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,
and quality assurance procedures to ensure that we detect errors in our software in a timely manner. If we are unable to efficiently
and cost-effectively fix errors or other problems that may be identified, or if there are unidentified errors that allow persons
to improperly access our services, we could experience loss of revenues and market share, damage to our reputation, increased expenses
and legal actions by our customers.
13
We may have insufficient network or server capacity, which
could result in interruptions in our services and loss of revenues.
Our operations are dependent in part upon:
network capacity provided by third-party telecommunications networks; data center services provider owned and leased infrastructure
and capacity; our dedicated and virtualized server capacity located at its data center services provider partner and a geo-redundant
micro-data center location; and our own infrastructure and equipment. Collectively, this infrastructure, equipment, and capacity
must be sufficiently robust to handle all of our customers’ web-traffic, particularly in the event of unexpected surges in
high-definition video traffic and network services incidents. We (and our service providers) may not be adequately prepared for
unexpected increases in bandwidth and related infrastructure demands from our customers. In addition, the bandwidth we have contracted
to purchase may become unavailable for a variety of reasons, including payment disputes, outages, or such service providers going
out of business. Any failure of these service providers or our own infrastructure to provide the capacity we require, due to financial
or other reasons, may result in a reduction in, or interruption of, service to our customers, leading to an immediate decline in
revenue and possible additional decline in revenue as a result of subsequent customer losses.
Our business operations are susceptible to interruptions
caused by events beyond our control.
Our business operations are susceptible
to interruptions caused by events beyond our control. We are vulnerable to the following potential problems, among others:
The occurrence of any of the foregoing could
result in claims for consequential and other damages, significant repair and recovery expenses and extensive customer losses and
otherwise have a material adverse effect on our business, financial condition and results of operations.
The markets in which we operate are rapidly emerging,
and we may be unable to compete successfully against existing or future competitors to our business.
The market in which we operate is becoming
increasingly competitive. Our current competitors generally include general digital signage companies, specialized digital
signage operators targeting certain vertical markets (e.g., financial services), content management software companies, or integrators
and vertical solution providers who develop single implementations of content distribution, digital marketing technology, and related
services. These competitors, including future new competitors who may emerge, may be able to develop a comparable or superior solution
capabilities, software platform, technology stack, and/or series of services that provide a similar or more robust set of features
and functionality than the technology, products and services we offer. If this occurs, we may be unable to grow as necessary to
make our business profitable.
14
Whether or not we have superior products,
many of these current and potential future competitors have a longer operating histories in their current respective business areas
and greater market presence, brand recognition, engineering and marketing capabilities, and financial, technological and personnel
resources than we do. Existing and potential competitors with an extended operating history, even if not directly related to our
business, have an inherent marketing advantage because of the reluctance of many potential customers to entrust key operations
to a company that may be perceived as new, inexperienced or unproven. In addition, our existing and potential future competitors
may be able to use their extensive resources to:
● take advantage of acquisition and other opportunities more readily; and
If we are unable to compete effectively
in our various markets, or if competitive pressures place downward pressure on the prices at which we offer our products and services,
our business, financial condition and results of operations may suffer.
Risks Related to Our Securities and Our Company
The variable sales cycle of some
of the combined company’s products will likely make it difficult to predict operating results.
Our revenues in any quarter depend substantially
upon contracts signed and the related shipment and installation or delivery of hardware and software products in that quarter.
It is therefore difficult for us to accurately predict revenues and this difficulty also will affect the Company. It is difficult
to forecast the timing of large individual hardware and software sales with a high degree of certainty due to the extended length
of the sales cycle and the generally more complex contractual terms that may be associated with our products that could result
in the deferral of some or all of the revenue to future periods.
Accordingly, large individual sales have
sometimes occurred in quarters subsequent to when we anticipated or not at all. If we receive any significant cancellation or deferral
of customer orders, or it is unable to conclude license negotiations by the end of a fiscal quarter, our operating results may
be lower than anticipated. In addition, any weakening or uncertainty in the economy may make it more difficult for the Company
to predict quarterly results in the future, and could negatively impact our business, operating results and financial condition
for an indefinite period of time.
