10-K
1
f10k2020_creativerealities.htm
ANNUAL REPORT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark one)
☒ ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,
2020
OR
☐ TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________
to ___________
Commission file number 001-33169
Creative Realities, Inc.
(Exact name of registrant as specified in
its charter)
Address of principal executive offices Zip Code
(502) 791-8800
Registrant’s telephone number, including
area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.01 per share CREX The Nasdaq Stock Market LLC
Warrants to purchase Common Stock CREXW The Nasdaq Stock Market LLC
Securities registered pursuant to Section
12(g) of the Act: None
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting
and non-voting common equity held by non-affiliates was $24,538,011 as of the last business day of the registrant’s most recently
completed second fiscal quarter.
As of March 7, 2021, the registrant had
11,743,667 shares of common stock outstanding.
TABLE OF CONTENTS
PART I
ITEM 1 BUSINESS 1
ITEM 1A RISK FACTORS 6
ITEM 2 PROPERTIES 18
ITEM 3 LEGAL PROCEEDINGS 18
ITEM 4 MINE SAFETY DISCLOSURES 18
PART II
ITEM 6 SELECTED FINANCIAL DATA 21
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 32
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 32
ITEM 9A CONTROLS AND PROCEDURES 32
ITEM 9B OTHER INFORMATION 33
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 34
ITEM 11 EXECUTIVE COMPENSATION 38
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES 47
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 48
SIGNATURES 49
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
EXHIBIT INDEX E-1
i
PART I
ITEM 1 BUSINESS
(All currency is rounded to the nearest
thousand, except share and per share amounts.)
Our Company
Creative Realities, Inc. is a Minnesota
corporation that provides innovative digital marketing technology solutions to a broad range of companies, individual brands, enterprises,
and organizations throughout the United States and in certain international markets. We have expertise in a broad range of existing
and emerging digital marketing technologies across approximately 15 vertical markets, as well as the related media management and
distribution software platforms and networks, device and content management, product management, customized software service layers,
systems, experiences, workflows, and integrated solutions. Our technology and solutions include: digital merchandising systems
and omni-channel customer engagement systems; content creation, production and scheduling programs and systems; a comprehensive
series of recurring maintenance, support, and field service offerings; interactive digital shopping assistants, advisors and kiosks;
and, other interactive marketing technologies such as mobile, social media, point-of-sale transactions, beaconing and web-based
media that enable our customers to transform how they engage with consumers.
Our main operations are conducted directly
through Creative Realities, Inc. and our wholly owned subsidiary Creative Realities Canada, Inc., a Canadian corporation. Our other
wholly owned subsidiaries are effectively dormant: Creative Realities, LLC, a Delaware limited liability company, ConeXus World
Global, LLC, a Kentucky limited liability company, and Allure Global Solutions, Inc., a Georgia corporation.
We generate revenue by:
These activities generate revenue through
bundled-solution sales; consulting services, experience design, content development and production, software development, engineering,
implementation, and field services; software subscription license fees; and maintenance and support services related to our software,
managed systems and solutions.
1
We currently market and sell our technology
and solutions primarily through our sales and business development personnel, but we also utilize agents, strategic partners, and
lead generators who provide us with access to additional sales, business development and licensing opportunities.
Our digital marketing technology solutions
have application in a wide variety of industries. The industries in which we sell our solutions are established and include
automotive, apparel & accessories, banking, baby/children, beauty, CPG, department stores, digital out-of-home (“DOOH”),
electronics, fashion, fitness, foodservice/quick service restaurant (“QSR”), financial services, gaming, luxury, mass
merchants, mobile operators, and pharmacy retail; however, the planning, development, implementation and maintenance of technology-enabled
experiences involving combinations of digital marketing technologies is relatively new and evolving. Moreover, a number of
participants in these industries have only recently started considering or expanding the adoption of these types of technologies,
solutions and experiences as part of their overall marketing strategies. As a result, we remain without an established history
of profitability.
We believe that the adoption and evolution
of digital marketing technology solutions will increase substantially in years to come in the industries in which we currently
focus and in others; however, adoption has not yet accelerated to the extent we expected, in part due to delays in capital expenditures
from our current and potential customer base as a result of the COVID-19 pandemic. We also believe that adoption of our solutions
depends not only upon the services and solutions that we provide but also upon the cost of hardware used to process and display
content. While the costs of hardware configurations and software media players have historically decreased and we believe they
will continue to do so at an accelerating rate, flat panel displays and players typically constitute a large portion of the expenditure
customers make relative to the entire cost of implementing a digital marketing system implementation and can be a barrier to customer
deployment. As a result, we believe that the broader adoption of digital marketing technology solutions is likely to increase,
although we cannot predict the rate at which such adoption will occur.
