement and the Debenture, the offer,
issuance and sale of the Debenture and in connection with the consummation of the transactions
contemplated by this Agreement, have been duly and validly taken.
(v) The Company is authorized by its Articles of Incorporation to issue 75,000,000 common
shares and 25,000,000 preferred shares.
(vi) No security holder of the Company is entitled to preemptive or similar rights to
subscribe for or to purchase any shares of capital stock of the Company pursuant to the Company’s
Articles of Incorporation, nor will any security holder of the Company
13
be entitled to any such
rights pursuant to the Company’s Articles of Incorporation as a result of the execution or delivery
of this Agreement or the issuance of the Debenture or the Conversion Stock.
(vii) Assuming the accuracy of the representations of the Purchaser set forth in Section 6
hereof, the Company has obtained the approval or consent of all governmental agencies or bodies
required to be obtained by it for the legal and valid execution and delivery of this Agreement and
the Debenture and the legal and valid offer, issuance and sale of the Debenture and the offer of
the Conversion Stock to the Purchaser through conversion and for the performance of the obligations
of the Company under any provisions of this Agreement or the Debenture. The Company is not in
violation of any term, provision or condition of its Articles of Incorporation or Bylaws, and the
consummation of the transactions contemplated by this Agreement will not result in any breach or
violation of the terms or provisions of, or constitute a default under, the Articles of
Incorporation or the Bylaws of the Company or to the best of such counsel’s knowledge any statute,
rule or regulation known to such counsel to be applicable to the Company.
(viii) Upon due and diligent inquiry, the primary lawyers have no actual knowledge of any
litigation, proceeding or governmental investigation pending or threatened against the Company, its
key management employees, properties or business which, if determined adversely to the Company;
would have a material adverse effect upon the financial condition, operations, results of
operations or business of the Company.
(b) The Company shall have delivered to the Purchaser an opinion
Thor Christensen, Executive Vice President and Chief Legal Counsel for the
Company, dated the Closing Date, to the effect that:
(i) The Company is a duly and validly organized and existing corporation in good standing
under the laws of the State of Minnesota; has the corporate power and authority to enter into this
Agreement and the Debenture, to issue and sell the Debenture and the Conversion Stock as
contemplated by this Agreement, and to carry out the provisions of this Agreement and the
Debenture, has the corporate power and authority to own and hold its properties owned and leased
and to carry on the business in which it is engaged; and has not failed to qualify to do business
as a foreign corporation in good standing in any state or jurisdiction wherein the nature of its
activities or of its properties owned or leased makes such qualification necessary and failure to
be so qualified would have a material adverse effect upon the Company.
(ii) This Agreement and the Debenture have been duly authorized, executed and delivered by the
Company, and are legal, valid and binding agreements of the Company enforceable in accordance with
their respective terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium, reorganization or similar laws affecting the enforcement of creditors’
rights generally, and except for judicial limitations on the enforcement of the remedy of specific
performance and other equitable remedies.
14
(iii) The Conversion Stock has been duly authorized and reserved for issuance upon conversion
of the Debenture based upon the initial Conversion calculations and when issued upon such
conversion in accordance with the terms and conditions of the Debenture and those of this Agreement
the Conversion Stock will be duly authorized and issued and will be fully paid and nonassessable.
(iv) All corporate proceedings required by law or by the provisions of this Agreement to be
taken by the Board of Directors and the stockholders of the Company on or prior to the Closing Date
in connection with the execution and delivery of this Agreement and the Debenture, the offer,
issuance and sale of the Debenture and in connection with the consummation of the transactions
contemplated by this Agreement, have been duly and validly taken.
(v) The Company is authorized by its Articles of Incorporation to issue 75,000,000 common
shares and 25,000,000 preferred shares. There are 5,207,007 common shares duly issued and
outstanding, all of which are fully paid and nonassessable. None of the preferred shares have ever
been issued and outstanding. The issuance and sale of such outstanding shares were exempt from
registration under the Securities Act and such shares were issued in conformity with the permit or
qualification requirements of all applicable state securities laws. Except for such common shares,
the Company has no other authorized or outstanding series or class of capital stock, and, to the
knowledge of such counsel, there are no outstanding securities convertible into common shares of
the Company or outstanding options, warrants or other rights to acquire securities of the Company,
other than the convertible notes, options and warrants disclosed in the Private Placement
Memorandum attached to this Agreement as Exhibit D or set forth in the schedules attached to this
Agreement as Exhibit C. To the knowledge of such counsel, there are no obligations on the part of
the Company to purchase or redeem any outstanding shares of capital stock of the Company.
(vi) No security holder of the Company is entitled to preemptive or similar rights to
subscribe for or to purchase any shares of capital stock of the Company, nor will any security
holder of the Company be entitled to any such rights as a result of the execution or delivery of
this Agreement or the issuance of the Debenture or the Conversion Stock.
(vii) Assuming the accuracy of the representations of the Purchaser set forth in Section 6
hereof, the Company has obtained the approval or consent of all governmental agencies or bodies
required to be obtained by it for the legal and valid execution and delivery of this Agreement and
the Debenture and the legal and valid offer, issuance and sale of the Debenture and the offer of
the Conversion Stock to the Purchaser through conversion and for the performance of the obligations
of the Company under any provisions of this Agreement or the Debenture. The Company is not in
violation of any term, provision or condition of its Articles of Incorporation or Bylaws, or, to
the best of such counsel’s knowledge, in violation of any agreement or other instrument known to
such counsel to which the Company is a party or by which it is bound or to which any of its
properties, assets or business is subject or any judgment, decree or order known to such counsel or
to the best of such counsel’s knowledge any statute, rule or regulation;
15
and the execution,
delivery and performance of this Agreement and the Debenture, the offer, issuance and sale of the
Debenture and the Conversion Stock, and the consummation of the transactions contemplated by this
Agreement will not result in any breach or violation of the terms or provisions of, or constitute a
default under, the Articles of Incorporation or the Bylaws of the Company or, to the best of such
counsel’s knowledge, in violation of any agreement or other instrument known to such counsel to
which the Company is a party or by which it is bound or to which any of its properties, assets or
business is subject or any judgment, decree or order known to such counsel or to the best of such
counsel’s knowledge any statute, rule or regulation.
(viii) Assuming the accuracy of the representations of the Purchaser set forth in Section 6
hereof, the offer, sale, issuance and delivery of the Debenture and the offer of the Conversion
Stock to the Purchaser through conversion of the Debenture under the circumstances contemplated by
this Agreement and the Debenture are exempt from the registration and prospectus delivery
requirements of the Securities Act, and all registrations, qualifications, permits and approvals
required under applicable state securities laws for the lawful offer, sale, issuance and delivery
of the Debenture and the Conversion Stock have been obtained.
(ix) Upon due and diligent inquiry, such counsel has no knowledge of any litigation,
proceeding or governmental investigation pending or threatened against the Company, its key
management employees, properties or business which, if determined adversely to the Company, would
have a material adverse effect upon the financial condition, operations, results of operations or
business of the Company.
7.5
No Event of Default
. There shall exist at the time of Closing no
condition or event which would constitute an Event of Default (as hereinafter defined)
or which, after notice or lapse of time or both, would constitute an Event of Default.
7.6
Qualification Under State Securities Laws
. All registrations,
qualifications, permits and approvals required under applicable state securities laws
for the lawful execution and delivery of this Agreement and the offer, sale, issuance
and delivery of the Debenture and the offer of the Conversion Stock shall have been
obtained.
7.7
Proceedings and Documents
. All corporate and other proceedings and
actions taken in connection with the transactions contemplated hereby and all
certificates, opinions, agreements, instruments and documents mentioned herein or
incident to any such transaction shall be satisfactory in form and substance to the
Purchaser and their special counsel.
8.
Affirmative Covenants
. Subject to the provisions of Section 14 hereof, the Company
covenants and agrees that:
8.1
Corporate Existence
. The Company will maintain its corporate existence
in good standing and comply with all applicable laws and regulations of the United
States or of any state or states thereof or of any political subdivision thereof and of
any governmental authority where failure to so comply would have a material adverse
impact on the Company or its business or operations.
16
8.2
Books of Account and Reserves
. The Company will keep books of record
and accounts in which full, true and correct entries are made of all of its dealings,
business and affairs, in accordance with generally accepted accounting principles. The
Company will employ certified public accountants selected by the Board of Directors of
the Company who are “independent” within the meaning of the accounting regulations of
the Commission and have annual audits made by such independent public accountants in
the course of which such accountants shall make such examinations, in accordance with
generally accepted auditing
standards, as will enable them to give such reports or opinions with respect to the
financial statements of the Company as will satisfy the requirements of the
Commission in effect at such time with respect to certificates and opinions of
accountants.
8.3
Furnishing of Financial Statements and Corporate Information
. The
Company will deliver to the Purchaser:
(a) as soon as practicable, but in any event within 30 days after
the close of each month, unaudited balance sheets of the Company as of the end
of such month, together with the related statements of operations and a
statement of sources and uses of cash for such month, setting forth the
budgeted figures for such month prepared and submitted in connection with the
Company’s annual plan as required under Section 8.5 hereof and in comparative
form figures for the corresponding month of the previous fiscal year, all in
reasonable detail and certified by the Chief Financial Officer of the Company,
subject to year-end adjustments;
(b) as soon as practicable, but in any event within 120 days after
the end of each fiscal year, a balance sheet of the Company, as of the end of
such fiscal year, together with the related statements of operations,
stockholders’ equity and a statement of sources and uses of cash for such
fiscal year, setting forth in comparative form figures for the previous fiscal
year, all in reasonable detail and duly certified by the Company’s independent
Certified Public Accountants, which accountants shall have given the Company an
opinion, unqualified as to the scope of the audit, regarding such financial
statements;
(c) concurrently with the delivery of any financial statements
referred to in paragraphs (a) and (b) of this Section 8.3, current schedules of
Indebtedness for Borrowed Money and Senior Indebtedness, as these terms are
hereinafter defined, together with a certificate of the Chief Executive Officer
and Chief Financial Officer of the Company to the effect that such schedules
are accurate and correct and that there exists no condition or event which
constitutes an event of default with respect to any indebtedness of the
Company, or, if any such condition or event exists, specify the nature and
period of existence thereof and what action the Company is taking or proposes
to take with respect thereto;
(d) within 90 days after the end of each fiscal year, and promptly
upon request of the Purchaser at any time during the fiscal year up to four
times per fiscal year, written notice of the current number of shares that
would be issued to the Purchaser if the Purchaser elected at the last business
day of the fiscal year or as of the date of the request, as the case may be, to
convert the entire Convertible Debenture into fully paid and nonassessable
shares of Common Stock of the Company that represent twenty percent (20%) of
the Fully Diluted Outstanding Shares of Common Stock of the Company After
Conversion as that term is defined in the Debenture;
17
(e) concurrently with the delivery in each year of the financial
statements referred to in paragraph (b) of this Section 8.3, a statement and
report signed by the independent Certified Public Accountants who certified
such financial statements to the effect that they have read this Agreement and
that in the course of the audit upon which their certificate was based they
became aware of no condition or event which constituted an Event of Default or
which, after notice or lapse of time or both, would constitute an Event of
Default or if such accountants did become aware of any such condition or event,
specifying the nature and period of existence thereof;
(f) promptly after the submission thereof to the Company, copies of
all reports and recommendations submitted by independent Certified Public
Accountants in connection with any annual or interim audit of the accounts of
the Company made by such accountants;
(g) promptly upon transmission thereof, copies of all reports,
proxy statements, registration statements and notifications filed by the
Company with the Commission pursuant to any act administered by the Commission
or furnished to stockholders of the Company or to any national securities
exchange;
(h) with reasonable promptness, such other financial data relating
to the business, affairs and financial condition of the Company as is available
to the Company and as from time to time the Purchaser may reasonably request;
(i) at least 30 days prior to the earlier of (i) the execution of
any agreement relating to any merger or consolidation of the Company with
another corporation, or a plan of exchange involving the outstanding capital
stock of the Company, or the sale, transfer or other disposition of all or
substantially all of the property, assets or business of the Company to another
corporation, or (ii) the holding of any meeting of the stockholders of the
Company for the purpose of approving such action, written notice of the terms
and conditions of such proposed merger, consolidation, plan of exchange, sale,
transfer or other disposition;
(j) within 15 days after the Company learns in writing of the
commencement or threatened commencement of any material suit, legal or
equitable, or of any material administrative, arbitration or other proceeding
against the Company or its businesses, assets or properties, written notice of
the nature and extent of such suit or proceeding; and
(k) with reasonable promptness, copies of all minutes of meetings
of the Company’s Shareholders and/or its Board of Directors, along with
documentation of all Corporate actions of the Company.
8.4
Inspection
. The Company will permit the Purchaser and any of its
partners, officers or employees, or any outside representatives designated by the
Purchaser and reasonably satisfactory to the Company, to visit and inspect at the
Purchaser’s expense the business offices of the Company and any of the properties of
the Company, including their books and records (and to make photocopies thereof or
make extracts therefrom), and to discuss their affairs, finances, and accounts with
their officers, lawyers and accountants, except with respect to trade secrets and
similar confidential information, all to such reasonable extent and at such
18
reasonable times and intervals as such Purchaser may reasonably request during
normal business hours. Except as otherwise required by laws or regulations
applicable to a Purchaser, the Purchaser shall maintain, and shall require its
representatives to maintain, all information obtained pursuant to Section 8.3
hereof, this Section 8.4 and Section 8.5 hereof on a confidential basis.
8.5
Preparation of Budgets
. Whenever the Company shall prepare and submit
to its Board of Directors for review and approval any budget, such as a .capital or
operating expense budget, the Company will, simultaneously with the submission thereof
to the Board of Directors, deliver a copy of each such budget and any modification
thereof that is provided to the Board of Directors to the Purchaser.
8.6
Payment of Taxes and Maintenance of :Properties
. The Company will:
(a) pay and discharge promptly, or cause to be paid and discharged
promptly when due and payable, all taxes, assessments and governmental charges
or levies imposed upon it or upon its income or upon any of its properties, as
well as all material claims of any kind (including claims for labor, material
and supplies) which, if unpaid, might by law become a lien or charge upon its
property; provided, however, that the Company shall not be required to pay any
such tax, assessment, charge, levy or claim if the amount, applicability or
validity thereof shall currently be contested in good faith by appropriate
proceedings and if the Company shall have set aside on its books reserves
(segregated to the extent required by generally accepted accounting principles)
deemed adequate by it with respect thereto; and
(b) maintain and keep, or cause to be maintained and kept, its
properties in good repair, working order and condition, and from time to time
make, or cause to be made, all repairs and renewals and replacements which in
the opinion of the Company are necessary and proper so that the business
carried on in connection therewith may be properly and advantageously conducted
at all times; the Company will maintain or cause to be maintained back-up
copies of all valuable papers and software.
8.7
Insurance
. The Company will obtain and maintain in force such property
damage, public liability, business interruption, worker’s compensation, indemnity bonds
and other types of insurance as the Company’s executive officers, after consultation
with an accredited insurance broker, shall determine to be necessary or appropriate to
protect the Company from the insurable hazards or risks associated with the conduct of
the Company’s business. The Company’s executive officers shall periodically report to
the Board of Directors on the status of such insurance coverage.
All insurance shall be maintained in at least such amounts and to such extent as shall be
determined to be reasonable by the Board of Directors; and all such insurance shall be effected and
maintained in force under a policy or policies issued by insurers of recognized responsibility,
except that the Company may effect worker’s compensation or similar insurance in respect of
operations in any state or other jurisdiction either through an insurance fund operated by such
state or other jurisdiction or by causing to be maintained a system or systems of self-insurance
which is in accord with applicable laws.
19
8.8
Payment of Indebtedness and Discharge of Obligations
. The Company will
pay or cause to be paid the principal of and interest and premium, if any, on all
Indebtedness for Borrowed Money heretofore or hereafter incurred or assumed by it when
and as the same shall become due and payable, unless such Indebtedness for Borrowed
Money is renewed or extended. The Company will faithfully observe, perform and
discharge all of the material. covenants, conditions and obligations which are imposed
on it by any and all indentures and other agreements securing or evidencing such
Indebtedness for Borrowed Money or pursuant to which such Indebtedness for Borrowed
Money is issued, and will not permit the continuance of any act or omission which is or
under the provisions thereof may be declared to be a material default thereunder,
unless such default is waived pursuant to the provisions thereof. The Company shall
not be required to make any payment or to take any other action by reason of this
Section 8.8 at any time while it shall be currently contesting in good faith by
appropriate proceedings its obligations to make such payment or to take such action
provided that the Company shall have set aside on its books reserves (segregated to the
extent required by generally accepted accounting principles) deemed adequate by it with
respect thereto.
8.9
Directors’ and Stockholders’ Meetings
. The Company agrees, as a
general practice, to hold a meeting of its Board of Directors at least once a year, and
during each year to hold its annual meeting of stockholders on or approximately on the
date provided in its Bylaws.
8.10
Replacement of Debenture or Certificates Representing Conversion Stock
.
Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of the Debenture or certificates representing Conversion
Stock, and, in the case of any such loss, theft or destruction, upon delivery of a bond
of indemnity satisfactory to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of the Debenture or certificates representing Conversion
Stock, as the case may be, the Company will issue a new Debenture or certificates
representing Conversion Stock, as the case may be, of like tenor, in lieu of such lost,
stolen, destroyed or mutilated Debenture or certificates representing Conversion Stock,
as the case may be.
8.11
Application of Proceeds
. Unless otherwise approved by the Purchaser,
the net proceeds received by the Company from the sale of the Debenture shall be used
substantially for working capital purposes. Upon proper invoice, the Company shall pay
Closing expenses and attorney fees of Purchaser in a sum not to exceed seven thousand
five hundred and no/100 dollars ($7,500.00).
