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. NoThere were no stock options were grantedoption grants during the nine months ended September 30, 2013 and 2012.
Due to the limited time that the Company’s common stock has been publicly traded, management estimates expected volatility based on the average expected volatilities of a sampling of five companies with similar attributes to the Company, including: industry, size and financial leverage. 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 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.
The Company is subject to the possibility of various loss contingencies, including claims, suits and complaints, arising in the ordinary course of business. The Company considers the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as its ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information available to it to determine whether such accruals should be adjusted and whether new accruals are required.
Some of the statements contained in this 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, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Form 10-Q, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. 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:
All written and oral forward-looking statements made in connection with this Form 10-Q that are 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.
On July 31, 2012 (“Illume Closing Date”), we consummated an asset purchase agreement (“Asset Purchase Agreement”) with MacroSolve, Inc. Pursuant to the Asset Purchase Agreement, the Companywe purchased the business (including substantially all the related assets) of the seller’s Illume Mobile division (“Illume Mobile”), based in Tulsa, Oklahoma.
The purchase price was allocated to the identifiable assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. The following table summarizes the fair value of the Apex assets acquired and liabilities assumed at June 4, 2012:
| Assets acquired: | | | |
| Accounts receivable | | $ | 242,992 | |
| Due from related party | | | 411,926 | |
| Other current assets | | | 63,456 | |
| Property and equipment | | | 29,780 | |
| Intangible assets | | | 4,465,890 | |
| Goodwill | | | 2,448,969 | |
| Total assets | | | 7,663,013 | |
| | | | | |
| Liabilities assumed: | | | | |
| Accounts payable and other accrued liabilities | | | 194,721 | |
| Unearned revenue | | | 297,518 | |
| Deferred tax liability | | | 1,183,927 | |
| Total liabilities assumed | | | 1,676,166 | |
| Net assets acquired | | $ | 5,986,847 | |
| | | | | |
| Purchase consideration: | | | | |
| Cash paid at closing | | $ | 4,801,000 | |
| Earn out consideration | | | 1,185,847 | |
| Total purchase consideration | | $ | 5,986,847 | |
| | | | | |
Under the Purchase Agreement, the following post-closing adjustments will be made:
(a) | if the Closing Working Capital as defined in the Purchase Agreement as shown on the closing date balance sheet: (i) is less than CDN$200,000 (US$192,000 at the Closing Date), the Closing Amount shall be reduced on a dollar for dollar basis by the amount of the shortfall; (ii) is greater than CDN$200,000 (US$192,000 at the Closing Date), the Closing Amount shall be increased on a dollar for dollar basis by the amount of such excess; and (iii) is equal to than CDN$200,000 (US$192,000 at the Closing Date), there shall be no adjustment to the Closing Amount as a result of this provision; and |
(b) | the Closing Amount shall be reduced on a dollar for dollar basis by the amount of any liabilities of Apex on the Closing Date as shown on the closing date balance sheet, including any taxes payable and indebtedness of Apex (other than the executory obligations under contracts and all accounts payable and accrued liabilities of Apex incurred in the ordinary course of business) and excluding any liabilities otherwise adjusted pursuant to (a) above. |
Pursuant to the above, a working capital adjustment of approximately $412,000 was recorded at the Closing Date. In July of 2012, pursuant to the above arrangement, the Closing Working Capital was audited and resulted in an adjustment of $76,414. The total due from the prior shareholder is reflected on the accompanying unaudited condensed consolidated balance sheet as due from related party and a reduction to goodwill.
In addition, if EBITDA, of Apex for the twelve months ending July 31, 2013 (“2013 EBITDA”), is equal to or less than CDN$2,000,000 (US$1,920,000 at the Closing Date), then Apex shall pay an amount equal to the product of the 2013 EBITDA multiplied by four less $4,801,000 (“2013 EBITDA Basic Earn Out Amount”), up to a maximum of CDN$3,000,000 (US$2,881,000 at the Closing Date). 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 (“Note”).
Under the terms of the Note, Apex will pay the principal sum due on the Note in eight quarterly payments beginning on January 31, 2014 (“Installment Dates”). Interest from and after August 1, 2013, shall be paid in arrears on the last day of each calendar quarter commencing on January 31, 2014. The interest rate shall be determined as follows:
(i) | 9% per annum, calculated and compounded quarterly before November 1, 2014; and |
(ii) | 11% per annum, calculated and compounded quarterly after October 31, 2014; |
(iii) | except, however, that, if, during the term of the Note, we raise 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 we receive 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 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 market price of our common stock on the day prior to the conversion, or $1.00. The shares issuable under the Note will be restricted but will have certain piggy back registration rights as set forth in the Purchase Agreement.
If the 2013 EBITDA is greater than CDN$2,000,000 (US$1,920,000 at the Closing Date), then Apex shall pay an amount (the “2013 EBITDA Additional Earn Out Amount”) by which the dollar-for-dollar 2013 EBITDA exceeds CDN$2,000,000 ($1,920,000 at the Closing Date), up to a maximum of CDN$500,000 (US$480,000 at the Closing Date). The 2013 EBITDA Additional Earn Out shall be paid by the issuance of shares of our common stock. The number of shares to be issued shall be determined by the amount due divided by the 30 day average daily closing price of the shares of our common stock in the month of July 2013. The shares issued will be restricted but will have certain piggy back registration rights as set forth in the Purchase Agreement.
The obligations of Apex under the Purchase Agreement are guaranteed by us.
The 2013 EBITDA Basic Earn Out Amount and 2013 EBITDA Additional Earn Out Amount were recorded as additional purchase price consideration and the fair value was estimated by using a Monte Carlo simulation model to calculate the present value of the earn out and determine the probability of reaching the earn out milestones. We simulated the EBITDA in the earn out periods by varying the following inputs:
· | Revenue – Earn out period revenue was simulated based on management’s projected revenue and a standard deviation based on revenue variance shown throughout management’s 2012 - 2014 projections.
|
· | Cost of Goods Sold (“COGS”) Margin – Earn out period COGS margin was simulated based on management’s projected margin and a standard deviation based on COGS margin variance shown throughout management’s 2012 - 2014 projections.
|
· | General and Administrative Expenses (“G&A”) – Earn out period G&A expense was simulated based on management’s projected G&A expense and a standard deviation based on G&A expenses variance shown throughout management’s 2012 - 2014 projections.
|
Once the EBITDA was simulated in the earn out period, we then determined the amount of the 2013 EBITDA Basic Earn Out and the 2013 EBITDA Additional Earn Out that was achieved.
The present value of the total earn out amount was calculated using a discount rate of 19.7%. The discount rate was determined based on: (i) a discount rate of 16.0% based on the cost of equity less 2.0 percent specific risk premium since the Earn Out period is only for one year, plus (ii) a counterparty risk of 3.7% based on the after-tax estimated cost of debt. The fair value of the earn out was calculated to be approximately CDN$1,076,000 (US$1,033,000 at the Closing Date). At the current balance sheet translation rate, approximately $1,094,000 is recorded in accrued earn out consideration in our unaudited condensed consolidated balance sheet as of September 30, 2012.
As part of the Purchase Agreement, we are obligated to pay an additional bonus consideration to the CEO of Apex. Such bonus is considered additional contingent purchase consideration as we are 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 the current balance sheet translation rate, approximately $162,000 is recorded in accrued earn out consideration in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2012.