Another key component of our business strategy,
given the evolving dynamics of the industry in which we operate, is to acquire and integrate other operating companies in the industry
in conjunction with pursuing our organic growth objectives. We believe that the selective acquisition and successful integration
of certain companies will: accelerate our growth in targeted vertical and operating markets; enable us to cost-effectively aggregate
multiple customer bases onto a single business and technology platform; provide us with greater operating scale on a consolidated
basis; enable us to leverage a common set of processes and tools, and cost efficiencies company-wide; and ultimately result in
higher operating profitability and cash flow from operations. Our management team evaluates acquisition opportunities on an ongoing
basis. Our management team and Board of Directors have broad experience with the execution, integration, and financing of acquisitions.
We believe that the COVID-19 pandemic has adversely affected our smaller competitors, and as a result, there may exist acquisition
opportunities in the future.We also believe that, based on the foregoing, we can successfully serve as a consolidator of multiple
business and technology platforms serving similar markets.
In addition to our historical product offerings
and solutions, in April 2020, we announced the joint launch of an AI-integrated non-contact temperature inspection kiosk known
as the “Thermal Mirror” with our partner, InReality, LLC for use by businesses as COVID-19 related workplace restrictions
are reduced or eliminated. The Thermal Mirror involves the development, marketing and sale of a new product to new customers involving
a joint effort with InReality compared to our historical products and services. The product also uses hardware and technologies
that have not been used with our other customers. Throughout 2020, the Company and InReality continued to develop incremental use
cases and subsequently launched a suite of Safe Space Solutions products addressing this market, each of which operate consistently
with our primary business model in that they represent a sale of hardware and a SaaS-based subscription license services contract.
You may read and copy any materials we file
with the SEC at the SEC’s public reference room at 100 F Street NE, Washington, DC 20549. The public may obtain information
about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site
that contains reports, proxy and information statements, and other information regarding issuers that file electronically with
the SEC. The website of the SEC is www.sec.gov. Additional information about the Company and its public disclosures
is available on our website at www.cri.com.
2
Corporate Organization
Our principal offices are located at 13100
Magisterial Drive, Ste 100, Louisville, Kentucky 40223, and our telephone number at that office is (502) 791-8800.
We originally incorporated and organized
as a Minnesota corporation under the name “Wireless Ronin Technologies, Inc.” in March 2003. Our business initially
focused on the provision of expertise in digital media marketing solutions to customers, including digital signage, interactive
kiosks, mobile, social media and web-based media solutions. We acquired the assets and business of Broadcast International, Inc.,
a Utah corporation and public registrant, through a merger transaction that was effective as of August 1, 2014. Then on August
20, 2014, we consummated a merger transaction with Creative Realities, LLC, a privately owned Delaware limited liability company,
in which we issued a majority of our issued and outstanding shares of common stock. In that merger transaction, we acquired the
interactive marketing technology business of Creative Realities that we currently operate. Shortly after that merger, we changed
our corporate name from “Wireless Ronin Technologies, Inc.” to “Creative Realities, Inc.” On October 15,
2015, we acquired the assets and business of ConeXus World Global, LLC, a privately-owned Kentucky limited liability company for
which we issued preferred and common stock. In that merger transaction, we acquired the systems integration and marketing technology
business of ConeXus World that we currently operate. On May 23, 2016, we dissolved Broadcast International, Inc. On November 20,
2018, we acquired Allure Global Solutions, Inc. (“Allure”), an enterprise software development company (as further
described below).
Business Strategy
We believe that our existing business model
is highly scalable and can be expanded successfully as we continue to grow organically and integrate our recent merger transactions,
acquire and integrate other companies which operate directly in our target markets, strengthen our operational practices and procedures,
further streamline our administrative office functions, and continue to capitalize on various marketing programs and activities.
