As filed with the Securities and Exchange Commission on
October 12, 2006
Registration
No.
333-136972
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO
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
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
OCTOBER 12, 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 $5.00 per share.
We intend to apply to list our common stock on The Nasdaq
Capital Market under the symbol RNIN.
The underwriter may also purchase up to 675,000 additional
shares of our common stock at the initial offering price, less
underwriting discounts and commissions within 45 days from
the date of this prospectus to cover over-allotments.
Investing in our common stock involves risks, including the
risk that we have had substantial losses since inception and
have received a report from our independent registered
accounting firm concerning our ability to continue as a going
concern, and as a result may be considered to be in an unsound
financial condition. See Risk Factors on
page 6.
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Underwriting
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Proceeds to
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Discounts and
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Wireless Ronin
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Price to Public
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Commissions
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Technologies
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Per Share
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$
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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 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.
Investment in our company is subject to certain limitations:
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Offers of securities to residents of the State of Alaska are
limited to investors who have either (i) annual gross
income of at least $65,000 and net worth of at least $65,000 or
(ii) net worth of at least $150,000.
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Offers of securities in the State of California are limited to
investors who have either (i) annual gross income of at
least $65,000 and a net worth of at least $250,000 or
(ii) net worth of at least $500,000. Additionally, an
investment in our company may not exceed 10% of the
investors net worth.
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Investment in our company by a resident of the State of North
Dakota may not exceed 10% of the net worth of the resident.
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Sales of securities in the State of Ohio are limited to
investors who have either (i) annual income of at least
$65,000 and a net worth of at least $250,000 or (ii) are
deemed to be an accredited investor as that term is defined by
Rule 501(a) of Regulation D under the Securities Act.
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Sales of securities in the State of Pennsylvania are limited to
investors who have either (i) annual gross income of at
least $65,000 and a net worth of at least $65,000 or
(ii) net worth of at least $150,000. Additionally, an
investment in our company in the State of Pennsylvania may not
exceed 10% of the investors net worth.
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Offers of securities to residents of the state of Washington are
limited to investors who have either (i) annual gross
income of at least $60,000 and net worth of at least $60,000 or
(ii) net worth of at least $225,000.
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In calculating net worth for each limitation above, an
investors home, home furnishings and automobiles are
excluded.
ii
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. Digital signage is an electronic
communication media viewed by a person on a video display. A
common example of digital signage is an electronic billboard
display in an arena or other public area. Through a suite of
software applications marketed as
RoninCast
®
,
we provide an enhanced enterprise-level content delivery system
that manages, schedules and delivers digital content over
wireless or wired networks. Additionally, RoninCasts
flexibility allows us to develop custom solutions for specific
customer applications.
RoninCast is a digital alternative to static signage, such as
cardboard, paper or other forms of temporary displays delivering
a static message, 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, digital signage utilizing 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. 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. Marys 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
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.
1
Marketing and Branding Initiatives.
Our marketing
initiatives convey our products distinguishing and
proprietary features wireless networking,
centralized content management and custom software solutions.
Leverage Strategic Partnerships and Reseller
Relationships.
We seek to establish and leverage
relationships with market participants to integrate
complementary technologies with our solutions. We believe that
strategic partnerships will enable access to emerging new
technologies and standards and increase our market presence.
Outsource Essential Operating Functions.
We intend to
outsource certain operating functions such as system
installation, integration and technical field support. In
addition, we contract with manufacturers for items such as
stands, mounts, custom enclosures, monitors and computer
hardware.
Custom Solutions.
Although RoninCast is an enterprise
solution designed for an array of standard applications, we also
develop custom solutions in which we retain rights derived from
our development activities.
New Product Development.
Developing new products and
technologies is critical to our success. We intend to integrate
our solutions with other enterprise systems such as inventory
control,
point-of
-sale
and database applications.
Our Competitive Challenges
We are an emerging growth company in the digital signage
industry. We are not currently a major factor in this industry
and our products have not yet gained wide customer acceptance.
Many of our current competitors in the digital signage industry
have far greater resources and name recognition. These factors,
among others discussed in the risk factor portion of this
prospectus, represent substantial obstacles to our achieving
customer acceptance and realizing our strategic plans.
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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874,368 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.
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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 underwriters over-allotment
option or underwriters 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 October 10, 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 $2,974,031 aggregate principal amount of additional
12% convertible bridge notes, together with warrants to purchase
594,806 shares of our common stock to purchasers of the
bridge notes, on the same terms as the notes and warrants issued
in the March 2006 offering.
4
Summary of Selected Financial Information
You should read the summary financial data below in conjunction
with our financial statements and the related notes and with
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus. The statements of operations data for the years
ended December 31, 2005 and 2004 and the balance sheet data
as of December 31, 2005 and 2004 are derived from our
audited financial statements that are included elsewhere in this
prospectus.
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Unaudited
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Years Ended December 31,
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Six Months Ended June 30,
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2005
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2004
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2006
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2005
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Statement of Operations Data:
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Sales
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$
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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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$
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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 20,000 shares
of common stock issued in connection with the exchange of
outstanding debt for our 12% convertible bridge notes; 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 may
not ever 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 and a shareholders
deficit of $8,880,956. 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 may
require additional financing in the future to support our
operations. For further information, please review the risk
factor Adequate funds for our operations may not be
available, requiring us to curtail our activities
significantly below.
We have formulated our business plans and strategies based on
certain assumptions regarding the acceptance of our business
model and the marketing of our products and services. However,
our assessments regarding market size, market share, or market
acceptance of our services or a variety of other factors may
prove incorrect. Our future success will depend upon many
factors, including factors which may be beyond our control or
which cannot be predicted at this time.
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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. Our prospective customers may
still not use our solutions for a number of other reasons,
including preference for static signage, unfamiliarity with our
technology or 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 RoninCasts 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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Adequate funds for our operations may not be available,
requiring us to curtail our activities significantly.
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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 for at least the next 12 months. 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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Difficulty in developing and maintaining relationships
with third party manufacturers, suppliers and service providers
could adversely affect our ability to deliver our products and
meet our customers demands.
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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
7
interrupted, or if our products experience quality problems, our
ability to meet customer demands would be harmed, causing a loss
of revenue and harm to our reputation. Increased costs,
transition difficulties and lead times involved in developing
additional or new third party relationships could adversely
affect our ability to deliver our products and meet our
customers demands and harm our business.
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Reductions in hardware costs will likely decrease hardware
pricing to our customers and would reduce our per
unit revenue.
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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,
reductions in such hardware costs could potentially reduce our
revenues.
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Because our future business model relies upon strategic
partners and resellers, we expect to face risks not faced by
companies with only internal sales forces.
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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
change. If we are unable to adapt our products and develop new
products to keep up with these rapid changes, we will 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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Our key personnel include:
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Jeffrey C. Mack, Chairman of the Board of Directors, President
and Chief Executive Officer;
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John A. Witham, Executive Vice President and Chief Financial
Officer;
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Christopher F. Ebbert, Executive Vice President and Chief
Technology Officer; and
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Scott W. Koller, Senior Vice President, Sales and Marketing.
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8
If we fail to retain our key personnel or to attract, retain and
motivate other qualified employees, our ability to maintain and
develop our business may be adversely affected. Our future
success depends significantly on the continued service of our
key technical, sales and senior management personnel and their
ability to execute our growth strategy. The loss of the services
of our key employees could harm our business. We may 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. If any such 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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9
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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 our security measures protecting our customers
intellectual property and other information fail, we may be
subject to claims based on such failure.
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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 result in claims based on such
failure, adversely affecting 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, and under Regulation D
under the Securities 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. Claims under such laws could require us to pay damages,
perform rescission offers, and/or pay 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 puts 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. If we do
not have sufficient resources to make these investments or are
unable to make the technological advances necessary to be
competitive, our competitive position will suffer. Increased
competition could result in price reductions, fewer customer
orders, reduced margins and loss of market share. Our failure to
compete successfully against current or future competitors could
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 managements 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 managements 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 managements 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, once our stock is listed, an active public
market for our common stock may not 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 Dealers 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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A market for our common stock may not develop and 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 one may not 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. 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.
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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.
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Based on shares outstanding as of October 10, 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
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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. 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 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,
Managements 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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|
|
|
|
our estimates of future expenses, revenue and profitability;
|
|
|
|
trends affecting our financial condition and results of
operations;
|
|
|
|
our ability to obtain customer orders;
|
|
|
|
the availability and terms of additional capital;
|
|
|
|
our ability to develop new products;
|
|
|
|
our dependence on key suppliers, manufacturers and strategic
partners;
|
|
|
|
industry trends and the competitive environment;
|
|
|
|
the impact of losing one or more senior executive or failing to
attract additional key personnel; and
|
|
|
|
other factors referenced in this prospectus, including those set
forth under the caption Risk Factors.
|
In some cases, you can identify forward-looking statements by
terms such as anticipates, believes,
could, estimates, expects,
intends, may, plans,
potential, predicts,
projects, should, will,
would, and similar expressions intended to identify
forward-looking statements. Forward-looking statements reflect
our current views with respect to future events, are based on
assumptions and are subject to risks and uncertainties. We
discuss many of these risks in this prospectus in greater detail
under the heading Risk Factors. Given these
uncertainties, you should not attribute undue certainty to these
forward-looking statements. Also, forward-looking statements
represent our estimates and assumptions only as of the date of
this prospectus. You should read this prospectus and the
documents that we reference in this prospectus and have filed as
exhibits to the registration statement, of which this prospectus
is a part, completely and with the understanding that our actual
future results may be materially different from what we expect.
Except as required by law, we assume no obligation to update any
forward-looking statements publicly, or to update the reasons
actual results could differ materially from those anticipated in
any forward-looking statements, even if new information becomes
available in the future.
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. We originally used the proceeds from the debt
being repaid to fund our sales and development efforts,
including our general and administrative expenses, as well as
repaying prior debt obligations.
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. We do not intend to raise any additional funds
from other sources outside this offering.
The offering is being conducted principally to provide
sufficient funding for the development of our business and to
meet maturing debt obligations. We plan to pay certain debt and
accrued interest totaling $7.6 million, provide funding of $7.2
million to continue the development and sales efforts for our
products and services and make payments in the aggregate amount
of $80,000 in management compensation due upon the completion of
this offering. We expect to apply any remaining cash to future
capital expenditures or other investments as they may be
identified, considered and approved. At present, no such
purchases or other opportunities have been identified.
The following table sets forth the approximate dollar amounts
and percentages of the estimated net proceeds, the purposes for
which the proceeds are to be used and the order in which the
proceeds will be used for the purposes stated:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
|
|
Proceeds
|
|
|
|
|
|
|
|
|
|
Net proceeds
|
|
|
|
|
|
$
|
17,038,000
|
|
|
|
100.0
|
%
|
Repayment of Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt and Accrued Interest
|
|
|
|
|
|
|
(7,551,665
|
)
|
|
|
(44.3
|
%)
|
Inventory and Product Delivery Costs
|
|
|
2,559,721
|
|
|
|
|
|
|
|
15.0
|
%
|
Sales & Marketing
|
|
|
2,930,408
|
|
|
|
|
|
|
|
17.2
|
%
|
Research and Development
|
|
|
1,409,663
|
|
|
|
|
|
|
|
8.3
|
%
|
Maintain Facilities, including Lease Obligations
|
|
|
290,700
|
|
|
|
|
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,190,492
|
)
|
|
|
(42.2
|
%)
|
Management Compensation
|
|
|
|
|
|
|
(80,000
|
)
|
|
|
(0.5
|
%)
|
Working Capital
|
|
|
|
|
|
$
|
2,215,843
|
|
|
|
13.0
|
%
|
|
|
|
|
|
|
|
|
|
|
16
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.
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.
17
CAPITALIZATION
The following table sets forth our capitalization as of
June 30, 2006, on an actual basis and as:
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|
|
|
adjusted for the issuance of $2,974,031 principal amount of
12% convertible bridge notes (net of debt discount of
$1,858,742, including the exchange of $618,923 of debt then
outstanding and the re-payment of debt outstanding of $181,900
anticipated before the initial public offering), the issuance of
8,333 shares of common stock (par value $83) to the Spirit
Lake Tribe in lieu of cash interest payable under its
convertible debenture, and the issuance of 20,000 shares of
common stock (par value $200) issued in connection with new debt
with valuation recorded as debt discount; and
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|
|
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
|
|
|
|
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
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
|
|
|
|
|
June 30, 2006
|
|
|
|
|
Pro Forma As
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of notes payable(1)
|
|
$
|
2,852,259
|
|
|
$
|
3,166,725
|
|
|
$
|
0
|
(2)
|
Current portion of notes payable-related parties(1)
|
|
|
4,036,990
|
|
|
|
4,036,990
|
|
|
|
|
|
Current portion of capital lease obligation
|
|
|
44,701
|
|
|
|
44,701
|
|
|
|
44,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,933,950
|
|
|
|
7,248,416
|
|
|
|
44,701
|
|
Notes payable, net of current portion
|
|
|
824,414
|
|
|
|
824,414
|
|
|
|
0
|
(2)
|
Notes payable, net of current portion-related parties
|
|
|
697,300
|
|
|
|
697,300
|
|
|
|
|
|
Capital lease obligations, net of current portion
|
|
|
105,687
|
|
|
|
105,687
|
|
|
|
105,687
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undesignated preferred stock; authorized 16,666,666 shares;
no shares issued and outstanding
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
Common stock, $0.01 par value; authorized
50,000,000 shares; issued and outstanding
846,035 shares
|
|
|
8,460
|
|
|
|
8,743
|
|
|
|
71,993
|
(3)
|
|
Additional paid-in capital
|
|
|
13,914,854
|
|
|
|
15,848,313
|
|
|
|
41,391,493
|
|
|
Accumulated deficit
|
|
|
(22,804,270
|
)
|
|
|
(22,985,347
|
)
|
|
|
(30,642,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
(8,880,956
|
)
|
|
|
(7,128,291
|
)
|
|
|
10,820,844
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
(7,253,555
|
)
|
|
$
|
(5,500,890
|
)
|
|
$
|
10,926,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes debt discount resulting from a reduction in the face
value of the notes by the value of equity compensation
associated with the notes. Actual debt discount for the current
portion of notes payable and current portion of notes
payable-related parties was $1,156,736 and $178,804,
respectively. As adjusted to reflect the financings
after June 30, 2006, such amounts were $2,950,177 and
$178,804 respectively.
|
18
|
|
(2)
|
In addition to our 12% convertible bridge notes issued in
March, July and August 2006 and the convertible debenture issued
to the Spirit Lake Tribe, we have issued an aggregate of
$2,029,973 principal amount of convertible notes, convertible at
the option of the holders thereof into shares of our common
stock. Except for the notes issued in March, July and August
2006, all of these convertible debentures and notes will be
automatically converted into shares of our common stock
simultaneously with the closing of this offering. The $3,000,000
convertible debenture we issued to the Spirit Lake Tribe is
convertible into 30% of our issued and outstanding shares of
common stock determined on a fully diluted basis, without giving
effect to shares issued and issuable in this offering including
shares issuable upon exercise of the warrant to the underwriter
of this offering or upon conversion of $5,749,031 principal
amount of 12% convertible bridge notes and warrants issued
in March, July and August 2006.
|
|
|
|
With respect to the remaining $2,029,973 principal amount of
convertible notes, such conversion will be effected at a per
share amount equal to the lower of: (i) $9.00 or
(ii) 80% of the price per share in this offering. If a
closing of this offering has not occurred on or before
November 30, 2006, the convertible securities will be
convertible into shares of our common stock in accordance with
their current terms. Accrued interest will be payable to the
holders in cash (unless converted into shares of common stock at
the option of the holder) at the closing of this offering, or on
November 30, 2006, if a closing of our public offering has
not occurred on or before that date. Outstanding principal
payment obligations on the convertible securities which, by
their present terms, have matured or will mature prior to
November 30, 2006, have, with the exception of $200,000
principal amount of notes which were exchanged for the August
2006 12% convertible bridge notes, been extended to
November 30, 2006, subject to the mandatory and optional
conversion features described above. In addition, holders of the
convertible securities will be entitled to have the shares
issuable upon conversion of their convertible securities (the
Registerable Securities) included in a registration
statement which must be filed by us within 60 days
following the closing of this offering. The Registerable
Securities are subject to a
180-day
(12 months
in the case Registerable Securities held by our directors and
officers)
lock-up
effective upon the closing of this offering.
|
|
|
(3)
|
Assumes no exercise of: (i) warrants to purchase up to an
aggregate of 1,010,942 shares of our common stock granted
to directors, executive officers, key associates, holders of
convertible securities and other investors, (ii) options to
purchase 493,333 shares of our common stock issued to certain of
our directors and executive officers subject to shareholder
approval, (iii) warrants to
purchase 1,149,806 shares of our common stock held by
the purchasers of the 12% convertible bridge notes we
issued in March, July and August 2006, or (iv) warrants
issued to the underwriter of this offering to purchase up to an
aggregate of 450,000 shares of our common stock.
|
19
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,
and when considering options and warrants exercisable for
662,300 shares of our common stock at less than $4.50 per share,
our adjusted pro forma net tangible book value as of
June 30, 2006 would have been $10,820,844, or
$1.38 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 $2.88 per share (or 69% of
the initial offering price per share) to new investors. The
following table illustrates this per share dilution:
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$
|
4.50
|
|
Net tangible book value per share at June 30, 2006
|
|
$
|
(11.03
|
)
|
|
|
|
|
Pro forma increase in net tangible book value per share as of
June 30, 2006
|
|
|
1.94
|
|
|
|
|
|
Decrease in tangible book value caused by warrants and options
exercisable at $4.50 per share or less
|
|
|
(0.12
|
)
|
|
|
|
|
Pro forma increase in tangible book value attributable to
conversion of convertible notes and convertible debentures
|
|
|
6.79
|
|
|
|
|
|
Increase in pro forma net tangible book value per share
attributable to new investors
|
|
|
3.80
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share after
this offering
|
|
|
|
|
|
|
1.38
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
3.12
|
|
|
|
|
|
|
|
|
The following table sets forth, on a pro forma basis as of
June 30, 2006, the total number of shares of common stock
issued by us, the total consideration paid to us and the average
price per share paid by existing investors and by new investors
purchasing shares in this offering. We have assumed an initial
public offering price of $4.50 per share and have not
deducted estimated underwriting discounts and commissions and
offering expenses payable by us. The data gives effect to the
conversion into common stock of all outstanding shares of our
convertible debentures and notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
|
|
|
|
|
|
|
|
|
Average Price Per
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Existing investors(1)
|
|
|
2,699,329
|
|
|
|
37
|
%
|
|
$
|
22,637,320
|
|
|
|
53
|
%
|
|
$
|
8.39
|
|
New investors
|
|
|
4,500,000
|
|
|
|
63
|
%
|
|
|
20,250,000
|
|
|
|
47
|
%
|
|
$
|
4.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,199,329
|
|
|
|
100
|
%
|
|
$
|
42,887,320
|
|
|
|
100
|
%
|
|
$
|
5.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes holders of $5,029,973 of convertible debentures and
notes that will convert into 1,824,961 share of common
stock upon the closing of this offering.
|
20
SELECTED FINANCIAL DATA
You should read the summary financial data below in conjunction
with our financial statements and the related notes and with
Managements 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and 20,000 shares of
common stock issued in connection with the exchange of
outstanding debt for our 12% convertible bridge notes;
|
|
|
|
|
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.
|
21
MANAGEMENTS 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
22
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 customers 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.
23
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.
24
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
25
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 which the
related services are received.
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. We
expect continued increases as our sales organization continues
to mature and our products gain market acceptance.
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
26
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,
as we continue to mature.
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. As long as we continue to fund our operating
losses with debt, interest expense will increase.
Liquidity
For the first six months of 2006, we funded our operations
primarily through the issuance of additional debt, as well as
through increased sales. In the first six months of 2006, we
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 for at least the next
12 months.
Operating Activities
We do not generate positive cash flow at the current level of
sales and gross profit. For the first six months of 2006 we 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
27
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.
Cost of sales for 2005 includes inventory write downs of
$390,247 compared to none in 2004. Without these write downs,
cost of sales was reduced by $479,413. The reduction was due to
a reduction in sales from 2004 to 2005. Also, the margin of cost
of goods sold as compared to sales recorded improved as we have
formed stricter pricing policies which should continue, in
addition to higher software and content sales. Our software and
content sales do not have any costs in the cost of sales
category since our current changes to our software product are
for continued development and update.
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
($126,725) 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.
Our auditors, in their opinion, have highlighted that we have
suffered recurring loses and negative cash flow from operating
activities and require additional working capital to support
future operations. This raises substantial doubt about our
ability to continue as a going concern. It is our short-term
intention to
28
raise the cash we require through the proposed initial public
offering, after which we believe we can continue to develop our
sales to a level at which we will become cash flow positive.
Based on our current expense levels, we anticipate that the net
proceeds from this offering will be adequate to fund our
operations for the next 12 months.
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 enterprises 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
29
in connection with its report on our financial statements. We
did not consult with Virchow, Krause & Company, LLP on
any financial or accounting matters in the period before its
appointment.
Subsequent Financing Events
Effective January 1, 2006, we entered into a termination
agreement with AllOver Media (AOM), pursuant to which we
terminated our strategic partnership agreement with AOM. To
satisfy our remaining obligations under the agreement, we
executed a promissory note in the principal amount of $384,525
in favor of AOM. The note accrues interest at the rate of
10% per annum. Final payment under the note is due in
December 2006.
Our $3,000,000 convertible debenture issued to the Spirit Lake
Tribe is presently convertible into 30 percent of our
issued and outstanding shares of common stock determined on a
fully diluted basis. In February 2006 and again in July 2006,
the debenture was amended to provide for automatic conversion,
simultaneous with the closing of this offering, into
30 percent of our issued and outstanding shares on a fully
diluted basis, but determined without giving effect to shares
issued and issuable: (i) in this offering, including shares
issuable upon exercise of the warrant to be issued to the
underwriter, or (ii) upon conversion of $5,749,031,
aggregate principal amount of 12% convertible bridge notes
and exercise of warrants to purchase 1,149,806 shares of our
common stock issued to the purchasers of such notes. We estimate
that we will issue 1,261,081 shares of common stock to the
Spirit Lake Tribe at this closing of this offering upon
conversion of this convertible debenture.
As of January 31, 2006, we had outstanding $2,229,973
convertible notes. In February and March 2006, we entered into
agreements with the holders of our outstanding convertible
notes, other than a holder of a $200,000 convertible note, to
provide, among other things, that the outstanding principal
balances (plus, at the option of each holder, interest accrued
through the closing of this offering) will be automatically
converted into shares of our common stock simultaneously with
the closing of this offering at a per share amount equal to the
lower of: (i) $9.00 or (ii) 80% of the initial public
offering price. The remaining $200,000 convertible note was
exchanged for a 12% convertible bridge note and warrants in the
August 2006 offering discussed immediately below.
In private placement offerings completed in March, July and
August 2006, we sold to accredited investors our
12% convertible bridge notes in aggregate principal amount
of $5,749,031, together with warrants to purchase an aggregate
of 1,149,806 shares of our common stock. The notes mature
on the earlier of 30 days following completion of this
offering or March 10, 2007. The notes are convertible and
the warrants exercisable by the holders thereof at
$7.20 per share or, following this offering, at 80% of the
initial public offering price per share.
30
BUSINESS
History
Wireless Ronin Technologies, Inc. is a Minnesota corporation
incorporated on March 23, 2000. Originally we sought to apply
our proprietary wireless technology in the information device
space and focused on an industrial strength personal
digital assistant. We recognized that we lacked the financial
and operating strength to compete in the general market and
instead targeted niche markets, but we were unable to gain
market acceptance for this type of application. Beginning in the
fall of 2002, we designed and developed
RoninCast
®
.
The first release of RoninCast was in the spring of 2003.
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, RoninCasts flexibility
allows us to develop custom solutions for specific customer
applications.
Business Strategy
Our objective is to be the premier provider of dynamic digital
signage systems to customers in our targeted retail and service
markets. To achieve this objective, we intend to pursue the
following strategies:
Focus on Vertical Markets.
Our direct sales force focuses
primarily on the following vertical market segments: retail,
hospitality, specialized services and public spaces. To attract
and influence customers, these markets continue to seek new
mediums that provide greater flexibility and visual impact in
displaying messages. We focus in markets where we believe our
solution offers the greatest advantages in functionality,
implementation and deployment over traditional media advertising.
Marketing and Branding Initiatives.
Our key marketing
objective is to establish RoninCast as an industry standard in
the dynamic digital signage industry. Our marketing initiatives
convey the distinguishing and proprietary features of our
products, including wireless networking, centralized content
management and custom software solutions.
Our strategy has included establishing a strong presence at
national trade shows, such as NADA (National Auto Dealership
Association), Globalshop and Digital Retailing. Both Globalshop
and Digital Retailing focus on retail markets and have attendees
from many countries. These trade shows provide an ideal venue
for product introduction and engaging with key retailers. We
continuously evaluate our strategies to determine which trade
show presence best serves our marketing objectives.
Leverage Strategic Partnerships and Reseller
Relationships.
We seek to develop and leverage relationships
with market participants to integrate complementary technologies
with our solutions. We believe that strategic partnerships will
enable access to emerging new technologies and standards and
increase our market presence. These strategic partners obtain
the rights, in some cases exclusively, to sell and distribute
the RoninCast technology in a defined market segment by
purchasing a license for that particular vertical market. We
plan to continue developing and expanding reseller relationships
with firms or individuals who possess specific market positions
or industry knowledge.
Outsource Essential Operating Functions.
We outsource
certain support functions such as system installation,
fixturing, integration and technical field support. In addition,
we purchase from manufacturers such items as stands, mounts,
custom enclosures, monitors and computer hardware. We believe
that our expertise in managing complex outsourcing relationships
improves the efficiency of our digital signage solutions.
Custom Solutions.
Although RoninCast is an enterprise
solution designed for an array of standard applications, we also
develop custom systems that meet the specific business needs of
our customers. As
31
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
Ages 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. Frost & Sullivan 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 iSuppli, the digital signage
market is expected to surpass $2 billion in overall revenue
by 2009.
Frost & Sullivan also estimates 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
signage.
Our review of the current market indicates that
most retailers go through a tedious process to produce
traditional static point-of-purchase 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. According to an article appearing in The Retail
Bulletin (February 19, 2006), it is estimated 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.
We believe that a majority of brand buying decisions are made
while in the retail store. Research presented at the 2005
Digital Signage Business conference shows that digital signage
receives up to 10 times the eye contact of static signage and,
depending upon the market, may significantly increase sales for
new products that are digitally advertised. A study by Arbitron,
Inc. found that 29% of the consumers who have seen video in a
store say they bought a product they were not planning on buying
after seeing the product featured on the in-store video display.
We believe that our dynamic digital signage solutions provide a
valuable alternative to advertisers currently using static
signage.
|
|
|
|
|
Changes in the advertising landscape.
With the
introduction of personal video recorders (PVRs) and satellite
radio, we believe retailers, manufacturers and advertising firms
are struggling with ways to present their marketing message
effectively. A recent article in Infomercial Media states that
PVRs (TiVo, for example) will be in over 30% of US homes within
the next five years. Although viewers are watching 20-30% more
television, they are using PVR technology to bypass as much as
70% of the commercials. In addition, satellite radio continues
to grow in popularity with limited
|
32
|
|
|
|
|
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
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, deliver and
update 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. An example of this is the
interactive, touch screen kiosk we designed for shoppers at
Sealy mattress stores. 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.
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.
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 players 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
|
33
|
|
|
|
|
health of the network before issues occur. In addition, display
monitors can be turned on or off remotely.
|
|
|
|
Ease and Speed of Message Delivery.
