UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2013
Or
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from __________ to __________
DECISIONPOINT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 000-54200 | 37-1644635 |
| (State of Incorporation) | (Commission File Number) | (IRS Employer Identification No.) |
8697 Research Drive Irvine CA, 92618-4204
(Address of principal executive offices) (Zip code)
(949) 465-0065
(Registrant's telephone number, including area code)
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 requirement for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The number of shares of common stock, par value $0.001 per share of DecisionPoint Systems, Inc. outstanding as of the close of business on October 31, 2013,2014, were 12,144,096.12,729,563.
DECISIONPOINT SYSTEMS, INC.
| Condensed Consolidated Financial Statements (unaudited) | |||||
| 1 | |||||
| 2 | |||||
| 3 | |||||
| 4 | |||||
| 23 | |||||
| 31 | |||||
| 32 | |||||
| PART II. OTHER INFORMATION | |||||
| Legal Proceedings | 33 | ||||
| Item 1a. | 33 | ||||
| 33 | |||||
| 33 | |||||
| 33 | |||||
| 33 | |||||
| 34 | |||||
| Signatures | 35 | ||||
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
| September 30, | December 31, | |||||||
| 2013 | 2012 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 270 | $ | 1,103 | ||||
| Accounts receivable, net | 12,685 | 12,287 | ||||||
| Due from related party | 195 | 202 | ||||||
| Inventory, net | 918 | 811 | ||||||
| Deferred costs | 3,773 | 3,955 | ||||||
| Deferred tax assets | 47 | 48 | ||||||
| Prepaid expenses and other current assets | 919 | 302 | ||||||
| Total current assets | 18,807 | 18,708 | ||||||
| Property and equipment, net | 139 | 179 | ||||||
| Other assets, net | 151 | 205 | ||||||
| Deferred costs, net of current portion | 1,810 | 2,124 | ||||||
| Goodwill | 8,485 | 8,571 | ||||||
| Intangible assets, net | 4,472 | 6,023 | ||||||
| Total assets | $ | 33,864 | $ | 35,810 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 13,036 | $ | 11,080 | ||||
| Accrued expenses and other current liabilities | 3,040 | 2,895 | ||||||
| Lines of credit | 4,247 | 3,430 | ||||||
| Current portion of debt | 1,963 | 1,800 | ||||||
| Due to related parties | 160 | 1 | ||||||
| Accrued earn out consideration | 331 | 1,186 | ||||||
| Warrant liability | 933 | - | ||||||
| Unearned revenue | 6,639 | 7,409 | ||||||
| Total current liabilities | 30,349 | 27,801 | ||||||
| Long term liabilities | ||||||||
| Unearned revenue, net of current portion | 2,472 | 2,883 | ||||||
| Debt, net of current portion and discount | 2,099 | 2,922 | ||||||
| Accrued earn out consideration, net of current portion | 154 | 159 | ||||||
| Deferred tax liabilities | 1,038 | 1,078 | ||||||
| Other long term liabilities | 76 | 80 | ||||||
| Total liabilities | 36,188 | 34,923 | ||||||
| Commitments and contingencies and subsequent event | - | - | ||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Cumulative Convertible Preferred stock, $0.001 par value, 10,000,000 shares | ||||||||
| authorized, 1,105,155 shares issued and outstanding, including | ||||||||
| cumulative and imputed preferred dividends of $586 and $361, and | ||||||||
| with a liquidation preference of $8,983 and $8,758 at September 30, 2013 | ||||||||
| and December 31, 2012, respectively | 7,609 | 7,370 | ||||||
| Common stock, $0.001 par value, 100,000,000 shares authorized, | ||||||||
| 12,297,979 issued and 12,144,096 outstanding as of September 30, 2013, | ||||||||
| and 9,300,439 issued and 9,146,556 outstanding as of December 31, 2012 | 12 | 9 | ||||||
| Additional paid-in capital | 16,621 | 16,132 | ||||||
| Treasury stock, 153,883 shares of common stock | (205 | ) | (205 | ) | ||||
| Accumulated deficit | (25,720 | ) | (21,674 | ) | ||||
| Unearned ESOP shares | (664 | ) | (767 | ) | ||||
| Accumulated other comprehensive income | 23 | 22 | ||||||
| Total stockholders’ (deficit) equity | (2,324 | ) | 887 | |||||
| Total liabilities and stockholders' equity | $ | 33,864 | $ | 35,810 | ||||
| September 30, | December 31, | |||||||
| 2014 | 2013 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 1,471 | $ | 641 | ||||
| Accounts receivable, net | 6,860 | 10,504 | ||||||
| Due from related party | - | 188 | ||||||
| Inventory, net | 642 | 1,533 | ||||||
| Deferred costs | 3,667 | 3,809 | ||||||
| Deferred tax assets | 47 | 49 | ||||||
| Prepaid expenses and other current assets | 463 | 188 | ||||||
| Total current assets | 13,150 | 16,912 | ||||||
| Property and equipment, net | 137 | 136 | ||||||
| Other assets, net | 131 | 165 | ||||||
| Deferred costs, net of current portion | 1,406 | 1,807 | ||||||
| Goodwill | 8,295 | 8,395 | ||||||
| Intangible assets, net | 2,523 | 3,907 | ||||||
| Total assets | $ | 25,642 | $ | 31,322 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 7,910 | $ | 9,774 | ||||
| Accrued expenses and other current liabilities | 3,658 | 2,976 | ||||||
| Lines of credit | 4,046 | 3,883 | ||||||
| Current portion of debt | 878 | 1,474 | ||||||
| Due to related parties | 152 | 77 | ||||||
| Accrued earn out consideration | 90 | 319 | ||||||
| Warrant liability | 549 | 803 | ||||||
| Unearned revenue | 5,824 | 7,481 | ||||||
| Total current liabilities | 23,107 | 26,787 | ||||||
| Long term liabilities | ||||||||
| Unearned revenue, net of current portion | 2,037 | 2,481 | ||||||
| Debt, net of current portion and discount | 1,655 | 1,961 | ||||||
| Accrued earn out consideration, net of current portion | - | 149 | ||||||
| Deferred tax liabilities | 703 | 740 | ||||||
| Other long term liabilities | 66 | 77 | ||||||
| Total liabilities | 27,568 | 32,195 | ||||||
| Commitments, contingencies, and subsequent events | - | - | ||||||
| STOCKHOLDERS' DEFICIT | ||||||||
| Cumulative Convertible Preferred stock, $0.001 par value, 10,000,000 shares | ||||||||
| authorized, 1,547,845 and 1,514,155 shares issued and outstanding, including | ||||||||
| cumulative and imputed preferred dividends of $2,208 and $1,956, and | ||||||||
| with a liquidation preference of $13,614 and $13,232 at September 30, 2014 | ||||||||
| and December 31, 2013, respectively | 12,735 | 12,193 | ||||||
| Common stock, $0.001 par value, 100,000,000 shares authorized, | ||||||||
| 12,883,446 issued and 12,729,563 outstanding as of September 30, 2014, | ||||||||
| and as of December 31, 2013 | 13 | 13 | ||||||
| Additional paid-in capital | 17,248 | 17,231 | ||||||
| Treasury stock, 153,883 shares of common stock | (205 | ) | (205 | ) | ||||
| Accumulated deficit | (31,173 | ) | (29,475 | ) | ||||
| Unearned ESOP shares | (520 | ) | (629 | ) | ||||
| Accumulated other comprehensive loss | (24 | ) | (1 | ) | ||||
| Total stockholders’ deficit | (1,926 | ) | (873 | ) | ||||
| Total liabilities and stockholders' deficit | $ | 25,642 | $ | 31,322 |
See accompanying notes to unaudited condensed consolidated financial statements
DECISIONPOINT SYSTEMS, INC.
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except share and per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
| Net sales | $ | 17,575 | $ | 18,567 | $ | 46,067 | $ | 54,144 | ||||||||
| Cost of sales | 14,113 | 14,445 | 36,216 | 42,559 | ||||||||||||
| Gross profit | 3,462 | 4,122 | 9,851 | 11,585 | ||||||||||||
| Selling, general and administrative expense | 4,485 | 4,741 | 13,981 | 13,370 | ||||||||||||
| Adjustment to earn-out obligations | (820 | ) | - | (820 | ) | - | ||||||||||
| Operating loss | (203 | ) | (619 | ) | (3,310 | ) | (1,785 | ) | ||||||||
| Other expense: | ||||||||||||||||
| Interest expense | 241 | 350 | 723 | 698 | ||||||||||||
| Other income, net | (168 | ) | (19 | ) | (182 | ) | (80 | ) | ||||||||
| Total other expense | 73 | 331 | 541 | 618 | ||||||||||||
| Net loss before income taxes | (276 | ) | (950 | ) | (3,851 | ) | (2,403 | ) | ||||||||
| Provision (benefit) for income taxes | (109 | ) | 64 | (466 | ) | 132 | ||||||||||
| Net loss | (167 | ) | (1,014 | ) | (3,385 | ) | (2,535 | ) | ||||||||
| Cumulative and imputed preferred stock dividends | (223 | ) | (249 | ) | (661 | ) | (710 | ) | ||||||||
| Net loss attributable to common shareholders | $ | (390 | ) | $ | (1,263 | ) | $ | (4,046 | ) | $ | (3,245 | ) | ||||
| Net loss per share - | ||||||||||||||||
| Basic and diluted | $ | (0.04 | ) | $ | (0.15 | ) | $ | (0.44 | ) | $ | (0.42 | ) | ||||
| Weighted average shares outstanding - | ||||||||||||||||
| Basic and diluted | 10,019,109 | 8,182,103 | 9,117,969 | 7,698,635 | ||||||||||||
| Comprehensive loss | $ | (166 | ) | $ | (992 | ) | $ | (3,383 | ) | $ | (2,507 | ) | ||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Net sales | $ | 14,143 | $ | 17,575 | $ | 47,365 | $ | 46,067 | ||||||||
| Cost of sales | 11,123 | 14,113 | 36,989 | 36,216 | ||||||||||||
| Gross profit | 3,020 | 3,462 | 10,376 | 9,851 | ||||||||||||
| Selling, general and administrative expense | 3,028 | 4,485 | 10,161 | 13,981 | ||||||||||||
| Adjustment to earn-out obligations | - | (820 | ) | - | (820 | ) | ||||||||||
| Operating income (loss) | (8 | ) | (203 | ) | 215 | (3,310 | ) | |||||||||
| Other (income) expense, net: | ||||||||||||||||
| Interest expense | 229 | 241 | 658 | 723 | ||||||||||||
| Fair market value adjustment of warrant liabilities | (88 | ) | (166 | ) | (254 | ) | (166 | ) | ||||||||
| Other (income) expense, net | 17 | (2 | ) | (12 | ) | (16 | ) | |||||||||
| Total other expense, net | 158 | 73 | 392 | 541 | ||||||||||||
| Net loss before income taxes | (166 | ) | (276 | ) | (177 | ) | (3,851 | ) | ||||||||
| Provision (benefit) for income taxes | 397 | (109 | ) | 519 | (466 | ) | ||||||||||
| Net loss | (563 | ) | (167 | ) | (696 | ) | (3,385 | ) | ||||||||
| Cumulative and imputed dividends on Series A and B preferred stock | (27 | ) | (27 | ) | (81 | ) | (81 | ) | ||||||||
| Cash and imputed dividends on Series D and E preferred stock | (307 | ) | (196 | ) | (921 | ) | (580 | ) | ||||||||
| Net loss attributable to common shareholders | $ | (897 | ) | $ | (390 | ) | $ | (1,698 | ) | $ | (4,046 | ) | ||||
| Net loss per share - | ||||||||||||||||
| Basic and diluted | $ | (0.07 | ) | $ | (0.04 | ) | $ | (0.14 | ) | $ | (0.44 | ) | ||||
| Weighted average shares outstanding - | ||||||||||||||||
| Basic and diluted | 12,369,840 | 10,019,109 | 12,342,371 | 9,117,969 | ||||||||||||
| Comprehensive loss | $ | (561 | ) | $ | (166 | ) | $ | (719 | ) | $ | (3,383 | ) | ||||
See accompanying notes to unaudited condensed consolidated financial statements
| 2 |
DECISIONPOINT SYSTEMS, INC.
(In thousands)
| Accumulated | ||||||||||||||||||||||||||||||||||||||||
| Convertible | Additional | Unearned | other | Total | ||||||||||||||||||||||||||||||||||||
| Preferred stock | Common stock | paid-in | Treasury | Accumulated | ESOP | comprehensive | stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | stock | deficit | shares | income | equity (deficit) | |||||||||||||||||||||||||||||||
| Balance at December 31, 2012 | 1,105 | $ | 7,370 | 9,300 | $ | 9 | $ | 16,132 | $ | (205 | ) | $ | (21,674 | ) | $ | (767 | ) | $ | 22 | $ | 887 | |||||||||||||||||||
| Net loss | - | - | - | - | - | - | (3,385 | ) | - | - | (3,385 | ) | ||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | - | - | - | 1 | 1 | ||||||||||||||||||||||||||||||
| Common stock issued to employee as | ||||||||||||||||||||||||||||||||||||||||
part of a specified portion of their regular annual cash bonus | - | - | 71 | - | 83 | - | - | - | - | 83 | ||||||||||||||||||||||||||||||
Common stock issued in private placement, net of costs | - | - | 2,927 | 3 | 400 | - | - | - | - | 403 | ||||||||||||||||||||||||||||||
| Employee stock-based compensation | - | - | - | - | 6 | - | - | - | - | 6 | ||||||||||||||||||||||||||||||
| Accrued dividends on preferred stock | - | 239 | - | - | - | - | (661 | ) | - | - | (422 | ) | ||||||||||||||||||||||||||||
| Principal payment from ESOP | - | - | - | - | - | - | - | 103 | - | 103 | ||||||||||||||||||||||||||||||
| Balance at September 30, 2013 | 1,105 | $ | 7,609 | 12,298 | $ | 12 | $ | 16,621 | $ | (205 | ) | $ | (25,720 | ) | $ | (664 | ) | $ | 23 | $ | (2,324 | ) | ||||||||||||||||||
| Nine Months ended September 30, | ||||||||
| 2014 | 2013 | |||||||
| Cash flows from operating activities: | ||||||||
Net loss | $ | (696 | ) | $ | (3,385 | ) | ||
| Adjustments to reconcile net loss to net cash | ||||||||
| provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 1,331 | 1,497 | ||||||
| Amortization of deferred financing costs and note discount | 117 | 140 | ||||||
| Employee and Director stock-based compensation | 89 | 31 | ||||||
| Acquisition earn-out adjustment | - | (820 | ) | |||||
| Change in fair value of warrants | (254 | ) | (166 | ) | ||||
| ESOP compensation expense | 37 | 79 | ||||||
| Allowance for doubtful accounts | (30 | ) | 56 | |||||
| Loss on disposal of property and equipment | 2 | 13 | ||||||
| Deferred taxes. net | (9 | ) | (5 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 3,669 | (468 | ) | |||||
| Due from related party | 184 | - | ||||||
| Inventory, net | 891 | (107 | ) | |||||
| Deferred costs | 543 | 496 | ||||||
| Prepaid expenses and other current assets | (251 | ) | (578 | ) | ||||
| Other assets, net | 11 | 5 | ||||||
| Accounts payable | (1,854 | ) | 1,961 | |||||
| Accrued expenses and other current liabilities | 447 | 106 | ||||||
| Due to related parties | 69 | 158 | ||||||
| Unearned revenue | (2,085 | ) | (1,163 | ) | ||||
| Net cash provided by (used in) operating activities | 2,211 | (2,150 | ) | |||||
| Cash flows from investing activities | ||||||||
| Purchases of property and equipment | (42 | ) | (33 | ) | ||||
| Net cash used in investing activities | (42 | ) | (33 | ) | ||||
| Cash flows from financing activities | ||||||||
| Borrowings from lines of credit, net | 165 | 817 | ||||||
| Proceeds from issuance of term debt | - | 1,000 | ||||||
| Repayment of debt | (819 | ) | (1,552 | ) | ||||
| Paid financing costs | (100 | ) | (119 | ) | ||||
| Dividends paid | (499 | ) | (296 | ) | ||||
| Payments for contingent acquisition liability | (84 | ) | - | |||||
| Common stock issued in private placement, net of costs | - | 1,502 | ||||||
| Net cash (used in) provided by financing activities | (1,337 | ) | 1,352 | |||||
| Effect on cash of foreign currency translation | (2 | ) | (2 | ) | ||||
| Net increase (decrease) in cash | 830 | (833 | ) | |||||
| Cash at beginning of period | 641 | 1,103 | ||||||
| Cash at end of period | $ | 1,471 | $ | 270 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Interest paid | $ | 634 | $ | 705 | ||||
| Income taxes paid | 32 | 234 | ||||||
| Supplemental disclosure of non-cash financing activities: | ||||||||
| Accrued and imputed dividends on preferred stock | $ | 1,002 | $ | 661 | ||||
| Warrants issued in connection with common stock private placement | - | 1,099 | ||||||
See accompanying notes to unaudited condensed consolidated financial statements
DECISIONPOINT SYSTEMS, INC.
| Nine Months ended September 30, | ||||||||
| 2013 | 2012 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (3,385 | ) | $ | (2,535 | ) | ||
| Adjustments to reconcile net loss to net cash | ||||||||
| (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 1,497 | 992 | ||||||
| Amortization of deferred financing costs and note discount | 140 | 160 | ||||||
| Employee stock-based compensation | 6 | 50 | ||||||
| Non-employee stock-based compensation | - | 341 | ||||||
| Non-cash interest income | - | (24 | ) | |||||
| Acquisition earn-out adjustment | (820 | ) | - | |||||
| Change in fair value of warrants | (166 | ) | - | |||||
| ESOP compensation expense | 104 | 98 | ||||||
| Deferred taxes, net | (5 | ) | 28 | |||||
| Allowance for doubtful accounts | 56 | 13 | ||||||
| Loss on disposal of property and equipment | 13 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (468 | ) | 3,899 | |||||
| Due from related party | - | (357 | ) | |||||
| Inventory, net | (107 | ) | (184 | ) | ||||
| Deferred costs | 496 | (583 | ) | |||||
| Prepaid expenses and other current assets | (578 | ) | 179 | |||||
| Other assets, net | 5 | (11 | ) | |||||
| Accounts payable | 1,961 | (572 | ) | |||||
| Accrued expenses and other current liabilities | 106 | 178 | ||||||
| Due to related parties | 158 | (791 | ) | |||||
| Unearned revenue | (1,163 | ) | (186 | ) | ||||
| Net cash (used in) provided by operating activities | (2,150 | ) | 695 | |||||
| Cash flows from investing activities | ||||||||
| Cash paid for acquisitions | - | (5,051 | ) | |||||
| Purchases of property and equipment | (33 | ) | (50 | ) | ||||
| Net cash used in investing activities | (33 | ) | (5,101 | ) | ||||
| Cash flows from financing activities | ||||||||
| (Repayments) borrowings from lines of credit, net | 817 | 718 | ||||||
| Proceeds from issuance of term debt | 1,000 | 4,033 | ||||||
| Cash received in reverse recapitalization, net of expenses | - | 1,500 | ||||||
| Repayment of debt | (1,552 | ) | (962 | ) | ||||
| Paid financing costs | (119 | ) | (296 | ) | ||||
| Dividends paid | (296 | ) | (482 | ) | ||||
| Common stock issued in private placement, net of costs | 1,502 | - | ||||||
| Net cash provided by financing activities | 1,352 | 4,511 | ||||||
| Effect on cash of foreign currency translation | (2 | ) | (79 | ) | ||||
| Net (decrease) increase in cash | (833 | ) | 26 | |||||
| Cash at beginning of period | 1,103 | 366 | ||||||
| Cash at end of period | $ | 270 | $ | 392 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Interest paid | $ | 705 | $ | 858 | ||||
| Income taxes paid | 234 | 56 | ||||||
| Supplemental disclosure of non-cash financing activities: | ||||||||
| Accrued and imputed dividends on preferred stock | $ | 661 | $ | 261 | ||||
| Warrants issued in connection with common stock private placement | 1,099 | - | ||||||
NOTE 1 - DESCRIPTION OF BUSINESS
Description of Business
DecisionPoint Systems, Inc., (“DecisionPoint”, the “Company”, “we”, or “us”), through its subsidiaries is a provider of Enterprise Mobility Systems. Enterprise Mobility Solutions are those computeran enterprise mobility systems integrator that sells and installs mobile computing and wireless systems that give an enterpriseare used both within a company’s facilities in conjunction with wireless networks and in the ability to connect to people, control assets, and transact business from any location byfield using carrier-based wireless networks. These systems generally include mobile computers, tablet computers,mobile application software, and smartphones to securely connect the mobile worker to the back office software systems that run the enterprise. Technologies that support Enterprise Mobility Solutions include national wireless carrier networks, Wi-Fi, local area networks, mobile computers, smartphonesrelated data capture equipment including bar code scanners and tablets, mobile software applications, middleware and device security and management software.radio frequency identification (“RFID”) readers. The Company also provides professional services, proprietary and third party software and software customization as an integral part of its customized solutions for its customers. The proprietary suite of software products utilizes the latestlate breaking technologies to empower the mobile worker in many areas including merchandising, sales and delivery,delivery; field service,service; logistics and transportation,transportation; and warehouse management.