Industry Background
We believe certain digital marketing technology
industry trends are creating the opportunity for retailers, brands, venue-operators, enterprises, non-profits and other organizations
to create innovative shopping, marketing, and informational experiences for their customers and other stakeholders in various venues
worldwide. These trends include: (i) the expectations of technology-savvy consumers; (ii) addressing on-line competitors by improving
physical experiences; (iii) accelerating decline in the cost of hardware configurations (primarily flat panel displays) and software
media players; (iv) the continued evolution of mobile, social, software and hardware technologies, applications and tools; (v)
increasing sophistication of social networking platforms; (vi) increasingly complex customer requirements related to their specific
digital marketing technology and solution objectives; and (vii) customers challenging service providers with the delivery of a
satisfactory consumer experience with the traditional pressure on reducing installation and ongoing operating costs.
As a result, a growing number of retailers,
brands, venue-operators and other organizations have identified the need and opportunity to implement increasingly cost-effective
and “sales-lifting” digital marketing, and interactive experiences to market to their customers. These experiences
include creating unique and customized experiences for targeted, timely offerings and relevant promotions; improving engagement
resulting in increased sales; and increasing shopping basket size. We believe our clients consider capitalizing on these industry
trends to be increasingly critical to any successful “store of the future” retail and brand sales environment, especially
where sales staff turnover is high, training outcomes are inconsistent and product knowledge is low.
3
Companies are accomplishing their strategies
by implementing various digital marketing technology solutions, which: are implemented in multiple forms and types of configurations
and locations; attempt to achieve any of a broad range of individual or combination of objectives; contain various levels of targeting;
have the ability to instantly manage single or multiple locations remotely from a customer’s desktop or other connected device
at each location; and are built to deliver or contain a standard or customized experience unique to and within the customer’s
environment. Examples of such solutions include:
Our Markets
We currently market and sell our marketing
technology solutions through our direct sales force, inside sales team, and word-of-mouth referrals from existing customers. Select
strategic partnerships and lead generation programs also drive business to the Company through targeted business development initiatives.
We market to companies that seek digital marketing solutions across multiple connected devices and who specifically seek or could
benefit from enhancements to the customer experience offered in their stores, venues, brands or organizations. In addition to our
direct sales force, we market our Safe Space Solutions suite of products through a network of distribution and reseller partners
through which we have expanded our market presence and reach. Distributors operate on either a consignment or direct drop ship
approach and no revenue is recognized until a sale is made and product is delivered.
Our digital marketing technology solutions
have application in a wide variety of industries. The industries in which we sell our solutions are established and include
automotive, apparel & accessories, banking, baby/children, beauty, CPG, department stores, digital out-of-home (“DOOH”),
electronics, fashion, fitness, foodservice/quick service restaurant (“QSR”), financial services, gaming, luxury, mass
merchants, mobile operators, and pharmacy retail; however, the planning, development, implementation and maintenance of technology-enabled
experiences involving combinations of digital marketing technologies is relatively new and evolving. Moreover, a number of
participants in these industries have only recently started considering or expanding the adoption of these types of technologies,
solutions and experiences as part of their overall marketing strategies.
Seasonality
A portion of our customer activity is influenced
by seasonal effects related to traditional end of calendar year peak retail sales periods, traditional spring stadium/venue opening
seasons, and certain other factors that arise from our target customer base. Nevertheless, our revenues can be materially affected
by the launch of new markets, the timing of production rollouts, and other factors, any of which have the ability to reduce or
outweigh certain seasonal effects.
4
Effect of General Economic Conditions
on our Business
We believe that demand for our services
will increase in part because of new construction and remodeling activities of pre-existing retail, convenience store, stadium
and event venues. While we do see reductions in retail footprints across the U.S., we see a continued focus on integration of digital
into the retail marketplace and a focus on digital refreshes within the retail space to stay relevant in an evolving e-commerce
marketplace. Recent general economic improvements generally make it easier for our customers to justify decisions to invest in
digital marketing technology solutions. A change in the macroeconomic trend in the U.S. could have a negative impact on our customers’
ability and/or willingness to advance their digital initiatives.
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 that 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 addressing 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. Presently, we do not believe that any such legislation or proposed legislation will
have a materially adverse impact on our business.
Our Thermal Mirror and other Safe Space
Solutions products are utilized by employers, in part, to evaluate the temperature of their respective employees or guests to their
facilities. Consequently, regulations from the U.S. Food and Drug Administration, as well as state regulations related to consumer
and employee privacy rights, may apply to the sale and use of such devices within the United States. Similarly, because the devices
are sold in Canada, regulations related to consumer and employee privacy in provinces where such regulations exist may apply to
the sale and use of such devices in those provinces in Canada. Presently, we do not believe that any such legislation or proposed
legislation will have a materially adverse impact on our business.
