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RNIN > SEC Filings for RNIN > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for WIRELESS RONIN TECHNOLOGIES INC

Form 10-Q for WIRELESS RONIN TECHNOLOGIES INC


9-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains various forward-looking statements within the meaning of Section 21E of the Exchange Act. Although we believe that, in making any such statement, our expectations are based on reasonable assumptions, any such statement 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" and similar expressions, as they relate to us or our management, are intended to identify such forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from those anticipated. Factors that could cause actual results to differ materially from those anticipated, certain of which are beyond our control, are set forth in the Cautionary Statement set forth in our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 23, 2013.

Our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking statements. Accordingly, we cannot be certain that any of the events anticipated by forward-looking statements will occur or, if any of them do occur, what impact they will have on us. We caution you to keep in mind the cautions and risks described in this document and the Cautionary Statement set forth in our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 23, 2013 and to refrain from attributing undue certainty to any forward-looking statements, which speak only as of the date of the document in which they appear. We do not undertake to update any forward-looking statement.

Overview

We provide marketing technology solutions, which include digital signage, interactive kiosks, mobile messaging, social networking and web development solutions, to customers who use our products and services in certain retail and service markets. Through our proprietary RoninCast® software, we provide enterprise, web-based and hosted content delivery systems that manage, schedule and deliver digital content over wireless and wired networks. We also provide custom interactive software solutions, content engineering and creative services to our customers.

While our marketing technology solutions have application in a wide variety of industries, we focus on three primary markets: (1) automotive, (2) food service (including quick serve restaurants (QSR), fast casual and managed food services markets), and (3) retail. Commencing April 2013, we began to target the QSR and "pump topper" markets through our license agreement with Delphi Display Systems, Inc. The industries in which we sell goods and services are not new but their application of marketing technology solutions is relatively new and participants in these industries only recently started adopting these types of technologies as part of their overall marketing strategies. As a result, we remain an early stage company without an established history of profitability, or substantial or steady revenue. We believe this characterization applies to our competitors as well, which are working to promote broader adoption of marketing technology solutions and to develop profitable, substantial and steady sources of revenue.

We believe that the adoption of marketing technology solutions will increase substantially in years to come both in industries on which we currently focus and in other industries. We also believe that adoption of our marketing technology solutions, which includes digital signage, depends not only upon the software and services that we provide but upon the cost of hardware used to process and display content in digital signage systems. Digital media players and flat panel displays constitute a large portion of the expenditure customers make relative to the entire cost of digital signage systems. Costs of these digital media players and flat panel displays have historically decreased and we believe will continue to do so, though we do not manufacture either product and do not substantially affect the overall markets for these products. In addition, we have been developing our next generation of RoninCast software in such a way as to allow it to function on significantly lower cost media players than the ones in use today. With the launch of our next generation RoninCast during the first half of 2013, we are now able to deploy our software on lower cost media players with this capability, coupled with a continued decline in costs for flat panel displays, we believe that adoption of digital signage and other marketing technology solutions is likely to increase, though we cannot predict the rate at which such adoption will occur.

Management focuses on a wide variety of financial measurements to assess our financial health and prospects but principally upon (1) sales, to measure the adoption of our marketing technology solutions by our customers, (2) cost of sales and gross profit, particularly expressed as gross profit percentage, to determine if sales have been made at levels of profit necessary to cover operating


expenses on a long-term basis (based upon assumptions regarding adoption), (3) sales of hardware relative to software and services, understanding that hardware typically provides a lower gross profit margin than do software license fees and services, (4) operating expenses, so that management can appropriately match those expenses with sales, and (5) current assets, especially cash and cash equivalents used to fund operating losses thus far incurred.

Our wholly-owned subsidiary, Wireless Ronin Technologies (Canada), Inc. ("RNIN Canada"), an Ontario, Canada provincial corporation located in Windsor, Ontario, maintains a vertical-specific focus in the automotive industry and houses our content engineering operation. RNIN Canada develops digital content and sales support systems to help retailers train their sales staff and educate their customers at the point of sale. Today, the capabilities of this operation are integrated with our historical business to provide content solutions to all of our clients.