8.12
Retirement Plans
. The Company will cause each retirement plan of the
Company in which any employees of the Company participate that is subject to the
provisions of ERISA and the documents and instruments governing each such plan to be
conformed to when necessary, and to be administered in a manner consistent with, those
provisions of ERISA which may, from time to time, become effective and operative with
respect to such plans; if requested by the Purchaser in writing from time to time,
furnish to the Purchaser a copy of any annual report with respect to each such plan
that the Company files with the Secretary of Labor pursuant to ERISA; and at such time
as such insurance shall be available at rates deemed commercially reasonable by the
Company, maintain insurance against the contingent liability against the net worth of
the Company imposed in respect of each such plan by the provisions of ERISA.
20
8.13
Filing of Reports
. The Company will, from and after such time as it
has securities registered pursuant to Section 12 of the Securities Exchange Act of
1934, as amended, or has securities registered pursuant to the Securities Act, make
timely filing of such reports as are required to be filed by it with the Commission so
that Rule 144 under the Securities Act or any successor provision thereto will be
available to the security holders of the Company who are otherwise able to take
advantage of the provisions of such Rule.
8.14
Patents and Other Intangible Rights
. The Company will apply for, or
obtain assignments of, or licenses to use, all patents, trademarks, trademark rights,
trade names, trade name rights and copyrights which in the opinion of a prudent and
experienced businessman operating in the industry in which the Company is operating;
are desirable or necessary for the conduct and protection of the business of the
Company.
8.15
Exchange of Debenture
. The Company will at any time, at the Company’s
expense (except for any transfer tax payable), at the written request of the Holder of
the Debenture and upon surrender of such Debenture for such purpose, issue new
Debentures in exchange therefor in the denomination of $5,000, or any multiple thereof
specified by the Purchaser, in an aggregate principal amount equal to the then unpaid
principal amount of the Debenture surrendered and substantially in the form of Exhibit
A to this Agreement with appropriate insertions and variations.
9.
Negative Covenants
. The Company will be limited and restricted as follows:
9.1
Dividends on or Redemption of Capital Stock
. Without the prior
approval of the Holder of the Debenture, the Company will not declare or pay any
dividend or make any other distribution on any shares of capital stock or purchase,
redeem or otherwise acquire for any consideration, or set aside a sinking fund or other
fund for the redemption or repurchase of any shares of capital stock or any warrants,
rights or options to purchase shares of capital stock.
9.2
Other Restrictions
. The Company will not without the prior approval of
the Holder of the Debenture:
(a) guarantee, endorse or otherwise be or become contingently
liable in connection with the obligations, securities or dividends of any
person, firm, association or corporation, other than the Company, except that
the Company may endorse negotiable instruments for collection in the ordinary
course of business; or
(b) make loans or advances to any person (including without
limitation to any officer, director or stockholder of the Company), firm,
association or corporation in excess of $10,000, except advances to suppliers
and employees made in the ordinary course of business; or
(c) purchase or invest in the stock or obligations of any other
person, firm or corporation; or
(d) make any material change in the nature of its business as
carried on at the date of this Agreement.
21
9.3
Limitations Upon Capital Reorganization of Common Stock, Consolidation, or
Merger
. No merger or acquisition of the Company, or substantially all of its
assets, or capital reorganization or reclassification of the capital stock of the
Company or voluntary dissolution, liquidation, or in bankruptcy filing shall occur
absent the written concurrence of the Purchaser.
10.
The Debenture
.
10.1
Conversion of Debenture
. The Holder of the Debenture may, at its
option, at any dale and from time to time, convert such Debenture, or any part thereof,
into Conversion Stock upon the terms and conditions set forth in the Form of Debenture.
10.2
Stock Fully Paid; Reservation of Shares
. The Company covenants and
agrees that all Conversion Stock that may be issued upon conversion of the Debenture
will, upon issuance in accordance with the terms of the Debenture, be fully paid and
nonassessable, and shall, at the time of issuance, not be diluted, and that the
issuance thereof shall not give rise to any preemptive rights on the part of any
person. The Company further covenants and agrees that the Company will at all times
have authorized and reserved a sufficient number of shares of its Common Stock for the
purpose of issue upon the conversion of the Debenture.
The Convertible Debenture is convertible in whole at any time prior to its payment at the
option of the Purchaser into fully paid and nonassessable shares of Common Stock of the Company
constituting twenty percent (20%) of all classes of the Common Stock of the Company on a fully
diluted basis, as further explained in paragraph 3(b) of the Convertible Debenture. In addition,
as further explained in paragraph 3(b) of the Convertible Debenture, the Convertible Debenture is
convertible in part at any time prior to its payment at the option of the Purchaser into fully paid
and nonassessable shares of Common Stock of the Company constituting a proportionate percentage of
twenty percent (20%) of all classes of the Common Stock of the Company on a fully diluted basis in
the ratio that the amount of the Convertible Debenture being converted bears to the total amount of
the Convertible Debenture acquired by the Purchaser.
Under no circumstances shall paragraph 3(b) of the Convertible Debenture be read to entitle
the Purchaser to shares of Common Stock of the Company constituting less than 20% of all classes of
the Common Stock of the Company on a fully diluted basis upon conversion in full of the Convertible
Debenture.
10.3
Number of Shares to be Issued Upon Conversion
. The number of shares of
Common Stock issuable upon full conversion of the Debenture will be as set forth in the
Form of Debenture, which is equal to twenty percent (20%) of all classes of the Common
Stock of the Company on a fully diluted basis. The number of shares of the Common
Stock of the Company issuable upon partial conversion shall be equivalent to the ratio
that the amount of the Convertible Debenture being converted bears to the total amount
of the Convertible Debenture originally acquired by the Purchaser.
11.
{Intentionally Omitted}
12.
{Intentionally Omitted}
22
13.
Default
.
13.1
Events of Default
. Each of the following events shall be an event of
default (an “Event of Default”) for purposes of this Agreement:
(a) if default shall be made in the punctual payment of interest on
the Debenture, and such default shall have continued for a period of 15 days
after written notice thereof to the Company by the Holder of the Debenture; or
(b) if default shall be made in the punctual payment of the
principal of the Debenture; or
(c) if the Company becomes insolvent or bankrupt, or admits in
writing its inability to pay its debts as they mature, or makes an assignment
for the benefit of creditors, or ceases doing business as a going concern, or
the Company applies for or consents to the appointment of a trustee or receiver
for the Company, or for the major part of its property; or
(d) if a trustee or receiver is appointed for the: Company or for
the major part of its property and the order of such appointment is not
discharged, vacated or stayed within 30 days after such appointment; or
(e) if any judgment, writ or warrant of attachment or of any
similar process in an amount in excess of $50,000 shall be entered or tiled
against the Company or against any of the property or assets of the Company and
remains unpaid, unvacated, unbonded or unstayed for a period of 120 days; or
(f) if an order for relief shall be entered in any Federal
bankruptcy proceeding in which the Company is the debtor; or if bankruptcy,
reorganization,
arrangement, insolvency, or liquidation proceedings, or other proceedings
for relief under any bankruptcy or similar law or laws for the relief of
debtors, are instituted by or against the Company and, if instituted against
the Company, are consented to or, if contested by the Company, are not
dismissed by the adverse parties or by an order, decree or judgment within
120 days after such institution; or
(g) if the Company shall default in any material respect in the due
and punctual performance of any covenant or agreement in any debenture
(including without limitation the Debenture which is the subject of this
Agreement), bond, indenture, loan agreement, debenture agreement, mortgage,
security agreement or other instrument evidencing or related to Indebtedness
for Borrowed Money, and such default shall continue for more than the period of
notice and/or grace, if any, therein specified and shall not have been waived
(any default in any material respect in the due and punctual performance of any
covenant or agreement in this Agreement or the Debenture shall not constitute
an Event of Default unless such default continues for a period of 15 days after
written notice thereof to the Company); or
(h) if any representation or warranty made by or on behalf of the
Company in this Agreement or in any certificate, report or other instrument
delivered under or pursuant to any term hereof or thereof shall prove to have
been untrue or incorrect in any material respect as of the date of this
Agreement or as of the Closing Date, or (ii) if any report, certificate,
financial statement or financial schedule or other instrument prepared or
purported to be prepared by the
23
Company or any officer of the Company furnished
or delivered under or pursuant to this Agreement after the Closing Date shall
prove to be untrue or incorrect in any material respect as of the date it was
made, furnished or delivered; or
(i) if the Company undertakes any action designed to diminish the
conversion rights of Purchaser in the absence of advance written permission of
Purchaser; or
(j) if default shall be made in the due and punctual performance or
observance of any other term contained in this Agreement, and such default
shall have continued for a period of 15 days after written notice thereof to
the Company by the Holder of the Debenture.
13.2
Remedies Upon Events of Default
. Upon the occurrence of an Event of
Default as herein defined, and so long as such Event of Default continues unremedied,
then, unless such Event of Default shall have been waived by the Holder of the
Debenture, then the Holder of the Debenture shall be entitled by notice to declare the
principal of and any accrued interest on the Debenture to be immediately due and
payable, and thereupon the Debenture, including both principal and interest shall
become immediately due and payable provided, however, that when any Event of Default
described in Section 13.1(f) hereof has
occurred, the Debenture shall immediately become due and payable without
presentment, demand or notice of any kind and (b) the Purchaser of the Debenture
shall be entitled to designate such number of members to the Board of Directors of
the Company as constitutes 20% of the total number of members of the Board of
Directors as provided herein.
13.3
Designation of Directors
. In the event the Purchaser of the Debenture
is entitled to designate members constituting 20% of the total number of members of the
Board of Directors of the Company pursuant to Section 13.2 hereof, the Company shall,
immediately upon receiving written notice from the Holder of the Debenture, call a
special stockholders’ meeting to be held as soon as possible, but in any event within
fifteen days of the date of the notice of such meeting. At such special stockholders’
meeting, 20% of the directors of the Company, shall be elected from designees nominated
by the Holder of the Debenture. Any right of the Holder of the Debenture to continue
to designate 20% of the Board of Directors of the Company shall expire, and a
stockholders’ meeting to elect new directors shall be called, six months after the
later of (a) the curing of the Event Default upon which the right was exercised, or (b)
the curing of any Event of Default occurring after the Event of Default upon which such
right was exercised.
13.4
Notice of Defaults
. When, to its knowledge, any Event of Default has
occurred or exists, the Company agrees to give written notice within three business
days of such Event of Default to the Holder of the Debenture.
13.5
Suits for Enforcement
. In case any one or more Events of Default shall
have occurred and be continuing, unless such Events of Default shall have been waived
in the manner provided in Section 13.2 hereof, the Holder of the Debenture may proceed
to protect and enforce its rights under this Section 13 by suit in equity or action at
law. It is agreed that in the event of such action the Holder of the Debenture shall
be entitled to receive all reasonable fees, costs and expenses incurred, including
without limitation such reasonable fees and expenses of
24
attorneys (whether or not
litigation is commenced) and reasonable fees, costs and expenses of appeals.
13.6
Remedies Cumulative
. No right, power or remedy conferred upon the
Holder of the Debenture shall be exclusive, and each such right; power or remedy shall
be cumulative and in addition to every other right, power or remedy, whether conferred
hereby or by any such security or now or hereafter available at law or in equity or by
statute or otherwise.
13.7
Remedies not Waived
. No course of dealing between the Company and the
Holder of the Debenture, and no delay in exercising any right, power or remedy
conferred hereby or by any such security or now or hereafter existing at law or in
equity or by statute or otherwise, shall operate as a waiver of or otherwise prejudice
any such right, power or remedy; provided, however, that this Section 13.7 shall not be
construed or applied so as to negate the provisions and intent of any statute which is
otherwise applicable.
14.
Definitions
. Unless the context otherwise requires, the terms defined in this
Section 14 shall have the meanings herein specified for all purposes of this Agreement, applicable
to both the singular and plural forms of any of the terms herein defined. All accounting terms
defined below shall, except as otherwise expressly provided, be determined by reference to the
Company’s books of account and in conformity with generally accepted accounting principles as
applied to such books of account in the opinion of the independent Certified Public Accountants
selected by the Board of Directors of the Company as required under the provisions of Section 8.3
hereof.
14.1 “Common Stock” shall mean the Company’s authorized common shares, any
additional common shares which may be authorized in the future by the Company, and any
stock into which such common shares may hereafter be changed, and shall also include
stock of the Company of any other class which is not preferred as to dividends or as to
distributions of assets on liquidation, dissolution or winding up of the Company over
any other class of stock of the Company, and which is not subject to redemption.
14.2 “Convertible Securities” shall mean evidences of indebtedness, shares of stock
or other securities which are at any time directly or indirectly convertible into or
exchangeable for shares of Common Stock.
14.3 “Indebtedness for Borrowed Money” shall include only indebtedness of the
Company incurred as the result of a direct borrowing of money and shall not include any
other indebtedness including, but not limited to, indebtedness incurred with respect to
trade accounts.
14.4 “Permitted Liens” shall mean (a) liens for taxes and assessments or
governmental charges or levies not at the time due or in respect of which the validity
thereof shall currently be contested in good faith by appropriate proceedings; (b)
liens existing as of the date of this Agreement, (c) liens arising in connection with
purchase money security interests; and (d) liens in respect of pledges or deposits
under worker’s compensation laws or similar legislation, carriers’, warehousemen’s,
mechanics’, laborers’ and materialmen’s, landlord’s and statutory and similar liens, if
the obligations secured by such liens are not then delinquent or are
25
being contested in
good faith, and liens and encumbrances incidental to the conduct of the business of the
Company which were not incurred in connection with the borrowing of money or the
obtaining of advances or credits and which do not in the aggregate materially detract
from the value of its property or materially impair the use thereof in the operation of
its business.
14.5 “Senior Indebtedness” shall mean (a) the principal of all Indebtedness for
Borrowed Money of the Company to banks, insurance companies or other financial
institutions, (b) the present value of net minimum lease payments of all leases under
which the Company is the lessee and which are required to be capitalized under
generally accepted accounting principles, (c) the principal of all indebtedness of the
Company under installment purchase agreements, and (d) the principal of all
indebtedness of the Company to the owners of any real property leased by the Company
for leasehold improvements financed by such owners.
15.
Consents; Waivers and Amendments
. Except as otherwise specifically provided
herein, in each case in which approval of the Holder of the Debenture is required by the terms of
this Agreement, such requirement shall be satisfied by the written consent of the Holder of the
Debenture. With the written consent of the Holder of the Debenture, the obligations of the Company
under this Agreement may be waived (either generally or in a particular instance and either
retroactively or prospectively), and with the same approval the Company may enter into a
supplementary agreement for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Agreement or of any supplemental agreement or modifying
in any manner the rights and obligations of the Holder of the Debenture. The Holder of Debenture
shall respond promptly to any request by the Company with respect to a proposed amendment, consent
or waiver and will not unreasonably withhold its approval or consent thereto.
16.
Changes, Waivers, etc
. Neither this Agreement nor any provision hereof may be
changed, waived, discharged or terminated orally, but only by a statement in writing signed by the
party against which enforcement of the change, waiver, discharge or termination is sought, except
to the extent provided in Section 15 hereof.
17.
Payment of Fees and Expenses of Purchaser
. The Company will pay all fees and
expenses incurred by the Purchaser with respect to the enforcement of the rights granted under this
Agreement or the agreements contemplated hereby.
18.
Notices
. All notices, requests, consents and other communications required or
permitted hereunder shall be in writing and shall be delivered, or mailed first-class postage
prepaid, registered or certified mail,
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(a)
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if to the Holder of the Debenture:
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To:
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Honorable Valentino White
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Chairman
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Spirit Lake Sioux Tribe
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Spirit Lake Tribal Council Office
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P.O. Box 359
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Main Street
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Fort Totten, ND 58335
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With Copy To:
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Larry B. Leventhal, Esq.
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Larry Leventhal & Associates
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Suite 420
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Sexton Building
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529 South 7th Street
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Minneapolis, Minnesota 55415
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(b)
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if to the Company:
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To:
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Mr. Jeffrey Mack
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President & CEO
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Wireless Ronin® Technologies, Inc.
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14700 Martin Drive
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Eden Prairie, Minnesota 55344
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With Copy To:
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Thor Christensen, Esq.
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Vice President Corporate Counsel
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Wireless Ronin® Technologies, Inc.
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14700 Martin Drive
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Eden Prairie, Minnesota 55344
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and such notices and other communications shall for all purposes of this Agreement be treated as
being effective or having been given if delivered personally, or, if sent by mail, when received.
19.
Survival of Representations and Warranties, etc
. All representations and
warranties contained herein shall survive the execution and delivery of this Agreement, any
investigation at any time made by the Purchaser or on its behalf, and the sale and purchase of the
Debenture and payment therefor and shall terminate upon payment or conversion in full of all
amounts due under the Debenture. All statements contained in any certificate, instrument or other
writing delivered by or on behalf of the Company pursuant hereto or in connection with or
contemplation of the transactions herein contemplated (other than legal opinions) shall constitute
representations and warranties by the Company hereunder.
20.
Parties in Interest
. All the terms and provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto, whether so expressed or not, and, in particular, shall inure to the
benefit of and be enforceable by the Holder of the Debenture.
27
21.
Headings
. The headings of the Sections and paragraphs of this Agreement have been
inserted for convenience of reference only and do not constitute a part of this Agreement.
22.
Choice of Law
. It is the intention of the parties that the laws of Minnesota
shall govern the validity of this Agreement, the construction of its terms and the interpretation
of the rights and duties of the parties.
23.