Changing market
developments or events can be quickly incorporated into our
system. The end-user may create entire content distributions on
a daily, weekly or monthly basis. Furthermore, the system allows
the end-user to interject quick daily updates to feature new or
overstocked items, and then automatically return to the previous
content schedule.
|
|
|
|
Scalability/ Mobility.
By utilizing a wireless network,
the RoninCast system provides the ability to easily move signage
or scale-up to incorporate additional digital
signage. Displays can be moved to or from any location under a
wireless network. Customers are able to accommodate
adds/moves/changes within their environment without rewiring
network connections. And when the customer wants to add
additional digital signage, only electrical power needs to be
supplied at the new location.
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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 generate revenues through system sales, license fees and
separate service fees for consulting, training, content
development and implementation services, and for ongoing
customer support and maintenance. We currently market and sell
our software and service solutions through our direct sales
force and value added resellers.
We market to companies that deploy
point-of
-purchase
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 point-of-purchase 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
customers 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
34
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 point-of-purchase compliance. Once static
signage is created, printed and shipped, retailers face the
challenge to get individual stores to install the
point-of-purchase advertising in the proper place and at the
proper time, and to remove it at the right time. In some
instances, retailers see less than 50% compliance on an
individual store level.
Hospitality.
Hospitality venues offer an array of
opportunities for digital signage. For example, in the gaming
and casino environment, entertainers and events often require
signage to be developed, installed and removed on a frequent
basis. RoninCast allows for centralized control and scheduling
of all content, which provides a more efficient and manageable
system. Additionally, casino and gaming facilities offer a
variety of non-gaming services, such as spas, restaurants,
shopping malls and convention halls. These facilities attempt to
raise guest awareness of multiple products and services in an
attractive and informative manner. Casinos may also have a need
for off-site advertising, such as at airports or arenas, to
drive traffic from these venues to their facilities. RoninCast
with mobile communications enables the use of in-house signage
to be used for off-site applications.
Restaurants also offer opportunities for digital signage. Indoor
advertising in restrooms, curbside pick-up, waiting areas and
menu boards are areas in which digital signage can be
incorporated. For example, most walk through restaurants use
backlit fixed menu systems. These are time consuming and
expensive to change, leaving the restaurant with a menu fare
that is fixed for a period of time. Additionally, restaurants
offer different menus at different times of the day making the
menu cluttered and difficult for the customer to follow.
RoninCast allows for real-time scheduling of menu
board items throughout the day with prices and selections
changing based on a user-defined schedule.
Specialized Services.
The healthcare and banking
industries both have specific customer waiting areas and are
information-driven. By incorporating digital signage programs,
these institutions can promote products and disseminate
information more effectively. In addition, digital signage can
reduce perceived wait times by engaging patients or customers
with relevant marketing messages and information.
Public Spaces.
Public spaces such as convention centers,
transportation locations and arenas present opportunities for
digital signage applications. Convention centers welcome
millions of visitors per year for a variety of events. Airports
offer another opportunity for digital signage. These potential
customers using RoninCast, along with mobile communications, can
control messages remotely from their central headquarters
without requiring an onsite communication network.
Our Customers
Historically, our business has been dependent upon a few
customers. Our goal is to broaden or diversify our customer
base. We have installed digital signage systems in over 200
locations since the introduction of RoninCast in January 2003.
Of the customers listed below, only Sealy in the first six
months of 2006 and Canterbury Park in the first six months of
2005, exceeded ten percent of that periods sales. The
percentages were 32% and 16%, respectively.
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
Sealys exclusive vendor for these systems during the
three-year term of the agreement, assuming Sealys
satisfaction of minimum order requirements described below, and
contingent upon the successful conclusion of Sealys 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
35
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 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 Americas leading
paint suppliers, including industry pace setters
Hirshfields 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.
36
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.
37
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.
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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
39
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
RoninCasts 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
customers 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.
Our Suppliers
Our principal suppliers include the following:
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Bailiwick Data Systems, Inc. and National Service Center
(installation services);
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Samsung America, LG Electronics USA, NEC Display Solutions and
Richardson Electronics Ltd. (monitors);
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Hewlett Packard Company, Dell USA, LP (computers); and
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Chief Manufacturing, Inc. (fixtures).
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On September 14, 2006, we entered into a hardware
partnership agreement with Richardson Electronics Ltd. that
establishes pricing and procedures for our purchase of products,
services and support that will allow us to focus on our core
business of providing digital signage solutions. Although the
agreement doesnt require us to purchase minimum levels of
products, services and support from Richardson or require
Richardson to provide us with minimum levels of products,
services or support, we expect that Richardson will be the
primary supplier of our touch screen systems, provide consulting
services regarding hardware selection and provide support for
our installations. The term of this agreement is one year and
will automatically renew for one-year terms unless terminated by
either party on thirty days written notice.
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. No other payments have
been
40
required from Marshall to date. We have received reimbursement
of commissions and expenses from Marshall of approximately
$107,000, with approximately $19,000 in unbilled expenses.
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.
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 MediaTiles patent
application. MediaTiles 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.
41
Pursuant to the terms of the Sale and Purchase Agreement, dated
July 11, 2006, between us and Sealy Corporation, we have granted
to Sealy a limited, nontransferable, non-royalty bearing license
to use our technology used in the SealyTouch System.
Sealys rights in our technology pursuant to this license
are expressly limited to Sealys use at specified locations
in connection with the SealyTouch Systems we have sold to Sealy.
We have agreed not to furnish our technology to any other
bedding manufacturer or retailer in the United States, Canada or
Mexico, provided Sealy meets certain minimum order requirements.
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. We
are not currently a major factor in the digital signage industry
as our products have not yet gained wide customer acceptance.
Although we have no access to detailed information regarding our
competitors respective operations, some or all of these entities
may have significantly greater financial, technical and
marketing resources than we do and may be able to respond more
rapidly than we can to new or emerging technologies or changes
in customer requirements. We also compete with standard
advertising media, including print, television and billboards.
Regulation
We are subject to regulation by various federal and state
governmental agencies. Such regulation includes radio frequency
emission regulatory activities of the U.S. Federal
Communications Commission, the consumer protection laws of the
U.S. Federal Trade Commission, product safety regulatory
activities of the U.S. Consumer Product Safety Commission,
and environmental regulation in areas in which we conduct
business. Some of the hardware components which we supply to
customers may contain hazardous or regulated substances, such as
lead. A number of U.S. states have adopted or are
considering takeback bills which address the
disposal of electronic waste, including CRT style and flat panel
monitors and computers. Electronic waste legislation is
developing. Some of the bills passed or under consideration may
impose on us, or on our customers or suppliers, requirements for
disposal of systems we sell and the payment of additional fees
to pay costs of disposal and recycling. As of this date, we have
not determined that such legislation or proposed legislation
will have a material adverse impact on our business.
Employees
We refer to our employees as associates. We currently have
29 full-time associates employed in programming,
networking, designing, training, sales/marketing and
administration areas.
Properties
We conduct our principal operations in a leased facility located
at 14700 Martin Drive, Eden Prairie, 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.
42
MANAGEMENT
The following table sets forth the name, age and positions of
each of our directors and executive officers as of
October 10,, 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
|
|
|
Executive Vice President and Chief Technology Officer
|
John A. Witham
|
|
|
55
|
|
|
Executive Vice President and Chief Financial Officer
|
Stephen E. Jacobs
|
|
|
58
|
|
|
Executive Vice President and Secretary
|
Scott W. Koller
|
|
|
44
|
|
|
Senior Vice President, Sales and Marketing
|
Henry B. May
|
|
|
51
|
|
|
Senior Vice President, Operations
|
Dr. William F. Schnell
|
|
|
50
|
|
|
Director
|
Carl B. Walking Eagle Sr.
|
|
|
64
|
|
|
Director
|
Gregory T. Barnum
|
|
|
51
|
|
|
Director
|
Thomas J. Moudry
|
|
|
46
|
|
|
Director
|
Brett A. Shockley
|
|
|
47
|
|
|
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.
43
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 such
companys President and Executive Creative Director from
June 2005 to December 2005 and such companys 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. In addition to complying with the independent director
requirements of the Nasdaq Stock Market, we will maintain at
least two directors who satisfy the independence requirements
set forth in the North American Securities Administrators
Association Statement of Policy Regarding Corporate Securities
Definitions.
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
44
board of directors in the management of our business and affairs
when the board of directors is not in session.
Audit Committee.
Our audit committee consists of
Messrs. Moudry, Barnum and Shockley. The functions of the
audit committee include oversight of the integrity of our
financial statements, our compliance with legal and regulatory
requirements, the performance, qualifications and independence
of our independent auditors and the performance of our internal
audit function. Our audit committee is directly responsible,
subject to shareholder ratification, for the appointment,
retention, compensation, evaluation, termination and oversight
of the work of any independent auditor engaged for the purpose
of preparing or issuing an audit report or related work. The
purpose and responsibilities of our audit committee are set
forth in the Audit Committee Charter approved by our board of
directors on February 27, 2006. All of the members of the
audit committee are independent as defined by
applicable regulations of the Securities and Exchange Commission
and Nasdaq. Our board of directors has determined that Gregory
T. Barnum qualifies as an audit committee financial
expert as defined by applicable regulations of the
Securities and Exchange Commission.
Compensation Committee.
Our compensation committee
consists of Messrs. Barnum and Moudry and Dr. Schnell.
The functions of the compensation committee include reviewing
and approving the goals and objectives relevant to compensation
of our Chief Executive Officer, evaluating the Chief Executive
Officers performance in light of those goals and
objectives and determining and approving the Chief Executive
Officers 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.
45
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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|
|
|
|
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|
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Long-Term
|
|
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|
Annual Compensation
|
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|
Compensation
|
|
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|
|
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|
|
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|
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|
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Awards
|
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Securities
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|
|
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Other Annual
|
|
|
Underlying
|
|
|
All Other
|
|
Name and Principal Position
|
|
Salary($)
|
|
|
Bonus($)
|
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|
Compensation($)
|
|
|
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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40,000
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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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6,667
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Executive Vice President
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|
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Christopher F. Ebbert
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129,615
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12,000
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76,308
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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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Senior Vice President Sales and Marketing
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(1)
|
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.
|
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)
|
|
|
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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|
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6,944
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3.11
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%
|
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9.00
|
|
|
|
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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|
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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
|
|
|
|
4/22/2010
|
|
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13,889
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|
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5.05
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%
|
|
|
6.75
|
|
|
|
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
|
|
|
|
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
|
(2)
|
|
|
3/31/2011
|
|
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
|
|
|
|
|
2,778
|
|
|
|
1.01
|
%
|
|
|
11.25
|
|
|
|
10/10/2010
|
|
46
|
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|
(1)
|
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 were granted subject to
shareholder approval, are immediately exercisable.
|
|
|
(2)
|
These warrants were subsequently repriced to $9.00 per
share as described under Certain Relationships and Related
Party Transactions Warrant Repricing below.
|
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
The following table sets forth certain information concerning
unexercised warrants held by the named executive officers as of
December 31, 2005. No warrants were exercised by the named
executive officers during the fiscal year ended
December 31, 2005.
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Number of Securities
|
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|
Value of Unexercised
|
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|
|
Underlying Unexercised
|
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|
In-The-Money
|
|
|
|
Options at
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Options at
|
|
|
|
Fiscal Year-End(#)(1)
|
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Fiscal Year-End($)(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
|
|
|
$
|
159,099
|
|
|
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|
|
Michael J. Hopkins
|
|
|
16,167
|
|
|
|
0
|
|
|
$
|
46,699
|
|
|
|
|
|
Christopher F. Ebbert
|
|
|
77,061
|
|
|
|
15,000
|
|
|
$
|
294,995
|
|
|
|
|
|
Scott W. Koller
|
|
|
11,573
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents shares of common stock issuable upon exercise of
outstanding warrants.
|
|
(2)
|
There was no public trading market for our common stock as of
December 31, 2005. Accordingly, the value of the
unexercised
in-the
-money warrants
listed above have been calculated on the basis of the assumed
initial public offering price of $4.50 per share, less the
applicable exercise price per share, multiplied by the number of
shares underlying the warrants.
|
Executive Employment Agreements
We entered into Executive Employment Agreements with our current
officers, Messrs. Mack, Witham, Jacobs, Ebbert and Koller,
effective as of April 1, 2006 and Mr. May, effective
as of June 19, 2006. These officers will continue to be
employed in their current positions. Except for our agreement
with Mr. Jacobs, the agreements are all for an initial term
of two years, and will be automatically extended for successive
one year periods unless either we or the officer elects not to
extend employment. Mr. Mays 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
officers 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 officers employment is involuntarily
terminated or the officer leaves for
47
good reason within 12 months following the change of
control, we would pay the officer the severance payments
described above, except that Mr. Withams 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. We will not grant non-statutory options under
the 2006 Equity Incentive Plan with an exercise price of less
than 85% of the fair market value of the Companys common
stock on the date of grant.
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
directors 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.
48
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:
|
|
|
Michael Frank
|
|
10,000 shares
|
Carl B. Walking Eagle Sr.
|
|
40,000 shares
|
Barry W. Butzow
|
|
10,000 shares
|
Gregory T. Barnum
|
|
40,000 shares
|
Thomas J. Moudry
|
|
40,000 shares
|
Brett A. Shockley
|
|
40,000 shares
|
William F. Schnell
|
|
40,000 shares
|
Susan K. Haugerud
|
|
10,000 shares
|
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.
49
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We believe that the terms of each of the following related party
transactions were no less favorable to us than could have been
obtained from an unaffiliated third party. With respect to each
of the following transactions, the transaction was ratified by a
majority of our independent directors who did not have an
interest in the transactions or who had access, at our expense,
to our or independent legal counsel.
We will enter into all future material affiliated transactions
and loans with officers, directors and significant shareholders
on terms that are no less favorable to us than those that can be
obtained from unaffiliated, independent third parties. All
future material affiliated transactions and loans, and any
forgiveness of loans, must be approved by a majority of our
independent directors who do not have an interest in the
transactions and who had access, at our expense, to our
independent legal counsel.
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,
50
in whole or in part, prior to the maturity date. In connection
with the note, we issued to Mr. Jacobs 5,555 shares of
our common stock and a five-year warrant to
purchase 8,333 shares of our common stock at
$9.00 per share.
On October 31, 2003, we sold a convertible note in the
principal amount of $25,000 to Steve Meyer, a beneficial owner
of more than 5% of our outstanding common stock. The note
matures on May 28, 2009. Interest accrues at the rate of
10% per annum and is payable quarterly. Under the terms of
the note, Mr. Meyer had the option, prior to the maturity
date, to convert the principal amount, in whole or in part, into
shares of our capital stock at a price of $1.00 per share
or the then-current offering price, whichever is less. We have
the option to call this note, in whole or in part, prior to the
maturity date. In connection with this note, we issued to
Mr. Meyer 1,388 shares of our common stock and a
five-year warrant to purchase 2,083 shares of our common
stock at $9.00 per share.
On November 24, 2003, we sold a convertible note in the
principal amount of $100,000 to Mr. Dorsey. The note
matures on June 26, 2009. Interest accrues at the rate of
10% per annum and is payable quarterly. Under the terms of
the note, Mr. Dorsey had the option, prior to the maturity
date, to convert the principal amount, in whole or in part, into
shares of our capital stock at a price of $1.00 per share
or the offering price, whichever is less. We have the option to
call this note, in whole or in part, prior to the maturity date.
In connection with this note, we issued to Mr. Dorsey
5,555 shares of our common stock and a five-year warrant to
purchase 8,333 shares of our common stock at $9.00 per
share.
On March 12, 2004, we sold a convertible note in the
principal amount of $100,000 to Mr. Meyer. The maturity
date of the note was extended to September 30, 2006.
Interest accrues at the rate of 10% per annum and is
payable at maturity. Under the terms of the note, Mr. Meyer
had the option, prior to the maturity date, to convert the
principal amount, in whole or in part, into shares of our
capital stock at a price of $1.00 per share or the
then-current offering price, whichever is less. We have the
option to call this note, in whole or in part, prior to the
maturity date. In connection with this note, we issued to
Mr. Meyer 5,555 shares of our common stock and a
five-year warrant to purchase 8,333 shares of our common
stock at $9.00 per share.
On July 22, 2004, we sold a convertible note in the
principal amount of $200,000 to R.A. Stinski, a beneficial owner
of more than 5% of our outstanding common stock. The note
matured on July 22, 2006. In connection with this note, we
issued to Mr. Stinski 11,111 shares of our common
stock and a five-year warrant to
purchase 16,667 shares of our common stock at
$13.50 per share. On August 25, 2006, Mr. Stinski
exchanged this promissory note for $237,933.37 of our 12%
convertible bridge notes together with warrants to purchase
47,586 shares of our common stock. In connection with
this exchange, we also issued to Mr. Stinski
20,000 shares of our common stock.
On December 22, 2004, we sold a convertible note in the
principal amount of $33,550 to Christopher F. Ebbert, an officer
of our company. The note matures on July 22, 2010 and is
convertible into shares of our capital stock at a price of
$1.00 per share or the then-current offering price,
whichever is less. Interest accrues at the rate of 10% per
annum and is due quarterly. In connection with the note, we
issued to Mr. Ebbert a five-year warrant to
purchase 3,727 shares of our common stock at
$9.00 per share.
A description of a $3,000,000 convertible debenture issued to
the Spirit Lake Tribe is described below under Description
of Capital Stock Convertible Debt Spirit
Lake Tribe. Mr. Carl B. Walking Eagle, Sr., a
director, is an officer and member of the Spirit Lake Tribal
Council.
Non-Convertible Notes
On January 30, 2004, we entered into a note in the
principal amount of $26,700 with Mr. Butzow. As of
May 12, 2006, the balance of this non-convertible note was
$13,750 and it matures on December 31, 2009. Interest
accrues at the rate of 10% per annum and is due quarterly.
In connection with this note, we issued to Mr. Butzow a
five-year warrant to purchase 2,967 shares of our common
stock at $9.00 per share.
51
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. Butzows personal guarantee, we issued to
Mr. Butzow a five-year warrant to
purchase 16,667 shares of our common stock at
$13.50 per share. These warrants were subsequently repriced
to $9.00 per share as described under Warrant
Repricing below.
On December 8, 2004, we entered into a
36-month
lease
agreement with Winmark Capital Corporation for office equipment
and furniture. As of June 30, 2006, we had drawn $122,983
on a $150,000 lease line of credit. Our payment obligations
under the lease are approximately $4,200 per month. This
lease has been personally guaranteed by Stephen Jacobs, one of
our officers. In consideration for his personal guarantee, we
issued to Mr. Jacobs a five-year warrant to
purchase 8,333 shares of our common stock at
$13.50 per share. These warrants were subsequently repriced
to $9.00 per share as described under Warrant
Repricing below.
On November 10, 2005, we entered into a business loan
agreement with Signature Bank that provides us with a variable
rate revolving line of credit of $200,000. As of May 12,
2006, we have borrowed $200,000 from Signature Bank under this
line. The amounts borrowed are due on November 10, 2006,
and our obligations are personally guaranteed by
Mr. Butzow. Interest accrues at a variable interest rate of
1.5 percentage points over the U.S. Bank index rate
and is payable the first day of each month. We may prepay all or
a portion of the loan early without penalty. We executed a
promissory note and made customary representations, warranties,
and covenants in connection with this loan. In consideration for
his personal guarantee, we issued to Mr. Butzow a five-year
warrant to purchase 5,556 shares of our common stock at
$9.00 per share.
On May 23, 2005, we entered into a factoring agreement with
Stephen E. Jacobs and Barry W. Butzow, whereby we agreed to
assign and sell to Mr. Jacobs and Mr. Butzow certain
of our receivables. They may limit their purchases to
receivables arising from sales to any one customer or a portion
of the net amount of the receivable. We have granted a
continuing security interest in all receivables purchased under
the agreement. This agreement expires on May 23, 2007, but
automatically renews from
year-to
-year unless
terminated by us upon at least 60 days prior written
notice. Mr. Jacobs and Mr. Butzow have the right to
terminate the agreement at any time by giving us 60 days
prior written notice. We pay interest equal to two times the
prime rate of interest published by Signature Bank in effect at
the time of purchase. The interest rate applies to all
receivables purchased under the agreement. The interest amount
is based on the receivable balance until collected and is
subject to change based on changes in the prime rate. In
consideration for this agreement, we have agreed to issue to
Mr. Jacobs and Mr. Butzow five-year warrants to
purchase shares of our common stock at $9.00 per share in
an amount equal to 100% of the net dollar amount of receivables
sold to Mr. Jacobs and Mr. Butzow. As of May 12,
2006, we had issued warrants to purchase an aggregate of
39,491 shares at $9.00 per share relating to this
agreement. We refer you to Note A(10) of our financials for
a discussion of our accounting treatment.
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
52
Mr. Butzow a five-year warrant to
purchase 25,000 shares of our common stock at
$6.30 per share. On March 27, 2006, we extended the
maturity date of this note for 90 days. As additional
consideration, we issued to Mr. Butzow a six-year warrant
to purchase 25,000 shares of our common stock at
$6.30 per share. On June 27, 2006, Mr. Butzow
agreed to extend the maturity date of his promissory note to
July 31, 2006 and to exchange the promissory note for our
12% convertible bridge notes in the principal amount of the
promissory note, plus accrued interest, together with warrants
to purchase shares of our common stock. In consideration for the
extension, we agreed to issue to Mr. Butzow
22,666 shares of our common stock. On July 27, 2006,
we issued to Mr. Butzow 12% convertible bridge notes in the
principal amount of $315,625 and warrants to purchase 63,125
shares of our common stock in exchange for this promissory note.
On December 27, 2005, we sold a
90-day
promissory note
to Mr. Norqual in the principal amount of $300,000. The
interest rate of the note is 10% per year. As additional
consideration, we issued to Mr. Norqual a five year warrant
to purchase 25,000 shares of our common stock at
$6.30 per share. On March 27, 2006, we extended the
maturity date of this note for 90 days. As additional
consideration, we issued to Mr. Norqual a six-year warrant
to purchase 25,000 shares of our common stock at
$6.30 per share. On June 27, 2006, Mr. Norqual agreed
to extend the maturity date of his promissory note to
July 31, 2006 and to exchange the promissory note for our
12% convertible bridge notes in the principal amount of the
promissory note, plus accrued interest, together with warrants
to purchase our common stock. In consideration for the
extension, we agreed to issue to Mr. Norqual 22,666 shares of
our common stock. On July 27, 2006, we issued to
Mr. Norqual 12% convertible bridge notes in the principal
amount of $315,472 and warrants to purchase 63,094 shares
of our common stock in exchange for this promissory note.
On January 12, 2006, we entered into a business loan
agreement with Signature Bank that provides us with a variable
rate revolving line of credit of $250,000. As of May 12,
2006, we had borrowed $250,000 from under this line. The amounts
borrowed are due on January 12, 2007, and our obligations
are personally guaranteed by Michael J. Hopkins, one of our
officers and a former director. Interest accrues at a variable
interest rate of 1.5 percentage points over the
U.S. Bank index rate and is payable the first day of each
month. We may prepay all or a portion of the loan early without
penalty. We executed a promissory note and made customary
representations, warranties, and covenants in connection with
this loan. In consideration for his personal guarantee, we
issued to Mr. Hopkins a five-year warrant to
purchase 6,944 shares of our common stock at
$9.00 per share.
Warrant Repricing
In February 2006, our board of directors determined that $9.00
more properly reflected the market value of our common stock and
approved a repricing, from $13.50 per share to
$9.00 per share, of the following warrants:
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|
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|
Warrant
|
|
Name
|
|
Shares
|
|
|
|
|
|
Jeffrey C. Mack
|
|
|
21,667
|
|
Stephen E. Jacobs
|
|
|
23,333
|
|
Christopher F. Ebbert
|
|
|
15,000
|
|
Marshall Group
|
|
|
4,444
|
|
Barry W. Butzow
|
|
|
16,667
|
|
Michael Frank
|
|
|
22,222
|
|
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.
53
Debt Conversion Agreements
Each of the individual holders of our outstanding convertible
notes, with the exception of our 12% convertible bridge notes,
has entered into an agreement to provide, among other things,
that the outstanding principal balances (plus, at the option of
each holder, interest accrued through the closing of this
offering) will be automatically converted into shares of our
common stock simultaneously with the closing of this offering.
Such conversion will be effected at a per share amount equal to
the lower of: (i) $9.00 or (ii) 80% of the offering
price. If this offering has not closed on or before
November 30, 2006, the convertible notes will be
convertible into shares of our common stock in accordance with
their current terms. Accrued interest will be payable to the
holders in cash (unless converted into shares of common stock at
the option of the holder) at the closing of this offering, or on
November 30, 2006 if a closing of this offering has not
occurred on or before that date. Outstanding principal payment
obligations which, by their present terms, have matured or will
mature prior to November 30, 2006, will be extended to
November 30, 2006, subject to the mandatory and optional
conversion features described above. In addition, holders of the
convertible notes will be entitled to have the shares issuable
upon conversion included in a registration statement to be filed
within 60 days following the closing of this offering. The
holders of an aggregate principal amount of $532,923 of
short-term notes have entered into similar debt conversion
agreements. Persons entering into debt conversion agreements
have agreed to refrain from selling any shares of our common
stock for specified periods following our initial public
offering as described below under Shares Eligible For
Future Sale Lock-Up Agreements.
A $3,000,000 convertible debenture issued to the Spirit
Lake Tribe is presently convertible into 30% of our issued and
outstanding shares of common stock determined on a fully diluted
basis. The debenture has been amended to provide for automatic
conversion of the debenture, simultaneous with the closing of
this offering, into 30% of our issued and outstanding shares on
a fully diluted basis, but determined without giving effect to
shares issued and issuable: (i) in this offering, including
shares issuable upon exercise of the warrant to be issued to the
underwriter, or (ii) upon conversion of our outstanding
12% convertible notes and exercise of our outstanding
warrants issued to the purchasers of such notes.
