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, 2014
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, 2014, were 12,729,563.
DECISIONPOINT SYSTEMS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
DECISIONPOINT SYSTEMS, INC.
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
| 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
| 1 |
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, | |||||||||||||||
| 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.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
| 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
| 3 |
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
NOTE 1 - DESCRIPTION OF BUSINESS
Description of Business
DecisionPoint Systems, Inc., (“DecisionPoint”, the “Company”, “we”, or “us”) through its subsidiaries is an enterprise mobility systems integrator that sells and installs mobile computing and wireless systems that are used both within a company’s facilities in conjunction with wireless networks and in the field using carrier-based wireless networks. These systems generally include mobile computers, mobile application software, and related data capture equipment including bar code scanners and 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 suite of software products utilizes late breaking technologies to empower the mobile worker in many areas including merchandising, sales and delivery; field service; logistics and 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 period ended September 30, 2014, are not necessarily indicative of results for the full 2014 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”). 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, 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 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 |
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
If the Company does not continue to achieve positive operating results and does not raise sufficient additional capital, material adverse events may occur including, but not limited to, (1) a reduction in the nature and scope of the Company’s operations, (2) the Company’s inability to fully implement its current business plan and (3) continued defaults under the Company’s various loan agreements (for a description of past defaults, see the discussion below). There can be no assurance that the Company will successfully improve its liquidity position. The accompanying unaudited condensed consolidated financial statements do not reflect any adjustments that might be required if our liquidity position does not improve.
In the quarter ended September 30, 2014, the Company experienced a decrease in revenue of $3.4 million, or 19.5% compared to the quarter ended September 30, 2013, and a $1.3 million, or 2.8% increase in revenue for the nine months ended September 30, 2014 over the comparable nine months of 2013. In the quarter ended September 30, 2014, the Company experienced a net loss of $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 comparable period in 2013. At September 30, 2014 and December 31, 2013, the Company had a substantial working capital deficit totaling $9.9 million. Although a portion of this deficit is associated with deferred costs, 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 we expect will have to be satisfied in the foreseeable future in cash substantially exceed the operating assets that we expected to have available in cash. As a result of our historical operations, the availability under our credit line has contracted and our liquidity has been constrained.
To address 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 outside funding through the sale of our securities unless deemed necessary. Should additional outside funding be needed, there is no assurance that such funding will be available on terms acceptable to us, or at all. If the Company raises additional funds by selling additional shares of capital stock, or securities convertible into shares of our capital stock, the ownership interest of the Company’s existing common stock holders will be diluted.
During 2012, 2013 and the first nine months of 2014, all principal and interest payments on the Company’s term debt were made within payment terms. On August 16, 2013, the Company's credit agreement ("RBC Credit Agreement") with the Royal Bank of Canada ("RBC") was amended and certain financial covenants were modified. These financial covenants required the Company to maintain specified ratios for fixed coverage and a ratio of funded debt to EBITDA to be tested on a quarterly basis. The Company was not in compliance with the reset covenants in 2013 and the first nine months of 2014. Although management of the Company believes it is not likely that, as a result of this noncompliance, RBC will exercise its rights up to, and including, acceleration of the outstanding debt, there can be no assurance that RBC will not exercise its rights pursuant to the RBC Credit Agreement. Accordingly, the term debt due to RBC is classified as current on the accompanying unaudited condensed consolidated balance sheets.
As of September 30, 2014, the outstanding balance on our line of credit with Silicon Valley Bank (“SVB”) was $3.8 million, down from $3.9 million at December 31, 2013, and the availability under the line of credit has decreased to $0.7 million (see Note 7 – Lines of Credit). The Company relies on the SVB and RBC lines of credit to fund daily operating activities, and the Company maintains very little cash on hand. As of September 30, 2014, the Company was in compliance with the Tangible Net Worth financial covenant under the SVB line of credit and had available a $0.6 million cushion over the covenant requirement. The Company currently believes that at the time of this filing it is compliant with all the terms and provisions of the SVB lending agreement. Should the Company’s results fail to improve further or once more deteriorate in a manner consistent with its recent historical financial performance, the Company will violate the Tangible Net Worth financial covenant unless it can raise additional outside funding in amounts that are approximately twice the amount of the losses incurred.
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, 2014. 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 2013 Annual Report on Form 10-K filed on March 31, 2014 with the SEC.
| 5 |
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 particular 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 fair value of post-contract customer support does not exist, revenue from the entire arrangement is recognized ratably over the support period. Software royalty revenue is recognized in arrears on a quarterly basis, based upon reports received from licensees during the period, unless collectability is not reasonably assured, in which case revenue is recognized when payment is received from the licensee.
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 Company uses Silicon Valley Bank, which is an FDIC insured institution. Based on these facts, collectability of bank balances appears to be adequate.
Historically, 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 10% of the Company’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 21% of its revenue for the nine months ended September 30, 2014 and 2013, respectively. The Company’s accounts receivable was concentrated with one customer at September 30, 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 that has been a significant source of revenue in one financial reporting period is a less significant source of revenue in the following period. The loss of a significant customer could have a material adverse impact on the Company.
| 6 |
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 - Fair value is the price that would be received from selling an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides a hierarchy for inputs used in measuring fair value that prioritize the use of observable inputs over the use of unobservable inputs, when such observable inputs are available. The three levels of inputs that may be used to measure fair value are as follows:
| ● | Level 1 - Quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data. |
| ● | Level 3 - Fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including assumptions and judgments made by the Company. |
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.
| 7 |
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 summarizes the financial liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 (in thousands):
| 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 summarizes changes to the fair 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 | ||||
| 8 |
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 fair value using income 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, 2014.