Counterparts
. This Agreement may be executed concurrently in two or more
counterparts, each of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
If you are in agreement with the foregoing, please sign the form of acceptance on the enclosed
counterpart of this letter and return the same to the undersigned, whereupon this letter shall
become a binding contract between you and the undersigned.
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Very truly yours,
WIRELESS RONIN® TECHNOLOGIES, INC.
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By:
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/s/ Jeffrey C. Mack
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Jeffrey C. Mack
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President & CEO
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By:
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/s/ Stephen E. Jacobs
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Stephen E. Jacobs
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Executive Vice President & CFO
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The foregoing Agreement is hereby accepted as
of the date first above written.
SPIRIT LAKE SIOUX TRIBE
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By:
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/s/ Valentino White Sr.
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Print Name:
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Valentino White Sr.
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Its:
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Chairman
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28
EXHIBIT 10.16
WIRELESS RONIN® TECHNOLOGIES, INC.
AMENDED AND RESTATED
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
SEPTEMBER 7, 2005
SPIRIT LAKE TRIBE
Spirit Lake Tribal Council Office
P.O. Box 359
Main Street
Fort Totten, ND 58335
Ladies and Gentlemen:
Reference is made to the Convertible Debenture Purchase Agreement between Spirit Lake Tribe
(the “Purchaser”) and WIRELESS RONIN® TECHNOLOGIES, INC., a Minnesota corporation (the “Company”),
dated January 5, 2005 (the “Original Purchase Agreement”) pursuant to which Purchaser purchased $2,000,000 of 10% fixed rate Convertible Debentures due
2009 (the “$2M Debenture”). The Original Purchase Agreement is hereby amended and restated as of
the date set forth above, to set forth the terms of the Purchaser’s purchase of an additional
$1,000,000 of 10% fixed rate Convertible Debenture due 2009 (the “$1M Debenture”). In
consideration of the Purchaser’s purchase of the $1M Debenture, the Company hereby agrees with the
Purchaser as follows:
1.
Authorization of Securities
. The Company proposes to authorize, issue and sell an
aggregate additional of $1,000,000 principal amount of its convertible debentures, to be in
substantially the form set forth in Exhibit A to this Agreement (the “Form of Debenture”), which
also constitutes an amendment and restatement of the $2M Debenture. The term “Debenture” as used
herein shall mean the Debenture in aggregate of $3,000,000 principal amount of convertible
debentures in the Form of Debenture, which represents the $l M Debenture and the amendment and
restatement of the $2M Debenture.
The Debenture is convertible into fully paid and nonassessable shares of Common Stock of the
Company in whole or in part at any time prior to its payment at the option of the Holder on the
terms set forth in the Debenture.
The Debenture is convertible in whole at any time prior to its payment at the option of the
Purchaser into fully paid and nonassessable shares of Common Stock of the Company constituting
thirty percent (30%) of all classes of the Common Stock of the Company on a fully diluted basis, as
further
explained in paragraph 3(b) of the Debenture. In addition, as further explained in
paragraph 3(b) of the Debenture, the Debenture is convertible in part at any time prior to its
payment at the option of the Purchaser into fully paid and nonassessable shares of Common Stock of
the Company constituting a proportionate percentage of thirty percent (30%) of all classes of the
Common Stock of the Company on a fully diluted basis in the ratio that the amount of the Debenture
being converted bears to the total amount of the Debenture acquired by the Purchaser. Under no
circumstances shall paragraph 3(b) of the Debenture be read to entitle the Purchaser to shares of
Common Stock of the Company constituting less than 30% of all classes of the Common Stock of the
Company on a fully diluted basis upon conversion in full of the Debenture.
2.
Sale and Purchase of Securities
. Subject to the terms and conditions hereof, the
Company agrees to sell to the Purchaser, and the Purchaser agrees to purchase from the Company, an
additional aggregate principal amount of $1,000,000 convertible debentures.
3.
Closing
. The closing of the sale to, and purchase by, the Purchaser of the $1M
Debenture and amendment and restatement of the $2M Debenture in the Form of Debenture (the
“Closing”) shall occur at the offices of the Marshall Group, Inc. at the hour of 10:30 A.M.,
Central Daylight Time, on September 7, 2005 or on such other day or at such other time or place as
the Purchaser and the Company shall agree upon (the “Closing Date”).
At the Closing, the Company will deliver to the Purchaser the Debenture being purchased by the
Purchaser, registered in its name, against delivery to the Company of its funds in the amount of
$1,000,000 in payment of the total purchase price of the $1M Debenture being purchased by the
Purchaser. As of the Closing, upon delivery of the Debenture, the $2M
Debenture shall be cancelled and the Purchaser shall deliver the $2M Debenture to the Company
within ten (10) days of Closing.
4.
Restriction on Transfer of Securities
.
4.1
Restrictions
. The Debenture is transferable only pursuant to (a) a public
offering registered under the Securities Act of 1933, as amended (the “Securities Act”), (b) Rule
144 (or any similar rule then in effect) adopted under the Securities Act, if such rule is
available, and (c) subject to the conditions elsewhere specified in this Section 4, any other
legally available means of transfer.
4.2(a)
Legend
. The Debenture shall be endorsed with the following
legend:
THIS CONVERTIBLE DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. NO SALE OR
DISPOSITION MAY BE EFFECTED EXCEPT IN COMPLIANCE WITH AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE
HOLDER, SATISFACTORY TO PAYOR, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE ACT.
2
Upon the conversion of the Debenture, unless the Company receives an opinion of counsel from
the holder of such a security satisfactory to the Company to the effect that a sale, transfer,
assignment, pledge or distribution of the Conversion Stock issuable upon such conversion may be
made without registration, or unless such Conversion Stock is being disposed of pursuant to
registration under the Securities Act and any applicable state act, the same legend shall be
endorsed on the certificate evidencing such Conversion Stock.
The aforesaid legend shall be removed with respect to securities held for at least three years
(including, with respect to the Conversion Stock, the period during which the related converted
Debenture had been held) by a person who has not been an affiliate of the Company (as defined in
Rule 144 under the Securities Act) during the three months preceding the request for removal of
such legend. The foregoing legend removal requirement is based on Rule 144(k) under the Securities
Act as currently in force, and assumes that such Rule (or a successor thereto) in substantially its
current form shall be in effect at the time of any such request for legend removal.
(b)
Stop Transfer Order
. A stop transfer order shall be placed with the Company’s
transfer agent preventing transfer of any of the securities referred to in paragraph (a) above
pending compliance with the conditions set forth in any such legend (except as otherwise provided
in paragraph (a) above).
4.3
Removal of Legend
. Any legend endorsed on a certificate or instrument evidencing
a security pursuant to Section 4.2 hereof shall be removed, and the Company shall issue a
certificate or instrument without such legend to the holder of such security, (a) in
accordance with Section 4.2(a) hereof, (b) if such security is being disposed of pursuant to
registration under the Securities Act and any applicable state acts or pursuant to Rule 144 or any
similar rule then in effect, or (c) if such holder provides the Company with an opinion of counsel
satisfactory to the Company to the effect that a sale, transfer, assignment, offer, pledge or
distribution for value of such security may be made without registration and that such legend is
not required to satisfy the applicable exemption from registration.
4.4
Register of Securities
. The Company, or its duly appointed agent shall maintain a
separate register for the Debenture in which it shall register the issuance and transfer of the
Debenture. All transfers of the Debenture shall be recorded on the register maintained by the
Company or its agent, and the Company shall be entitled to regard the registered holder of such
securities as the actual owner of the securities so registered until the Company or its agent is
required to record a transfer of such securities on its register. The Company or its agent shall
be required to record any such transfer when it receives (a) the security to be transferred duly
and properly endorsed by the registered holder thereof or by its attorney duly authorized in
writing, and (b) the opinion of counsel referred to in Sections 4.2 and 4.3 hereof or evidence of
compliance with the registration provisions referred to in those Sections.
5.
Representations and Warranties by Company
. Except as disclosed in Exhibit C
hereto, the Company represents and warrants to the Purchaser that:
5.1
Organization, Standing, etc
. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Minnesota, and
3
has the requisite
corporate power and authority to own its properties and to carry on its business in all material
respects as it is now being conducted. The Company has the requisite corporate power and authority
to issue the Debenture and the Conversion Stock, and to otherwise perform its obligations under
this Agreement and the Debenture. The copies of the Articles of Incorporation and Bylaws (as such
Bylaws were amended on May 28, 2004) of the Company delivered to the Purchaser or their agents
prior to the execution of this Agreement are true and complete copies of the duly and legally
adopted Articles of Incorporation and Bylaws of the Company in effect as of the date of this
Agreement. The Company does not have any direct or indirect equity interest in any other firm,
corporation, partnership, joint venture association or other business organization.
5.2
Qualification
. The Company is duly qualified or licensed as a foreign corporation
in good standing in each jurisdiction wherein the nature of its activities or of its properties
owned or leased makes such qualification or licensing necessary and failure to be so qualified or
licensed would have a material adverse impact on its business.
5.3 [Intentionally Omitted ]
5.4
Tax Returns and Audits
. All required federal, state and local tax returns or
appropriate extension requests of the Company have been filed, and all federal, state and local
taxes required to be paid with respect to such returns have been paid or due provision for the
payment thereof has been made. The Company is not delinquent in the payment of any such tax or in
the payment of any assessment or governmental charge. The Company has not received notice of any
tax deficiency proposed or assessed against it, and has not executed any waiver of
any statute of limitations on the assessment or collection of any tax. None of the Company’s
tax returns have been audited by governmental authorities in a manner to bring such audits to the
Company’s attention. The Company does not have any tax liabilities except those incurred in the
ordinary course of business since July 31, 2005 (the “Balance Sheet Date”).
5.5
Changes, Dividends, etc
. Except for the transactions contemplated by this
Agreement, since the Balance Sheet Date the Company has not: (a) incurred any debts, obligations or
liabilities, absolute, accrued or contingent and whether due or to become due, except current
liabilities incurred in the ordinary course of business, which (individually or in the aggregate)
will not materially and adversely affect the business, properties or prospects of the Company; (b)
paid any obligation or liability other than, or discharged or satisfied any liens or encumbrances
other than those securing, current liabilities, in each case in the ordinary course of business;
(c) declared or made any payment or distribution to its stockholders as such, or purchased or
redeemed any of its shares of capital stock or other securities, or obligated itself to do so; (d)
mortgaged, pledged or subjected to lien, charge, security interest or other encumbrance any of its
assets, tangible or intangible, except in the ordinary course of business; (e) sold, transferred or
leased any of its assets except in the ordinary course of business; (f) cancelled or compromised
any debt or claim, or waived or released any right of material value; (g) suffered any physical
damage, destruction or loss (whether or not covered by insurance) materially and adversely
affecting the properties, business or prospects of the Company; (h) entered into any transaction
other than in the ordinary course of business; (i) encountered any labor difficulties or labor
union organizing activities; (j) issued or sold any shares of capital stock or other securities or
granted any options, warrants or other purchase rights with respect thereto other than as
4
contemplated by this Agreement; (k) made any acquisition or disposition of any material assets or
become involved in any other material transaction, other than for fair value in the ordinary course
of business; (1) increased the compensation payable, or to become payable, to any of its directors
or employees, or made any bonus payment or similar arrangement with any directors or employees or
increased the scope or nature of any fringe benefits provided for its employees or directors; or
(m) agreed to do any of the foregoing other than pursuant hereto. There has been no material
adverse change in the financial condition, operations, results of operations or business of the
Company since the Balance Sheet Date.
5.6
Title to Properties and Encumbrances
. The Company has good and marketable title
to all of its owned properties and assets, and the properties and assets used in the conduct of its
business, except for property disposed of in the ordinary course of business since the Balance
Sheet Date, which properties and assets are not subject to any mortgage, pledge, lease, lien,
charge, security interest, encumbrance or restriction, except Permitted Liens (as hereinafter
defined). The plant, offices and equipment owned and leased by the Company have been kept in good
condition and repair in the ordinary course of business, and the Company has not been threatened
with any action or proceeding under any building or zoning ordinance, law or regulation.
5.7
Litigation; Governmental Proceedings
. There are no legal actions, suits,
arbitrations or other legal, administrative or governmental proceedings or investigations pending
or, to the knowledge of the Company, threatened against the Company, its properties, assets or
business, and the Company is not aware of any facts which are likely to result in or form the basis
for any such action, suit or other proceeding. The Company is not in default with respect to
any judgment, order or decree of any court or any governmental agency or instrumentality. The
Company has not been threatened with any action or proceeding under any business or zoning
ordinance, law or regulation.
5.8
Compliance with Applicable Laws and Other Instruments
. The business and
operations of the Company have been and are being conducted in accordance with all applicable laws,
rules and regulations of all governmental authorities. Neither the execution nor delivery of, nor
the performance of or compliance with, this Agreement or the Debenture nor the consummation of the
transactions contemplated hereby or thereby will conflict with, or, with or without the giving of
notice or passage of time, result in any breach of, or constitute a default under, or result in the
imposition of any lien or encumbrance upon any asset or property of the Company pursuant to, any
applicable law, administrative regulation or judgment, order or decree of any court or governmental
body, any agreement or other instrument to which the Company is a party or by which it or any of
its properties, assets or rights is bound or affected, and will not violate the Articles of
Incorporation or Bylaws of the Company. The Company is not in violation of its Articles of
Incorporation or its Bylaws nor in violation of, or in default under, any lien, indenture,
mortgage, lease, agreement, instrument, commitment or arrangement in any material respect.
5.9
Conversion Stock
. The shares of Conversion Stock issuable upon conversion of the
Debenture have been reserved for issuance and when issued upon conversion will be duly authorized,
validly issued and outstanding, fully paid, nonassessable and free and clear of all pledges, liens,
encumbrances and restrictions, except as set forth in Section 4 hereof.
5
The certificates
representing the Conversion Stock to be delivered upon the conversion of the Debenture will be
genuine, and the Company has no knowledge of any fact which would impair the validity thereof.
5.10
Securities Laws
. Based in part upon the representations and warranties contained
in Section 6 hereof, no consent, authorization, approval, permit or order of or filing with any
governmental or regulatory authority is required under current laws and regulations in connection
with the execution and delivery of this Agreement or the Debenture or the offer, issuance, sale or
delivery of the Debenture or the offer of the Conversion Stock other than the qualification
thereof, if required, under applicable state securities laws, which qualification has been or will
be effected as a condition of these sales. The Company has not, directly or through an agent,
offered the Debenture or the Conversion Stock or any similar securities for sale to, or solicited
any offers to acquire such securities from, persons other than the Purchaser and other accredited
investors. Under the circumstances contemplated hereby, the offer, issuance, sale and delivery of
the Debenture and the offer of the Conversion Stock will not under current laws and regulations
require compliance with the prospectus delivery or registration requirements of the Securities Act.
5.11
Patents and Other Intangible Rights
. The Company (a) owns or has the exclusive
right to use, free and clear of all material liens, claims and restrictions, all patents,
trademarks, service marks, trade names, copyrights, licenses and rights with respect to the
foregoing, used in the conduct of its business as now conducted, (b) is not obligated or under any
liability whatsoever to make any payments of a material nature by way of royalties, fees or
otherwise to any owner of, licensor of, or other claimant to, any patent, trademark, trade name,
copyright or other intangible asset, with respect to the use thereof or in connection with the
conduct of its business or otherwise, (c) owns or has the unrestricted right to use all trade
secrets, including know-how, inventions, designs, processes, computer programs and technical data
necessary to the development, operation and sale of all products and services sold or proposed to
be sold by it, free and clear of any rights, liens or claims of others, and (d) is not using any
confidential information or trade secrets of others. The Company is not, nor has it received
notice with respect to, infringing upon or otherwise acting adversely to any known right or claimed
right of any person under or with respect to any patents, trademarks, service marks, trade names,
copyrights, licenses or rights with respect to the foregoing.
5.12 [Intentionally Omitted]
5.13 [Intentionally Omitted]
5.14 [Intentionally Omitted]
5.15
Corporate Acts and Proceedings
. This Agreement has been duly authorized by all
necessary corporate action on behalf of the Company, and has been duly executed and delivered by
authorized officers of the Company. All corporate action necessary to the authorization, creation,
issuance and delivery of the Debenture and the Conversion Stock has been taken on the part of the
Company, or will be taken by the Company on or prior to the Closing Date.
6
This Agreement is, and the Debenture when issued pursuant to the terms of this Agreement will be,
when executed and delivered pursuant to the terms of this Agreement, a valid and binding agreement
of the Company enforceable in accordance with its terms, except as the enforceability thereof may
be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting
the enforcement of creditors’ rights generally, and except for judicial limitations on the
enforcement of the remedy of specific enforcement and other equitable remedies.
5.16 [Intentionally Omitted]
5.17 [Intentionally Omitted]
5.18
Purchase Commitments and Outstanding Bids
. No purchase commitment of the Company
is in excess of normal, ordinary and usual requirements of its business, or was made at any price
in excess of the then current market price, or contains terms and conditions more onerous than
those usual and customary in the industry. There is no outstanding material bid, sales proposal,
contract or unfilled order of the Company which (a) will, or could if accepted, require the Company
to supply goods or services at a cost to the Company in excess of the revenues to be received
therefrom, or (b) quotes prices which do not include a mark-up over reasonably estimated costs
consistent with past mark-ups on similar business or market conditions current at the time.
5.19
Insurance Coverage
. There are in full force policies of insurance issued by
insurers of recognized responsibility insuring the Company, its properties and business against
such losses and risks, and in such amounts, as in the Company’s best judgment, after
advice from its insurance broker, are acceptable for the nature and extent of its business and
the Company’s resources.