Our largest shareholder possesses controlling voting power
with respect to our common stock, which will limit your influence on corporate matters.
Our largest shareholder, Slipstream Communications,
LLC, has beneficial ownership of 6,726,350 shares of common stock, including common shares that are beneficially owned by its affiliate
Slipstream Funding, LLC. In addition, the Company may pay off certain of its outstanding principal and interest owed to Slipstream
Communications, LLC in shares of its common stock, which would increase the number of shares beneficially owned by Slipstream Communications.
These shares represent beneficial ownership of approximately 36.2% of our common stock (on an as-converted basis including conversion
of outstanding warrants) as of March 7, 2021. As a result, Slipstream Communications, LLC has significant influence on our management
and affairs, including the election and removal of our Board of Directors and all other matters requiring shareholder approval,
including the future merger, consolidation or sale of all or substantially all of our assets. This stockholder position could discourage
others from initiating any potential merger, takeover or other change-of-control transaction that may otherwise be beneficial to
our shareholders. Furthermore, this concentrated ownership will limit the practical effect of your participation in Company matters,
through shareholder votes and otherwise.
15
Our Articles of Incorporation grant our Board of Directors
the power to issue additional shares of common and preferred stock and to designate other classes of preferred stock, all without
shareholder approval.
Our authorized capital consists of 250 million
shares of capital stock, 50 million of which is undesignated preferred stock. Pursuant to authority granted by our Articles of
Incorporation, our Board of Directors, without any action by our shareholders, may designate and issue shares in such classes or
series (including other classes or series of preferred stock) as it deems appropriate and establish the rights, preferences and
privileges of such shares, including dividends, liquidation and voting rights, provided it is consistent with Minnesota law. The
rights of holders of other classes or series of stock that may be issued could be superior to the rights of holders of our common
shares. The designation and issuance of shares of capital stock having preferential rights could adversely affect other rights
appurtenant to shares of our common stock. Furthermore, any issuances of additional stock (common or preferred) will dilute the
percentage of ownership interest of then-current holders of our capital stock and may dilute our book value per share.
We do not intend to pay dividends on our common stock
for the foreseeable future.
We do not plan to pay dividends on our common
stock for the foreseeable future. Earnings of the business will be reinvested in future growth strategies or utilized to repay
outstanding debt.
We do not have significant tangible
assets that could be sold upon liquidation.
We have nominal tangible assets. As a result,
if we become insolvent or otherwise must dissolve, there will be no tangible assets to liquidate and no corresponding proceeds
to disburse to our shareholders. If we become insolvent or otherwise must dissolve, shareholders will likely not receive any cash
proceeds on account of their shares.
We can provide no assurance that our securities will continue
to meet Nasdaq listing requirements. If we fail to comply with the continuing listing standards of the Nasdaq, our securities could
be delisted.
If we fail to comply with the continuing
listing standards of the Nasdaq, our securities could be delisted. A failure to remain listed on Nasdaq could have a material adverse
effect on the liquidity and price of our common stock.
Our pending disputes arising out
of our Allure acquisition may harm our financial condition and results of operations.
We acquired the capital stock of Allure
in 2018 from Christie Digital Systems. We are currently engaged in a dispute involving Allure and its legacy customer based upon
alleged deficient products and services provided by Allure prior to our acquisition. The alleged claim seeks $3,200 from us in
damages that, if successful, would materially adversely affect our business. We have also tendered an indemnity claim against Christie
Digital Systems for the claimed damages in such dispute, and have alleged additional damages related to the Allure acquisition.
In connection with our claims against Christie Digital, we asserted an offset right and have not paid to Christie Digital Systems
the $1,637 outstanding principal or accrued interest under a promissory note that matured on February 20, 2020. Christie Digital
Systems disputes our ability to exercise such offset right. At this time, there is no guarantee that we will prevail on any matter.
Our required payment of the foregoing amounts would have a material adverse effect on our cash flow and operations.
General Risk Factors
Unpredictability in financing markets could impair our
ability to grow our business through acquisitions.