Competition
While we believe there is presently no direct
competitor with the comprehensive offering of technologies, solutions and services we provide to our customers, there are multiple
individual competitors who offer pieces of our solutions. These include digital signage software companies such as Stratacache,
Four Winds Interactive, and Reflect Systems; marketing services companies such as Sapient Nitro or digital signage systems integrators
such as SageNet. Some of these competitors may have significantly greater financial, technical and marketing resources than we
do and may be able to respond more rapidly than we can to new or emerging technologies or changes in customer requirements. We
believe that our sales and business development capabilities, network operations / field service management capabilities, our comprehensive
offering of digital marketing technology and solutions, brand awareness, and proprietary processes are the primary factors affecting
our competitive position.
Major Customers
We had two (2) and one (1) customer(s) that
accounted for 27.8% and 18.5% of revenue for the years ended December 31, 2020 and 2019, respectively.
Decisions by one or more of these key customers
to not renew, terminate or substantially reduce their use of our products, technology, services, and platform could substantially
slow our revenue growth and lead to a decline in revenue. Our business plan assumes continued growth in revenue, and it is unlikely
that we will become profitable without a continued increase in revenue.
For the years ended December 31, 2020 and
2019, we had sales of $1,058 (6.1% of consolidated sales) and $1,103 (3.5% of consolidated sales), respectively, with 33 Degrees
Convenience Connect, Inc., a related party that is approximately 17.5% owned by a member of our senior management (“33 Degrees”).
Territories
We sell products and services primarily
throughout North America.
Employees
We have approximately 75 employees as of
March 8, 2021. We do not have any employees that operate under collective-bargaining agreements.
5
ITEM 1A RISK FACTORS
Our business involves a high degree of
risk. In evaluating our business, you should carefully consider the specific risks described below, and any risks described in
our other filings with the Securities and Exchange Commission, pursuant to Sections 13(a), 13(c), 14, or 15(d) of the Securities
Exchange Act of 1934. Any of the risks we describe below could cause our business, financial condition, results of operations or
future prospects to be materially adversely affected. In addition, some of the following statements are forward-looking statements.
For more information about forward-looking statements, please see the “Forward-Looking Statements” section included
in Item 7 of this Annual Report. Amounts within the “Risk Factors” section are stated in thousands with the exception
of share information.
RISKS RELATED TO OUR BUSINESS AND OUR INDUSTRY
The ongoing
COVID-19 pandemic has had, and may in the future have, a significant adverse impact on our advertising revenue and also exposes
our business to other risks.
The ongoing COVID-19 pandemic has resulted
in authorities implementing numerous preventative measures to contain or mitigate the outbreak of the virus, such as travel bans
and restrictions, limitations on business activity, quarantines, and shelter-in-place orders. These measures have caused, and are
continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide, which have significantly
impacted our business and results of operations.
For example, for the year ended December
31, 2020, our revenue declined by $14,141, or 45%, versus the year ended December 31, 2019, as compared to a four-year average
revenue growth rate of 29.1% from 2015 to 2019, and represented the first revenue reduction for the Company since its merger with
ConeXus World Global, LLC in October 2015. This reduction was driven by a combination of factors, including, but not limited to,
a decrease in revenues generated from (1) installation services of $4,962 following a significant increase in suspended, delayed,
and cancelled customer projects, initiatives, and capital expenditures as a direct result of the COVID-19 pandemic, (2) management
services of $1,186 related to contracts with customers which were partially or permanently closed during the year, and (3) reductions
in new customer acquisition, each of which were directly attributable, either in whole or in part, to the COVID-19 pandemic.
While we have seen improved revenue generation
and customer activity in the second half of 2020 and first quarter of 2021, there can be no assurance that it will not decrease
again as a result of the effects of the pandemic. In addition, we believe that the pandemic has contributed to an acceleration
in the shift of commerce from offline to online, potentially altering customer demand for our products and services as our customers
evaluate the most effective approach to capture consumer demand.
The demand for and pricing of our services
may be materially and adversely impacted by the pandemic for the foreseeable future, and we are unable to predict the duration
or degree of such impact with any certainty. In addition to the impact on our installation and managed services business, the pandemic
exposes our business, operations, and workforce to a variety of other risks, including:
Any of these developments may adversely
affect our business, harm our reputation, or result in legal or regulatory actions against us. The persistence of COVID-19, and
the preventative measures implemented to help limit the spread of the illness, have impacted, and will continue to impact, our
ability to operate our business and may materially and adversely impact our business, financial condition, and results of operations.
