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, 2021
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 $25,772,393 as of the last business day
of the registrant’s most recently completed second fiscal quarter.
As of March 22, 2022, the registrant had 17,124,986
shares of common stock outstanding.
TABLE
OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS; RISK FACTOR SUMMARY ii
PART I
ITEM 1 BUSINESS 1
ITEM 1A RISK FACTORS 9
ITEM 2 PROPERTIES 23
ITEM 3 LEGAL PROCEEDINGS 23
ITEM 4 MINE SAFETY DISCLOSURES 23
PART II
ITEM 6 [RESERVED] 24
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 39
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 39
ITEM 9A CONTROLS AND PROCEDURES 40
ITEM 9B OTHER INFORMATION 40
ITEM 9C DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS 40
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 41
ITEM 11 EXECUTIVE COMPENSATION 44
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES 51
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 52
SIGNATURES 53
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
EXHIBIT INDEX E-1
i
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS;
RISK
FACTOR SUMMARY
The
information in this Report contains various forward-looking statements within the meaning of Section 21E of the Exchange Act of 1934,
as amended. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statements
may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. When used
in the following discussion, the words “anticipates,” “believes,” “expects,” “intends,”
“plans,” “estimates,” “projects,” should,” “may,” “propose,” and similar
expressions (or the negative versions of such words or expressions), are intended to identify such forward-looking statements.
We
caution you that these forward-looking statements are subject to numerous risks and uncertainties, most of which are difficult to predict
and many of which are beyond our control. Should one or more of the risks or uncertainties described in this Report occur, or should
underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking
statements.
All
forward-looking statements, expressed or implied, included in this Report are expressly qualified in their entirety by this cautionary
note. This cautionary note should also be considered in connection with any subsequent written or oral forward-looking statements that
we or persons acting on our behalf may issue. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking
statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date
of this Report.
A
summary of the principal risk factors that make investing in our securities risky and might cause our actual results to differ is set
forth below. The following is only a summary of the principal risks that may materially adversely affect our business, financial condition,
results of operations and cash flows. This summary should be read in conjunction with the more complete discussion of the risk factors
we face, which are set forth in the section entitled “Risk Factors” in this Report.
Risks
Related to our Business and our Industry
● We have generally incurred losses, and may never become or remain profitable.
ii
● Our Safe Space Solutions products may no longer be marketable.
Risks
Related to our Acquisition of Reflect Systems, Inc. (“Reflect”)
● The acquisition of Reflect may fail to achieve beneficial synergies.
iii
Risks
Related to our Securities and our Company
General
Risk Factors
● There may not be an active market for shares of our common stock.
iv
PART
I
ITEM 1 BUSINESS
(All
currency is rounded to the nearest thousand, except share and per share amounts.)
Our
Company
Creative Realities, Inc. (“Creative Realities”,
or the “Company”) provides digital solutions to enhance communications in a wide-ranging variety of out-of-home environments
by providing innovative digital signage solutions for key market segments and use cases, including:
● Retail
● Entertainment and Sports Venues
● Restaurants, including quick-serve restaurants (“QSR”)
● Convenience Stores
● Financial Services
● Automotive
● Medical and Healthcare Facilities
● Mixed Use Developments
● Corporate Communications, Employee Experience
● Digital out of Home (DOOH) Advertising Networks
We serve market-leading companies, so there is
a good chance that if you leave your home today to shop, work, eat or play, you will encounter one or more of our digital signage experiences.
Our solutions are increasingly visible because we help our enterprise clients achieve a wide range of business objectives including:
● Increased brand awareness/engagement
● Improved customer support
● Enhanced employee productivity and satisfaction
● Increased revenue and profitability
● Improved guest experience
● Increased customer/guest engagement
● Improved patient outcomes
Through a combination of organically grown platforms
and a series of strategic acquisitions, including our recent acquisition of Reflect Systems, Inc. in February 2022, the Company assists
clients to design, deploy, manage, and monetize their digital signage networks. The Company sources leads and opportunities for its solutions
through its digital and content marketing initiatives, close relationships with key industry partners, equipment manufacturers, and the
direct efforts of its in-house industry sales experts. Client engagements focus on consultative conversations that ensure the Company’s
solutions are positioned to help clients achieve their business objectives in the most cost-effective manner possible.