Income Taxes - We 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 measure the effect 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.
For the three months ended September 30, 2014, the Company recorded 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 three 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 expects a material tax provision benefit to be recorded in the fourth quarter. This is a result of the application of FIN 18. Actual annual effective tax rate and tax expense (benefit) for the year may vary significantly from quarterly estimates as a result of the mechanics 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 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, 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 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 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 does not expect the adoption of this amended guidance to have a significant impact on its Consolidated Financial Statements.
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 similarly 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 nine months ended September 30, 2014 and 2013 exclude approximately 0.4 million and 0.5 million, respectively, of shares related to the Employee Stock Ownership Plan that have not been committed to be released.
For periods presented in which there is a 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 periods presented.
Potential dilutive securities consist of (in thousands):
| 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 | ||||||
| 9 |
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
NOTE 4 – WARRANT LIABILITY
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 fair value of the warrant liability. Accordingly, the Company expects future changes in the fair value of the warrants to continue to vary from quarter to quarter.
The Company revalues the warrants as of the end of each reporting period. The estimated fair value of the outstanding warrant liabilities was approximately $549,000 and $803,000, as of September 30, 2014 and December 31, 2013, respectively. The decrease in the fair value of the warrant liabilities for the 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, 2014 was $254,000. The adjustments to the fair value of the warrant liabilities are included in other income in the Company’s consolidated statement of operations.
The warrant liabilities were valued at the closing dates of the common stock 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 | |||||||||||||||
| 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 could have been required to make an additional payment (“Earn-Out Payment”) to the seller of up to $500,000 of which 50% would be payable in cash, and 50% would be in shares of the common stock of the Company. In 2013, it was determined there was not an Earn-Out Payment obligation due under the Asset Purchase Agreement. The Company continues to recognize no Earn-Out Payment obligation in 2014.
| 10 |
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
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. 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 may 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 (the “EBITDA”), as defined by the Apex Purchase Agreement, in the period ended July 2013. The initial fair value of the earn-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 Apex Earn-Out Payment due under the Apex Purchase Agreement was CDN$341,000 (US$331,000). 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. On June 9, 2014, the accounting expert issued their final report and the fair value of the Apex Earn-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 financial statements (see Note 12). The convertible promissory note is expected to be executed in the fourth quarter of 2014.
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, 2014 there is CDN$101,000 (US$90,000) recorded in earn out consideration reflected in accrued liabilities in the Company’s unaudited condensed consolidated financial statements.
NOTE 6 – GOODWILL AND INTANGIBLE ASSETS
The following summarizes the transaction affecting goodwill through September 30, 2014 (in thousands):
| 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, 2014 and December 31, 2013, the Company’s intangible assets and accumulated amortization consist of the following (in thousands):
| 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, 2014 is approximately ($100,000) and ($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.
| 11 |
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 term loans 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 was approximately $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 due February 2015. The line of credit has a certain financial covenant and other non-financial covenants. The minimum Tangible Net Worth requirement of an $8.7 million deficit is 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 $0.6 million and $0.8 million cushion over the requirement, respectively. The Company believes that at the time of this filing it is compliant with the terms and provisions of its SVB Loan Agreement. Should the Company continue to incur losses in a manner consistent with its recent historical financial performance, the Company will violate Tangible 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 $0.7 million as of September 30, 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, 2014 or December 31, 2013.
RBC Line of Credit - The Company is party to a credit agreement, dated June 4, 2012 (the “RBC Credit Agreement”) with Royal Bank of Canada (“RBC”). Under the RBC Credit Agreement, the revolving demand facility allows for borrowings up to CDN$200,000 based upon eligible accounts receivable. Interest is based on the Royal Bank Prime (“RBP”) plus 1.5% and is payable on demand. As of September 30, 2014 and December 31, 2013, the outstanding balance on the line of credit was $193,000 and the interest rate is 4.5%. The RBC Credit Agreement is secured by the assets of Apex. The revolving demand facility has certain financial covenants and other non-financial covenants. The covenants were reset by RBC on August 16, 2013. The Company was not in compliance with the reset covenants at September 30, 2014 and December 31, 2013. See further discussion regarding this condition at Note 8.
For the nine months ended September 30, 2014 and 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, 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 and its subsidiaries.
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, 2014, consists of the following (in thousands):
| 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 at RBP plus 4% (7% at September 30, 2014). Principal and interest is payable over a three year period at a fixed principal amount of CDN $70,000 a month beginning in July 2012 and continuing through June 2015. Apex paid approximately $120,000 in financing costs, which has been recorded as deferred financing costs or note discount in the accompanying unaudited consolidated balance sheets as of September 30, 2014 and December 31, 2013, and is being amortized to interest expense over the term of the loan.
In 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, 2014 and December 31, 2013.