54
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the
beneficial ownership of our common stock as of October 10,
2006, and after the sale of shares in this offering, by:
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|
|
|
|
each person who is known by us to own beneficially more than 5%
of our common stock;
|
|
|
|
each current director;
|
|
|
|
each of our executive officers; and
|
|
|
|
all directors and executive officers as a group.
|
Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission. In computing
percentage ownership of each person, shares of common stock
subject to options, warrants, rights, conversion privileges or
similar obligations held by that person that are currently
exercisable or convertible, or exercisable or convertible within
60 days of October 10, 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 shareholders name. Percentage of
ownership after this offering is based on 874,368 shares of
our common stock outstanding on October 10, 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
|
|
|
Beneficial Ownership
|
|
|
|
Prior to Offering
|
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After Offering(1)
|
|
|
|
|
|
|
|
|
Name and Address of Beneficial Owner
|
|
Shares
|
|
|
Percent
|
|
|
Shares
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
Jeffrey C. Mack
|
|
|
53,689
|
(2)
|
|
|
5.8
|
%
|
|
|
53,689
|
|
|
|
*
|
%
|
Michael J. Hopkins
|
|
|
33,944
|
(3)
|
|
|
3.9
|
%
|
|
|
33,944
|
|
|
|
*
|
%
|
Christopher F. Ebbert
|
|
|
121,052
|
(4)
|
|
|
12.8
|
%
|
|
|
121,052
|
|
|
|
1.7
|
%
|
John A. Witham
|
|
|
22,222
|
(5)
|
|
|
2.5
|
%
|
|
|
22,222
|
|
|
|
*
|
%
|
Stephen E. Jacobs
|
|
|
133,933
|
(6)
|
|
|
13.5
|
%
|
|
|
133,933
|
|
|
|
1.8
|
%
|
Scott W. Koller
|
|
|
11,574
|
(7)
|
|
|
1.3
|
%
|
|
|
11,574
|
|
|
|
*
|
%
|
Henry B. May
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. William F. Schnell
|
|
|
74,769
|
(8)
|
|
|
8.3
|
%
|
|
|
74,769
|
|
|
|
1.0
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%
|
Carl B. Walking Eagle Sr.
|
|
|
1,305,525
|
(9)
|
|
|
61.4
|
%
|
|
|
1,305,525
|
|
|
|
18.1
|
%
|
Gregory T. Barnum
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|
|
|
(10)
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|
|
|
|
|
|
|
|
|
|
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Thomas J. Moudry
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|
|
(10)
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|
|
|
|
|
|
|
|
|
|
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Brett A. Shockley
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|
|
|
(10)
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|
|
|
|
|
|
|
|
|
|
|
|
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5% Beneficial Owners
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|
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|
|
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|
|
|
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|
|
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Spirit Lake Tribe
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1,305,525
|
(11)
|
|
|
61.4
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%
|
|
|
1,305,525
|
|
|
|
18.1
|
%
|
Barry W. Butzow
|
|
|
467,850
|
(12)
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|
|
36.6
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%
|
|
|
467,850
|
|
|
|
6.3
|
%
|
Jack Norqual
|
|
|
311,428
|
(13)
|
|
|
27.7
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%
|
|
|
311,428
|
|
|
|
4.3
|
%
|
Galtere International
|
|
|
104,245
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(14)
|
|
|
11.0
|
%
|
|
|
104,245
|
|
|
|
1.4
|
%
|
R.A. Stinski
|
|
|
197,957
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(15)
|
|
|
19.3
|
%
|
|
|
197,957
|
|
|
|
2.7
|
%
|
Jill Jensen-Behr
|
|
|
72,729
|
(16)
|
|
|
8.1
|
%
|
|
|
72,729
|
|
|
|
1.0
|
%
|
Stephen P. Meyer
|
|
|
66,806
|
(17)
|
|
|
7.3
|
%
|
|
|
66,806
|
|
|
|
*
|
%
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial Ownership
|
|
|
Beneficial Ownership
|
|
|
|
Prior to Offering
|
|
|
After Offering(1)
|
|
|
|
|
|
|
|
|
Name and Address of Beneficial Owner
|
|
Shares
|
|
|
Percent
|
|
|
Shares
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Donald Dorsey
|
|
|
163,148
|
(18)
|
|
|
16.0
|
%
|
|
|
163,148
|
|
|
|
2.3
|
%
|
SHAG LLC
|
|
|
64,352
|
(19)
|
|
|
7.2
|
%
|
|
|
64,352
|
|
|
|
*
|
%
|
All executive officers and directors as a
group (11 persons)
|
|
|
1,756,708
|
(20)(21)
|
|
|
71.0
|
%
|
|
|
1,756,708
|
|
|
|
23.4
|
%
|
|
|
*
|
Less than 1%
|
|
(1)
|
Shares beneficially owned reflect a one-for-six reverse stock
split of our common stock effected in April 2006 and a
two-for-three reverse stock split effected in August 2006.
|
|
(2)
|
Represents shares issuable upon exercise of warrants. Excludes
55,555 shares issuable upon exercise of options granted subject
to shareholder approval.
|
|
(3)
|
Includes 16,167 shares issuable upon exercise of warrants.
|
|
(4)
|
Includes 6,213 shares issuable upon conversion of
convertible notes and 77,061 shares issuable upon exercise
of warrants.
|
|
(5)
|
Represents shares issuable upon exercise of warrants. Excludes
22,222 shares issuable upon exercise of options granted
subject to shareholder approval.
|
|
(6)
|
Includes 18,519 shares issuable upon conversion of
convertible notes and 109,859 shares issuable upon exercise
of warrants.
|
|
(7)
|
Represents shares issuable upon exercise of warrants.
|
|
(8)
|
Includes 2,083 shares issuable upon exercise of warrants
and 64,352 shares beneficially owned by SHAG LLC, which
includes 11,111 shares issuable upon exercise of warrants
and 19,907 shares issuable upon conversion of convertible
notes. Dr. Schnell is an owner of SHAG LLC and may be
deemed to beneficially own the shares held by SHAG LLC.
Dr. Schnell disclaims beneficial ownership of the shares
held by SHAG LLC except to the extent of his pecuniary interest
in such shares. Excludes 13,333 shares issuable upon exercise of
options granted subject to shareholder approval.
|
|
(9)
|
Includes 44,444 shares owned by Spirit Lake Tribe and
1,261,081 shares issuable upon conversion of the
convertible debenture owned by Spirit Lake Tribe. Carl B.
Walking Eagle Sr. is the Vice Chairman of the Spirit Lake Tribal
Council and may be deemed to beneficially own the shares held by
Spirit Lake Tribe. Mr. Walking Eagle disclaims beneficial
ownership of the shares owned by Spirit Lake Tribe except to the
extent of his pecuniary interest in such shares. Excludes 13,333
shares issuable upon exercise of options granted subject to
shareholder approval.
|
|
|
(10)
|
Excludes 13,333 shares issuable upon exercise of options
granted subject to shareholder approval.
|
|
(11)
|
Includes 1,261,081 shares issuable upon conversion of a
convertible debenture.
|
|
(12)
|
Includes 203,083 shares issuable upon conversion of
convertible notes and 208,767 shares issuable upon exercise
of warrants. Excludes 3,333 shares issuable upon exercise of
options granted subject to shareholder approval.
|
|
(13)
|
Includes 133,970 shares issuable upon conversion of
convertible notes and 124,236 shares issuable upon exercise
of warrants.
|
|
(14)
|
Includes 55,634 shares issuable upon conversion of
convertible notes and 29,167 shares issuable upon exercise
of warrants.
|
|
(15)
|
Includes 66,093 shares issuable upon conversion of
convertible notes and 92,698 shares issuable upon exercise
of warrants.
|
|
(16)
|
Includes 29,029 shares issuable upon exercise of warrants.
|
|
(17)
|
Includes 23,148 shares issuable upon conversion of
convertible notes and 31,157 shares issuable upon exercise
of warrants.
|
56
|
|
(18)
|
Includes 92,593 shares issuable upon conversion of
convertible notes and 59,444 shares issuable upon exercise
of warrants.
|
|
(19)
|
Includes 19,907 shares issuable upon conversion of a
promissory note and 11,111 shares issuable upon exercise of
warrants.
|
|
(20)
|
Includes 1,305,720 shares issuable upon conversion of
convertible debentures and notes and 303,766 shares
issuable upon exercise of warrants beneficially owned by our
executive officers and directors.
|
|
(21)
|
Includes 1,380,294 shares beneficially owned by entities
related to two of our directors. These directors may be deemed
to beneficially own the shares held by such entities, which
include 1,280,988 shares issuable upon conversion of
convertible debentures and notes and 13,194 shares issuable
upon exercise of warrants.
|
57
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 October 10, 2006, we had
874,368 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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|
|
|
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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|
|
|
are entitled to one vote per share on all matters which
shareholders may vote on at all meetings of shareholders.
|
All shares of our common stock now outstanding are fully paid
and nonassessable and the shares of common stock to be issued
upon completion of this offering will be fully paid and
nonassessable. There are no redemption, sinking fund, conversion
or preemptive rights with respect to the shares of our common
stock.
The holders of our common stock do not have cumulative voting
rights. Subject to the rights of any future series of preferred
stock, the holders of a plurality of outstanding shares voting
for the election of our directors can elect all of the directors
to be elected, if they so choose. In such event, the holders of
the remaining shares will not be able to elect any of our
directors.
Undesignated Preferred Stock
Under governing Minnesota law and our amended and restated
articles of incorporation, no action by our shareholders is
necessary, and only action of our board of directors is
required, to authorize the issuance of up to
16,666,666 shares of undesignated preferred stock. Our
board of directors is empowered to establish, and to designate
the name of, each class or series of the undesignated preferred
shares and to set the terms of such shares, including terms with
respect to redemption, sinking fund, dividend, liquidation,
preemptive, conversion and voting rights and preferences.
Accordingly, our board of directors, without shareholder
approval, may issue preferred stock having rights, preferences,
privileges or restrictions, including voting rights, that may be
greater than the rights of holders of common stock. It is not
possible to state the actual effect of the issuance of any
shares of preferred stock upon the rights of holders of our
common stock until our board of directors determines the
specific rights of the holders of such preferred stock. However,
the effects might include, among other things, restricting
dividends on our common stock, diluting the voting power of our
common stock, impairing the liquidation rights of our common
stock and delaying or preventing a change in control of our
company without further action by our shareholders. Our board of
directors has no present plans to issue any shares of preferred
stock.
We will not issue preferred stock to our officers, directors,
significant shareholders or others deemed to be
promoters under the North American Securities
Administrators Association Statement of Policy Regarding
Corporate Securities Definitions unless we offer it to all other
existing shareholders or to new shareholders on the same terms,
or the issuance is approved by a majority of our independent
directors who do not have an interest in the issuance and who
have access, at our expense, to our counsel or independent
counsel.
58
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.
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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|
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Spirit Lake Tribe Debenture
|
On January 5, 2005, in connection with a Convertible
Debenture Purchase Agreement, we sold $2,000,000 aggregate
principal amount of 10% fixed rate five-year Convertible
Debentures to the Spirit Lake Tribe, a federally recognized
Native American Indian Tribe. On September 7, 2005, Spirit
Lake Tribe purchased a $1,000,000 principal amount convertible
debenture from us and amended the terms of the $2,000,000
principal amount convertible debenture that it purchased from us
on January 5, 2005.
The debenture may be prepaid in whole at any time upon
60 days notice at our option. If we prepay a portion of the
debenture on or before January 5, 2008, we must pay a
penalty equal to 20% of the principal amount prepaid, and we
must pay a penalty equal to 10% of the principal amount prepaid
if we prepay after January 5, 2008. Interest on the unpaid
principal balance of the debenture will accrue at the rate of
10% per annum and is payable in quarterly installments in
arrears commencing on March 31, 2005. If not sooner
converted, the entire unpaid balance of principal and all
accrued and unpaid interest will be due and payable on
December 31, 2009.
The debenture is convertible in whole (or in part) at any time
prior to its payment at the option of the holder into fully paid
and nonassessable shares of our common stock constituting 30% of
our outstanding common stock calculated on a fully-diluted basis
as of the date of conversion. The fully-diluted outstanding
shares of common stock includes the aggregate, as of the date of
conversion, of:
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|
|
|
|
the total outstanding shares of common stock;
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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
|
|
|
|
all shares of common stock that can be acquired pursuant to
warrants or options issued to employees pursuant to existing
employment contracts.
|
In each of February and July of 2006, the debenture was amended
to provide for automatic conversion of the conversion
simultaneous with the closing of this offering into 30% of our
issued and outstanding shares on a fully diluted basis, but
determined without giving effect to shares issued and issuable
to the investors or the underwriter in this offering and shares
issued or issuable upon conversion of our outstanding
12% convertible bridge notes or exercise of warrants issued
to investors in March, July and August of 2006. Spirit Lake
Tribe also agreed to waive our default under the debenture
purchase agreement, based on our failure to pay all principal
and interest due on our outstanding convertible debt securities,
until November 30, 2006.
59
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.
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.
Restrictions on Issuance of Options and Warrants
As required by certain state securities regulators, we have
agreed that during the one-year period commencing on the
effective date of the offering, we will not grant options or
warrants to officers, directors, 5% shareholders, employees or
affiliates exceeding 20% of the shares of our common stock
outstanding upon completion of this offering.
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
60
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 persons last purchase of our shares in
a takeover offer unless all shareholders are given the
opportunity to dispose of their shares to the person on terms
that are substantially equivalent to those in the earlier
takeover offer. This provision does not apply if the acquisition
is approved by a committee of disinterested directors before any
shares are acquired in the takeover offer.
Section 302A.553, subdivision 3, of the Minnesota
Business Corporation Act prohibits us from purchasing any voting
shares owned for less than two years from a holder of more than
5% of our outstanding voting stock for more than the market
value of the shares. Exceptions to this provision are provided
if the share purchase is approved by a majority of our
shareholders or if we make a repurchase offer of equal or
greater value to all shareholders.
Our articles of incorporation provide that the holders of our
common stock do not have cumulative voting rights. For the
shareholders to call a special meeting, our bylaws require that
at least 10% of the voting power must join in the request. Our
articles of incorporation give our board of directors the power
to issue any or all of the shares of undesignated preferred
stock, including the authority to establish one or more series
and to fix the powers, preferences, rights and limitations of
such class or series, without seeking shareholder approval. Our
board of directors also has the right to fill vacancies of the
board, including a vacancy created by an increase in the size of
the board of directors.
Our bylaws provide for an advance notice procedure for the
nomination, other than by or at the direction of the board of
directors, of candidates for election as directors, as well as
for other shareholder proposals to be considered at annual
meetings of shareholders. In general, notice of intent to
nominate a director or raise matters at such meetings will have
to be received by us not less than 90 days prior to the
date fixed for the annual meeting, and must contain certain
information concerning the persons to be nominated or the
matters to be brought before the meeting and concerning the
shareholders submitting the proposal.
Transfer Agent and Registrar
The transfer agent and registrar with respect to our common
stock will be Registrar and Transfer Company.
Listing
We have applied to list our shares of common stock on The Nasdaq
Capital Market under the symbol RNIN.
61
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, based upon the number of
shares of common stock outstanding as of October 10, 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, 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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|
the average weekly trading volume of our common stock during the
four calendar weeks preceding the date of filing of a notice on
Form 144 with respect to the sale.
|
Sales under Rule 144 are also generally subject to certain
manner of sale provisions and notice requirements and to the
availability of current public information about us.
Rule 144(k).
Under Rule 144(k), a person, or
persons whose shares are aggregated, who is not deemed to have
been one of our affiliates at any time during the 90 days
preceding a sale and who owns shares that were acquired from the
issuer or an affiliate at least two years ago is entitled to
sell the shares without complying with the manner of sale,
public information, volume limitations or notice of sale
provisions of Rule 144. Therefore, unless otherwise
restricted, the shares eligible for sale under Rule 144(k)
may be sold immediately upon the completion of this offering.
Rule 701.
Rule 701 permits resales of shares in
reliance upon Rule 144 but without compliance with some
restrictions of Rule 144, including the holding period
requirement. Most of our employees, officers, directors or
consultants who purchased shares under a written compensatory
plan or contract may be entitled to rely on the resale
provisions of Rule 701, but all holders of
Rule 701 shares are required to wait until
90 days after the date of this prospectus before selling
their shares pursuant to the rule.
Lock-Up Agreements.
Our directors, executive officers and
certain shareholders have agreed that, during the period
beginning on the date of the final prospectus and continuing to
and including the date 360 days, in the case of our
directors and executive officers, or 180 days, in the case
of certain other shareholders, after the date of the final
prospectus, they will not, directly or indirectly:
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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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|
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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62
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.
Escrow Agreement.
In accordance with the terms of an
escrow agreement, our directors and executive officers have
agreed to place all of their equity securities in our company
(the Escrowed Securities) in escrow at the closing
of this offering. Those depositing Escrowed Securities may
request the release of their Escrowed Securities as follows:
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if our aggregate revenues for the three fiscal years preceding
such request, and any additional interim period, equal or exceed
$500,000 and the auditors report accompanying our latest
audited financial statements does not contain a
going-concern qualification, then commencing one
year from the closing of the offering,
2
1
/
2
% of the Escrowed Securities may be released on a pro rata basis
each quarter, with the remaining Escrowed Securities being
released on the second anniversary of the closing of the
offering; or
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if our aggregate revenues for the three fiscal years preceding
such request, and any additional interim period, are less than
$500,000, then commencing two years from the closing of the
offering,
2
1
/
2
% of the Escrowed Securities may be released on a pro rata basis
each quarter, with the remaining Escrowed Securities being
released on the fourth anniversary of the closing of the
offering.
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In addition, the Escrowed Securities will be released in their
entirety upon, among other things, our common stock meeting the
definition of Covered Securities as defined in
Section 18(b)(1) of the Securities Act of 1933, as amended,
all Escrowed Securities shall be released.
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. These registration statements will become effective
upon filing and the shares registered under these registration
statements will, subject to Rule 144 volume limitations
applicable to affiliates, the
lock-up
agreements
described above and escrow arrangements imposed by state
securities regulators, be available for sale in the open market
following the 180 day anniversary of the effective date.
63
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 Underwriters
obligation to purchase our shares is subject to, among other
things, the Underwriters receipt of a comfort letter in
customary form from our independent registered accounting firm,
opinion letters from our legal counsel and legal counsel to the
Underwriter,
lock-up
agreements from our directors, officers and holders of our
common stock and securities convertible into our common stock
and closing certificates customary for initial public offerings.
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 Underwriters 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. The
non-accountable expense allowance represents an amount based
upon a percentage of the gross offering proceeds that is payable
to the Underwriter in respect of expenses that need not be
itemized.
Warrant
As additional compensation, we have agreed to sell to the
Underwriter, for nominal consideration, a warrant (the
Underwriters Warrant) to purchase up to
450,000 shares of our common stock. The Underwriters
Warrant is not exercisable during the first 360 days 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
Underwriters Warrant contains customary anti-dilution
provisions and certain demand and participatory registration
rights. The Underwriters Warrant also includes a
cashless exercise provision entitling the holder to
convert the Underwriters Warrant into shares of our common
stock without the payment in cash of the exercise price. The
Underwriters 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.
64
Over-Allotment Option
We have granted to the Underwriter an option, exercisable not
later than 45 days after the date of the final prospectus
related to this offering, to purchase up to an aggregate of
675,000 additional shares at the initial public offering price
set forth on the cover page of this prospectus less the
underwriting discounts and commissions. The Underwriter may
exercise this option only to cover over-allotments, if any, made
in connection with the sale of shares offered hereby.
Lock-Up Agreement
Except as noted below, our directors, executive officers and
certain shareholders have agreed with the Underwriter that for a
period of 360 days, in the case of our directors and
executive officers, or 180 days, in the case of certain
other shareholders, following the date of the final prospectus
related to this offering, they will not offer, sell, assign,
transfer, pledge, contract to sell or otherwise dispose of or
hedge any of our shares of common stock or any securities
convertible into or exchangeable for our shares of common stock.
We have entered into a similar agreement with the Underwriter
that we will not issue additional shares (with the exception of
shares pursuant to the over-allotment option) of our common
stock before the end of the
180-day
period
following the date of the final prospectus related to this
offering, other than with respect to our issuing shares pursuant
to employee benefit plans, qualified option plans or other
employee compensation plans already in existence, or pursuant to
currently outstanding options, warrants or other rights to
acquire shares of our common stock. The Underwriter may, in its
sole discretion, at any time without prior notice, release all
or any portion of the shares from the restrictions in any such
agreements. In determining whether to release shares from the
restrictions, the Underwriter may consider, among other factors,
the financial circumstances applicable to a directors,
executive officers or shareholders 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
underwriters 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
65
purchase additional shares through the over-allotment option or
purchasing shares in the open market. In determining the source
of shares to close out the covered short position, an
underwriter will consider, among other things, the price of
shares available for purchase in the open market as compared to
the price at which it may purchase additional shares through the
over-allotment option. Naked short sales are any
short sales of shares in excess of the shares an underwriter may
purchase pursuant to the over-allotment option. An underwriter
must close out any naked short position by purchasing shares in
the open market. A naked short position is more likely to be
created if an underwriter is concerned that there may be
downward pressure on the price of the common stock in the open
market after pricing that could adversely affect investors who
purchase in the offering. Stabilizing transactions consist of
various bids for or purchases of common stock made by an
underwriter in the open market prior to the completion of the
offering. In passive market making, an underwriter may, subject
to certain limitations, make bids for or purchases of the shares
of common stock until the time, if any, at which a stabilizing
bid is made.
Stabilizing transactions to cover short sale positions may cause
the price of the shares of common stock to be higher than it
would otherwise be in the absence of these transactions. These
transactions may be commenced and discontinued at any time.
Discretionary Accounts
The Underwriter has advised us that it does not intend to
confirm sales of the shares to discretionary accounts.
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 Commissions 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 Commissions web site
http://www.sec.gov.
66
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 companys
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 Companys ability to continue as a going
concern. Managements 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
customers past payment history and its current
creditworthiness. If it is determined that collection of a fee
is not reasonably assured, the Company defers the revenue and
recognizes it at the time collection becomes reasonably assured,
which is generally upon receipt of cash payment. If an
acceptance period is required, revenue is recognized upon the
earlier of customer acceptance or the expiration of the
acceptance period.
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
Companys 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 three
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 managements
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
Companys 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
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)
|
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 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 Companys 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 Companys 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 Companys common stock or warrants to
purchase shares of the Companys 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 entitys financial
instruments. Such disclosures, which pertain to the
Companys 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 Companys
expected borrowing rate, evaluation of risk factors for debt
with similar remaining maturities and comparable risk.
|
|
12.
|
Registration Rights Agreements
|
The Company has adopted
EITF
05-4,
The
Effect of Liquidated Damages Clause on a Freestanding Financial
Instrument Subject to Issue
No.
00-19
,
View C to account for its registration rights agreements.
The Company has entered into registration rights agreements in
association with the issuance of common stock, debt and
warrants. View C of
EITF
05-4
takes
the position that the registration rights should be accounted
for separately from the financial instrument as the payoff of
the financial instruments is not dependent on the payoff of the
registration rights agreement, and according to
DIG
K-1,
registration rights agreements and the financial instruments do
not meet the combining criteria as they relate to different
risks. The Financial Accounting Standards Board (Board) has
postponed further discussion on
EITF
05-4.
The
Companys accounting for registration rights agreements may
change when the Board reaches a consensus on
EITF
05-4.
|
|
13.
|
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
Companys management, reflect all adjustments (consisting
of normal recurring adjustments) considered necessary to present
fairly the Companys 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.
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)
|
|
15.
|
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
enterprises 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, 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 Companys 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 Companys
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 Companys common stock outstanding on
a fully diluted basis, excluding shares
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 A SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
|
|
16.
|
Going Concern (Continued)
|
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
Companys 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 Companys 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.
NOTE B CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances with several financial
institutions. At times, deposits may exceed federally insured
limits.
A significant portion of the Companys revenues are derived
from a few customers. Customers with greater than 10% of total
sales are represented on the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
June 30,
|
|
Customer
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
A
|
|
|
10.0%
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
B
|
|
|
*
|
|
|
|
61.4%
|
|
|
|
31.6%
|
|
|
|
*
|
|
C
|
|
|
*
|
|
|
|
21.4%
|
|
|
|
*
|
|
|
|
*
|
|
D
|
|
|
*
|
|
|
|
*
|
|
|
|
31.7%
|
|
|
|
*
|
|
E
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
16.2%
|
|
F
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
14.8%
|
|
G
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
13.9%
|
|
|
|
|
10.0%
|
|
|
|
82.8%
|
|
|
|
63.3%
|
|
|
|
44.9%
|
|
|
|
*
|
Sales from this customer were less than 10% of the total sales
for the period reported.
|
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 Companys customer base.
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 B CONCENTRATION OF CREDIT
RISK (Continued)
A significant portion of the Companys accounts receivable
are concentrated with a few customers. Customers with greater
than 10% of total accounts receivable are represented on the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
June 30,
|
|
Customer
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
A
|
|
|
41.1%
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
B
|
|
|
30.8%
|
|
|
|
*
|
|
|
|
*
|
|
|
|
24.3%
|
|
C
|
|
|
14.3%
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
D
|
|
|
*
|
|
|
|
77.0%
|
|
|
|
*
|
|
|
|
*
|
|
E
|
|
|
*
|
|
|
|
14.8%
|
|
|
|
*
|
|
|
|
*
|
|
F
|
|
|
*
|
|
|
|
*
|
|
|
|
37.5%
|
|
|
|
*
|
|
G
|
|
|
*
|
|
|
|
*
|
|
|
|
25.9%
|
|
|
|
*
|
|
H
|
|
|
*
|
|
|
|
*
|
|
|
|
10.0%
|
|
|
|
*
|
|
I
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
33.9%
|
|
J
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
13.1%
|
|
|
|
|
86.2%
|
|
|
|
91.8%
|
|
|
|
73.4%
|
|
|
|
71.3%
|
|
|
|
*
|
Receivables from this customer were less than 10% of total
accounts receivable for the period reported.
|
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
|
|
|
|
|
|
|
|
|
|
|
|
The Company purchased the above-referenced software licenses
from an unrelated vendor for resale to its customers.
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-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 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 Companys 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 Companys 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 Companys 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 Companys common stock at
$9.00 per share to an employee for the guarantee of a bank
line of credit. The fair value
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 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 Companys 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 Companys 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 banks 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 Companys 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 following assumptions were used to
calculate the value of the warrant: dividend yield of 0%,
risk-free
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 F BANK LINES OF CREDIT AND
NOTES PAYABLE (Continued)
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 Companys common stock at
a conversion rate equal to 80% of the public offering price of
the Companys common stock in the event of a public
offering. The Company must complete the initial public offering
of the Companys 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 Companys 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 Companys
common stock. The shares of common stock issuable upon the
conversion of the notes or exercise of the warrants are required
to be registered within 60 days of the completion of an
initial public offering. 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
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 G SHORT-TERM NOTES PAYABLE
RELATED PARTIES (Continued)
had been received on these notes. The remaining $400,000 was
received in January and February 2006. 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
Companys common stock valued at $240,000 and warrants to
purchase 50,000 shares of the Companys 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 based on the current offering price of the
stock at the date of issuance. 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 Companys common stock and
six year warrants to purchase 50,000 shares of the
Companys 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 Company
agreed to assign and sell certain receivables to the related
parties in exchange for these short-term borrowings. The related
parties may limit their purchases to receivables arising from
sales to any one customer or a portion of the net amount of the
receivable. The Company has 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. Each related party has the
right to terminate the agreement at any time by giving the
Company 60 days prior written notice. These transactions
were accounted for as sales and as a result the related
receivables have been excluded from the accompanying balance
sheets. The agreement underlying the sale of receivables
contains provisions that indicate the Company is not responsible
for end-user customer payment defaults on sold receivables. The
borrowings are due when those accounts receivables are paid and
require interest payments at twice the prime rate (14.5% and 16%
at December 31, 2005 and at June 30, 2006,
respectively).
The Company issued the related parties warrants to purchase
39,492 shares of the Companys 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
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 G SHORT-TERM NOTES PAYABLE
RELATED PARTIES (Continued)
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
December 31, 2005 and June 30, 2006. During the year
ended December 31, 2005, the Company borrowed and repaid
$431,208 pursuant to this agreement. During the six months ended
June 30, 2006, the Company borrowed and repaid $149,216
pursuant to this agreement. The net book value of the
receivables sold was equal to the proceeds the Company borrowed
and repaid.
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 Companys products in the gaming industry. The
agreement also called for installation of three of the
Companys 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
Companys products in the restaurant industry. The
agreement also called for the future installation of
3,000 units of one on the Companys 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 signing a new
agreement with the customer in March 2006 calling for repayment
of remaining uninstalled units and elimination of additional
performance to the customer. See note payable to customer in
Note J.
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 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.
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.
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)
As consideration for entering into the agreements, the note
holders also received shares of the Companys common stock
and warrants to purchase shares of the Companys common
stock. As of December 31, 2005, the note holders had
received a total of 103,659 shares of the Companys
common stock and warrants to purchase 208,209 shares
of the Companys 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
($1.80 per share) based on an internal valuation of the
Companys common stock during July 2004 in the absence of
stock transactions. 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
Companys common stock in the event of an initial public
offering of the Companys 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 Companys stock by
September 30, 2006 or the notes will revert to their prior
terms (see note R for subsequent amendment of terms). The
Company will record a debt inducement expense if and when the
initial public offering is completed.
|
|
|
Non-convertible notes payable
|
The Company has various notes payable owed to individuals and
corporations. The notes are unsecured and have varying repayment
terms for principal and interest, with maturity dates through
January 2008. Interest accrues at interest rates ranging from 8%
to 12%.