5.20
No Brokers or Finders
. No person, firm or corporation has or will have, as a
result of any act or omission of the Company, any right, interest or valid claim against or upon
the Company or any Purchaser for any commission, fee or other compensation as a finder or broker,
or in any similar capacity, in connection with the transactions contemplated by this Agreement
except for the fees agreed to be paid by the Company to Marshall Investments Corporation. The
Company will indemnify and hold the Purchaser harmless against any and all liability with respect
to any such commission, fee or other compensation which may be payable or determined to be payable
in connection with the transactions contemplated by this Agreement.
5.21
Conflicts of Interest
. No officer, director or stockholder of the Company or any
affiliate (as such term is defined in Rule 405 under the Securities Act) of any such person has any
direct or indirect interest (a) in any entity which does business with the Company, or (b) in any
property, asset or right which is used by the Company in the conduct of its business, or (c) in any
contractual relationship with the Company other than as an employee. For the purpose of this
Section 5.21, there shall be disregarded any interest which arises solely from the ownership of
less than a 1% equity interest in a corporation whose stock is regularly traded on any national
securities exchange or in the over-the-counter market.
5.22
Licenses
. The Company possesses from the appropriate agency, commission, board
and government body and authority, whether state, local or federal, all
7
licenses, permits,
authorizations, approvals, franchises and rights which (a) are necessary for it to engage in the
business currently conducted by it, and (b) if not possessed by the Company would have an adverse
impact on the Company’s business. The Company has no knowledge that would lead it to believe that
it will not be able to obtain all licenses, permits, authorizations, approvals, franchises and
rights that may be required for any business the Company proposes to conduct.
5.23
Registration Rights
. The Company has not agreed to register any of its
authorized or outstanding securities under the Securities Act.
5.24
Retirement Plans
. The Company does not have any retirement plans in which any
employees of the Company participate that is subject to any provisions of the Employee Retirement
Income Security Act of 1974 and of the regulations adopted pursuant thereto (“ERISA”).
5.25
Environmental and Safety Laws
. To the best of its knowledge, the Company is not
in violation of any applicable statute, law or regulation relating to the environment or
occupational health and safety, and no material expenditures are or will be required in order to
comply with any such existing statute, law or regulation.
The operations of the Company do not involve any asbestos, urea-formaldehyde foamed-in-place
insulation, polyclorinated biphenyls (“PCBs”) or any other hazardous substances or materials
including, but not limited to, hazardous substances or materials under the Comprehensive
Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and
Reauthorization Act, the Resource Conservation and Recovery Act,
the Minnesota Environmental Response and Liability Act, or any other federal, state or local
statute, regulation, code or ordinance.
5.26
Employees
. To the best of the Company’s knowledge, no officer of the Company or
employee of the Company whose annual compensation is in excess of $50,000.00 has any plans to
terminate his or her employment with the Company. The Company has complied in all material
respects with all laws relating to the employment of labor, including provisions relating to wages,
hours, equal opportunity, collective bargaining and payment of Social Security and other taxes, and
the Company has not encountered any material labor difficulties. The Company does not have any
worker’s compensation liabilities, except those reflected in the Company’s financial statements
that have been provided to the Purchaser.
5.27
Absence of Restrictive Agreements
. To the best of the Company’s knowledge, no
employee of the Company is subject to any secrecy or non-competition agreement or any agreement or
restriction of any kind that would impede in any way the ability of such employee to carry out
fully all activities of such employee in furtherance of the business of the Company. To the best
of the Company’s knowledge, no employer or former employer of any employee of the Company has any
claim of any kind whatsoever in respect of any of the rights described in Section 5.11 hereof.
5.28
Disclosure
. The Company has not knowingly withheld from the Purchaser any
material facts relating to the assets, business, operations, financial condition or prospects of
the Company. No representation or warranty in this Agreement or in any certificate, schedule,
8
statement or other document furnished or to be furnished to any Purchaser pursuant hereto or in
connection with the transactions contemplated hereby contains or will contain any untrue statement
of a material fact or omits or will omit to state any material fact required to be stated herein or
therein or necessary to make the statements herein or therein not misleading.
6.
Representations and Warranties of Purchaser
. The Purchaser represents and warrants
that:
6.1
Purchaser
. Purchaser is a federally recognized American Indian Tribe.
6.2
Investment Intent
. The Debenture being acquired by the Purchaser hereunder is
being purchased and the Conversion Stock acquired by the Purchaser upon conversion of such
Debentures will be acquired, for such Purchaser’s own account and not with the view to, or for
resale in connection with, any distribution or public offering thereof within the meaning of the
Securities Act. The Purchaser understands that the Debenture and the Conversion Stock have not
been registered under the Securities Act or any applicable state laws by reason of their issuance
or contemplated issuance in a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act and such laws, and that the reliance of the Company and others
upon this exemption is predicated in part upon this representation and warranty. The Purchaser
further understands that the Debenture and Conversion Stock may not be transferred or resold
without (a) registration under the Securities Act and any applicable state securities laws, or (b)
an exemption from the requirements of the Securities Act and applicable state securities laws.
The Purchaser understands that an exemption from such registration is not presently available
pursuant to Rule 144 promulgated under the Securities Act by the Securities and Exchange Commission
(the “Commission”) and that in any event the Purchaser may not sell any securities pursuant to Rule
144 prior to the expiration of a two-year period after the Purchaser has acquired the securities.
The Purchaser understands that any sales pursuant to Rule 144 may only be made in full compliance
with the provisions of Rule 144.
6.3
Qualification as Accredited Investor
. The Purchaser qualifies as an accredited
investor within the meaning of Rule 501 under the Securities Act. The Purchaser has such knowledge
and experience in financial and business matters that the Purchaser is capable of evaluating the
merits and risks of the investment to be made hereunder by such Purchaser. The Purchaser has and
has had access to all of the Company’s material books and records and access to the Company’s
executive officers has been provided to the Purchaser or to the Purchaser’s qualified agents. The
state in which the Purchaser’s principal office is located is set forth in the Purchaser’s address
in Section 18(a) of this Agreement. The Purchaser’s principal office is located within the Spirit
Lake Reservation, which is located in the State of North Dakota.
6.4
Acts and Proceedings
. This Agreement has been duly authorized by all necessary
action on the part of the Purchaser, has been duly executed and delivered by the Purchaser, and is
a valid and binding agreement upon the part of the Purchaser.
6.5
No Brokers or Finders
. No person, firm or corporation has or will have, as a
result of any act or omission by such Purchaser, any right, interest or valid claim against the
9
Company for any commission, fee or other compensation as a finder or broker, or in any similar
capacity, in connection with the transactions contemplated by this Agreement. Such Purchaser will
indemnify and hold the Company harmless against any and all liability with respect to any such
commission, fee or other compensation which may be payable or determined to be payable as a result
of the actions of such Purchaser in connection with the transactions contemplated by this
Agreement.
6.6
Sovereign Immunity
. The Spirit Lake Tribe as Purchaser, being an American Indian
Tribe, is possessed with sovereign immunity. The Tribe hereby proclaims its sovereign immunity,
but does agree to a limited waiver of sovereign immunity pursuant to the terms set forth herein and
no expansion thereof. Purchaser agrees to be subject to suit in United States District Court for
the District of North Dakota for injunctive relief in respect to any claim, crossclaim, or
counterclaim associated with any responsibility set forth herein or associated with its status as
purchaser and/or holder of the Debentures of the Company. Should the United States District Court,
District of North Dakota not have jurisdiction, then Purchaser agrees to suit in the North Dakota
District Court for the County of Benson. No waiver of sovereign immunity is made as to Tribal
assets beyond those committed for the purchase of the Debenture of the Company. Specification of
jurisdiction wherein the Purchaser agrees to be sued as specified above does not limit the
jurisdictions in which Purchaser may initiate suit against the Company, should Purchaser believe
that such legal action may be warranted.
7.
Conditions of the Purchaser’s Obligation
. The obligation to purchase and pay for
the Debenture which the Purchaser has agreed to purchase on the Closing Date is subject to the
fulfillment prior to or on the Closing Date of the following conditions.
7.1 [Intentionally Omitted]
7.2 The Company shall have performed and complied with all agreements or conditions required
by this Agreement to be performed and complied with by it prior to or as of the Closing Date.
7.3
Certificate of Officers
. The Company shall have delivered to the Purchaser a
certificate, dated the Closing Date, executed by the President and the senior financial officer of
the Company and certifying to the satisfaction of the conditions specified in Sections 7.2 and 7.5
hereof.
7.4 [Intentionally Omitted]
7.5
No Event of Default
. There shall exist at the time of Closing no condition or
event which would constitute an Event of Default (as hereinafter defined) or which, after notice or
lapse of time or both, would constitute an Event of Default.
7.6
Qualification Under State Securities Laws
. All registrations, qualifications,
permits and approvals required under applicable state securities laws for the lawful execution and
delivery of this Agreement and the offer, sale, issuance and delivery of the Debenture and the
offer of the Conversion Stock shall have been obtained.
10
7.7
Proceedings and Documents
. All corporate and other proceedings and actions taken
in connection with the transactions contemplated hereby and all certificates, opinions, agreements,
instruments and documents mentioned herein or incident to any such transaction shall be
satisfactory in form and substance to the Purchaser and their special counsel.
8.
Affirmative Covenants
. Subject to the provisions of Section 14 hereof, the Company
covenants and agrees that:
8.1
Corporate Existence
. The Company will maintain its corporate existence in good
standing and comply with all applicable laws and regulations of the United States or of any state
or states thereof or of any political subdivision thereof and of any governmental authority where
failure to so comply would have a material adverse impact on the Company or its business or
operations.
8.2
Books of Account and Reserves
. The Company will keep books of record and accounts
in which full, true and correct entries are made of all of its dealings, business and affairs, in
accordance with generally accepted accounting principles. The Company will employ certified public
accountants selected by the Board of Directors of the Company who are “independent” within the
meaning of the accounting regulations of the Commission and have annual audits made by such
independent public accountants in the course of which such accountants shall make such
examinations, in accordance with generally accepted auditing standards, as will enable them to give
such reports or opinions with respect to the financial statements of the Company as will satisfy
the requirements of the Commission in effect at such time with respect to certificates and opinions
of accountants.
8.3
Furnishing, of Financial Statements and Corporate Information
. The Company will
deliver to the Purchaser:
(a) as soon as practicable, but in any
event within 30 days after the close of each month, unaudited
balance sheets of the Company as of the end of such month,
together with the related statements of operations and a
statement of sources and uses of cash for such month, setting
forth the budgeted figures for such month prepared and
submitted in connection with the Company’s annual plan as
required under Section 8.5 hereof and in comparative form
figures for the corresponding month of the previous fiscal
year, all in reasonable detail and certified by the Chief
Financial Officer of the Company, subject to year-end
adjustments;
(b) as soon as practicable, but in any
event within 120 days after the end of each fiscal year, a
balance sheet of the Company, as of the end of such fiscal
year, together with the related statements of operations,
stockholders’ equity and a statement of sources and uses of
cash for such fiscal year, setting forth in comparative form
figures for the previous fiscal year, all in reasonable detail
and duly certified by the Company’s independent Certified
Public Accountants, which accountants shall have given the
Company an opinion, unqualified as to the scope of the audit,
regarding such financial statements;
11
(c) concurrently with the delivery of any
financial statements referred to in paragraphs (a) and (b) of
this Section 8.3, current schedules of Indebtedness for
Borrowed Money and Senior Indebtedness, as these terms are
hereinafter defined, together with a certificate of the Chief
Executive Officer and Chief Financial Officer of the Company to
the effect that such schedules are accurate and correct and
that there exists no condition or event which constitutes an
event of default with respect to any indebtedness of the
Company, or, if any such condition or event exists, specify the
nature and period of existence thereof and what action the
Company is taking or proposes to take with respect thereto;
(d) within 90 days after the end of each
fiscal year, and promptly upon request of the Purchaser at any
time during the fiscal year up to four times per fiscal year,
written notice of the current number of shares that would be
issued to the Purchaser if the Purchaser elected at the last
business day of the fiscal year or as of the date of the
request, as the case may be, to convert the entire Debenture
into fully paid and nonassessable shares of Common Stock of the Company that
represent thirty percent (30%) of the Fully Diluted
Outstanding Shares of Common Stock of the Company After
Conversion as that term is defined in the Debenture;
(e) concurrently with the delivery in each
year of the financial statements referred to in paragraph (b)
of this Section 8.3, a statement and report signed by the
independent Certified Public Accountants who certified such
financial statements to the effect that they have read this
Agreement and that in the course of the audit upon which their
certificate was based they became aware of no condition or
event which constituted an Event of Default or which, after
notice or lapse of time or both, would constitute an Event of
Default or if such accountants did become aware of any such
condition or event, specifying the nature and period of
existence thereof;
(f) promptly after the submission thereof
to the Company, copies of all reports and recommendations
submitted by independent Certified Public Accountants in
connection with any annual or interim audit of the accounts of
the Company made by such accountants;
(g) promptly upon transmission thereof,
copies of all reports, proxy statements, registration
statements and notifications filed by the Company with the
Commission pursuant to any act administered by the Commission
or furnished to stockholders of the Company or to any national
securities exchange;
(h) with reasonable promptness, such other
financial data relating to the business, affairs and financial
condition of the Company as is available to the Company and as
from time to time the Purchaser may reasonably request;
(i) at least 30 days prior to the earlier
of (i) the execution of any agreement relating to any merger or
consolidation of the Company with another corporation, or a
plan of exchange involving the outstanding capital stock of the
12
Company, or the sale, transfer or other disposition of all or
substantially all of the property, assets or business of the
Company to another corporation, or (ii) the holding of any
meeting of the stockholders of the Company for the purpose of
approving such action, written notice of the terms and
conditions of such proposed merger,
consolidation, plan of exchange, sale, transfer or other
disposition;
(j) within 15 days after the Company learns
in writing of the commencement or threatened commencement of
any material suit, legal or equitable, or of any material
administrative, arbitration or other proceeding against the
Company or its businesses, assets or properties, written notice
of the nature and extent of such suit or proceeding; and
(k) with reasonable promptness, copies of
all minutes of meetings of the Company’s Shareholders and/or
its Board of Directors, along with documentation of all
Corporate actions of the Company.
8.4
Inspection
. The Company will permit the Purchaser and any of its partners,
officers or employees, or any outside representatives designated by the Purchaser and reasonably
satisfactory to the Company, to visit and inspect at the Purchaser’s expense the business offices
of the Company and any of the properties of the Company, including their books and records (and to
make photocopies thereof or make extracts therefrom), and to discuss their affairs, finances, and
accounts with their officers, lawyers and accountants, except with respect to trade secrets and
similar confidential information, all to such reasonable extent and at such reasonable times and
intervals as such Purchaser may reasonably request during normal business hours. Except as
otherwise required by laws or regulations applicable to a Purchaser, the Purchaser shall maintain,
and shall require its representatives to maintain, all information obtained pursuant to Section 8.3
hereof, this Section 8.4 and Section 8.5 hereof on a confidential basis.
8.5
Preparation of Budgets
. Whenever the Company shall prepare and submit to its
Board of Directors for review and approval any budget, such as a capital or operating expense
budget, the Company will, simultaneously with the submission thereof to the Board of Directors,
deliver a copy of each such budget and any modification thereof that is provided to the Board of
Directors to the Purchaser.
8.6
Payment of Taxes and Maintenance of Properties
. The Company will:
(a) pay and discharge promptly, or cause to
be paid and discharged promptly when due and payable, all
taxes, assessments and governmental charges or levies imposed
upon it or upon its income or upon any of its properties, as
well as all material claims of any kind (including claims for
labor, material and supplies) which, if unpaid, might by law
become a lien or charge upon its property; provided, however,
that the Company shall not be required to pay any such tax,
assessment, charge, levy or claim if the amount, applicability
or validity thereof shall currently be contested
in good faith by appropriate proceedings and if the Company
shall have set aside on its books reserves (segregated to the
extent
13
required by generally accepted accounting principles)
deemed adequate by it with respect thereto; and
(b) maintain and keep, or cause to be
maintained and kept, its properties in good repair, working
order and condition, and from time to time make, or cause to be
made, all repairs and renewals and replacements which in the
opinion of the Company are necessary and proper so that the
business carried on in connection therewith may be properly and
advantageously conducted at all times; the Company will
maintain or cause to be maintained back-up copies of all
valuable papers and software.
8.7
Insurance
. The Company will obtain and maintain in force such property damage,
public liability, business interruption, worker’s compensation, indemnity bonds and other types of
insurance as the Company’s executive officers, after consultation with an accredited insurance
broker, shall determine to be necessary or appropriate to protect the Company from the insurable
hazards or risks associated with the conduct of the Company’s business. The Company’s executive
officers shall periodically report to the Board of Directors on the status of such insurance
coverage.
All insurance shall be maintained in at least such amounts and to such extent as shall be
determined to be reasonable by the Board of Directors; and all such insurance shall be effected and
maintained in force under a policy or policies issued by insurers of recognized responsibility,
except that the Company may effect worker’s compensation or similar insurance in respect of
operations in any state or other jurisdiction either through an insurance fund operated by such
state or other jurisdiction or by causing to be maintained a system or systems of self-insurance
which is in accord with applicable laws.