The fair value at June 4, 2012, of the intangible assets acquired and the estimated useful lives over which they are being amortized are:
| | | | | |
| | | Fair Value | | Estimated Useful Life |
| | | | | |
| | | | | |
| Customer relationships | | $ | 1,536,320 | | 9 years |
| ApexWare software | | | 2,483,077 | | 3.5 years |
| Trade name | | | 432,090 | | 7 years |
| Covenant not to compete | | | 14,403 | | 1 year |
| | | | | | |
| | | $ | 4,465,890 | | |
Amortization of the ApexWare software is calculated as the greater of the proportional revenue approach or the straight-line approach. Amortization of customer relationships and trade names are calculated on the discounted cash flow methodology to more properly reflect the greater useful life of the assets in the early years and the covenant not to compete is amortized on a straight-line basis.
The transaction resulted in a purchase price residual at the Closing date of approximately $2,449,000 for goodwill, representing the financial, strategic and operational value of the transaction to us. Goodwill is attributed to the premium that we were willing to pay to obtain the value of the Apex business and the synergies created with the integration of key components of a commercial infrastructure. The total amount of the goodwill acquired is not deductible for tax purposes.
On June 4, 2012, Apex entered into a Credit Agreement (“RBC Credit Agreement”) with Royal Bank of Canada (“RBC”), pursuant to which RBC made available certain credit facilities in the aggregate amount of up to CDN$2,750,000 (US$2,641,000 at the Closing date), including a revolving demand facility with an authorized limit of CDN$200,000 (US$192,000 at the Closing Date). In addition, Apex entered into a Loan Agreement (”BDC Loan Agreement”) with BDC Capital Inc. (“BDC”), a wholly-owned subsidiary of Business Development Bank of Canada, pursuant to which BDC made available to Apex a term credit facility (“BDC Credit Facility”) in the aggregate amount of CDN$1,700,000 (US$1,632,000 at the Closing Date). Further, we drew amounts under our line of credit with SVB to fund the remainder of the cash purchase price.
Pro Forma Financial Information:
The following summarizes the Company’s unaudited combined results of operations for the three and nine months ended September 30, 2012 and 2011 that includesas if the Apex and Illume Mobile: (000’sacquisitions had occurred on January 1, 2012 (in thousands except per share data):
| | | Three Months ended September 30, | | | Nine Months ended September 30, | |
| | | 2012 | | | 2011 | | | 2012 | | | 2011 | |
| | | | | | | | | | | | | |
| Net revenues | | $ | 18,669 | | | $ | 17,258 | | | $ | 56,346 | | | $ | 44,867 | |
| Net loss attributable to common shareholders | | $ | (1,446 | ) | | $ | (706 | ) | | $ | (5,312 | ) | | $ | (7,539 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss per share - basic and fully-diluted | | $ | (0.18 | ) | | $ | (0.08 | ) | | $ | (0.69 | ) | | $ | (1.17 | ) |
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, 2012 | | | Nine Months Ended September 30, 2012 | |
| | | As Reported | | | Pro Forma | | | As Reported | | | Pro Forma | |
| | | | | | | | | | | | | |
| Net sales | | $ | 18,567 | | | $ | 18,669 | | | $ | 54,144 | | | $ | 56,346 | |
| Net loss attributable to common shareholders | | | (1,263 | ) | | | (1,445 | ) | | | (3,245 | ) | | | (5,311 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss per share - basic and diluted | | | (0.15 | ) | | | (0.18 | ) | | | (0.42 | ) | | | (0.69 | ) |
| | | | | | | | | | | | | | | | | |
Included in the pro forma combined results of operations are the following adjustments for Apex: (i) amortization of intangible assets for the three months ended September 30, 2012 and 2011 of $0 and $352,000, respectively, and for the nine months ended September 30, 2012 of $0 and 2011 of $572,000, and $1,056,000, respectively and (ii) a net increase in interest expense for the three months ended September 30, 2012 and 2011 of $0 and $179,000, respectively, and for the nine months ended September 30, 2012 of $0 and 2011 of $291,000, and $537,000, respectively.
Included in the pro forma combined results of operations are the following adjustments for Illume Mobile: (i) amortization of intangible assets for the three months ended September 30, 2012 and 2011 of $18,000 and $53,000, respectively, and for the nine months ended September 30, 2012 of $18,000 and 2011 of $125,000, and $160,000, respectively. Net loss per share assumes the 325,000 shares issued in connection with the Apex acquisition and the 617,284 shares issued in connection with the Illume Mobile acquisition are outstanding for each period presented (see discussion at Note 9)5 – “Business Combinations” in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements).
The historical financial information of Apex has been extracted for the periods required from the historical financial statements of Apex Systems Integrators, Inc. which were prepared in accordance with U.S. generally accepted accounting principles. The historical financial information of Illume Mobile has been derived from using internally generated management reports for the periods required.
The unaudited pro forma financial information is not intended to represent or be indicative of the Company’sour consolidated results of operations that would have been reported had the Apex and Illume Mobile acquisitions been completed as of the beginning of the period presented, nor should it be taken as indicative of our future consolidated results of operations.
Recent Business Developments
Retail solution sales have continuedDuring the third quarter of 2013, we focused on improving customer service levels and increasing our ability to bounce back asleverage consumer class mobile devices and cloud services to support our enterprise applications. We released a new customer ordering portal that enables our enterprise customers to easily order additional products using electronic payment methods thus reducing the industry ispaperwork and time associated with generating repetitive purchase orders. We also consolidated our east and west coast depot facilities into a single facility in the beginning stages of a technology upgrade that will enhance retailers’ own competitiveness. Our tablet-based assisted shopping solution suite for in-store applications is a revenue generation and productivity tool that continuesour Irvine, CA location. This consolidation enables us to gain acceptance with existing and new retail customers. In field mobility applications our major wireless carrier partners are embracing our Grapevine Push-to-Talk solution for enterprise and small business applications. In addition we recently introducedthe economies of scale created by a number of packaged solutionssingle location while also allowing us to be sold through our carrier partners which have been well received byextend the market. These encouraging demand trends reinforce our belief that revenue will continue to grow in 2012.
In connection with these trends, in September 2012 we announced further upgrades to twoservice hours of our bundled solutions -- Fleet Control and the Field Force Manager Pro Kit -- developed in cooperation with and fulfilled for a major Wireless Carrier. XRS Corporation provides vehicle management applications for these mobile workforce efficiency solutions.
An Android version of APEXWare™ Field Service has been ported to a mobile application that went into beta with one account in June 2012.
In July 2012,east coast customers. Lastly, we relocated our Foothill Ranch, CA officeOklahoma, software development center to a larger facilityhistoric building that is located in Irvine, CA.the heart of downtown Tulsa. The new facility provides additional space was designed by DecisionPoint to accommodatemeet the needs of our customers and employees.
With the continued expansion of consumer class tablet computers and smart phones into the Express Depotenterprise, we released the 2.7 version of ContentSentral, our mobile content management solution. Some of the enhancements in this release include improvements to the user interface, extended support for additional file types and staging operation. Additionally,enhanced email and printing capabilities. We are also increasing our support of Android devices. In addition to extending APEXWare FS to the Motorola Android product line we have also become a Samsung partner and joined the Samsung APP Exchange. Furthering our efforts to support cloud computing and the SaaS software deployment model, DecisionPoint was selected to be part of the Amazon Web Service (AWS) Partner Network as an APN Consulting Partner. APN Consulting Partners are professional service firms that help customers design, architect, migrate or build new building provides expansion for our technical support team as well as larger customer meetingapplications on AWS. Consulting Partners are given access to a range of resources and product demonstration areas.training to better help customers deploy, run and manage applications in the AWS cloud.