As consideration for the loans, the lenders received warrants to
purchase shares of the Companys common stock. As of
December 31, 2005, the note holders received warrants to
purchase 2,778 shares of the Companys 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.
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 J LONG-TERM
NOTES PAYABLE (Continued)
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.
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
|
|
|
|
|
|
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 J LONG-TERM
NOTES PAYABLE (Continued)
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
|
|
|
|
|
|
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 Companys 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 Companys 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 requiring the Company to be current on
all principal and interest payments for any debt of the Company.
However, the Company 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 Companys common stock on a fully
diluted basis,
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)
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 Companys 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.
As consideration for the loans, the lenders received shares of
the Companys common stock and warrants to purchase shares
of the Companys common stock. As of December 31,
2005, the note holders received a total of 36,106 shares of
the Companys common stock and warrants to
purchase 82,895 shares of the Companys 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 ($1.80 per share) based on an internal
valuation of the Companys common stock during July 2004 in
the absence of stock transactions. 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
Companys common stock in the event of an initial public
offering of the Companys 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 Companys 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 Companys 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%.
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 K LONG-TERM NOTES PAYABLE
RELATED PARTIES (Continued)
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.
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-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)
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 Companys 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 Companys 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
Companys common stock in the event of an initial public
offering of the Companys 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 Companys stock by
September 30, 2006 or the notes will revert to their prior
terms (see note R for subsequent amendment of terms).
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 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 Companys 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 Companys 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-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
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 Companys 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 Companys deferred tax asset.
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 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 Companys 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-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 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 Companys common
stock at $9.00 per share within five years from the advance
date. The fair value of the warrants
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 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 Companys 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 Companys 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
Companys 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 shares of
common stock issuable upon the conversion of the notes or
exercise of the warrants are required to be registered within
60 days of the completion of an initial public offering.
The fair value of the warrants granted was calculated at
$989,659 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 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
F-36
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)
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 Companys 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 Companys common stock. The following
assumptions were used to calculate the value of the warrant:
dividend yield of 0%, risk-free interest rate of 5%, expected
life equal to the contractual life of five years, and volatility
of 61.718%. The Company reduced the carrying value of the notes
by amortizing the fair value of warrants granted in connection
with the note payable over the original term of the notes as
additional interest expense. The Company determined that there
was a beneficial conversion feature of $803,782 at the date of
issuance which was recorded as debt discount at date of issuance
and will be amortized into interest expense over the original
term of the notes. The Company will record a debt discount of
$989,659 during the quarter ending September 30, 2006. The
Company will record an additional amount related to the
beneficial conversion feature if and when the initial public
offering is completed.
F-37
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
persons 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
|
|
|
2,570
|
|
Nasdaq listing fee
|
|
|
30,000
|
|
Legal fees and expenses
|
|
|
350,000
|
|
Accounting fees and expenses
|
|
|
50,000
|
|
Blue sky qualification fees and expenses
|
|
|
15,000
|
|
Printing and engraving expenses
|
|
|
75,000
|
|
Transfer agent and registrar fees and expenses
|
|
|
5,000
|
|
Miscellaneous expenses
|
|
|
49,161
|
|
|
|
|
|
|
Total
|
|
$
|
579,500
|
|
|
|
|
|
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 holders 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
(s) On September 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.
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 (s) 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.
See Index to Exhibits.
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.
II-4
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-5
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 October 12, 2006.
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WIRELESS RONIN TECHNOLOGIES, INC.
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Jeffrey C. Mack
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President and Chief Executive Officer
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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.
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Signature
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Title
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Date
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/s/
Jeffrey C. Mack
Jeffrey
C. Mack
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Chairman of the Board of Directors, President and Chief
Executive Officer (Principal Executive Officer and Director)
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October 12, 2006
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/s/
John A. Witham
John
A. Witham
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Executive Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)
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October 12, 2006
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*
Dr.
William F. Schnell
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Director
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October 12, 2006
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*
Carl
B. Walking Eagle Sr.
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Director
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October 12, 2006
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*
Gregory
T. Barnum
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Director
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October 12, 2006
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*
Thomas
J. Moudry
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Director
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October 12, 2006
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*
Brett
A. Shockley
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Director
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October 12, 2006
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*By:
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/s/
John A. Witham
John
A. Witham
Attorney-in-fact
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II-6
EXHIBIT INDEX
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Exhibit
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Number
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Description
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1
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Form of Underwriting Agreement by and between the Registrant and
Feltl and Company (including form of warrant).
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3
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.1
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Articles of Incorporation, as amended of the Registrant.
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3
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.2
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Bylaws, as amended of the Registrant.*
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4
|
.1
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See exhibits 3.1 and 3.2.
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4
|
.2
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Specimen form of common stock certificate of the Registrant.
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4
|
.3
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Form of Current Warrant to Purchase Common Stock of the
Registrant.*
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4
|
.4
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Form of Previous Warrant to Purchase Common Stock of the
Registrant.*
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4
|
.5
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Form of Convertible Debenture Note issued to lenders, including
related parties (including the extension thereto).*
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4
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.6
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Convertible Debenture Note issued to Steve Meyer in the amount
of $100,000 dated March 12, 2004.*
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4
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.7
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|
Promissory Note issued to SHAG LLC in the amount of $100,000
dated November 11, 2005.*
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4
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.8
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Promissory Note issued to Jack Norqual in the amount of $300,000
dated December 27, 2005.*
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4
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.9
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Promissory Note issued to Barry Butzow in the amount of $300,000
dated December 27, 2005.*
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4
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.10
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Form of Note Conversion Agreement by and between the
Registrant and certain lenders (including the addendum thereto).*
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4
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.11
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Note Conversion Agreement by and between the Registrant and
Galtere International Master Fund L.P., dated March 3,
2006.*
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4
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.12
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Note Conversion Agreement by and between the Registrant and
SHAG LLC, dated March 9, 2006.*
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4
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.13
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Letter regarding Note Extension by Barry Butzow dated
June 27, 2006.*
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4
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.14
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Letter regarding Note Extension by Jack Norqual dated
June 27, 2006.*
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5
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Opinion of Briggs and Morgan, Professional Association.
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10
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.1
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Wireless Ronin Technologies, Inc. 2006 Equity Incentive Plan.*
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10
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.2
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Wireless Ronin Technologies, Inc. 2006 Non-Employee Director
Stock Option Plan.*
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10
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.3
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Form of Loan and Subscription Agreement by and between the
Registrant and each purchaser of 12% Convertible Bridge
Notes.*
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10
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.4
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Form of the Registrants 12% Convertible Bridge Notes.*
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10
|
.5
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Form of Warrant to Purchase Shares of Common Stock issued by the
Registrant to purchasers of 12% Convertible Bridge Notes.*
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10
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.6
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|
Employment Agreement, dated as of April 1, 2006, between
the Registrant and Jeffrey C. Mack.*
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10
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.7
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Employment Agreement, dated as of April 1, 2006, between
the Registrant and Christopher F. Ebbert.*
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10
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.8
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Employment Agreement, dated as of April 1, 2006, between
the Registrant and Stephen E. Jacobs.*
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10
|
.9
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Employment Agreement, dated as of April 1, 2006, between
the Registrant and Scott W. Koller.*
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10
|
.10
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|
Employment Agreement, dated as of April 1, 2006, between
the Registrant and John A. Witham.*
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10
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.11
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Strategic Partnership Agreement, dated May 28, 2004,
between the Registrant and The Marshall Special Assets Group,
Inc., as amended.
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10
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.12
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Factoring Agreement, dated May 23, 2005, by and between the
Registrant and Barry W. Butzow and Stephen E. Jacobs.*
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10
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.13
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Lease, dated November 15, 2004, between the Registrant and
The Brastad/Lyman Partnership.*
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10
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.14
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Convertible Debenture Purchase Agreement between the Registrant
and the Spirit Lake Tribe dated January 5, 2005.*
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10
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.15
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10% Convertible Debenture in principal amount of $3,000,000
dated September 7, 2005.*
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|
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Exhibit
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Number
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Description
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|
|
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10
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.16
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Amended and Restated Convertible Debenture Purchase Agreement
between the Registrant and the Spirit Lake Tribe dated
September 7, 2005.*
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10
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.17
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Amendment No. 1 to Amended and Restated Convertible
Debenture Purchase Agreement between the Registrant and the
Spirit Lake dated February 27, 2006.*
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10
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.18
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Guaranty by and between Stephen E. Jacobs and Winmark
Corporation dated December 8, 2004.*
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10
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.19
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Commercial Guaranty by and between the Registrant, as Borrower,
Signature Bank, as Lender and Michael J. Hopkins, as Guarantor
dated January 12, 2006.
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10
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.20
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Commercial Guaranty by and between the Registrant, as Borrower,
Signature Bank, as Lender and Barry Butzow, as Guarantor dated
November 10, 2005.*
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10
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.21
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Commercial Guaranty by and between the Registrant, as Borrower,
Signature Bank, as Lender and Barry Butzow, as Guarantor dated
November 2, 2004.*
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10
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.22
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Lease by and between Dennis P. Dirlam and the Registrant dated
April 18, 2006.
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10
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.23
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Sale and Purchase Agreement, dated July 11, 2006, between
Sealy Corporation and the Registrant.x
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10
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.24
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Amendment No. 2 to Amended and Restated Convertible
Debenture Agreement and Debenture between the Registrant and
Spirit Lake Tribe dated July 18, 2006.*
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10
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.25
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Note Amendment Agreement by and between the Registrant and
Galtere International Master Fund L.P. dated July 21, 2006.*
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10
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.26
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Form of Note Amendment Agreement by and between the Registrant
and certain lenders dated July 27, 2006.*
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10
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.27
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Form of option agreement granted under the 2006 Equity Incentive
Plan.*
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10
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.28
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Employment Agreement, dated as of June 19, 2006, between
the Registrant and Henry B. May.*
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21
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Subsidiaries of the Registrant.*
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23
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.1
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Consent of Virchow, Krause & Company, LLP.
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23
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.2
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Consent of Briggs and Morgan, Professional Association (included
in Exhibit 5).
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24
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Powers of Attorney.*
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*
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Previously filed.
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x
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Confidential treatment has been requested for the confidential
portions of this agreement.
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Exhibit 1
Underwriting Agreement
__________________, 2006
FELTL AND COMPANY, INC.
d/b/a Feltl and Company
225 South Sixth Street
Suite 4200
Minneapolis, MN 55402
Ladies and Gentlemen:
Wireless Ronin Technologies, Inc., a Minnesota corporation (the Company), proposes to issue
and sell to Feltl and Company, Inc., d/b/a Feltl and Company, a Minnesota corporation (the
Underwriter) 4,500,000 shares of its common stock, $.01 par value per share (the Common Stock).
The 4,500,000 shares of Common Stock to be sold by the Company are called the Firm Common
Shares. In addition, the Company has granted to the Underwriter an option to purchase up to an
additional 675,000 shares of Common Stock (the Optional Common Shares), as provided in Section 2
of this Underwriting Agreement (this Agreement). The Firm Common Shares and, if and to the
extent such option is exercised, the Optional Common Shares are collectively called the Common
Shares.
The Company has prepared and filed with the Securities and Exchange Commission (the
Commission) a registration statement on Form SB-2 (File No. 333-136972), which contains a form of
prospectus to be used in connection with the public offering and sale of the Common Shares, and
such amendments thereof as may have been required to the date of this Agreement. Such registration
statement, as amended, including the financial statements, exhibits and schedules thereto, in the
form in which it was declared effective by the Commission under the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder (collectively, the Securities Act),
including any information deemed to be a part thereof at the time of effectiveness pursuant to Rule
430A under the Securities Act, is called the Registration Statement. Any registration statement
filed by the Company pursuant to Rule 462(b) under the Securities Act is called the Rule 462(b)
Registration Statement, and from and after the date and time of filing of the Rule 462(b)
Registration Statement, the term Registration Statement shall include the Rule 462(b)
Registration Statement. Such prospectus, in the form first used by the Underwriter to confirm
sales of the Common Shares, is called the Prospectus. All references in this Agreement to (i)
the Registration Statement, the Rule 462(b) Registration Statement, a preliminary prospectus or the
Prospectus, or any amendments or supplements to any of the foregoing, shall include any copy
thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
System (EDGAR) and (ii) the Prospectus shall be deemed to include the electronic Prospectus
provided for use in connection with the offering of the Common Shares as contemplated by Section
3(s) of this Agreement.
The Company hereby confirms its agreements with the Underwriter as follows:
1.
Representations and Warranties
. The Company hereby represents, warrants, covenants and
agrees with the Underwriter that:
(a)
Compliance with Registration Requirements.
The Registration Statement and any Rule 462(b)
Registration Statement have been declared effective by the Commission under the Securities Act.
The Company has complied with all requests of the Commission for additional or supplemental
information. No stop order suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement is in effect, and no proceedings for such purpose have been
instituted or are pending or, to the best knowledge of the Company, are contemplated or threatened
by the Commission.
Each preliminary prospectus, the final preliminary prospectus included in the Disclosure
Package (as defined below) and the Prospectus, complied or will comply in all material respects
with the Section 10(a) Securities Act, and if filed by electronic transmission pursuant to EDGAR
(except as may be permitted by Regulation S-T under the Securities Act), was identical to the copy
thereof delivered to the Underwriter for use in connection with the offer and sale of the Common
Shares. The preliminary prospectus, including amendments thereto, delivered to the Underwriter for
distribution in connection with the offer and sale of the Common Shares and the Prospectus complied
or will comply in all material respects with the Section 10(a) Securities Act and did not and will
not contain any untrue statement of a material fact or omit or will omit to state a material fact
required to be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. As of the Initial Sale Time (defined
below), as of the First Closing Date (as defined below) or the Second Closing Date (as defined
below), as the case may be, and as of the effective date of any post-effective amendment, neither
the Registration Statement or any Rule 462(b) Registration Statement, any post-effective amendment
to the Registration Statement or Rule 462(b) Registration Statement, nor any prospectus included in
the Disclosure Package (as defined below), when considered together with the Disclosure Package,
included or will include any untrue statement of a material fact or omitted or will omit to state a
material fact necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. The representations and warranties set forth in the
two immediately preceding sentences do not apply to statements in or omissions from the
Underwriting section of the Registration Statement, or of any Rule 462(b) Registration Statement,
or any post-effective amendment thereto, or the Prospectus, or any amendments or supplements
thereto, made in reliance upon and in conformity with information relating to the Underwriter
furnished to the Company in writing by the Underwriter expressly for use therein. There are no
agreements or understandings (including those that have not been reduced to writing) or other
documents required to be described in the Prospectus or to be filed as exhibits to the Registration
Statement which have not been described or filed as required.
(b)
Offering Materials Furnished to the Underwriter.
The Company has delivered to the
Underwriter three complete manually signed copies of the Registration Statement and of each consent
and certificate of experts filed as a part thereof, and conformed copies of the Registration
Statement (without exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Underwriter has reasonably requested.
2
(c)
Disclosure Package
. The term Disclosure Package shall mean, collectively, (i) the
preliminary prospectus that is included in the Registration Statement immediately prior to the
Initial Sale Time (as defined below), if any, as amended or supplemented, (ii) any issuer free
writing prospectuses as defined in Rule 433 of the Securities Act (each, an Issuer Free Writing
Prospectus) identified in Schedule 1 hereto, and (iii) any other free writing prospectus that the
parties hereto shall hereafter expressly agree in writing to treat as part of the Disclosure
Package. As of ___:___ [a/p]m (Eastern time) on the date of this Agreement (the Initial Sale
Time).
(d)
Issuer Free Writing Prospectuses
. Each Issuer Free Writing Prospectus, as of its issue
date and at all subsequent times through the completion of the public offering and sale of the
Common Shares or until any earlier date that the Company notified or notifies the Underwriter as
described in the next sentence, did not, does not and will not include any information that
conflicted, conflicts or will conflict with the information contained in the Registration
Statement. The foregoing sentence does not apply to statements in or omissions from any Issuer
Free Writing Prospectus based upon and in conformity with written information furnished to the
Company by the Underwriter specifically for use therein, it being understood and agreed that the
only such information furnished by the Underwriter consists of the information described as such in
Section 9 hereof.
(e)
Distribution of Offering Material By the Company.
The Company has not distributed and
will not distribute, prior to the later of the Second Closing Date and the completion of the
Underwriters distribution of the Common Shares, any offering material in connection with the
offering and sale of the Common Shares other than a preliminary prospectus, the Prospectus, any
Issuer Free Writing Prospectus reviewed and consented to by the Underwriter or included in Schedule
1 hereto or the Registration Statement.
(f)
The Underwriting Agreement.
This Agreement has been duly authorized, executed and
delivered by, and is a valid and binding agreement of, the Company and, with respect to Section 17
of this Agreement, its Subsidiaries (as defined below) enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the rights and remedies of creditors or by general equitable
principles.
(g)
Authorization of the Common Shares
. The Common Shares to be purchased by the Underwriter
from the Company have been duly authorized for issuance and sale pursuant to this Agreement and,
when issued and delivered by the Company pursuant to this Agreement, will be validly issued, fully
paid and nonassessable.
(h)
No Transfer Taxes
. There are no transfer taxes or other similar fees or charges under
federal law or the laws of any state, or any political subdivision thereof, required to be paid in
connection with the execution and delivery of this Agreement or the issuance by the Company or sale
by the Company of the Common Shares.
(i)
No Applicable Registration or Other Similar Rights.
There are no persons with
registration or other similar rights to have any equity or debt securities registered for sale
under
3
the Registration Statement or included in the offering contemplated by this Agreement, except for such rights as have been duly waived in writing prior to the date of this Agreement, with
copies of such written waivers furnished to the Underwriter.
(j)
No Material Adverse Change.
Except as otherwise expressly disclosed or described in the
Disclosure Package and the Prospectus, subsequent to the respective dates as of which information
is given in the Disclosure Package and the Prospectus: (i) there has been no adverse change, or any
development that could reasonably be expected to result in an adverse change in the condition,
financial or otherwise, or in the earnings, business, operations or prospects of the Company that
is, individually or in the aggregate, material to the Company, whether or not arising from
transactions in the ordinary course of business, of the Company or any of its Subsidiaries (any
such change or effect is called a Material Adverse Change); (ii) the Company has not incurred
any material liability or obligation, indirect, direct or contingent, not in the ordinary course of
business nor entered into any material transaction or agreement not in the ordinary course of
business; and (iii) there has been no dividend or distribution of any kind declared, paid or made
by the Company on any class of capital stock or repurchase or redemption by the Company of any
class of capital stock, nor is there any agreement or understanding with respect to the same.
(k)
Independent Accountants.
Virchow, Krause & Company, LLP, who have expressed their opinion
with respect to the financial statements (which term as used in this Agreement includes the related
notes and schedules thereto) filed with the Commission as a part of the Registration Statement and
included in the Disclosure Package and the Prospectus, are and, during the periods covered by their
report, were an independent registered public accounting firm within the meaning of Regulation S-X
issued under the Securities Act and the Securities Exchange Act of 1934, as amended (the Exchange
Act), and as required under the Securities Act and the Exchange Act.
(l)
Preparation of the Financial Statements.
The financial statements filed with the
Commission as a part of the Registration Statement and included in the Disclosure Package and the
Prospectus present fairly the financial position of the Company as of and at the dates indicated
and the results of its operations and cash flows for the periods specified. Such financial
statements have been prepared in conformity with generally accepted accounting principles as
applied in the United States applied on a consistent basis throughout the periods involved, except
as may be expressly stated in the related notes thereto. No other financial statements or
supporting schedules are required to be included in the Registration Statement. The financial data
set forth under the captions Prospectus SummarySummary of Selected Financial Information,
Capitalization, Dilution, Selected Financial Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in the preliminary prospectus included
the Disclosure Package and the Prospectus fairly present the information set forth therein on a
basis consistent with that of the financial statements contained in the Registration Statement.
(m)
Incorporation and Good Standing of the Company.
Each of the Company and its Subsidiaries
has been duly incorporated and is validly existing as a corporation in good standing under the laws
of the jurisdiction of its incorporation and has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the Disclosure
4
Package and the Prospectus and, with respect to the Company, to enter into and perform its obligations under this Agreement. Each of the Company and its Subsidiaries is duly qualified
as a foreign corporation to transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or leasing of property or the
conduct of business, except for such jurisdictions where the failure to so qualify or to be in good
standing would not, individually or in the aggregate, result in a Material Adverse Change. All of
the issued and outstanding capital stock of the Subsidiaries issued to the Company has been duly
authorized and validly issued, is fully paid and nonassessable, and is owned by the Company free
and clear of any security interest, mortgage, pledge, lien, encumbrance or claim except are
described in the Disclosure Package and the Prospectus. The Company does not own or control,
directly or indirectly, any corporation, association or other entity other than the Subsidiaries
listed in Exhibit 21 to the Registration Statement (the Subsidiaries), and has not, either
directly and indirectly, held either beneficially or of record any capital stock or other
securities with equity features of any entity other than the Subsidiaries.
(n)
Capitalization and Other Capital Stock Matters.
The authorized, issued and outstanding
capital stock of the Company is as set forth in each of the Disclosure Package and the Prospectus
under the caption Capitalization (other than for subsequent issuances, if any, pursuant to
employee benefit plans described in the Disclosure Package and the Prospectus or upon exercise of
outstanding options or warrants described in the Disclosure Package and the Prospectus). The
Common Stock (including the Common Shares) conforms in all material respects to the description
thereof contained in the Disclosure Package and the Prospectus. All of the issued and outstanding
shares of Common Stock have been duly authorized and validly issued, are fully paid and
nonassessable and have been issued in compliance with all applicable federal and state securities
laws. None of the outstanding shares of Common Stock were issued in violation of any preemptive
rights, rights of first refusal or other similar rights to subscribe for or purchase securities of
the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights
of first refusal or other rights to purchase, or equity or debt securities convertible into or
exchangeable or exercisable for, any capital stock of the Company, other than those accurately
described in the Disclosure Package and the Prospectus. The description of the Companys stock
option, stock bonus and other stock plans or arrangements, and the options or other rights granted
thereunder, set forth in each of the Disclosure Package and the Prospectus accurately and fairly
presents the information required to be shown with respect to such plans, arrangements, options and
rights.
(o)
Listing; Exchange Act Registration
. The Company has satisfied all of the requirements of
The Nasdaq Capital Market for listing the Common Shares on such market and for the trading of the
Common Stock on The Nasdaq Capital Market, and the Common Shares have been approved for inclusion
on The Nasdaq Capital Market, subject only to official notice of issuance. A registration
statement has been filed on Form 8-A pursuant to Section 12 of the Exchange Act with respect to the
Common Stock, which registration statement complies in all material respects with the Exchange Act.
(p)
Non-Contravention of Existing Instruments; No Further Authorizations or Approvals
Required
. Neither the Company nor any of its Subsidiaries is (i) in violation or is in default
(or, with the giving of notice or lapse of time, would be in default) (Default) under its charter
or bylaws, (ii) is in Default under any indenture, mortgage, loan or credit agreement,
5
deed of trust, note, contract, franchise, lease or other agreement, obligation, condition, covenant or instrument to which the Company or any of its Subsidiaries is a party or by which it or any
of them may be bound, or to which any of the property or assets of the Company or any of its
Subsidiaries is subject (each, an Existing Instrument), or (iii) is in violation of any statute,
law, rule, regulation, judgment, order or decree of any court, regulatory body, administrative
agency, governmental body, arbitrator or other authority having jurisdiction over the Company or
any of its Subsidiaries or any of its properties, as applicable, except with respect to clauses
(ii) and (iii) only, for such violations as would not, individually or in the aggregate, result in
a Material Adverse Change. The execution, delivery and performance of this Agreement by the
Company and, with respect to Section 17 of this Agreement, by each of the Subsidiaries, and
consummation of the transactions contemplated hereby, by the Disclosure Package and by the
Prospectus (i) have been duly authorized by all necessary corporate action and will not result in
any Default under the charter or bylaws of the Company or any of its Subsidiaries, (ii) will not
conflict with or constitute a breach of, or Default or a Debt Repayment Triggering Event (as
defined below) under, or result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of its Subsidiaries pursuant to, or require the
consent of any other party to, any Existing Instrument, except for such conflicts, breaches,
Defaults, Debt Repayment Triggering Events (as defined below), liens, charges or encumbrances as
would not, individually or in the aggregate, result in a Material Adverse Change, and (iii) will
not result in any violation of any law, regulation, order or decree applicable to the Company or
any of its Subsidiaries of any court, regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over the Company or any of its Subsidiaries or
any of its or their properties, except for such violations as would not, individually or in the
aggregate, result in a Material Adverse Change. No consent, approval, authorization or other order
of, or registration or filing with, any court or other governmental or regulatory authority or
agency, is required for the execution, delivery and performance of this Agreement by the Company
and, with respect to Section 17 of this Agreement, by the Subsidiaries and consummation of the
transactions contemplated hereby, by the Disclosure Package and by the Prospectus, except such as
have been obtained or made by the Company or its Subsidiaries and are in full force and effect
under the Securities Act, applicable state securities or blue sky laws and from the National
Association of Securities Dealers, Inc. (the NASD), and (B) such consents, approvals,
authorizations, orders, registrations or qualifications that, if not obtained or made, would not
individually or in the aggregate result in a Material Adverse Change. As used herein, a Debt
Repayment Triggering Event means any event or condition which gives, or with the giving of notice
or lapse of time would give, the holder of any note, debenture or other evidence of indebtedness
(or any person acting on such holders behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Company or its Subsidiaries.
(q)
No Material Actions or Proceedings.
There are no legal or governmental actions, suits or
proceedings pending or, to the best of the Companys knowledge, threatened (i) against or affecting
the Company or any of its Subsidiaries, (ii) which has as the subject thereof any officer, director
or employee of, or property owned or leased by, any of the Company or its Subsidiaries, (iii)
relating to environmental or discrimination matters, where in any such case any such action, suit
or proceeding, if so determined adversely, would reasonably be expected to result in a Material
Adverse Change or adversely affect the consummation of the transactions contemplated by this
Agreement or by the Prospectus. No labor problem or dispute with the
6
employees of the Company or any of its Subsidiaries or with the employees of any third party, with whom the Company or its Subsidiaries has a material relationship, exists or, to the best
of the Companys knowledge, is threatened or imminent.
(r)
Intellectual Property Rights.