Our company and our subsidiary sell products and services primarily throughout North America.

Our Sources of Revenue

We generate revenue through system sales, license fees and separate service fees, including consulting, content development and implementation services, as well as ongoing customer support and maintenance, including product upgrades. We currently market and sell our software and service solutions primarily through our direct sales force, but we also utilize strategic partnerships and business alliances. In addition, in April 2013, we entered into a license agreement with Delphi Display Systems, Inc. ("Delphi") (the "License Agreement") pursuant to which we granted Delphi an exclusive, worldwide, perpetual license to use and sublicense our RoninCast® 4.0 HTML5-based software, as revised from time to time (the "Software"), in specified target markets. Under the License Agreement, these target markets are (1) quick-service restaurants or food service providers that have a substantial number of drive-through locations, (2) pump toppers (displays located on fuel dispensing devices) and (3) other markets as subsequently mutually agreed upon between us and Delphi.

The license is exclusive in the target markets for five years from the date of the License Agreement, unless earlier terminated pursuant to the License Agreement. During this exclusivity period, we have agreed not to market, sell or otherwise promote, either directly or indirectly, any product with substantially similar functionality to the Software to the target markets. Delphi has agreed to use its best efforts to market, promote, and sublicense the Software within the target markets. Although Delphi may develop its own software to facilitate interface with the Software for application in Delphi's own business or in the businesses of Delphi's sublicensees, Delphi may not form an agreement with a third party to develop or resell software to compete with the Software in any market during the term of the License Agreement. Should Delphi elect to develop software that would compete with the Software for a specific customer or market application ("the Competing Software"), prior to Delphi developing such software, Delphi will grant us a right of first refusal to develop the Competing Software at a cost equal or less than Delphi's reasonable, documented costs to develop the Competing Software.

In consideration of such license, Delphi paid us in April 2013 a one-time license fee of $750 for the first 7,500 installed nodes, which represents approximately 1,500 locations based on an assumption of five installed nodes per location. We also agreed to certain node license fees for additional nodes. Delphi has agreed to pay us monthly hosting and support service fees on installed nodes, including hosting and support service fees that increase each year over a five-year period and aggregate to a minimum of $1,283 over such period. Based on our review, we determined all the criteria to recognize the $750 had been properly met during the second quarter of 2013. This included the delivery of a master version of our RoninCast® software to allow Delphi the ability to replicate 7,500 copies as they resell our software. In addition, the $750 license fee is a fixed amount and not subject to change regardless of how many copies of our software, up to 7,500 copies, are ultimately resold. Lastly, the collectability of the license fee was determined to be probable as the amount was paid to us during the second quarter of 2013.

Our Expenses

Our expenses are primarily comprised of three categories: sales and marketing, research and development and general and administrative. Sales and marketing expenses include salaries and benefits for our sales associates and commissions paid on sales. This category also includes amounts spent on the hardware and software we use to prospect new customers, including those expenses incurred in trade shows and product demonstrations. Our research and development expenses represent the salaries and benefits of


those individuals who develop and maintain our software products including RoninCast® and other software applications we design and sell to our customers. Our general and administrative expenses consist of corporate overhead, including administrative salaries, real property lease payments, salaries and benefits for our corporate officers and other expenses such as legal and accounting fees.

Critical Accounting Policies and Estimates

A discussion of our critical accounting policies was provided in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012. There were no significant changes to these accounting policies during the three or six months ended June 30, 2013.


Results of Operations

All dollar amounts reported in Item 2 are in thousands, except per share information.