The RBC Term Loan has certain financial covenants and other non-financial covenants. 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 ended 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 was not in compliance with the reset covenants at September 30, 2014 and December 31, 2013. Although the Company believes it is not 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 into the BDC Loan Agreement as part of the Apex Purchase Agreement described in Note 5, pursuant to which BDC made available to Apex a term credit facility (“BDC Term Loan”) in the aggregate amount of CDN $1,700,000 (USD $1,632,000 at the Closing Date). The BDC Term Loan accrues interest at the rate of 12.5% 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. 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 September 30, 2014, the Company estimates that 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 days 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 $35,000 has been recorded as deferred financing costs and $35,000 recorded as a note discount in the accompanying consolidated balance sheet as of September 30, 2014, and is being amortized to interest expense over the term of the loan using the effective interest rate method. As of September 30, 2014, there was approximately $15,000 in unamortized deferred financing costs and $15,000 in unamortized note discount.
| 13 |
DECISIONPOINT 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 BDC will remain in full force and effect until the maturity date or any amended or extended maturity date agreed by 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. 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. The Company was in compliance with all of our BDC financial covenants as of 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 million from Silicon Valley Bank (“SVB”). The SVB Term Loan was due in 36 equal monthly installments of principal plus interest beginning on February 1, 2011. The SVB Term Loan is secured by substantially all of the assets of the Company except for the assets of Apex. On May 20, 2011, pursuant to a Consent and Amendment to Loan and Security Agreement (“Amendment”), the maturity date was amended to April 30, 2012, with the remaining principal due on that date to be paid as a balloon payment. On September 27, 2011, the agreement was amended and certain covenants were replaced or modified resulting in the Company being in full compliance at September 30, 2011. The principal amount outstanding under the Term Loan accrues interest at a fixed rate equal to 9% per annum. In addition, a final payment equal to 2% of the aggregate amount of the Term Loan is due on the earlier of the maturity date or the date the Term Loan is prepaid. This final payment of $60,000 has been recorded as a discount to the SVB Term Loan, which was amortized to interest expense through December 2013, using the effective interest method.
The 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 September 30, 2014, the Company was in compliance with the tangible Net Worth financial covenant and had available a $0.6 million cushion over the requirement. The Company currently 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. Should the Company continue to incur losses in a manner consistent with its recent historical financial performance, the Company will violate this covenant without additional net capital raises in amounts that are approximately twice the amount of the losses incurred.
On February 27, 2013, the Company 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. As of September 30, 2014 and December 31, 2013, the outstanding balance on the SVB Term Loan 2 was approximately $472,000 and $722,000, respectively.
| 14 |
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
For the nine months ended September 30, 2014 and 2013, the Company’s interest expense on the term debt, including amortization of deferred financing costs, was approximately $317,000 and $439,000, 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’ DEFICIT
The Company is authorized to issue two classes of stock designated as common stock and preferred stock. As of September 30, 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, 4,000,000 shares are designated as Series D Preferred Stock, of which 730,357 shares are issued and outstanding, and 2,000,000 are designated as Series E Preferred Stock, of which 416,533 shares are issued and outstanding.
(a) Cumulative Convertible Preferred Stock
A summary of preferred stock outstanding as of September 30, 2014 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 $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.
| 15 |
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
Series C Preferred Stock
On December 20, 2012, 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 private placement closed on August 15, 2013 and August 21, 2013, 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 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 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 1, 2013 to December 31, 2013. As those shares were not issued until April 2014, they have not been included in the Series D Preferred 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 Company 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, 2014 in the accompanying unaudited condensed consolidated balance sheet.
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 of 1933, as amended).
The Series D 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 (December 31, 2012), and requires the registration statement to become effective within 90 days thereafter. The initial registration statement was filed on February 12, 2013. If the registration statement is not declared effective by May 12, 2013, 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 July 30, 2013, the registration statement was declared effective by the 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.
| 16 |
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.
| 17 |
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 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, 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 result of the sale of Series E Preferred Shares described above, the conversion price of the Investor Warrants was reduced to $0.50 per share on November 12, 2013.
Pursuant to the 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 Common 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). 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.
| 18 |
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. As a result of the sale of Series E Preferred Shares described above, the conversion price of the Placement Agent Warrants was reduced to $0.50 per share on November 12, 2013.
The Company recorded the Investor Warrants and Placement Agent Warrants as a liability (see further disclosure at Note 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, 2014
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 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 December 31, 2013, the warrants were re-valued with a fair value of $803,000. At September 30, 2014, the warrants were revalued with a fair value of $549,000 with the difference of $254,000 recorded in the Company’s Unaudited Condensed Consolidated Statement of Operations and Comprehensive Loss for the nine months ended September 30, 2014
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.
| 19 |
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, 2014:
| 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 | ||||||||||||||||||||
* warrants classified as liabilities
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 three months ended September 30, 2014, was $45,000 representing approximately $37,000 for the ESOP principal payment and $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, 2014 was approximately $62,000. The fair value of the shares was $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 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, 2014, and information with respect to the changes in options outstanding is as follows:
| 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 | $ | - | |||||||||||||
| 20 |
DECISIONPOINT SYSTEMS, INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
The following table summarizes information about stock options outstanding as of September 30, 2014:
| 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, 2014 and 2013, respectively. The total fair value of awards vested for the nine months ended September 30, 2014 and 2013 was $109,000 and $40,000, 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. The fair value of options granted to directors during the nine months ended September 30, 2014, was $79,000 (no options were granted during the nine months ended September 30, 2013). The fair values were estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:
| 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 using historical volatility of its common stock over a period equal to the 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 $31,000, respectively, and is included in selling, general and administrative expense in the accompanying unaudited condensed consolidated statements of operations. As of September 30, 2014, total unrecognized estimated employee and director compensation cost related to stock options granted prior to that date was $37,000 which is expected to be recognized over a weighted-average vesting period of 1.65 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 fiscal 2020 and require us to pay a portion of the related operating expenses such as maintenance, property taxes, and insurance. There have been no material changes to our lease arrangements during the nine months ended September 30, 2014. Please refer to Note 15 to the audited consolidated financial statements for the year ended December 31, 2013, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2014.