The Company and its Subsidiaries own or possess valid and
enforceable licenses or other rights to use all trademarks, trade names, service marks, patent
rights (including all patents and patent applications), copyrights, domain names, licenses,
approvals, know-how (including trade secrets and other unpatented and/or unpatentable proprietary
or confidential information, systems or procedures), inventions, trade secrets, technologies,
proprietary techniques (including processes and substances) and other similar rights (collectively,
Intellectual Property Rights) reasonably necessary to conduct its business as now conducted and
as currently contemplated to be conducted as disclosed in the Registration Statement, the
Disclosure Package and the Prospectus, free and clear of all liens, claims and encumbrances, other
than as described in the Registration Statement, the Disclosure Package and the Prospectus, except
where the failure to own or have such rights would not, individually or in the aggregate, have a
material adverse effect on such conduct of the business or on the assets, liabilities, financial
condition, results of operations and prospects of the Company and its Subsidiaries; and the
expected expiration of any of such Intellectual Property Rights would not result in a Material
Adverse Change. Other than as described in the Registration Statement, the Disclosure Package and
the Prospectus: (i) there are no third parties who, to the Companys knowledge, have any rights in
the Intellectual Property Rights that could preclude the Company and its Subsidiaries from
conducting their business as currently conducted or as presently contemplated to be conducted as
described in the Registration Statement, the Disclosure Package and the Prospectus; (ii) there are
no pending or, to the best knowledge of the Company, threatened actions, suits, proceedings,
investigations or claims by others challenging the rights of the Company or any of its Subsidiaries
(or if the Intellectual Property Rights are licensed to the Company or any of its Subsidiaries, the
licensor thereof) in any Intellectual Property owned or licensed to the Company and its
Subsidiaries; (iii) neither the Company nor any of its Subsidiaries nor (if the Intellectual
Property Rights are licensed to the Company and its Subsidiaries) the licensor thereof has
infringed, or received any notice of infringement of or conflict with, any rights of others with
respect to the Intellectual Property; and (iv) there is no dispute between any of the Company and
its Subsidiaries and any licensor with respect to any Intellectual Property Right. The Company and
its Subsidiaries have taken all steps necessary or appropriate to protect, maintain and safeguard
the Intellectual Property Rights for which improper or unauthorized disclosure would impair its
value or validity and has entered into appropriate and enforceable (i) nondisclosure and
confidentiality agreements, (ii) invention assignment and other assignment agreements with all
current employees and contractors, and all past employees and contractors to the extent necessary
to so protect, maintain and safeguard the Intellectual Property Rights, and (iii) has made
appropriate filings and registrations in connection with the foregoing.
(s)
Title to Properties.
The Company and its Subsidiaries have good and marketable title to
all the properties and assets reflected as owned in the financial statements referred to in Section
1(l) above (or elsewhere in the Disclosure Package and the Prospectus), in each case free and clear
of any security interests, mortgages, liens, encumbrances, equities, claims and other defects,
except as expressly described in the Disclosure Package and the Prospectus or such as do not
materially and adversely affect the value of such property and do not materially interfere
7
with the use made or proposed to be made of such property by the Company or its Subsidiaries. The real property, improvements, equipment and personal property held under lease by the
Company or its Subsidiaries are held under valid and enforceable leases, with such exceptions as
are not material and do not materially interfere with the use made or proposed to be made of such
real property, improvements, equipment or personal property by the Company or its Subsidiaries.
(t)
Tax Law Compliance.
Each of the Company and its Subsidiaries have filed all necessary
federal, state and foreign income, employment and franchise tax returns and has paid all taxes
required to be paid by any of them and, if due and payable, any related or similar assessment, fine
or penalty levied against any of them. The Company has made adequate charges, accruals and
reserves in the applicable financial statements referred to in Section 1(l) above in respect of all
federal, state and foreign income and franchise taxes for all periods as to which the tax liability
of the Company and its Subsidiaries has not been finally determined.
(u)
Company Not an Investment Company.
The Company has been advised by its legal counsel of
the rules and requirements under the Investment Company Act of 1940, as amended (the Investment
Company Act). The Company is not, and after receipt of payment for the Common Shares and
application of the proceeds thereof contemplated under Use of Proceeds in each of the Disclosure
Package and the Prospectus will not be, an investment company within the meaning of the
Investment Company Act and will conduct its business in a manner so that it will not become subject
to the Investment Company Act.
(v)
Insurance.
Each of the Company and its Subsidiaries are insured by recognized,
financially sound and reputable institutions with policies in such amounts and with such
deductibles and covering such risks as are generally deemed adequate and customary for their
business including, but not limited to, policies covering real and personal property owned or
leased by the Company and its Subsidiaries against theft, damage, destruction and acts of
vandalism. All policies of insurance and surety bonds insuring the Company or its Subsidiaries or
their respective businesses, assets, employees, officers and directors are in full force and
effect; the Company and its Subsidiaries are in compliance with the terms of such policies and
instruments in all material respects; and there are no claims by the Company or its Subsidiaries
under any such policy or instrument as to which any insurance company is denying liability or
defending under a reservation of rights clause. The Company has no reason to believe that it or
its Subsidiaries will not be able (i) to renew its existing insurance coverage as and when such
policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary
or appropriate to conduct its business as now conducted and at a cost that would not result in a
Material Adverse Change. Neither the Company nor any of its Subsidiaries have been denied any
insurance coverage which it has sought or for which it has applied.
(w)
No Price Stabilization or Manipulation.
The Company has not taken and will not take,
directly or indirectly, any action designed to or that might be reasonably expected to cause or
result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or
resale of the Common Shares. The Company acknowledges that the Underwriter may engage in passive
market making transactions in the Common Shares on The Nasdaq Capital Market in accordance with
Regulation M under the Exchange Act.
8
(x)
Related Party Transactions.
No relationship, direct or indirect, exists between or among
any of the Company or any of its Subsidiaries, on the one hand, and the directors, officers, employees, contractors, stockholders, customers, distributors or suppliers of the
Company or any of its Subsidiaries, on the other, that is required by the Securities Act to be
described in the Registration Statement, the Disclosure Package and the Prospectus and that is not
so described.
(y)
Disclosure Controls and Procedures
. The Company has established and will maintain
disclosure controls and procedures (as such term is defined in Rule 13a-14(c) under the Exchange
Act), which (i) are designed to ensure that information relating to the Company is made known to
the Companys principal executive officer and its principal financial officer by others within the
Company, particularly during the periods in which the periodic reports required under the Exchange
Act are being prepared, and (ii) are effective in all material respects to perform the functions
for which they were established. Based on the evaluation of the Companys disclosure controls and
procedures described above, the Company is not aware of (a) any deficiency in the design or
operation of internal controls which could adversely affect the Companys ability to record,
process, summarize and report financial data or any material weaknesses in internal controls or (b)
any fraud, whether or not material, that involves management or other employees who have a
significant role in the Companys internal controls. Since the most recent evaluation of the
Companys disclosure controls and procedures described above, there have been no significant
changes in internal controls or in other factors that could significantly affect internal controls.
(z)
No Unlawful Contributions or Other Payments.
Neither the Company nor its Subsidiaries
nor, to the best of the Companys knowledge, any director, officer, employee, agent, contractor,
distributor or other persons acting on behalf of any of the Company or its Subsidiaries, has made
any contribution or other payment to any official of, or candidate for, any federal, state or
foreign office in violation of any law or of the character required to be disclosed in the
Disclosure Package and the Prospectus.
(aa)
Companys Accounting System.
The books, records and accounts of the Company and its
Subsidiaries accurately and fairly reflect, in all material respects and in reasonable detail, the
transaction in, and the dispositions of, the assets of, and the results of operations of, the
Company and its Subsidiaries. The Company and its Subsidiaries maintain a system of accounting
controls sufficient to provide reasonable assurances that (i) transactions are executed in
accordance with managements general or specific authorization; (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity with generally accepted
accounting principles as applied in the United States and to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with managements general or specific
authorization; and (iv) the recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any differences. The Company
has no off-balance sheet arrangements, as that term is defined in Item 303(a)(4)(ii) of
Regulation S-K under the Securities Act and the Exchange Act.
(bb)
Compliance with Environmental Laws.
Except as would not, individually or in the
aggregate, result in a Material Adverse Change (i) neither the Company nor its Subsidiaries is in
violation of any federal, state, local or foreign law or regulation relating to pollution or
9
protection of human health or the environment (including, without limitation, ambient air, surface
water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum and petroleum products (collectively, Materials of Environmental Concern), or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport
or handling of Materials of Environment Concern (collectively, Environmental Laws), which
violation includes, but is not limited to, noncompliance with any permits or other governmental
authorizations required for the operation of the business of the Company or its Subsidiaries under
applicable Environmental Laws, or noncompliance with the terms and conditions thereof, nor has the
Company or its Subsidiaries received any written communication, whether from a governmental
authority, citizens group, employee or otherwise, that alleges that the Company or its Subsidiaries
is in violation of any Environmental Law; (ii) there is no claim, action or cause of action filed
with a court or governmental authority, no investigation with respect to which the Company or its
Subsidiaries have received written notice, and no written notice by any person or entity alleging
potential liability for investigatory costs, cleanup costs, governmental responses costs, natural
resources damages, property damages, personal injuries, attorneys fees or penalties arising out
of, based on or resulting from the presence, or release into the environment, of any Material of
Environmental Concern at any location owned, leased or operated by the Company or its Subsidiaries,
now or in the past (collectively, Environmental Claims), pending or, to the best of the Companys
knowledge, threatened against the Company or its Subsidiaries or any person or entity whose
liability for any Environmental Claim the Company or its Subsidiaries have retained or assumed
either contractually or by operation of law; (iii) to the best of the Companys knowledge, there
are no past or present actions, activities, circumstances, conditions, events or incidents,
including, without limitation, the release, emission, discharge, presence or disposal of any
Material of Environmental Concern, that reasonably could result in a violation of any Environmental
Law or form the basis of a potential Environmental Claim against the Company or its Subsidiaries or
against any person or entity whose liability for any Environmental Claim the Company or its
Subsidiaries has retained or assumed either contractually or by operation of law, and neither the
Company nor its Subsidiaries is subject to any pending or threatened proceeding under Environmental
Law to which a governmental authority is a party and which is reasonably likely to result in
monetary sanctions of $100,000 or more.
(cc)
ERISA Compliance.
The Company and any employee benefit plan (as defined under the
Employee Retirement Income Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, ERISA)) established or maintained by the Company, its
Subsidiaries or its ERISA Affiliates (as defined below) are in compliance in all material
respects with ERISA. ERISA Affiliate means, with respect to the Company and its Subsidiaries,
any member of any group of organizations described in Sections 414(b),(c),(m) or (o) of the
Internal Revenue Code of 1986, as amended, and the regulations and published interpretations
thereunder (the Code) of which the Company and its Subsidiaries are a member. No reportable
event (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any
employee benefit plan established or maintained by the Company, its Subsidiaries or any of its
ERISA Affiliates. No employee benefit plan established or maintained by the Company, its
Subsidiaries or any of its ERISA Affiliates, if such employee benefit plan were terminated, would
have any amount of unfunded benefit
10
liabilities (as defined under ERISA). Neither the Company nor its Subsidiaries nor any of its ERISA Affiliates has incurred or reasonably expects to incur
any liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any employee benefit plan or (ii) Section 412, 4971,
4975 or 4980B of the Code. Each employee benefit plan established or maintained by the Company,
its Subsidiaries or any of its ERISA Affiliates that is intended to be qualified under Section
401(a) of the Code is so qualified and nothing has occurred, whether by action or failure to act,
which would cause the loss of such qualification.
(dd)
Brokers
. Other than as required by the terms of this Agreement, there is no broker,
finder or other party that is entitled to receive from the Company or its Subsidiaries any
brokerage or finders fee or other fee, commission or performance-based compensation as a result of
any transactions contemplated by this Agreement.
(ee)
No Outstanding Loans or Other Indebtedness.
There are no outstanding loans, advances
(except normal advances for business expenses in the ordinary course of business) or guarantees of
indebtedness by any of the Company or its Subsidiaries to, or for the benefit of, any of the
officers, directors, employees or consultants of any of the Company or its Subsidiaries.
(ff)
Compliance with Laws.
Except as expressly described in the Registration Statement, the
Disclosure Package and the Prospectus, the Company: (i) is in full compliance with all statutes,
rules, regulations, permits, licenses, authorizations, ordinances, orders, decrees and guidances
issued by the applicable federal, state, local or foreign governmental or self-regulatory agencies
or bodies having authority over the Company or its Subsidiaries (Governmental Authority)
applicable to the conduct of its business as described under BUSINESSGeneralBusiness
StrategyThe Ronincast SolutionOur MarketsOur CustomersProduct DescriptionAgreement with
Marshall Special Assets Group, Inc.Services (Applicable Laws), except for such non-compliance
as would not, individually or in the aggregate, result in a Material Adverse Change; (ii) has not
received any notice of adverse finding, warning letter, untitled letter or other correspondence or
notice from any Governmental Authority alleging or asserting noncompliance with any Applicable Laws
or any licenses, certificates, approvals, clearances, registrations, authorizations, permits,
orders and supplements or amendments thereto required by any such Applicable Laws
(Authorizations); (iii) possesses all Authorizations required for the conduct of its business and
such Authorizations are valid and in full force and effect and the Company is not in violation of
any term of any such Authorizations, except for any failure to possess or violation of any
Authorization as would not, individually or in the aggregate, result in a Material Adverse Change;
(iv) has not received notice of any pending or threatened claim, suit, proceeding, hearing,
enforcement, audit, investigation, arbitration or other action from any Governmental Authority or
third party alleging that any Company operation or activity is in violation of any Applicable Laws
or Authorizations and the Company has no knowledge or reason to believe that any such Governmental
Authority or third party is considering any such claim, suit, proceeding, hearing, enforcement,
audit, investigation, arbitration or other action; (v) has not received notice that any
Governmental Authority has taken, is taking or intends to take action to limit, suspend, modify or
revoke any Authorizations and the Company has no knowledge or reason to believe that any such
Governmental Authority is considering such action; (vi) has filed, obtained, maintained or
submitted all reports, documents, forms, notices, applications, records, claims, submissions and
supplements or
11
amendments as are required by all Applicable Laws or Authorizations and all such
reports, documents, forms, notices, applications, records, claims, submissions and supplements or
amendments were complete and correct on the date filed (or were corrected or supplemented by a
subsequent submission), except for any failure to file, obtain, maintain, or submit, and any
failure to be complete and correct as would not result, individually or in the aggregate, in a
Material Adverse Change; and (vii) has not, either voluntarily or involuntarily, initiated,
conducted, or issued or caused to be initiated, conducted or issued, any recall, market withdrawal
or replacement, post-sale warning or other notice or action relating to an alleged lack of efficacy
of any product, any alleged product defect, or violation on any Applicable Laws or Authorizations;
the Company is not aware of any facts that would cause the Company to initiate any such notice or
action; and the Company does not have any knowledge or reason to believe that any Governmental
Authority or third party intends to initiate any such notice or action.
(gg)
Nasdaq Governance Rules.
The Company has duly adopted organizational structures and
policies sufficient to comply with the requirements of The Nasdaq Stock Market corporate governance
rules in effect as of the date hereof and as may be proposed to be amended in accordance with any
proposed rules of The Nasdaq Stock Market published for comment as of the date hereof.
(hh)
Patent Filings
. The Company has duly and properly filed or caused to be filed with the
United States Patent and Trademark Office (the PTO) all patent applications owned by the Company
(the Company Patent Applications). The Company has complied, or is in the process of complying,
with the PTOs duty of candor and disclosure for the Company Patent Applications and has made no
material misrepresentation in the Company Patent Applications. The Company is not aware of any
information material to a determination of patentability regarding the Company Patent Applications
not called or being called to the attention of the PTO or similar foreign authority which would
preclude the grant of a patent for the Company Patent Applications. The Company has no knowledge
of any information which would preclude the Company from having clear title to, and complete
ownership of, the Company Patent Applications.
(ii)
Suppliers
. No supplier of products to the Company has ceased shipments to the Company or
indicated, to the Companys best knowledge, an interest in decreasing or ceasing its sales to the
Company or otherwise modifying its relationship with the Company, other than in the normal and
ordinary course of business consistent with past practices in a manner which would not,
individually or in the aggregate, result in a Material Adverse Change.
(jj)
Statistical and Market Data.
The scientific, statistical and market-related data
included in the Registration Statement, the Disclosure Package and the Prospectus are accurately
based on or derived from sources that are credible and generally recognized as authoritative in the
Companys industry.
(kk)
MD&A.
There are no transactions, arrangements or other relationships that are required
to be disclosed in the Disclosure Package and the Prospectus by the Commissions Statement About
Managements Discussion and Analysis of Financial Condition and Results of Operations that are not
so disclosed or described as required.
12
(ll)
Sarbanes-Oxley Act.
The Company is in material compliance with all applicable provisions
of the U.S. Sarbanes Oxley Act of 2002 that are effective and the rules and regulations promulgated
in connection therewith.
(mm)
Underwriters Warrants.
The Underwriters Warrants have been duly authorized for
issuance to the Underwriter or its designees and will, when issued, possess rights, privileges, and
characteristics as represented in the most recent form of Underwriters Warrants filed as an
exhibit to the Registration Statement. Further, the securities to be issued upon exercise of the
Underwriters Warrants, when issued and delivered against payment therefor in accordance with the
terms thereof, will be duly and validly issued, fully paid, nonassessable and free of preemptive
rights, and all corporate action required to be taken for the authorization and issuance of the
Underwriters Warrants, and the securities to be issued upon their exercise, have been validly and
sufficiently taken. The execution by the Company of the Underwriters Warrants has been duly
authorized by all required action of the Company and, when so executed and delivered, will
constitute the valid and binding obligations of the Company, enforceable against the Company in
accordance with their terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors rights and remedies or by
general equitable principles.
(nn)
Compliance with Money Laundering Laws.
The operations of the Company and its
Subsidiaries are and have been conducted at all times in material compliance with applicable
financial recordkeeping and reporting requirements of the Currency and Foreign Transactions
Reporting Act of 1970, as amended, the USA Patriot Act, the money laundering statutes of all
jurisdictions to which the Company and its Subsidiaries are subject, the rules and regulations
thereunder and any related or similar rules, regulations or guidelines, issued, administered or
enforced by any governmental agency (collectively, the Money Laundering Laws), and no action,
suit or proceeding by or before any court or governmental agency, authority or body or any
arbitrator involving any of the Company and its Subsidiaries with respect to the Money Laundering
Laws is pending, or to the knowledge of the Company, threatened.
(oo)
Sanctions by OFAC
. Neither the Company nor its Subsidiaries nor, to the knowledge of the
Company, any director, officer, agent, employee or affiliate of any of the Company or its
Subsidiaries is currently subject to any U.S. sanctions administered by the Office of Foreign
Assets Control of the U.S. Treasury Department (OFAC); and the Company and its Subsidiaries will
not directly or indirectly use the proceeds of the offering, or lend, contribute or otherwise make
available such proceeds to any subsidiary, joint venture partner or other person or entity, for the
purpose of financing the activities of any person currently subject to any U.S. sanctions
administered by OFAC.
(pp)
No Issuance of Securities
. Except as expressly disclosed or described in the Disclosure
Package and the Prospectus, the Company has not sold or issued any securities during the six-month
period preceding the date of the Disclosure Package and the Prospectus, including any sales
pursuant to Rule 144A under, or Regulations D or S of, the Securities Act.
(qq)
Lock-Up Agreements.
All of the lock-up agreements described in Section 6(j) hereof are
in full force and effect.
13
Any certificate signed by an officer of the Company and delivered to the Underwriter or
to counsel for the Underwriter shall be deemed to be a representation and warranty by the Company
to the Underwriter as to the matters set forth therein. The Company acknowledges that the
Underwriter and, for purposes of the opinions to be delivered pursuant to Section 6 hereof,
counsels to the Company and to the Underwriter, will rely upon the accuracy and truthfulness of the
foregoing representations and hereby consents to such reliance.
2.
Purchase, Sale and Delivery of the Common Shares
.
(a)
The Firm Common Shares
. The Company agrees to issue and sell to the Underwriter the Firm
Common Shares upon the terms herein set forth. On the basis of the representations, warranties and
agreements herein contained, and upon the terms but subject to the conditions herein set forth, the
Underwriter agrees to purchase from the Company the Firm Common Shares. The purchase price per
Firm Common Share to be paid by the Underwriter to the Company shall be $______.___ per share.
(b)
The First Closing Date.
Delivery of certificates for the Firm Common Shares to be
purchased by the Underwriter and payment therefor shall be made at the offices of Maslon Edelman
Borman & Brand, LLP, 90 South 7
th
Street, Suite 3300, Minneapolis, Minnesota 55402 (or
such other place as may be agreed to by the Company and the Underwriter) at 9:00 a.m., Minneapolis,
Minnesota time, on ______, 2006, or such other time as the Underwriter shall designate by
notice to the Company (the time and date of such closing are called the First Closing Date). The
Company hereby acknowledges that circumstances under which the Underwriter may provide notice to
postpone the First Closing Date as originally scheduled include, but are in no way limited to, any
determination by the Company or the Underwriter to recirculate to the public copies of an amended
or supplemented Prospectus.
(c)
The Optional Common Shares; the Second Closing Date.
In addition, on the basis of the
representations, warranties and agreements herein contained, and upon the terms but subject to the
conditions herein set forth, the Company hereby grants an option to the Underwriter to purchase up
to an aggregate of 675,000 Optional Common Shares from the Company at the purchase price per share
to be paid by the Underwriter for the Firm Common Shares. The option granted hereunder is for use
by the Underwriter solely in covering any over-allotments in connection with the sale and
distribution of the Firm Common Shares. The option granted hereunder may be exercised at any time
(but not more than once) upon notice by the Underwriter to the Company, which notice may be given
at any time within 45 days from the date of this Agreement. Such notice shall set forth (i) the
aggregate number of Optional Common Shares as to which the Underwriter is exercising the option,
(ii) the names and denominations in which the certificates for the Optional Common Shares are to be
registered and (iii) the time, date and place at which such certificates will be delivered (which
time and date may be simultaneous with, but not earlier than, the First Closing Date; and in such
case the term First Closing Date shall refer to the time and date of delivery of certificates for
the Firm Common Shares and the Optional Common Shares). Such time and date of delivery, if
subsequent to the First Closing Date, is called the Second Closing Date and shall be determined
by the Underwriter and shall not be earlier than three nor later than five full business days after
delivery of such notice of exercise. If any Optional Common Shares are to be purchased, the
Underwriter agrees to purchase the number of Optional Common Shares (subject
14
to such adjustments to eliminate fractional shares as the Underwriter may determine) set forth
in the notice from the Underwriter to the Company referenced in this subsection (c). The
Underwriter may cancel the option at any time prior to its expiration by giving written notice of
such cancellation to the Company.
(d)
Public Offering of the Common Shares.
The Underwriter hereby advises the Company that it
intends to offer for sale to the public, as described in the Prospectus, the Common Shares as soon
after this Agreement has been executed and the Registration Statement has been declared effective
as the Underwriter, in its sole judgment, has determined is advisable and practicable.
(e)
Payment for the Common Shares.
Payment for the Common Shares shall be made at the First
Closing Date (and, if applicable, at the Second Closing Date) by wire transfer of immediately
available funds to the order of the Company. It is understood that the Underwriter has been
authorized, for its own account, to accept delivery of and receipt for, and make payment of the
purchase price for, the Firm Common Shares and any Optional Common Shares the Underwriter has
agreed to purchase.
(f)
Delivery of the Common Shares.
The Company shall deliver, or cause to be delivered, to
the Underwriter certificates for the Firm Common Shares at the First Closing Date, against the
irrevocable release of a wire transfer of immediately available funds for the amount of the
purchase price therefor. The Company shall also deliver, or cause to be delivered, to the
Underwriter certificates for the Optional Common Shares the Underwriter has agreed to purchase at
the First Closing Date or the Second Closing Date, as the case may be, against the irrevocable
release of a wire transfer of immediately available funds for the amount of the purchase price
therefor. The certificates for the Common Shares shall be in definitive form and registered in
such names and denominations as the Underwriter shall have requested at least two full business
days prior to the First Closing Date (or the Second Closing Date, as the case may be) and shall be
made available for inspection on the business day preceding the First Closing Date (or the Second
Closing Date, as the case may be) at a location in Minneapolis, Minnesota as the Underwriter may
designate. Time shall be of the essence, and delivery at the time and place specified in this
Agreement is a further condition to the obligations of the Underwriter.
(g)
Delivery of Prospectus to the Underwriter.
Not later than 3:00 p.m. (Minneapolis,
Minnesota time) on the next business day, or such shorter period as may be required by law,
following the date of this Agreement, the Company shall deliver or cause to be delivered copies of
the Prospectus in such quantities and at such places as the Underwriter shall request.
3.
Covenants of the Company
. The Company further covenants and agrees with the Underwriter as
follows:
(a)
Underwriters Review of Proposed Amendments and Supplements.
During such period beginning
on the Initial Sale Time and ending on the later of the First Closing Date or such other date, as
in the opinion of counsel for the Underwriter, the Prospectus is no longer required by law to be
delivered in connection with sales by an Underwriter or dealer, including in circumstances where
such requirement may be satisfied pursuant to Rule 172 (the Prospectus
15
Delivery Period), prior to amending or supplementing the Registration Statement (including
any registration statement filed under Rule 462(b) under the Securities Act), the Disclosure
Package or the Prospectus, the Company shall furnish to the Underwriter for review a copy of each
such proposed amendment or supplement, and the Company shall not file any such proposed amendment
or supplement to which the Underwriter reasonably objects.
(b)
Securities Act Compliance.
After the date of this Agreement, the Company shall promptly
advise the Underwriter in writing of (i) the receipt of any comments of, or requests for additional
or supplemental information from, the Commission, (ii) the time and date of any filing of any
post-effective amendment to the Registration Statement or any amendment or supplement to any
preliminary prospectus or the Prospectus, (iii) the time and date that any post-effective amendment
to the Registration Statement becomes effective and (iv) the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or any post-effective amendment
thereto or of any order preventing or suspending the use of the Registration Statement, any
preliminary prospectus or the Prospectus, or of any proceedings to remove, suspend or terminate
from listing or quotation the Common Stock from any securities exchange upon which it is listed for
trading or included or designated for quotation, or of the threatening or initiation of any
proceedings for any of such purposes. The Company shall use its best efforts to prevent the
issuance of any such stop order or prevention or suspension of such use. If the Commission shall
enter any such stop order at any time, the Company will use its best efforts to obtain the lifting
of such order at the earliest possible moment. Additionally, the Company agrees that it shall
comply with the provisions of Rules 424(b) and 434, as applicable, under the Securities Act and
will use its best efforts to confirm that any filings made by the Company under such Rule 424(b)
were received in a timely manner by the Commission.
(c)
Amendments and Supplements to the Prospectus and Other Securities Act Matters.
(i) If
the preliminary prospectus included in the Disclosure Package is being used to solicit offers to
buy the Common Shares and any event or development shall occur or condition exist as a result of
which it is necessary to amend or supplement the Disclosure Package in order to make the statements
therein, in the light of the circumstances under which they were made or then prevailing, as the
case may be, not misleading (in which case the Company agrees to notify the Underwriter of any such
event or condition), or if in the reasonable opinion of the Underwriter it is otherwise necessary
to amend or supplement the Disclosure Package to comply with law, the Company agrees to promptly
prepare (subject to Section 3(a) hereof), file with the Commission and furnish to the Underwriter
and to dealers, at its own expense, amendments or supplements to the Disclosure Package so that the
statements in the Disclosure Package as so amended or supplemented will not be, in the light of the
circumstances under which they were made or then prevailing, as the case may be, misleading or so
that the Disclosure Package, as amended or supplemented, will comply with law. (ii) If, during the
Prospectus Delivery Period, any event shall occur or condition exist as a result of which it is
necessary to amend or supplement the Registration Statement or the Prospectus in order to make the
statements therein, in the light of the circumstances under which they were made or then
prevailing, as the case may be, not misleading, or if in the opinion of the Underwriter or counsel
for the Underwriter it is otherwise necessary to amend or supplement the Registration Statement or
the Prospectus to comply with applicable law, including in connection with the delivery of the
Prospectus, the Company agrees to promptly prepare (subject to Section 3(a) hereof), file with the
Commission and furnish at its own expense to the Underwriter and to dealers, amendments or
supplements to
16
the Registration Statement or the Prospectus so that the statements in the Registration
Statement or the Prospectus as so amended or supplemented will not, in the light of the
circumstances under which they were made or then prevailing, as the case may be, misleading or so
that the Registration Statement or the Prospectus, as amended or supplemented, will comply with
law.