Three and Six Months Ended June 30, 2013 Compared to Three and Six Months Ended June 30, 2012

The following table sets forth, for the periods indicated, certain unaudited consolidated statements of operations information:

                                                             Three Months Ended
                            June 30,   % of total    June 30,   % of total   $ Increase   % Increase
                              2013       sales         2012       sales      (Decrease)   (Decrease)

Sales                     $   2,626       100.0%   $   1,557       100.0%  $     1,069        68.7%
Cost of sales                   807        30.7%         612        39.3%          195        31.9%
Gross profit (exclusive
of depreciation and
amortization shown
separately below)             1,819        69.3%         945        60.7%          874        92.5%
Sales and marketing
expenses                        381        14.5%         400        25.7%          (19)       (4.8%)
Research and development
expenses                        205         7.8%         396        25.4%         (191)      (48.2%)
General and
administrative expenses       1,244        47.4%       1,280        82.2%          (36)       (2.8%)
Depreciation and
amortization expense             59         2.2%          75         4.8%          (16)      (21.3%)
Total operating expenses      1,889        71.9%       2,151       138.2%         (262)      (12.2%)
Operating loss                  (70)       (2.7%)     (1,206)      (77.5%)       1,136       (94.2%)
Other income (expenses):
Interest expense                 (6)       (0.2%)         (1)       (0.1%)           5      (500.0%)
Interest income                    -            -           -            -            -            -
Total other expense              (6)       (0.2%)         (1)       (0.1%)          (5)      500.0%
Net loss                  $     (76)       (2.9%)  $  (1,207)      (77.5%) $     1,131       (93.7%)


                                                             Three Months Ended
                            June 30,   % of total    June 30,   % of total   $ Increase   % Increase
                              2013       sales         2012       sales      (Decrease)   (Decrease)
United States             $   2,487        94.7%   $   1,446        92.9%  $     1,041        72.0%
Canada                          139         5.3%          92         5.9%           47        51.1%
Other International                -            -         19         1.2%          (19)     (100.0%)
Total Sales               $   2,626       100.0%   $   1,557       100.0%  $     1,069        68.7%


                                                             Six Months Ended
                            June 30,   % of total   June 30,   % of total   $ Increase   % Increase
                              2013       sales        2012       sales      (Decrease)   (Decrease)

Sales                     $   4,033       100.0%  $   3,330       100.0%  $       703        21.1%
Cost of sales                 1,468        36.4%      1,436        43.1%           32         2.2%
Gross profit (exclusive
of depreciation and
amortization shown
separately below)             2,565        63.6%      1,894        56.9%          671        35.4%
Sales and marketing
expenses                        743        18.4%        858        25.8%         (115)      (13.4%)
Research and development
expenses                        523        13.0%        955        28.7%         (432)      (45.2%)
General and
administrative expenses       2,654        65.8%      2,956        88.8%         (302)      (10.2%)
Depreciation and
amortization expense            120         3.0%        155         4.7%          (35)      (22.6%)
Total operating expenses      4,040       100.2%      4,924       147.9%         (884)      (18.0%)
Operating loss               (1,475)      (36.6%)    (3,030)      (91.0%)       1,555       (51.3%)
Other income (expenses):
Interest expense                (13)       (0.3%)        (6)       (0.2%)           7      (116.7%)
Interest income                    -            -         1             -          (1)     (100.0%)
Total other expense             (13)       (0.3%)        (5)       (0.2%)          (8)      160.0%
Net loss                  $  (1,488)      (36.9%) $  (3,035)      (91.1%) $     1,547       (51.0%)


                                                             Six Months Ended
                            June 30,   % of total   June 30,   % of total   $ Increase   % Increase
                              2013       sales        2012       sales      (Decrease)   (Decrease)
United States             $   3,763        93.3%  $   3,083        92.6%  $       680        22.1%
Canada                          257         6.4%        222         6.7%           35        15.8%
Other International              13         0.3%         25         0.7%          (12)      (48.0%)
Total Sales               $   4,033       100.0%  $   3,330       100.0%  $       703        21.1%

Sales

Our sales during the three months ended June 30, 2013 increased 69% or $1,069 to $2,626 compared to the same period in the prior year. This increase was primarily attributable to a $750 software license sale to Delphi. During the second quarter of 2013, we entered into an exclusive licensing and services agreement with Delphi to provide integrated technology solutions to the quick-serve restaurant (QSR) and "pump topper" gas station market. In consideration for granting this license, we will receive a minimum of $2,000 over five years, of which $750 was paid upon the execution of the contract.
Based on our review, we determined all the criteria to recognize the $750 had been properly met during the second quarter of 2013. This included the delivery of a master version of our RoninCast® software to allow Delphi the ability to replicate 7,500 copies as they resell our software. In addition, the $750 license fee is a fixed amount and not subject to change regardless of how many copies of our software, up to 7,500 copies, are ultimately resold. Lastly, the collectability of the license fee was determined to be probable as the amount was paid to us during the second quarter of 2013. Delphi will use our 24/7 network operations center exclusively to host Delphi's digital signage applications, which will provide us recurring hosting and maintenance revenue over the next five years. We believe this significantly extends our reach within the QSR and pump topper markets as Delphi has over 30,000 customers to which it can offer an integrated technology offering.