Company History
DecisionPoint Systems, Inc., formerly known as Comamtech, Inc. (the "Company”, “DecisionPoint”, “we”, “our” or “us”), was incorporated on August 16, 2010, in Canada under the laws of the Ontario Business Corporations Act (“OCBA”). On June 15, 2011, we entered into a Plan of Merger (“Merger Agreement”) among the Company, its wholly-owned subsidiary, 2259736 Ontario Inc., incorporated under the laws of the Province of Ontario, Canada (“Purchaser”) and DecisionPoint Systems, Inc., (“Old DecisionPoint”). Pursuant to the Merger Agreement, under Section 182 of the OCBA, on June 15, 2011 (“Effective Date”), Old DecisionPoint merged (“Merger”) into the Purchaser and became a wholly-owned subsidiary of the Company. Prior to the Merger, Comamtech was a “shell company” (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (“Exchange Act”)). In connection with the Merger, we changed our name to DecisionPoint Systems, Inc., and the Purchaser changed its name to DecisionPoint Systems International, Inc. (“DecisionPoint Systems International”). On June 15, 2011, both companies were reincorporated in the State of Delaware. Since the Merger, the business conducted by us has been the business conducted by Old DecisionPoint prior to the Merger.
The accompanying unaudited condensed consolidated financial statements present the previously issued shares of Comamtech common stock as having been issued pursuant to the Merger on June 15, 2011, in exchange for the net assets of Comamtech totaling approximately $3.9 million as consideration received. The shares of common stock of the Company issued to Old DecisionPoint’s stockholders in the Merger are presented as having been outstanding since the original issuance of the shares. Further, the exchange ratio has been retroactively applied to all shares, weighted-average share, loss per share, and stock option and warrant disclosures.
We have two wholly-owned subsidiaries, Apex and DecisionPoint Systems International. Apex was acquired on June 4, 2012. DecisionPoint Systems International has two wholly-owned subsidiaries, DecisionPoint Systems Group Inc. (“DPS Group”) and CMAC, Inc. DecisionPoint Systems International acquired CMAC on December 31, 2010. CMAC was founded and incorporated in March 1996, and is a logistics consulting and systems integration provider focused on delivering operational and technical supply chain solutions, headquartered in Alpharetta, Georgia.
DPS Group has two wholly-owned subsidiaries, DecisionPoint Systems CA, Inc. and DecisionPoint Systems CT, Inc. DecisionPoint Systems CA, Inc., formerly known as Creative Concepts Software, Inc. was founded in 1995 and is a leading provider of Enterprise Mobility Solutions. Enterprise Mobility Solutions are those computer systems that give an enterprise the ability to connect to people, control assets, and transact business from any location by using mobile computers, tablet computers, and smartphones to securely connect the mobile worker to the back office software systems that run the enterprise. Technologies that support Enterprise Mobility Solutions include national wireless carrier networks, Wi-Fi, local area networks, mobile computers, smartphones and tablets, mobile software applications, middleware and device security and management software. DecisionPoint Systems CT, Inc. formerly known as Sentinel Business Systems, Inc. was founded in 1976, and has developed over time a family of powerful enterprise data collection software solutions, products and services. The combined company is a data collection systems integrator that sells and installs mobile devices, software, and related bar coding equipment, radio frequency identification systems technology and provides custom solutions and other professional services.
The acquisitionResults of the Illume Mobile business was completely integrated into the operations of DPS Group in August 2012.
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations is based upon the unaudited results of operations for the three and nine months ended September 30, 2012, as compared to the same periods ended September 30, 2011. These should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto contained elsewhere in this Form 10-Q along with our Form 10-K, filed with the Securities and Exchange Commission on March 30, 2012.Operations
For comparison purposes, all dollar amounts have been rounded to the nearest million while all percentages are actual. Due to rounding, totals in the tables presented may not sum to the total presented in the table.
| | Three Months Ended September 30, | | | Increase | | | Nine Months Ended September 30, | | | Increase | |
| | 2013 | | 2012 | | | (Decrease) | | | 2013 | | 2012 | | | (Decrease) | |
| | | | | | | | | | | | | | | | |
| Total revenue | | $ | 17.6 | | | $ | 18.6 | | | | (5.3 | %) | | | $ | 46.1 | | | $ | 54.1 | | | | (14.9 | %) |
| Gross profit | | | 3.5 | | | | 4.1 | | | | (16.0 | %) | | | | 9.9 | | | | 11.6 | | | | (15.0 | %) |
| Total operating expenses | | | 3.7 | | | | 4.7 | | | | (22.7 | %) | | | | 13.2 | | | | 13.4 | | | | (1.6 | %) |
| Loss from operations | | | (0.2 | ) | | | (0.6 | ) | | | (67.2 | %) | | | | (3.3 | ) | | | (1.8 | ) | | | 85.4 | % |
| Loss before provision for income taxes | | | (0.3 | ) | | | (1.0 | ) | | | (71.0 | %) | | | | (3.9 | ) | | | (2.4 | ) | | | 60.2 | % |
Comparison of the Quarters Ended September 30, 2012 and 2011Total Revenue
Revenues for the three and nine months ended September 30, 2013 and 2012 is summarized below:
| | Three Months Ended September 30, | | Increase | | | Nine Months Ended September 30, | | | Increase | |
| | 2013 | | 2012 | | (Decrease) | | | 2013 | | 2012 | | | (Decrease) | |
| | | | | | | | | | | | | | | |
| Hardware | | $ | 11.9 | | | $ | 12.1 | | | (2.3 | %) | | $ | 28.7 | | | $ | 36.8 | | | | (21.9 | %) |
| Professional services | | | 4.3 | | | | 4.7 | | | (7.4 | %) | | | 12.7 | | | | 12.6 | | | | 0.8 | % |
| Software | | | 0.9 | | | | 1.4 | | | (32.9 | %) | | | 3.5 | | | | 3.2 | | | | 6.9 | % |
| Other | | | 0.5 | | | | 0.4 | | | 20.8 | % | | | 1.2 | | | | 1.6 | | | | (21.8 | %) |
| | | $ | 17.6 | | | $ | 18.6 | | | (5.3 | %) | | $ | 46.1 | | | $ | 54.1 | | | | (14.9 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Revenues were $18.5$17.6 million for the quarterthree months ended September 30, 2012,2013, compared to $16.4$18.6 million for the same period ended September 30, 2011, an increase2012, a decrease of $2.1$1.0 million or 12.9%5.3%. The increasedecrease in revenue was primarilypartially offset due to the increased field mobility solution salesinclusion of the operating results of our Apex and increased professional services revenue from our CMAC subsidiaryIllume Mobile acquisitions in 2012 asmid-2012. Revenues for Apex were $0.5 million for the three months ended September 30, 2013, compared to 2011. The incremental revenue from our acquisitions$0.4 million for the same period ended September 30, 2012. Revenues for Illume Mobile were $0.2 million in the three months ended September 30, 2013 compared to $0.2 million for the same period ended September 30, 2012. Excluding the impact of Apex and Illume Mobile has not been materialacquisitions in mid-2012, revenues decreased by $1.2 million, or 6.6% over the same quarter in the quarter.prior year with the largest decrease occurring in software where sales decreased by 32.9%.