NOTE 2 - BASIS OF PRESENTATION, LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all of the adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company at the dates and for the periods indicated. The interim results for the periodsperiod ended September 30, 2013,2014, are not necessarily indicative of results for the full 20132014 fiscal year or any other future interim periods.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, DecisionPoint Systems International and Apex Systems Integrators, Inc. (“Apex”). DecisionPoint Systems International has two wholly-owned subsidiaries, DecisionPoint Systems Group, Inc. (“DPS Group”) and CMAC, Inc. (“CMAC”). Apex was acquired on June 4, 2012, and as such, the operating results of Apex have been consolidated into the Company’s consolidated results of operations beginning on June 5, 2012. In addition, on July 31, 2012, the Company consummated an asset purchase agreement (“Asset Purchase Agreement”) with MacroSolve, Inc. Pursuant to the Asset Purchase Agreement, the Company purchased the business (including substantially all the related assets) of the seller’s Illume Mobile division (“Illume Mobile”) and is a division of the Company. The Company currently operates in one business segment.
The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the recorded amounts reported therein. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. The Company evaluates its estimates and assumptions on a regular basis. The Company uses historical experience and various other assumptions that are believed to be reasonable under the circumstances to form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates and assumptions used in preparation of the unaudited condensed consolidated financial statements.
These unaudited condensed consolidated financial statements have been prepared by management and should be read in conjunction with the audited consolidated financial statements of DecisionPoint Systems, Inc. and notes thereto for the year ended December 31, 2012,2013, included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 28, 2013.31, 2014.
Liquidity and Going Concern
The accompanying unaudited condensed consolidated financial statements were prepared on a going concern basis in accordance with U.S. GAAP. The going concern basis of presentation assumes that the Company will continue in operation for the next twelve months and will able to realize its assets and discharge its liabilities and commitments in the normal course of business and does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the Company’s inability to continue as a going concern. The Company’s history of losses, working capital deficit, capital deficit, minimal liquidity and other factors raises substantial doubt about the Company’s ability to continue as a going concern. In order for the Company to continue operations beyond the next twelve months and be able to discharge its liabilities and commitments in the normal course of business, the Company must establish sustained positive operating results through increased sales, successfully implement cost cutting measures, avoid further unforeseen expenses, potentially raise additional equity or debt capital, and successfully refinance its current debt obligations when they come due in February of 2015. There can be no assurance that the Company will be able to achieve sustainable positive operating results or cost reductions or obtain additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to management.
| 4 |
In the quarter ended September 30, 2013,2014, the Company experienced a decrease in revenue of $1.0$3.4 million, or 19.5% compared to the quarter ended September 30, 2012,2013, and a $2.9$1.3 million, or 2.8% increase in revenue compared to the previous sequential quarter ended June 30, 2013. Infor the nine months ended September 30, 2013,2014 over the Company incurred approximately $1.3 million in increased expenses due to professional fees relating to capital raising activities, includingcomparable nine months of 2013. In the registration of common shares as a result ofquarter ended September 30, 2014, the Series D Preferred Stock offering completed in December 2012 and the private placement of common stock completed in August 2013 and associated audit fees, and other matters such as employee termination costs. The Company experienced a net loss of $0.2 million$563,000 compared to the net loss of $167,000 for the quarter ended September 30, 2013, and a $696,000 net loss for the nine months ended September 30, 2014 compared to a net loss of $3.4 million for the three and nine month periods endedcomparable period in 2013. At September 30, 2013. In addition,2014 and December 31, 2013, the Company hashad a substantial working capital deficit totaling $(11.5) million at September 30, 2013.$9.9 million. Although a portion of this deficit is associated with deferred costs, and unearned revenues and term debt that has been classified current due to expected future covenant violations (see further discussion at Note 8), the liabilities of the Company that are expectedwe expect will have to be satisfied in the foreseeable future in cash substantially exceed the operating assets that arewe expected to be satisfiedhave available in cash.
To address this,liquidity constraints, the Company has reduced non-essential expenses. Such expense reduction measures have included, but have not been limited to, consolidation of information technology environments, consolidation of our East Coast depot facility into our larger California depot facility, the reduction of outsourced consulting expertise where unnecessary and the replacement of certain service providers with lower cost providers. The Company has also consolidated administrative personnel and reduced total staffing levels by 29% from April 2013 through February 2014, constituting annual savings of approximately $3 million. These cost reduction measures have reduced the expense structure of the Company’s business significantly. The Company is focused on continuing to improve processes and reduce costs. Currently, the Company has no plans to seek additional capitaloutside funding through salesthe sale of our securities. Theresecurities unless deemed necessary. Should additional outside funding be needed, there is no assurance additionalthat such funding will be available on terms acceptable to us, or at all. If the Company raises additional funds by selling additional shares of our capital stock, or securities convertible into shares of our capital stock, the ownership interest of ourthe Company’s existing shareholderscommon stock holders will be diluted. The Company is also reducing non-essential expenses and completing the integration of our acquisitions of Apex and Illume Mobile, which is expected to result in further cost savings. Such expense reduction measures include, but are not limited to, consolidation of administrative personnel, consolidation of information technology environments, reduction of outsourced consulting expertise and replacing certain service providers with lower cost providers. The result of these activities has reduced the expense structure of the consolidated business, however this reduction has not been material to date and we do not anticipate it becoming material in the foreseeable future.
In November 2013, the Company entered into definitive subscription agreements (“Series E Purchase Agreement”) with accredited investors for the sales of $3,835,000 in gross proceeds for 383,500 shares of Series E Convertible Preferred Stock (“Series E Preferred Shares”) for a purchase price of $10.00 per share. The initial Conversion Price is $0.50, subject to adjustment in the event of stock splits, stock dividends and similar transactions, and in the event of subsequent equity sales at a lower price per share, subject to certain exceptions. The Company received net proceeds of approximately $3.4 million (net of the fair value of placement agent warrants) from the initial closing, after deducting the placement agent’s fees of 8% and other offering expenses. The Company issued to the Placement Agent five-year warrants to purchase 767,000 shares of our common stock (equal to 10% of the number of shares of common stock underlying the Series E Preferred Shares sold under the Series E Purchase Agreement) at an exercise price of $0.55 per share, in connection with the Series E Purchase Agreement initial closing. The Company expects to close a second round of Series E Preferred Shares with gross proceeds of $300,000-$700,000 shortly thereafter. (see Note 13 – Subsequent Event).
As of September 30, 2013 (see Note 8 – Term Debt).
Summary of Significant Accounting Policies
There have been no material changes to the Company's significant accounting policies during the nine months ended September 30, 2013. See2014. For a comprehensive description of the Company's significant accounting policies, see Footnote 2 of the Company's consolidated financial statements included in the Company's 20122013 Annual Report on Form 10-K filed on March 28, 2013,31, 2014 with the SEC.
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
Revenue Recognition - Revenues are generated through product sales, warranty and maintenance agreements, software customization, and professional services. Product sales are recognized when the following criteria are met (1) there is persuasive evidence that an arrangement exists; (2) delivery has occurred and title has passed to the customer which generally happens at the point of shipment provided that no significant obligations remain; (3) the price is fixed and determinable; and (4) collectability is reasonably assured. The Company generates revenues from the sale of extended warranties on wireless and mobile hardware and systems. Revenue related to extended warranty and service contracts is recorded as unearned revenue and is recognized over the life of the contract as the Company maintains financial risk throughout the term of these contracts and may be liable to refund a customer for amounts paid in certain circumstances. Our policy is to classify shipping and handling costs billed to customers and the related expenses as cost of sales.
The Company also generates revenue from professional services and customer specified software customization on either a fee-for-service or fixed fee basis. Revenue from software customization and professional services that is contracted as fee-for-service is recognized in the period in which the services are performed or delivered. Adjustments to contract price and estimated labor costs are made periodically, and losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. The Company records sales net of sales tax.
The Company enters into revenue arrangements that contain multiple deliverables. Judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria of revenue recognition have been met for each deliverable in order for revenue recognition to occur in the appropriate accounting period. In an arrangement with multiple deliverables, the delivered item or items shall be considered a separate unit of accounting if both of the following criteria are met: (i) the delivered item or items have value to the customer on a standalone basis; (ii) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item or items is considered probable and substantially in the control of the vendor. A delivered item or items that do not qualify as a separate unit of accounting within the arrangement shall be combined with the other applicable undelivered item(s) within the arrangement and the allocation of arrangement consideration and the recognition of revenue then shall be determined for those combined deliverables as a single unit of accounting. While changes in the allocation of the arrangement consideration between the units of accounting will not affect the amount of total revenue recognized for a comprehensive descriptionparticular sales arrangement, any material changes in these allocations could affect the timing of revenue recognition, which could affect the Company’s results of operations. When the Company enters into an arrangement that includes multiple elements, we allocate revenue based on their relative selling prices. We use a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor specific objective evidence of fair value (“VSOE”), (ii) third party evidence of selling prices (“TPE”) and (iii) best estimate of selling price (“ESP”) as a proxy for VSOE. When both VSOE and TPE are unavailable, we use ESP. We determine ESP by considering all relevant factors in establishing the price, which is demonstrated in a gross margin model used.
Revenue from software licenses may contain arrangements with multiple deliverables, including post-contract customer support, that are subject to software revenue recognition guidance. The revenue for these arrangements is allocated to the software and non-software deliverable based on the relative selling prices of all components in the arrangement using the criteria above. Post-contract support is recognized ratably over the support period. When a contract contains multiple elements wherein the only undelivered element is post-contract customer support and VSOE of the Company's significant accounting policies.
Concentration of Credit Risk -
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash, accounts receivable, and accounts payable. Beginning January 1, 2013, all of our cash balances were insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per depositor at each financial institution. This coverage is available at all FDIC member institutions. The CompanyHistorically, a relatively small number of customers have accounted for a significant portion of the Company’s revenue. The Company had one customer who represented 11% and 21.1% and 26.2%10% of revenues from the top three customers inCompany’s revenue for the nine months ended September 30, 2014 and 2013, respectively. The Company had three customers, one of which was not the same, who represented 23% and 2012,21% of its revenue for the nine months ended September 30, 2014 and 2013, respectively. Additionally thereThe Company’s accounts receivable was concentrated with one customer which comprised 15.5% of accounts receivable at September 30, 2013.2014, representing 13% of gross accounts receivable and with one customer at December 31, 2013, representing 16% of gross accounts receivable. Customer mix can shift significantly from year to year, but a concentration of the business with a few large customers is typical in any given year. A decline in revenues could occur if a customer whichthat has been a significant factorsource of revenue in one financial reporting period gives significantlyis a less businesssignificant source of revenue in the following period.
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
The Company has the same four primary vendors for the nine months ended September 30, 2014 compared to the similar period in 2013. For the nine months ended September 30, 2014, the Company had purchases from these four vendors that collectively represented 59% of total purchases and 69% of the total outstanding accounts payable at September 30, 2014. For the nine months ended September 30, 2013, the Company had purchases from these four vendors that collectively represented 58% of total purchases and 79% of the total outstanding accounts payable at September 30, 2013. The same single vendor represented 21% and 26% of the total purchases for the nine months ended September 30, 2014 and 2013, respectively. Loss of this certain vendor could have a material adverse effect on our operations.
The Company’s contracts with these customers and other customers do not include any specific purchase requirements or other requirements outside of the normal course of business. The majority of customer contracts are on an annual basis for service support while on a purchase order basis for hardware purchases. Typical hardware sales are submitted on an estimated order basis with subsequent follow on orders for specific quantities. These sales are ultimately subject to the time that the units are installed at each of the customer locations as per their requirements. Service contracts are purchased on an annual basis generally and are the performance responsibility of the actual service provider as opposed to the Company. Termination provisions are generally standard clauses based upon non-performance, but a customer can cancel with a certain reasonable notice period anywhere from 30 to 90 days. General industry standards for contracts provide ordinary terms and conditions, while actual work and performance aspects are usually dictated by a Statement of Work which outlines what is being ordered, product specifications, delivery, installation and pricing.
Translation of Foreign Currencies -
The Company's functional currency is the U.S. dollar. The financial statements of the Company's foreign subsidiary is measured using the local currency, in this case the Canadian dollar (CDN$), as its functional currency and is translated to U.S. dollars for reporting purposes. Assets and liabilities of the subsidiary are translated at exchange rates as of the balance sheet dates. Revenues and expenses of the subsidiary are translated at the rates of exchange in effect during the year.Fair Value Measurement -
| ● | Level 1 |
| ● | Level 2 |
| ● | Level 3 |
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurements. The Company reviews the fair value hierarchy classification on a quarterly basis. Changes in the observable inputs may result in a reclassification of assets and liabilities within the three levels of the hierarchy outlined above.
Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The Company measures certain liabilities at fair value on a recurring basis such as our contingent consideration related to business combinations and recognizes transfers within the fair value hierarchy at the end of the fiscal quarter in which the change in circumstances that caused the transfer occurred. There have been no transfers between Level 1, 2 or 3 assets or liabilities during the nine months ended September 30, 2014.
The Company has classified its contingent consideration related to the Apex acquisition as a Level 3 liability. Revenue and other assumptions used in the calculation require significant management judgment. The unobservable inputs in our valuation model includes estimates by management of Apex achieving specified targets. The Company reassesses the fair value of the contingent consideration liabilities on a quarterly basis. The Company is obligated to pay bonus consideration to the CEO of Apex. Such bonus is considered additional contingent purchase consideration as the Company is obligated to pay the bonus regardless of whether or not the CEO’s employment is retained. The fair value of the bonus was calculated to be approximately CDN$160,000 (US$153,000 at the Closing Date). At September 30, 2014 there is CDN$101,000 (US$90,000) recorded in earn out consideration in the Company’s unaudited condensed consolidated financial statements.
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
The Company has classified certain warrants related to the August 2013 issuance and sale of Common Stock in a private offering as a Level 3 Liability.�� Assumptions used in the calculation require significant judgment. The unobservable inputs in our valuation model includes the probability of additional equity financing and whether the additional equity financing would trigger a reset on the down round protection. The Company reassesses the fair value of the warrant liabilities on a quarterly basis. Based on that assessment, the Company recognized a $254,000 reduction to the fair value of the warrant liability for the nine months ended September 30, 2014.
The following table presentssummarizes the Company’s warrant liabilityfinancial liabilities measured at fair value on a recurring basis as of September 30, 20132014 and December 31, 2012, aggregated by the level in the fair-value hierarchy within which those measurements fall2013 (in thousands):
| Balance | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant other unobservable inputs (Level 3) | |||||||||||||
| Balance at December 31, 2012 | $ | - | - | - | $ | - | ||||||||||
| Balance at September 30, 2013 | $ | 933 | - | - | $ | 933 | ||||||||||
| Quoted prices inactive markets | Significant other observable inputs | Significant other unobservable inputs | ||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities | ||||||||||||||||
| Contingent consideration liability | ||||||||||||||||
| recorded for business combinations | $ | 90 | $ | - | $ | - | $ | 90 | ||||||||
| Fair value of warrants issued in connection | ||||||||||||||||
| with share purchase agreement | 549 | - | - | 549 | ||||||||||||
| Balance at September 30, 2014 | $ | 639 | $ | - | $ | - | $ | 639 | ||||||||
| Quoted prices inactive markets | Significant other observable inputs | Significant other unobservable inputs | ||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Liabilities | ||||||||||||||||
| Contingent consideration liability | ||||||||||||||||
| recorded for business combinations | $ | 468 | $ | - | $ | - | $ | 468 | ||||||||
| Fair value of warrants issued in connection | ||||||||||||||||
| with share purchase agreement | 803 | - | - | 803 | ||||||||||||
| Balance at December 31, 2013 | $ | 1,271 | $ | - | $ | - | $ | 1,271 | ||||||||
The following table presentssummarizes changes to the activity forfair value of the contingent consideration and derivative warrants, which are Level 3 liabilities (in thousands):
| Level 3 | ||||||||
| Contingent | Derivative | |||||||
| consideration | warrants | |||||||
| Balance at December 31, 2013 | $ | 468 | $ | 803 | ||||
| Adjustments to fair value of warrants (reflected in other income) | - | (254 | ) | |||||
| Cash paid for contingent acquisition liability | (84 | ) | - | |||||
| Settlement of earn-out obligation reflected in accrued liabilities | (279 | ) | - | |||||
| Effect of currency translation | (15 | ) | - | |||||
| Balance at September 30, 2014 | $ | 90 | $ | 549 | ||||
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
The Company's non-financial assets and liabilities, such as goodwill, intangible assets, and other long lived assets resulting from business combinations are measured at estimated fair value using unobservable inputs (Level 3) from December 31, 2012 throughincome and market comparable valuation methodologies at the date of acquisition and subsequently re-measured if there are indicators of impairment. There were no indicators of impairment identified during the nine months ended September 30, 2013 (in thousands):
| Level 3 | ||||
| Balance at December 31, 2012 | $ | - | ||
| Fair value of derivative warrants issued in connection with share purchase agreement (see Note 3) | 1,099 | |||
| Adjustments to fair value (reflected in other income) | (166 | ) | ||
| Balance at September 30, 2013 | $ | 933 | ||
Income Taxes - Certain reclassifications have been madeWe account for income taxes in accordance with the Financial Accounting Standards Board (“FASB”) guidance, which requires deferred tax assets and liabilities, be recognized using enacted tax rates to prior years to conform to current period financial statement presentation with nomeasure the effect of temporary differences between book and tax bases on our previously reported consolidated financial position, resultsrecorded assets and liabilities. FASB guidance also requires that deferred tax assets be reduced by a valuation allowance, if it is more likely than not some portion or all of operations, or cash flows.