6
The launch of our new Safe Space Solutions products may
not be successful.
On April 28, 2020, we announced the joint
launch of an AI-integrated non-contact temperature inspection kiosk known as the Thermal Mirror with our partner, InReality, for
use by businesses as COVID-19 related workplace restrictions are reduced or eliminated. Although we have experience in providing
customers digital integration solutions, our launch of the Thermal Mirror involves the development, marketing and sale of a new
product to new customers involving a joint effort with InReality. The product also uses hardware and technologies that have not
been used with our other customers. To date, the Company and InReality continued to develop incremental use cases and subsequently
launched a suite of Safe Space Solutions products addressing this market, each of which operate consistently with our primary business
model in that they represent a sale of hardware and a SaaS-based subscription license services contract.
While we believe this product and our launch
will be successful, there are a number of risks involved in such a launch. First, we are investing significant time and resources
that take away the attention of management that would otherwise be available for ongoing development of our existing business or
to respond to new opportunities. We also have limited cash and we are spending significant costs in the launch, which may ultimately
not be successful. This cash could have been used to support our other proven business lines. We face significant competition from
other COVID-19 related workplace safety solutions, and our competitors have more capital resources than we do. The failure to successfully
manage these risks in the development and marketing of Safe Space Solutions could have a material, adverse effect on the Company’s
business, financial condition, and results of operations.
We have generally incurred losses, and may never become
or remain profitable.
Except for the second, third and fourth
quarters of 2019, we have incurred historical net losses. As of and for the year-ended December 31, 2020, we had a working capital
deficit and negative cash flows from operations. We incurred a net loss for the years ended December 31, 2020 and December 31,
2019. While we have been able to achieve profitability in certain recent periods, it is uncertain whether we will be able to sustain
or increase our profitability in successive periods.
We have formulated our business plans and
strategies based on certain assumptions regarding the acceptance of our business model and the marketing of our products and services.
Nevertheless, our assessments regarding market size, market share, market acceptance of our products and services and a variety
of other factors may prove incorrect. Our future success will depend upon many factors, including factors beyond our control and
those that cannot be predicted at this time. The ongoing COVID-19 pandemic has also caused a significant increase in suspended,
delayed, and cancelled customer projects, initiatives, and capital expenditures, and it is not known when these opportunities will
be revived for the Company, if at all.
7
Our digital marketing business is
evolving in a rapidly changing market, and we cannot ensure the long-term successful operation of our business or the execution
of our business plan.
Our digital marketing technology and solutions
are an evolving business offering and the markets in which we compete are rapidly changing and the evolution has slowed as a result
of the COVID-19 pandemic. As a result, our prospects must be considered in light of the risks, expenses and difficulties frequently
encountered by growing companies in new and rapidly evolving markets. We may be unable to accomplish any of the following, which
would materially impact our ability to implement our business plan:
● integration of acquisitions.
Our business strategy may be unsuccessful
and we may be unable to address the risks we face in a cost-effective manner, if at all. If we are unable to successfully accomplish
these tasks, our business will be harmed.
Adequate funds for our operations may not be available,
requiring us to raise additional financing or else curtail our activities significantly.
On February 18, 2021, the Company entered
into a securities purchase agreement with an institutional investor which provided for the issuance and sale by the Company of
800,000 shares of the Company’s common stock (the “Shares”), in a registered direct offering (the “Offering”)
at a purchase price of $2.50 per Share, for gross proceeds of $2,000. The net proceeds from the Offering after paying estimated
offering expenses were approximately $1,835 which the Company intends to use for general corporate purposes. The closing of the
Offering occurred on February 22, 2021.
We may nonetheless be required to raise
additional funding through public or private financings, including equity financings, through 2021. We have an “at-the-market”
offering in place, pursuant to which we may direct Roth Capital Partners, our sale agent, to sell shares of our common stock to
investors in the market, subject to the terms and conditions of a sales agreement. These sales are dilutive to shareholders. Any
additional equity financings may also be dilutive to shareholders and may be completed at a discount to the then-current market
price of our securities. Debt financing, if available, may involve restrictive covenants on our operations or pertaining to future
financing arrangements. Nevertheless, we may not successfully complete any future equity or debt financing. Adequate funds for
our operations, whether from financial markets, collaborative or other arrangements, may not be available when needed or on terms
attractive to us. If adequate funds are not available, our plans to operate our business may be adversely affected and we could
be required to curtail our activities significantly and/or cease operating.