Rent expense for the nine months ended September 30, 2014 and 2013, was $396,000 and $511,000, respectively.
Apex Earn Out Obligations - If EBITDA (as uniquely defined in the Apex Purchase Agreement), for the twelve months ending July 31, 2013 (“2013 EBITDA”), is equal to or less than CDN$2,000,000, Apex shall pay an amount, to its former owners, equal to the product of the 2013 EBITDA multiplied by four less CDN$5,000,000 (“2013 EBITDA Basic Earn-Out Amount”), up to a maximum of CDN$3,000,000. An amount equal to 22.22% of the 2013 EBITDA Basic Earn-Out Amount shall be paid in cash and the balance shall be paid by Apex issuing a subordinated convertible note (the “Apex Note”).
| 21 |
DECISIONPOINT 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 (“Installment Dates”). Interest from and after June 18, 2014, shall be paid in arrears on the last day of each calendar quarter commencing on 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 July 1, 2015; and |
| (ii) | 11% per annum, calculated and compounded quarterly after June 30, 2015; |
| (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 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 entered into an employment agreement with Donald Dalicandro, the Former Chief Executive Officer of Apex, as a result of the Apex acquisition. 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. The fair value of the bonus was calculated to be approximately CDN$160,000 (US$153,000 at the Apex Closing Date). At September 30, 2014, there is CDN$101,000 (US$90,000) recorded in accrued earn out consideration in the unaudited condensed consolidated financial statements.
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 the additional bonus consideration. In December 2012, the Company raised $7,042,000 as part of the Series D Purchase Agreement. In August 2013, the Company raised $1,756,000 as part of the Common Stock Purchase Agreement. In November 2013, the Company raised $4,090,000 as part of the Series E Purchase Agreement. These funds have not been placed into escrow pending agreement between the Company and the sellers of Apex regarding the financial institution that will escrow the funds, the amount of funds that are to be placed in escrow and the escrow agreement itself.
Contingencies – In addition to the matter discussed below, from time to time the Company is subject to the possibility of involvement in litigation incidental to the conduct of our business. When applicable, we record accruals for contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. While the outcome of lawsuits and other proceedings against us cannot be predicted with certainty, in the opinion of management, individually or in the aggregate, no such lawsuits are expected to have a material effect on our financial position or results of operations.
Wells Notice - On July 2, 2014, the Company 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 the Company. On the same day Nicholas R. Toms, the Company’s President and Chief Executive Officer and a member of the Board of Directors, also received a Wells Notice. The SEC staff has informed the Company that both Wells Notices relate to allegations that, from late 2009 to early 2011, Mr. Toms was the beneficial owner of shares of common stock of the Company 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 the Company’s 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 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 the date of this filing, there have been no further developments in this matter.
Settlement of Taglich Action – In July 2014, the Company settled an action brought against it by stockholder Michael N. Taglich, in the Delaware Chancery Court, seeking to compel the Company to hold an annual meeting of stockholders. Pursuant to the settlement, the parties agreed that the Company would hold an annual meeting. The Company’s annual meeting was held on October 28, 2014.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and financial condition of the business of DecisionPoint Systems, Inc. (“DecisionPoint”, the “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 related notes thereto included elsewhere in this Form 10-Q.
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 forward-looking statements. Such statements 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 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, the risk factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K filed with the SEC on March 31, 2014 and the following:
| • | 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 and management information systems. |
All forward-looking statements made in connection with this Quarterly Report on Form 10-Q and 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 its clients to “move decisions closer to the customer” by “empowering the mobile worker”. We define mobile workers as those individuals who 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 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 it back to the organization.
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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 customers in the retail, manufacturing, transportation, warehousing, distribution, logistics and other 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 substantially increased our software products expertise with the acquisition in June 2012 of Apex in Canada. The APEXWare™ software suite significantly expanded our field sales/service software offerings. APEXWare™ is a purpose-built mobile application suite well 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. We are continuing to extend our mobile device management (“MDM”) offering from our historically ruggedized mobile computer customer base to address the growing use of consumer devices by clients and others and to support the Bring Your Own Device (“BYOD”) and Bring Your Own Application (“BYOA”) movements affecting commerce and our industry in general.
Recognizing that we cannot build every business application, we have developed an ‘ecosystem’ of partners to 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) and a large number of specialized independent software vendors such as AirWatch, VeriFone GlobalBay, XRS and Wavelink.
We have several offices throughout North America allowing us to serve multi-location clients and their mobile workforces. Additionally, we keep aware of potential acquisition candidates that could provide us with complementary products and service offerings, and make acquisitions when we identify sufficiently valuable opportunities.