Revenues were $46.1 million for the nine months ended September 30, 2013, compared to $54.1 million for the same period ended September 30, 2012, a decrease of $8.0 million or 14.9%. The returndecrease in revenue was partially offset due to the inclusion of normal product availability fromthe operating results of our principal hardware vendor enabled usApex and Illume Mobile acquisitions in mid-2012. Revenues for Apex were $1.9 million for the nine months ended September 30, 2013, compared to fulfill our increased field mobility solutions sales$0.5 million for the same period ended September 30, 2012. Revenues for Illume Mobile were $0.7 million in the current period.nine months ended September 30, 2013, compared to $0.2 million for the same period ended September 30, 2012. Excluding the impact of Apex and Illume Mobile acquisitions in mid-2012, revenues decreased by $10.0 million, or 18.7% over the same period in the prior year with the largest decrease occurring in hardware sales where sales decreased by 21.9%.
During 2011, we experienced decreases in traditional mobility solutions revenue which historically generated lower gross margins, while our field mobility solutions and professional services revenues have continued to grow. While the slowly improvingThe improved economic conditions in the U.S. havewhich had begun in the first half of 2010, and continued improvement throughout 2011 and 2012 had a positive effect generally, we have continuedon our sales in those years. Prior to experience greater competitive forces in the market place within our core traditional solutions business. Major2010, major retail chains had deferred new technology implementation and delayed systems’ refresh in recent years.refresh. Conversely, the economic environment in 2012 has continuedstabilized whereupon we benefitted from renewed interest and more importantly, fundamental need to improve slightly, and accordingly we are continuing to see an increased volume of requests for implementation ofimplement new cost saving technology. In the first nine months of 2013, we did not have the same level of customers with new technology which will enable our customers to competeimplementation and systems’ refresh. As a result, the hardware revenues for the ultimate consumer spendingthree and nine months ended September 30, 2013 declined by 2.3% and 21.9%, respectively, which was due to the decrease in theirsystem upgrades of mobile computing at the retail stores.level. The slight increase in professional services for the nine months ended September 30, 2013 compared to the same period in 2012 of 0.8%, related to deployment and staging services to support our customers’ prior technology upgrades. For the three months ended September 30, 2013, we did not have the same level of customers in professional services which resulted in a decrease of $0.4 million, or 7.4% over the same period in the prior year. Our increase in software revenues for the nine months ended September 30, 2013 compared to the same period in 2012 is attributable to contributions of software revenues from the Apex and Illume Mobile acquisitions. The slight decrease in other revenues for the nine months ended September 30, 2013 compared to the same period in the prior year relates to a reallocation of our corporate resources away from the lower volume for consumables and towards the professional services business.
Cost of Sales
Cost of sales were $14.2 million for the quarterthree and nine months ended September 30, 2013 and 2012 compared to $13.0 million for the quarter ended September 30, 2011, an increase of $1.2 million or 9.2%. Our gross profit was $4.3 million for the quarter ended September 30, 2012, compared to $3.4 million for the quarter ended September 30, 2011, an increase of $0.9 million or 26.5%. Our realized gross margin percentage has increased by 2.6 percentage points to 23.5% in the 2012 quarter, from 20.9% in the comparable quarter of 2011. The increase is due to the higher gross margin from our professional services revenue including CMAC and improved utilization of our professional services resources. 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, as noted above. Additionally, we have continued our increased emphasis on cost control and improved utilization and efficiency of our professional services personnel and related costs. We expect to realize increased gross margins as our two recent acquisitions begin to ramp up their revenue as their product offerings become more integral with our existing sales force and customer base.
Selling, general and administrative expenses were $5.0 million for the quarter ended September 30, 2012, compared to $3.3 million for the quarter ended September 30, 2011, an increase of $1.7 million or 51.2%. Substantially all of the increase was due to increased personnel and operating expenses relating to the Illume Mobile and Apex acquisitions of $0.6 million, Illume Mobile and Apex acquisition related costs of $0.5 million, and accrued severance for a terminated employee of $0.2 million.
Interest expense, which is related to our lines of credit, subordinated debt (in 2011) and our obligations to related parties, was $0.3 million for the quarter ended September 30, 2012, compared to $0.2 million for the quarter ended September 30, 2011. The $0.1 million increase in interest expense was the result of increased borrowings outstanding as a result of the Apex acquisition in June 2012.
summarized below:
| | | Three Months Ended September 30, | | | Increase | | | Nine Months Ended September 30, | | | Increase | |
| | | 2013 | | | 2012 | | | (Decrease) | | | 2013 | | | 2012 | | | (Decrease) | |
| | | | | | | | | | | | | | | | | | | |
| Hardware | | $ | 9.8 | | | $ | 10.0 | | | | (2.4 | %) | | $ | 23.4 | | | $ | 30.5 | | | | (23.4 | %) |
| Professional services | | | 2.9 | | | | 3.0 | | | | (2.0 | %) | | | 8.6 | | | | 8.4 | | | | 2.2 | % |
| Software | | | 1.1 | | | | 1.2 | | | | (8.7 | %) | | | 3.4 | | | | 2.7 | | | | 27.0 | % |
| Other | | | 0.3 | | | | 0.2 | | | | 30.8 | % | | | 0.9 | | | | 1.0 | | | | (11.4 | %) |
| | | $ | 14.1 | | | $ | 14.4 | | | | (2.3 | %) | | $ | 36.2 | | | $ | 42.6 | | | | (14.9 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
In connection with the Apex acquisition in June 2012, we obtained two additional new term loan facilities from separate Canadian lendersThe types of expenses included in the totalcost of amount $4.0 million. Principalsales line are hardware costs, third party licenses, costs associated with third party professional services, salaries and interest are obligations of Apex. Expenses directly related to obtaining the financing of $0.2 million were recorded as deferred financing costsbenefits for project managers and amortized over the term of the respective loans in our unaudited condensed consolidated statements of operationssoftware engineers, freight, consumables and comprehensive loss as of September 30, 2012.
Comparison of the Nine Months Ended September 30, 2012 and 2011accessories.
NetCost of sales were $54.1$36.2 million for the nine months ended September 30, 2012,2013, compared to $42.5$42.6 million for the same period ended September 30, 2012, a decrease of $6.4 million or 14.9%. The decrease in cost of sales for hardware of 23.4% for the nine months ended September 30, 2013 compared to the same period in 2012 was slightly higher than the hardware revenue decrease due to a fewer large orders which usually have reduced pricing. The increase in cost of sales for professional services from the nine months ended September 30, 2013 to the nine months ended September 30, 2012 was 2.2% compared to the revenue growth rate of 0.8%. The increase in cost of sales for software of 27.0% for the nine months ended September 30, 2013 compared to the same period in 2012 was slightly higher due to the impact of software intangible asset amortization. The decrease in other cost of sales was related to the decrease in other revenues.
Gross Profit
Our gross profit was $3.5 million for the three months ended September 30, 2013, compared to $4.1 million for the same period ended September 30, 2012, a decrease of $0.6 million or 16.0%. Our gross margin percentage decreased by 250 basis points to 19.7% in 2013, from 22.2% in the comparable period of 2012.
Our gross profit was $9.9 million for the nine months ended September 30, 2011, an increase of2013, compared to $11.6 million for the same period ended September 30, 2012, a decrease of $1.7 million or 27.3%15.0%. The increase in net sales in the current nine monthsOur gross margin percentage was due to the revenues earned by CMAC and the increase in our core revenue from the comparable period in 2011. The incremental revenue from our two acquisitions has not been material in 2012.