(d)
Permitted Free Writing Prospectuses
. The Company agrees that, unless it obtains the prior
written consent of the Underwriter, it will not make any offer relating to the Common Shares that
would constitute an Issuer Free Writing Prospectus or that would otherwise constitute a free
writing prospectus (as defined in Rule 405 of the Securities Act) required to be filed by the
Company with the Commission or retained by the Company under Rule 433 of the Securities Act;
provided that the prior written consent of the Underwriter hereto shall be deemed to have been
given in respect of the Free Writing Prospectuses included in Schedule 1 hereto. Any such free
writing prospectus consented to by the Underwriter is hereinafter referred to as a Permitted Free
Writing Prospectus. The Company agrees that (i) it has treated and will treat, as the case may
be, each Permitted Free Writing Prospectus as an Issuer Free Writing Prospectus, and (ii) has
complied and will comply, as the case may be, with the requirements of Rules 164 and 433 of the
Securities Act applicable to any Permitted Free Writing Prospectus, including in respect of timely
filing with the Commission, legending and record keeping.
(e)
Copies of the Registration Statement and the Prospectus
. The Company will furnish to the
Underwriter signed copies of the Registration Statement (including exhibits thereto) and, during
the Prospectus Delivery Period, as many copies of the Prospectus and any amendments or supplements
thereto and the Disclosure Package as the Underwriter may reasonably request.
(f)
Blue Sky Compliance.
The Company shall cooperate with the Underwriter and counsel for the
Underwriter to qualify or register the Common Shares for sale under (or obtain exemptions from the
application of) the state securities or blue sky laws or other foreign laws of those jurisdictions
designated by the Underwriter, shall comply with such laws and shall continue such qualifications,
registrations and exemptions in effect so long as required for the distribution of the Common
Shares. The Company shall not be required to qualify as a foreign corporation or to take any
action that would subject it to general service of process in any such jurisdiction where it is not
presently qualified or where it would be subject to taxation as a foreign corporation. The Company
will advise the Underwriter promptly of the suspension of the qualification or registration of (or
any such exemption relating to) the Common Shares for offering, sale or trading in any jurisdiction
or any initiation or threat of any proceeding for any such purpose, and in the event of the
issuance of any order suspending such qualification, registration or exemption, the Company shall
use its best efforts to obtain the withdrawal thereof at the earliest possible moment.
(g)
Use of Proceeds.
The Company shall apply the proceeds from the sale of the Common Shares
sold by it in the manner described under the caption Use of Proceeds in each of the Disclosure
Package and the Prospectus.
(h)
Transfer Agent.
The Company shall engage and maintain, at its expense, an independent,
qualified and experienced registrar and transfer agent for the Common Stock.
17
(i)
Earnings Statement.
As soon as practicable, the Company will make generally available to
its security holders and to the Underwriter an earnings statement (which need not be audited)
covering the twelve-month period ending December 31, 2007, that satisfies the provisions of Section
11(a) of the, and Rule 158 under the, Securities Act.
(j)
Periodic Reporting Obligations.
During the Prospectus Delivery Period, the Company shall
file, on a timely basis, with the Commission and The Nasdaq Capital Market all reports and
documents required to be filed under the Exchange Act. Additionally, the Company shall timely
report the use of proceeds from the issuance of the Common Shares as may be required under Rule 463
under the Securities Act.
(k)
Company to Provide Interim Financial Statements.
Prior to the Closing Date, the Company
will furnish the Underwriter as soon as they have been prepared by or are available to the Company,
a copy of any unaudited interim financial statements of the Company and its Subsidiaries for any
period subsequent to the period covered by the most recent financial statements appearing in the
Registration Statement and the Prospectus.
(l)
Listing.
The Company will take such steps as may be required to cause, subject to notice
of issuance, the Common Shares to be listed on The Nasdaq Capital Market, and will comply with the
corporate governance or similar rules of The Nasdaq Capital Market.
(m)
Agreement Not to Offer or Sell Additional Securities.
During the period commencing on the
date hereof and ending on the 180
th
day following the date of the Prospectus, the
Company will not, without the prior written consent of the Underwriter (which consent may be
withheld at the sole discretion of the Underwriter), directly or indirectly, 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 a registration statement with the Commission in
respect of, 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, any shares of Common Stock, options
or warrants to acquire shares of the Common Stock or securities exchangeable or exercisable for or
convertible into shares of Common Stock, or publicly announce an intention to do any of the
foregoing (other than as contemplated by this Agreement with respect to the Common Shares and the
Underwriters Warrant (as defined)); provided, however, that the Company may issue shares of its
Common Stock or options or other awards to purchase its Common Stock, or Common Stock upon the
exercise of options, warrants or convertible securities, pursuant to any stock option, stock bonus
or other incentive plan or other arrangement described in the Prospectus, but only if the holders
of such shares, options or other awards, or shares issued upon exercise of such options, warrants
or convertible securities agree in writing not to sell, offer, dispose of or otherwise transfer any
such shares, options or warrants during such 180 day period without the prior written consent of
the Underwriter (which consent may be withheld at the sole discretion of the Underwriter).
Notwithstanding restrictions set forth above in the Section 3(m), the Company shall be permitted to
file a resale registration statement in compliance with existing agreements of the Company that
require such filing respecting shares of Common Stock issuable upon conversion of the Companys 12%
Convertible Promissory Notes, upon exercise of warrants issued in connection therewith and other
outstanding warrants
18
(including the Underwriters Warrant (as defined below)), and upon conversion by existing
holders of other convertible notes who entered into note conversion agreements and addenda thereto.
The filing of such resale registration statement shall in not act as a waiver of, or in any way
affect the Companys or the Underwriters rights under written lock-up agreements. Notwithstanding
the foregoing, if (a) during the period that begins on the date that is 15 calendar days plus three
business days before the last day of the 180-day restricted period and ends on the last day of the
180-day restricted period, the Company issues an earnings release or material news or a material
event relating to the Company occurs; or (b) prior to the expiration of the 180-day restricted
period, the Company announces that it will release earnings results during the 16-day period
beginning on the last day of the 180-day restricted period, then the restrictions imposed in this
clause shall continue to apply until the expiration of the date that is 15 calendar days plus three
business days after the date on which the issuance of the earnings release or the material news or
material event occurs, unless the Underwriter waives such extension. The Company will provide the
Underwriter and each individual subject to the 180-day restricted period pursuant to the lock-up
agreements described in Section 6(j) with prior notice of any such announcement that gives rise to
an extension of the 180-day restricted period.
(n)
Compliance with Sarbanes-Oxley Act
. During the Prospectus Delivery Period, the Company
will comply in all material respects with all applicable securities and other laws, rules and
regulations, including, without limitation, the Sarbanes-Oxley Act, and use its best efforts to
cause the Companys directors and officers, in their capacities as such, to comply in all material
respects with such laws, rules and regulations, including, without limitation, the provisions of
the Sarbanes-Oxley Act.
(o)
Future Reports to the Underwriter
. For a period of five years following the date of the
Prospectus, the Company will furnish to the Underwriter, Feltl and Company, Inc., 225 South Sixth
Street, Suite 4200, Minneapolis, MN 55402, Attention: John C. Feltl (i) as soon as practicable
after the end of each fiscal year, copies of the Annual Report of the Company containing the
balance sheet of the Company as of the close of such fiscal year and statements of income,
shareholders equity and cash flows for the year then ended and the opinion thereon of the
Companys independent public or certified public accountants; (ii) as soon as practicable after the
filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on
Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, the
NASD or any securities exchange; and (iii) as soon as available, copies of any report or
communication of the Company mailed generally to holders of its capital stock; provided, however,
that the filing of such reports and communications with the Commission through the EDGAR system
shall satisfy the requirements of this Section 3(o).
(p)
Investment Limitation.
The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Common Shares, in such a manner as would require the
Company to register as an investment company under the Investment Company Act.
(q)
No Manipulation of Price.
The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably be expected to
constitute, the stabilization or manipulation of the price of any securities of the Company.
19
(r)
Existing Lock-Up Agreements.
The Company will pay all reasonable expenses incurred by the
Underwriter in connection with strictly enforcing all agreements between the Underwriter and each
director, officer and individual or entity owning any capital stock of the Company and each holder
of options, warrants or other securities convertible into capital stock of the Company that
prohibit the sale, transfer, assignment, pledge or hypothecation of any of the Companys securities
in connection with the Companys initial public offering. In addition, the Company will direct the
transfer agent to place stop transfer restrictions upon any such securities of the Company.
(s)
Company Trademarks.
Upon written request of the Underwriter, the Company shall furnish,
or cause to be furnished, to the Underwriter an electronic version of the Companys trademarks,
both for use on the Underwriters website, if any, operated by the Underwriter for the purpose of
facilitating the on-line offering of the Common Shares (the License); provided, however, that the
License shall be used solely for the purpose described above, the Underwriter shall comply with all
trademark, trade name, and service mark notice markings required by the Company and shall not use
the marks in any manner that adversely reflects upon the image or quality of the Company. The
License is granted without any fee, the License is non-exclusive, and the License may not be
assigned, transferred or sub-licenses by the Underwriter.
The Underwriter may, in its sole discretion, waive in writing the performance by the Company
of any one or more of the foregoing covenants or extend the time for their performance.
4.
Covenant of the Underwriter
. The Underwriter certifies to and covenants with the Company
that it has not and will not use, authorize use of, refer to, or participate in the planning for
use of any free writing prospectus, as defined in Rule 405 under the Securities Act (which term
includes use of any written information furnished to the Commission by the Company and not
incorporated by reference into the Registration Statement and any press release issued by the
Company), other than (i) a free writing prospectus that contains no issuer information (as
defined in Rule 433(h)(2) under the Securities Act) that was not included (including through
incorporation by reference) in the preliminary prospectus, (ii) any Issuer Free Writing Prospectus
identified on Schedule 1, or (iii) any free writing prospectus prepared by the Underwriter and
approved by the Company in advance in writing.
5.
Payment of Expenses and Underwriters Warrants
.
(a) The Company agrees to pay all costs, fees and expenses incurred in connection with the
performance of its obligations hereunder, including, without limitation (i) all expenses incident
to the issuance and delivery of the Common Shares (including all printing and engraving costs),
(ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the
Common Shares to the Underwriter, (iv) all fees and expenses of the Companys counsel, independent
public or certified public accountants and other advisors, (v) all costs and expenses incurred in
connection with the preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and certificates of
experts), each Issuer Free Writing Prospectus, each preliminary prospectus, the Prospectus and any
Prospectus wrapper, and all amendments and supplements thereto, and this Agreement, (vi) all filing
fees, and reasonable attorneys fees and expenses incurred by the Company and the Underwriter in
connection with qualifying or registering (or obtaining
20
exemptions from the qualification or registration of) all or any part of the Common Shares for
offer and sale under the state securities or blue sky laws or any foreign jurisdiction, and
preparing and printing a Blue Sky Survey or memorandum, and any supplements thereto, advising the
Underwriter of such qualifications, registrations and exemptions, (vii) the filing fees incident
to, and the reasonable fees and expenses of counsel for the Underwriter in connection with, the
NASDs review and approval of the Underwriters participation in the offering and distribution of
the Common Shares, (viii) the fees and expenses associated with including the Common Shares on The
Nasdaq Capital Market, (ix) all other fees, costs and expenses referred to in Item 13 of Part II of
the Registration Statement, (x) the costs and expenses of the Company relating to investor
presentations on any road show undertaken in connection with the marketing of the Common Shares,
including, without limitation, expenses associated with the production of road show slides and
graphics, fees and expenses of any consultants engaged by the Company or the Underwriter (with the
Companys prior consent which shall not unreasonably be withheld) in connection with the road show
presentations, lodging expenses of the Underwriter and officers of the Company and any such
consultants, and all transportation expenses, in connection with the road show, (xi) a
nonaccountable expense allowance payable to the Underwriter equal to two percent (2 %) of the
public offering price of the Common Shares payable on the First Closing Date, less the refundable
$50,000 deposit already paid by the Company to the Underwriter, (xii) all reasonable expenses of
the Underwriter in connection with due diligence meetings with the investment community and (xiii)
in addition to the fees and expenses of counsel to the Underwriter specifically identified above in
this Section 5(a), all other reasonable fees and expenses of such counsel incurred incident to and
in connection with the performance of the Underwriting obligations under and the transactions
contemplated by this Agreement. Except as otherwise provided in this Agreement, the Underwriter
shall pay its own expenses, including the fees and disbursements of its legal counsel.
(b) On the First Closing Date, the Company shall sell to the Underwriter for an aggregate of
$50, a warrant (the Underwriters Warrants) entitling the Underwriter to purchase 450,000 shares
of Common Stock, at a per share exercise price equal to $_______ (subject to adjustment), which
shall first become exercisable one year after the Effective Date and shall remain exercisable for a
period of four years thereafter. The Underwriters Warrant shall be subject to certain transfer
restrictions and shall be in substantially the form attached as Appendix A hereto.
6.
Conditions of the Obligations of the Underwriter.
The obligations of the Underwriter to
purchase and pay for the Common Shares as provided herein on the First Closing Date and, with
respect to the Optional Common Shares, the Second Closing Date, shall be subject to the accuracy of
the representations and warranties on the part of the Company set forth in Section 1 hereof as of
the date hereof and as of the First Closing Date as though then made and, with respect to the
Optional Common Shares, as of the Second Closing Date as though then made, to the timely
performance by the Company of its covenants and other obligations hereunder, and to each of the
following additional conditions:
(a)
Accountants Comfort Letter.
On the date hereof, the Underwriter shall have received from
Virchow, Krause & Company, LLP, independent public or certified public accountants for the Company,
a letter dated the date hereof addressed to the Underwriter, in form and substance satisfactory to
the Underwriter, containing statements and information of the
type
21
ordinarily included in accountants comfort letters to underwriters, delivered according to
Statement of Auditing Standards No. 72 (or any successor bulletin), with respect to the audited and
unaudited financial statements and certain financial information contained in the Registration
Statement and the Prospectus.
(b)
Compliance with Registration Requirements; No Stop Order; No Objection from NASD.
For the
period from and after effectiveness of this Agreement and prior to the First Closing Date and, with
respect to the Optional Common Shares, the Second Closing Date:
(i) the Company, if required, shall have filed the Prospectus with the Commission
(including the information required by Rule 430A under the Securities Act) in the manner and
within the time period required by Rule 424(b) under the Securities Act; or the Company
shall have filed a post-effective amendment to the Registration Statement containing the
information required by such Rule 430A, and such post-effective amendment shall have become
effective;
(ii) all material required to be filed by the Company pursuant to Rule 433(d) under the
Securities Act shall have been filed with the Commission within the applicable time periods
prescribed for such filings under such Rule 433;
(iii) no stop order suspending the effectiveness of the Registration Statement, any
Rule 462(b) Registration Statement, or any post-effective amendment to the Registration
Statement, shall be in effect and no proceedings for such purpose shall have been instituted
or threatened by the Commission; and
(iv) the NASD shall have raised no objection to the fairness and reasonableness of the
underwriting terms and arrangements.
(c)
No Material Adverse Change.
For the period from and after the date of this Agreement and
prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing
Date: (i) in the judgment of the Underwriter there shall not have occurred any Material Adverse
Change, and (ii) there shall not have been any change or decrease specified in the letter referred
to in paragraph (a) of this Section 6 which is, in the sole judgment of the Underwriter, so
material and adverse as to make it impractical or inadvisable to proceed with the offering or
delivery of the Common Shares as contemplated by the Registration Statement and the Prospectus.
(d)
Opinion of Counsel for the Company
. On each of the First Closing Date and the Second
Closing Date, the Underwriter shall have received the favorable opinion of Briggs and Morgan, P.A.,
counsel for the Company, dated as of such closing date, in form and substance satisfactory to the
Underwriter, the form of which is attached as Exhibit A.
(e)
Opinion of Counsel for the Underwriter
. On each of the First Closing Date and the Second
Closing Date, the Underwriter shall have received the favorable opinion of Maslon Edelman Borman &
Brand, LLP, counsel for the Underwriter, dated as of such closing date in a form satisfactory to
the Underwriter.
22
(f)
Officers Certificate.
On each of the First Closing Date and the Second Closing Date, the
Underwriter shall have received the written certificates executed by the Chairman, President and
Chief Executive Officer of the Company and the Executive Vice President and Chief Financial Officer
of the Company (who shall be the Companys principal financial and accounting officer), dated as of
such closing date, to the effect that the signers of such certificate have carefully examined the
Registration Statement, the Prospectus and any amendment or supplement thereto, any Issuer Free
Writing Prospectus and any amendment or supplement thereto and this Agreement, to the effect set
forth in subsection (b) of this Section 6, and further to the effect that:
(i) for the period from and after the date of this Agreement and prior to such closing
date, there has not occurred any Material Adverse Change;
(ii) the representations, warranties and covenants of the Company set forth in Sections
1 and 3 of this Agreement are true and correct with the same force and effect as though
expressly made on and as of such closing date;
(iii) the Company has complied with all the agreements hereunder and satisfied all the
conditions on its part to be performed or satisfied hereunder at or prior to such closing
date; and
(iv) (A) any financial projections presented to the Underwriter for its review were
prepared in good faith and represent the Company managements best estimate of the
Companys financial condition following the First Closing Date; and (B) the net proceeds to
be derived from the offering that is the subject hereof are sufficient to fund the Companys
operations for at least twelve (12) months following the First Closing Date.
(g)
Secretarys Certificate.
On each of the First Closing Date and the Second Closing Date,
the Underwriter shall have received the written certificates executed by the Secretary of the
Company, dated as of such closing date, in form and substance satisfactory to the Underwriter,
certifying as to (i) the incumbency and the signatures of those officers of the Company executing
this Agreement and such other certificates or documents contemplated under this Agreement, (ii) the
charter or bylaws of the Company, and (iii) the resolutions of the Board of Directors of the
Company authorizing the execution and delivery of this Agreement and such other certificates or
documents contemplated under this Agreement, a copy of such resolutions to be attached to said
certificate.
(h)
Good Standing.
The Underwriter shall have received on and as of the First Closing Date or
the Second Closing Date, as the case may be, satisfactory evidence of the good standing of each of
the Company and its Subsidiaries in the jurisdiction of their respective organization and their
good standing as a foreign entity in such other jurisdictions as the Underwriter may reasonably
request, in each case in writing or any standard form from the appropriate Governmental Authorities
of such jurisdictions.
(i)
Bring-down Comfort Letter.
On each of the First Closing Date and the Second Closing Date,
the Underwriter shall have received from Virchow, Krause & Company, LLP, as
23
the independent registered public accounting firm for the Company, a letter dated such date,
in form and substance satisfactory to the Underwriter to the effect that they reaffirm the
statements made in the letter furnished by them pursuant to subsection (a) of this Section 6,
except that the specified date referred to therein for the carrying out of procedures shall be no
more than three business days prior to the First Closing Date and Second Closing Date, if
applicable.
(j)
Lock-Up Agreement from Certain Securityholders of the Company.
On or prior to the date
hereof, the Company shall have furnished to the Underwriter an agreement in the form of Exhibit B
hereto, or in such other form that is satisfactory to the Underwriter, from each director, officer
and each individual or entity owning any capital stock of the Company and each holder of options,
warrants or other securities convertible into capital stock of the Company, and such agreement
shall be in full force and effect on each of the First Closing Date and the Second Closing Date.
(k)
Additional Documents.
On or before each of the First Closing Date and the Second Closing
Date, the Underwriter and counsel for the Underwriter shall have received such information,
documents and opinions as they may reasonably require for the purposes of enabling them to pass
upon the issuance and sale of the Common Shares as contemplated herein, or in order to evidence the
accuracy of any of the representations and warranties, or the satisfaction of any of the conditions
or agreements, herein contained.
If any condition specified in this Section 6 is not satisfied when and as required to be
satisfied, this Agreement may be terminated by the Underwriter by notice to the Company at any time
on or prior to the First Closing Date and, with respect to the Optional Common Shares, at any time
prior to the Second Closing Date, which termination shall be without liability on the part of any
party to any other party, except that Section 5, Section 7, Section 9 and Section 10 shall at all
times be effective and shall survive such termination.
7.
Reimbursement of Underwriter Expenses
. If this Agreement is terminated by the Underwriter
pursuant to Section 6, Section 8 or Section 11, hereof, or if the sale to the Underwriter of the
Common Shares on the First Closing Date is not consummated because of any refusal, inability or
failure on the part of the Company to perform any agreement herein or to comply with any provision
hereof, the Company agrees to reimburse the Underwriter, upon demand, for all out-of-pocket
expenses that shall have been reasonably incurred by the Underwriter in connection with the
proposed purchase and the offering and sale of the Common Shares, including, but not limited to,
fees and disbursements of counsel, printing expenses, travel expenses, postage, facsimile and
telephone charges, up to the $50,000 deposit already received by the Underwriter. The Company
shall have no obligation to the Underwriter for out-of-pocket expenses referenced in this Section 7
to the extent that the Underwriters out-of-pocket expenses, in the aggregate, exceed $50,000. In
the event all such out-of-pocket expenses do not equal or exceed $50,000, the Underwriter shall, as
soon as reasonably practicable, pay the Company the difference between the aggregate amount of all
such out-of-pocket expenses and $50,000.
8.
Effectiveness of this Agreement.
This Agreement shall not become effective until the later
of (i) the execution of this Agreement by the parties hereto, and (ii) notification by the
Commission to the Company and the Underwriter of the effectiveness of the Registration Statement
under the Securities Act.
24
Prior to such effectiveness, this Agreement may be terminated by any party by notice to
each of the other parties hereto, and any such termination shall be without liability on the part
of (a) the Company to the Underwriter, except that the Company shall be obligated to reimburse the
expenses of the Underwriter to the extent required by Sections 5 and 7 hereof, (b) the Underwriter
to the Company, except as provided in Section 7, or (c) any party hereto to any other party except
that the provisions of Section 9 and Section 10 shall at all times be effective and enforceable and
shall survive such termination.
9.
Indemnification
.
(a)
Indemnification of the Underwriter.
The Company agrees to indemnify and hold harmless the
Underwriter, its officers, directors and employees, and each person, if any, who controls the
Underwriter within the meaning of the Securities Act and the Exchange Act, against any loss, claim,
damage, liability or expense, joint or several, as incurred, to which the Underwriter, its
officers, directors and employees or such controlling person may become subject, under the
Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if such settlement is effected
with the prior written consent of the Company), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon
any untrue statement or alleged untrue statement of a material fact contained in the Registration
Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant
to Rule 430A, Rule 430B or Rule 430C under the Securities Act, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to make the statements
therein not misleading; or (ii) upon any untrue statement or alleged untrue statement of a material
fact contained in any Issuer Free Writing Prospectus, any preliminary prospectus or the Prospectus
(or any amendment or supplement thereto), or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading; or (iii) in whole or in part upon any inaccuracy in the
representations and warranties of the Company contained herein; or (iv) in whole or in part upon
any failure of the Company or any of its Subsidiaries to perform its obligations hereunder or under
law; or (v) any act or failure to act or any alleged act or failure to act by the Underwriter in
connection with, or relating in any manner to, the Common Stock or the offering contemplated
hereby, and which is included as part of or referred to in any loss, claim, damage, liability or
action arising out of or based upon any matter covered by clause (i) through (iv) above, provided
that the Company shall not be liable under this clause (v) to the extent that a court of competent
jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability or
action resulted directly from any such acts or failures to act undertaken or omitted to be taken by
the Underwriter through its gross negligence, bad faith or willful misconduct; and to reimburse the
Underwriter, its officers, directors and employees and each such controlling person for any and all
expenses (including the fees and disbursements of counsel for the Underwriter chosen by the
Underwriter) as such expenses are reasonably incurred by the Underwriter, officer, director,
employee, or such controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or action; provided,
however, that (A) the foregoing indemnity agreement shall not apply to any loss, claim, damage,
liability or expense to the extent, but only to the extent, arising out of or based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in reliance upon and in
conformity with
25
written information furnished to the Company by the Underwriter expressly for use in the
Registration Statement, any Issuer Free Writing Prospectus, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto); and (B) that with respect to any preliminary
prospectus, the foregoing indemnity agreement shall not inure to the benefit of the Underwriter or
any person controlling the Underwriter if copies of any subsequent preliminary prospectus were
timely delivered to such Underwriter and a copy of such subsequent preliminary prospectus was not
sent or given by or on behalf of the Underwriter to such person, if required by law so to have been
delivered, at or prior to the written confirmation of the sale of the Common Shares to such person,
and if a court of competent jurisdiction shall have determined by a final non-appealable judgment
that the subsequent preliminary prospectus would have cured the defect giving rise to such loss,
claim, damage, liability or expense. The indemnity agreement set forth in this Section 9(a) shall
be in addition to any liabilities that the Company may otherwise have.
(b)
Indemnification of the Company, its Directors and Officers.
The Underwriter agrees to
indemnify and hold harmless the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within the meaning of the
Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense, as
incurred, to which the Company, or any such director, officer or controlling person may become
subject, under the Securities Act, the Exchange Act, or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the prior written consent of the Underwriter), insofar as such loss,
claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises
out of or is based upon any untrue or alleged untrue statement of a material fact contained in the
Registration Statement, any Issuer Free Writing Prospectus, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto), or arises out of or is based upon the omission
or alleged omission to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged omission was made in
the Registration Statement, any Issuer Free Writing Prospectus, any preliminary prospectus, or the
Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with
written information furnished to the Company by the Underwriter expressly for use therein; and to
reimburse the Company, or any such director, officer or controlling person, for any legal and other
expenses (subject to Section 9(c) hereof) reasonably incurred by the Company, or any such director,
officer or controlling person in connection with investigating, defending, settling, compromising
or paying any such loss, claim, damage, liability, expense or action. The Company hereby
acknowledges that the only information that the Underwriter has furnished to the Company expressly
for use in the Registration Statement, any Issuer Free Writing Prospectus, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) are the statements set forth
under Commissions and Expenses, Lock-Up Agreement (but excluding the first two sentences
thereof), Stabilization; Short Positions and Penalty Bids, and Discretionary Accounts
subheadings under the caption Underwriting in the Prospectus. The indemnity agreement set forth
in this Section 9(b) shall be in addition to any liabilities that the Underwriter may otherwise
have.
26
(c)
Notifications and Other Indemnification Procedures.
Promptly after receipt by an
indemnified party under this Section 9 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against an indemnifying party
under this Section 9, notify the indemnifying party in writing of the commencement thereof, but the
omission so to notify the indemnifying party will not relieve it from any liability which it may
have to any indemnified party for contribution or otherwise than under the indemnity agreement
contained in this Section 9 or to the extent it is not prejudiced as a proximate result of such
failure. In case any such action is brought against any indemnified party and such indemnified
party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be
entitled to participate in and, to the extent that it shall elect, jointly with all other
indemnifying parties similarly notified, by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to assume the defense
thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that a conflict may arise between the positions
of the indemnifying party and the indemnified party in conducting the defense of any such action or
that there may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the indemnified party or
parties shall have the right to select separate counsel to assume such legal defenses and to
otherwise participate in the defense of such action on behalf of such indemnified party or parties.
Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying
partys election so to assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party under this Section 9
for any legal or other expenses subsequently incurred by such indemnified party in connection with
the defense thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one separate counsel (together
with local counsel), approved by the indemnifying party representing the indemnified parties who
are parties to such action) or (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action, in each of which cases the fees and expenses of counsel
shall be at the expense of the indemnifying party.
(d)
Settlements.