8
We do not have sufficient capital to engage in material
research and development, which may harm our long-term growth.
In light of our limited resources in general,
we have made no material investments in research and development over the past several years. This conserves capital in the short
term. In the long term, as a result of our failure to invest in research and development, our technology and product offerings
may not keep pace with the market, and we may lose any current existing competitive advantage. Over the long term, this may harm
our revenues growth and our ability to become profitable.
We are reliant on the continued support
of a related party for adequate financing of our operations.
As of March 8, 2021, our largest shareholder
and investor, Slipstream Communications LLC (“Slipstream”) is the holder of 83.5% of our outstanding debt instruments
including a term loan, secured revolving promissory note, and secured special promissory note and has beneficial ownership of approximately
36.2% of our common stock (on an as-converted, fully diluted basis including conversion of outstanding warrants, and assuming no
other convertible securities, options and warrants are converted or exercised by other parties) as of December 31, 2020. Slipstream
has also provided us with a continued support letter through March 31, 2022. If we are unable to extend the maturity or replace
our existing financing agreements in the future, our plans to operate our business may be adversely affected and we could be required
to curtail our activities significantly and/or cease operating.
We expect that there will be significant consolidation
in our industry. Our failure or inability to lead that consolidation would have a severe adverse impact on our access to financing,
customers, technology, and human resources.
Our industry is currently composed of a
large number of relatively small businesses, no single one of which is dominant or which provides integrated solutions and product
offerings incorporating much of the available technology. Accordingly, we believe that substantial consolidation may occur in our
industry in the near future. If we do not play a positive role in that consolidation, either as a leader or as a participant whose
capability is merged in a larger entity, we may be left out of this process, with product offerings of limited value compared with
those of our competitors. Moreover, even if we lead the consolidation process, the market may not validate the decisions we make
in that process.
Our success depends on our interactive marketing technologies
achieving and maintaining widespread acceptance in our targeted markets.
Our success will depend to a large extent
on broad market acceptance of our interactive marketing technologies among our current and prospective customers. Our prospective
customers may still not use our solutions for a number of other reasons, including preference for static advertising, lack of familiarity
with our technology, preference for competing technologies or perceived lack of reliability. We believe that the acceptance of
our interactive marketing technologies by prospective customers will depend primarily on the following factors:
● the reliability of our interactive marketing technologies.
Our interactive technologies are complex
and must meet stringent user requirements. Some undetected errors or defects may only become apparent as new functions are added
to our technologies and products. The need to repair or replace products with design or manufacturing defects could temporarily
delay the sale of new products and adversely affect our reputation. Delays, costs and damage to our reputation due to product defects
could harm our business.
Our financial condition and potential for continued net
losses may negatively impact our relationships with customers, prospective customers and third-party suppliers.
Our financial condition and potential for
continued net losses may cause current and prospective customers to defer placing orders with us, to require terms that are less
favorable to us, or to place their orders with our competitors, which could adversely affect our business, financial condition
and results of operations. On the same basis, third-party suppliers may refuse to do business with us, or may do so only on terms
that are unfavorable to us, which also could cause our expenses to increase.
9
Because we do not have long-term purchase commitments
from our customers, the failure to obtain anticipated orders or the deferral or cancellation of commitments could have adverse
effects on our business.
Our business is characterized by short-term
purchase orders and contracts that do not require that purchases be made by our customers. This makes forecasting our sales difficult.
The failure to obtain anticipated orders and deferrals or cancellations of purchase commitments because of changes in customer
requirements, or otherwise, could have a material adverse effect on our business, financial condition and results of operations.
We have experienced such challenges in the past and may experience such challenges in the future.
Our continued growth and financial
performance could be adversely affected by the loss of several key customers, including a significant related party customer.
Our largest customers account for a significant
portion of our total revenue on a consolidated basis. We had two (2) and one (1) customer(s) that accounted for 27.8% and 18.5%
of revenue for the years ended December 31, 2020 and 2019, respectively.
For the years ended December 31, 2020 and
2019, we had sales of $1,058 (6.1% of consolidated sales) and $1,103 (3.5% of consolidated sales), respectively, with 33 Degrees
Convenience Connect, Inc., a related party that is approximately 17.5% owned by a member of our senior management (“33 Degrees”).