For the three months ended September 30, 2014, the Company has issued contain provisions that protectrecorded a tax expense of $0.4 million on pre-tax loss of $0.2 million, compared to an income tax benefit of $0.1 million on pre-tax loss of $0.3 million for the holders from future issuancesthree months ended September 30, 2013. For the nine months ended September 30, 2014, the Company recorded a tax expense of $0.5 million on pre-tax loss of $0.2 million, compared to an income tax benefit of $0.5 million on pre-tax loss of $3.9 million for the nine months ended September 30, 2013. As of September 30, 2014, the tax provision was calculated on an annualized method as described in FIN18 with an annual effective tax rate of negative 302.81%. The difference in the annual effective tax rate in fiscal 2014 as compared to the U.S. federal statutory rate of 34% was primarily driven by the establishment of a valuation allowance related to our deferred tax assets. If forecast is achieved, management of the Company’s Common Stock at prices below such warrants’ thenCompany expects a material tax provision benefit to be recorded in effect respective exercise prices (see Note 9). These provisions couldthe fourth quarter. This is a result in modification of the warrants then in effect exercise price. The Company evaluatedapplication of FIN 18. Actual annual effective tax rate and tax expense (benefit) for the following guidance ASC 480-10 Distinguishing Liabilitiesyear may vary significantly from Equity and ASC 815-40 Contracts in an Entity’s Own Equity. Pursuant to this guidance, the Company’s management concluded these instruments do not meet the criteria for classification as equity treatment and must be recorded as a liabilityquarterly estimates as a result of the termsmechanics of applying FIN 18 for the interim quarter tax provision calculations.
Recently Issued Accounting Pronouncements– In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and most industry specific guidance. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the warrantstransfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This new guidance is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, the Company will adopt this new guidance beginning in fiscal 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt this new guidance and management is currently evaluating which transition approach to use and the impact of this new guidance on our consolidated financial position or results of operations.
In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (Subtopic 205-40), which defines management's responsibility to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern and to provide related disclosures. Currently, this evaluation has only been an auditor requirement. Specifically, the amendments (1) provide a definition of the term “substantial doubt,” (2) require an evaluation every reporting period, (3) provide principles for price protection inconsidering the eventmitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a future issuance.result of the consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that financial statements are issued. This amended guidance will be effective for us beginning January 1, 2016. The Company recognized these Warrants as liabilities at their fair value and re-measures them at fair value on each reporting date. ASC 820 Fair Value Measurement provides requirements for disclosuredoes not expect the adoption of liabilities that are measured at fair value on a recurring basis in periods subsequentthis amended guidance to the initial recognition (see Note 2).
NOTE 3 – LOSS PER COMMON SHARE
Basic loss per share is computed by dividing the loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed fair valuesimilarly to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The weighted-average basic and diluted shares for each of the warrant liability. As such, the Company expects future changes in the fair value of the warrants to continue to vary from quarter to quarter.
For periods presented in which there is included in other incomea net loss, potentially dilutive securities are excluded from the computation of fully diluted net loss per share as their effect is anti-dilutive. All potentially dilutive securities are anti-dilutive due to the net loss incurred by the Company in the unaudited condensed consolidated statementperiods presented.
Potential dilutive securities consist of operations and comprehensive loss.
| Nine Months Ended September 30, | ||||||||
| 2014 | 2013 | |||||||
| Convertible preferred stock - Series A | 270 | 270 | ||||||
| Convertible preferred stock - Series B | 131 | 131 | ||||||
| Convertible preferred stock - Series D | 10,287 | 7,824 | ||||||
| Convertible preferred stock - Series E | 8,331 | - | ||||||
| Warrants to purchase common stock | 3,555 | 2,737 | ||||||
| Options to purchase common stock | 766 | 544 | ||||||
| Total potentially dilutive securities | 23,340 | 11,506 | ||||||
DECISIONPOINT SYSTEMS, INC.
Notes to the closing dates of the Purchase Agreement (see Note 9 (c)) and the end of each reporting period using a Monte Carlo valuation model with the following assumptions:
| Placement Agent Warrants | Investor Warrants | |||||||||||||||||||
| Investor Warrants | September 30, 2013 | August 21, 2013 | September 30, 2013 | August 21, 2013 | August 15, 2013 | |||||||||||||||
| Closing price per share of common stock | $ | 0.63 | $ | 0.84 | $ | 0.63 | $ | 0.84 | $ | 0.69 | ||||||||||
| Exercise price per share (range) | 0.60 | 0.60 | 1.00 | 1.00 | 1.00 | |||||||||||||||
| Expected volatility | 132.1 | % | 134.9 | % | 132.1 | % | 134.9 | % | 134.1 | % | ||||||||||
| Risk-free interest rate | 1.4 | % | 1.6 | % | 1.4 | % | 1.6 | % | 1.6 | % | ||||||||||
| Dividend yield | - | - | - | - | - | |||||||||||||||
| Remaining expected term of underlying securities (years) | 4.9 | 5.0 | 4.9 | 5.0 | 5.0 | |||||||||||||||
NOTE 4 – LOSS PER COMMON SHARE
The Company has determined that certain warrants the Company has issued contain provisions that protect the holders from future issuances of the Company’s Common Stock at prices below such warrants’ then-in-effect respective exercise prices (see Note 9). These provisions could result in modification of the warrants then-in-effect exercise price. The Company has evaluated the guidance ASC 480-10 Distinguishing Liabilities from Equity and ASC 815-40 Contracts in an Entity’s Own Equity. Pursuant to this guidance, the Company’s management has concluded that these instruments do not meet the criteria for classification as equity treatment and must be recorded as a liability as a result of the terms in the warrants that provide for price protection in the event of a future issuance. The Company recognizes these warrants as liabilities at their fair value and re-measures them at fair value on each reporting date. ASC 820 Fair Value Measurement provides requirements for disclosure of liabilities that are measured at fair value on a recurring basis in periods subsequent to the initial recognition (see Note 2).
The Company uses Level 3 inputs for its valuation methodology for the warrant derivative liabilities. The estimated fair values were determined using a Monte Carlo option pricing model based on various assumptions. The Company’s derivative liabilities are adjusted to reflect estimated fair value at each period end, with any decrease or increase in the estimated fair value being recorded in other income or expense accordingly, as adjustments to the fair value of derivative liabilities. Various factors are considered in the pricing models the Company uses to value the warrants, including the Company’s current common stock price, the remaining life of the warrants, the volatility of the Company’s common stock price, and the risk-free interest rate. In addition, as of the valuation dates, management assessed the probabilities of future financing assumptions in the Monte Carlo valuation models. Future changes in these factors will have a significant impact on the computed by dividingfair value of the loss availablewarrant liability. Accordingly, the Company expects future changes in the fair value of the warrants to common shareholders bycontinue to vary from quarter to quarter.
The Company revalues the weighted-average numberwarrants as of common shares outstanding. Diluted loss per share is computed similarly to basic loss per share except that the denominator is increased to includeend of each reporting period. The estimated fair value of the numberoutstanding warrant liabilities was approximately $549,000 and $803,000, as of additional common shares that would have been outstanding ifSeptember 30, 2014 and December 31, 2013, respectively. The decrease in the potential common shares had been issued and iffair value of the additional common shares were dilutive. The weighted-average basic and diluted shareswarrant liabilities for eachthe three months ended September 30, 2014 was $88,000 while the decrease in fair value of the warrant liabilities for the nine months ended September 30, 2013 and 2012 exclude approximately 0.5 million of ESOP shares that have not been committed to be released.
The warrant liabilities were valued at the closing dates of (in thousands):
| Nine Months Ended September 30, | ||||||||
| 2013 | 2012 | |||||||
| Convertible preferred stock - Series A | 270 | 270 | ||||||
| Convertible preferred stock - Series B | 131 | 131 | ||||||
| Convertible preferred stock - Series C | - | 1,415 | ||||||
| Convertible preferred stock - Series D | 7,824 | - | ||||||
| Warrants to purchase common stock | 2,737 | 277 | ||||||
| Options to purchase common stock | 544 | 642 | ||||||
| Total potentially dilutive securities | 11,506 | 2,735 | ||||||
| Placement Agent Warrants | Investor Warrants | |||||||||||||||
| Warrants | September 30, 2014 | December 31, 2013 | September 30, 2014 | December 31, 2013 | ||||||||||||
| Closing price per share of common stock | $ | 0.40 | $ | 0.53 | $ | 0.40 | $ | 0.53 | ||||||||
| Exercise price per share (range) | 0.50 | 0.50 | 0.50 | 0.50 | ||||||||||||
| Expected volatility | 132.4 | % | 123.5 | % | 132.7 | % | 123.5 | % | ||||||||
| Risk-free interest rate | 1.4 | % | 1.6 | % | 1.4 | % | 1.6 | % | ||||||||
| Dividend yield | - | - | - | - | ||||||||||||
| Remaining expected term of underlying securities (years) | 3.9 | 4.6 | 3.9 | 4.6 | ||||||||||||
NOTE 5 – BUSINESS COMBINATIONS
Illume Mobile
On July 31, 2012 (“Illume Closing Date”), the Company consummated an asset purchase agreement (“Asset Purchase Agreement”) with MacroSolve, Inc. Pursuant to the Asset Purchase Agreement, the Company purchased the business (including substantially all the related assets) of the seller’s Illume Mobile division (“Illume Mobile”), based in Tulsa, Oklahoma. Founded in 1996, Illume Mobile is a mobile business solutions provider that serves mobile products and platforms. Illume Mobile’s initial core business is the development and integration of business applications for mobile environments. The Company accounted for the transaction using the purchase method of accounting and the operating results for Illume Mobile have been consolidated into the Company’s results of operations beginning on August 1, 2012.
In consideration for the business of Illume Mobile, the Company paid $1,000,000, of which $250,000 was paid in cash and $750,000 was paid in the form of 617,284 shares of the Company’s common stock. The Company valued the shares issued in conjunction with the acquisition at $697,531.
Pursuant to the Asset Purchase Agreement, the Company wascould have been required to make an additional payment (“Earn OutEarn-Out Payment”) to the seller of up to $500,000 of which 50% willwould be paidpayable in cash, and 50% willwould be paid in shares of the common stock of the Company. The value of the shares will be based on the closing price of the Company’s common stock on the one year anniversary of the Illume Closing Date, July 31, 2013. The fair value of the Earn OutIn 2013, it was determined there was not an Earn-Out Payment was calculated to be approximately $107,000 at the Closing Date. At September 30, 2013, the calculated Earn Out Paymentobligation due under the Asset Purchase Agreement was zero. Accordingly, there is $0 accrued forAgreement. The Company continues to recognize no Earn-Out Payment obligation in 2014.
DECISIONPOINT SYSTEMS, INC.
Notes to the Earn Out Payment included in accrued earn out consideration in the unaudited condensed consolidated financial statements. The adjustment was recorded as a separate component of operating expenses in the unaudited condensed consolidated statement of operations and comprehensive loss as of September 30, 2013.
Apex
On June 4, 2012 (“(the “Apex Closing Date”), pursuant to a Stock Purchase Agreement (“(the “Apex Purchase Agreement”), the Company acquired all of the issued and outstanding shares of Apex, a corporation organized under the laws of the Province of Ontario, Canada. Apex is a provider of wireless mobile work force software solutions. solutions. Its suite of products utilizes the latest technologies to empower the mobile worker in many areas including merchandising, sales and delivery; field service; logistics and transportation; and, warehouse management. Its clients are North American companies that are household names whose products and services are used daily to feed, transport, entertain and care for people throughout the world.The Company accounted for the transaction using the purchase method of accounting and the operating results for Apex have been consolidated into the Company’s results of operations beginning on June 5, 2012.
In consideration for the shares of Apex, the Company paid CDN$5,000,000 (US$4,801,000 at the Closing Date) (“(the “Apex Closing Amount”) in cash. The Company wasmay have been required to pay up to an undiscounted amount of CDN$3,500,000 (US$3,360,700 at the Closing Date) in consideration for Apex achieving certain levels of adjusted earnings before interest, depreciation, taxes and amortization (“EBITDA”(the “EBITDA”), as defined by the Apex Purchase Agreement, in the period ended July 2013. The initial fair value of the earn outearn-out (the “Apex Earn-Out Payment”) was calculated to be approximately CDN$1,076,000 (US$1,033,000 at the Closing Date).At September 30, 2013, the calculated Earn OutApex Earn-Out Payment due under the Apex Purchase Agreement was CDN$341,000 (US$331,000). The seller has disputed the Company’s calculation (see Note 12). Accordingly, there is CDN$341,000 (US$331,000) recorded as potential additional purchase consideration in the unaudited condensed consolidated financial statements. The adjustment of CDN$735,000 (US$713,000) was recorded as a separate component of operating expenses in the unaudited condensed consolidated statement of operations and comprehensive loss as of September 30, 2013. The Company accounted forOn June 9, 2014, the transaction using the purchase method of accounting expert issued their final report and the operating results forfair value of the Apex have beenEarn-Out Payment was calculated to be CDN$400,000 of which CDN$89,000 (US$84,000) (22.22%) was paid in cash and CDN$311,000 (US$291,000) (77.78%) payable in the form of a convertible promissory note.As of September 30, 2014, there is CDN$311,000 (US$279,000) recorded in earn out consideration reflected in accrued liabilities in the unaudited condensed consolidated intofinancial statements (see Note 12). The convertible promissory note is expected to be executed in the Company’s resultsfourth quarter of operations beginning on June 5, 2012. The Company funded the purchase of Apex through borrowings as further explained below.
As part of the Apex Purchase Agreement, the Company is obligated to pay bonus consideration to the CEO of Apex. Such bonus is considered additional contingent purchase consideration as the Company is obligated to pay the bonus regardless of whether or not the CEO’s employment is retained. The initial fair value of the bonus was calculated to be approximately CDN$160,000 (US$153,000 at the Closing Date). At September 30, 20132014 there is CDN$160,000101,000 (US$154,000)90,000) recorded in accrued earn out consideration reflected in accrued liabilities in the Company’s unaudited condensed consolidated balance sheets.
Three Months Ended September 30, 2012 | Nine Months Ended September 30, 2012 | |||||||||||||||
| As Reported | Pro Forma | As Reported | Pro Forma | |||||||||||||
| Net sales | $ | 18,567 | $ | 18,669 | $ | 54,144 | $ | 56,346 | ||||||||
| Net loss attributable to common shareholders | (1,263 | ) | (1,445 | ) | (3,245 | ) | (5,311 | ) | ||||||||
| Net loss per share - basic and diluted | (0.15 | ) | (0.18 | ) | (0.42 | ) | (0.69 | ) | ||||||||
The following summarizes the transaction affecting goodwill through September 30, 20132014 (in thousands):
| Balance at December 31, 2012 | $ | 8,571 | ||
| Effect of currency translation on Apex | (86 | ) | ||
| Balance at September 30, 2013 | $ | 8,485 | ||
| Balance at December 31, 2013 | $ | 8,395 | ||
| Effect of currency translation on Apex | (100 | ) | ||
| Balance at September 30, 2014 | $ | 8,295 |
As of September 30, 20132014 and December 31, 2012,2013, the Company’s intangible assets and accumulated amortization consist of the following (in thousands):
| September 30, 2013 | December 31, 2012 | |||||||||||||||||||||||
| Accumulated | Accumulated | |||||||||||||||||||||||
| Gross | Amortization | Net | Gross | Amortization | Net | |||||||||||||||||||
| Customer relationships | $ | 3,319 | $ | (1,498 | ) | $ | 1,821 | $ | 3,373 | $ | (966 | ) | $ | 2,407 | ||||||||||
| Contractor and resume databases | 675 | (371 | ) | 304 | 675 | (270 | ) | 405 | ||||||||||||||||
| Tradename | 878 | (324 | ) | 554 | 893 | (193 | ) | 700 | ||||||||||||||||
| Internal use software | 2,892 | (1,137 | ) | 1,755 | 2,978 | (545 | ) | 2,433 | ||||||||||||||||
| Covenant not to compete | 105 | (67 | ) | 38 | 105 | (27 | ) | 78 | ||||||||||||||||
| $ | 7,869 | $ | (3,397 | ) | $ | 4,472 | $ | 8,024 | $ | (2,001 | ) | $ | 6,023 | |||||||||||
| September 30, 2014 | December 31, 2013 | |||||||||||||||||||||||
| Accumulated | Accumulated | |||||||||||||||||||||||
| Gross | Amortization | Net | Gross | Amortization | Net | |||||||||||||||||||
| Customer relationships | $ | 3,202 | $ | (2,006 | ) | $ | 1,196 | $ | 3,264 | $ | (1,654 | ) | $ | 1,610 | ||||||||||
| Contractor and resume databases | 675 | (506 | ) | 169 | 675 | (405 | ) | 270 | ||||||||||||||||
| Tradename | 845 | (504 | ) | 341 | 862 | (364 | ) | 498 | ||||||||||||||||
| Internal use software | 2,702 | (1,885 | ) | 817 | 2,802 | (1,299 | ) | 1,503 | ||||||||||||||||
| Covenant not to compete | 103 | (103 | ) | - | 104 | (78 | ) | 26 | ||||||||||||||||
| $ | 7,527 | $ | (5,004 | ) | $ | 2,523 | $ | 7,707 | $ | (3,800 | ) | $ | 3,907 | |||||||||||
The effect of foreign currency translation on the goodwill and intangible assets for the nine months ended September 30, 20132014 is approximately ($86,000)100,000) and ($120,000),91,000).
Amortization expense for the three and nine months ended September 30, 2014 was $0.4 million and $1.3 million, respectively, and amortization expense for the three and nine months ended September 30, 2013 was $0.4 million and $1.4 million, respectively.