8.8
Payment of Indebtedness and Discharge of Obligations
. The Company will pay or
cause to be paid the principal of and interest and premium, if any, on all Indebtedness for
Borrowed Money heretofore or hereafter incurred or assumed by it when and as the same shall become
due and payable, unless such Indebtedness for Borrowed Money is renewed or extended. The Company
will faithfully observe, perform and discharge all of the material covenants, conditions and
obligations which are imposed on it by any and all indentures and other agreements securing or
evidencing such Indebtedness for Borrowed Money or pursuant to which such Indebtedness for Borrowed
Money is issued, and will not permit the continuance of any act or omission which is or under the
provisions thereof may be declared to be a material default thereunder, unless such default is
waived pursuant to the provisions thereof. The Company shall not be required to make any payment
or to take any other action by reason of this Section 8.8 at any time while it shall be currently
contesting in good faith by appropriate proceedings its obligations to make such payment or to take
such action provided that the Company shall have set aside on its books reserves (segregated to the
extent required by generally accepted accounting principles) deemed adequate by it with respect
thereto.
8.9
Directors’ and Stockholders’ Meetings
. The Company agrees, as a general practice,
to hold a meeting of its Board of Directors at least once a year, and during each year to hold its
annual meeting of stockholders on or approximately on the date provided in its Bylaws.
14
8.10
Replacement of Debenture or Certificates Representing Conversion Stock
. Upon
receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of the Debenture or certificates representing Conversion Stock, and, in the case of any
such loss, theft or destruction, upon delivery of a bond of indemnity satisfactory to the Company,
or, in the case of any such mutilation, upon surrender and cancellation of the Debenture or
certificates representing Conversion Stock, as the case may be, the Company will issue a new
Debenture or certificates representing Conversion Stock, as the case may be, of like tenor, in lieu
of such lost, stolen, destroyed or mutilated Debenture or certificates representing Conversion
Stock, as the case may be.
8.11
Application of Proceeds
. Unless otherwise approved by the Purchaser, the net
proceeds received by the Company from the sale of the Debenture shall be used substantially for
working capital purposes.
8.12
Retirement Plans
. The Company will cause each retirement plan of the Company in
which any employees of the Company participate that is subject to the provisions of ERISA and the
documents and instruments governing each such plan to be conformed to when necessary, and to be
administered in a manner consistent with, those provisions of ERISA which may, from time to time,
become effective and operative with respect to such plans; if requested by the Purchaser in writing
from time to time, furnish to the Purchaser a copy of any annual report with respect to each such
plan that the Company files with the Secretary of Labor pursuant to ERISA; and at such time as such
insurance shall be available at rates deemed commercially reasonable by the Company, maintain
insurance against the contingent liability against the net worth of the Company imposed in respect
of each such plan by the provisions of ERISA.
8.13
Filing of Reports
. The Company will, from and after such time as it has
securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, or
has securities registered pursuant to the Securities Act, make timely filing of such reports as are
required to be filed by it with the Commission so that Rule 144 under the Securities Act or any
successor provision thereto will be available to the security holders of the Company who are
otherwise able to take advantage of the provisions of such Rule.
8.14
Patents and Other Intangible Rights
. The Company will apply for, or obtain
assignments of, or licenses to use, all patents, trademarks, trademark rights, trade names, trade
name rights and copyrights which in the opinion of a prudent and experienced businessman operating
in the industry in which the Company is operating are desirable or necessary for the conduct and
protection of the business of the Company.
8.15
Exchange of Debenture
. The Company will at any time, at the Company’s expense
(except for any transfer tax payable), at the written request of the Holder of the Debenture and
upon surrender of such Debenture for such purpose, issue new Debentures in exchange therefor in the
denomination of $5,000, or any multiple thereof specified by the Purchaser, in an aggregate
principal amount equal to the then unpaid principal amount of the
Debenture surrendered and substantially in the form of Exhibit A to this Agreement with
appropriate insertions and variations.
15
9.
Negative Covenants
. The Company will be limited and restricted as follows:
9.1
Dividends on or Redemption of Capital Stock
. Without the prior approval of the
Holder of the Debenture, the Company will not declare or pay any dividend or make any other
distribution on any shares of capital stock or purchase, redeem or otherwise acquire for any
consideration, or set aside a sinking fund or other fund for the redemption or repurchase of any
shares of capital stock or any warrants, rights or options to purchase shares of capital stock.
9.2
Other Restrictions
. The Company will not without the prior approval of the Holder
of the Debenture:
(a) guarantee, endorse or otherwise be or
become contingently liable in connection with the obligations,
securities or dividends of any person, firm, association or
corporation, other than the Company, except that the Company
may endorse negotiable instruments for collection in the
ordinary course of business; or
(b) make loans or advances to any person
(including without limitation to any officer, director or
stockholder of the Company), firm, association or corporation
in excess of $10,000, except advances to suppliers and
employees made in the ordinary course of business; or
(c) purchase or invest in the stock or
obligations of any other person, firm or corporation; or
(d) make any material change in the nature
of its business as carried on at the date of this Agreement.
9.3
Limitations Upon Capital Reorganization of Common Stock, Consolidation, or Merger
.
No merger or acquisition of the Company, or substantially all of its assets, or capital
reorganization or reclassification of the capital stock of the Company or voluntary dissolution,
liquidation, or in bankruptcy filing shall occur absent the written concurrence of the Purchaser.
10.
The Debenture
.
10.1
Conversion of Debenture
. The Holder of the Debenture may, at its option, at any
time and from time to time, convert such Debenture, or any part thereof, into Conversion Stock upon
the terms and conditions set forth in the Form of Debenture.
10.2
Stock Fully Paid; Reservation of Shares
. The Company covenants and agrees that
all Conversion Stock that may be issued upon conversion of the Debenture will, upon issuance in
accordance with the terms of the Debenture, be fully paid and nonassessable, and
shall, at the time of issuance, not be diluted, and that the issuance thereof shall not give
rise to any preemptive rights on the part of any person. The Company further covenants and agrees
that the Company will at all times have authorized and reserved a sufficient number of shares of
its Common Stock for the purpose of issue upon the conversion of the Debenture.
16
The Debenture is convertible in whole at any time prior to its payment at the option of the
Purchaser into fully paid and nonassessable shares of Common Stock of the Company constituting
thirty percent (30%) of all classes of the Common Stock of the Company on a fully diluted basis, as
further explained in paragraph 3(b) of the Debenture. In addition, as further explained in
paragraph 3(b) of the Debenture, the Debenture is convertible in part at any time prior to its
payment at the option of the Purchaser into fully paid and nonassessable shares of Common Stock of
the Company constituting a proportionate percentage of thirty percent (30%) of all classes of the
Common Stock of the Company on a fully diluted basis in the ratio that the amount of the Debenture
being converted bears to the total amount of the Debenture acquired by the Purchaser. Under no
circumstances shall paragraph 3(b) of the Debenture be read to entitle the Purchaser to shares of
Common Stock of the Company constituting less than 30% of all classes of the Common Stock of the
Company on a fully diluted basis upon conversion in full of the Debenture.
10.3
Number of Shares to be Issued Upon Conversion
. The number of shares of Common
Stock issuable upon full conversion of the Debenture; will be as set forth in the Form of
Debenture, which is equal to thirty percent (30%) of all classes of the Common Stock of the Company
on a fully diluted basis. The number of shares of the Common Stock of the Company issuable upon
partial conversion shall be equivalent to the ratio that the amount of the Debenture being
converted bears to $3,000,000, said sum being the total of the $2M Debenture and the $1M Debenture
acquired by the Purchaser.
11. [Intentionally Omitted]
12. [Intentionally Omitted]
13.
Default
.
13.1
Events of Default
. Each of the following events shall be an event of default (an
“Event of Default”) for purposes of this Agreement:
(a) if default shall be made in the
punctual payment of interest on the Debenture, and such default
shall have continued for a period of 15 days after written
notice thereof to the Company by the Holder of the Debenture;
or
(b) if default shall be made in the
punctual payment of the principal of the Debenture; or
(c) if the Company becomes insolvent or
bankrupt, or admits in writing its inability to pay its debts
as they mature, or makes an assignment for the benefit of
creditors, or ceases doing business as a going concern, or the
Company applies
for or consents to the appointment of a trustee or receiver
for the Company, or for the major part of its property; or
(d) if a trustee or receiver is appointed
for the Company or for the major part of its property and the
order of such appointment is not discharged, vacated or stayed
within 30 days after such appointment; or
17
(e) if any judgment, writ or warrant of
attachment or of any similar process in an amount in excess of
$50,000 shall be entered or filed against the Company or
against any of the property or assets of the Company and
remains unpaid, unvacated, unbonded or unstayed for a period of
120 days; or
(f) if an order for relief shall be entered
in any Federal bankruptcy proceeding in which the Company is
the debtor; or if bankruptcy, reorganization, arrangement,
insolvency, or liquidation proceedings, or other proceedings
for relief under any bankruptcy or similar law or laws for the
relief of debtors, are instituted by or against the Company
and, if instituted against the Company, are consented to or, if
contested by the Company, are not dismissed by the adverse
parties or by an order, decree or judgment within 120 days
after such institution; or
(g) if the Company shall default in any
material respect in the due and punctual performance of any
covenant or agreement in any debenture (including without
limitation the Debenture which is the subject of this
Agreement), bond, indenture, loan agreement, debenture
agreement, mortgage, security agreement or other instrument
evidencing or related to Indebtedness for Borrowed Money, and
such default shall continue for more than the period of notice
and/or grace, if any, therein specified and shall not have been
waived (any default in any material respect in the due and
punctual performance of any covenant or agreement in this
Agreement or the Debenture shall not constitute an Event of
Default unless such default continues for a period of 15 days
after written notice thereof to the Company); or
(h) if any representation or warranty made
by or on behalf of the Company in this Agreement or in any
certificate, report or other instrument delivered under or
pursuant to any term hereof or thereof shall prove to have been
untrue or incorrect in any material respect as of the date of
this Agreement or as of the Closing Date, or (ii) if any report,
certificate, financial statement or financial schedule or
other instrument prepared or purported to be prepared by the
Company or any officer of the Company furnished or delivered
under or pursuant to this Agreement after the Closing Date
shall prove to be untrue or incorrect in any material respect
as of the date it was made, furnished or delivered; or
(i) if the Company undertakes any action
designed to diminish the conversion rights of Purchaser in the
absence of advance written permission of Purchaser; or
(j) if default shall be made in the due and
punctual performance or observance of any other term contained
in this Agreement, and such default shall have continued for a
period of 15 days after written notice thereof to the Company
by the Holder of the Debenture.
13.2
Remedies Upon Events of Default
. Upon the occurrence of an Event of Default as
herein defined, and so long as such Event of Default continues unremedied, then,
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unless such Event
of Default shall have been waived by the Holder of the Debenture, then the Holder of the Debenture
shall be entitled by notice to declare the principal of and any accrued interest on the Debenture
to be immediately due and payable, and thereupon the Debenture, including both principal and
interest shall become immediately due and payable (provided, however, that when any Event of
Default described in Section 13.1(f) hereof has occurred, the Debenture shall immediately become
due and payable without presentment, demand or notice of any kind and (b) the Purchaser of the
Debenture shall be entitled to designate such number of members to the Board of Directors of the
Company as constitutes 30% of the total number of members of the Board of Directors as provided
herein.
13.3
Designation of Directors
. In the event the Purchaser of the Debenture is
entitled to designate members constituting 30% of the total number of members of the Board of
Directors of the Company pursuant to Section 13.2 hereof, the Company shall, immediately upon
receiving written notice from the Holder of the Debenture, call a special stockholders’ meeting to
be held as soon as possible, but in any event within fifteen days of the date of the notice of such
meeting. At such special stockholders’ meeting, 30% of the directors of the Company shall be
elected from designees nominated by the Holder of the Debenture. Any right of the Holder of the
Debenture to continue to designate 30% of the Board of Directors of the Company shall expire, and a
stockholders’ meeting to elect new directors shall be called, six months after the later of (a) the
curing of the Event Default upon which the right was exercised, or (b) the curing of any Event of
Default occurring after the Event of Default upon which such right was exercised.
13.4
Notice of Defaults
. When, to its knowledge, any Event of Default has occurred or
exists, the Company agrees to give written notice within three business days of such Event of
Default to the Holder of the Debenture.
13.5
Suits for Enforcement
. In case any one or more Events of Default shall have
occurred and be continuing, unless such Events of Default shall have been waived in the manner
provided in Section 13.2 hereof, the Holder of the Debenture may proceed to protect and enforce its
rights under this Section 13 by suit in equity or action at law. It is agreed that in the event of
such action the Holder of the Debenture shall be entitled to receive all reasonable fees, costs and
expenses incurred, including without limitation such reasonable fees and expenses of attorneys
(whether or not litigation is commenced) and reasonable fees, costs and expenses of appeals.
13.6
Remedies Cumulative
. No right, power or remedy conferred upon the Holder of the
Debenture shall be exclusive, and each such right, power or remedy shall be cumulative and in
addition to every other right, power or remedy, whether conferred hereby or by any such security or
now or hereafter available at law or in equity or by statute or otherwise.
13.7
Remedies not Waived
. No course of dealing between the Company and the Holder of
the Debenture, and no delay in exercising any right, power or remedy conferred hereby or by any
such security or now or hereafter existing at law or in equity or by statute or otherwise, shall
operate as a waiver of or otherwise prejudice any such right, power or remedy; provided, however,
that this Section 13.7 shall not be construed or applied so as to negate the provisions and intent
of any statute which is otherwise applicable.
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14.
Definitions
. Unless the context otherwise requires, the terms defined in this
Section 14 shall have the meanings herein specified for all purposes of this Agreement, applicable
to both the singular and plural forms of any of the terms herein defined. All accounting terms
defined below shall, except as otherwise expressly provided, be determined by reference to the
Company’s books of account and in conformity with generally accepted accounting principles as
applied to such books of account in the opinion of the independent Certified Public Accountants
selected by the Board of Directors of the Company as required under the provisions of Section 8.3
hereof.
14.1 “Common Stock” shall mean the Company’s authorized common shares, any additional common
shares which may be authorized in the future by the Company, and any stock into which such common
shares may hereafter be changed, and shall also include stock of the Company of any other class
which is not preferred as to dividends or as to distributions of assets on liquidation, dissolution
or winding up of the Company over any other class of stock of the Company, and which is not subject
to redemption.
14.2 “Convertible Securities” shall mean evidences of indebtedness, shares of stock or other
securities which are at any time directly or indirectly, convertible into or exchangeable for
shares of Common Stock.
14.3 “Indebtedness for Borrowed Money” shall include only indebtedness of the Company incurred
as the result of a direct borrowing of money and shall not include any other indebtedness
including, but not limited to, indebtedness incurred with respect to trade accounts.
14.4 “Permitted Liens” shall mean (a) liens for taxes and assessments or governmental charges
or levies not at the time due or in respect of which the validity thereof shall currently be
contested in good faith by appropriate proceedings, (b) liens existing as of the date of this
Agreement, (c) liens arising in connection with purchase money security interests; and (d) liens in
respect of pledges or deposits under worker’s compensation laws or similar legislation, carriers’,
warehousemen’s, mechanics’, laborers’ and materialmen’s, landlord’s and statutory and similar
liens, if the obligations secured by such liens are not then delinquent or are being contested in
good faith, and liens and encumbrances incidental to the conduct of the business of the Company
which were not incurred in connection with the borrowing of money or the obtaining of advances or
credits and which do not in the aggregate materially detract from the value of its property or
materially impair the use thereof in the operation of its business.
14.5 “Senior Indebtedness” shall mean (a) the principal of all Indebtedness for Borrowed Money
of the Company to banks, insurance companies or other financial institutions, (b) the present value
of net minimum lease payments of all leases under which the Company is the lessee and which are
required to be capitalized under generally accepted accounting principles, (c) the principal of all
indebtedness of the Company under installment purchase agreements, and (d) the principal of all
indebtedness of the Company to the owners of any real property leased by the Company for leasehold
improvements financed by such owners.
15.
Consents; Waivers and Amendments
. Except as otherwise specifically provided
herein, in each case in which approval of the Holder of the Debenture is required by the terms of
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this Agreement, such requirement shall be satisfied by the written consent of the Holder of the
Debenture. With the written consent of the Holder of the Debenture, the obligations of the Company
under this Agreement may be waived (either generally or in a particular instance and either
retroactively or prospectively), and with the same approval the Company may enter into a
supplementary agreement for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Agreement or of any supplemental agreement or modifying
in any manner the rights and obligations of the Holder of the Debenture. The Holder of Debenture
shall respond promptly to any request by the Company with respect to a proposed amendment, consent
or waiver and will not unreasonably withhold its approval or consent thereto.
16.
Changes, Waivers, etc
. Neither this Agreement nor any provision hereof may be
changed, waived, discharged or terminated orally, but only by a statement in writing signed by the
party against which enforcement of the change, waiver, discharge or termination is sought, except
to the extent provided in Section 15 hereof.
17.
Payment of Fees and Expenses of Purchaser
. The Company will pay all fees and
expenses incurred by the Purchaser with respect to the enforcement of the rights granted under this
Agreement or the agreements contemplated hereby.
18.
Notices
. All notices, requests, consents and other communications required or
permitted hereunder shall be in writing and shall be delivered, or mailed first-class postage
prepaid, registered or certified mail,
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(a)
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if to the Holder of the Debenture:
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To:
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Honorable Myra Pearson
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Chairman
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Spirit Lake Sioux Tribe
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Spirit Lake Tribal Council Office
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P.O. Box 359
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Main Street
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Fort Totten, ND 58335
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With Copy To:
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Larry B. Leventhal, Esq.
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Larry Leventhal & Associates
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319 Ramsey Street
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St. Paul, MN 55402
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To:
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Mr. Jeffrey Mack
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President & CEO
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Wireless Ronin® Technologies, Inc.
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14700 Martin Drive
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Eden Prairie, Minnesota 55344
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With Copy To:
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Thor Christensen, Esq.
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Vice President Corporate Counsel
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Wireless Ronin® Technologies, Inc.