Our sales to ARAMARK during the second quarter of 2013 increased 228% or $418 to $601, primarily as a result of one order we received totaling $452, which consisted of hardware, software and our services. The remaining increase in revenue was generated from a new customer, Polaris Industries. During the second quarter, we recognized a total of $267 of revenue associated with deployment of our marketing technologies solutions in connection with the launching of Polaris' Indian motorcycle brand to 35 dealerships. The order consisted of hardware, software and content engineering and development, as well as ongoing content hosting and support at our network operations center.

Partially offsetting these increases was a decline in sales to Chrysler during the second quarter of 2013 of 43% or $309. The decline was primarily attributable to fewer orders for our content and development services associated with e-learning course work and enhancements to iShowroom. Our recurring hosting revenue totaled $489 during the second quarter of 2013 compared to $474 for the same period in the prior year.

Our revenue for the first half of 2013 totaled $4,033 compared to $3,330 for the same period in the prior year, an increase of $703 or 21%. The increase in revenue when comparing the first half of 2013 to 2012 was due primarily the $750 software sale to Delphi during the second quarter of 2013. Additionally, our sales to ARAMARK for the first half of 2013 were higher by $490 when compared to the first half of the prior year primarily as a result of an order we received during the second quarter of 2013 totaling $452. Lastly, the remaining increase in revenue was the result of the order we received from Polaris Industries under which we recognized revenue totaling $267 during the first half of 2013. Partially offsetting these increases was a year-to-date decline in revenue from Chrysler of $501 when comparing the first half of 2013 to the same period in 2012. The reason for the decline was primarily due to few orders for our content and development services associated with e-learning course work and enhancements to iShowroom. We do not anticipate the decline in orders from Chrysler to be a continued trend, but more a function of timing of when new features are added to the iShowroom application Our recurring hosting revenue for the first half of 2013 increase by $44 or 5% to $984 compared to the same period in the prior year, as our installation base grew.

Although we are starting to see an increase of adoption for marketing technology solutions such as ours at the macro level, we are unable to predict or forecast our future revenue with any degree of precision at this time.

Cost of Sales

Our cost of sales for the three months ended June 30, 2013 increased 32% or $195 to $807 compared to the same period in the prior year. On a year-to-date basis, our cost of sales increased 2% or $32 to $1,468. The increases were primarily due to an increase in hardware sales to ARAMARK during the second quarter and first half of 2013 compared to the same periods in the prior year. On a percentage basis, our overall gross margin improved to 69% for the second quarter of 2013, compared to 61% for the same period in 2012. Our gross margin on a percentage basis for the first half of 2012 was 64% compared to 57% for the same period in the prior year. The year over year improvement in our gross margin on a percentage basis for the periods presented was primarily due to a higher percentage of our revenue coming from software sales. During the second quarter of 2013, we sold a software license to Delphi totaling $750 with no associated cost of sales. Our gross margins on a percentage basis when excluding the $750 license fee from Delphi would've been 57% and 55% for the three and six months ended June 30, 2013.

Our ability to maintain these levels of gross margin on a percentage basis can be impacted in any given quarter by shifts in our sales mix.

Operating Expenses

Our operating expenses decreased 12% or $262 to $1,889 for the three months ended June 30, 2013 compared to the same period in the prior year. Total operating costs for the first half of 2013 totaled $4,040 compared to $4,924 for the same period in the prior year.