Cost of sales was $42.3 million21.4% for the nine months ended September 30, 2012,2013, compared to $34.0 million21.4% for the comparable period of 2012.
The decrease in gross margin percentage for the three months ended September 30, 2013 was due to a few large orders which usually have reduced pricing. For the nine months ended September 30, 2011, an increase of $8.3 million or 24.2%, in line2013, our gross margin was comparable with the increase in net sales. Our gross margin and gross profit were 21.9% and $11.9 million for the nine monthssame period ended September 30, 2012, respectively, as compared to 19.8% and $8.4 million for the nine months ended September 30, 2011, respectively.2012. We have continued to implementimplementation of increased cost control for the products and services which we resell, and our professional servicesservice costs were positively impacted by our better utilization associated with greater recognized revenue from these services in the current three and nine months and therefore, we did realizerealized higher margins on those services. We have continued personnel reductionsAdditionally, the benefits of increased cost control were partially offset due to amortization of intangible software assets, offset by the lower volume of hardware sales which carry a lower gross margin, combined with a higher proportion of sales from professional services.
Selling, General and Administrative Expenses
| | | | | | | | | | | | |
| | | Three Months Ended September 30, | | | Increase | | Nine Months Ended September 30, | | | Increase | |
| | | 2013 | | | 2012 | | | (Decrease) | | 2013 | | | 2012 | | | (Decrease) | |
| | | | | | | | | | | | | | | | | | |
| Selling, general and administrative expenses | | $ | 4.5 | | | $ | 4.7 | | | (5.4%) | | $ | 14.0 | | | $ | 13.4 | | | | 4.6 | % |
| As a percentage of sales | | | 25.5 | % | | | 25.5 | % | | (0.0%) | | | 30.3 | % | | | 24.7 | % | | | 5.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Adjustment to earn-out obligations | | $ | (0.8 | ) | | $ | - | | | | | $ | (0.8 | ) | | $ | - | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses were $4.5 million for the three months ended September 30, 2013, compared to $4.7 million for the same period in the first nine months that will be fully realized in the fourth quarterprior year. This represents a decrease of 2012.$0.2 million, or 5.4%. The decrease was primarily due to reduced legal and other professional fees.
Selling, general and administrative expenses were $13.6$14.0 million for the nine months ended September 30, 2012,2013, compared to $10.3$13.4 million for the same period in the prior year. This represents an increase of $0.6 million, or 4.6%. The increase was primarily due to the increase in sales salary related expenses of $0.6 million which, in part relates to the expansion of the sales force in the U.S. tasked with bringing the APEXWare™ product to the U.S. market offset partially by reduced legal and other professional fees.
The adjustment recorded for the earn-out obligations were $0.8 million for the three and nine months ended September 30, 2013. The adjustment for Apex was $0.7 million and $0.1 million for Illume Mobile.
| | | | | | | | | | | |
| | | Three Months Ended September 30, | | Increase | | | Nine Months Ended September 30, | | Increase | |
| | | 2013 | | | 2012 | | (Decrease) | | | 2013 | | | 2012 | | (Decrease) | |
| Depreciation and amortization | | | | | | | | | | | | | | | | |
| In cost of sales | | $ | 0.2 | | | $ | 0.2 | | (8.9 | %) | | $ | 0.6 | | | $ | 0.3 | | 110.4 | % |
| In operating expenses | | | 0.3 | | | | 0.3 | | (16.5 | %) | | | 0.9 | | | | 0.7 | | 26.5 | % |
| Total depreciation and amortization | | $ | 0.5 | | | $ | 0.6 | | (13.5 | %) | | $ | 1.5 | | | $ | 1.0 | | 51.2 | % |
| As a percentage of sales | | | 2.8% | | | | 3.1 | % | | | | | 3.2 | % | | | 1.8 | % | | |
2011, an increase2013 due to amortization of $3.3 million or 31.9%. The increase in the current nine months was primarily the directintangible assets as a result of costs of $2.1 million incurred to complete our acquisitions ofthe Apex and Illume Mobile. Additionally, there were increased personnel and operating costs relating to the two acquisitions of $0.7 million which impacted the current nine month period.in 2012.
Interest Expense
Interest expense, which is primarily related to our linesline of credit, and term loans, andsubordinated debt, was $0.2 million for the three months ended September 30, 2013, compared to $0.3 million for the same period in the prior year.
Interest expense, which is related to our line of credit, subordinated debt, was $0.7 million for the nine months ended September 30, 2012,2013, compared to $1.0$0.7 million for the ninesame period in the prior year.
The $0.1 million decrease in interest expense for the three months ended September 30, 2011, a decrease of $0.3 million. Interest expense due related parties was $0.1 million and $.0.2 million for2013 compared to the 2012 and 2011 periods. respectively. The decreasesame period in interest expensethe prior year was the result of decreased general debt obligations offset by an amendment to BDC Loan Agreement on April 29, 2013 to accrue interest at the exchangerate of our subordinated notes for preferred stock in June 2011, lower amounts outstanding on our lines of credit12.5% per annum and term loans in the first five months of 2012, prioramendment to the issuance of term debt for the Apex financing.
In connectionLoan and Security Agreement with the Apex acquisitionSVB entered in June 2012, we obtained twoto on February 27, 2013 which provided an additional new term loan facilities from separate Canadian lenders in the total of amount $4.0 million. Principal and interest are obligations$1 million at a rate of Apex. Expenses directly related7.5%. Due to obtaining the financing of $0.2 million were recorded as deferred financing costs and amortized over the term of the respective loans in our unaudited condensed consolidated statements of operations and comprehensive loss as of September 30, 2012.
In June 2011, we sold $4.0 million of secured debt and exchanged that same debt for convertible preferred stock in the same period. The accruedthese additional borrowings, interest expense and preferred stock issued as relating towas slightly less during the debt exchange along with an additional issuance of common shares, at no cost, were all treated as a loss on debt extinguishment which is recorded as a separate line in ‘other expense’ in our unaudited condensed consolidated statements of operations and comprehensive loss as of September 30, 2011. This one-time, non-cash expense totaled $2.6 million in the period. There were no further expenses related to this transaction in the subsequent periods.
Revenue Concentration - We derived approximately 20% and 22% of our revenues from two customers in the ninethree months ended September 30, 2012 and 2011, respectively. 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 our revenues could occur if a customer which has been a significant factor in one financial reporting period gives us significantly less business in the following period.2013.
Liquidity and Capital Resources
Credit Facility
In December 2006, pursuant to a Loan and Security Agreement (“Loan Agreement”), we obtained a $6.5 million line of credit, which provides for borrowings based upon eligible accounts receivable. In March 2009, pursuant to an Amendment to the Loan Agreement (“First Amendment”), the line of credit was renewed through March 2011, and the amount available for borrowing was increased to $8.5 million. We are required to pay an annual renewal fee of one percent of the total line of credit facility. Pursuant to the First Amendment, the rate at which interest accrues is prime plus 4%, with a potential interest rate reduction of 0.50% based on future profitability.
The amount outstanding under our lines of credit at September 30, 2012, was approximately $4.7 million with interest accruing at 7.5%. Availability under our lines of credit was approximately $2.7 million at September 30, 2012. During the first quarter we paid an annual renewal fee of $100,000.