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14700 Martin Drive
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Eden Prairie, Minnesota 55344
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and such notices and other communications shall for all purposes of this Agreement be treated as
being effective or having been given if delivered personally, or, if sent by mail, when received.
19.
Survival of Representations and Warranties, etc
. All representations and
warranties contained herein shall survive the execution and delivery of this Agreement, any
investigation at any time made by the Purchaser or on its behalf, and the sale and purchase of the
Debenture and payment therefor and shall terminate upon payment or conversion in full of all
amounts due under the Debenture. All statements contained in any certificate, instrument or other
writing delivered by or on behalf of the Company pursuant hereto or in connection with or
contemplation of the transactions herein contemplated (other than legal opinions) shall constitute
representations and warranties by the Company hereunder.
20.
Parties in Interest
. All the terms and provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto, whether so expressed or not, and, in particular, shall inure to the
benefit of and be enforceable by the Holder of the Debenture.
21.
Headings
. The headings of the Sections and paragraphs of this Agreement have been
inserted for convenience of reference only and do not constitute a part of this Agreement.
22.
Choice of Law
. It is the intention of the parties that the laws of Minnesota
shall govern the validity of this Agreement, the construction of its terms and the interpretation
of the rights and duties of the parties.
23.
Counterparts
. This Agreement may be executed concurrently in two or more
counterparts, each of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
22
If you are in agreement with the foregoing, please sign the form of acceptance on the enclosed
counterpart of this letter and return the same to the undersigned, whereupon this letter shall
become a binding contract between you and the undersigned.
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Very truly yours,
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WIRELESS RONIN® TECHNOLOGIES, INC.
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By:
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/s/ Jeffrey C. Mack
Jeffrey C. Mack
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President & CEO
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By:
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/s/ Stephen E. Jacobs
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Stephen E. Jacobs
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Executive Vice President & CFO
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The foregoing Agreement is hereby accepted as
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of the date first above written.
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SPIRIT LAKE SIOUX TRIBE
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By:
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/s/ Myra Pearson
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Print Name: Myra Pearson
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Its: Tribal Chairman
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23
EXHIBIT 10.23
FINAL VERSION
SALE AND PURCHASE AGREEMENT
Sale and Purchase Agreement (this “Agreement”), dated this 11
th
day of July, 2006,
by and between Wireless Ronin Technologies, Inc., a Minnesota corporation, with offices located at
14700 Martin Drive, Eden Prairie, MN 55344 (“WRT”), and Sealy Corporation, a Delaware corporation,
with offices located at One Office Parkway at Sealy Drive, Trinity, NC 27370 (“Sealy”).
WITNESSETH:
WHEREAS, WRT has developed the SealyTouch™ System (the “System”), consisting of (i) all of
WRT’s programs, software, databases, media devices, user materials provided to Sealy, and all other
intellectual property needed to make the System fully operational, including, without limitation,
all revisions, updates, corrections, and improvements thereto, now and hereafter existing (the “WRT
Technology”) and (ii) a computerized touch screen or interactive display center, related hardware
and software purchased by WRT from third party manufacturers according to WRT’s specifications, and
all parts and supplies needed to make the System fully operational (collectively the “Equipment”),
all as more fully described in
Exhibit A
hereto;
WHEREAS, the Systems are designed as a marketing platform to be installed at locations
(“Installation Sites”) of retailers (“Retailers”) chosen by Sealy and used by the Retailers’
customers (“Customers”) in shopping for, selecting and purchasing mattresses, box springs, and
other bedding products of Sealy and its subsidiaries;
WHEREAS, Sealy desires to purchase (as used herein, “purchase” means to buy the Equipment and
license use of the WRT Technology) Systems from WRT for use in Beta Tests (as defined below);
WHEREAS, assuming that (i) Sealy is satisfied with the results of the Beta Tests, (ii) Sealy
and WRT have executed a SealyTouch™ Master Service Agreement in accordance with Section 5 below
(the “Master Service Agreement”) pursuant to which, for a separate fee, WRT shall install, test,
maintain, repair, update, and otherwise service all of the Systems purchased by Sealy and keep them
in good working order and provide insurance claim, warranty claim and such other services as are
specified therein, (iii) Sealy, WRT and Richardson Electronics, Ltd. have executed the Backup
Service Agreement in accordance with Section 5 below, and (iv) Sealy has accepted and become a
beneficiary of WRT’s Master Preferred Escrow Agreement with Iron Mountain (the “Master Preferred
Escrow Agreement”) relating to WRT’s Technology in accordance with Section 5 below, Sealy desires
to purchase additional Systems from WRT in an amount to be determined by Sealy in its sole
discretion, but estimated to be up to 3,000 units, all upon the terms and conditions set forth
herein; and
WHEREAS, WRT desires to sell (as used herein, “sell” means to sell the Equipment and license
the use of the WRT Technology) Systems to Sealy for use in the Beta Tests, to cooperate
with Sealy and Winmark Capital Corporation (“Winmark”) if Sealy decides to utilize Winmark in
connection with this transaction to finance and/or manage Sealy’s purchase and use of
Systems through a lease, to execute and provide Sealy with the services specified in the Master Service
Agreement, to execute the Backup Service Agreement, to make Sealy a beneficiary of its Master
Preferred Escrow Agreement, and to sell additional Systems to Sealy, all upon the terms and
conditions set forth herein.
NOW, THEREFORE, IN CONSIDERATION of the foregoing and the mutual covenants set forth herein,
the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound,
the parties agree as follows:
SECTION 1
PURCHASE AND SALE OF SYSTEMS; LICENSE OF WRT TECHNOLOGY
1.1
General
. Subject to the terms and conditions hereof, Sealy agrees to purchase Systems
from WRT, and WRT agrees to sell Systems to Sealy.
1.2
Purchase and Sale of Systems for Beta Test
. Pursuant to the purchase order attached
hereto as Exhibit B, Sealy has purchased from WRT, and WRT has sold to Sealy, 50 Systems, many of
which have been installed at Installation Sites designated by Sealy and used in a Beta Test.
Sealy intends to conduct a further Beta Test and for that purpose may purchase and have installed
additional Systems. Sealy shall complete its Beta Tests of the Systems on or before September 30,
2006 or such other date as the parties may agree.
1.3
Purchase and Sale of Additional Systems beyond the Beta Test
. Assuming that (i) Sealy is
satisfied with the results of the Beta Tests, (ii) Sealy and WRT have executed a Master Service
Agreement pursuant to which, for a separate fee, WRT will install, test, maintain, repair, update,
and otherwise service the Systems and keep them in good working order and provide insurance claim,
warranty claim and such other services as are specified therein, and (iii) Sealy has accepted and
become a beneficiary of WRT’s Master Preferred Escrow Agreement with Iron Mountain relating to
WRT’s Technology, Sealy shall purchase from WRT, and WRT shall sell to Sealy, additional Systems
to be installed at Installation Sites in the United States, Canada and Mexico (the “Territory”).
Subject to the provisions of Section 1.4 below, the number of such additional Systems purchased by
Sealy from WRT and their Installation Sites shall be determined by Sealy in its sole discretion;
provided, however, that every purchase order placed by Sealy and filled by WRT shall be for a
minimum of 50 additional Systems.
1.4
Purchase Estimates
. Not less than 20 days prior to the beginning of each calendar
quarter, Sealy will provide WRT with a written quarterly System purchase estimate for the upcoming
3 month period (the “Estimate”). Sealy may in its sole discretion amend an Estimate at any time
by providing written notice of same to WRT. An Estimate or amended Estimate shall not obligate
Sealy to purchase any particular volume of Systems, shall not in any way be construed by WRT as a
promise or guaranty by Sealy to purchase any volume of Systems, and shall not be relied upon by
WRT in deciding to incur any costs in connection with this Agreement. Subject to Section 3.2
below, Sealy may purchase fewer or more Systems during a quarter than predicted in the Estimate or amended Estimate for said quarter without
any liability to WRT beyond that specified in this Agreement.
2
1.5
Purchase Orders
. Any purchase order delivered by Sealy will incorporate the terms and
conditions of this Agreement and the Master Service Agreement, and all additional or different
terms in any purchase order delivered by Sealy will not be part of the agreement between the
parties unless agreed to in writing by WRT. Each purchase order placed by Sealy in accordance
with the terms of this Agreement shall be accepted by WRT.
1.6
Designation of Installation Sites
. With every purchase order that Sealy places with WRT,
whether for Systems to be used in the Beta Test or for additional Systems, Sealy shall designate
to WRT the Installation Site for each System ordered.
1.7
License of WRT Technology
. Subject to the provisions of this Agreement, WRT grants to
Sealy and Sealy accepts, effective upon completion of the delivery and installation of each
System, a limited, personal, nonexclusive, nontransferable, nonassignable, irrevocable,
non-royalty bearing Object Code license to use WRT Technology. “Object Code” shall mean the
binary machine-readable version of WRT Technology. Sealy’s rights in the WRT Technology pursuant
to such license are expressly limited to the use of the WRT Technology by Sealy at Installation
Sites in the Territory in connection with the Equipment. Sealy shall not assign, transfer, or
sublicense the WRT Technology without the prior written consent of WRT; provided, however, that
Retailers and Customers are free to use WRT Technology as part of the Systems at Installation
Sites.
1.8
Limited Exclusivity
. During the term of this Agreement and so long as Sealy shall have
ordered and provided WRT with an Installation Schedule for either (i) 250 Systems per calendar
quarter beginning with the quarter ending December 31, 2006, or (ii) a total of 2,000 Systems
deliverable during the term of this Agreement in quantities of at least 250 Systems per calendar
quarter, commencing with the quarter ending December 31, 2006, WRT agrees not to furnish the WRT
Technology to any other Bedding Manufacturer or Bedding Retailer in the Territory. The
requirements for the limited exclusivity for the term of this Agreement shall be deemed met if
Sealy has met the conditions of clause (i) or (ii) of the preceding sentence. During the term of
this Agreement, Sealy agrees to use only WRT as its vendor for interactive touch screen display
technology; provided, that at such time as the requirements for limited exclusivity above are not
met and WRT shall have thereafter furnished WRT Technology to any other Bedding Manufacturer or
Bedding Retailer in the Territory, Sealy shall not be bound by the limited exclusivity obligations
of this Section 1.8. For purposes of this Agreement, “Bedding Manufacturer” or “Bedding Retailer”
shall be any manufacturer or stand alone retailer of beds or futons, whether conventional
innerspring products or specialty foam or air products, or any other product that is used or
marketed for a person to sleep upon. A Bedding Manufacturer or Bedding Retailer shall not include
a mass retailer that sells bedding in addition to other retail consumer merchandise.
1.9
Reverse Engineering
. Sealy shall not translate, reverse engineer, decompile, recompile,
update, or modify all or any part of the WRT Technology or merge the WRT Technology into any other
software.
1.10
No Licenses
. Except as explicitly provided in Section 1.7 of this Agreement, no license
under any patents, copyrights, trademarks, trade secrets, or any other intellectual property
rights, express or implied, are granted by WRT to Sealy under this Agreement.
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1.11
Corruption Protection
. WRT will equip the WRT Technology licensed to Sealy with
protection against viruses, Trojan horses, worms or other software routines or hardware components
designed to permit unauthorized access or to disable, erase or otherwise harm any software,
hardware or data (collectively “Corruptions”), and will periodically provide any updates to such
protection for the Systems sold to Sealy.
SECTION 2
UNIT PRICE; ADJUSTMENT OF UNIT PRICE; PAYMENT TERMS; TAXES
2.1
Unit Price
. The purchase price for each System (the “Unit Price”) shall be set forth in
Schedule 2.1 hereto, shall become effective upon said Schedule 2.1 being dated and signed by both
Sealy and WRT, and shall remain effective until replaced by a new dated and signed Schedule 2.1
setting forth an adjusted Unit Price pursuant to Section 2.2 below. The Unit Price shall include
the purchase price for the Equipment, the license fee for the WRT Technology, and all charges for
packing, loading, transporting, unloading, installing and testing the System at the Installation
Site and for insurance on the System pursuant to Section 4.2 below. Sealy shall not be liable to
WRT for any additional price, fee or charge beyond the Unit Price for the purchase and
installation of each System. The Unit Price shall not include the separate fee that Sealy agrees
to pay WRT for post-sale services relating to the Equipment pursuant to the Master Service
Agreement. The Unit Price shall not include the amounts that Sealy agrees to reimburse to WRT for
payment of certain taxes pursuant to Section 2.4 below.
2.2 Quarterly Pricing, Annual Review and Adjustment of Unit Price.
2.2.1
Quarterly Pricing
. The Unit Price shall be subject to adjustment unilaterally by
WRT at the end of each calendar quarter, beginning with the calendar quarter ending December
31, 2006 (each such date, an “Adjustment Date”) based on WRT’s costs for all hardware
(including without limitation hard drive and flat screen components) (“Components”) of the
Unit. If the cost of the Unit is more than five percent (5%) below or five percent (5%)
above the current cost of the Unit due to the price movement of the Components, WRT shall
provide Sealy with a price change notice and all purchase orders dated after the date of the
Price Change Notice shall be seventy-five percent (75%) of the documented price change in
either direction. As an example, if the Component costs lower the Unit cost by ten percent
(10%), then WRT shall lower for Sealy the Unit Price by 7.5%, thereby rewarding WRT 2.5% of
the price savings.
2.2.2
Annual Review
. Upon either parties’ request, the parties shall cause Larson,
Allen, Weishar & Co., LLP, or such other professional firm as the parties mutually agree (in
either case, the “Analyst”), to prepare and deliver to each of WRT and Sealy within 30 days
of any request a detailed written analysis showing all of WRT’s outside vendor costs for the
Components incurred during the Review Period (the “Review Period”) ending with the month
that immediately precedes the month of the request date
and calculating the per unit cost (the “Per Unit Cost”) for that Review Period. Upon
request by either party, the Analyst shall explain the analysis and identify the documents
and information relied upon for the analysis. WRT shall make all relevant data in its
custody, possession or control available to the Analyst. If the Per Unit Cost for that
4
Adjustment Period is more than five percent (5%) less than the Per Unit Cost charged by WRT,
then Sealy shall receive a retroactive price decrease for that Review Period for the entire
amount of the savings and pay the new Per Unit Price going forward as determined by the
Analyst. If the Unit Cost is higher, then Sealy shall pay 75% of the documented price
increase based on the Component cost increases. The party requesting the Annual Review
shall be responsible for the costs of the review unless a price change favorable to that
party is determined by the Analyst. The foregoing notwithstanding, there shall be no
adjustment to the Unit Price, whether increase or decrease, unless the change in the Per
Unit Cost is 5% or greater.
2.3
Payment Terms
. Sealy shall pay the Unit Price for each System that it purchases from WRT
in three equal installments. Sealy shall pay the first equal installment when it places its
purchase order for the System with WRT. Sealy shall pay the second equal installment within
thirty (30) days after receipt from WRT of an invoice for the sale and written evidence (e.g.,
delivery ticket signed by Retailer) that the System has been delivered to the proper Installation
Site. Sealy shall pay the third equal installment within thirty (30) days after the System has
been installed, tested, and accepted by Sealy in accordance with Section 3.4 below. One sixth
(1/6
th
) of the final payment (or 5.5% of the total Unit Price) shall be deposited into
an escrow account pursuant to an Escrow Agreement between WRT, Sealy and the Escrow Agent
thereunder (the “Escrow Agreement”) from which the Escrow Agent shall then distribute the proceeds
of this account to WRT in twelve monthly installments from the date it is deposited as long as
Sealy does not file an objection with the Escrow Agent. Upon the receipt of an objection, the
Escrow Agent shall immediately cease distribution of the escrow funds, until a notice has been
filed by Sealy that such objection has been resolved. An objection must be detailed and be
related to the functioning of the Systems themselves or the installation of the Systems, but does
not have to refer or relate to the particular Systems for which the Deposit is part of the third
installment payment. An objection must be reasonably related to a request to withhold escrow
distribution (i.e. must represent damages or a remedy to Sealy and in the event of an arbitration
as set out below shall represent one source of funds for Sealy if its is determined that WRT has
breached this Agreement or the Master Service Agreement). To the degree the parties disagree
about any objection, they shall promptly meet to resolve the dispute pursuant to the dispute
resolution terms below. The escrow funds may be invested in any reasonable manner (as long as a
commercially independent investment vehicle) as determined by WRT with prior approval by Sealy,
such approval shall not be unreasonably withheld or delayed. All profits or losses from the
escrow account shall be accrued or borne solely by WRT. The parties agree that a Deposit in the
Escrow Agreement shall not be required on any purchase of fewer than ten (10) units and will not
apply to the purchase of the twelve (12) additional units envisioned for the extended beta in July
or August 2006.
2.4
Taxes
. Sealy shall be responsible for and pay all fees, expenses, charges, costs and
taxes payable for the sale of Systems to Sealy, the sale of Equipment to Sealy, and the license of
WRT Technology to Sealy, including but not limited to sales, use, excise, value-added and other
taxes and duties (collectively, “Taxes”). WRT’s invoices shall separately state
the amount of any Taxes WRT is collecting from Sealy, to the extent applicable. The parties
agree to cooperate in collecting Taxes and filing when due all returns in respect of any Taxes.
If Sealy is exempt from payment of Taxes, it shall provide WRT with a valid exemption certificate
evidencing tax-exempt status prior to delivery of any Systems hereunder. Sealy shall
5
indemnify WRT for all Taxes paid by WRT and any other costs and expenses related thereto, including
attorney’s fees. The parties agree that if Sealy leases through Winmark or other leasing agent,
such agent may be responsible for Taxes, but in no event shall WRT be responsible for such Taxes.