Decisions by one or more of these key customers
to not renew, terminate or substantially reduce their use of our products, technology, services, and platform could substantially
slow our revenue growth and lead to a decline in revenue. Our business plan assumes continued growth in revenue, and it is unlikely
that we will become profitable without a continued increase in revenue.
Most of our contracts are terminable by our customers
with limited notice and without penalty payments, and early terminations could have a material adverse effect on our business,
operating results and financial condition.
Most of our contracts are terminable by
our customers following limited notice and without early termination payments or liquidated damages due from them. In addition,
each stage of a project often represents a separate contractual commitment, at the end of which the customers may elect to delay
or not to proceed to the next stage of the project. We cannot assure you that one or more of our customers will not terminate a
material contract or materially reduce the scope of a large project. The delay, cancellation or significant reduction in the scope
of a large project or a number of projects could have a material adverse effect on our business, operating results and financial
condition.
It is common for our current and prospective customers
to take a long time to evaluate our products, most especially during economic downturns that affect our customers’ businesses,
including as a result of the COVID-19 pandemic. The lengthy and variable sales cycle makes it difficult to predict our operating
results.
It is difficult for us to forecast the timing
and recognition of revenue from sales of our products and services because our actual and prospective customers often take significant
time to evaluate our products before committing to a purchase. Even after making their first purchases of our products and services,
existing customers may not make significant purchases of those products and services for a long period of time following their
initial purchases, if at all. The period between initial customer contact and a purchase by a customer may be years with potentially
an even longer period separating initial purchases and any significant purchases thereafter. During the evaluation period, prospective
customers may decide not to purchase or may scale down proposed orders of our products for various reasons, including:
● reduced need to upgrade existing visual marketing systems;
● introduction of products by our competitors;
● lower prices offered by our competitors; and
● changes in budgets and purchasing priorities.
Our prospective customers routinely require
education regarding the use and benefit of our products. This may also lead to delays in receiving customers’ orders.
10
Our industry is characterized by frequent technological
change. If we are unable to adapt our products and services and develop new products and services to keep up with these rapid changes,
we will not be able to obtain or maintain market share.
The market for our products and services
is characterized by rapidly changing technology, evolving industry standards, changes in customer needs, heavy competition and
frequent new product and service introductions. If we fail to develop new products and services or modify or improve existing products
and services in response to these changes in technology, customer demands or industry standards, our products and services could
become less competitive or obsolete.
We must respond to changing technology and
industry standards in a timely and cost-effective manner. We may not be successful in using new technologies, developing new products
and services or enhancing existing products and services in a timely and cost-effective manner. Furthermore, even if we successfully
adapt our products and services, these new technologies or enhancements may not achieve market acceptance.
A portion of our business involves the use of software
technology that we have developed or licensed. Industries involving the ownership and licensing of software-based intellectual
property are characterized by frequent intellectual-property litigation, and we could face claims of infringement by others in
the industry. Such claims are costly and add uncertainty to our operational results.
A portion of our business involves our ownership
and licensing of software. This market space is characterized by frequent intellectual property claims and litigation. We could
be subject to claims of infringement of third-party intellectual-property rights resulting in significant expense and the potential
loss of our own intellectual property rights. From time to time, third parties may assert copyright, trademark, patent or other
intellectual property rights to technologies that are important to our business. 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:
● pay substantial damages;
● cease the development, use, licensing or sale of infringing products;
● discontinue the use of certain technology; or
11
Our proprietary platform architectures
and data tracking technology underlying certain of our services are complex and may contain unknown errors in design or implementation
that could result in system performance failures or inability to scale.
The platform architecture, data tracking
technology and integration layers underlying our proprietary platforms, our contract administration, procurement, timekeeping,
content and network management, network services, device management, virtualized services, software automation and other tools,
and back-end services are complex and include specially developed software and code. This software and code are developed internally,
licensed from third parties, or integrated by in-house personnel and third parties. Any of the system architecture, system administration,
integration layers, software or code may contain errors, or may be implemented or interpreted incorrectly, particularly when they
are first introduced or when new versions or enhancements to our tools and services are released. Consequently, our systems could
experience performance failure, or we may be unable to scale our systems, which may:
● increase our costs related to product development or service delivery; or
● adversely affect our revenues and expenses.
Our business may be adversely affected by malicious applications
that interfere with, or exploit security flaws in, our products and services.