The indemnifying party under this Section 9 shall not be liable for any
settlement of any proceeding effected without its prior written consent, but if settled with such
consent or if there be a final non-appealable judgment for the plaintiff, the indemnifying party
agrees to indemnify the indemnified party against any loss, claim, damage, liability or expense by
reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an
indemnified party shall have requested an indemnifying party to reimburse the indemnified party for
fees and expenses of counsel as contemplated by Section 9(c) hereof, the indemnifying party agrees
that it shall be liable for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party
of the aforesaid request, including notice of the terms of such settlement, and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance with such request
prior to the date of such settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement, compromise or
27
consent to the entry of judgment in any pending or threatened action, suit or proceeding in
respect of which any indemnified party is or could have been a party and indemnity was or could
have been sought hereunder by such indemnified party, unless such settlement, compromise or consent
includes an unconditional release of such indemnified party from all liability on claims that are
the subject matter of such action, suit or proceeding and does not include a statement as to or an
admission of fault, culpability or a failure to act, by or on behalf of any indemnified party.
10.
Contribution.
If the indemnification provided for in Section 9 is for any reason held to
be unavailable to or otherwise insufficient to hold harmless an indemnified party in respect of any
losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party
shall contribute to the aggregate amount paid or payable by such indemnified party, as incurred, as
a result of any losses, claims, damages, liabilities or expenses referred to therein (i) in such
proportion as is appropriate to reflect the relative benefits received by the Company, on the one
hand, and the Underwriter, on the other hand, from the offering of the Common Shares pursuant to
this Agreement or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company, on the one hand, and
the Underwriter, on the other hand, in connection with the statements or omissions or inaccuracies
in the representations and warranties herein which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company, on the one hand, and the Underwriter, on the other hand, in
connection with the offering of the Common Shares pursuant to this Agreement shall be deemed to be
in the same respective proportions as the total net proceeds from the offering of the Common Shares
pursuant to this Agreement (before deducting expenses) received by the Company, and the total
underwriting discount received by the Underwriter, in each case as set forth on the front cover
page of the Prospectus, bear to the aggregate initial public offering price of the Common Shares as
set forth on such cover page. The relative fault of the Company, on the one hand, and the
Underwriter, on the other hand, shall be determined by reference to, among other things, whether
any such untrue or alleged untrue statement of a material fact or omission or alleged omission to
state a material fact or any such inaccurate or alleged inaccurate representation or warranty
relates to information supplied by the Company, on the one hand, or the Underwriter, on the other
hand, and the parties relative intent, knowledge, access to information and opportunity to correct
or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims, damages, liabilities
and expenses referred to above shall be deemed to include, subject to the limitations set forth in
Section 9(c), any legal or other fees or expenses reasonably incurred by such party in connection
with investigating or defending any action or claim. The provisions set forth in Section 9(c) with
respect to notice of commencement of any action shall apply if a claim for contribution is to be
made under this Section 10; provided, however, that no additional notice shall be required with
respect to any action for which notice has been given under Section 9(c) for purposes of
indemnification.
The Company and the Underwriter agree that it would not be just and equitable if contribution
pursuant to this Section 10 were determined by pro rata allocation or by any other method of
28
allocation which does not take account of the equitable considerations referred to in this
Section 10.
Notwithstanding the provisions of this Section 10, the Underwriter shall not be required to
contribute any amount in excess of the underwriting commissions or discount received by the
Underwriter in connection with the Common Shares underwritten by it and distributed to the public.
No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 10, each officer, director and employee
of the Underwriter and each person, if any, who controls the Underwriter within the meaning of the
Securities Act and the Exchange Act shall have the same rights to contribution as the Underwriter,
and each director of the Company, each officer of the Company who signed the Registration
Statement, and each person, if any, who controls the Company with the meaning of the Securities Act
and the Exchange Act shall have the same rights to contribution as the Company.
11.
Termination of this Agreement.
Prior to the First Closing Date, this Agreement may be
terminated by the Underwriter by notice given to the Company if at any time (a) trading in or
listing of any of the Companys securities shall have been suspended or limited by the Commission
or by The Nasdaq Capital Market or trading in securities generally on either The Nasdaq Stock
Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum
prices shall have been generally established on any of such stock exchanges by the Commission or
the NASD; (b) a general banking moratorium shall have been declared by any federal, New York,
Delaware or Minnesota authorities or a material disruption in commercial banking or securities
settlement or clearing services in the United States has occurred; or (c) there shall have occurred
any outbreak or escalation of national or international hostilities or any crisis or calamity, or
any change in the United States or international financial markets, or any substantial change or
development involving a prospective substantial change in the United States or international
political, financial or economic conditions, as in the reasonable judgment of the Underwriter is
material and adverse and makes it impracticable or inadvisable to market the Common Shares in the
manner and on the terms described in the Prospectus or to enforce contracts for the sale of
securities; (d) in the judgment of the Underwriter, there shall have occurred any Material Adverse
Change; or (e) the Company shall have sustained a loss by strike, fire, flood, earthquake, storm,
accident or other calamity of such character as in the reasonable judgment of the Underwriter may
interfere materially with the conduct of the business and operations of the Company regardless of
whether or not such loss shall have been insured. Any termination pursuant to this Section 11
shall be without liability on the part of (x) the Company to the Underwriters, except that the
Company shall be obligated to reimburse the expenses of the Underwriter pursuant to Section 5 and
Section 7 hereof, (y) the Underwriters to the Company, or (z) any party hereto to any other party,
except that the provisions of Section 9 and Section 10 shall at all times be effective and shall
survive such termination.
12.
No Advisory or Fiduciary Responsibility
. The Company acknowledges and agrees that: (i)
the purchase and sale of the Common Shares pursuant to this Agreement, including the determination
of the public offering price of the Common Shares and any related discounts and commissions, is an
arms-length commercial transaction between the Company, on the one hand, and the Underwriter, on
the other hand, and the Company is capable of evaluating and understanding and understands and
accepts the terms, risks and conditions of the transactions
29
contemplated by this Agreement; (ii) in connection with each transaction contemplated hereby
and the process leading to such transaction the Underwriter is and has been acting solely as a
principal and is not the financial advisor, agent or fiduciary of the Company or its Subsidiaries,
affiliates, stockholders, creditors or employees or any other party; (iii) the Underwriter has not
assumed or will assume an advisory, agency or fiduciary responsibility in favor of the Company with
respect to any of the transactions contemplated hereby or the process leading thereto (irrespective
of whether the Underwriter has advised or is currently advising the Company on other matters) and
the Underwriter has no any obligation to the Company with respect to the offering contemplated
hereby except the obligations expressly set forth in this Agreement; (iv) the Underwriter and its
respective affiliates may be engaged in a broad range of transactions that involve interests that
differ from those of the Company and that the Underwriter has no obligation to disclose any of such
interests by virtue of any advisory, agency or fiduciary relationship; and (v) the Underwriter has
not provided any legal, accounting, regulatory or tax advice with respect to the offering
contemplated hereby and the Company has consulted its own legal, accounting, regulatory and tax
advisors to the extent it deemed appropriate.
This Agreement supersedes all prior agreements and understandings (whether written or oral)
between the Company and the Underwriter with respect to the subject matter hereof. The Company
hereby waives and releases, to the fullest extent permitted by law, any claims that the Company may
have against the Underwriter with respect to any breach or alleged breach of agency or fiduciary
duty.
13.
Representations and Indemnities to Survive Delivery.
The respective indemnities,
agreements, representations, warranties and other statements of the Company and its Subsidiaries,
its officers and of the Underwriter set forth in or made pursuant to this Agreement will remain in
full force and effect, regardless of any investigation made by or on behalf of the Underwriter or
the Company or any of its or their partners, officers or directors or any controlling person, as
the case may be, and will survive delivery of and payment for the Common Shares sold hereunder and
any termination of this Agreement.
14.
Notices.
All communications hereunder shall be in writing and shall be mailed, hand
delivered or telecopied and confirmed to the parties hereto as follows:
If to the Underwriter:
Feltl and Company, Inc.
225 South Sixth Street, Suite 4200
Minneapolis, MN 55402
Attention: John C. Feltl
with copies to:
Maslon Edelman Borman & Brand, LLP
90 South 7
th
Street, Suite 3300
Minneapolis, MN 55402
Facsimile: (612) 672-8397
Attn: William M. Mower, Esq.
If to the Company or its Subsidiaries:
30
Wireless Ronin Technologies, Inc.
14700 Martin Drive
Eden Prairie, MN 55344
Facsimile: (952) 974-7887
Attention: Jeffrey C. Mack
with a copy to:
Briggs and Morgan, P.A.
80 South 8
th
Street, Suite 2200
Minneapolis, MN 55402
Facsimile: (612) 977-8650
Attention: Avron L. Gordon, Esq.
Any party hereto may change the address for receipt of communications by giving written notice
to the others.
15.
Successors.
This Agreement will inure to the benefit of and be binding upon the parties
hereto and to the benefit of the employees, officers and directors and controlling persons referred
to in Section 9 and Section 10, and in each case their respective successors, and no other person
will have any right or obligation hereunder. The term successors shall not include any purchaser
of the Common Shares from the Underwriter merely by reason of such purchase.
16.
Partial Unenforceability.
The invalidity or unenforceability of any Section, paragraph or
provision of this Agreement shall not affect the validity or enforceability of any other Section,
paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any
reason determined to be invalid or unenforceable, there shall be deemed to be made such minor
changes (and only such minor changes) as are necessary to make it valid and enforceable.
17.
Governing Law and Consent to Jurisdiction.
THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF MINNESOTA APPLICABLE TO AGREEMENTS
MADE AND TO BE PERFORMED IN SUCH STATE. ANY LEGAL SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
BASED UPON THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (RELATED PROCEEDINGS) MAY BE
INSTITUTED IN THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA LOCATED IN HENNEPIN COUNTY,
MINNESOTA, OR THE COURTS OF THE STATE OF MINNESOTA IN EACH CASE LOCATED IN MINNEAPOLIS OR ST. PAUL,
MINNESOTA (COLLECTIVELY, THE SPECIFIED COURTS), AND EACH OF THE COMPANY, ITS SUBSIDIARIES AND THE
UNDERWRITER IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION (EXCEPT FOR PROCEEDINGS INSTITUTED IN
REGARD TO THE ENFORCEMENT OF A JUDGMENT OF ANY SUCH COURT (A RELATED JUDGMENT), AS TO WHICH SUCH
JURISDICTION IS NON-EXCLUSIVE) OF SUCH COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING. SERVICE OF
ANY PROCESS, SUMMONS, NOTICE OR DOCUMENT BY MAIL TO SUCH PARTYS ADDRESS SET FORTH ABOVE SHALL BE
EFFECTIVE SERVICE OF PROCESS FOR ANY SUIT, ACTION OR OTHER PROCEEDING BROUGHT IN ANY SUCH COURT.
31
EACH OF THE COMPANY, ITS SUBSIDIARIES AND THE UNDERWRITER IRREVOCABLY AND UNCONDITIONALLY
WAIVE ANY OBJECTION TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR OTHER PROCEEDING IN THE SPECIFIED
COURTS AND IRREVOCABLY AND UNCONDITIONALLY WAIVE AND AGREE NOT TO PLEAD OR CLAIM IN ANY SUCH COURT
THAT ANY SUCH SUIT, ACTION OR OTHER PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM.
18.
General Provisions.
This Agreement constitutes the entire agreement of the parties to
this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements,
understandings and negotiations with respect to the subject matter hereof. This Agreement may be
executed in two or more counterparts, each one of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be
amended or modified unless in writing signed by all of the parties hereto, and no condition herein
(express or implied) may be waived unless waived in writing by each party whom the condition is
meant to benefit. The Section headings herein are for the convenience of the parties only and
shall not affect the construction or interpretation of this Agreement.
Each of the parties hereto acknowledges that it is a sophisticated business person who was
adequately represented by counsel during negotiations regarding the provisions hereof, including,
without limitation, the indemnification provisions of Section 9 and the contribution provisions of
Section 10, and is fully informed regarding said provisions. Each of the parties hereto further
acknowledges that the provisions of Sections 9 and 10 hereto fairly allocate the risks in light of
the ability of the parties to investigate the Company, its affairs and its business in order to
assure that adequate disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as required by the
Securities Act and the Exchange Act.
[SIGNATURE PAGES FOLLOW]
32
If the foregoing is in accordance with your understanding of our agreement, kindly sign and
return to the Company the enclosed copies hereof, whereupon this instrument, along with all
counterparts hereof, shall become a binding agreement in accordance with its terms.
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Very truly yours,
WIRELESS RONIN TECHNOLOGIES, INC.
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By:
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Jeffrey C. Mack
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Chairman, President and Chief Executive
Officer
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The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first
above written.
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FELTL AND COMPANY, INC.
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By:
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John C. Feltl
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Director of Capital Markets
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SCHEDULE 1
SCHEDULE OF FREE WRITING PROSPECTUSES
INCLUDED IN THE DISCLOSURE PACKAGE
35
EXHIBIT A
FORM OF OPINION OF COUNSEL FOR THE COMPANY
36
EXHIBIT B
FORM OF LOCK-UP AGREEMENT
37
APPENDIX
A
FORM OF UNDERWRITERS WARRANT AGREEMENT
UNDERWRITERS WARRANT AGREEMENT dated as of , 2006 (this
Agreement
), between Wireless Ronin Technologies, Inc., a Minnesota corporation (the
Company
), and Feltl and Company, Inc. (hereinafter referred to as the
Underwriter
).
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Underwriter warrants (the
Warrants
) to
purchase up to an aggregate of 450,000 (as such number may be adjusted from time to time pursuant
to Article 8 of this Warrant Agreement) shares (the
Shares
) of common stock, $.01 par
value per share (the
Common Stock
), of the Company; and
WHEREAS, the Underwriter has agreed, pursuant to the underwriting agreement (the
Underwriting Agreement
) dated between the Underwriter and the
Company, to act as the Underwriter in connection with the Companys proposed public offering (the
Public Offering
) of 4,500,000 shares of Common Stock (the
Public Shares
) at an
initial public offering price of $ per Public Share; and
WHEREAS, the Warrants issued pursuant to this Agreement are being issued by the Company to the
Underwriter or to its designees who are officers or partners of the Underwriter (collectively, the
Designees
), in consideration for, and as part of the Underwriters compensation in
connection with the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the Underwriter to the
Company of the aggregate amount of fifty dollars ($50.00), the agreements herein set forth and
other good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1.
Grant
. The Underwriter and/or the Designees are hereby granted the right to
purchase up to an aggregate of fully-paid and non-assessable Shares at an
initial exercise price (subject to adjustment as provided in Article 6 hereof) of $
per Share at any time from until 5:00 P.M., Minneapolis, Minnesota time, on
(the
Underlying Share Warrant Term
). The Shares are in all respects
identical to the Public Shares being sold to the public pursuant to the terms and provisions of the
Underwriting Agreement.
2.
Exercise of Warrant
.
2.1
Cash Exercise
. The Warrants initially are exercisable at a price of $
per Share, payable in cash or by check to the order of the Company, or any combination
thereof, subject to adjustment as provided in Article 8 hereof. Upon surrender of the Warrant
Certificate(s) with the annexed Form of Election to Purchase duly executed, together with payment
of the Exercise Price (as hereinafter defined) for the Shares, at the Companys principal office
(located at 14700 Martin Drive, Eden Prairie, Minnesota 55344), the registered holder of a Warrant
Certificate (
Holder
or
Holders
) shall be entitled to receive a certificate or
certificates for the Shares so purchased. The purchase rights represented by the Warrant
Certificate are exercisable at the option of the Holder hereof, in whole or in part. In the
case of the purchase of less than all of the Shares purchasable under any Warrant Certificate, the
Company shall cancel said Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate of like tenor for the balance of the Shares.
2.2
Cashless Exercise
. At any time during the Warrant Exercise Term, the Holder may,
at the Holders option, exchange, in whole or in part, the Warrants represented by such Holders
Warrant Certificate which are exercisable for the purchase of Shares into the number of Shares
determined in accordance with this Section 2.2 (a
Warrant Exchange
), by surrendering such
Warrant Certificate at the principal office of the Company or at the office of its transfer agent,
accompanied by a notice stating such Holders intent to effect such exchange, the number of
Warrants to be so exchanged and the date on which the Holder requests that such Warrant Exchange
occur (the
Notice of Exchange
). The Warrant Exchange shall take place on the date
specified in the Notice of Exchange or, if later, the date the Notice of Exchange is received by
the Company or at the office of its transfer agent, as applicable (the
Exchange Date
).
Certificates for the Shares issuable upon such Warrant Exchange and, if applicable, a new Warrant
Certificate of like tenor representing the Warrants which were subject to the surrendered Warrant
Certificate and not included in the Warrant Exchange, shall be issued as of the Exchange Date and
delivered to the Holder within three (3) business days following the Exchange Date. In connection
with any Warrant Exchange, the Holder shall be entitled to subscribe for and acquire (i) the number
of Shares (rounded to the next highest integer) which would, but for such Warrant Exchange, then be
issuable pursuant to the provisions of Section 2.1 above upon the exercise of the Warrants
specified by the Holder in its Notice of Exchange (the
Total Share Number
) less (ii) the
number of Shares equal to the quotient obtained by dividing (a) the product of the Total Share
Number and the existing Exercise Price per Share (as hereinafter defined) by (b) the Market Price
(as hereinafter defined) of a Public Share on the trading day immediately preceding the Exchange
Date.
Market Price
at any date shall be deemed to be the closing sale price or, in case
no reported sales takes place on such day, the average of the closing sale prices for the last
three (3) consecutive trading days on which reported sales have taken place, in either case as
officially reported by the principal securities exchange on which the Common Stock is listed or
admitted to trading or as reported in the Nasdaq Capital Market, or, if the Common Stock is not
listed or admitted to trading on any national securities exchange or quoted on the Nasdaq Capital
Market, the closing bid price as furnished by (i) the National Association of Securities Dealers,
Inc. through the OTC Bulletin Board or successor trading market, or (ii) if not listed on the OTC
Bulletin Board (or its successor market), the pink sheets. If the Common Stock is listed or
admitted to trading or as reported in the Nasdaq Capital Market, or, if the Common Stock is not
listed or admitted to trading on any national securities exchange or quoted on the Nasdaq Capital
Market, and bid prices are not furnished by the National Association of Securities Dealers, Inc.
through the OTC Bulletin Board or successor trading market, or the pink sheets, then the Market
Price shall be determined by the Companys Board of Directors in good faith
3.
Issuance of Certificates
.
Upon the exercise of the Warrants, the issuance of certificates for the Shares purchased shall
be made no later than three (3) business days thereafter without charge to the
2
Holder thereof including, without limitation, any tax which may be payable in respect of the
issuance thereof, and such certificates shall (subject to the provisions of Article 5 hereof) be
issued in the name of, or in such names as may be directed by, the Holder thereof;
provided
,
however
, that the Company shall not be required to pay any transfer tax
which may be payable in respect of any transfer involved in the issuance and delivery of any such
certificates in a name other than that of the Holder, and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
The certificates representing the Shares shall be executed on behalf of the Company by the
manual or facsimile signature of the present or any future Chief Executive Officer or President of
the Company under its corporate seal (if any) reproduced thereon, attested to by the manual or
facsimile signature of the present or any future Secretary or Assistant Secretary of the Company.
Warrant Certificates shall be dated the date of execution by the Company upon initial issuance,
division, exchange, substitution or transfer.
Upon exercise, in part or in whole, of the Warrants, certificates representing the Shares
purchased (the
Warrant Securities
), shall bear a legend substantially similar to the
following:
The securities represented by this certificate and the other securities issuable upon
exercise thereof have not been registered for purposes of public distribution under the
Securities Act of 1933, as amended (the
Act
), and may not be offered, sold or
transferred except (i) pursuant to an effective registration statement under the Act, or
(ii) upon the delivery by the holder to the Company of an opinion of counsel, reasonably
satisfactory to counsel to the Company, stating that an exemption from registration under
such Act is available.
4.
Restriction on Transfer of Warrants
. The Holder of a Warrant Certificate, by the
Holders acceptance thereof, covenants and agrees that the Warrants are being acquired as an
investment and not with a view to the distribution thereof, and that the Warrants may not be sold
during the Public Offering, or sold, transferred, assigned, pledged or hypothecated, or be the
subject of any hedging, short sale, derivative, put or call transaction that would result in the
effective economic disposition of the Warrants for a period of three hundred sixty (360) days from , except to the Underwriter or the Designees, provided that any portion of the Warrant so transferred shall remain subject to the above restriction for the remainder of the
restriction period.
5.
Price
.
5.1
Initial and Adjusted Exercise Price
. The initial exercise price of each Warrant
shall be $ per Share. The adjusted Exercise Price per Share shall be the prices which
shall result from time to time from any and all adjustments of the initial Exercise Price per Share
in accordance with the provisions of Article 8 hereof.
3
5.2
Exercise Price
. The term
Exercise Price
herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the context.
6.
Registration Rights
.
6.1
Registration Under the Securities Act of 1933
. None of the Warrants or the Shares
have been registered for purposes of public distribution under the Securities Act of 1933, as
amended (the
Act
).
6.2
Registrable Securities
. As used herein, the term
Registrable Security
means the Shares and any shares of Common Stock issued upon any stock split or stock dividend in
respect of such Shares;
provided
,
however
, that with respect to any particular
Registrable Security, such security shall cease to be a Registrable Security when, as of the date
of determination, (i) it has been registered under the Act and disposed of pursuant thereto, (ii)
registration under the Act is no longer required for the Holder for subsequent public distribution
of such security without regard to volume restrictions under Rule 144 promulgated under the Act or
otherwise, or (iii) it has ceased to be outstanding. The term
Registrable Securities
means any and/or all of the securities falling within the foregoing definition of a
Registrable Security
. In the event of any merger, reorganization, consolidation,
recapitalization or other change in corporate structure affecting the Common Stock, such adjustment
shall be made in the definition of
Registrable Security
as is appropriate in order to
prevent any dilution or enlargement of the rights granted pursuant to this Article 7.
6.3
Piggyback Registration
. If, within seven (7) years following the effective date
of the Public Offering, the Company proposes to prepare and file one or more post-effective
amendments to the registration statement filed in connection with the Public Offering or any new
registration statement or post-effective amendments thereto covering equity or debt securities of
the Company, or any such securities of the Company held by its shareholders (in any such case,
other than in connection with a merger, acquisition, pursuant to Form S-8 or successor form, or on
any form which does not include substantially the same information as would be required to be
included in a registration statement covering the sale of Registrable Securities) (for purposes of
this Article 7, collectively, the
Registration Statement
), it will give written notice of
its intention to do so by certified mail, return receipt requested (
Notice
), at least
thirty (30) days prior to the filing of each such Registration Statement, to all Holders of the
Registrable Securities. Upon the written request of such a Holder (a
Requesting Holder
),
made within twenty (20) days after receipt by the Holder of the Notice, that the Company include
any of the Requesting Holders Registrable Securities in the proposed Registration Statement, the
Company shall, as to each such Requesting Holder, use its best efforts to effect the registration
under the Act of the Registrable Securities which it has been so requested to register
(
Piggyback Registration
), at the Companys sole cost and expense and at no cost or
expense to the Requesting Holders (except as provided in Section 6.5(b) hereof).
Notwithstanding the provisions of this Section 6.3, the Company shall have the right at any
time after it shall have given written notice pursuant to this Section 6.3 (irrespective of whether
any written request for inclusion of Registrable Securities shall have already been made) to elect
not to file any such proposed Registration Statement, or to withdraw
4
the same after the filing but prior to the effective date thereof, without incurring any
liability to any holder of Registrable Securities.
6.4
Demand Registration
.
(a) At any time beginning at such time as the Company is eligible to use a registration
statement on Form S-3 under the Act (or applicable successor form) for secondary offerings of
securities and ending five (5) years after the effective date of the Public Offering, any
Majority Holder
(as such term is defined in Section 6.4(c) below) of the Registrable
Securities shall have the right (which right is in addition to the piggyback registration rights
provided for under Section 6.3 hereof), exercisable by written notice to the Company (the
Demand Registration Request
), to have the Company prepare and file with the Securities
and Exchange Commission (the
Commission
) on one occasion, at the sole expense of the
Company (except as provided in Section 6.5(b) hereof), a Registration Statement on Form S-3 (or
applicable successor form) and such other documents, including a prospectus, as may be necessary
(in the opinion of both counsel for the Company and counsel for such Majority Holder) in order to
comply with the provisions of the Act, so as to permit a public offering and sale of the
Registrable Securities by the Holders thereof. The Company shall use its best efforts to cause the
Registration Statement to become effective under the Act so as to permit a public offering and sale
of the Registrable Securities by the Holders thereof. Once effective, the Company will use its
best efforts to maintain the effectiveness of the Registration Statement until the earlier of (i)
the date that all of the Registrable Securities have been sold or (ii) the date the Holders thereof
receive an opinion of counsel to the Company that all of the Registrable Securities may be freely
traded without registration and without volume restrictions under the Act under Rule 144
promulgated under the Act or otherwise.
(b) The Company covenants and agrees to give written notice of any Demand Registration Request
to all Holders of the Registrable Securities within ten (10) business days from the date of the
Companys receipt of any such Demand Registration Request. After receiving notice from the Company
as provided in this Section 6.4(b), holders of Registrable Securities may request the Company to
include their Registrable Securities in the Registration Statement to be filed pursuant to Section
6.4(a) hereof by notifying the Company of their decision to have such securities included within
fifteen (15) business days of their receipt of the Companys notice.
(c) The term
Majority Holder
as used in Section 6.4 hereof shall mean any Holder or
any combination of Holders of Registrable Securities, if included in such Holders Registrable
Securities, that hold an aggregate number of shares of Common Stock (including Shares already
issued, Shares issuable pursuant to the exercise of outstanding Warrants) as would constitute a
majority of the aggregate number of shares of Common Stock outstanding (including Shares already
issued and Shares issuable pursuant to the exercise of outstanding Warrants) that are Registrable
Securities.
6.5
Covenants of the Company With Respect to Registration
. The Company covenants and
agrees as follows:
5
(a) In connection with any registration under Section 6.4 hereof, the Company shall file the
Registration Statement as expeditiously as possible, but in any event no later than thirty (30)
days following receipt of any demand therefor, shall use its best efforts to have any such
Registration Statement declared effective at the earliest possible time, and shall furnish each
Holder of Registrable Securities such number of prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs, fees and expenses (other than underwriting fees,
discounts and nonaccountable expense allowance applicable to the Registrable Securities and fees
and expenses of counsel retained by the Holders of Registrable Securities) in connection with all
Registration Statements filed pursuant to Sections 6.3 and 6.4(a) hereof including, without
limitation, the Companys legal and accounting fees, printing expenses, and blue sky fees and
expenses and any fees due to the National Association of Securities Dealers, Inc (NASD) related
to such registration or sale of any of the Registrable Securities.
(c) The Company will take all necessary action which may be required in qualifying or
registering the Registrable Securities included in the Registration Statement for offering and sale
under the securities or blue sky laws of such states as are requested by the Holders of such
securities and for obtaining the clearance of NASD member firms to participate in the distribution
of such Registrable Securities.
(d) The Company shall indemnify any Holder of the Registrable Securities to be sold pursuant
to any Registration Statement and any underwriter or person deemed to be an underwriter under the
Act and each person, if any, who controls such Holder or underwriter or person deemed to be an
underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange
Act of 1934, as amended (
Exchange Act
), against all loss, claim, damage, expense or
liability (including all expenses reasonably incurred in investigating, preparing or defending
against any claim whatsoever) to which any of them may become subject under the Act, the Exchange
Act or otherwise, arising from such registration statement to the same extent and with the same
effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriter as
set forth in Section 9 of the Underwriting Agreement and to provide for just and equitable
contribution as set forth in Section 10 of the Underwriting Agreement.