We anticipate that opportunities to acquire
similar businesses will materially depend on, among other things, the availability of financing alternatives with acceptable terms.
As a result, poor credit and other market conditions or uncertainty in financial markets could materially limit our ability to
grow through acquisitions since such conditions and uncertainty make obtaining financing more difficult.
16
Because of our limited resources, we may not have in place
various processes and protections common to more mature companies and may be more susceptible to adverse events.
We have limited resources as a result of,
among other things, significant restructuring and integration costs incurred in connection with prior acquisition activities. As
a result, we may not have in place systems, processes and protections that many of our competitors have or that may be essential
to protect against various risks. For example, we have in place only limited resources and processes addressing human resources,
timekeeping, data protection, business continuity, personnel redundancy, and knowledge institutionalization concerns. As a
result, we are at risk that one or more adverse events in these and other areas may materially harm our business, balance sheet,
revenues, expenses or prospects.
General global market and economic conditions may have
an adverse impact on our operating performance and results of operations.
Our business has been and could continue
to be affected by general global economic and market conditions. Any downturn in the United States and worldwide economy could
have a negative effect on our operating results, including a decrease in revenue and operating cash flow. To the extent our customers
are unable to profitably leverage various forms of digital marketing technology and solutions, and/or the content we create, deliver
and publish on their behalf, they may reduce or eliminate their purchase of our products and services. Such reductions in traffic
would lead to a reduction in our revenues. Additionally, in a down-cycle economic environment, we may experience the negative effects
of increased competitive pricing pressure, customer loss, slowdown in commerce over the Internet and corresponding decrease in
traffic delivered over our network and failures by our customers to pay amounts owed to us on a timely basis or at all. Suppliers
on which we rely for equipment, field services, servers, bandwidth, co-location and other services could also be negatively impacted
by economic conditions that, in turn, could have a negative impact on our operations or revenues. Flat or worsening economic conditions
may harm our operating results and financial condition.
In addition, our business could be adversely
affected by the effects of a widespread outbreak of contagious disease, including the recent outbreak of the COVID-19 respiratory
illness. A significant outbreak of contagious diseases in the human population could result in a widespread health crisis that
could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect
demand for our products, our ability to collect against existing trade receivables and our operating results. Specifically, such
event may cause us, our customers or suppliers to temporarily suspend operations in the affected city or country, and customers
may suspend or terminate capital improvements including in-store digital deployments or refresh projects, all of which may have
a material adverse effect on our business.
Significant issuances of our common stock, or the perception
that significant issuances may occur in the future, could adversely affect the market price for our common stock.
Significant actual or perceived potential
future issuance of our common stock could adversely affect the market price of our common stock. Generally, issuances of substantial
amounts of common stock in the public market, and the availability of shares for future sale, could adversely affect the prevailing
market price of our common stock and could cause the market price of our common stock to remain low for a substantial amount of
time.
We cannot foresee the impact of potential
securities issuances of common shares on the market for our common stock, but it is possible that the market for our shares may
be adversely affected, perhaps significantly. It is also unclear whether or not the market for our common stock could absorb a
large number of attempted sales in a short period of time, regardless of the price at which they might be offered.
There may not be an active market for shares of our common
stock.
In general, there has been minimal trading
volume in our common stock. Small trading volumes would likely make it difficult for our shareholders to sell their shares as and
when they choose. Furthermore, small trading volumes are generally understood to depress market prices. As a result, you may not
always be able to resell shares of our common stock publicly at the time and prices that you feel are fair or appropriate.
17
ITEM 2 PROPERTIES
(All currency is rounded to the nearest
thousands, except share and per share amounts.)
Our headquarters
is located at 13100 Magisterial Drive, Suite 100, Louisville, KY 40223. There, we have approximately 17,500 square-feet of office
space and 6,500 square-feet of warehouse space, which we believe is sufficient for our projected near-term future growth. The monthly
lease amount is currently $30 and escalates 1% annually through the end of the lease term in December 2023, should the Company
elect to retain the entire space. We restructured this lease during 2020, which allows the Company to right to exit approximately
9,100 square feet of space and reduce the monthly rent expense by $13 per month beginning in July 2021. The restructured lease
also provided the Company deferred payment terms of approximately $6 monthly between July 2020 and June 2021. The Consolidated
Balance Sheet includes accrued rental payments related to this deferral of $42 as of December 31, 2020.