Our business may be adversely affected by
malicious applications that make changes to our customers’ computer systems and interfere with the operation and use of our
products or products that impact our business. These applications may attempt to interfere with our ability to communicate with
our customers’ devices. The interference may occur without disclosure to or consent from our customers, resulting in a negative
experience that our customers may associate with our products and services. These applications may be difficult or impossible to
uninstall or disable, may reinstall themselves and may circumvent other applications’ efforts to block or remove them. The
ability to provide customers with a superior interactive marketing technology experience is critical to our success. If our efforts
to combat these malicious applications fail, or if our products and services have actual or perceived vulnerabilities, there may
be claims based on such failure or our reputation may be harmed, which would damage our business and financial condition.
We compete with other companies that have more resources,
which puts us at a competitive disadvantage.
The market for interactive marketing technologies
is generally highly competitive and we expect competition to increase in the future. Some of our competitors or potential competitors
may have significantly greater financial, technical and marketing resources than us. 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 us.
We expect competitors to continue to improve
the performance of their current products and to introduce new products, services and technologies. Successful new product and
service introductions or enhancements by our competitors could reduce sales and the market acceptance of our products and services,
cause intense price competition or make our products and services obsolete. To be competitive, we must continue to invest significant
resources in research and development, sales and marketing and customer support. If we do not have sufficient resources to make
these investments or are unable to make the technological advances necessary to be competitive, our competitive position will suffer.
Increased competition could result in price reductions, fewer customer orders, reduced margins and loss of market share. Our failure
to compete successfully against current or future competitors could adversely affect our business and financial condition.
12
Our future success depends on key personnel and our ability
to attract and retain additional personnel.
Our key personnel include our:
● Rick Mills, our Chief Executive Officer;
● Will Logan, our Chief Financial Officer; and
● Mike McKim, our Vice President of Operations
If we fail to retain our key personnel or
to attract, retain and motivate other qualified employees, our ability to maintain and develop our business may be adversely affected.
Our future success depends significantly on the continued service of our key technical, sales and senior management personnel and
their ability to execute our growth strategy. The loss of the services of our key employees could harm our business. We may be
unable to retain our employees or to attract, assimilate and retain other highly qualified employees who could migrate to other
employers who offer competitive or superior compensation packages, especially in light of the compensation reductions that we implemented
in connection with the COVID-19 pandemic.
We are subject to cyber security risks and interruptions
or failures in our information technology systems and will likely need to expend additional resources to enhance our protection
from such risks. Notwithstanding our efforts, a cyber incident could occur and result in information theft, data corruption, operational
disruption and/or financial loss.
We depend on digital technologies to process
and record financial and operating data and rely on sophisticated information technology systems and infrastructure to support
our business, including process control technology. At the same time, cyber incidents, including deliberate attacks, have increased.
The U.S. government has issued public warnings that indicate that energy assets might be specific targets of cyber security threats.
Our technologies, systems and networks and those of our vendors, suppliers and other business partners may become the target of
cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss
or destruction of proprietary and other information, or other disruption of business operations. In addition, certain cyber incidents,
such as surveillance, may remain undetected for an extended period. Our systems for protecting against cyber security risks may
not be sufficient. As the sophistication of cyber incidents continues to evolve, we will likely be required to expend additional
resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents.
Additionally, any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures,
usage errors by employees, computer viruses, cyber-attacks or other security breaches or similar events. The failure of any of
our information technology systems may cause disruptions in our operations, which could adversely affect our revenues and profitability.
Our reliance on information management and transaction
systems to operate our business exposes us to cyber incidents and hacking of our sensitive information if our outsourced service
provider experiences a security breach.
Effective information security internal
controls are necessary for us to protect our sensitive information from illegal activities and unauthorized disclosure in addition
to denial of service attacks and corruption of our data. In addition, we rely on the information security internal controls maintained
by our outsourced service provider. Breaches of our information management system could also adversely affect our business reputation.
Finally, significant information system disruptions could adversely affect our ability to effectively manage operations or reliably
report results.
Because our technology, products,
platform, and services are complex and are deployed in and across complex environments, they may have errors or defects that could
seriously harm our business.
Our technology, proprietary platforms, products
and services are highly complex and are designed to operate in and across data centers, large and complex networks, and other elements
of the digital media workflow that we do not own or control. On an ongoing basis, we need to perform proactive maintenance services
on our platform and related software services to correct errors and defects. In the future, there may be additional errors and
defects in our software that may adversely affect our services. We may not have in place adequate reporting, tracking, monitoring,