In December 2010, the line of credit was temporarily reduced to $7.0 million in conjunction with a new Term Loan of $3.0 million in order to facilitate the CMAC acquisition. The Term Loan was used to acquire CMAC and repay all of our remaining subordinated debt. We paid a $60,000 commitment fee over the first six quarters of the loan and will pay a final payment of $60,000, or 2% of the principal amount borrowed, at the earlier of the maturity date in December 2013, or date of prepayment of the Term Loan. The Term Loan accrues interest at a fixed rate of 9% and $1.25 million was outstanding at September 30, 2012.
In February 2011, pursuant to a Second Amendment to the Loan Agreement the line of credit was renewed for an additional two year period and the amount available for borrowing was increased to $10.0 million. We paid an annual renewal fee of $100,000. The overall credit facility with our financial institution was $13.0 million and reducing as the term loan principal is repaid over the 36 month term.
In May 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. 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 Term Loan, which is being amortized to interest expense over the term of the Loan using the effective interest method. In September 2011, pursuant to a Limited Waiver and Amendment to Loan and Security Agreement, the Loan Agreement was amended and certain covenants were replaced or modified resulting in our being in full compliance at September 30, 2011. In addition, the maturity date was extended to the earlier of the maturity of the line of credit (see Note 7 of the Notes to the attached unaudited condensed consolidated financial statements) or December 1, 2013, the original maturity of the Term Loan and the principal is due in equal installments with no balloon payment.
In conjunction with the acquisition of Apex 0n June 4, 2012, we increased our fix term loan debt as follows:
RBC Term Loan -- On June 4, 2012, Apex entered into the RBC Credit Agreement with RBC described in Notes 5 and 8 of the Notes to the attached unaudited condensed consolidated financial statements 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$2,400,500 at the Closing Date). The RBC Term Loan accrues interest at RBP plus 4% (7% at September 30, 2012). Principal and interest is payable over a three year period at a fixed principal amount of CDN $69,444 a month beginning in July 2012. Apex paid approximately $120,000 in financing costs, which has been recorded as deferred financing costs in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2012, 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 $80,000.
The RBC Term Loan has certain financial covenants and other non-financial covenants. As of September 30, 2012, Apex was not in compliance with these covenants. RBC has indicated it is in process of providing a waiver for the covenant violations at September 30, 2012.
BDC Term Loan -- On June 4, 2012, Apex also entered into the BDC Loan Agreement (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 $1,632,340 at the Closing Date). The BDC Term Loan accrues interest at the rate of 12% per annum, and matures on June 23, 2016, with an available one year extension for a fee of 2%, payable at that time. In addition to the interest payable, consecutive quarterly payments of CDN$20,000, as additional interest are due beginning on June 23, 2012. Apex paid approximately $70,000 in financing costs.
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, 2012, the Company estimates that the cash sweep will be approximately $20,000. 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.
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 DecisionPoint prior to the Maturity Date or any extended maturity date of the BDC Tern Loan,
In the event of (a) or (b) above, Apex will pay to the BDC a bonus in an amount equal to 2% of the aggregate value of Apex and DecisionPoint determined as at the closing date of such transaction, which bonus shall become due and payable at the time of the closing of such transaction. Notwithstanding any prepayment of the BDC Term Loan, the bonus and Apex’s obligation to pay same to the BDC will remain in full force and effect until the Maturity Date or any amended or extended maturity date agreed by the BDC such that in the event of any sale, initial public offering or similar transaction, Apex’s obligation to pay the bonus amount to the BDC will survive such prepayment.
We believe that cash on hand, plus amounts anticipated to be generated from operations and from other contemplated financing transactions, whether from issuing additional long term debt or from the sale of equity securities through a private placement, as well as borrowings available under our line of credit, will be sufficient to support our operations through September 2013. If we are not able to raise funds through private placements, we may choose to modify our growth plans to the extent of available funding, if any, and further reduce our selling, general and administrative expenses.
Cash and Cash Flow
We have seen our revenue increase in the nine months almost 27%, due to increases in our core field mobility solutions and professional services provided by CMAC. Our gross margin percentage improved as a result of improved utilization of our professional services resources. Selling, general and administrative expenses increased due to significant professional fees and other expenses associated with the completion of the acquisitions of Apex and Illume Mobile of approximately $2.1 million in 2012. Had we not incurred those substantial professional fees, our net loss of $2.4 million for the nine month period ended September 30, 2012 would have approximated breakeven.
We believe that our strategic shift to higher margin field mobility solutions, and with additional ApexWare software and professional service revenues, will improve our results through this improving economic period.
As a matter of course, we do not maintain significant cash balances on hand since we are financed by lines of credit. Typically, any excess cash is automatically applied to the then outstanding line of credit balance. As long as we continue to generate revenues, we are permitted to draw down on our lines of credit to fund our normal working capital needs. As such, we anticipate that we will have more than sufficient borrowing capacity to continue our operations in the normal course of business unless unforeseeable, material economic events occur that are beyond our control. Availability on our line of credit was $2.7 million at September 30, 2012.
In the last three complete years of operations from 2009 through 2011, we have not experienced any significant effects of inflation on our product and service pricing, revenues or our income from continuing operations.
As of September 30, 2012 and December 31, 2011, we had cash on hand of approximately $0.4 million. We have used, and plan to use, such cash for general corporate purposes, including working capital.
For the nine months ended September 30, 2012, net cash provided by operating activities was $0.7 million, primarily due to a $3.9 million increase in accounts receivable offset by an increase in accounts payable of $0.6 million. All of these have offset our net loss of $2.5 million in the nine month period ended September 31, 2012. Net cash used in investing activities was $5.1 million, for the acquisitions of Apex and Illume Mobile. Net cash provided by financing activities was $4.5 million for the nine months ended September 30, 2012, primarily from the proceeds of issuance of term debt for the acquisition of Apex in the net amount of $4.0 million, collection of a $1.5 million receivable in connection with Comamtech merger, the net reduction in our credit line of $0.7 million, the payments on our term loan of $1.0 million, paid financing expenses of $0.3 million and the payment of dividends of $0.5 million.
For the nine months ended September 30, 2011, net cash used in operating activities was $1.4 million, primarily due to a $3.0 million increase in accounts receivable offset by a reduction in accounts payable of $0.5 million and $0.8 million reduction in accrued expenses. All of these have offset our net loss of $5.2 million in the 2011 for the period and which was also reduced by the non-cash loss debt extinguishment of $2.3 million. Net cash used in investing activities was $1.8 million, primarily due to a $2.2 million cash payment for the acquisition of CMAC, offset by the collection of a note receivable of $0.4 million in connection with the Comamtech merger. Net cash provided by financing activities was $3.1 million for the nine months ended September 30, 2011, primarily from the proceeds of the issuance of subordinated debt of $4.0 million, the net reduction on our credit line facility of $2.0 million, cash received in the merger with Comamtech of $2.0 million and the repayment on our term loan of $0.8 million.
As of September 30, 2012, we have negative working capital of $9.2 million and total stockholders’ equity of $0.9 million. Included in our current liabilities is unearned revenue of $6.4 million, which reflects services that are to be performed in future periods but that have been paid and/or accrued for and therefore, do not generally represent additional future cash outflow requirements. Included in our current assets are deferred costs of $3.6 million which reflect costs paid for third party extended maintenance services that are being amortized over their respective service periods, which do not generally represent future cash outflows. The increase in the unearned revenue, offset by the deferred costs, continues to provide a benefit in future periods as the amounts convert to net realized revenue.