1
When comparing Creative Realities to other digital
signage competitors, our customers value the following competitive advantages:
2
The three primary sources of revenue for the company are:
o Hardware system design/engineering
o Hardware installation
o Content development
o Content scheduling
o Post-deployment network and field support
o Media sales, as a result of our acquisition of Reflect
3
While hardware sales and support services revenues
can fluctuate more significantly year over year based on new, large-scale network deployments, the Company expects to see continuous growth
in recurring SaaS revenue for the foreseeable future as digital signage adoption/utilization continues to expand across the vertical markets
we serve.
We believe that the adoption and evolution of our
digital signage technology solutions will increase substantially in years to come in the industries in which we currently focus and in
others; however it has been delayed in recent years. First, our current and potential customer base reduced capital expenditures as a
result of the COVID-19 pandemic, including capital expenditures that would be used to implement digital technology solutions. The costs
of hardware configurations and software media players used to process and display content have also increased recently. Throughout 2021,
we faced significant supply chain challenges which limited the availability of each of these components to our sold solutions and expect
the availability of those products to continue to face supply constraints at least through the first half of 2022. Nevertheless, we believe
that the costs of such hardware will decrease over time as it has done so historically, and will 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.
As
part of our acquisition strategy, we acquired Allure in 2018, and in February 2022, we consummated our acquisition of Reflect.
Acquisition of Reflect
On November 12, 2021, the Company and Reflect Systems,
Inc., or “Reflect,” entered into an Agreement and Plan of Merger (as amended on February 8, 2022, the “Merger Agreement”)
pursuant to which a direct, wholly owned subsidiary of Creative Realities, CRI Acquisition Corporation, or “Merger Sub”, merged
with and into Reflect, with Reflect surviving as a wholly owned subsidiary of Creative Realities, , which transaction is referred to herein
as the “Merger.” On February 17, 2022, the parties consummated the Merger.
Reflect provides digital
signage solutions, including software, strategic and media services to a wide range of companies across the retail, financial, hospitality
and entertainment, healthcare, and employee communications industries in North America. Reflect offers digital signage platforms, including
ReflectView, a platform used by companies to power hundreds of thousands of active digital displays. Through its strategic services, Reflect
assists its customers with designing, deploying and optimizing their digital signage networks, and through its media services, Reflect
assists customers with monetizing their digital advertising networks.
4
Subject to the terms and
conditions of the Merger Agreement, upon the closing of the Merger, Reflect stockholders as of the effective time of the Merger collectively
received from the Company, in the aggregate, the following Merger consideration: (i) $16,166 payable in cash, (ii) 2,333,334 shares of
common stock of Creative Realities (valued based on an issuance price of $2 per share) (the “CREX Shares”), (iii) the Secured
Promissory Note (as described below), and (iv) supplemental cash payments (the “Guaranteed Consideration”), if any, payable
on or after the three-year anniversary of the effective time of the Merger (subject to the Extension Option described below, the “Guarantee
Date”), in an amount by which the value of the CREX Shares on such anniversary is less than $6.40 per share, or if certain customers
of Reflect collectively achieve over 85,000 billable devices online at any time on or before December 31, 2022, is less than $7.20 per
share (such applicable amount, the “Guaranteed Price”), multiplied by the amount of CREX Shares held by the Reflect stockholders
on the Guarantee Date (subject to the Extension Option described below), subject to the terms of the Merger Agreement.
Creative Realities may exercise an extension option
(the “Extension Option”) to extend the Guarantee Date from the three-year anniversary of the Closing Date to six (6) months
thereafter if (i) the Extension Threshold Price is greater than or equal to 70% of the Guaranteed Price described above, and (ii) Creative
Realities provides written notice of its election to exercise the Extension Option at least ten (10) days prior to the three-year anniversary
of the Closing. The “Extension Threshold Price” means the average closing price per share of Creative Realities Shares as
reported on the Nasdaq Capital Market (or NYSE) in the fifteen (15) consecutive trading day period ending fifteen (15) days prior to the
three-year anniversary of the Closing Date. If the Extension Threshold Price is less than 80% of the Guaranteed Price, then the Guaranteed
Price will be increased by $1.00 per share.
5
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 operations with Reflect as a result
of the Merger, acquire and integrate other companies 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) a 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.
6
Companies are 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 customer 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 are 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.
Effect
of General Economic Conditions on our Business
We believe that demand for our services will increase
in the future 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.