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
NOTE 7 – LINES OF CREDIT
SVB Line of Credit - The Company has a $10.0 million revolving line of credit with Silicon Valley Bank (“SVB”) which provides for borrowings based upon eligible accounts receivable, as defined in the Loan Agreement (“SVB Loan Agreement”). Under the SVB Loan Agreement as amended, SVB has also provided the Company with a term loanloans as discussed at Note 8. The SVB Loan Agreement is secured by substantially all the assets of the Company and matures in February 2015. As of September 30, 2014 and December 31, 2013, the outstanding balance on the line of credit iswas approximately $4.1$3.8 and $3.9 million, respectively, and the interest rate for September 30, 2014 and December 31, 2013 was 6.5% and 7.0%, respectively. The line of credit is 7.0%.due February 2015. The line of credit has a certain financial covenant and other non-financial covenants. As of December 31, 2012, the Company was in compliance with all of its financial covenants with SVB. As of May 31, 2013 and June 30, 2013, the Company was not incompliance with the Tangible Net Worth covenant as defined in the amended SVB Loan Agreement. On August 16, 2013, the Company and SVB signed an agreement (“Forbearance Agreement”) where SVB agreed to temporarily forbear from exercising their rights and remedies under the facility until August 28, 2013 and agreed to waive the existing covenant violations, subject to the Company’s completion of a capital raise. The Company completed the capital raise and was able to achieve compliance with the forbearance agreement prior to August 28, 2013. Except for any capital raises through August 28, 2013, the minimum Tangible Net Worth requirement of a $(9.7)an $8.7 million deficit willis to be further reduced by one half of any funds raised through sales of common stock (as only 50% of additional capital raises are given credit in the Tangible Net Worth calculation). As of September 30, 2014 and December 31, 2013, the Company was in compliance with the Tangible Net Worth financial covenant and had available a $0.3$0.6 million and $0.8 million cushion over the requirement. In November 2013, the Company entered into a definitive subscription agreement with accredited investors for the sale of Series E Preferred Stock, raising $3.8 million in gross proceeds (See Note 13). Given the effect of the capital raise ($3.8 million in gross proceeds, net of $400,000 in costs) closed to date in November, therequirement, respectively. The Company believes that at the time of this filing it is compliant with the terms and provisions of its SVB lending agreement and expects to continue to meet the requirements of our SVB financial covenants over the short and long term. The Company is in currently discussions with SVB regarding the Tangible Net Worth covenant and a reduction of the 50% of additional capital raised to 25% of capital raised in November 2013.Loan Agreement. Should the Company continue to incur losses in a manner consistent with its recent historical financial performance, the Company will violate thisTangible Net Worth covenant without additional net capital raises in amounts that are approximately twice the amount of the losses incurred.
Availability under the line of credit was approximately $4.3$0.7 million as of September 30, 2013 and $1.6 million as of October 31, 2013.2014. The line of credit allows the Company to cause the issuance of letters of credit on account of the Company to a maximum of the borrowing base as defined in the SVB Loan Agreement. No letters of credit were outstanding as of September 30, 20132014 or December 31, 2012.
RBC Line of the termination date of the line of credit to February 28, 2015, 2) the modification of the line of credit borrowing base, advance rate and financial covenants, 3) the inclusion of an additional $1.0 million term loan (See further discussion at Note 8, 5) a modification of the rate of interest of the line of credit to 3.75% above SVB’s prime rate and 5) other various terms and provisions.
For the nine months ended September 30, 20132014 and 2012,2013, the Company’s interest expense for the SVB and RBC lines of credit, including amortization of deferred financing costs, was approximately $329,000 and $262,000, and $251,000, respectively.
RBC and SVB are party to a subordination agreement, pursuant to which RBC agreed to subordinate any security interest in assets of the Company granted in connection with the RBC Credit Agreement to SVB’s security interest in assets of the Company.
Under the RBC Credit Agreement, the lender provided Apex with a term loan as discussed at Note 8.
| 12 |
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
NOTE 8 – TERM DEBT
Term debt as of September 30, 2013,2014, consists of the following (in thousands):
Balance December 31, 2012 | Additions | Payments | Amortization of Note Discount | Effect of Currency Translation | Balance September 30, 2013 | |||||||||||||||||||
| RBC term loan | $ | 2,090 | $ | - | $ | (608 | ) | $ | - | $ | (68 | ) | $ | 1,414 | ||||||||||
| Note discount | (38 | ) | - | 18 | $ | 1 | (19 | ) | ||||||||||||||||
| BDC term loan | 1,705 | - | - | - | (56 | ) | 1,649 | |||||||||||||||||
| Note discount | (31 | ) | - | 5 | 1 | (25 | ) | |||||||||||||||||
| SVB term loan | 1,000 | - | (750 | ) | - | - | 250 | |||||||||||||||||
| Note discount | (4 | ) | - | - | 4 | - | - | |||||||||||||||||
| SVB term loan-2 | - | 1,000 | (194 | ) | - | - | 806 | |||||||||||||||||
| Note discount | - | (19 | ) | - | 6 | - | (13 | ) | ||||||||||||||||
| Total debt | $ | 4,722 | $ | 981 | $ | (1,552 | ) | $ | 33 | $ | (122 | ) | 4,062 | |||||||||||
| Less contractual current portion | (1,377 | ) | ||||||||||||||||||||||
| Less RBC debt long term classified as current | (586 | ) | ||||||||||||||||||||||
| Debt, net of current portion | $ | 2,099 | ||||||||||||||||||||||
| Balance December 31, 2013 | Additions | Payments | Amortization of Note Discount | Effect of Currency Translation | Balance September 30, 2014 | |||||||||||||||||||
| RBC term loan | $ | 1,169 | $ | - | $ | (570 | ) | $ | - | $ | (38 | ) | $ | 561 | ||||||||||
| BDC term loan | 1,589 | - | - | - | (65 | ) | 1,524 | |||||||||||||||||
| SVB term loan-2 | 722 | - | (250 | ) | - | - | 472 | |||||||||||||||||
| Total note discounts | (45 | ) | - | - | 21 | - | (24 | ) | ||||||||||||||||
| Total debt | $ | 3,435 | $ | - | $ | (820 | ) | $ | 21 | $ | (103 | ) | 2,533 | |||||||||||
| less current portion | (878 | ) | ||||||||||||||||||||||
| Debt, net of current portion | $ | 1,655 | ||||||||||||||||||||||
The Company’s debt is recorded at par value adjusted for any unamortized discounts. Discounts and costs directly related to the issuance of debt are capitalized and amortized over the life of the debt using the effective interest rate method and is recorded in interest expense in the accompanying unaudited condensed consolidated statements of operations. Unamortized deferred financing costs of approximately $26,000 and $48,000 are included in other assets in the accompanying unaudited consolidated balance sheets as of September 30, 2014 and December 31, 2013, respectively.
RBC Term Loan --
On June 4, 2012, Apex entered into the RBC Credit Agreement with RBC described in Note 7, pursuant to which RBC made available certain credit facilities in the aggregate amount of up to CDN$2,750,000, including a term facility (“RBC Term Loan”) in the amount of CDN $2,500,000 (US$2,401,000 at the Closing Date). The RBC Term Loan accrues interest atIn addition, the RBC Term Loan calls for mandatory repayments based on 20% of Apex’s free cash flow as defined in the RBC Credit Agreement, before discretionary bonuses based on the annual year end audited financial statements of Apex, beginning with the fiscal year ended December 31, 2012, and payable within 30 days of the delivery of the annual audited financial statements, and continuing every six months through December 31, 2014. This amount is estimated to be $0 at September 30, 20132014 and December 31, 2012.
The RBC Term Loan has certain financial covenants and other non-financial covenants. As of June 30, 2013 and December 31, 2012, Apex was not in compliance with the Fixed Charge Coverage ratio covenant as defined in the RBC Credit Agreement. At June 30, 2013, Apex was not in compliance with the Maximum Funded Debt to EBITDA ratio covenant as defined in the RBC Credit Agreement. In March 2013, May 2013 and August 2013, the Company received waivers for non-compliance of these covenants at December 31, 2012, March 31, 2013 and June 30, 2013. On August 16, 2013 the RBC Credit Agreement was amended and certain financial covenants were modified. Pursuant to the amended credit agreement and commencing with the fiscal year endingended December 31, 2013, the Company is required to maintain a fixed coverage ratio, calculated on a consolidated basis of not less than 1.15:1 with a step-up to 1.25:1 as of March 31, 2014, tested on a rolling four quarter basis thereafter and a ratio of funded debt to EBITDA, calculated on an annual consolidated basis of not greater than 3.0:1, tested on a rolling four quarter basis thereafter. As part of the revised financial covenants, covenant testing was waived by RBC for September 30, 2013. The Company doeswas not believe that it will be in compliance with the reset covenants at September 30, 2014 and December 31, 2013. Although the Company believes it is improbablenot likely that RBC will exercise their rights up to, and including, acceleration of the outstanding debt, there can be no assurance that RBC will not exercise their rights pursuant to the provisions of the debt obligation. Accordingly, the Company has classified the term debt obligation as current at September 30, 2014 and December 31, 2013.
BDC Term Loan --
On June 4, 2012, Apex also entered intoDECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
The terms of the BDC loan agreement also provide for a fee to BDC in the event of the occurrence of any of the following:
(a) if 50% or more of any company comprising Apex or the Company (consolidated assets or shares) is sold or merged with an unrelated entity; or
(b) if there is a change of control of Apex and/or the Company prior to the Maturity Date or any extended maturity date of the BDC Term Loan,
In the event of (a) or (b) above, Apex will pay to BDC a bonus in an amount equal to 2% of the aggregate value of Apex and the Company determined as at the closing date of such transaction, which bonus shall become due and payable at the time of the closing of such transaction. Notwithstanding any prepayment of the BDC Term Loan, the bonus and Apex’s obligation to pay same to the BDC will remain in full force and effect until the maturity date or any amended or extended maturity date agreed by the BDC such that in the event of any sale, initial public offering or similar transaction, Apex’s obligation to pay the bonus amount to the BDC will survive such prepayment.
The BDC Loan Agreement contains certain financial and non-financial covenants. As of June 30, 2013 and December 31, 2012, Apex was not in compliance with the minimum working capital financial covenant. In March 2013, May 2013 and August 2013, the Company received waivers for non-compliance of these covenants at December 31, 2012, March 31, 2013 and June 30, 2013. On August 22, 2013, the BDC Term Loan was amended and certain financial covenants were modified. Pursuant to the amended loan agreement, the Company is required to maintain, for the duration of the investment, a term debt to equity ratio not exceeding 1.1:1 (measured annually); and an adjusted current ratio of 0.40:1 (measured annually) and revised yearly 120 days after each year end. We wereThe Company was in compliance with all of our BDC financial covenants as of September 30,December 31, 2013. We expect to continue to meet the requirements of our BDC financial covenants over the short and long term.
In the event either or both of the RBC Loan Agreement or the BDC Loan Agreement were deemed to be in default, RBC or BDC, as applicable, could, among other things (subject to the rights of SVB as the Company’s senior lender), terminate the facilities, demand immediate repayment of any outstanding amounts, and foreclose on our assets. Any such action would require us to curtail or cease operations, as the Company does not currently have alternative sources of financing.
SVB Term Loan -
On December 31, 2010, pursuant to an Assumption and Amendment to Loan and Security Agreement ("Amended SVB Loan Agreement"), the Company borrowed $3.0 millionThe Amended SVB Loan Agreement includes various customary covenants, limitations and events of default. Financial covenants, among others, include liquidity and fixed charge coverage ratios, minimum tangible net worth requirements and limitations on indebtedness. As of December 31, 2012, the Company was in compliance with all of its financial covenants with SVB. As of May 31, 2013 and June 30, 2013, the Company was not incompliance with the Tangible Net Worth covenant as defined in the Amended SVB Loan Agreement. On August 16, 2013, the Company and SVB signed an agreement (“Forbearance Agreement”) where SVB agreed to temporarily forbear from exercising their rights and remedies under the facility until August 28, 2013 and agreed to waive the existing covenant violations if a gross capital raise of $1.5 million is completed by such date. The Company completed the capital raise and was able to achieve compliance with the forbearance agreement prior to August 28, 2013. As of September 30, 2013,2014, the Company was in compliance with the Tangibletangible Net Worth financial covenant and had available a $0.3$0.6 million cushion over the requirement. In November 2013, theThe Company entered into a definitive subscription agreement with accredited investors for the sale of Series E Preferred Stock, raising $3.8 million in gross proceeds (See Note 13). Given the effect of the capital raise ($3.8 million in gross proceeds, net of $400,000 in costs) closed to date in November, the Companycurrently believes that at the time of this filing it is compliant with the terms and provisions of its SVB lending agreement and expects to continue to meet the requirements of our SVB financial covenants over the short and long term. TheShould the Company iscontinue to incur losses in currently discussionsa manner consistent with SVB regardingits recent historical financial performance, the Tangible Net WorthCompany will violate this covenant and a reductionwithout additional net capital raises in amounts that are approximately twice the amount of the 50% of additional capital raised to 25% of capital raised in November 2013. See further discussion regarding this matter at Note 7.
On February 27, 2013, the Company entered into an amended the Loan and Security Agreement which provided an additional term loan (the “SVB Term Loan 2”) of $1,000,000. The new term loan is due in 36 monthly installments of principal plus accrued interest beginning on April 1, 2013. The additional term loan accrues interest at 7.5% per annum.
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
For the nine months ended September 30, 20132014 and 2012,2013, the Company’s interest expense on the term debt, including amortization of deferred financing costs, was approximately $317,000 and $439,000, and $331,000, respectively.
In the event either or both RBC Loan Agreement and/or the BDC Loan Agreement were deemed to be in default, then the Amended SVB Loan agreement would be in default, which could, among other things, terminate the facility and term loan, demand immediate repayment of any outstanding amounts, and foreclose on our assets. Any such action would require us to curtail or cease operations, as the Company does not currently have alternative sources of financing.
NOTE 9 – STOCKHOLDERS’ EQUITY
The Company is authorized to issue two classes of stock designated as common stock and preferred stock. As of September 30, 2013,2014, the Company is authorized to issue 110,000,000 total shares of stock. Of that amount, 100,000,000 shares are common stock, each having a par value of $0.001. The remaining 10,000,000 shares are preferred stock, each having a par value of $0.001, of which 500,000 shares are designated as Series A Preferred Stock, of which 269,608 are issued and outstanding, 500,000 shares are designated as Series B Preferred Stock, of which 131,347 are issued and outstanding, 5,000,000 shares are designated as Series C Preferred Stock, of which 0 shares are issued and outstanding and, 4,000,000 shares are designated as Series D Preferred Stock, of which 704,200730,357 shares are issued and outstanding.
(a) Cumulative Convertible Preferred Stock
A summary of preferred stock outstanding as of September 30, 20132014 is as follows (in thousands, except share data):
| Description | ||||
| Series A Preferred, $0.001 par value per share, 500,000 shares designated, | ||||
| 269,608 shares issued and outstanding, liquidation preference of $975 | ||||
| plus cumulative dividends of $344 | $ | 1,319 | ||
| Series B Preferred, $0.001 par value per share, 500,000 shares designated, | ||||
| 131,347 shares issued and outstanding, liquidation preference of $380 | ||||
| plus cumulative dividends of $85 | 465 | |||
| Series D Preferred, $0.001 par value per share, 4,000,000 shares designated, | ||||
| 704,200 shares issued and outstanding, liquidation preference of $7,042 | ||||
| (net of $1,374 in issuance costs) plus imputed dividends of $157 | 5,825 | |||
| Total convertible preferred stock | $ | 7,609 | ||
| Description | ||||||||||||
| Series A Preferred, $0.001 par value per share, 500,000 shares designated, | ||||||||||||
| 269,608 shares issued and outstanding, liquidation preference of $975 | ||||||||||||
| plus cumulative dividends of $422 | $ | 1,397 | ||||||||||
| Series B Preferred, $0.001 par value per share, 500,000 shares designated, | ||||||||||||
| 131,347 shares issued and outstanding, liquidation preference of $380 | ||||||||||||
| plus cumulative dividends of $116 | 496 | |||||||||||
| Series D Preferred, $0.001 par value per share, 4,000,000 shares designated, | ||||||||||||
| 730,357 shares issued and outstanding (net of $1,374 in issuance costs), | ||||||||||||
| liquidation preference of $7,451 plus cumulative imputed dividends and | ||||||||||||
| beneficial conversion feature of $1,589 | 7,470 | |||||||||||
| Series E Preferred, $0.001 par value per share, 2,000,000 shares designated, | ||||||||||||
| 416,533 shares issued and outstanding (net of $875 in issuance costs), | ||||||||||||
| liquidation preference of $4,270 plus cumulative imputed dividends of $82 | 3,372 | |||||||||||
| Total convertible preferred stock | $ | 12,735 | ||||||||||
Series A Preferred Stock and Series B Preferred Stock
The holders of the Series A and Series B Preferred Stock shall be entitled to receive, when, as, and if declared by the Board of Directors, dividends at an annual rate of 8% of the stated value. The stated value of the Series A Preferred is $4.00 per share and the stated value of the Series B Preferred is $3.20 per share. Dividends shall be cumulative and shall accrue on each share of the outstanding preferred stock from the date of its issue.
The holders of the Series A and Series B Preferred Stock have no voting rights except on matters affecting their rights or preferences. Subject to the rights of the Series D Preferred Stock, upon any liquidation, dissolution or winding-up of the Company, the holders of the Series A (subject to the rights of the Series B Preferred) and Series B Preferred Stock shall be entitled to receive an amount equal to the stated value per share of $4.00 and $3.20, respectively, plus any accrued and unpaid dividends before any payments shall be made to the holders of any common stock or hereinafter issued preferred stock. The Series A Preferred Stock has preference over the Series B Preferred Stock in liquidation.
Each share of Series A Preferred Stock is convertible, at the option of the holder, at a conversion price of $4.00 per share. Each share of Series B Preferred Stock is convertible, at the option of the holder, at a conversion price of $3.20 per share.
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
Series C Preferred Stock
On December 20, 2012, the Company redeemed all issued and outstanding shares of Series C Preferred Stock were redeemed using the proceeds generated from the sale of the Series D Preferred Stock.
In connection with the sale of Series E Preferred Stock, on November 12, 2013, the Company filed a Certificate of Elimination of Series C Preferred Stock (the “Series C Certificate of Elimination”), pursuant to which, the 5,000,000 shares of the Company’s preferred stock that had been designated as Series C Preferred Stock were returned to the status of blank check preferred stock.
Series D Preferred Stock
On December 20, 2012, we filed a Certificate of Designation of Series D Preferred Shares (the “Series D Certificate of Designation”) with the Secretary of State of Delaware. Pursuant to the Series D Certificate of Designation, we designated 4,000,000 shares of our preferred stock as Series D Preferred Stock. The Series D Preferred Stock has a Stated Value of $10.00 per share, votes on an as-converted basis with the common stock, and is convertible, at the option of the holder, into such number of shares of our common stock equal to the number of shares of Series D Preferred Stock to be converted, multiplied by the Stated Value, divided by the Conversion Price in effect at the time of the conversion. The initial Conversion Price is $1.00, subject to adjustment in the event of stock splits, stock dividends and similar transactions, and in the event of subsequent equity sales at a lower price per share, subject to certain exceptions. As a result of the subsequent sales of common stockprivate placement closed on August 15, 2013 and August 21, 2013, (see Note 9(b)), the Conversion Price of the Series D Preferred Stock was reduced to $0.90. As a result of the private placement closed on November 12, 2013 and November 22, 2013, the Conversion Price of the Series D Preferred Stock was reduced to $0.71. As a result of the reduction in conversion price, the Company recorded a contingent beneficial conversion feature of $1.3 million. The Series D Preferred Stock entitles the holder to cumulative dividends, payable quarterly, at an annual rate of (i) 8% of the Stated Value during the three year period commencing on the date of issue, and (ii) 12% of the Stated Value commencing three years after the date of issue. We may, at the Company’sour option, pay dividends in PIK Shares, in which event the applicable dividend rate will be 12% and the number of such PIK Shares issuable as a dividend will be equal to the aggregate dividend payable divided by the lesser of (x) the then effective Conversion Price or (y) the average volume weighted average price of the Company’s common stock for the five prior consecutive trading days. On January 1, 2014, the Board of Directors declared a PIK dividend payable in the form of 26,157 shares of Series D Preferred Stock. The dividends were payable to holders of record as of December 31, 2013 for accrued dividends for the period of October 15,1, 2013 the Company paid a cash dividend of $142,000 onto December 31, 2013. As those shares were not issued until April 2014, they have not been included in the Series D preferredPreferred Stock balance at December 31, 2013. As such, the Company recorded a dividend payable in Current Liabilities in the in the Condensed Consolidated Balance Sheet at December 31, 2013 at an estimated fair value of $213,000. Additionally, on December 31, 2013, cash dividends of $351 were accrued for fractional share dividends not paid-in-kind. In April 2014, the period from July 1, 2013 toCompany issued 26,157 Series D Preferred Stock PIK dividend shares, for previously accrued dividends. Dividends totaling $147,000 are accrued for in Current Liabilities at September 30, 2013.