Recent Events
On July 2, 2014, the Company received a written “Wells Notice” from the staff of the Securities Exchange Commission (the “SEC”) indicating that the staff has made a preliminary determination to recommend that the SEC bring an administrative proceeding against the Company. On the same day Nicholas R. Toms, the Company’s President and Chief Executive Officer and a member of the Board of Directors, also received a Wells Notice. The SEC staff has informed the Company that both Wells Notices relate to allegations that, from late 2009 to early 2011, Mr. Toms was the beneficial owner of shares of common stock of the Company 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 the Company’s common stock. 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 the date of this filing, there have been no further developments.
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On August 15, 2014, Nicholas Toms, a director of the Company and the Chief Executive Officer, who has been on 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 file a proxy statement with the SEC in preparation for notifying its shareholders of, and conducting, an annual meeting of shareholders. The Company’s proxy statement proposed the reelection of the incumbent members of the Board and the election of a new, additional director, James F. DeSocio. On September 16, 2014, shareholders Michael N. Taglich and Robert F. Taglich filed a preliminary proxy statement contesting the Company’s director slate and proposing an alternative slate of directors to be elected at the October 15, 2014 meeting. Effective as of the close of business on October 3, 2014, the Company’s incumbent directors and Messrs. Michael and Robert Taglich reached a settlement of their differences. Pursuant to the settlement, five of the incumbent directors, Board Chairman Lawrence Yelin and Board members Jay B. Sheehy, David M. Rifkin, Marc Ferland and Donald Dalicandro, resigned from the Board; James F. DeSocio was appointed to the Board; and Donald Dalicandro was authorized to serve as a Board observer until the end of the term during which he is eligible, under his employment agreement with the Company, to remain as a member of the Board. Thereafter, remaining incumbent director Robert Schroeder and new director Mr. DeSocio appointed the following four additional individuals as directors (all of whom were members of the alternative director slate proposed by Messrs. Michael and Robert Taglich): Michael N. Taglich, John Guttilla, Stanley P. Jaworski and Paul A. Seid. The Company’s annual shareholders meeting was held on October 28, 2014. At the meeting, the sitting directors, Messrs. Schroeder, DeSocio, Michael N. Taglich, Guttilla, Jaworski and Seid, were elected to serve as the Company’s directors until the next annual meeting.
Results of Operations
For comparison purposes, all dollar amounts have been rounded to nearest million while all percentages are actual. Due to rounding, column entries in the tables presented may not sum to the totals presented in the table.
| 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, 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 | $ | 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 $14.1 million for the three months ended September 30, 2014, compared to $17.6 million for the same period ended September 30, 2013, a decrease of $3.5 million or 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 due to significant orders by several large retail customers in the first and second quarters of 2014 not being repeated at the same level in the third quarter of 2014.
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Net sales were $47.4 million for the nine months ended September 30, 2014, compared to $46.1 million for the same period ended September 30, 2013, 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 first and second quarters of 2014. The increase in revenue was also due to the increased field mobility solution sales and increased professional services revenue from our CMAC subsidiary for the nine months ended September 30, 2014, compared to the period ended September 30, 2013. We also recognized higher revenues through the expansion of our customer base and continued ordering from customers acquired after the first quarter of 2013. The decrease in software revenue of $0.8 million, or 22.0% for the nine months ended September 30, 2014 was primarily attributable to the decrease of $0.4 million associated with the Apex business. Software revenue for Apex in the nine months ended September 30, 2013 received the benefit of a new customer and additional business opportunities not recognized at the same level in the nine months ended September 30, 2014.
Improved economic conditions in the U.S. have had a positive effect on our sales. In 2013, major retail chains 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. While the slowly improving economic conditions in the U.S. have had a positive effect generally, we have continued to experience greater competitive forces in the market place within our core traditional solutions business.
Cost of Sales
Cost of sales 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 | $ | 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 cost of sales line includes 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 was $11.1 million for the three months ended September 30, 2014, compared to $14.1 million for the same period ended September 30, 2013, a decrease of $3.0 million or 21.2%. The decrease in cost of sales for hardware of 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, which was 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 2013 was slightly higher than the hardware revenue increase due to fewer large orders which usually have reduced pricing and product mix. The decrease in cost of sales for professional services from the nine months ended September 30, 2014 to the nine months ended September 30, 2013 was 2.6% compared to the revenue growth rate of 1.9%, and was 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 17.8% for the nine months ended September 30, 2014 compared to the same period in 2013 was also related to professional service personnel reductions. The increase in other cost of sales was approximately in proportion to the increase on other revenues.
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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 $3.0 million for the three months ended September 30, 2014, compared to $3.5 million for the same period ended September 30, 2013, a decrease of $0.5 million or 12.6%. Our gross margin increased by 1,656 basis points to 21.4% in 2014, from 19.7% in the comparable period of 2013.
Our gross profit was $10.4 million for the nine months ended September 30, 2014, compared to $9.9 million for the same period ended September 30, 2013, an increase of $0.5 million or 5.3%. Our gross margin increased by 524 basis points to 21.9% in 2014, from 21.4% in the comparable period of 2013.
We believe that we would have realized even better gross margins had it not been for the very competitive environment for hardware sales across our entire customer base, hardware sales carry a lower gross margin. We realized higher gross margins on our professional services, due to our increased emphasis on cost control and reductions in professional services personnel.