For the periods presented, the table below sets forth a non-GAAP presentation of our ‘cash’ working capital position after removing the accrual effect of the current deferred assets and liabilities and should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto:
| | | September 30, | | | December 31, | |
| (000's) | | 2012 | | | 2011 | |
| | | | | | | |
| Current assets | | $ | 16,227 | | | $ | 20,342 | |
| Current liabilities | | | 25,448 | | | | 24,104 | |
| | | | | | | | | |
| Working capital - GAAP | | | (9,221 | ) | | | (3,762 | ) |
| Deferred cost | | | (3,603 | ) | | | (3,469 | ) |
| Unearned revenue | | | 6,368 | | | | 6,756 | |
| | | | | | | | | |
| Adjusted working capital - non-GAAP measure | | $ | (6,456 | ) | | $ | (475 | ) |
| | | | | | | | | |
Liquidity – Although we have historically experienced losses, a material part of those losses were from non-cash transactions (refer to the accompanying unaudited Condensed Consolidated Statements of Cash Flows.) In connection with these losses, we have accumulated substantial net operating loss carry-forwards to off-set future taxable income. In order to maintain normal operations for the foreseeable future, we must continue to have access to our line of credit, become profitable and/or access additional equity capital. There can be no assurance that we will become profitable or that we can continue to raise additional funds required to continue our normal operations. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that would be required should we not be successful with these activities.
Funds generated by operating activities and our credit facilities continue to be our most significant sources of liquidity. For the nine months ended September 30, 2013, our revenue decreased approximately 14.9%, compared to the nine months ended September 30, 2012, partially due to the lower level of retail customers’ system refreshes and system implementations. Excluding the impact of Apex and Illume Mobile Earn-Out adjustment, we also had an increased level of selling, general and administrative expenses in the first nine months of 2013 compared to the same period in 2012 due to inclusion of the results from Apex and Illume Mobile along with increased selling expenses, professional expenses and investor relations expenses related to being a public company along with an increase in amortization expense of intangible assets, all resulted in higher operating loss for the first nine months of 2013.
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 economic conditions continue to improve.
In the quarter ended September 30, 2013, we experienced a decrease in revenue of $1.0 million compared to the quarter ended September 30, 2012, and a $2.9 million increase in revenue compared to the previous sequential quarter ended June 30, 2013. In the nine months ended September 30, 2013, we incurred approximately $1.3 million in increased expenses due to professional fees relating to capital raising activities, the registration of common shares as a result of the Series D Preferred Stock offering and associated audit fees, and other matters such as employee termination costs. We experienced a net loss of $0.2 million and $3.4 million for the three and nine month periods ended September 30, 2013, which were far in excess of the internal forecast maintained by the management team. In addition, we have a substantial working capital deficit totaling $(11.5) million at September 30, 2013. Although a portion of this deficit is associated with deferred costs and unearned revenues and term debt that has been classified current due to expected future covenant violations (see Note 8 – “Term Debt” in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements), our liabilities that are expected to be satisfied in the foreseeable future in cash far exceed the operating assets that are expected to be satisfied in cash. As a result, the availability under our credit line has contracted significantly and our overall liquidity has become significantly constrained.
To address this, we have plans to seek additional capital through sales of our securities. There is no assurance additional funding 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 interest of our existing shareholders may be diluted. We are also reducing non-essential expenses and completing the integration of our acquisitions of Apex and Illume Mobile, which is expected to result in further cost savings. Such expense reduction measures include, but are not limited to, consolidation of administrative personnel, consolidation of information technology environments, reduction of outsourced consulting expertise and replacing certain service providers with lower cost providers. The result of these activities has reduced the expense structure of the consolidated business, however this reduction has not been material to date and we do not anticipate it becoming material in the foreseeable future.
On August 15, 2013, we entered into a securities purchase agreement (the “Purchase Agreement”) with accredited investors for the sale of common stock for gross proceeds of $1,756,400 (including $100,000 from management and existing shareholders of the Company) for 2,927,333 shares of common stock. The effective price of the offering was $0.60 per share of common stock. An initial closing for $1,556,400 was held on August 15, 2013. The final closing for $200,000 was held on August 21, 2013. Additionally, pursuant to the Purchase Agreement, the Company issued 1,463,667 warrants to accredited investors at an exercise price of $1.00 per share. Further, the Company issued 292,833 warrants to the placement agent at an exercise price of $0.60 per share. The warrants received liability accounting treatment under existing technical standards. We received net proceeds of approximately $1.5 million from the offering, after deducting the placement agent’s fees of 10% and other offering expenses. (see Note 9 – “Stockholders’ Equity” and Note 3 – “Warrant Liability” in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements).
In November 2013, the Company entered into definitive subscription agreements (“Series E Purchase Agreement”) with accredited investors for the sales of $3,835,000 in gross proceeds for 383,500 shares of Series E Convertible Preferred Stock (“Series E Preferred Shares”) for a purchase price of $10.00 per share. The initial Conversion Price is $0.50, subject to adjustment in the event of stock splits, stock dividends and similar transactions, and in the event of subsequent equity sales at a lower price per share, subject to certain exceptions. The Company received net proceeds of approximately $3.4 million (net of the fair value of placement agent warrants) from the initial closing, after deducting the placement agent’s fees of 8% and other offering expenses. The Company issued to the Placement Agent five-year warrants to purchase 767,000 shares of our common stock (equal to 10% of the number of shares of common stock underlying the Series E Preferred Shares sold under the Series E Purchase Agreement) at an exercise price of $0.55 per share, in connection with the Series E Purchase Agreement initial closing. The Company expects to close a second round of Series E Preferred Shares with gross proceeds of $300,000-$700,000 shortly thereafter (see Note 13 –“Subsequent Event” in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements).
During 2012 and 2013, all principal payments on our term debt were made within payment terms. We were not in compliance with certain financial covenants under the agreements with Royal Bank of Canada (“RBC Credit Agreement”) and BDC, Inc. (“BDC Credit Agreement”) as of December, 31, 2012, March 31, 2013 and June 30, 2013. We have received waivers for non-compliance for past covenant violations. On August 22, 2013, the BDC Credit Agreement was amended and certain financial covenants were modified. Pursuant to the amended loan agreement, we are required to maintain, for the duration of the investment, a term debt to equity ratio not exceeding 1.1:1 (measured annually); and an adjusted current ratio of 0.40:1 (measured annually) and revised yearly 120 days after each year end. We were in compliance with all of our BDC financial covenants as of September 30, 2013. We expect to continue to meet the requirements of our BDC financial covenants over the short and long term. On August 16, 2013 the RBC Credit Agreement was amended and certain financial covenants were modified. Pursuant to the amended credit agreement and commencing with the fiscal year ending December 31, 2013, we are required to maintain a fixed coverage ratio, calculated on a consolidated basis of not less than 1.15:1 with a step-up to 1.25:1 as of March 31, 2014, tested on a rolling four quarter basis thereafter and a ratio of funded debt to EBITDA, calculated on an annual consolidated basis of not greater than 3.0:1, tested on a rolling four quarter basis thereafter. As part of the revised financial covenants, covenant testing was waived by RBC for September 30, 2013. We do not believe that we will be in compliance with the reset covenants at December 31, 2013. Although we believe it is improbable that RBC will exercise their rights up to, and including, acceleration of the outstanding debt, there can be no assurance RBC will not exercise their rights pursuant to the provisions of the debt obligation. Accordingly, we have classified this debt obligation as current at September 30, 2013 (see Note 8 – “Term Debt” in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements).
