Item 1A. Risk Factors
ITEM 1 A 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.
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:
●
delays
in product development or releases, or reductions in manufacturing production and sales of consumer hardware, as a result of inventory
shortages, supply chain or labor shortages;
●
significant
volatility and disruption of global financial markets, which could negatively impact our ability to access capital in the future;
●
our
inability to recognize revenue, collect payment, or generate future revenue from customers, including from those that have been or
may be forced to close their businesses or are otherwise impacted by the economic downturn;
●
negative
impact on our workforce productivity, product development, and research and development due to difficulties resulting from our personnel
working remotely;
●
illnesses
to key employees, or a significant portion of our workforce, which may result in inefficiencies, delays, and disruptions in our business;
and
●
increased
volatility and uncertainty in the financial projections we use as the basis for estimates used in our financial statements.
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:
●
establishing
and maintaining broad market acceptance of our technology, solutions, services, and platforms, and converting that acceptance into
direct and indirect sources of revenue;
●
establishing
and maintaining adoption of our technology, solutions, services, and platforms in and on a variety of environments, experiences,
and device types;
●
timely
and successfully developing new technology, solution, service, and platform features, and increasing the functionality and features
of our existing technology, solution, service, and platform offerings;
●
developing
technology, solutions, services, and platforms that result in a high degree of customer satisfaction and a high level of end-customer
usage;
●
successfully
responding to competition, including competition from emerging technologies and solutions;
●
developing
and maintaining strategic relationships to enhance the distribution, features, content and utility of our technology, solutions,
services, and platforms;
●
identifying,
attracting and retaining talented engineering, network operations, program management, technical services, creative services, and
other personnel at reasonable market compensation rates in the markets in which we employ such personnel; and
●
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:
●
our
ability to demonstrate the economic and other benefits attendant to our interactive marketing technologies;
●
our
customers becoming comfortable with using our interactive marketing technologies; and
●
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.
13
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
●
obtain
a license under the intellectual property rights of the third party claiming infringement, which license may not be available on
reasonable terms or at all.
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:
●
adversely
impact our relationship with customers and others who experience system failure, possibly leading to a loss of affected and unaffected
customers;
●
increase
our costs related to product development or service delivery; or
●
adversely
affect our revenues and expenses.
14
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.
Our
future success depends on key personnel and our ability to attract and retain additional personnel.
Our
key personnel include:
●
Rick
Mills, our Chief Executive Officer;
●
Will
Logan, our Chief Financial Officer;
●
Lee
Summers, our President of Media; and
●
Bob
Sanders, our Chief Strategy Officer.
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.
15
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.
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.
16
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:
●
our
platform, technology, products, and services and underlying infrastructure, or that of our key suppliers, may be damaged or destroyed
by events beyond our control, such as fires, earthquakes, floods, power outages or telecommunications failures;
●
we
and our customers and/or partners may experience interruptions in service as a result of the accidental or malicious actions of Internet
users, hackers or current or former employees;
●
we
may face liability for transmitting viruses to third parties that damage or impair their access to computer networks, programs, data
or information. Eliminating computer viruses and alleviating other security problems may require interruptions, delays or cessation
of service to our customers; and
●
failure
of our systems or those of our suppliers may disrupt service to our customers (and from our customers to their customers), which
could materially impact our operations (and the operations of our customers), adversely affect our relationships with our customers
and lead to lawsuits and contingent liability.
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.
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:
●
develop
and deploy new products and services more quickly and effectively than we can;
●
develop,
improve and expand their platforms and related infrastructures more quickly than we can;
●
reduce
costs, particularly hardware costs, because of discounts associated with large volume purchases and longer-term relationships and
commitments;
17
●
offer
less expensive products, technology, platform, and services as a result of a lower cost structure, greater capital reserves or otherwise;
●
adapt
more swiftly and completely to new or emerging technologies and changes in customer requirements;
●
take
advantage of acquisition and other opportunities more readily; and
●
devote
greater resources to the marketing and sales of their products, technology, platform, and services.
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.
Our
Safe Space Solutions products may no longer be marketable.
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. While the product
and its launch were successful and recouped our initial investment, we still maintain $1,750 of inventory as of December 31, 2021 that
is solely used in deploying our Safe Space Solutions which may not be saleable elsewhere should the market for these products reduce
or eliminate as a result of the development of the COVID-19 vaccine. As of December 31, 2021, the Company has recorded a reserve of $426
for this inventory in the Consolidated Balance Sheet.
RISKS
RELATED TO OUR ACQUISITION OF REFLECT SYSTEMS, INC.
The
loss of the services of certain key management personnel at Reflect could impair our ability to execute our business strategy and as
a result, reduce our sales and profitability.
We
depend on the continued services of certain key personnel from Reflect’s senior management team. As we integrate and combine Reflect’s
with our business, the loss of key personnel at Reflect could have a material adverse effect on our ability to execute our business strategy
and on our financial condition and results of operations. Reflect does not maintain key-person insurance for members of its senior management
team and we do not anticipate obtaining any such insurance.
We
may be unable to successfully integrate Reflect with our business, which could cause our business to suffer.