Upon any liquidation, dissolution or winding-up of our Company, holders of Series D Preferred Stock will be entitled to receive, for each share of Series D Preferred Stock, an amount equal to the Stated Value of $10.00 per share plus any accrued but unpaid dividends thereon before any distribution or payment may be made to the holders of any common stock, Series A Preferred Stock, Series B Preferred Stock, or subsequently issued preferred stock.
In addition, commencing on the trading day on which the closing price of the common stock is greater than $2.00 for thirty consecutive trading days with a minimum average daily trading volume of at least 5,000 shares for such period, and at any time thereafter, the Company may, in its sole discretion, effect the conversion of all of the outstanding shares of Series D Preferred Stock to common stock (subject to the condition that, all of the shares issuable upon such conversion may be re-sold without limitation under an effective registration statement or pursuant to Rule 144 under the Securities Act)Act of 1933, as amended).
The Series D Preferred Stock holders also were grantedcontains registration rights which requiredcompel the Company to file a registration statement with the SEC within 60 days of the final closing date (December 31, 2012), and to haverequires the registration statement declaredto become effective within 90 days thereafter. The initial registration statement was filed on February 12, 2013. Failure ofIf the registration statement to beis not declared effective by May 12, 2013, resulted in a partial liquidated damage equal to 0.1% of the purchase price paid by each investor to becomeshall be payable on each monthly anniversary until the registration statement was declaredbecomes effective. In no event shall the partial liquidated damage exceed 0.6% of the purchase price paid by each investor. On July 30, 2013, the registration statement was declared effective by the U.S. Securities and Exchange Commission.SEC. On October 15, 2013, the Company paid liquidated damages of $18,000.
Pursuant to the Series D Certificate of Designation, commencing two years from the termination or expiration of the offering of the Series D Preferred Stock (which termination occurred on December 31, 2012), and at any time thereafter, the Company in its sole discretion may redeem all of the outstanding shares of Series D Preferred Stock at a purchase price of $10.00 per share plus any accrued but unpaid dividends.
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
Series E Preferred Stock
In November 2013, the Company issued 409,000 shares of Series E Preferred for cash consideration totaling $4,090,000. In conjunction with the issuance, the Company incurred issuance costs totaling $875,000, consisting of placement fees of $327,000, legal and other expenses of $270,000, and issued 818,000 warrants to purchase shares of common stock with an exercise price of $0.55 per share to the placement agent with an estimated fair value of $278,000 determined using the Black Scholes option valuation pricing model. The fair value calculation was prepared using the following assumptions: Stock price: $0.47; expected term: 2.5 years; risk free rate of interest of 0.44%; volatility of 143%; and dividend yield of $0.
On November 12, 2013, the Company filed a Certificate of Designation of Series E Preferred Stock (the “Series E Certificate of Designation”) with the Secretary of State of Delaware. Pursuant to the Series E Certificate of Designation, we designated 2,000,000 shares of the Company’s preferred stock as Series E Preferred Stock. The Series E Preferred Stock has a Stated Value of $10.00 per share, does not have voting rights, and is convertible, at the option of the holder, into such number of shares of common stock equal to the number of shares of Series E Preferred Stock to be converted, multiplied by the Stated Value, divided by the Conversion Price in effect at the time of the conversion. The initial Conversion Price is $0.50, subject to adjustment in the event of stock splits, stock dividends and similar transactions, and in the event of subsequent equity sales at a lower price per share, subject to certain exceptions.
The Series E Preferred Stock entitles the holder to cumulative dividends (subject to the prior dividend rights of the Company’s Series D Preferred Stock), payable quarterly, at an annual rate of (i) 10% of the Stated Value during the three year period commencing on the date of issue, and (ii) 14% of the Stated Value commencing three years after the date of issue. We may, at our option (subject to certain conditions), pay dividends in PIK shares, in which event the applicable dividend rate will be 14% and the number of shares issuable as a dividend will be equal to the aggregate dividend payable divided by the lesser of (x) the then effective Conversion Price or (y) the average volume weighted average price of our common stock for the five prior consecutive trading days. On January 1, 2014, the Board of Directors declared a PIK dividend payable in the form of 7,533 shares of Series E Preferred Stock. The dividends were payable to holders of record as of December 31, 2013 for accrued dividends for the period of October 1, 2013 to December 31, 2013. As those shares were not issued until April 2014, they have not been included in the Series E Preferred Stock balance December 31, 2013. As such, the Company recorded a dividend payable in Current Liabilities in the Condensed Consolidated Balance Sheet at December 31, 2013 at an estimated fair value of $75,000. Additionally, on December 31, 2013, cash dividends of $561 were accrued for fractional share dividends not paid-in-kind. In April 2014, the Company issued 7,533 Series E Preferred Stock PIK dividend shares, for previously accrued dividends. Dividends totaling $105,000 are accrued for in Current Liabilities at September 30, 2014 in the accompanying unaudited condensed consolidated balance sheet.
Upon any liquidation, dissolution or winding-up of our Company, holders of Series E Preferred Stock will be entitled to receive (following payment in full of amounts owed to in respect of the Company’s Series D Preferred Stock), for each share of Series E Preferred Stock, an amount equal to the Stated Value of $10.00 per share plus any accrued but unpaid dividends thereon before any distribution or payment may be made to the holders of any common stock, Series A Preferred Stock, Series B Preferred Stock, or subsequently issued preferred stock.
In addition, commencing on the trading day on which the closing price of the common stock is greater than $1.35 for thirty consecutive trading days with a minimum average daily trading volume of at least 10,000 shares for such period, and at any time thereafter, the Company may, in our sole discretion, effect the conversion of all of the outstanding shares of Series E Preferred Stock to common stock (subject to the condition that, all of the shares issuable upon such conversion may be re-sold without limitation under an effective registration statement or pursuant to Rule 144 under the Securities Act of 1933, as amended).
The Series E Preferred Stock also contains registration rights which compel the Company to file a registration statement with the SEC within 60 days of the final closing date (November 22, 2013), and requires the registration statement to become effective within 90 days thereafter. The initial registration statement was filed on January 10, 2014. If the registration statement is not declared effective by January 21, 2014, a partial liquidated damage equal to 0.1% of the purchase price paid by each investor shall be payable on each monthly anniversary until the registration statement becomes effective. In no event shall the partial liquidated damage exceed 0.6% of the purchase price paid by each investor. On January 22, 2014, the registration statement was declared effective by the SEC.
On November 12, 2013, we filed Amendment No. 2 to our Certificate of Designation of Series A Preferred Stock (the “Series A Amendment”), and Amendment No. 2 to our Certificate of Designation of Series B Preferred Stock (the “Series B Amendment”). Pursuant to the Series A Amendment and the Series B Amendment, the Series A Preferred Stock and the Series B Preferred Stock will be subordinate to the Series E Preferred Stock with respect to any distributions upon any liquidation, dissolution or winding-up of our Company, respectively.
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(b) Common Stock
For the nine months ended September 30, 2014
There were no common stock issuances for the nine months ended September 30, 2014.
For the year ended December 31, 2013
On April 26, 2013, the Company issued 70,207 shares of its common stock to 3 employees as part of a specified portion of their regular annual cash bonus. The shares were valued at $83,000 and were recorded as part of selling, general and administrative expenses in the consolidated statement of operations and comprehensive loss as of December 31, 2013.
On August 15, 2013, the Company entered into a Purchase Agreementpurchase agreement with multiple accredited investors relating to the issuance and sale of Common Stock in a private offering. On August 15, 2013, the initial closing date (the “Initial Closing”) of the Purchase Agreement,purchase agreement, we sold (i) an aggregate of 2,594,000 shares of our Common Stock for $0.60 per share and (ii) Common Stock Purchase Warrants (the “Investor Warrants”) for the purchase of an aggregate of 1,297,000 shares for aggregate gross proceeds of $1,556,400. The Investor Warrants have a five-year term, an exercise price of $1.00 and contain certain provisions for anti-dilution and price adjustments in the event of a future offering.
On August 21, 2013, the final closing date (the “Final Closing”) of the Purchase Agreement, we sold (i) an aggregate of 333,333 shares of our Common Stock for $0.60 per share and (ii) 166,667 Investor Warrants for aggregate gross proceeds of $200,000.
For a period commencing on the Initial Closing and terminating on a date which is 24 months from the Initial Closing, in the event the Company issues or grants any shares of Common Stock or securities convertible, exchangeable or exercisable for shares of Common Stock pursuant to which shares of Common Stock may be acquired at a price less than $0.60 per share, then the Company shall promptly issue additional shares of Common Stock to the investors under the Purchase Agreement in an amount sufficient that the subscription price paid, when divided by the total number of shares issued (shares purchased under the Purchase Agreement plus the additional shares issued under this provision), will result in an actual price paid by the Subscriber per share of Common Stock equal to such lower price.
On December 10, 2013, the Company issued 585,467 shares of its common stock as a result of the anti-dilution adjustment triggered by the sale of Series E Preferred Shares. The common stock issued to investors at the closings on August 15, 2013 and August 21, 2013 contained certain price protection provisions. These price protections are considered embedded options to contingently acquire common stock that are clearly and closely related to the host common stock and are therefore not bifurcated. The shares issued were valued at $263,000 and were recorded as deemed dividend as of December 31, 2013.
If the Company at any time while the Investor Warrants are outstanding, shall sell or grant an option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue any common stock or securities convertible, exchangeable or exercisable for shares of common stock (as, at an effective price per share less than the exercise price of the Investor Warrants then in effect, the exercise price of the Investor Warrants will be reduced to equal to such lower price
As a Registration Statement on Form S-1 (the “Form S-1”) for the registrationresult of the 2,927,333 sharessale of Common Stock andSeries E Preferred Shares described above, the 1,463,667 shares issuable upon exerciseconversion price of the Investor Warrants sold underwas reduced to $0.50 per share on November 12, 2013.
Pursuant to the Purchase Agreement.purchase agreement, we agreed to, within 30 days of August 21, 2013, file a registration statement (the “Common Stock Registration Statement”) with the SEC covering the re-sale of the Common Shares and the shares of common stock underlying the Investor Warrants. We also agreed to use its best efforts to have the Common Stock Registration Statement become effective as soon as possible after filing (and in any event within 120 days of the filing of such Common Stock Registration Statement). If the Common Stock Registration Statement is not declared effective within the requisite period of time, a partial liquidated damage equal to 0.2% of the purchase price paid by each investor shall be payable on each monthly anniversary until it becomes effective. In no event shall the partial liquidated damage exceed 10% of the purchase price paid by each investor. On October 4, 2013, the Form S-1Common Stock Registration Statement was declared effective by the SEC.
The Company paid the placement agent $175,600 in commissions (equal to 10% of the gross proceeds), and issued to the placement agent five-year warrants (the “Placement Agent Warrants”) to purchase 292,733 shares of our common stock (equal to 10% of the number of shares of common stock sold under the Purchase Agreement)purchase agreement). The Placement Agent Warrants have a five-year term, an exercise price of $0.60 and contain provisions for anti-dilution and price adjustments in the event of a future offering.
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
If the Company at any time while the Placement Agent Warrants are outstanding, shall sell or grant an option to purchase, or sell or grant any right to reprice, or otherwise dispose of or issue any common stock or securities convertible, exchangeable or exercisable for shares of common stock, at an effective price per share less than the exercise price of the Placement Agent Warrants then in effect, the exercise price of the Placement Agent Warrants will be reduced to equal to such lower price.
The Company recorded the Investor Warrants and Placement Agent Warrants as a liability (see further disclosure at Note 3)4). Accordingly, the net proceeds raised ($1.7 million in gross offering proceeds, net of $0.2 million in cost), were allocated to the fair value of the warrant liability of $1.1 million and the remainder was recorded as equity ($0.4 million).
(c) Warrants
For the nine months ended September 30, 2013
There were no warrant issuances for the nine months ended September 30, 2014.
For the year ended December 31, 2013
On August 15, 2013 and August 21, 2013, the Company issued 1,463,667 Investor Warrants and 292,733 Placement Agent Warrants as discussed above. The exercise price of the Investor Warrants and the Placement Agent Warrants will be adjusted in the event of future issuances of the Company’s Common Stock at prices below the exercise price then in effect (“down-round” protection). The Company evaluated the following guidance ASC 480-10 Distinguishing Liabilities from Equity and ASC 815-40 Contracts in an Entity’s Own Equity. Based on this guidance, the Company’s management concluded these instruments are to be accounted for as liabilities instead of equity due to the down-round protection feature available on the exercise price of the Warrants. The Company recognized these Warrants as liabilities at their fair value and will re-measure them at fair value on each reporting date. ASC 820 Fair Value Measurement provides requirements for disclosure of liabilities that are measured at fair value on a recurring basis in periods subsequent to the initial recognition (see Note 2). Fair values for warrants are determined using the Monte-Carlo Simulation Model valuation technique. The Monte-Carlo Simulation Model valuation model provides for dynamic assumptions regarding volatility and risk-free interest rates within the total period to expected conversion. In addition, management assessed the probabilities of future financing assumptions.
As of August 15, 2013 and August 21, 2013, the dates of issuance, we recorded the warrant liability at $1,099,000. At September 30,December 31, 2013, the warrants were re-valued with a fair value of $933,000$803,000. At September 30, 2014, the warrants were revalued with a fair value of $549,000 with the difference of $166,000$254,000 recorded to other income in the unaudited condensed consolidated statementCompany’s Unaudited Condensed Consolidated Statement of operationsOperations and comprehensive loss.
On November 12, 2013 and November 22, 2013 in connection with the sale of Series E Preferred Stock, the Company issued 818,000 warrants to purchase shares of common stock with an exercise price of $0.55 per share provided to the placement agent with an estimated fair value of $278,000 determined using the Black Scholes option valuation pricing model. The fair value calculation was prepared using the following assumptions: stock price: $0.47; expected term: 2.5 years; risk free rate of interest of 0.44%; volatility of 143%; and dividend yield of $0.
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
The following table summarizes information about the Company’s outstanding common stock warrants as of September 30, 2013:
| Total | Weighted | |||||||||||||||
| Warrants | Total | Average | ||||||||||||||
| Date | Strike | Outstanding | Exercise | Exercise | ||||||||||||
| Issued | Expiration | Price | and Exercisable | Price | Price | |||||||||||
| Senior Subordinated Notes | Dec-09 | Dec-14 | $ | 3.62 | 138,260 | $ | 500,000 | |||||||||
| Senior Subordinated Notes | Dec-09 | Dec-14 | 4.34 | 138,260 | 600,000 | |||||||||||
| Placement Agent Preferred Stock - Class D | Dec-12 | Dec-17 | 1.10 | 704,200 | 774,620 | |||||||||||
| Common Stock Investor Warrants | Aug-13 | Aug-18 | 1.00 | 1,297,000 | 1,297,000 | |||||||||||
| Common Stock Investor Warrants | Aug-13 | Aug-18 | 1.00 | 166,667 | 166,667 | |||||||||||
| Placement Agent Warrants - Common Stock | Aug-13 | Aug-18 | 0.60 | 292,733 | 175,640 | |||||||||||
| 2,737,120 | $ | 3,513,927 | $ | 1.28 | ||||||||||||
| Total | ||||||||||||||||||||||||
| Warrants | Weighted | |||||||||||||||||||||||
| Outstanding | Total | Average | ||||||||||||||||||||||
| Date | Strike | and | Exercise | Exercise | ||||||||||||||||||||
| Issued | Expiration | Price | Exercisable | Price | Price | |||||||||||||||||||
| Senior Subordinated Notes | Dec-09 | Dec-14 | $ | 3.62 | 138,260 | $ | 500,000 | |||||||||||||||||
| Senior Subordinated Notes | Dec-09 | Dec-14 | 4.34 | 138,260 | 600,000 | |||||||||||||||||||
| Placement Agent Preferred Stock - Class D | Dec-12 | Dec-17 | 1.10 | 704,200 | 774,620 | |||||||||||||||||||
| Common Stock Investor Warrants * | Aug-13 | Aug-18 | 0.50 | 1,463,667 | 731,834 | |||||||||||||||||||
| Placement Agent Warrants - Common Stock * | Aug-13 | Aug-18 | 0.50 | 292,733 | 146,367 | |||||||||||||||||||
| Placement Agent Preferred Stock - Class E | Nov-13 | Nov-18 | 0.55 | 818,000 | 449,900 | |||||||||||||||||||
| 3,555,120 | $ | 3,202,721 | $ | 0.90 | ||||||||||||||||||||
NOTE 10 – ESOP PLAN
The Company has an Employee Stock Ownership Plan (the “ESOP”) which covers all non-union employees. The Company’s contribution expense for the ninethree months ended September 30, 2013,2014, was $134,000$45,000 representing approximately $104,000$37,000 for the ESOP principal payment and $30,000$8,000 for the ESOP interest. The Company’s contribution expense for the nine months ended September 30, 2014, was $134,000 representing approximately $109,000 for the ESOP principal payment and $25,000 for the ESOP interest. ESOP shares are allocated to individual employee accounts as the loan obligation of the ESOP to the Company is reduced. These amounts were previously calculated on an annual basis by an outside, independent financial advisor. Compensation costs relating to shares released are based on the fair value of shares at the time they are committed to be released. The unreleased shares are not considered outstanding in the computation of earnings per common share. ESOP compensation expense consisting of both cash contributions and shares committed to be released for the nine months ended September 30, 20132014 was approximately $78,000.$62,000. The fair value of the shares was $0.94$0.45 per share, based on the average of the daily market closing share price.
NOTE 11 - STOCK OPTION PLAN
In December 2010, the Company established the 2010 Stock Option Plan (the “Plan”). The Plan authorizes the issuance of 1,000,000 shares of common stock. Pursuant to the terms of the Merger Agreement,August 16, 2010 merger agreement, the Company assumed all of Old DecisionPoint’s obligations under their outstanding stock option plans.