The corporate phone
number is (502) 791-8800.
We also lease office
space of approximately 6,000 square feet to support our Canadian operations at a facility located at 4600 Rhodes Drives, Unit 3
& 4, Windsor, Ontario under a lease that expires November 30, 2025 and with a monthly rental, inclusive of CAMS and related
realty taxes, of $9 CAD per month.
We also lease office
space of approximately 900 square feet to support our Atlanta operations at a facility known as Northridge Center II and having
as its street address at 365 Northridge Road, Atlanta, GA 30350. This property is under lease until September 30, 2021 with a monthly
rental of $2.
ITEM 3 LEGAL PROCEEDINGS
On August 2, 2019, the Company filed suit
in Jefferson Circuit Court, Kentucky, against a supplier of Allure for breach of contract, breach of warranty, and negligence with
respect to equipment installations performed by such supplier for an Allure customer.
On October 10, 2019, the Allure customer
that is the basis of our claim above sent a demand to the Company for payment of $3,200 as settlement for an alleged breach of
contract related to hardware failures of equipment installations performed by Allure between November 2017 and August 2018, before
our acquisition of Allure. The suits filed by and against Allure were consolidated in the Jefferson Circuit Court, Kentucky in
January 2020. These consolidated cases remain in the early stages of litigation and, as a result, the outcome of each and the allocation
of liability, if any, remain unclear, so the Company is unable to reasonably estimate the possible liability, recovery, or range
of magnitude for either the liability or recovery, if any, at the time of this filing.
The Company has notified its insurance company
of potential claims and continues to evaluate both the claim made by the customer and potential avenues for recovery against third
parties should the customer prevail.
On February 20, 2020, the Company and Allure
filed a demand for arbitration against Seller (Christie Digital Systems, Inc.) for breach of contract, indemnification, and fraudulent
misrepresentation under the Purchase Agreement executed in connection with our acquisition of Allure. This demand includes a claim
for the right to offset the amounts owing under the Amended and Restated Seller Note due February 20, 2020. On February 27, 2020,
Seller sent the Company a notice of breach for failure to pay the Amended and Restated Seller Note on the maturity date of February
20, 2020 and demanding immediate payment. In December 2020, the parties entered a pre-arbitration mediation process in an effort
to settle the litigation, which remains ongoing as of the date of this report. We continue to assert the offset right under the
Purchase Agreement and Amended and Reseller Note.
Information regarding legal proceeding can
be found in Note 9 Commitments and Contingencies to the Company’s Consolidated Financial Statements.
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
18
PART II
(All currency is rounded to the nearest thousands, except share
and per share amounts.)
Market Information
Our common stock is listed for trading on
the Nasdaq Capital Markets (“Nasdaq”) under the symbol “CREX”. Trading of our common stock on Nasdaq commenced
on November 19, 2018. Prior to November 19, 2018, our common stock was listed for trading on the OTC Bulletin Board, the “OTCQX,”
under the symbol “CREX.” The transfer agent and registrar for our common stock is Computershare Limited, 401 2nd Avenue
North, Minneapolis, Minnesota 55401.
Shareholders
As of March 8, 2021, we had 344 holders
of record of our common stock. The actual number of stockholders is greater than this number of record holders, and includes stockholders
who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record
also does not include stockholders whose shares may be held in trust by other entities.
Dividend Policy
We have never declared or paid cash dividends
on our common stock. We currently intend to retain future earnings, if any, to operate and expand our business and to finance the
development and expansion of our business. We do not anticipate paying cash dividends on our common stock in the foreseeable future.
Any payment of cash 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 and other factors deemed relevant by our Board of Directors.