Selling, General and Administrative Expenses
| 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 $3.0 million for the three months ended September 30, 2014, compared to $4.5 million for the same period in the prior year. This represents a decrease of $1.5 million, or 32.5%.
Selling, general and administrative expenses were $10.2 million for the nine months ended September 30, 2014, compared to $14.0 million for the same period in the prior year. This represents a decrease of $3.8 million, or 27.3%.
The decrease for the three and nine months ended September 30, 2014 compared to the similar periods in the prior year were due to significant efforts to streamline our business model. These efforts included, consolidation of our East Coast depot facility in to our larger California depot facility, 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 $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.
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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 expense. 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, 2014, compared to $723,000 for the same period in the prior year. The $65,000 decrease in interest expense reflected a decrease in our average outstanding general debt obligations during the nine months ended September 30, 2014 compared to the similar period in the prior year.
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 Capital Resources
Although we have historically experienced losses, a material part of those losses have been from non-cash transactions. In connection with these losses, we have accumulated substantial net operating loss carry-forwards to set 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 lines of credit, establish sustained positive operating results and access additional equity or debt capital. There can be no assurance that we will be able to achieve sustainable positive operating results or cost reductions or that we can obtain additional funds when needed to continue our normal operations.
Funds generated by operating activities and our credit facilities continue to be our most significant sources of liquidity. We believe that our strategic shift to higher margin field mobility solutions with additional APEXWare™ software and professional service revenues will improve our results as general economic conditions continue to improve.
| 28 |
In the quarter ended September 30, 2014, we experienced a decrease in revenue of $3.4 million, or 19.5% compared to the quarter ended September 30, 2013, and a $1.3 million, or 2.8% increase in revenue for 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, 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 comparable period in 2013. At September 30, 2014 and December 31, 2013, we had a substantial working capital deficit totaling $9.9 million. Although a portion of this deficit is associated with deferred costs, unearned revenues and term debt that has been classified current due to expected future covenant violations (see further discussion at Note 8, Term Debt of the Notes to the Unaudited Condensed Consolidated Financial Statements), our liabilities that we expect will be satisfied in the foreseeable future in cash substantially 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 and our liquidity has been constrained.
To address 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 outside funding through the sale of our securities unless deemed necessary. Should additional outside financing be needed, there is no assurance that 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 interests of our existing common stockholders will be diluted.
During 2012, 2013 and the first nine months of 2014, all principal and interest payments on our term debt were made within payment terms.
As a matter of course, we do not maintain significant cash balances on hand because we have availability under our lines of credit. Typically, we use any excess cash to repay the then outstanding line of credit balance. As long as we continue to generate revenues and meet our financial covenants, we are permitted to draw down on our SVB line of credit to fund our normal working capital needs. Our line of credit has a borrowing capacity of up to $10 million and is due February 2015. As of September 30, 2014 and December 31, 2013, the outstanding balance on our SVB line of credit was approximately $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. As of September 30, 2014, there was $0.7 million available under the SVB line of credit. The line of credit has a certain financial covenant and other non-financial covenants. The minimum Tangible Net Worth requirement of $8.7 million deficit is to be 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, we were in compliance with the Tangible Net Worth financial covenant and had available a $0.6 million and $0.8 million cushion over the requirement, respectively. We believe that at the time of this filing we are in compliance with the terms and provisions of its SVB lending agreement. Should our results fail to improve further or once more deteriorate in a manner consistent with its recent historical financial performance, we will violate the Tangible Net Worth financial covenant without additional net capital outside funding in amounts that are approximately twice the amount of the losses incurred.
We have $0.6 million of term debt with the Royal Bank of Canada (the “RBC Term Loan”), $1.5 million of term debt with the BDC (the “BDC Term Loan”) and $0.5 million of term debt with SVB (the “SVB Term Loan”). For more information regarding these Term Loans, please see our Annual Report on Form 10-K filed with the SEC on March, 31, 2014. All three Term Loans have financial covenants. We were in compliance with the covenants of these Term Loans except for the RBC Term Loan, for which we were not in compliance at September 30, 2014 and December 31, 2013. Although the Company believes it is not 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.
As part of the Apex Purchase Agreement, from the Apex Closing Date up until the expiry of the bonus period, under that agreement we are 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, the 2013 EBITDA Additional Earn-Out and the additional bonus consideration. In December 2012, the Company raised $7,042,000 as part of its Series D preferred stock offering. In August 2013, the Company raised $1,756,000 issuing common stock. In November 2013, the Company raised $4,090,000 as part of its Series E preferred stock offering. None of these funds have been placed into escrow pending agreement between the Company and the sellers of Apex regarding the financial institution that will escrow the funds, the amount of funds that are to be placed into escrow and the escrow agreement itself.
In the 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.
| 29 |
As referred to above under the heading “Non-GAAP Financial Measures,” we monitor our ‘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 operating results and financial condition of our company.
Adjusted Working Capital at September 30, 2014 and December 31, 2013 are computed as follows (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 any securities issuances or other material capital raising in the first nine months of 2014.
2013 Financing and Common Stock Private Placement
For information concerning the financing we undertook in 2012 and 2013, please see our Annual Report on Form 10-K filed with the SEC on March, 31, 2014.