The Plan is administered by the Board of Directors, or a committee appointed by the Board of Directors, which determines recipients and types of awards to be granted, including the number of shares subject to the awards, the exercise price and the vesting schedule. The term of stock options granted under the Plans cannot exceed ten years. Options shall not have an exercise price less than 100% of the fair market value of the Company’s common stock on the grant date, and generally vest over a period of five years. If the individual possesses more than 10% of the combined voting power of all classes of stock of the Company, the exercise price shall not be less than 110% of the fair market of a share of common stock on the date of grant.
A summary of the status of the Plans as of September 30, 2013,2014, and information with respect to the changes in options outstanding is as follows:
| Weighted - | ||||||||||||||||
| Options | Average | Aggregate | ||||||||||||||
| Available | Options | Exercise | Intrinsic | |||||||||||||
| for Grant | Outstanding | Price | Value | |||||||||||||
| December 31, 2012 | 455,495 | 544,505 | $ | 1.82 | $ | - | ||||||||||
| Granted | - | - | - | - | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Forfeited | - | - | - | - | ||||||||||||
| September 30, 2013 | 455,495 | 544,505 | $ | 1.82 | $ | - | ||||||||||
| Exercisable options at September 30, 2013 | 446,374 | $ | 1.75 | $ | - | |||||||||||
| Weighted | ||||||||||||||||||
| Options | Average | Aggregate | ||||||||||||||||
| Available for Grant | Options Outstanding | Exercise Price | Intrinsic Value | |||||||||||||||
| December 31, 2013 | 195,495 | 804,505 | $ | 1.39 | $ | - | ||||||||||||
| Granted | (272,475 | ) | 272,475 | 0.47 | - | |||||||||||||
| Exercised | - | - | - | - | ||||||||||||||
| Forfeited | 310,640 | (310,640 | ) | 1.66 | - | |||||||||||||
| September 30, 2014 | 233,660 | 766,340 | $ | 0.95 | $ | - | ||||||||||||
| Exercisable options at September 30, 2013 | 717,053 | $ | 0.91 | $ | - | |||||||||||||
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
The following table summarizes information about stock options outstanding as of September 30, 2013:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||||
| Weighted- | Weighted- | |||||||||||||||||||||||||
| Average | Weighted- | Average | Weighted- | |||||||||||||||||||||||
| Range of | Remaining | Average | Remaining | Average | ||||||||||||||||||||||
| Exercise | Number | Contractual | Exercise | Number | Contractual | Exercise | ||||||||||||||||||||
| Prices | Outstanding | Life (Years) | Price | Exercisable | Life (Years) | Price | ||||||||||||||||||||
| $ | 1.33 - 2.03 | 365,620 | 1.58 | $ | 1.65 | 355,461 | 1.53 | $ | 1.64 | |||||||||||||||||
| $ | 2.06 - 4.34 | 178,885 | 7.60 | 2.16 | 90,913 | 7.54 | 2.16 | |||||||||||||||||||
| Total | 544,505 | 3.56 | $ | 1.82 | 446,374 | 2.76 | $ | 1.75 | ||||||||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||
| Weighted | Weighted | |||||||||||||||||||||||||||||
| Average | Weighted | Average | Weighted | |||||||||||||||||||||||||||
| Range of | Remaining | Average | Remaining | Average | ||||||||||||||||||||||||||
| Exercise | Number | Contractual | Exercise | Number | Contractual | Exercise | ||||||||||||||||||||||||
| Prices | Outstanding | Life (Years) | Price | Exercisable | Life (Years) | Price | ||||||||||||||||||||||||
| $ | 0.40 - 0.53 | 532,475 | 2.39 | $ | 0.49 | 513,607 | 2.40 | $ | 0.48 | |||||||||||||||||||||
| $ | 1.33 - 2.03 | 122,730 | 2.25 | 1.90 | 122,730 | 2.25 | 1.90 | |||||||||||||||||||||||
| $ | 2.06 - 4.34 | 111,135 | 6.53 | 2.16 | 80,716 | 6.47 | 2.16 | |||||||||||||||||||||||
| 122 | ||||||||||||||||||||||||||||||
| Total | 766,340 | 2.97 | $ | 0.95 | 717,053 | 2.83 | $ | 0.91 | ||||||||||||||||||||||
No awards were exercised during the nine months ended September 30, 20132014 and 2012,2013, respectively. The total fair value of awards vested for the nine months ended September 30, 2014 and 2013 was $109,000 and 2012 was $40,000, and $73,000, respectively.
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the required service period, which is generally equal to the vesting period. There were no stock option grantsThe fair value of options granted to directors during the nine months ended September 30, 2013 and 2012.
| For the Nine Months Ended | ||||
| September 30, | ||||
| 2014 | 2013 | |||
| Expected term | 1.50 years | N/A | ||
| Expected volatility | 140.28% | N/A | ||
| Dividend yield | 0% | N/A | ||
| Risk-free interest rate | 0.30% | N/A | ||
The Company estimates expected volatility based on the average expected volatilitiesusing historical volatility of its common stock over a sampling of five companies with similar attributesperiod equal to the Company, including: industry, size and financial leverage.expected life of the options. The expected term of the awards represents the period of time that the awards are expected to be outstanding. Management considered expectations for the future to estimate employee exercise and post-vest termination behavior. The Company does not intend to pay common stock dividends in the foreseeable future, and therefore has assumed a dividend yield of zero. The risk-free interest rate is the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term of the awards.
Employee and director stock-based compensation costs for the nine months ended September 30, 2014 and 2013, was $89,000 and 2012, was $31,000, and $50,000, respectively, and is included in selling, general and administrative expense in the accompanying unaudited condensed consolidated statements of operations. As of September 30, 2013,2014, total unrecognized estimated employee and director compensation cost related to stock options granted prior to that date was $109,000$37,000 which is expected to be recognized over a weighted-average vesting period of 2.691.65 years.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Leases -
The Company leases its facilities and certain equipment under various operating leases which expire at various dates through fiscalRent expense for the nine months ended September 30, 2014 and 2013, was $396,000 and 2012, was $511,000, and $353,000, respectively.
Apex Earn Out Obligations -
If EBITDA (as uniquely defined in theDECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
Under the terms of the Note, Apex will pay the principal sum due on the Note in eight quarterly payments beginning on January 31, 2014 (“Installment Dates”). Interest from and after August 1, 2013,June 18, 2014, shall be paid in arrears on the last day of each calendar quarter commencing on January 31,September 30, 2014. On June 9, 2014, the accounting expert issued their final report and the fair value of the Earn-Out was calculated to be CDN$400,000 of which CDN$89,000 (US$84,000) (22.22%) was paid in cash and CDN$311,000 (77.78%) payable in the form of a convertible promissory note. At September 30, 2014, there is CDN$311,000 (US$279,000) recorded in accrued earn out consideration in the unaudited condensed consolidated financial statements.The convertible promissory note is expected to be executed in the fourth quarter of 2014.The interest rate shall be determined as follows:
| (i) | 9% per annum, calculated and compounded quarterly before |
| (ii) | 11% per annum, calculated and compounded quarterly after |
| (iii) | except, however, that, if, during the term of the Apex Note, the Company raises Net Equity Capital (as defined in the Note) in an amount greater than CDN$5,000,000 and this Note is not repaid in full within 30 days from the date that the Company receives such Net Equity Capital, the interest rate otherwise provided in the Note shall be 15% per annum from the end of such 30-day period to the first anniversary thereof and 20% per annum thereafter to the date of payment in full. |
The Apex Note is convertible, only on each Installment Date, at the option of the Note holder, into shares of our common stock at a conversion price that is equal to the greater of the Canadian Dollar equivalent of the market price of our common stock on the day prior to the conversion using a fixed rate of US$1.00=CDN$1.04, or $1.00.the Canadian Dollar equivalent of US$1.00 = CDN$1.04. The shares issuable under the Note will be restricted but will have certain piggy back registration rights as set forth in the Apex Purchase Agreement.
The Company also entered into an employment agreement with Donald Dalicandro, the Former Chief Executive Officer of Apex, as a result of the Apex acquisition. Under the employment agreement, the Company further agreed Mr. Dalicandro would be appointed to the Company’s board of directors effective June 4, 2012, and would not be removed from the Company’s board of directors during the Earn-Out Period (as defined in the employment agreement) and the Bonus Period (as defined in the employment agreement) except by death, bankruptcy, incapacity or voluntary resignation. The agreement calls for annual bonus upon achieving certain results of operation at Apex for the 12 months ending July 31, 2013, 2014, and 2015. Such bonuses are considered additional contingent purchase consideration as the Company is obligated to pay the bonus regardless of whether or not his employment is retained (see Note 5).
Apex Escrow Obligation -
As part of the Apex Purchase Agreement, from the Apex Closing Date up until the expiry of the bonus period, the Company is obligated to escrow 25% of any Equity Capital raised in excess of $500,000. The funds in the escrow are to be used to pay the 2013 EBITDA Basic Earn-Out and theContingencies -
Wells Notice- On July 2, 2014, the Company regularly evaluates current information availablereceived a written “Wells Notice” from the staff of the SEC indicating that the staff has made a preliminary determination to it to determine whether such accruals should be adjusted and whether new accruals are required.
A Wells Notice is neither a formal allegation of wrongdoing nor a finding that any violations of law have occurred. Rather, it provides the recipient with an exercise priceopportunity to respond to issues raised by the SEC staff and offer its perspective to the SEC staff prior to any decision to institute proceedings. On August 8, 2014, the Company submitted to the SEC a response to the Wells Notice setting forth why no action should be commenced against it. As of $0.55 per share,the date of this filing, there have been no further developments in connection with this matter.
Settlement of Taglich Action – In July 2014,the Series E Purchase Agreement initial closing. The Company expects to close a second round of Series E Preferred Shares with gross proceeds of $300,000-$700,000 shortly thereafter.
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and similar transactions,Analysis is intended to help the reader understand the results of operations and in the event of subsequent equity sales at a lower price per share, subject to certain exceptions. As a resultfinancial condition of the issuancebusiness of Common Stock in connection with the August 15, 2013 private placement (see Note 9(b))DecisionPoint Systems, Inc. (“DecisionPoint”, the Conversion Price of“Company”, “we” or “us”). Management’s Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the Series D Preferred Stock was reduced to $0.90. As a result of the sale of Series E Preferred Shares described above, the Conversion Price of the Series D Preferred Stock was further reduced to $0.75 per share on November 12, 2013. The Company expects a second closing of Series E Preferred shortly after November 12, 2013 of approximately $300,000- $700,000. If the second closing is for $700,000 the revised conversion price would be reduced to $0.73 per share. The Series D Preferred Stock contained certain anti-dilution provisions whereby the subsequent sale of Series E Preferred Shares may potentially create an imputed dividend that would impact EPS.
Forward Looking Statements
Some of the statements contained in this Quarterly Report on Form 10-Q that are not historical facts are "forward-looking statements" which can be identified by the use of terminology such as "estimates," "projects," "plans," "believes," "expects," "anticipates," "intends," or the negative or other variations of such terms, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements. Such statements that such statements, which are contained in this Form 10-Q, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face and otherwise, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events.as a result of the risks we face and otherwise. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include, without limitation:
| • | Our ability to raise capital when needed and on acceptable terms and conditions; | ||
| • | Our ability to manage the growth of our business through internal growth and acquisitions; | ||
| • | The intensity of competition; | ||
| • | General economic conditions; and, | ||
| • | |||
| Our ability to attract and retain management, and to integrate and maintain technical |
All written and oral forward-looking statements made in connection with this Quarterly Report on Form 10-Q areand attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements. Except as may be required under applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements whether as a result more information, future events or occurrences.
Non-GAAP Financial Measures
In the following discussion and analysis of results of operations and financial condition, certain financial measures may be considered “non-GAAP financial measures” under SEC rules. These rules require supplemental explanation and reconciliation, which is provided in this Quarterly Report on Form 10-Q as applicable.
DecisionPoint’s management uses the non-GAAP financial measure, “Adjusted Working Capital”; in their evaluation of business cash flow and financial condition. We consider this measure to reflect our ‘cash’ working capital position. It is the equivalent of our U.S. GAAP working capital position, after removing the accrual effect of current deferred assets and liabilities. We believe this non-GAAP financial measure provides us, and investors with a better understanding of the operating results and financial condition of our company.
Non-GAAP disclosures have limitations as analytical tools, should not be viewed as a substitute for measures of cash flow, operating earnings or financial condition determined in accordance with U.S. GAAP, and should not be considered in isolation from or as a substitute for analysis of our results as reported under U.S. GAAP, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies. Our supplemental presentation of Non-GAAP financial measures should not be construed as an inference that our future operating results or financial condition will be unaffected by any adjustments necessary to reconcile our Non-GAAP financial measures to measures determined in accordance with U.S. GAAP.
Overview
Business Overview
DecisionPoint enables ourits clients to “move decisions closer to the customer” by “empowering the mobile worker”. We define the mobile workerworkers as those individuals thatwho are on the front line in direct contact with customers. These workers include field repair technicians, sales associates, couriers, public safety employees and millions of other workers that deliver goods and or services throughout the country. Whether they are blue or white collar, mobile workers have many characteristics in common. Mobile workers need information, access to corporate resources, decision support tools and the ability to capture information and report informationit back to the organization.
| 23 |
DecisionPoint empowers these mobile workers through the implementation of various mobile technologies including specialized mobile business applications, wireless networks, mobile computers (for example, rugged, tablets, and smartphones) and a comprehensive suite of consulting, integration, deployment and support services.
At DecisionPoint, we deliver to our customers the ability to make better, faster and more accurate business decisions by implementing industry-specific, enterprise wireless and mobile computing systems for their front-line mobile workers, inside and outside of the traditional workplace. It is these systems that provide the information necessary for businesses to improve hundreds of the individual decisions made each day. Historically, critical information has remained locked away in the organization’s enterprise computing systems, accessible only when employees are at their desks. Our solutions are designed to unlock this information and deliver it to employees when needed regardless of their location. As a result, our customers are able to move their business decision points closer to their customers which we believe in turn improves customer service levels, reduces cost and accelerates business growth.
Mobile computing capabilities and usage continue to grow. With choice comes complexity so helping our customers navigate the myriad of options is what we aim to do best. The right choice may be an off-the-shelf application or a custom business application to fit a very specific business process. DecisionPoint has the specialized resources and support structure to help our customers make the right choices, and then to deliver to those customers the hardware, software, connectivity and follow-up maintenance and other services that they need. We address the mobile application needs of mobile applicationscustomers in the retail, manufacturing, transportation, field workforce sales/servicewarehousing, distribution, logistics and the warehousingother market segments. We continue to invest in building out our capabilities to support these markets and business needs. For example, in July 2012, we invested in the expansion of our custom software development capabilities through the acquisition of Illume Mobile in Tulsa, OK, which specializes in the custom development of specialized mobile business applications for Apple, Android and Windows Mobile devices. Additionally, through the acquisition of Illume Mobile we acquired a cloud-based, horizontal software application “ContentSentral” which manages and distributes multiple types of corporate content (for example, PDF, video, images, and spreadsheets) on mobile tablets used by field workers. We also dramaticallysubstantially increased our software products expertise with the acquisition in June 2012 of APEXApex in Canada. The APEXWare™ software suite significantly expanded our field sales/service software offerings. APEXWare™ is a purpose-built mobile application suite ideallywell suited to the automation of field sales/service and warehouse workers. Additionally, we continue to expand our deployment and MobileCare support offerings. In 2012 we moved our headquarters location to a larger facility in Irvine, CA in order to accommodate the expansion of our express depot and technical support organizations. In 2013 we consolidated our East Coast depot facility into our larger facility in Irvine, CA in order to provide our East Coast customers with later service hours and to gain some economies of scale. We also continue to invest in our “MobileCare EMM” enterprise mobility management offering. In 2008, we recognized the need for customersWe are continuing to outsource theirextend our mobile device management (“MDM”) needs, thus we invested in building out a MDM practice that offers these services under a comprehensive managed service model. We have extended this offering from our historically ruggedized mobile computer customer base to address the growthgrowing use of consumer devices in the enterpriseby clients and others and to support the Bring Your Own Device (BYOD)(“BYOD”) and Bring Your Own Application (BYOA) movement.
Recognizing that we cannot build every business application, we have developed an ‘ecosystem’ of partners whichto support the assembly and manufacturing provisions of our custom and off-the-shelf solutions. These partners include suppliers of mobile devices (Apple, Intermec and Motorola among others), wireless carriers (AT&T, Sprint, T-Mobile, Verizon), mobile peripheral manufactures (Zebra Technologies Corporation, Datamax - O’Neil), in addition to and a hostlarge number of specialized independent software vendors such as AirWatch, VeriFone GlobalBay, XRS and Wavelink.
We have several offices throughout North America which allowsallowing us to serve our multi-location clients and their mobile workforces. We provide depot services through our West and East coast facilities. Additionally, we are always keenlykeep aware of potential acquisition candidates that cancould provide us with complementary products and service offerings, to our customer base.
Recent Events
On July 31, 2012 (“Illume Closing Date”), we consummated an asset purchase agreement (“Asset Purchase Agreement”) with MacroSolve, Inc. Pursuant to2, 2014, the Asset Purchase Agreement, we purchased the business (including substantially all the related assets) of the seller’s Illume Mobile division (“Illume Mobile”), based in Tulsa, Oklahoma.
Three Months Ended September 30, 2012 | Nine Months Ended September 30, 2012 | |||||||||||||||
| As Reported | Pro Forma | As Reported | Pro Forma | |||||||||||||
| Net sales | $ | 18,567 | $ | 18,669 | $ | 54,144 | $ | 56,346 | ||||||||
| Net loss attributable to common shareholders | (1,263 | ) | (1,445 | ) | (3,245 | ) | (5,311 | ) | ||||||||
| Net loss per share - basic and diluted | (0.15 | ) | (0.18 | ) | (0.42 | ) | (0.69 | ) | ||||||||
On August 15, 2014, Nicholas Toms, a director of the Company and the Chief Executive Officer, who has been retroactively appliedon leave from his duties as an officer since July 2014 (see the Company’s Form 8-K dated July 10, 2014), resigned from his positions as Chief Executive Officer, President and member of the board of directors, effective immediately. The directors have commenced a search for a new, permanent Chief Executive Officer.
On September 10, 2014, the Board of Directors of Company caused the Company to all shares, weighted-average share, loss per share,file a proxy statement with the SEC in preparation for notifying its shareholders of, and stock optionconducting, an annual meeting of shareholders. The Company’s proxy statement proposed the reelection of the incumbent members of the Board and warrant disclosures.
Results of Operations
For comparison purposes, all dollar amounts have been rounded to nearest million while all percentages are actual. Due to rounding, totalscolumn entries in the tables presented may not sum to the totaltotals presented in the table.