Holders of our common stock are entitled
to share pro rata in dividends and distributions with respect to the common stock when, as and if declared by our Board of Directors
out of funds legally available therefor. Our future dividend policy is subject to the sole discretion of our Board of Directors
and will depend upon a number of factors, including future earnings, capital requirements and our financial condition.
Recent Sales of Unregistered Securities
On March 7, 2021, the Company and its subsidiaries
(collectively, the “Borrowers”) refinanced their current debt facilities with Slipstream Communications, LLC (“Slipstream”),
pursuant to an Amended and Restated Credit and Security Agreement (the “Credit Agreement”). The debt facilities continue
to be fully secured by all assets of the Borrowers. The maturity date (“Maturity Date”) on the outstanding debt and
new debt is extended to March 31, 2023. The Credit Agreement (i) provides a $1,000 of availability under a line of credit (the
“Line of Credit”), (ii) consolidates our existing term and revolving line of credit facilities into a new term loan
(the “New Term Loan”) having an aggregate principal balance of approximately $4,550 (including a 3.0% issuance fee
capitalized into the principal balance), (iii) increases the outstanding special convertible term loan (the “Convertible
Loan”) to approximately $2,280 (including a 3.0% issuance fee capitalized into the principal balance), and (iv) extinguishes
the outstanding obligations owed with respect to a $264 existing disbursed escrow loan in exchange for shares of the Company’s
common stock (the “Disbursed Escrow Conversion Shares”), valued at $2.718 per share (the trailing 10-day volume weighted
average price (“VWAP”)) as reported on the Nasdaq Capital Market as of the date of execution of the Credit Agreement).
The Line of Credit and Convertible Loan accrue interest at 10% per year, and the New Term Loan accrues interest at 8% per year.
19
The New Term Loan requires no principal
payments until the Maturity Date, and interest payments are payable on the first day of each month until the Maturity Date. All
interest payments owed prior to October 1, 2021 are payable as PIK payments, or increases to the principal balance only.
The Line of Credit and Convertible Loan
require payments of accrued interest payable on the first day of each month through April 1, 2022. All such interest payments made
prior to October 1, 2021 are payable as PIK payments, or increases to the principal balances under the Line of Credit and Convertible
Loan only. No principal payments are owed under the Line of Credit or Convertible Loan until April 1, 2022, at which time all principal
and interest on each of the Line of Credit and Convertible Loan will be paid in monthly installments until the Maturity Date to
fully amortize outstanding principal by the Maturity Date.
All payments of interest (other than PIK
payments) and principal on the Line of Credit and Convertible Loan may be paid, in the Borrowers’ sole discretion, in shares
of the Company’s Common Stock (the “Payment Shares,” and together with the Disbursed Escrow Conversion Shares,
the “Shares”). The Payment Shares will be valued on a per-Share basis at 70% of the VWAP of the Company’s shares
of common stock as reported on the Nasdaq Capital Market for the 10 trading days immediately prior to the date such payment is
due; provided that the Payment Shares shall not be valued below $0.50 per Share (the “Share Price”).
The Credit Agreement limits the Company’s
ability to issue Shares as follows (the “Exchange Limitations”): (1) The total number of Shares that may be issued
under the Credit Agreement will be limited to 19.99% of the Company’s outstanding shares of common stock on the date the
Credit Agreement is signed (the “Exchange Cap”), unless stockholder approval is obtained to issue shares in excess
of the Exchange Cap; (2) if Slipstream and its affiliates (the “Slipstream Group”) beneficially own the largest ownership
position of shares of Company common stock immediately prior to the proposed issuance of Payment Shares and such shares are less
than 19.99% of the then-issued and outstanding shares of Company common stock, the issuance of such Payment Shares will not cause
the Slipstream Group to beneficially own in excess of 19.99% of the issued and outstanding shares of Company common stock after
such issuance unless stockholder approval is obtained for ownership in excess of 19.99%; and (3) if the Slipstream Group does not
beneficially own the largest ownership position of shares of Company common stock immediately prior to the proposed issuance of
Payment Shares, the Company may not issue Payment Shares to the extent that such issuance would result in Slipstream Group beneficially