7
Effect of Supply Chain Constraints
A key component of our business includes the sale
of digital media players and digital displays supplied by third parties, each of which require semiconductors to complete the manufacturing
process. Throughout 2021, we experienced disruptions and delays related to fulfillment of inventory purchases from vendors, which represent
the key components to our digital signage solutions, because of a global shortage of semiconductor chips. In instances in which inventory
was available, we experienced delays in transportation of these goods from manufacturers to the Company, and in delivery of our solutions
to our customers. We expect the availability of these products to continue to face supply constraints at least through the first half
of 2022.
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.
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 and Four Winds Interactive; 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 holistic sales and business development capabilities, network operations
/ field service management capabilities, our comprehensive offering of digital signage technology and solutions, brand awareness, and
proprietary processes are the primary factors providing our competitive advantage.
Major
Customers
We
had two (2) customers that accounted for 41.1% and 27.8% of revenue for the years ended December 31, 2021 and 2020, respectively.
We had two (2) customers that in the aggregate
accounted for 56.6% and 42.6% of accounts receivable as of December 31, 2021 and December 31, 2020, 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.
Territories
We
sell products and services primarily throughout North America, with limited software licensing agreements operating in other international
jurisdictions.
Human
Capital
We have a workforce comprised of approximately
105 employees as of March 22, 2022, which represents a 40% year-over-year increase in employee headcount, driven primarily by our acquisition
of Reflect in February 2022, which is further discussed in Recent Developments in Item 7 of this Annual Report. We do not have
any employees that operate under collective-bargaining agreements.
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 have additional offices in the
Dallas, TX, Atlanta, GA, and Windsor, Ontario (Canada) metro areas.
Corporate Organization
We originally incorporated and organized as a Minnesota
corporation under the name “Wireless Ronin Technologies, Inc.” in March 2003 and focused on our expertise in digital media
marketing solutions, including digital signage, interactive kiosks, mobile, social media and web-based media solutions. We acquired the
interactive marketing technology business that we currently operate in a 2014 merger with Creative Realities, LLC. 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 systems integration and marketing technology business of ConeXus World Global, LLC. On November 20,
2018, we acquired Allure, an enterprise software development company. On February 17, 2022, we acquired Reflect pursuant to the Merger.
8
ITEM 1ARISK 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.
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 certain affected areas, both regionally and worldwide,
which have significantly adversely impacted our business and results of operations.
For example, for the year ended December 31, 2021 and 2020, our revenue
was $18,437 and $17,457, representing a reduction of 42% and 45% as compared to the year ended December 31, 2019 revenue, respectively.
The Company’s four-year average revenue growth rate was 29.1% from 2015 to 2019, and 2020 represented the first revenue reduction
for the Company since the 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 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 related to contracts with customers which were partially or permanently closed during the year(s), 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 grew revenue
5.6% in 2021, this growth rate is below our historic average.
While
we have seen improved revenue generation and customer activity in the second half of 2020 and in 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:
9
Any
of these developments may adversely affect our business, harm our reputation, or result in legal or regulatory actions against us. The
persistence of the COVID-19 pandemic, 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.
We
have generally incurred losses, and may never become or remain profitable.
We
have incurred historical net losses, and we have had negative cash flows from operations. While we have been able to achieve profitability
in 2021, 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.
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.
10
Adequate
funds for our operations may not be available, requiring us to raise additional financing or else curtail our activities significantly.
During February of 2022, the Company completed a Debt Financing and
Equity Financing (as further described in this Annual Report), which resulted in gross proceeds to the Company, prior to deducting placement
agent and other offering fees, of approximately $20,000.
The net proceeds from the forgoing financings were
used to pay the cash portion of the merger consideration payable to former stockholders of Reflect in connection with our acquisition
of Reflect in February 2022. As a result, we may be required to raise additional funding through public or private financings, including
equity financings, through 2022 and beyond. 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.
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 limited 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.
11
We
are reliant on the continued support of a related party for adequate financing of our operations.
As of March 22, 2022, our largest shareholder and investor, Slipstream
Communications LLC (“Slipstream”) is the holder of 87% of our outstanding debt instruments, including two term loans, and
has beneficial ownership of approximately 47.57% 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).
Slipstream has also provided us with a continued support letter through March 31, 2023. 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.
There
has been, and we expect that there will continue to 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. We believe that our prior acquisitions of Allure and Reflect illustrate acquisition opportunities
that exist in our industry. 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.
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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.
We
had two (2) customers that accounted for 41.1% and 27.8% of revenue for the years ended December 31, 2021 and 2020, 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.
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.
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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
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.
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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