Three Months Ended September 30, | Increase | Nine Months Ended September 30, | Increase | ||||||||||||||||||||||
| 2013 | 2012 | (Decrease) | 2013 | 2012 | (Decrease) | ||||||||||||||||||||
| Total revenue | $ | 17.6 | $ | 18.6 | (5.3 | %) | $ | 46.1 | $ | 54.1 | (14.9 | %) | |||||||||||||
| Gross profit | 3.5 | 4.1 | (16.0 | %) | 9.9 | 11.6 | (15.0 | %) | |||||||||||||||||
| Total operating expenses | 3.7 | 4.7 | (22.7 | %) | 13.2 | 13.4 | (1.6 | %) | |||||||||||||||||
| Loss from operations | (0.2 | ) | (0.6 | ) | (67.2 | %) | (3.3 | ) | (1.8 | ) | 85.4 | % | |||||||||||||
| Loss before provision for income taxes | (0.3 | ) | (1.0 | ) | (71.0 | %) | (3.9 | ) | (2.4 | ) | 60.2 | % | |||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
| September 30, | Increase | September 30, | Increase | |||||||||||||||||||||
| 2014 | 203 | (Decrease) | 2014 | 2013 | (Decrease) | |||||||||||||||||||
| Net sales | $ | 14.1 | $ | 17.6 | (19.5 | %) | $ | 47.4 | $ | 46.1 | 2.8 | % | ||||||||||||
| Gross profit | 3.0 | 3.5 | (12.8 | %) | 10.4 | 9.9 | 5.3 | % | ||||||||||||||||
| Total operating expenses | 3.0 | 3.7 | (17.4 | %) | 10.2 | 13.2 | (22.8 | %) | ||||||||||||||||
| Operating income (loss) | (0.0 | ) | (0.2 | ) | (96.2 | %) | 0.2 | (3.3 | ) | (106.5 | %) | |||||||||||||
| Net loss before income taxes | (0.2 | ) | (0.3 | ) | (39.7 | %) | (0.2 | ) | (3.9 | ) | (95.4 | %) | ||||||||||||
Net Sales
Net sales for the three and nine months ended September 30, 20132014 and 20122013 is summarized below:
Three Months Ended September 30, | Increase | Nine Months Ended September 30, | Increase | ||||||||||||||||||||
| 2013 | 2012 | (Decrease) | 2013 | 2012 | (Decrease) | ||||||||||||||||||
| Hardware | $ | 11.9 | $ | 12.1 | (2.3 | %) | $ | 28.7 | $ | 36.8 | (21.9 | %) | |||||||||||
| Professional services | 4.3 | 4.7 | (7.4 | %) | 12.7 | 12.6 | 0.8 | % | |||||||||||||||
| Software | 0.9 | 1.4 | (32.9 | %) | 3.5 | 3.2 | 6.9 | % | |||||||||||||||
| Other | 0.5 | 0.4 | 20.8 | % | 1.2 | 1.6 | (21.8 | %) | |||||||||||||||
| $ | 17.6 | $ | 18.6 | (5.3 | %) | $ | 46.1 | $ | 54.1 | (14.9 | %) | ||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
| September 30, | Increase | September 30, | Increase | |||||||||||||||||||||
| 2014 | 2013 | (Decrease) | 2014 | 2013 | (Decrease) | |||||||||||||||||||
| Hardware | $ | 8.8 | $ | 11.9 | (26.1 | %) | $ | 30.7 | $ | 28.8 | 6.4 | % | ||||||||||||
| Professional services | 4.3 | 4.3 | (1.5 | %) | 12.9 | 12.7 | 1.9 | % | ||||||||||||||||
| Software | 0.8 | 0.9 | (18.6 | %) | 2.7 | 3.5 | (22.0 | %) | ||||||||||||||||
| Other | 0.3 | 0.4 | (20.2 | %) | 1.1 | 1.1 | (1.5 | %) | ||||||||||||||||
| $ | 14.1 | $ | 17.6 | (19.5 | %) | $ | 47.4 | $ | 46.1 | 2.8 | % | |||||||||||||
Net sales were $17.6$14.1 million for the three months ended September 30, 2013,2014, compared to $18.6$17.6 million for the same period ended September 30, 2012,2013, a decrease of $1.0$3.5 million or 5.3%19.5%.The decrease was driven principally by our hardware category, where net sales declined by $3.1 million, or 26.1% over the comparable period. The decrease in hardware revenue was partially offset due to significant orders by several large retail customers in the inclusionfirst and second quarters of 2014 not being repeated at the operating resultssame level in the third quarter of our Apex and Illume Mobile acquisitions in mid-2012. Revenues for Apex2014.
Net sales were $0.5$47.4 million for the threenine months ended September 30, 2013,2014, compared to $0.4$46.1 million for the same period ended September 30, 2012. Revenues for Illume Mobile were $0.22013, an increase of $1.3 million or 2.8%.The increase was driven principally by our hardware category, which grew by $1.9 million, or 6.4% over the comparable period. The increase in hardware revenue was partially due to significant orders by several large retail customers in the three months ended September 30, 2013 comparedfirst and second quarters of 2014. The increase in revenue was also due to $0.2 million for the same period ended September 30, 2012. Excluding the impact of Apexincreased field mobility solution sales and Illume Mobile acquisitions in mid-2012, revenues decreased by $1.2 million, or 6.6% over the same quarter in the prior year with the largest decrease occurring in software where sales decreased by 32.9%.
Improved economic conditions in the U.S. which had begun in the first half of 2010, and continued improvement throughout 2011 and 2012have had a positive effect on our sales in those years. Prior to 2010,sales. In 2013, major retail chains had deferred new technology implementation and delayed systems’ refresh. Conversely, the economic environment in 2012 stabilized whereupon we benefitted from renewed interest and more importantly, fundamental need to implement new cost saving technology. InWhile the first nine months of 2013, we did not have the same level of customers with new technology implementation and systems’ refresh. As a result, the hardware revenues for the three and nine months ended September 30, 2013 declined by 2.3% and 21.9%, respectively, which was due to the decrease in system upgrades of mobile computing at the retail level. The slight increase in professional services for the nine months ended September 30, 2013 compared to the same period in 2012 of 0.8%, related to deployment and staging services to support our customers’ prior technology upgrades. For the three months ended September 30, 2013, we did not have the same level of customers in professional services which resulted in a decrease of $0.4 million, or 7.4% over the same periodslowly improving economic conditions in the prior year. Our increase in software revenues for the nine months ended September 30, 2013 comparedU.S. have had a positive effect generally, we have continued to the same period in 2012 is attributable to contributions of software revenues from the Apex and Illume Mobile acquisitions. The slight decrease in other revenues for the nine months ended September 30, 2013 compared to the same periodexperience greater competitive forces in the prior year relates to a reallocation ofmarket place within our corporate resources away from the lower volume for consumables and towards the professional servicescore traditional solutions business.
Cost of Sales
Cost of sales for the three and nine months ended September 30, 20132014 and 20122013 is summarized below:
Three Months Ended September 30, | Increase | Nine Months Ended September 30, | Increase | |||||||||||||||||||||
| 2013 | 2012 | (Decrease) | 2013 | 2012 | (Decrease) | |||||||||||||||||||
| Hardware | $ | 9.8 | $ | 10.0 | (2.4 | %) | $ | 23.4 | $ | 30.5 | (23.4 | %) | ||||||||||||
| Professional services | 2.9 | 3.0 | (2.0 | %) | 8.6 | 8.4 | 2.2 | % | ||||||||||||||||
| Software | 1.1 | 1.2 | (8.7 | %) | 3.4 | 2.7 | 27.0 | % | ||||||||||||||||
| Other | 0.3 | 0.2 | 30.8 | % | 0.9 | 1.0 | (11.4 | %) | ||||||||||||||||
| $ | 14.1 | $ | 14.4 | (2.3 | %) | $ | 36.2 | $ | 42.6 | (14.9 | %) | |||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
| September 30, | Increase | September 30, | Increase | |||||||||||||||||||||
| 2014 | 2013 | (Decrease) | 2014 | 2013 | (Decrease) | |||||||||||||||||||
| Hardware | $ | 7.2 | $ | 9.8 | (26.1 | %) | $ | 25.0 | $ | 23.4 | 6.8 | % | ||||||||||||
| Professional services | 2.8 | 2.9 | (6.1 | %) | 8.4 | 8.6 | (2.6 | %) | ||||||||||||||||
| Software | 0.9 | 1.1 | (18.6 | %) | 2.8 | 3.4 | (17.8 | %) | ||||||||||||||||
| Other | 0.3 | 0.3 | (19.6 | %) | 0.9 | 0.9 | (0.1 | %) | ||||||||||||||||
| $ | 11.1 | $ | 14.1 | (21.2 | %) | $ | 37.0 | $ | 36.2 | 2.1 | % | |||||||||||||
The types of expenses included in the cost of sales line areincludes hardware costs, third party licenses, costs associated with third party professional services, salaries and benefits for project managers and software engineers, freight, consumables and accessories.
Cost of sales were $36.2was $11.1 million for the ninethree months ended September 30, 2013,2014, compared to $42.6$14.1 million for the same period ended September 30, 2012,2013, a decrease of $6.4$3.0 million or 14.9%21.2%. The decrease in cost of sales for hardware of 23.4%26.1% for the three months ended September 30, 2014 compared to the same period in 2013 was consistent with the hardware revenue decrease. The decrease in cost of sales for professional services from the three months ended September 30, 2014 compared to the three months ended September 30, 2013 was 6.1%, more than the professional services revenue decline of 1.5% for the same period, whichwas due to reductions in professional service personnel that we achieved as a component of our operational improvement efforts. The decrease in cost of sales for software of 18.6% for the three months ended September 30, 2014 compared to the similar period in 2013 was consistent with the decrease in software revenues for the same period and related to professional service personnel reductions. The decrease in other cost of sales was approximately in proportion to the decrease in the other revenues.
Cost of sales was $37.0 million for the nine months ended September 30, 2014, compared to $36.2 million for the same period ended September 30, 2013, an increase of $0.8 million or 2.1%. The increase in cost of sales for hardware of 6.8% for the nine months ended September 30, 2014 compared to the same period in 20122013 was slightly higher than the hardware revenue decreaseincrease due to a fewer large orders which usually have reduced pricing.pricing and product mix. The increasedecrease in cost of sales for professional services from the nine months ended September 30, 20132014 to the nine months ended September 30, 20122013 was 2.2%2.6% compared to the revenue growth rate of 0.8%.1.9%, andwas due to reductions in professional service personnel that we achieved as a component of our operational improvement efforts. The increasedecrease in cost of sales for software of 27.0%17.8% for the nine months ended September 30, 20132014 compared to the same period in 20122013 was slightly higher duealso related to the impact of software intangible asset amortization. professional service personnel reductions.The decreaseincrease in other cost of sales was relatedapproximately in proportion to the decrease inincrease on other revenues.
Gross Profit
Gross profit for the three and nine months ended September 30, 2014 and 2013 is summarized below:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
| September 30, | Increase | September 30, | Increase | |||||||||||||||||||||
| 2014 | 2013 | (Decrease) | 2014 | 2013 | (Decrease) | |||||||||||||||||||
| Hardware | $ | 1.6 | $ | 2.2 | (26.4 | %) | $ | 5.7 | $ | 5.4 | 4.5 | % | ||||||||||||
| Professional services | 1.5 | 1.4 | 8.4 | % | 4.5 | 4.1 | 11.3 | % | ||||||||||||||||
| Software | (0.1 | ) | (0.2 | ) | (19.0 | %) | (0.1 | ) | 0.1 | (187.2 | %) | |||||||||||||
| Other | 0.1 | 0.1 | (22.7 | %) | 0.2 | 0.3 | (6.2 | %) | ||||||||||||||||
| $ | 3.0 | $ | 3.5 | (12.8 | %) | $ | 10.4 | $ | 9.9 | 5.3 | % | |||||||||||||
| As a percentage of sales | 21.4 | % | 19.7 | % | 1.7 | % | 21.9 | % | 21.4 | % | 0.5 | % | ||||||||||||
Our gross profit was $3.5$3.0 million for the three months ended September 30, 2013,2014, compared to $4.1$3.5 million for the same period ended September 30, 2012,2013, a decrease of $0.6$0.5 million or 16.0%12.6%. Our gross margin percentage decreasedincreased by 2501,656 basis points to 19.7%21.4% in 2013,2014, from 22.2%19.7% in the comparable period of 2012.
Our gross profit was $9.9$10.4 million for the nine months ended September 30, 2013,2014, compared to $11.6$9.9 million for the same period ended September 30, 2012, a decrease2013, an increase of $1.7$0.5 million or 15.0%5.3%. Our gross margin percentage wasincreased by 524 basis points to 21.9% in 2014, from 21.4% for the nine months ended September 30, 2013, compared to 21.4% forin the comparable period of 2012.
We believe that we would have realized even better gross margin percentagemargins had it not been for the three months ended September 30, 2013 was due to a few large orders which usually have reduced pricing. For the nine months ended September 30, 2013, our gross margin was comparable with the same period ended September 30, 2012. We have continued implementation of increased cost controlvery competitive environment for the products and services which we resell, and our professional service costs were positively impacted by our better utilization associated with greater recognized revenue from these services in the current three and nine months and therefore, we realized higher margins on those services. Additionally, the benefits of increased cost control were partially offset due to amortization of intangible software assets, offset by the lower volume of hardware sales whichacross our entire customer base, hardware sales carry a lower gross margin, combined with amargin. We realized higher proportion of sales fromgross margins on our professional services.
Selling, General and Administrative Expenses
Three Months Ended September 30, | Increase | | Nine Months Ended September 30, | Increase | ||||||||||||||||||
| 2013 | 2012 | (Decrease) | 2013 | 2012 | (Decrease) | |||||||||||||||||
| Selling, general and administrative expenses | $ | 4.5 | $ | 4.7 | (5.4%) | $ | 14.0 | $ | 13.4 | 4.6 | % | |||||||||||
| As a percentage of sales | 25.5 | % | 25.5 | % | (0.0%) | 30.3 | % | 24.7 | % | 5.7 | % | |||||||||||
| Adjustment to earn-out obligations | $ | (0.8 | ) | $ | - | $ | (0.8 | ) | $ | - | ||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
| September 30, | Increase | September 30, | Increase | |||||||||||||||||||||
| 2014 | 2013 | (Decrease) | 2014 | 2013 | (Decrease) | |||||||||||||||||||
| Selling, general and administrative expenses | $ | 3.0 | $ | 4.5 | (32.5 | %) | $ | 10.2 | $ | 14.0 | (27.3 | %) | ||||||||||||
| As a percentage of sales | 21.4 | % | 25.5 | % | (4.1 | %) | 21.5 | % | 30.3 | % | (8.9 | %) | ||||||||||||
| Adjustment to earn-out obligations | $ | - | (0.8 | ) | $ | - | (0.8 | ) | ||||||||||||||||
Selling, general and administrative expenses were $4.5$3.0 million for the three months ended September 30, 2013,2014, compared to $4.7$4.5 million for the same period in the prior year. This represents a decrease of $0.2$1.5 million, or 5.4%32.5%. The decrease was primarily due to reduced legal and other professional fees.
Selling, general and administrative expenses were $14.0$10.2 million for the nine months ended September 30, 2013,2014, compared to $13.4$14.0 million for the same period in the prior year. This represents an increasea decrease of $0.6$3.8 million, or 4.6%27.3%.
The increase was primarily due to the increase in sales salary related expenses of $0.6 million which, in part relates to the expansion of the sales force in the U.S. tasked with bringing the APEXWare™ product to the U.S. market offset partially by reduced legal and other professional fees.
Three Months Ended September 30, | Increase | Nine Months Ended September 30, | Increase | |||||||||||||||||
| 2013 | 2012 | (Decrease) | 2013 | 2012 | (Decrease) | |||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||
| In cost of sales | $ | 0.2 | $ | 0.2 | (8.9 | %) | $ | 0.6 | $ | 0.3 | 110.4 | % | ||||||||
| In operating expenses | 0.3 | 0.3 | (16.5 | %) | 0.9 | 0.7 | 26.5 | % | ||||||||||||
| Total depreciation and amortization | $ | 0.5 | $ | 0.6 | (13.5 | %) | $ | 1.5 | $ | 1.0 | 51.2 | % | ||||||||
| As a percentage of sales | 2.8% | 3.1 | % | 3.2 | % | 1.8 | % | |||||||||||||
Depreciation and Amortization
We account for a portion of our depreciation and amortization expense as cost of sales, and the remainder as selling, general and administrative costs were lowerexpense. Depreciation and amortization for the three and nine month periods ended September 30, 2014 and 2013 is summarized below:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
| September 30, | Increase | September 30, | Increase | |||||||||||||||||||||
| Depreciation and | 2014 | 2013 | (Decrease) | 2014 | 2013 | (Decrease) | ||||||||||||||||||
| amortization | ||||||||||||||||||||||||
| In cost of sales | $ | 0.2 | $ | 0.2 | 5.5 | % | $ | 0.6 | $ | 0.6 | 4.7 | % | ||||||||||||
| In operating expenses | 0.2 | 0.3 | (23.9 | %) | 0.7 | 0.9 | (21.3 | %) | ||||||||||||||||
| Total depreciation and amortization | $ | 0.4 | $ | 0.5 | (12.0 | %) | $ | 1.3 | $ | 1.5 | (10.6 | %) | ||||||||||||
| As a percentage of sales | 3.1 | % | 2.8 | % | 0.3 | % | 2.8 | % | 3.2 | % | (0.4 | %) | ||||||||||||
The reduction in depreciation and amortization accounted for as selling, general and administrative expense was principally as a result of a decrease in the amortization of intangible assets.
Interest Expense
Interest expense arises from our outstanding balances under our lines of credit and from our outstanding subordinated debt.
Interest expense was $229,000 for the three months ended September 30, 2014, compared to $241,000 for the same period in the prior year. The $12,000 decrease in interest expense reflected a decrease in our average outstanding general debt obligations during the three months ended September 30, 2014 compared to the similar period in the prior year.
Interest expense was $658,000 for the nine months ended September 30, 2013 due to amortization of intangible assets as a result of the Apex and Illume acquisitions in 2012.
Liquidity and Capital Resources
Going Concern Matters
Our consolidated financial statements were prepared on a going concern basis in accordance with U.S. GAAP. The going concern basis of presentation assumes that we will continue in operation for the next twelve months and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business and does not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern. Our history of losses, working capital deficit, capital deficit, minimal liquidity and other factors raises substantial doubt about our ability to continue as a going concern. In order for us to continue operations beyond the next twelve months and be able to discharge our liabilities and commitments in the normal course of business, we must do some or all of the following: establish sustained positive operating results through increased sales, successfully implement cost cutting measures, avoid further unforeseen expenses, potentially raise additional equity or debt capital, and successfully refinance our current debt obligations when they come due in February of 2015. There can be no assurance that we will be able achieve sustained positive operating results or obtain additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to us.
If we do not continue to achieve positive operating results and do not raise sufficient additional capital, material adverse events may occur including, but not limited to: 1) a reduction in the nature and scope of our operations, 2) our inability to fully implement our current business plan and 3) continued defaults under our various loan agreements. There can be no assurances that we will be able to successfully improve our liquidity position. Our consolidated financial statements do not do not reflect any adjustments that might be required if our liquidity position does not improve.