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 flows for the nine months ended September 30, 2014 and 2013 (in millions):
| 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 2014 increased by $4.4 million over the same period in the prior year. The increase in cash from operations was primarily driven by a decrease in net loss in the first nine months of 2014 of $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 $0.9 million increase in cash provided by operating activities, most notably from a $4.1 million decrease in accounts receivable due to timing of receivable collections, a $3.8 million decrease in accounts payable and a $1.0 million decrease in inventory.
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 during the first nine months of 2013, most of which was the result of non-cash transactions during the quarter. Specifically, we had a $0.8 million non-cash expense including depreciation and amortization, employee and non-employee stock-based compensation.
Net cash used in investing activities was negligible during the nine months ended September 30, 2014 and the comparable nine months of 2013.
During the nine months ended September 30, 2014, net cash used in financing activities was $1.3 million, due to $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 credit.
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.
| 30 |
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.
There have been no material changes to the Company's critical accounting policies during the nine months ended September 30, 2014. See Footnote 2 of the Company's consolidated financial statements included in the Company's 2013 Annual Report on Form 10-K filed on March 31, 2014 with the SEC, for a description of the Company's critical accounting policies.
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 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 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 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. We do not expect the adoption of this amended guidance to have a significant impact on our Consolidated Financial Statements.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements as of September 30, 2014.
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.
| 31 |
ITEM 4. 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 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 were 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 SEC 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, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| 32 |
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 perspective to the SEC staff prior to any decision to institute proceedings. On August 8, 2014, we submitted to the SEC a response to the Wells Notice setting forth why no action should be commenced against it. As of the date of this filing, there have been no further developments in this matter.
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 filed with the SEC on March 31, 2014. Please refer to that Risk Factors section for information concerning risks associated with the Company and an investment in the Company’s securities.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Not applicable.
| 32 |
| 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 10, 2014 | By: | /s/ Dan Romanello | |
| Dan Romanello | |||
|
Acting Chief Executive Officer (Principal Executive Officer) | |||
| Date: November 10, 2014 | By: | /s/ Michael P. Roe | |
| Michael P. Roe | |||
| Chief Financial Officer (Principal Financial and Accounting Officer | |||
35
Exhibit 31.1
Certifications
I, Dan Romanello, undertaking the duties of Chief Executive Officer of the Company on an interim basis, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of DecisionPoint Systems, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 10, 2014
|
/s/ Dan Romanello |
| Dan Romanello |
| Acting Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
Certifications
I, Michael Roe, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of DecisionPoint Systems, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 10, 2014
|
/s/ Michael P. Roe |
| Michael P. Roe |
| Chief Financial Officer (Principal Financial and Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of DecisionPoint Systems, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dan Romanello, undertaking the duties of Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: November 10, 2014
|
/s/ Dan Romanello |
||
| Dan Romanello | ||
| Acting Chief Executive Officer (Principal Executive Officer) | ||
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of DecisionPoint Systems, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael Roe, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: November 10, 2014
|
/s/ Michael P. Roe |
||
| Michael P. Roe | ||
| Chief Financial Officer (Principal Financial and Accounting Officer) | ||
|
Lines of Credit (Detail Textuals) (USD $)
|
9 Months Ended | 9 Months Ended | 12 Months Ended | |||||
|---|---|---|---|---|---|---|---|---|
|
Sep. 30, 2014
|
Dec. 31, 2013
|
Sep. 30, 2014
Silicon Valley Bank ("SVB") [Member]
Line of Credit [Member]
|
Sep. 30, 2014
SVB Loan Agreement [Member]
Silicon Valley Bank ("SVB") [Member]
Line of Credit [Member]
|
Sep. 30, 2013
SVB Loan Agreement [Member]
Silicon Valley Bank ("SVB") [Member]
Line of Credit [Member]
|
Dec. 31, 2013
SVB Loan Agreement [Member]
Silicon Valley Bank ("SVB") [Member]
Line of Credit [Member]
|
Sep. 30, 2014
RBC Credit Agreement [Member]
Royal Bank of Canada [Member]
Line of Credit [Member]
|
Dec. 31, 2013