SECTION 3
SITE PREPARATION; DELIVERY; INSTALLATION; ACCEPTANCE
3.1
Site Preparation
. Sealy shall be responsible for assuring that each Installation Site is
properly prepared for installation and operation of the System in accordance with the procedures
set forth on Schedule 3.1 hereto. Should WRT determine that any Installation Site has not been
properly prepared for installation and operation of the System, WRT shall promptly notify Sealy
and the Retailer so that remedial steps may be taken to correct the problem with the site and
permit installation and operation with minimal delay. WRT shall not be responsible for paying or
reimbursing the costs, if any, associated with proper site preparation. Sealy shall promptly
reimburse WRT for any costs incurred by WRT in connection with any improper site preparation
following receipt from WRT of a written statement showing the nature and dollar amount of each
such cost, how it was calculated, and what was improper about the site preparation that caused WRT
to incur the cost. WRT shall not be responsible for providing, or otherwise bearing the costs of,
communications facilities for the Systems for the purposes of remote access and support by WRT.
3.2
Delivery
. WRT shall have each System available for shipping to its proper Installation
Site within 12 weeks after receiving the relevant purchase order from Sealy, or within such other
time period as the parties may agree. The Unit Price is a delivered and installed price. All
packing, loading, freight, transportation, unloading and similar charges for delivery of Systems
to Installation Sites are to be paid or incurred by WRT. Sealy shall have no responsibility for
paying or reimbursing WRT for such charges other than as a component of the Unit Price.
3.3
Installation
. Within 6 weeks after providing a purchase order to WRT, Sealy shall
provide to WRT a written schedule (the “Installation Schedule”) setting forth the Installation
Date and Installation Site for each of the ordered Systems. Within 3 weeks of receiving the
Installation Schedule from Sealy, WRT shall provide to Sealy and to each affected Retailer written
notice of the final Installation Schedule either as proposed by Sealy or as modified by the mutual
agreement of Sealy and WRT. WRT shall provide complete installation of each System at its proper
Installation Site and on the date set forth in the final Installation Schedule. The Unit Price is
a delivered and installed price. All rigging, labor, supplies, parts, and other costs associated
with installing Systems are to be paid or incurred by WRT. Sealy shall have no responsibility for
paying or reimbursing WRT for such charges other than as a component of the Unit Price.
3.4
Acceptance of System by Sealy
. Following installation of each System, WRT shall test the
System to assure that it is fully operational. The test shall be conducted in the presence of
Sealy or its representative (for this purpose, Sealy’s representative may be the Retailer at whose
retail location the System has been installed). If the test reveals problems
6
with the System that can be remedied on site, WRT shall fix problems and make the System fully operational. Once WRT
has tested an installed System and concluded that it is fully operational, WRT shall certify in
writing to Sealy that it is ready for acceptance. Sealy shall certify in writing its acceptance of
each System that WRT has delivered, installed, tested, and made fully operational at the proper
Installation Site. Sealy shall notify WRT of any System that Sealy rejects, including the reason
or reasons for rejection. Sealy and WRT shall attempt to resolve in good faith any disagreement
they might have over whether a System merits acceptance. WRT shall promptly de-install and remove
from the Installation Site any System that Sealy has rejected and shall do so at no cost or
expense to Sealy. Further, Sealy shall be entitled to credit or offset the installment payments
it has made on any rejected System that has not been cured or remedied to Sealy’s satisfaction
against its payment obligations to WRT under this Agreement or the Master Service Agreement.
SECTION 4
LOSS OR DAMAGE; INSURANCE; RELOCATING SYSTEMS
4.1
Loss or Damage
. WRT shall assume and bear the risk of loss, theft, or damage to each
System from any and every cause whatsoever, whether or not covered by insurance, that occurs prior
to delivery of the System to its proper Installation Site. WRT shall not assume or bear any of
the risk of loss, theft, or damage to any System that occurs after the System has been delivered to
the proper Installation Site, except and to the extent caused by WRT while installing, testing,
repairing, or servicing the System under the Master Service Agreement.
4.2
Insurance
. WRT shall, at its expense, purchase and maintain goods in transit insurance,
including theft, loss, accidental damage, liability caused during transit and damages for any delay
in delivery, in such amounts and with such limits as Sealy may require (which is $1,000,000 per
occurrence and $2,000,000 in the aggregate), and naming Sealy as an additional insured. All such
insurance shall provide for thirty (30) days prior written notice to Sealy of cancellation,
restriction, or reduction of coverage. WRT agrees to obtain this insurance from an insurance
company which is at least “A” rated by A.M. Best.
4.3
Relocating Systems
. Upon written request by Sealy, WRT shall relocate a System from one
Installation Site to another, including de-installing, packing, loading, transporting, unloading,
unpacking, re-installing, testing and making the System operational at the new Installation Site.
For these services, WRT shall be entitled to a fee (the “Relocation Fee”) in the amount set forth
on Schedule 2.1. Sealy shall pay the Relocation Fee to WRT within thirty (30) days after the
System has been relocated and is operational at the new Installation Site.
SECTION 5
ANCILLARY AGREEMENTS
5.1
Ancillary Agreements
. Within 90 days after the execution of this Agreement, WRT and Sealy
shall execute and deliver (i) the Master Service Agreement, (ii) the Master Preferred Escrow
Agreement, (iii) the Escrow Agreement and (iv) the Backup Service
7
Agreement (the “Ancillary Agreements”); provided, that WRT and Sealy shall in any event execute and deliver the Escrow
Agreement after the completion of the Beta Test and prior to the purchase and sale of additional
Systems as contemplated by Section 1.3.
SECTION 6
PROPRIETARY PROTECTION OF WRT TECHNOLOGY
6.1
Reservation of Title
. All right, title and interest in and to WRT Technology, including
all modifications, enhancements and derivatives thereof, and all deliverables and know-how and
proprietary rights, including patents, patent applications and copyrights and trade secrets
relating to WRT Technology will remain with WRT or its suppliers, as applicable. It is intended
that Sealy have no ownership rights in any WRT Technology other than ownership of tangible media
in which WRT Technology is expressed, in connection with the operation of the Systems at the
Installation Sites. This Agreement does not effect any transfer of title in the WRT Technology,
or any materials furnished or produced in connection therewith, including drawings, diagrams,
specifications, input formats, source code, and user manuals. Sealy acknowledges that the WRT
Technology (and all materials furnished or produced in connection with the WRT Technology),
including, without limitation, the design, programming techniques, flow charts, source code, and
input data formats, contain trade secrets of WRT, entrusted by WRT to Sealy under this Agreement
for use only in the manner expressly permitted hereby. Sealy further acknowledges that WRT claims
and reserves all rights and benefits afforded under federal law in the WRT Technology as
copyrighted works.
6.2
Confidentiality
. This Agreement, the Ancillary Agreements, and the development efforts
of the parties are not deemed to establish a confidential relationship between the parties and all
information and documentation exchanged between them, other than Proprietary Information (as
hereinafter defined) will be received and treated by the receiving party on a non-confidential and
unrestricted basis, subject to restrictions imposed by patent, copyright and trade secret laws.
Subject to Section 6.4, each party agrees that for a period of three years from the termination or
expiration of this Agreement, without the prior written consent of the other party regarding a
specific contemplated transaction: (a) a party will not disclose Proprietary Information of the
other party; (b) except as provided herein, limit dissemination of the other party’s Proprietary
Information to only those of the receiving party’s officers, directors and employees who require
access thereto to perform their functions regarding the purposes of this Agreement and the
Ancillary Agreements; and (c) not to use Proprietary Information of the other party except for the
purposes of this Agreement and the Ancillary Agreements, which purposes shall include disclosure
to subcontractors and sources of supply. “Proprietary Information” as used herein means all or
any portion of: (i) WRT Technology; (ii) written, recorded, graphical or other information in
tangible form disclosed during the term of this Agreement, by one party to the other party, which is labeled
“proprietary,” “confidential,” or with similar legend denoting the proprietary interest therein of
the disclosing party; (iii) oral information disclosed by one party to the other party to the
extent identified as “proprietary” or “confidential” at the time of oral disclosure, and confirmed
in written or other tangible form within thirty (30) days following oral disclosure, or with
similar written evidence denoting the proprietary interest of the disclosing party; and (iv)
models, test software, beta versions and sample products identified at the time of disclosure as
being
8
proprietary to the disclosing party; provided, however, that Proprietary Information shall
not include any data or information that is: (A) in the possession of the receiving party prior
to its disclosure by the disclosing party and not subject to other restrictions on disclosure; (B)
independently developed by the receiving party; (C) publicly disclosed by the disclosing party;
(D) rightfully received by the receiving party from a third party without restrictions on
disclosure; (E) approved by unrestricted release or disclosure by the disclosing party; or (F)
produced or disclosed pursuant to applicable law, regulation, subpoena, or court order, provided
that the receiving party has given the disclosing party prompt notice of such request so that the
disclosing party has an opportunity to defend, limit or protect such production or disclosure.
Notwithstanding any other provision of this Agreement, WRT shall have the right to disclose
this Agreement and its terms to its investors and in connection with any filings and disclosures
required to be made under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, and any related state securities filings.
6.3
Restrictions on Use of WRT Technology
. Neither the WRT Technology nor any materials
provided to Sealy in connection with the WRT Technology may be copied, reprinted, transcribed, or
reproduced, in whole or in part, without the prior written consent of WRT. Sealy shall not in any
way modify or enhance the WRT Technology, or any materials furnished or produced in connection
therewith, without the prior written consent of WRT.
6.4
Duration of Duties and Return of WRT Technology.
The duties and obligations of Sealy
hereunder shall remain in full force and effect for so long as Sealy continues to control,
possess, or use any System. Sealy shall promptly return to WRT all tangible WRT Technology,
together with all materials furnished or produced in connection therewith by WRT, upon (1)
termination of Sealy’s license to use the WRT Technology or (2) abandonment or sale by Sealy of
all Systems or all Equipment used in all Systems.
SECTION 7
REPRESENTATIONS, WARRANTIES AND LIMITATIONS
7.1
WRT Technology
. WRT represents and warrants that it has the lawful right to grant the
license to Sealy of the WRT Technology as provided herein. WRT represents and warrants that the
WRT Technology will perform its intended functions as part of the Systems in accordance with the
specifications set forth on Exhibit A hereto. WRT further represents and warrants that when a
System is first installed at an Installation Site, the WRT Technology incorporated therein will be
free of all Corruptions. WRT does not represent or warrant that the WRT Technology will remain
free of Corruptions after being installed at an Installation Site or that the WRT Technology will
operate uninterrupted or error free.
7.2
Equipment
. WRT represents and warrants that the Equipment has been integrated with the
Systems delivered hereunder in accordance with the specifications set forth on Exhibit A hereto.
WRT does not represent or warrant that the Equipment will be free of manufacturing defects or that
the Equipment will be manufactured in accordance with the specifications provided by WRT to the
manufacturers or that the Equipment will operate
9
uninterrupted or error free; provided, however,
that this sentence shall not affect WRT’s obligations under the Master Service Agreement to
repair, service and maintain the Systems. Claims against the Equipment manufacturers under their
warranties will be handled pursuant to the Master Service Agreement.
7.3
Systems
. WRT represents and warrants that the Systems conform to the specifications set
forth on Exhibit A hereto. WRT does not represent or warrant that the Systems installed at the
Installation Sites will operate uninterrupted or error free; provided, however, that this sentence
shall not affect WRT’s obligations under the Master Service Agreement to repair, service, and
maintain the Systems.
7.4
Remedy for WRT Technology Defect or Non-Conformity
. WRT’s sole and exclusive
responsibility, and Sealy’s sole and exclusive remedy, for any defect or non-conformity in the WRT
Technology incorporated into a System shall be for WRT to promptly correct or replace, at no
additional charge to Sealy, the defective or non-conforming WRT Technology so that the System is
restored and fully operational; provided, however, that if WRT fails to correct or replace
defective or non-conforming WRT Technology in a System within 30 days after WRT receives notice of
same, Sealy may elect to have the defect or non-conformity corrected or replaced by a third party
contractor and the expense thereof may be credited or offset by Sealy against any payment
obligation is owes to WRT under this Agreement or the Ancillary Agreements.
7.5
Warranty Disclaimer
. EXCEPT AS SET FORTH IN THIS SECTION 7, WRT MAKES NO EXPRESS OR
IMPLIED REPRESENTATIONS OR WARRANTIES WITH RESPECT TO THE SYSTEMS, THE WRT TECHNOLOGY, AND THE
EQUIPMENT OR THEIR CONDITION, MERCHANTABILITY, FITNESS FOR ANY PARTICULAR PURPOSE OR USE BY SEALY.
WRT FURNISHES THE ABOVE WARRANTIES IN LIEU OF ALL OTHER WARRANTIES, EXPRESSED OR IMPLIED,
INCLUDING THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
7.6
Voiding of Representations and Warranties
. Any and all representations and warranties by
WRT with respect to the WRT Technology, the Equipment and Systems shall be void as to a claimed
defect or non-conformity caused by or related to any of the following actions taken without WRT’s
prior consent or approval: (1) any alterations or modifications made to any WRT Technology, the
Equipment or Systems by Sealy, it representatives or agents; (2) any use of the WRT Technology,
Equipment, or Systems other than in the operating environment specified in the technical
specifications provided to Sealy by WRT; or (3) the negligence or willful misconduct of Sealy or
any Retailer, or any of their respective representatives, agents or Customers.
SECTION 8
DEFAULT
8.1
Events of Default
. Any of the following shall constitute an “Event of Default” under
this Agreement:
10
8.1.1 WRT’s failure during the term of this Agreement to keep on deposit for the
benefit of Sealy the Deposit Materials as required by the Master Preferred Escrow Agreement;
8.1.2 WRT’s material breach of this Agreement and/or the Master Service Agreement that
has not been cured within fifteen (15) days after Sealy has provided WRT with written notice
thereof;
8.1.3 Sealy’s material breach of this Agreement and/or the Master Service Agreement
that has not been cured within fifteen (15) days after WRT has provided Sealy with written
notice thereof;
8.1.4 Every written notice under Subsections 8.1.2 and 8.1.3 shall identify the act or
omission that constitutes the breach and the particular provision(s) of the Agreement and/or
the Master Service Agreement that have been breached;
8.1.5 Any act or event whereby Sealy or WRT (a) is or becomes a party to any bankruptcy
or receivership proceeding or any similar action affecting the financial condition or
property of Sealy or WRT, as applicable, if such proceeding has not been dismissed within 30
days, or (b) makes a general assignment for the benefit of creditors.
8.2
Remedies
.
8.2.1 Upon the occurrence of an Event of Default by WRT, Sealy shall have the following
remedies, any one or more of which it may elect: (a) Sealy may cure or attempt to cure the
default, in which event WRT shall be liable for Sealy’s cure or attempted cure costs, and
Sealy shall be entitled to credit or offset said costs against any obligations that Sealy
owes to WRT; (b) Sealy may terminate this Agreement and/or the Master Service Agreement,
said termination to be effective upon Sealy’s providing written notice of termination to
WRT; (c) if Sealy terminates this Agreement and/or the Master Service Agreement, Sealy may
continue to use the WRT Technology in the Systems and may perform or have performed
maintenance, repair, updating and other services on the WRT Technology in the Systems; (d)
Sealy may pursue any damage or equitable claims it has against WRT under applicable law but
only through an arbitration proceeding in accordance with Section 13.3 below, subject to the
limitations set forth in Section 11.3 and Section 11.4 below; or (e) Sealy may file an
Objection with the Escrow Agent as set out above in Section 2.2; provided, that upon the
occurrence of an Event of Default by WRT, WRT shall be entitled to reject any purchase
orders placed by Sealy hereunder after such Event of Default, without liability of WRT to
Sealy, and Sealy shall be entitled to cancel any purchase orders placed by Sealy hereunder
after an Event of Default by WRT pursuant to Section 8.1.1 or 8.1.5, without liability to
Sealy.
8.2.2 Upon the occurrence of an Event of Default by Sealy, WRT shall have the following
remedies, any one or more of which it may elect: (a) WRT may cure or attempt to cure the
default, in which event Sealy shall be liable for WRT’s cure or attempted cure costs, and
WRT shall be entitled to credit or offset said costs against any obligations that WRT owes
to Sealy; (b) WRT may terminate this Agreement and/or the Master Service
11
Agreement, said termination to be effective upon WRT’s providing written notice of termination to Sealy; and
(c) WRT may pursue any damage or equitable claims it has against Sealy under applicable law
but only through an arbitration proceeding in accordance with Section 13.3 below.
8.3
Waiver
. No delay or failure of either party in exercising any right or remedy hereunder,
nor any partial exercise thereof, shall be deemed to constitute a waiver of any right or remedy
granted hereunder or at law or equity.
SECTION 9
JOINT DEVELOPMENT
WRT has developed a unique point of sale interactive technology with a number of potential
retail and educational applications. Sealy has expertise in developing and commercializing a wide
range of consumer mattresses and related products as well as marketing and distributing those
products to retailers throughout North America. WRT and Sealy will continue to collaborate to
develop innovative Sealy-based, WRT sales applications that will aim to enhance the shopping
experience of Customers while in the retail store. The parties agree to discuss and negotiate
ownership of jointly developed intellectual property.
SECTION 10
TERM OF AGREEMENT
The initial term of this Agreement shall commence upon the full execution of this Agreement
and the Ancillary Agreements, and shall continue for three (3) years, subject to automatic renewals
for additional one (1) year terms; provided, however, that this Agreement shall expire at the end
of the initial term or any renewal term if within sixty (60) days of the end of such term, either
party gives notice to the other that it desires to have this Agreement expire at the end of said
term.