Sales and marketing expenses include the salaries, employee benefits, commissions, stock compensation expense, travel and overhead costs of our sales and marketing personnel, as well as tradeshow activities and other marketing costs. Total sales and marketing expenses decreased 5% or $19 to $381 for the three months ended June 30, 2013 compared to the same period in the prior year. Total sales and marketing costs for the first half of 2013 totaled $743 compared to $858 for the same period in the prior year.


The decrease in sales and marketing expense when comparing the second quarter of 2013 to the second quarter of 2012 was primarily due to lower stock compensation expense during the periods presented. The decrease in the first half of 2013 when compared to the same period in 2012 was also due to lower levels of compensation and employee related expenses of $55, attributable to the lower level of sales and other personnel changes made during first quarter of 2012. We also incurred a reduction in tradeshow costs of $49 during the first half of 2013 compared to the same period in 2012 as a result of concentrating our marketing dollars on more forums and user groups instead of larger national tradeshows such as Digital Signage Expo. Lastly, our stock compensation expense was lower by $22 when comparing the first half of 2013 to the same period in 2012. Total stock compensation expense included in sales and marketing was $10 and $19 during the second quarter and first half of 2013, compared to $30 and $41 for the same periods in the prior year, respectively. We continue to focus our efforts to maximize return on investment by attending select industry tradeshows, as we believe our presence is necessary to attract and retain new customers. We traditionally incur higher levels of tradeshow expenditures in the first quarter of our fiscal year compared to the remaining three quarters. Any significant increase in our sales and marketing expenses for the full year 2013 relative to 2012 would be the result of higher levels of commission expense resulting from an increase in our revenue, as we do not anticipate higher costs associated with tradeshows or other marketing initiatives.

Research and development expenses include salaries, employee benefits, stock-based compensation expense, related overhead costs and consulting fees associated with product development, enhancements, upgrades, testing, quality assurance and documentation. Total research and development expenses for the second quarter of 2013 decreased 48% or approximately $191 to $205 when compared to the same period in the prior year. Total research and development expense for the first half of 2013 totaled $523 compared to $955 for the same period in the prior year. The decrease when comparing the second quarter of 2013 to the same period in 2012 was primarily due to a one-time research and development state tax refund of $90, lower levels of compensation and employee related costs of $48 and a reduction in consulting costs of $44. The decrease when comparing the first half of 2013 to the same period in the prior year was due to lower compensation and related employee costs of $233 and a decline in outside consulting costs of $87, along with a one-time $90 research and development state tax refund. In addition, we also allocated a higher level of our research and development expense to cost of goods sold as a result of an increase in billable development work we performed for our customers internally versus the use of outside consultants. We currently believe our research and development expenses for the remaining half of 2013 will be at a similar level to that experienced during the first half of this year. It continues to be critical for our success that we are able to further enhance our RoninCast® software as the need for a more sophisticated dynamic digital signage platform continues to evolve. Included in research and development expense was stock-based compensation expense of $6 and $15 during the second quarter and first half of 2013, compared to $26 and $39 for the same periods in the prior year, respectively.

General and administrative expenses include the salaries, employee benefits, stock-based compensation expense and related overhead cost of our finance, information technology, human resources and administrative employees, as well as legal and accounting expenses, consulting and contractor fees and bad debt expense. Total general and administrative expenses decreased 3% or $36 to $1,244 for the second quarter of 2013, when compared to the same period in the prior year. The decrease in general and administrative costs during the second quarter of 2013 when compared to the same period of the prior year was primarily due to lower employee compensation costs of $72 due to lower headcount which was partially offset by higher public company related expenses. Total general and administrative expense for the first half of 2013 totaled $2,654 compared to $2,956 for the same period in the prior year. The decline in general and administrative expenses was primarily attributable to lower stock-based compensation expense of $175 attributable to stock and warrants issued to outside vendors for professional fees when comparing the first half of 2013 to 2012. The decrease was primarily the result of stock issued to a vendor for recruiting services. In addition, we had a reduction in employee compensation and related costs of $108, lower telephone expense of $40 and also $35 less in depreciation expense. Total stock compensation expense related to stock awards and options issued to our employees and non-employee directors for the second quarter and first half of 2013 totaled $71 and $210, compared to $59 and $194 . . .

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