(e) Any Holder of Registrable Securities to be sold pursuant to a registration statement, and
such Holders successors and assigns, shall severally, and not jointly, indemnify the Company, its
officers and directors and each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage,
expense or liability (including all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become subject under the Act, the
Exchange Act or otherwise, arising from information furnished by or on behalf of such Holder, or
such Holders successors or assigns, for specific inclusion in such Registration Statement to the
same extent and with the same effect as the provisions pursuant to which the Underwriter has agreed
to indemnify the Company as set forth
6
in Section 9 of the Underwriting Agreement and to provide for just and equitable contribution
as set forth in Section 10 of the Underwriting Agreement.
(f) Nothing contained in this Agreement shall be construed as requiring any Holder to exercise
the Warrants held by such Holder prior to the initial filing of any registration statement or the
effectiveness thereof.
(g) If the Company shall fail to comply with the provisions of this Article 7, the Company
shall, in addition to any other equitable or other relief available to the Holders of Registrable
Securities, be liable for any or all incidental, special and consequential damages sustained by the
Holders of Registrable Securities requesting registration of their Registrable Securities.
(h) In connection with any offering involving an underwriting of shares of the Companys
Common Stock pursuant to Section 6.3, the Company shall not be required to include any of the
Registrable Securities in such underwriting unless the Holders accept the terms of the underwriting
as agreed upon between the Company and its underwriters, and then only in such quantity as the
underwriters determine in their sole discretion will not jeopardize the success of the offering by
the Company. If the total number of securities to be included in such offering, including the
Registrable Securities requested by Holders to be included therein, exceeds the amount of
securities that the underwriters determine in their reasonable discretion is compatible with the
success of the offering, then the Company shall be required to include in the offering only that
number of such securities, including Registrable Securities, which the underwriters and the Company
determine in their sole discretion will not jeopardize the success of the offering. In the event
that the underwriters determine that less than all of the securities proposed to be included in
such offering (including the Registrable Securities requested to be registered) can be so included,
then the securities that are included in such offering shall be allocated in the following manner:
(i) to the Company and, if there is a balance remaining, (ii) to the Holders and the other
stockholders holding rights as selling security holders, but excluding any stockholder who is an
officer or director of the Company, provided that if the balance remaining is not sufficient to
include in the offering all of the Registrable Securities and other securities requested to be
registered by the Holders and such other stockholders, the number of Registrable Securities and
other securities to be included for any such holder shall be determined pro rata based on the
proportionate number of Registrable Securities and other securities then held (regardless of
whether or not any such Holder or other stockholder has requested that all such Registrable
Securities or other securities be included). If there is a balance remaining after all of the
Registrable Securities and other securities requested to be registered by the Company, the Holders
and such other stockholders, then securities of the Company held by officers and directors of the
Company may be included in such offering.
(i) The Company shall promptly deliver copies of all correspondence between the Commission and
the Company, its counsel or its auditors with respect to the Registration Statement to each Holder
of Registrable Securities included for registration in such Registration Statement pursuant to
Section 6.3 hereof or Section 6.4 hereof requesting such correspondence and to the managing
underwriter, if any, of the offering in connection with which such Holders Registrable Securities
are being registered and shall permit each Holder of Registrable Securities and such underwriter to
do such reasonable investigation,
7
upon reasonable advance notice, with respect to information contained in or omitted from the
Registration Statement as it deems reasonably necessary to comply with applicable securities laws
or rules of the NASD. Such investigation shall include access to books, records and properties and
opportunities necessary or helpful to discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at such reasonable times and as often as
any such Holder of Registrable Securities or underwriter shall reasonably request; provided, that
the Company may require each such Holder or underwriter to enter into reasonable confidentiality
and non-disclosure agreements with respect to the information contained in or derived from such
investigations.
7.
Adjustments of Exercise Price and Number of Securities
. The following adjustments
apply to the Exercise Price of the Warrants with respect to the Shares and the number of Shares
purchasable upon exercise of the Warrants.
7.1
Computation of Adjusted Price
. In case the Company shall at any time after the
date hereof pay a dividend in shares of Common Stock or make a distribution in shares of Common
Stock, then upon such dividend or distribution, the Exercise Price in effect immediately prior to
such dividend or distribution shall forthwith be reduced to a price determined by dividing:
(a) an amount equal to the total number of shares of Common Stock outstanding immediately
prior to such dividend or distribution multiplied by the Exercise Price in effect immediately prior
to such dividend or distribution, by
(b) the total number of shares of Common Stock outstanding immediately after such issuance or
sale.
For the purposes of any computation to be made in accordance with the provisions of this
Section 7.1, the Common Stock issuable by way of dividend or other distribution on any stock of the
Company shall be deemed to have been issued immediately after the opening of business on the date
following the date fixed for the determination of stockholders entitled to receive such dividend or
other distribution.
7.2
Subdivision and Combination
. In case the Company shall at any time subdivide or
combine the outstanding shares of Common Stock, the Exercise Price shall forthwith be
proportionately decreased in the case of subdivision or proportionately increased in the case of
combination.
7.3
Adjustment in Number of Securities
. Upon each adjustment of the Exercise Price
pursuant to the provisions of this Article 7, the number of Shares issuable upon the exercise of
each Warrant shall be adjusted to the nearest full number by multiplying a number equal to the
Exercise Price in effect immediately prior to such adjustment by the number of Shares issuable upon
exercise of the Warrants immediately prior to such adjustment and dividing the product so obtained
by the adjusted Exercise Price.
8
7.4
Reclassification, Consolidation, Merger, etc
. In case of any reclassification or
change of the outstanding shares of Common Stock (other than a change in par value to no par value,
or from no par value to par value, or as a result of a subdivision or combination), or in the case
of any consolidation of the Company with, or merger of the Company into, another corporation (other
than a consolidation or merger in which the Company is the surviving corporation and which does not
result in any reclassification or change of the outstanding shares of Common Stock, except a change
as a result of a subdivision or combination of such shares or a change in par value, as aforesaid),
or in the case of a sale or conveyance to another corporation of all or substantially all of the
assets of the Company, the Holders shall thereafter have the right to purchase the kind and number
of shares of stock and other securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance as if the Holders were the owners of the Shares
immediately prior to any such events, at a price equal to the product of (x) the number of shares
of Common Stock issuable upon exercise of the Holders Warrants and (y) the exercise prices for the
Warrants in effect immediately prior to the record date for such reclassification, change,
consolidation, merger, sale or conveyance as if such Holders had exercised the Warrants.
7.5
Determination of Outstanding Common Shares
. The number of Common Shares at any
one time outstanding shall include the aggregate number of shares issued and the aggregate number
of shares issuable upon the exercise of options, rights, warrants and upon the conversion or
exchange of convertible or exchangeable securities.
7.6
Dividends and Other Distributions with Respect to Outstanding Securities
. In the
event that the Company shall at any time prior to the exercise of all Warrants make any
distribution of its assets to holders of its Common Stock as a liquidating or a partial liquidating
dividend, then the Holder of Warrants who exercises its Warrants after the record date for the
determination of those Holders of Common Stock entitled to such distribution of assets as a
liquidating or partial liquidating dividend shall be entitled to receive for the exercise price per
Warrant, in addition to each share of Common Stock, the amount of such distribution (or, at the
option of the Company, a sum equal to the value of any such assets at the time of such distribution
as determined by the Board of Directors of the Company in good faith) which would have been payable
to such Holder had he been the Holder of record of the Common Stock receivable upon exercise of his
Warrant on the record date for the determination of those entitled to such distribution. At the
time of any such dividend or distribution, the Company shall make appropriate reserves to ensure
the timely performance of the provisions of this Subsection 7.6.
7.7
Subscription Rights for Shares of Common Stock or Other Securities
. In the case
that the Company or an affiliate of the Company shall at any time after the date hereof and prior
to the exercise of all the Warrants issue any rights, warrants or options to subscribe for shares
of Common Stock or any other securities of the Company or of such affiliate to all the shareholders
of the Company, the Holders of unexercised Warrants on the record date set by the Company or such
affiliate in connection with such issuance of rights, warrants or options shall be entitled, in
addition to the shares of Common Stock or other securities receivable upon the exercise of the
Warrants, to receive such rights, warrants or options that such Holders would have been entitled to
receive had they been, on such record date, the holders of record of the number of whole shares of
Common Stock then issuable upon
9
exercise of their outstanding Warrants (assuming for purposes of this Section 7.7, that the
exercise of the Warrants is permissible immediately upon issuance).
8.
Exchange and Replacement of Warrant Certificates
.
Each Warrant Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new Warrant Certificate
of like tenor and date representing in the aggregate the right to purchase the same number of
securities in such denominations as shall be designated by the Holder thereof at the time of such
surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of any Warrant Certificate and, in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of the Warrant
Certificate, if mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor in lieu thereof.
9.
Elimination of Fractional Interests
. The Company shall not be required to issue
certificates representing fractions of Shares upon the exercise of the Warrants, nor shall it be
required to issue scrip or pay cash in lieu of fractional interests, it being the intent of the
parties that all fractional interests shall be eliminated by rounding any fraction up to the
nearest whole number of Shares.
10.
Reservation and Listing of Securities
. The Company shall at all times reserve and
keep available out of its authorized shares of Common Stock, solely for the purpose of issuance
upon the exercise of the Warrants, such number of shares of Common Stock as shall be issuable upon
the exercise thereof. The Company covenants and agrees that, upon exercise of the Warrants and
payment of the Exercise Price therefor, all Shares issuable upon such exercise shall be duly and
validly issued, fully paid, non-assessable and not subject to the preemptive rights of any
shareholder. As long as the Warrants shall be outstanding, the Company shall use its best efforts
to cause all shares of Common Stock issuable upon the exercise of the Warrants to be listed on the
Nasdaq Capital Market, or any successor trading market on which the Common Stock may be listed
and/or quoted.
11.
Notices to Warrant Holders
.
Nothing contained in this Agreement shall be construed as conferring upon the Holder or
Holders the right to vote or to consent or to receive notice as a shareholder in respect of any
meetings of shareholders for the election of directors or any other matter, or as having any rights
whatsoever as a shareholder of the Company. If, however, at any time prior to the expiration of
the Warrants and their exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of its shares of Common Stock for the
purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or
a cash dividend or distribution payable otherwise than out of current or
10
retained earnings, as indicated by the accounting treatment of such dividend or distribution
on the books of the Company; or
(b) the Company shall offer to all the holders of its Common Stock any additional shares of
capital stock of the Company or securities convertible into or exchangeable for shares of capital
stock of the Company, or any option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other than in connection with a
consolidation or merger) or a sale of all or substantially all of its property, assets and business
as an entirety shall be proposed; or
(d) reclassification or change of the outstanding shares of Common Stock (other than a change
in par value to no par value, or from no par value to par value, or as a result of a subdivision or
combination), consolidation of the Company with, or merger of the Company into, another corporation
(other than a consolidation or merger in which the Company is the surviving corporation and which
does not result in any reclassification or change of the outstanding shares of Common Stock, except
a change as a result of a subdivision or combination of such shares or a change in par value, as
aforesaid), or a sale or conveyance to another corporation of the property of the Company as an
entirety is proposed; or
(e) The Company or an affiliate of the Company shall propose to issue any rights to subscribe
for shares of Common Stock or any other securities of the Company or of such affiliate to all the
shareholders of the Company;
then, in any one or more of said events, the Company shall give written notice to the Holder
or Holders of such event at least fifteen (15) business days prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the shareholders entitled
to such dividend, distribution, convertible or exchangeable securities or subscription rights,
options or warrants, or entitled to vote on such proposed dissolution, liquidation, winding up or
sale. Such notice shall specify such record date or the date of closing the transfer books, as the
case may be. Failure to give such notice or any defect therein shall not affect the validity of
any action taken in connection with the declaration or payment of any such dividend or
distribution, or the issuance of any convertible or exchangeable securities or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or sale.
12.
Notices
. All notices, requests, consents and other communications hereunder shall
be in writing and shall be deemed to have been duly made when delivered, or mailed by registered or
certified mail, return receipt requested:
(a) If to a registered Holder of the Warrants, to the address of such Holder as shown on the
books of the Company; or
11
(b) If to the Company, to the address set forth in Section 2 of this Agreement or to such
other address as the Company may designate by notice to the Holders given pursuant to this section.
13.
Supplements and Amendments
. The Company and the Underwriter may from time to time
supplement or amend this Agreement without the approval of any Holders of the Warrants and/or
Warrant Securities in order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any other provisions herein, or to make any
other provisions in regard to matters or questions arising hereunder which the Company and the
Underwriter may deem mutually necessary or desirable and which the Company and the Underwriter
mutually deem not to adversely affect the interests of the Holders of Warrant Certificates, such
supplement or amendment shall be binding upon all Holders of the Warrants.
14.
Successors
. All the covenants and provisions of this Agreement by or for the
benefit of the Company and the Holders inure to the benefit of their respective successors and
assigns hereunder.
15.
Governing Law
. This Agreement and each Warrant Certificate issued hereunder shall
be deemed to be a contract made under the laws of the State of Minnesota and for all purposes shall
be construed in accordance with the laws of said State, other than its conflicts of laws
provisions.
16.
Benefits of this Agreement
. Nothing in this Agreement shall be construed to give
to any person or corporation other than the Company and the Underwriter and any other registered
Holder or Holders of the Warrant Certificates or Warrant Securities any legal or equitable right,
remedy or claim under this Agreement; and this Agreement shall be for the sole and exclusive
benefit of the Company and the Underwriter and any other Holder or Holders of the Warrant
Certificates or Warrant Securities.
17.
Counterparts
. This Agreement may be executed in any number of counterparts, and
each of such counterparts shall for all purposes be deemed to be an original, and such counterparts
shall together constitute but one and the same instrument.
12
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of
the day and year first above written.
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WIRELESS RONIN TECHNOLOGIES, INC.
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By:
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Its:
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FELTL AND COMPANY, INC.
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By:
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John C. Feltl
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Director of Capital Markets
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13
EXHIBIT A
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE
THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE ACT), AND MAY
NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
(ii) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT
IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN
ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., MINNEAPOLIS TIME,
14
WARRANT CERTIFICATE
This Warrant Certificate certifies that Feltl and Company, Inc. or its registered assigns, is
the registered holder of Warrants to purchase, at any time from until 5:00 P.M. Minneapolis, Minnesota time on (Expiration Date),
up to fully-paid and non-assessable shares (the Shares) of the common stock,
$.01 par value per share (the
Common Stock
), of Wireless Ronin Technologies, Inc., a
Minnesota corporation (the
Company
), at an initial exercise price, subject to adjustment
in certain events (the
Exercise Price
), of $ per Share, upon
surrender of this Warrant Certificate and payment of the Exercise Price at an office or agency of
the Company, but subject to the conditions set forth herein and in the Underwriters Warrant
Agreement dated as of , 2006, between the Company and Feltl and Company, Inc.
(the
Warrant Agreement
). Payment of the Exercise Price may be made in cash or by check
payable to the order of the Company, or any combination thereof.
No Warrant may be exercised after 5:00 P.M., Minneapolis, Minnesota time, on the Expiration
Date, at which time all Warrants evidenced hereby, unless exercised prior thereto, shall thereafter
be void.
The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of
Warrants issued pursuant to the Warrant Agreement, which Warrant Agreement is hereby incorporated
by reference in and made a part of this instrument and is hereby referred to for a description of
the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and
the holders (the words
holders
or
holder
means the registered holders or
registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events, the Exercise Price
and the type and/or number of the Companys securities issuable thereupon may, subject to certain
conditions, be adjusted. In such event, the Company will, at the request of the holder, issue a
new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or type
of securities issuable upon the exercise of the Warrants;
provided
,
however
, that
the failure of the Company to issue such new Warrant Certificates shall not in any way change,
alter, or otherwise impair the rights of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant Certificate at an office or
agency of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and
evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided herein and in the
Warrant Agreement, without any charge except for any tax or other governmental charge imposed in
connection therewith.
Upon the exercise of less than all of the Warrants evidenced by this Certificate, the Company
shall forthwith issue to the holder hereof a new Warrant Certificate representing such number of
unexercised Warrants.
15
The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of
this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise hereof, and of any distribution to the holder(s) hereof,
and for all other purposes, and the Company shall not be affected by any notice to the contrary.
All terms used in this Warrant Certificate which are defined in the Warrant Agreement shall
have the meanings assigned to them in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed.
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Dated:
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WIRELESS RONIN TECHNOLOGIES, INC.
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By:
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Name:
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Title:
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[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant
Certificate, to purchase Shares of Common Stock and herewith tenders in payment
for such securities, cash or check payable to the order of Wireless Ronin Technologies, Inc. in the
amount of $ , all in accordance with the terms hereof. The undersigned
requests that a certificate for such securities be registered in the name of , whose address is , and that such Certificate be delivered to , whose address is .
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Dated:
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Signature:
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(Signature must conform in all respects to the name of holder as
specified on the face of the Warrant Certificate or with the name
of the assignee appearing in the assignment form, if any.)
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(Insert Social Security or Tax Identification
Number of Holder)
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[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED, hereby sells, assigns and transfers unto
(Please print name, address and social security or tax identification number of assignee)
this Warrant Certificate, together with all right, title and interest therein, and does hereby
irrevocably constitute and appoint , Attorney, to transfer the within
Warrant Certificate on the books of the within-named Company, with full power of substitution.
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Dated:
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Signature:
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(Signature must conform in all respects to the name of holder as
specified on the face of the Warrant Certificate or with the name
of the assignee appearing in the assignment form, if any.)
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(Insert Social Security or Tax Identification Number
of Holder)
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[CASHLESS EXERCISE FORM]
(To be executed upon exercise of Warrant
pursuant to Section 2.2)
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To:
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WIRELESS RONIN TECHNOLOGIES, INC.
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The undersigned hereby irrevocably elects a cashless exercise of the right to purchase
represented by the attached Warrant Certificate for, and to purchase thereunder, Shares, as provided for in Section 2.2 therein.
Please issue a certificate or certificates for such Shares in the names of:
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Name
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Address
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(Please print name)
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and deliver such certificate or certificates to (if different from above):
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Address
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Dated:
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Signature
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(Insert Social Security or
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NOTE: The above signature should correspond exactly with the name on the first page of this
Warrant Certificate or with the name of the assignee appearing in the assignment form, if any.
And if said number of shares shall not be all the shares purchasable under the attached
Warrant Certificate, a new Warrant Certificate is to be issued in the name of the undersigned for
the remaining balance of the shares purchasable thereunder.
19
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 WRTs 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
MGs 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:
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Wireless Ronin® Technologies, Inc.
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The Marshall Special Assets Group, Inc.
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By
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/s/ Steve Jacobs
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By
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/s/ Scott H. Anderson
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Its
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CFO
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Its
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President
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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:
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I.
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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.
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II.
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Amendment of Strategic Partnership Agreement
. The Strategic Partnership
Agreement is hereby amended as follows:
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Section 1.1
of the Strategic Partnership Agreement is hereby amended in its entirety
to provide:
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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.
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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 Anderson
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Jeffrey Mack
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Scott Anderson
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President
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President
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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 WRTs 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
MGs 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 MGs 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 MGs 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 MGs 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 MGs European customers will be
purchased directly from WRE, WRT, or WRTs 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 WRTs and WREs
performance of its obligations under this Agreement.
4.2
Technical and Support Services
. WRT will provide Technical and Support Services
directly to MGs 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 MGs 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. WRTs or WREs, 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 WRTs or WREs 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 WRTs 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 WRTs 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
8
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-Users 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 WRTs 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 MGs 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
10
action taken by WRT against such third parties, provided that WRT shall pay all expenses of
such action and for MGs 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 WRTs 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 WRTs 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. WRTs 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
WRTs 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
WRTs 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
MGs 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.
12
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 manufacturers 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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13
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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, WREs 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 MGs remedies at law
or in equity, MG may return any defective or nonconforming WRT Products with written notice to WRT
and WRT shall, at MGs 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 WRTs 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 Partys 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 partys 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 partys 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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Attachment I
Description of RoninCast Technology
RoninCast is comprised of four key components: (1) Content management software which allows
the control of remote devices from a single location; (2) Innovative presentation technology
employing Macromedia
®
Flash for rapid, vivid and powerful visuals; (3) Wireless 802.11 technology
which allows ultimate location flexibility; and (4) Secure hardware platform and communication
protocol using encryption, packet tracking and command verification.
The power to create full scale or on-the-fly media distributions resides in the Master Controller
software which publishes and delivers the content as scheduled. Content is transmitted to remote
locations for local distribution by the End Point Controller software and also reports back to the
Master Controller regarding the health of the network. Site Controller software can be employed to
interject quick updates to feature time critical information or for local customization of the
content.
The H-Box is able to transmit information to virtually any display, video wall, plasma, LCD or
jumbotron via a wired or wireless LAN, outputting standard VGA. The H-Box allows the convenience
of utilizing an existing network and the flexibility to choose any location.
The S-Box offers the ability to provide compelling messages in a compact space. By combining a
display with the H-box technology, the S-Box offers a space efficient frame, ease of installation
and which can be interactive through a LCD touchscreen. The S-Box provides a custom solution for
cash wraps, end caps and in elevators.
The T-Box is designed specifically for casino table applications whereby a traditionally static
sigh is transformed into a compelling marketing tool. It provides the dealers the ability to
dynamically change betting limit signage and to display advertising during shuffle-up or when the
table is closed.
Interactive capability is another feature of RoninCast. Touch screens become convertible and
responsive, providing the opportunity to retain pertinent customer information. Designed for
instinctive ease of use, RoninCast touch screens feature a flat LCD screen ranging in size from
6.4 to 42 in size.
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 Licensees 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. WRTs 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. WRTS 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 WRTs reasonable control, including, without limitation, Licensees 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 10.23
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
WRTs 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 WRTs 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 WRTs Master Preferred Escrow Agreement with Iron Mountain (the Master Preferred
Escrow Agreement) relating to WRTs 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 Sealys 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 WRTs Master Preferred Escrow Agreement with Iron Mountain relating to
WRTs 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. Sealys 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.
3
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 WRTs 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 WRTs 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). WRTs 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
attorneys 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, Sealys 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 Sealys 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 partys Proprietary
Information to only those of the receiving partys 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 Sealys 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 WRTs 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 WRTs obligations under the Master Service Agreement to repair, service, and
maintain the Systems.
7.4
Remedy for WRT Technology Defect or Non-Conformity
. WRTs sole and exclusive
responsibility, and Sealys 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 WRTs
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 WRTs 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 WRTs 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 Sealys 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 Sealys 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 Sealys 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 WRTs 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 WRTs 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 WRTs 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 Sealys 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 Sealys
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 WRTS
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 manufacturers 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 Sealys
offices in North Carolina and WRTs 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
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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.
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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 WRTs 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 Sealys 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, WRTs and Sealys identification and procurement of required permits,
certificates, approvals and inspections in WRTs and Sealys 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
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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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Exhibit A
Description of Systems
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SealyTouch with Communications
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32 NEC Touch Screen Monitor (NEC #NEC3210BK w/capacitive touch screen)
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RoninCast EX Box (HP 7600 3GHZ) with wireless communications card
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Speaker Unit and cabling
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Sealy Stand with POP Display Bracket
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Ethernet Hub and Linksys Access Point
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VGX and USB Cabling
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SealyTouch without Communications
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32 NEC Touch Screen Monitor (NEC #NEC3210BK w/capacitive touch screen)
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RoninCast EX Box (HP 7600 3GHZ)
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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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Exhibit B
WIRELESS
RONIN ®
TECHNOLOGIES
14700 Martin Drive
Eden Prairie, MN 55344
P: (952) 224-8110
F: (952) 974-7887
INVOICE
Invoice Number:
ml02
Invoice Date:
Nov 4, 2005
Page:
1
Sealy Inc.
One Office Parkway
Trinity, NC 27370
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Customer ID
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Customer PO
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Payment Terms
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00085
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PO #1 Beta Test
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Net 30 Days
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Sales Rep ID
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Shipping Method
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Ship Date
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Due Date
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Airborne
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12/4/05
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Quantity
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Item
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Description
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Unit Price
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Extension
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27.00
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STS-3210-N
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Sealy Touch Stand Unit-No
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*
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*
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Communication
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*
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*
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27.00
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Installation
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*
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*
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1.00
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Content creation
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Subtotal
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*
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Sales Tax
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*
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Total Invoice Amount
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*
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Check/Credit Memo No: 391522
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Payment/Credit Applied
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*
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TOTAL
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*
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* Confidential portion omitted and filed separately with the SEC.
WIRELESS RONIN ®
TECHNOLOGIES
14700 Martin Drive
Eden Prairie, MN 55344
P: (952) 224-8110
F: (952) 974-7887
INVOICE
Invoice Number:
201
Invoice Date:
Nov l5, 2005
Page:
1
Sealy Inc.
One Office Parkway
Trinity, NC 27370
|
|
|
|
|
Customer ID
|
|
Customer PO
|
|
Payment Terms
|
00085
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|
Beta #2
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Net 30 Days
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Sales Rep ID
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Shipping Method
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Ship Date
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Due Date
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Scott Koller
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UPS Ground
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12/15/05
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Quantity
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|
Item
|
|
Description
|
|
Unit Price
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|
Extension
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25.00
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STS-3210-N
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Sealy Touch Stand Unit-No Communication
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*
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*
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25.00
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INS-001-NC
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Sealy Touch Screen Installation-No Communication
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*
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*
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Subtotal
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*
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Sales Tax
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*
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Total Invoice Amount
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*
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Check/Credit Memo No: 391522
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Payment/Credit Applied
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*
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TOTAL
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*
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* Confidential portion omitted and filed separately with the SEC.
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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Macys
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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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Macys
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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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Macys
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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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Macys
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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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Macys
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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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|
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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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|
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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
|
|
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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|
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50320
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|
Schedule 2.1
Unit Price
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
Sealy Touch
TM
|
|
|
|
|
|
3000
|
without Communications
|
|
Part #
|
|
Description
|
|
Units
|
Sealy Touch Stand Unit NEC
|
|
STS-3210-N
|
|
Sealy Touch Stand Unit-Complete unit without communications
|
|
*
|
Sealy Touch Installation NEC
|
|
INS-3210-N
|
|
Site visit, complete installation including shipping
|
|
*
|
|
|
|
|
Total*:
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
Sealy Touch
TM
|
|
|
|
|
|
3000
|
with Communications
|
|
Part #
|
|
Description
|
|
Units
|
Sealy Touch Stand Unit DSL
|
|
STS-3210-D
|
|
Sealy Touch Stand Unit-Complete unit with internet communications
|
|
*
|
Sealy Touch Installation DSL
|
|
INS-3210-D
|
|
Site visit, complete installation including shipping
|
|
*
|
|
|
|
|
Total*:
|
|
*
|
* Confidential portion omitted and filed separately with the SEC.
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:
|
1.
|
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Six weeks prior to installation, Wireless Ronin Technologies, Inc must have
complete site information. This includes the following information:
|
|
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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|
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c.
|
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Store Phone Number
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|
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d.
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Site Contact Information. (Mattress Department Manager)
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|
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e.
|
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Site Contacts Business and/or Cell Phone Number to Aid in
Receiving Shipment.
|
|
2.
|
|
Prior to installation, Wireless Ronin Technologies, Inc requests that the
following criteria and considerations have been fulfilled:
|
|
a.
|
|
Placement of the unit has been determined prior to our arrival
onsite.
|
|
|
b.
|
|
Power requirements for the unit have been met. Power
requirements are standard 110 volt dual plug 20-amp service at each location.
|
|
|
c.
|
|
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.
|
|
3.
|
|
During Installation, Wireless Ronin Technologies, Inc requests the following
while the SealyTouch Installer is on-site.
|
|
a.
|
|
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).
|
|
|
b.
|
|
A two hour time period for installation without interruptions.
(note: Most installations will take place in approximately 1 hour).
|
|
4.
|
|
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.
|