Cash and Cash Flow
Although we have historically experienced losses, a material part of those losses werehave been from non-cash transactions (refer to the accompanying unaudited Condensed Consolidated Statements of Cash Flows.)transactions. In connection with these losses, we have accumulated substantial net operating loss carry-forwards to off-setset off against future taxable income. In order to maintain normal operations for the foreseeable future, generate taxable income and make use of our net operating loss carry-forwards, we must continue to have access to our linelines of credit, become profitable and/orestablish sustained positive operating results and access additional equity or debt capital. There can be no assurance that we will become profitablebe able to achieve sustainable positive operating results or cost reductions or that we can continue to raiseobtain additional funds requiredwhen needed to continue our normal operations. The accompanying consolidated financial statements do not include any adjustments that would be required should we not be successful with these activities.
Funds generated by operating activities and our credit facilities continue to be our most significant sources of liquidity. For the nine months ended September 30, 2013, our revenue decreased approximately 14.9%, compared to the nine months ended September 30, 2012, partially due to the lower level of retail customers’ system refreshes and system implementations. Excluding the impact of Apex and Illume Mobile Earn-Out adjustment, we also had an increased level of selling, general and administrative expenses in the first nine months of 2013 compared to the same period in 2012 due to inclusion of the results from Apex and Illume Mobile along with increased selling expenses, professional expenses and investor relations expenses related to being a public company along with an increase in amortization expense of intangible assets, all resulted in higher operating loss for the first nine months of 2013.
In the quarter ended September 30, 2013,2014, we experienced a decrease in revenue of $1.0$3.4 million, or 19.5% compared to the quarter ended September 30, 2012,2013, and a $2.9$1.3 million, or 2.8% increase in revenue compared to the previous sequential quarter ended June 30, 2013. Infor the nine months ended September 30, 2014 over the comparable nine months of 2013. In the quarter ended September 30, 2014, we experienced net loss of $563,000 compared to the net loss of $167,000 for the quarter ended September 30, 2013, we incurred approximately $1.3 million in increased expenses dueand a $696,000 net loss for the nine months ended September 30, 2014 compared to professional fees relating to capital raising activities, the registration of common shares as a result of the Series D Preferred Stock offering and associated audit fees, and other matters such as employee termination costs. We experienced a net loss of $0.2 million and $3.4 million for the three and nine month periods endedcomparable period in 2013. At September 30, 2014 and December 31, 2013, which were far in excess of the internal forecast maintained by the management team. In addition, we havehad a substantial working capital deficit totaling $(11.5) million at September 30, 2013.$9.9 million. Although a portion of this deficit is associated with deferred costs, and unearned revenues and term debt that has been classified current due to expected future covenant violations (see further discussion at Note 8, – “Term Debt” inDebt of the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements), our liabilities that are expected towe expect will be satisfied in the foreseeable future in cash farsubstantially exceed the operating assets that are expected to be satisfied in cash. As a result of our historical operations, the availability under our credit line has contracted significantly and our overall liquidity has become significantlybeen constrained.
To address this,liquidity constraints, we have reduced non-essential expenses. Such expense reductions have included, but have not been limited to, the consolidation of information technology environments, the consolidation of our East Coast depot facility in to our larger California depot facility, the reduction of outsourced consulting expertise where unnecessary and the replacement of certain service providers with lower cost providers. We have also consolidated administrative personnel and reduced total staffing levels by 29% from April 2013 through February 2014, constituting annual savings of approximately $3 million. These cost reduction measures have reduced the expense structure of our business significantly. We are focused on continuing to improve processes and reduce costs. Currently, we have no plans to seek additional capitaloutside funding through salesthe sale of our securities. Theresecurities unless deemed necessary. Should additional outside financing be needed, there is no assurance additional fundingthat such amounts will be available on terms acceptable to us, or at all. If we raise additional funds by selling additional shares of our capital stock, or securities convertible into shares of our capital stock, the ownership interestinterests of our existing shareholders maycommon stockholders will be diluted. We are also reducing non-essential expenses and completing the integration of our acquisitions of Apex and Illume Mobile, which is expected to result in further cost savings. Such expense reduction measures include, but are not limited to, consolidation of administrative personnel, consolidation of information technology environments, reduction of outsourced consulting expertise and replacing certain service providers with lower cost providers. The result of these activities has reduced the expense structure of the consolidated business, however this reduction has not been material to date and we do not anticipate it becoming material in the foreseeable future.
During 2012, 2013 and 2013,the first nine months of 2014, all principal and interest payments on our term debt were made within payment terms. We were not in compliance with certain financial covenants under the agreements with Royal Bank of Canada (“RBC Credit Agreement”) and BDC, Inc. (“BDC Credit Agreement”) as of December, 31, 2012, March 31, 2013 and June 30, 2013. We have received waivers for non-compliance for past covenant violations. On August 22, 2013, the BDC Credit Agreement was amended and certain financial covenants were modified. Pursuant to the amended loan agreement, we are required to maintain, for the duration of the investment, a term debt to equity ratio not exceeding 1.1:1 (measured annually); and an adjusted current ratio of 0.40:1 (measured annually) and revised yearly 120 days after each year end. We were in compliance with all of our BDC financial covenants as of September 30, 2013. We expect to continue to meet the requirements of our BDC financial covenants over the short and long term. On August 16, 2013 the RBC Credit Agreement was amended and certain financial covenants were modified. Pursuant to the amended credit agreement and commencing with the fiscal year ending December 31, 2013, we are required to maintain a fixed coverage ratio, calculated on a consolidated basis of not less than 1.15:1 with a step-up to 1.25:1 as of March 31, 2014, tested on a rolling four quarter basis thereafter and a ratio of funded debt to EBITDA, calculated on an annual consolidated basis of not greater than 3.0:1, tested on a rolling four quarter basis thereafter. As part of the revised financial covenants, covenant testing was waived by RBC for September 30, 2013. We do not believe that we will be in compliance with the reset covenants at December 31, 2013. Although we believe it is improbable that RBC will exercise their rights up to, and including, acceleration of the outstanding debt, there can be no assurance RBC will not exercise their rights pursuant to the provisions of the debt obligation. Accordingly, we have classified this debt obligation as current at September 30, 2013 (see Note 8 –
“Term Debt” in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements).
We have $0.6 million of Common Stock in a private offering. On August 15, 2013, the initial closing date (the “Initial Closing”) of the Purchase Agreement, we sold (i) an aggregate of 2,594,000 shares of our Common Stock for $0.60 per share and (ii) Common Stock Purchase Warrants (the “Investor Warrants”) for the purchase of an aggregate of 1,297,000 shares for aggregate gross proceeds of $1,556,400. The Investor Warrants have a five-year term an exercise price of $1.00 and contain certain provisions for anti-dilution and price adjustments in the event of a future offering.
As part of the Apex also entered intoPurchase Agreement, from the BDC Loan Agreement with BDCApex Closing Date up until the expiry of the bonus period, under that agreement we are obligated to escrow 25% of any Equity Capital Inc. (“BDC”), a wholly-owned subsidiaryraised in excess of Business Development Bank of Canada, pursuant to which BDC made available to Apex a term credit facility (“BDC Credit Facility”)$500,000. The funds in the aggregate amountescrow are to be used to pay the 2013 EBITDA Basic Earn-Out, the 2013 EBITDA Additional Earn-Out and the additional bonus consideration. In December 2012, the Company raised $7,042,000 as part of CDN $1,700,000 (USD $1,632,340 at the Closing Date). The BDC Term Loan initially accrued interest at the rate of 12% per annum, and matures on June 23, 2016, with an available one year extension for a fee of 2%, payable at the time of extension. On April 29, 2013, the BDC Term Loan was amended to accrue interest at the rate of 12.5% per annum.its Series D preferred stock offering. In addition to the interest payable, consecutive quarterly payments of CDN$20,000 as additional interest are due beginning on June 23, 2012, and subject to compliance with bank covenants, Apex will make a mandatory annual principal payment in the form of a cash flow sweep which will be equal to 50% of the Excess Available Funds (as defined by the BDC Loan Agreement) before discretionary bonuses based on the annual year end audited financial statements of Apex. The maximum annual cash flow sweep in any year will be CDN$425,000. As of December 31, 2012 and at September 30,August 2013, the Company estimatedraised $1,756,000 issuing common stock. In November 2013, the cash sweep will be approximately $0. Such payments will be applied to reduce the outstanding principal payment due on the maturity date. In the event that Apex’s annual audited financial statements are not received within 120 daysCompany raised $4,090,000 as part of its fiscal year end, the full CDN$425,000 becomes due and payable on the next payment date. Apex paid approximately $70,000 in financing costs which has been recorded as deferred financing costs and is being amortized to interest expense over the term of the loan.
In connectionthe last five complete years of operations from 2009 through 2013, we have not experienced any significant effects of inflation on our product and service pricing, revenues or our income (loss) from continuing operations.
As referred to above under the heading “Non-GAAP Financial Measures,” we monitorour ‘cash’ working capital position after removing the accrual effect of current deferred assets and liabilities. We refer to this non-GAAP financial measure as our “Adjusted Working Capital”. We believe this non-GAAP financial measure provides us, and investors, with a better understanding of the Series D First Closing, on December 20, 2012, we filed a Certificate of Designation of Series D Preferred Stock (the “Series D Certificate of Designation”) with the Secretary of State of Delaware. Pursuant to the Series D Certificate of Designation, we designated 4,000,000 sharesoperating results and financial condition of our preferred stockcompany.
Adjusted Working Capital at September 30, 2014 and December 31, 2013 are computed as Series D Preferred Stock. The Series D Preferred Stock has a Stated Value of $10.00 per share, votes on an as-converted basis with the common stock, and is convertible, at the option of the holder, into such number of shares of our common stock equal to the number of shares of Series D Preferred Stock to be converted, multiplied by the Stated Value, divided by the Conversion Pricefollows (in thousands):
| September 30, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Current assets | $ | 13,150 | $ | 16,912 | ||||
| Current liabilities | 23,107 | 26,787 | ||||||
| Working capital - U.S. GAAP | (9,957 | ) | (9,875 | ) | ||||
| Deferred costs | (3,667 | ) | (3,809 | ) | ||||
| Deferred revenue | 5,824 | 7,481 | ||||||
| Adjusted working capital - Non-GAAP measure | $ | (7,800 | ) | $ | (6,203 | ) | ||
2014 Financing
We have not engaged in effect at the time of the conversion. The initial Conversion Price is $1.00, subject to adjustmentany securities issuances or other material capital raising in the eventfirst nine months of stock splits, stock dividends2014.
2013 Financing and similar transactions,Common Stock Private Placement
For information concerning the financing we undertook in 2012 and in the event of subsequent equity sales at a lower price per share, subject to certain exceptions. As a result of the private placement closed2013, please see our Annual Report on August 15, 2013 and August 21, 2013 (see Note 9(b)), the Conversion Price of the Series D Preferred Stock was reduced to $0.90. The Series D Preferred Stock entitles the holder to cumulative dividends, payable quarterly, at an annual rate of (i) 8% of the Stated Value during the three year period commencing on the date of issue, and (ii) 12% of the Stated Value commencing three years after the date of issue. We may, at our option, pay dividends in PIK Shares, in which event the applicable dividend rate will be 12% and the number of such PIK Shares issuable will be equal to the aggregate dividend payable divided by the lesser of (x) the then effective Conversion Price or (y) the average volume weighted average price of the Company’s common stock for the five prior consecutive trading days.
Cash Flows from Operating, Investing and Financing Activities
Information about our cash flows, by category, is presented in the accompanying unaudited Condensed Consolidated Statements of Cash Flows. The following table summarizes our cash inflows (outflows)flows for the nine months ended September 30, 20132014 and 20122013 (in millions):
| Nine Months Ended | ||||||||||||||||
| September 30, | ||||||||||||||||
| 2013 | 2012 | Increase/(Decrease) | ||||||||||||||
| Operating activities | $ | (2.2 | ) | $ | 0.7 | $ | (2.8 | ) | (409.4 | %) | ||||||
| Investing activities | (0.0 | ) | (5.1 | ) | (5.1 | ) | (99.4 | %) | ||||||||
| Financing activities | 1.4 | 4.5 | (3.2 | ) | (70.0 | %) | ||||||||||
| Nine Months Ended | ||||||||||||||||
| September 30, | ||||||||||||||||
| 2014 | 2013 | Increase/(Decrease) | ||||||||||||||
| Operating activities | $ | 2.2 | $ | (2.2 | ) | $ | 4.4 | 202.8 | % | |||||||
| Investing activities | (0.0 | ) | (0.0 | ) | 0.0 | 27.1 | % | |||||||||
| Financing activities | (1.3 | ) | 1.4 | (2.7 | ) | (198.6 | %) | |||||||||
Net cash provided by operating activities during the first nine months of 2013 decreased2014 increased by $2.8$4.4 million over the same period in the prior year. The decreaseincrease in cash from operations was primarily driven by a decrease in gross profit of $1.7 million resulting in an increase in net loss in the first nine months of 20132014 of $0.9$2.7 million. Our net loss was $696,000 in the first nine months of 2014, a portion of which was the result of non-cash transactions during the year. Specifically, we had a $0.1 million non-cash expense related to employee and non-employee stock based compensation and a net $1.4 million of other non-cash transactions such as depreciation and amortization. Additionally, the changes in net working capital and other balance sheet changes contributed to a $2.5$0.9 million increase in cash used inprovided by operating activities, offsetmost notably from a $4.4$4.1 million decrease in accounts receivable due to timing of receivable collections.
During the nine months ended September 30, 2013, net cash used in operating activities was $2.2 million. Our net loss was $3.5 million induring the first nine months of 2013, a portion of which was the result of non-cash transactions during the year. Specifically, we had a $0.8 million of other non-cash transactions including, but not limited to depreciation and amortization, employee stock-based compensation and ESOP compensation expense.
Net cash used in investing activities was negligible during the nine months ended September 30, 2014 and the comparable nine months of 2013. Net cash used in investing activities was $5.1 million for
During the nine months ended September 30, 2012 and primarily related2014, net cash used in financing activities was $1.3 million, due to the cash payment$0.1 million in paid financing costs, $0.8 million in repayments under our term loans, $0.5 million in payments for the Series D and Series E Preferred Stock dividends and $0.1 million for payment on contingent acquisition liability, offset by cash provided by an $0.2 million in net amounts borrowed under our lines of Apex System Integrators, Inc. in June 2012.
During the nine months ended September 30, 2013, net cash provided by financing activities was $1.4 million, primarily due to $1.0 million in proceeds from the bank term loan, net of $1.6 million in payments for term loans, a net $0.8 million in borrowings under our lines of credit, payment of $0.3 million for the Series D Preferred Stock dividend and $1.5 million in net proceeds from a common stock private placement.
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Critical Accounting Policies
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the consolidated financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. We believe that
There have been no material changes to the followingCompany's critical accounting policies involve a high degree of judgment and estimation:
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and most industry specific guidance. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This new guidance is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, we will adopt this new guidance beginning in fiscal 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt this new guidance and management is currently evaluating which requires deferred tax assetstransition approach to use and liabilities, be recognized using enacted tax rates to measure the effectimpact of temporary differences between book and tax bases on recorded assets and liabilities. FASB guidance also requires that deferred tax assets be reduced by a valuation allowance, if it is more likely than not some portion or all of the deferred tax assets will not be recognized.
In August 2014, the fair valueFASB issued ASU No. 2014-15, “Disclosure of stock options using the Black-Scholes option-pricing model. This valuation model requires usUncertainties about an Entity’s Ability to make assumptions and judgmentsContinue as a Going Concern” (Subtopic 205-40), which defines management's responsibility to evaluate whether there are conditions or events that raise substantial doubt about the variables used inentity’s ability to continue as a going concern and to provide related disclosures. Currently, this evaluation has only been an auditor requirement. Specifically, the calculation. These variablesamendments (1) provide a definition of the term “substantial doubt,” (2) require an evaluation every reporting period, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of the consideration of management’s plans, (5) require an express statement and assumptions include the weighted-averageother disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of timeone year after the date that financial statements are issued. This amended guidance will be effective for us beginning January 1, 2016. We do not expect the options granted are expectedadoption of this amended guidance to be outstanding, the volatility ofhave a significant impact on our common stock, the risk-free interest rate and the estimated rate of forfeitures of unvested stock options. Additional information on the variables and assumptions used in our stock-based compensation are described in Note 10 of the accompanying notes to our unaudited condensed consolidated financial statements.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements as of September 30, 2013.
Inflation
We do not believe that inflation has had a material impact on our business or operating results during the periods presented.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
ITEM4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our Acting Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial and accounting officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”Rules 13a-15(e) and 15d-15(e))) as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the effectiveness of our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on our evaluation, our Acting Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are designed at a reasonable assurance level and arewere effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange CommissionSEC rules and forms, and that such information is accumulated and communicated to our management, including our Acting Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Controls.
There were no changes in our internal controls over financial reporting during the fiscal quarter ended September 30, 2013,2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II-OTHER INFORMATION
In addition to the matter described below, from time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
We may also become involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and other regulatory agencies regarding our business, and involving, among other matters, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief.
Wells Notice - On July 2, 2014, we received a written “Wells Notice” from the staff of the SEC indicating that the staff has made a preliminary determination to recommend that the SEC bring an administrative proceeding against us. On the same day Nicholas R. Toms, our President and Chief Executive Officer and a member of the Board of Directors, also received a Wells Notice. The SEC staff has informed us that both Wells Notices relate to allegations that, from late 2009 to early 2011, Mr. Toms was the beneficial owner of shares of our common stock that were held and traded by a Delaware corporation in which Mr. Toms was a 10% owner; that Mr. Toms exercised control over the corporation’s securities account; and that the corporation’s shareholding and trades should have been reflected at the relevant times in public disclosures of Mr. Toms’ other holdings of our common stock.
A Wells Notice is neither a formal allegation of wrongdoing nor a finding that any violations of law have occurred. Rather, it provides the recipient with an opportunity to respond to issues raised by the SEC staff and offer its business. We are not currently partyperspective to the SEC staff prior to any material legaldecision to institute proceedings.
Settlement of Taglich Action – In July 2014, we settled an action brought against it by stockholder Michael N. Taglich, in the Delaware Chancery Court, seeking to compel us to hold an annual meeting of stockholders. Pursuant to the settlement, the parties agreed that we would hold an annual meeting. The annual meeting was held on October 28, 2014.
There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K as filed with the SEC on March 28, 2013.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Not applicable.
Not applicable.
Not applicable.
| Exhibit Number | Description of Exhibit | |
| Certification of the Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a) | ||
| 31.2 | ||
| 32.1 | ||
| 32.2 | ||
| EX-101.INS | XBRL INSTANCE DOCUMENT | |
| EX-101.SCH | XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT | |
| EX-101.CAL | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE | |
| EX-101.DEF | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE | |
| EX-101.LAB | XBRL TAXONOMY EXTENSION LABELS LINKBASE | |
| EX-101.PRE | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE |
| 33 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DecisionPoint Systems, Inc. | |||
| Date: November | By: | /s/ | |
Acting Chief Executive Officer (Principal Executive Officer) | |||
| Date: November | By: | /s/ Michael P. Roe |
| Michael P. Roe | ||
| Chief Financial Officer (Principal Financial | ||
35