Our
acquisition of Reflect is significant, and we may be unable to successfully integrate and combine the operations, personnel and technology
of Reflect with our operations. If we fail to successfully manage the integration of Reflect, we may experience interruptions in our
business activities, a deterioration in our employee and customer relationships, increased costs of integration and harm to our reputation,
all of which could have a material adverse effect on our business, financial condition and results of operations. The types of integration
issues we face may include difficulties in combining corporate cultures, maintaining employee morale and retaining key employees. The
integration process is likely to impose substantial demands on our management. Other challenges involved in integrating Reflect with
Creative Realities include, but are not limited to, the following:
●
retaining
existing customers and strategic partners for each company;
●
retaining
and integrating management and other key employees of the combined company;
●
coordinating
research and development activities to enhance introduction of new products and technologies, especially in light of rapidly evolving
markets for those products and technologies;
●
effectively
managing the diversion of management’s attention from business matters to integration issues;
18
●
combining
product offerings and incorporating acquired software, technology and rights into the product offerings of the combined company effectively
and quickly;
●
integrating
sales efforts so that customers can do business easily with the combined company;
●
transitioning
all facilities to a common information technology environment;
●
effectively
offering products and services of Creative Realities and Reflect to each other’s customers;
●
anticipating
the market needs and achieving market acceptance of our products and services;
●
bringing
together the companies’ marketing efforts so that the industry receives useful information about the combination and customers
perceive value in the combined company’s products and services; and
●
developing
and maintaining uniform standards, controls, procedures and policies.
There
is no assurance that improved operating results will be achieved as a result of the Reflect acquisition or that we successfully integrate
the businesses of Reflect in a timely manner, if at all.
We
may not realize the growth opportunities that are anticipated from our acquisition of Reflect.
The
benefits we expect to achieve as a result of the Reflect acquisition will depend, in part, on our ability to realize anticipated growth
opportunities. Our success in realizing these growth opportunities, and the timing of this realization, depends largely on the successful
integration of Reflect’s business and operations with our business and operations. Even if we are able to integrate our business
with Reflect’s business successfully, this integration may not result in the realization of the full benefits of the growth opportunities
we currently expect from this integration within the anticipated time frame or at all. While we anticipate that certain expenses will
be incurred, such expenses are difficult to estimate accurately, and may exceed current estimates. Accordingly, the benefits from the
acquisition may be offset by costs incurred or delays in integrating the companies, which could cause our revenue assumptions to be inaccurate.
The
acquisition of Reflect may fail to achieve beneficial synergies.
We
consummated the acquisition of Reflect with the expectation that the acquisition will result in beneficial synergies, such as cost reductions
and improving the stability of the combined company’s revenues. Achieving these anticipated synergies and benefits will depend
largely on our success in integrating our existing business with Reflect’s business. Potential risks from an unsuccessful integration
include:
●
The
potential disruption of the combined company’s ongoing business and distraction of management;
●
The
risk that the customers of Creative Realities or Reflect may defer purchasing decisions due to disagreements with the combined company
on its strategic direction and product initiatives;
●
the
risk that Reflect’s customers abandon or reject products offered by the combined company after the acquisition, including Reflect
products that are integrated into Creative Realities’ business, such as additional software products, hosting applications
or installation services;
●
The
risk that it may be more difficult to retain key management, marketing, and technical personnel after the acquisition;
●
The
risk that costs and expenditures for retaining personnel, eliminating unnecessary resources and integrating the businesses are greater
than anticipated;
●
The
risk that the combined company cannot increase sales of its product; and
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●
The
risk that integrating and changing the businesses will impair Creative Realities’ and Reflect’s relationships with their
customers and business partners.
●
effectively
offering products and services of Creative Realities and Reflect to each other’s customers;
●
anticipating
the market needs and achieving market acceptance of our products and services;
●
bringing
together the companies’ marketing efforts so that the industry receives useful information about the acquisition and customers
perceive value in the combined company’s products and services; and
●
developing
and maintaining uniform standards, controls, procedures and policies.
Even
if the two companies are able to effectively integrate operations, there can be no assurance that the anticipated synergies will be achieved.
The failure to achieve such synergies could adversely affect the business, results of operations and financial condition of the combined
company.
The assumption of unknown liabilities in
the acquisition of Reflect may harm our financial condition and results of operations.
Because
we acquired all of the capital stock of Reflect, we obtained ownership of Reflect subject to all of its liabilities, including contingent
and unknown liabilities. Although the definitive merger agreement includes representations and warranties and indemnity covenants from
the sellers of Reflect capital stock that may offer us some contractual remedies for breaches or certain other undisclosed or unknown
liabilities, there are limitations and conditions to our ability to recoup any liabilities, and there may be other unknown obligations
for which we have no contractual remedy. In such a case, our business could be materially and adversely affected. We may learn additional
information about Reflect’s business that adversely affects us, such as the existence of unknown liabilities, or issues that could
affect our ability to comply with applicable laws. If Reflect’s liabilities are greater than expected, or if there are material
obligations of which we do not become aware until after the acquisition or we have no recourse against the Seller, our business could
be materially and adversely affected. If we become responsible for substantial uninsured liabilities, such liabilities may have a material
adverse effect on our financial condition and results of operations.
We
have incurred and will continue to incur significant transaction and integration costs in connection with the acquisition of Reflect.
We
have incurred significant costs associated with completing the acquisition of Reflect, and expect to incur additional significant costs
integrating the operations of the two companies. The substantial majority of these costs will be non-recurring expenses and will consist
of transaction costs (e.g., legal, accounting), facilities and systems consolidation costs and employment-related costs. Additional unanticipated
costs may be incurred in the integration of our businesses. Although we expect that the elimination of duplicative costs, as well as
the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction and acquisition
costs over time, this net benefit may not be achieved in the near term, or at all.
RISKS
RELATED TO OUR SECURITIES AND OUR COMPANY
The
variable sales cycle of our 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.
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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.
As of the date of this Annual Report, our largest shareholder, Slipstream
Communications, LLC, has beneficial ownership of 11,658,469 shares of common stock, including common shares that are beneficially owned
by its affiliate Slipstream Funding, LLC, and including warrants not yet exercisable. 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.
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 250,000,000 shares of capital stock, 50,000,000 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.
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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.
Because of our limited internal 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 internal resources. 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, financial condition,
and results from operations.
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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.