SECTION 11
INDEMNIFICATION; LIMITATION OF LIABILITY
11.1
Indemnification by WRT
. WRT shall indemnify and hold Sealy harmless against all claims,
liabilities, losses, damages and causes of action based on: (a) any claim that WRT Technology,
when used by Sealy in accordance with this Agreement, has infringed any U.S. patent, copyright, or
other intellectual property rights; (b) an Event of Default by WRT; (c) any claim of death, bodily
injury or property damage as a result of WRT’s negligence or breach of its obligations under this
Agreement; or (d) any claim that WRT has failed to pay or otherwise has materially breached its obligations to a manufacturer or seller of Equipment
for the Systems or to a service provider to whom WRT has subcontracted one or more of its service
obligations under the Master Service Agreement.
11.2
Indemnification by Sealy
. Sealy shall indemnify and hold harmless WRT against all
claims, liabilities, losses, damages and causes of action based on: (a) a claim that
12
involves the sale or use of Sealy’s products purchased by any party utilizing a System; (b) an Event of Default
by Sealy; (c) any claim of death, bodily injury or property damage as a result of Sealy’s
negligence or breach of its obligations under this Agreement; or (d) any claim that content
developed or provided by Sealy has infringed any U.S. patent, copyright, or other intellectual
property rights.
11.3
Disclaimer of Liability
. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY (A)
SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES, INCLUDING LOSS OF PROFITS,
ARISING FROM OR RELATED TO A BREACH OF THIS AGREEMENT OR THE OPERATION OR USE OF SYSTEMS, THE
EQUIPMENT OR WRT TECHNOLOGY INCLUDING SUCH DAMAGES, WITHOUT LIMITATION, ARISING FROM LOSS OF DATA
OR PROGRAMMING, LOSS OF REVENUE OR PROFITS, FAILURE TO REALIZE SAVINGS OR OTHER BENEFITS, DAMAGE
TO EQUIPMENT, AND THIRD PARTY CLAIMS AGAINST ONE PARTY, EVEN IF THE OTHER PARTY HAS BEEN ADVISED
OF THE POSSIBILITY OF SUCH DAMAGES; OR (B) DAMAGES (REGARDLESS OF THEIR NATURE) FOR ANY DELAY OR
FAILURE BY WRT TO PERFORM ITS OBLIGATIONS UNDER THIS AGREEMENT DUE TO ANY CAUSE BEYOND WRT’S
REASONABLE CONTROL
11.4
Limitation of Liability
. NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, THE
DAMAGES THAT EITHER PARTY MAY RECOVER FROM THE OTHER FOR BREACH OF THIS AGREEMENT, WHETHER UNDER
CONTRACT LAW, TORT LAW, WARRANTY OR OTHERWISE, SHALL BE LIMITED TO DIRECT DAMAGES AND SHALL NOT
EXCEED THE SUM OF THE AMOUNTS ACTUALLY RECEIVED BY WRT AND THE AMOUNTS DUE AND OWING TO WRT UNDER
THIS AGREEMENT.
SECTION 12
OBLIGATIONS THAT SURVIVE TERMINATION
The parties recognize and agree that their obligations under Sections 2.3, 2.4, 4.1, 6, 7, 8,
11, 13.1, 13.2, 13.3, 13.4, 13.5, 13.6, 13.10, 13.11, 13.12, and 13.13 of this Agreement shall
survive the termination or expiration of this Agreement; provided, that the representations and
warranties set forth in Section 7 shall terminate upon the earlier to occur of (i) the date that is
three years following the installation of the applicable System, (ii) the termination or expiration
of the manufacturer’s Equipment warranty for the applicable System, and (iii) the termination or
expiration of the Master Service Agreement.
SECTION 13
GENERAL
13.1
Force Majeure
.
13.1.1 Neither party hereto shall be liable for failure to perform or delay in the
performance of any of its obligations hereunder, when such failure or delay is caused by
13
acts of God, the public enemy, war, acts of the elements, fires, riots, insurrection, civil
commotion, governmental acts and regulations or any other circumstance or condition beyond
the reasonable control of either party.
13.1.2 If the performance of either party is affected by any event of Force Majeure,
each party shall immediately notify in writing the other giving details of the event. The
performance of the party affected by such event of Force Majeure shall be suspended only for
as long as the event of Force Majeure and/or its effects on performance hereunder
continue(s), but the parties hereto shall consult and will use their commercially reasonable
efforts to find alternative means of accomplishing such performance which satisfies the
requirements of this Agreement. Immediately upon cessation of the event and its effects on
performance hereunder, the party affected by an event of Force Majeure shall notify the
other party in writing and shall take steps to recommence or continue the performance that
was suspended.
13.2
Relationship of Parties
. WRT and Sealy are independent contractors and no relationship
of joint venturer, franchisee/franchisor, or partner is created by this Agreement and/or the
Ancillary Agreements.
13.3
Governing Law
. This Agreement shall be governed by and construed in accordance with the
laws of the New York.
13.4
Junta
. Sealy and WRT shall each designate two representatives to serve throughout the
term of this Agreement as members of a four-person group (the “Junta”), the purpose of which is to
identify, consider, and resolve by consensus or majority vote any dispute, controversy or claim
arising out of or relating to this Agreement or the performance by the parties of its terms. The
Junta shall meet and conduct business regularly at least one meeting on at least an annual basis
and specially at such other times as any member of the Junta shall request in order to address a
specific matter or matters that he or she believes cannot reasonably be deferred until the next
regular meeting. All meetings of the Junta shall be held in person, alternating between Sealy’s
offices in North Carolina and WRT’s offices in Minnesota, unless a majority of the members of the
Junta decide to hold the meeting at another location or to permit one or more of the members to
participate in the meeting by telephone. All special meetings of the Junta may be conducted by
telephone or in person. Should any member of the Junta resign, the party that designated the
resigning member shall promptly designate a replacement. Each party shall bear the travel and
other expenses of its representatives on the Junta, and the parties shall split all other costs of
the Junta. No arbitration pursuant to Section 13.5 below may be commenced by either party until at
least one meeting on the subject matter of the dispute has been held with at least one member from
each Sealy and WRT from the Junta. All offers of settlement or compromise made during deliberations of the Junta shall
be subject to Federal Rule of Evidence 408 and similar state rules of evidence and shall not be
admissible in any formal arbitration.
13.5
Arbitration
. Any dispute, controversy or claim arising out of or relating to this
Agreement or the performance by the parties of its terms that is not resolved by consensus or
majority vote of the Junta in accordance with Section 13.4 may be resolved by binding arbitration
initiated by either party and held (i) if the arbitration is initiated by Sealy, in
14
Minneapolis, Minnesota, or (ii) if the arbitration is initiated by WRT, in Chicago, Illinois. The provisions
of Section 13.4 and this Section 13.5 shall be the exclusive dispute resolution procedures for any
and all matters arising out of or related to this Agreement pursuant to which any party is seeking
an award of money damage.
13.5.1 Unless the parties agree upon a single person to serve as the arbitrator, each
party shall appoint one person to serve as an arbitrator and the two arbitrators selected by
the parties shall select a third person to serve as an arbitrator and the three arbitrators
shall arbitrate the dispute, controversy or claim.
13.5.2 The arbitrator(s) may allow such discovery as the arbitrator(s) determine
appropriate under the circumstances and shall resolve the dispute as expeditiously as
practicable, and if reasonably practicable, within 120 days after the selection of the
arbitrator(s). Each party agrees to produce at its expense in Atlanta, Georgia, for
deposition (if allowed by the arbitrator(s)) and for testimony at the arbitration hearing
any witnesses within its control or in its employment if requested by the other party;
provided, however, that neither party shall be required to produce or pay the expenses of
more than five (5) witnesses. The arbitrator(s) shall give the parties written notice of
their award, with the reasons therefor set out, and shall have 30 days thereafter to
reconsider and modify such award if any party so requests within 10 days after the award.
13.5.3 The arbitrator(s) shall have authority to award relief under legal or equitable
principles. The parties shall equally split the arbitrator(s)’ fee and other costs of the
arbitration. However, each party shall be solely responsible for any attorneys fees such
party incurs pursuant to preparing for and participating in any such arbitration proceeding.
13.5.4 Judgment upon the award rendered by the arbitrator(s) may be entered by any
state or federal court of North Carolina or Minnesota or other court having in personam and
subject matter jurisdiction.
13.6
Export
. Each party shall cooperate fully so that prior to exporting or reexporting any
Systems, WRT Technology or Equipment the parties will fully comply with all then current laws of
the United States including, without limitation, regulations of the United States Office of Export
Administration and other applicable U.S. governmental agencies.
13.7
Entire Agreement; Amendments
. This Agreement, together with the Ancillary Agreements
and any and all exhibits, schedules and appendices attached hereto and thereto, constitutes the
entire agreement between the parties hereto with respect to the subject matter
hereof and supersedes any and all prior and contemporaneous representations, proposals,
agreements, negotiations, advertisements, statements, or understandings, whether oral or written.
No amendment to this Agreement shall be binding on either party unless such amendment is in
writing and executed by authorized representatives of both parties to this Agreement. No
provision of this Agreement shall be deemed waived, amended, discharged or modified orally or by
custom, usage or course of conduct unless such waiver, amendment or modification is in writing and
signed by an officer of each party hereto.
15
13.8
Assignment
. Sealy may not assign or transfer its interests, rights or obligations
under this Agreement by written agreement, merger, consolidation, operation of law, or otherwise,
without the prior written consent of WRT, and any attempt by Sealy to assign this Agreement
without WRT’s prior written consent shall be null and void; provided, however, that Sealy shall
have the right to assign this Agreement to a successor by merger or a purchaser of all or
substantially all of its assets, if said successor or purchaser, as the case may be, agrees in
writing at or before said merger or sale to be bound by this Agreement and the Ancillary
Agreements. WRT may not assign or transfer its interests, rights or obligations under this
Agreement by written agreement, merger, consolidation, operation of law, or otherwise, including
without limitation assignment or transfer to the Backup Provider pursuant to the Backup Services
Agreement,, without the prior written consent of Sealy, and any attempt by WRT to assign this
Agreement without Sealy’s prior written consent shall be null and void; provided, however, that
WRT shall have the right to assign this Agreement to a successor by merger or a purchaser of all
or substantially all of its assets, if said successor or purchaser, as the case may be, agrees in
writing at or before said merger or sale to be bound by this Agreement and the Ancillary
Agreements.
13.9
Compliance with Laws
. WRT and Sealy each shall comply with the provisions of all
applicable federal, state, county and local laws, ordinances, regulations and codes including, but
not limited to, WRT’s and Sealy’s identification and procurement of required permits,
certificates, approvals and inspections in WRT’s and Sealy’s performance of this Agreement.
13.10
Notice
. Every notice and other communication by a party that is required or permitted
under this Agreement shall be in writing and shall be effective when and only when it has been (a)
transmitted by facsimile to the other party at the facsimile number below
and also
(b)
delivered in person, mailed by registered or certified mail, return receipt requested, with proper
postage affixed, or delivered by Federal Express or other commercial overnight courier to the
other party at the address set forth below:
To Sealy
:
Sealy Corporation
Attn: Michael Q. Murray, Vice President — Legal Counsel and Assistant Secretary
One Office Parkway at Sealy Drive
Trinity, NC 27370
Facsimile: (336) 861-3640
To WRT:
Wireless Ronin Technologies, Inc.
Attn: John A. Witham
14700 Martin Drive
Eden Prairie, MN 55344
Facsimile: 952-974-7887
16
13.11
Corporate Authority
. The parties hereto represent and warrant that the persons signing
this Agreement on their behalf have been or will be duly authorized to do so prior to execution
and that this Agreement constitutes a valid and binding obligation of the parties hereto.
13.12
Construction of Agreement
. The parties hereto acknowledge and agree that this
Agreement in its final, executed form is the result of substantial negotiation and drafting by
both parties and that neither party should be favored in the construction, interpretation or
application of any provision or ambiguity of this Agreement.
13.13
Severability
. If any one or more of the provisions of this Agreement is for any reason
held invalid, illegal or unenforceable, the remaining provisions of this Agreement shall be
unimpaired.
13.14
Counterpart Originals
. This Agreement may have two or more counterpart originals
which, taken together, shall be considered one and the same document.
17
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly
authorized representatives as of the date first above written.
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WIRELESS RONIN TECHNOLOGIES, INC.
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By:
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/s/ Jeffrey C. Mack
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Name: Jeffrey C. Mack
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Title: CEO/President
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SEALY CORPORATION
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By:
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/s/ Michael Q. Murray
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Name: Michael Q. Murray
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Title: Vice President — Legal Counsel
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Assistant Secretary
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18
Exhibit A
Description of Systems
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•
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SealyTouch™ with Communications
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•
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32” NEC Touch Screen Monitor (NEC #NEC3210BK w/capacitive touch screen)
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•
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RoninCast EX Box (HP 7600 3GHZ) with wireless communications card
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•
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Speaker Unit and cabling
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•
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Sealy Stand — with POP Display Bracket
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•
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Ethernet Hub and Linksys Access Point
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•
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VGX and USB Cabling
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•
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SealyTouch™ without Communications
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•
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32” NEC Touch Screen Monitor (NEC #NEC3210BK w/capacitive touch screen)
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•
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RoninCast EX Box (HP 7600 3GHZ)
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•
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Speaker Unit and cabling
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Sealy Stand — with POP Display Bracket
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VGX and USB Cabling
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Schedule 1.2
Installation Sites for Beta Test
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Location Name
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Install Date
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Address
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City
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State
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Zip
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Mattress Firm
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10-Apr-06
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10012 West FM 1960 Bypass, Unit D
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Humble
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TX
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77338
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Mattress Firm
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10-Apr-06
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1340 Lake Woodlands Dr, Suite B
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Woodlands
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TX
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77380
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Mattress Firm
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10-Apr-06
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7105 FM 1960 West
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Houston
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TX
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77069
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Mattress Firm
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10-Apr-06
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5000 Westheimer #320
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Houston
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TX
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77056
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Mattress Firm
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10-Apr-06
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5815 Gulf Freeway
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Houston
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TX
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77023
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Slumberland
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11-Apr-06
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2121 Frontage Rd.
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Waite Park
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MN
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56387
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Macy’s
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11-Apr-06
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4125 Cleveland Ave,
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Ft. Myers
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FL
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33901
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Macy’s
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11-Apr-06
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600 South Gate Plaza,
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Sarasota
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FL
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34329
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Macy’s
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11-Apr-06
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298 Westshore Plaza,
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Tampa
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FL
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33609
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Macy’s
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11-Apr-06
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2201 E. Fowlr Ave,
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Tampa
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FL
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33612
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Macy’s
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11-Apr-06
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1800 9th Street N.,
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Naples
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FL
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34102
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Boston/Carsons
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12-Apr-06
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3232 LAKE AVE. SUITE 330
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Wilmette
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IL
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60091
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Boston/Carsons
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12-Apr-06
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830 E. GOLF RD.
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Shaumburg
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IL
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60173
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Boston/Carsons
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12-Apr-06
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2 YORKTOWN MALL
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Lombard
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IL
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60148
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Slumberland
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12-Apr-06
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7801 Xerxes Ave. S.
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Bloomington
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MN
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55431
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Boston/Carsons
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12-Apr-06
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404 S. Route 59, Suite 128
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Naperville
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IL
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60540
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Slumberland
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12-Apr-06
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1755 County Rd. D
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Maplewood
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MN
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55109
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American TV
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13-Apr-06
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5355 NW 86th St
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Johnston
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IA
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50131
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American TV
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13-Apr-06
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4750 Grande Market Drive
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Appleton
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WI
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54913
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Boston/Carsons
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13-Apr-06
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18615 W. BLUEMOUND RD.
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Brookfield
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WI
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53045
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American TV
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13-Apr-06
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W229N1400 Westwood Drive
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Waukesha
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WI
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53185
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American TV
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13-Apr-06
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2404 W. Beltline Hwy
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Madison
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WI
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53713
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Slumberland
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13-Apr-06
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1536 E. Army Post Rd
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Des Moines
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IA
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50320
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Schedule 3.1
Installation Site Preparation Procedures
SealyTouch™ Stand Unit Installation
Pre-Installation Checklist
For successful SealyTouch™ installation each retail location must adhere to the following for
implementation success:
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1.
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Six weeks prior to installation, Wireless Ronin Technologies, Inc must have
complete site information. This includes the following information:
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a.
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Retail chain name
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b.
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Shipping Address (Street, City, State, Zip Code).
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c.
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Store Phone Number
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d.
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Site Contact Information. (Mattress Department Manager)
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e.
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Site Contact’s Business and/or Cell Phone Number to Aid in
Receiving Shipment.
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2.
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Prior to installation, Wireless Ronin Technologies, Inc requests that the
following criteria and considerations have been fulfilled:
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a.
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Placement of the unit has been determined prior to our arrival
onsite.
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b.
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Power requirements for the unit have been met. Power
requirements are standard 110 volt dual plug 20-amp service at each location.
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c.
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Network requirements have been met. (Depending on retail
chain). Each DSL installation location will be required to have an operable
DSL or Cable Modem line for network communication.
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3.
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During Installation, Wireless Ronin Technologies, Inc requests the following
while the SealyTouch Installer is on-site.
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a.
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A clear area to assemble the SealyTouch™ unit away from high
traffic areas, loud noises, or an environment otherwise considered unsafe for
electronics. (Damp, wet, or areas affected by weather).
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b.
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A two hour time period for installation without interruptions.
(note: Most installations will take place in approximately 1 hour).
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4.
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Upon completion of the installation, Wireless Ronin Technologies, Inc requests
the retail location has an area to dispose of empty boxes, and packaging material. The
technician will be responsible for removing trash from the store provided an area is
available.
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