RBC Credit Agreement [Member]
Royal Bank of Canada [Member]
Line of Credit [Member]
|
|
| Line of Credit Facility [Line Items] | ||||||||
| Aggregate amount of credit facility | $ 10,000,000 | $ 200,000 | ||||||
| Outstanding balance on the line of credit | 3,800,000 | 3,900,000 | 193,000 | 193,000 | ||||
| Minimum Tangible Net Worth | 8,700,000 | |||||||
| Percentage of additional capital raises in tangible net worth | 50.00% | |||||||
| Minimum tangible net worth's pro forma effect in capital raise | 600,000 | 800,000 | ||||||
| Line of credit, covenant terms | the Company was in compliance with the Tangible Net Worth financial covenant and had available a $0.6 million and $0.8 million cushion over the requirement, respectively. |
The Company was in compliance with the Tangible Net Worth financial covenant under the SVB line of credit and had available a $0.6 million cushion over the covenant requirement. |
||||||
| Annual Interest Rate | 6.50% | 7.00% | 4.50% | 4.50% | ||||
| Annual interest rate, Additional percentage | 1.50% | 1.50% | ||||||
| Availability under the line of credit | 700,000 | |||||||
| Interest expense for the lines of credit, including amortization of deferred financing costs | $ 329,000 | $ 262,000 | ||||||
| Line of Credit Facility, Expiration Date | Feb. 28, 2015 | |||||||
|
Stock Option Plan (Details 2)
|
9 Months Ended | |
|---|---|---|
|
Sep. 30, 2014
|
Sep. 30, 2013
|
|
| Stock Option Plan [Abstract] | ||
| Expected term | 1 year 6 months | |
| Expected volatility | 140.28% | |
| Dividend yield | 0.00% | |
| Risk-free interest rate | 0.30% | |
|
Stockholders' Deficit (Detail Textuals 1) (USD $)
|
9 Months Ended | 0 Months Ended | 1 Months Ended | 9 Months Ended | 0 Months Ended | 9 Months Ended | 9 Months Ended | 1 Months Ended | 9 Months Ended | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Sep. 30, 2014
|
Dec. 31, 2013
|
Nov. 12, 2013
Series E Preferred Stock [Member]
|
Nov. 30, 2013
Warrants [Member]
|
Sep. 30, 2014
Cumulative Convertible Preferred Stock [Member]
Series A Preferred Stock [Member]
|
Sep. 30, 2014
Cumulative Convertible Preferred Stock [Member]
Series B Preferred Stock [Member]
|
Apr. 30, 2014
Cumulative Convertible Preferred Stock [Member]
Series D Preferred Stock [Member]
|
Sep. 30, 2014
Cumulative Convertible Preferred Stock [Member]
Series D Preferred Stock [Member]
|
Dec. 31, 2013
Cumulative Convertible Preferred Stock [Member]
Series D Preferred Stock [Member]
|
Sep. 30, 2014
Cumulative Convertible Preferred Stock [Member]
Series D Preferred Stock [Member]
Minimum [Member]
|
Sep. 30, 2014
Cumulative Convertible Preferred Stock [Member]
Series D Preferred Stock [Member]
Maximum [Member]
|
Sep. 30, 2014
Cumulative Convertible Preferred Stock [Member]
Series D Preferred Stock [Member]
After the date of issue [Member]
|
Nov. 30, 2013
Cumulative Convertible Preferred Stock [Member]
Series E Preferred Stock [Member]
|
Sep. 30, 2014
Cumulative Convertible Preferred Stock [Member]
Series E Preferred Stock [Member]
|
Sep. 30, 2014
Cumulative Convertible Preferred Stock [Member]
Series E Preferred Stock [Member]
Minimum [Member]
|
Sep. 30, 2014
Cumulative Convertible Preferred Stock [Member]
Series E Preferred Stock [Member]
Maximum [Member]
|
|
| Dividends Payable [Line Items] | ||||||||||||||||
| Stated value of the Preferred per share | $ 4.00 | $ 3.20 | $ 10.00 | $ 10.00 | ||||||||||||
| Dividend Rate | 8.00% | 8.00% | 12.00% | |||||||||||||
| Conversion Price per Share | $ 0.50 | $ 4.00 | $ 3.20 | $ 1 | $ 0.50 | |||||||||||
| Preferred Stock, Shares Authorized | 10,000,000 | 10,000,000 | 500,000 | 500,000 | 4,000,000 | 2,000,000 | ||||||||||
| Reduced Conversion Price per share | $ 0.90 | $ 0.71 | ||||||||||||||
| Preferred Stock, Dividend Payment Rate, Variable | 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 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. | 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. | ||||||||||||||
| Cash dividend paid | $ 147,000 | $ 105,000 | ||||||||||||||
| Liquidation Price per Share | $ 10.00 | |||||||||||||||
| Partial liquidated damage percentages of purchase price paid by each investor | 0.10% | 0.60% | 0.10% | 0.60% | ||||||||||||
| Minimum closing price of common stock | $ 2.00 | $ 1.35 | ||||||||||||||
| Minimum average daily trading volume | 5,000 | 10,000 | ||||||||||||||
| Liquidated Damages | 18,000 | |||||||||||||||
| Redemption purchase price per share | $ 10 | |||||||||||||||
| Contingent beneficial conversion feature recorded as conversion price | 1,300,000 | |||||||||||||||
| Dividend payable, Shares | 26,157 | 26,157 | 7,533 | |||||||||||||
| Dividend payable estimated fair value | 213,000 | 213,000 | 75,000 | |||||||||||||
| Accrued Cash Dividends | 351 | 561 | ||||||||||||||
| Number of preferred stock issued for cash consideration | 409,000 | |||||||||||||||
| Value of preferred stock issued for cash consideration | 4,090,000 | |||||||||||||||
| Issuance cost | 875,000 | |||||||||||||||
| Placement Fees | 327,000 | |||||||||||||||
| Legal And Other Expenses | 270,000 | |||||||||||||||
| Number of common stock called for warrants | 818,000 | |||||||||||||||
| Exercise price of warrants | $ 0.50 | $ 0.55 | ||||||||||||||
| Estimated fair value of warrants | $ 278,000 | |||||||||||||||
| Stock price | $ 0.47 | $ 0.47 | ||||||||||||||
| Expected term | 2 years 6 months | 2 years 6 months | ||||||||||||||
| Risk-free interest rate | 0.44% | 0.44% | ||||||||||||||
| Expected volatility | 143.00% | 143.00% | ||||||||||||||
| Dividend yield | 0.00% | 0.00% | ||||||||||||||