At October 31, 2013, the outstanding balance on the line of credit with Silicon Valley Bank (“SVB”) is $3.7 million, down from $4.1 million at September 30, 2013, and the availability under the line of credit has decreased to $1.6 million (see Note 7 – Lines of Credit). We rely on the line of credit to fund daily operating activities maintaining very little cash on hand. As of December 31, 2012, we were in compliance with all of our financial covenants with SVB. As of May 31, 2013 and June 30, 2013, we were not in compliance with the Tangible Net Worth financial covenant as defined in the amended SVB Loan Agreement. SVB has agreed to temporarily forbear from exercising their rights and remedies under the facility until August 28, 2013 and has agreed to waive the existing covenant violations if a gross capital raise of $1.5 million is completed by such date. We completed the capital raise and were able to achieve compliance with the forbearance agreement prior to August 28.2013. Except for any capital raises through August 28, 2013, the minimum Tangible Net Worth requirement of a $(9.7) million deficit will 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, 2013, we were in compliance with the Tangible Net Worth financial covenant and had available a $0.3 million cushion over the requirement. In November 2013, the Company entered into a definitive subscription agreement with accredited investors for the sale of Series E Preferred Stock, raising $3.8 million in gross proceeds (See Note 13). Given the effect of the capital raise ($3.8 million in gross proceeds, net of $400,000 in costs) closed to date in November, we believe that at the time of this filing we are in compliant with the terms and provisions of its SVB lending agreement and expect to continue to meet the requirements of our SVB financial covenants over the short and long term. The Company is in currently discussions with SVB regarding the Tangible Net Worth covenant and a reduction of the 50% of additional capital raised to 25% of capital raised in November 2013. Should we continue to incur losses in a manner consistent with its recent historical financial performance, we will violate this covenant without additional net capital raises in amounts that are approximately twice the amount of the losses incurred.
In the near term, our successful restructuring of our operations and reduction of operating costs and/or our ability to raise additional capital at acceptable terms is critical to our ability to continue to operate for the foreseeable future. If we continue to incur operating losses and/or 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 the Company’s operations, 2) the Company’s inability to fully implement its current business plan and/or 3) continued defaults under the various loan agreements. A covenant default would give the bank the right to demand immediate payment of all outstanding amounts which we would not be able to repay out of normal operations. There are no assurances that we will successfully implement our plans with respect to these liquidity matters. The unaudited condensed consolidated financial statements do not reflect any adjustment that may be required resulting from the adverse outcome relating to this uncertainty.
As a matter of course, we do not maintain significant cash balances on hand since we are financed by a line 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 line of credit to fund our normal working capital needs. As of September 30, 2013, the outstanding balance on our SVB line of credit was approximately $4.1 million and the interest rate is 7.0%. As of September 30, 2013, there was $4.3 million available under the line of credit. As of October 31, 2013, the outstanding balance under the line of credit was $3.7 million and there was $1.3 million available under the line of credit. On February 27, 2013, we obtained an additional $1.0 million term loan from SVB (see below under “2013 Financing” for terms of the line of credit and the term loan.)
In connection with our Preferred Series D Private Placement in December 2012, 25% of the net proceeds are to be restricted for the Apex payment of the contingent consideration and the additional bonus consideration (see below under “2012 Financing.”) These funds have not been placed into escrow pending agreement between the Company and former owners of Apex regarding the financial institution that will escrow the funds, the amount of funds to be escrowed and the terms of the escrow agreement itself.
In the last four complete years of operations from 2009 through 2012, we have not experienced any significant effects of inflation on our product and service pricing, revenues or our income from continuing operations.
As of September 30, 2013 and December 31, 2012, we had cash of approximately $0.3 million and $1.1 million, respectively. We have used, and plan to use, such cash for general corporate purposes, including working capital.
As of September 30, 2013, we had negative working capital of $11.5 million and total stockholders’ deficit of ($2.3) million. As of December 31, 2012, we had negative working capital of $9.1 million and total stockholders’ equity of $0.9 million. We experienced a net loss of $0.2 million and $3.4 million for the three and nine month periods ended September 30, 2013. Although a portion of this deficit is associated with deferred costs and unearned revenues and term debt that has been classified current due to expected future covenant violations (see further discussion at Note 8 – “Term Debt” in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements), the liabilities of the Company that are expected to be satisfied in the foreseeable future in cash exceed the operating assets that are expected to be satisfied in cash.
2013 Financing, Common Stock Private Placement and Preferred Series E Private Placement
CRITICAL ACCOUNTING ESTIMATESSilicon Valley Bank Financing
On February 27, 2013, we and Silicon Valley Bank (“SVB”), entered into an Amendment (the “Amendment”) to Loan and Security Agreement, which amended the terms of the Loan and Security Agreement dated as of December 15, 2006 (as amended, the “Loan Agreement”). Pursuant to the Amendment, SVB made a new term loan to us on February 27, 2013, of $1,000,000 (“Term Loan II”). Repayment of Term Loan II, together with accrued interest thereon, is due in 36 monthly installments commencing on the first day of the month following the month in which the funding date of Term Loan II occurred.
Pursuant to the Amendment, the Loan Agreement was amended to provide that the revolving credit line thereunder will accrue interest at an annual rate equal to 3.75 percentage points above the Prime Rate, which may be further reduced to 3.25 percentage points above the Prime Rate after we achieve two consecutive fiscal quarters (beginning with any fiscal quarter ending on or after March 31, 2013) of profitability. In addition, the maturity date of the revolving credit line under the Loan Agreement was extended to February 28, 2015, the principal amount outstanding under the Term Loan under the Loan Agreement will accrue interest at a fixed annual rate equal to 9.0%, the principal amount outstanding under the Term Loan II will accrue interest at a fixed annual rate equal to 7.5%, and we agreed to pay an anniversary fee of $100,000 on February 28, 2014.
The Loan Agreement includes customary covenants, limitations and events of default. Financial covenants which may materially impact our liquidity include minimum liquidity and fixed charge coverage ratios (1.5 to 1), minimum tangible net worth requirements ($9.7 million) and limitations on indebtedness. Additionally, the Loan Agreement has customary cross-default covenants which will cause us to be in default if we are in default in other loan agreements. As of December 31, 2012, we were in compliance with all of our financial covenants with SVB. As of May 31, 2013 and June 30, 2013, we were not on compliance with the Tangible Net Worth financial covenant as defined in the amended SVB Loan Agreement.
On August 16, 2013, we signed an agreement with SVB (“Forbearance Agreement”) where SVB has agreed to temporarily forbear from exercising their rights and remedies under the facility until August 28, 2013 and has agreed to waive the existing covenant violations if a gross capital raise of $1.5 million is completed by such date. We completed the capital raise and were able to achieve compliance with the Forbearance Agreement prior to August 28, 2013. Accordingly, we believe that at the time of this filing it is compliance with the terms and provisions of its SVB lending agreements. Except for any capital raises through August 28, 2013, the minimum Tangible Net Worth requirement of a $(9.7) million deficit will 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, 2013, we were in compliance with the Tangible Net Worth financial covenant and had available a $0.3 million cushion over the requirement. In November 2013, the Company entered into a definitive subscription agreement with accredited investors for the sale of Series E Preferred Stock, raising $3.8 million in gross proceeds (See Note 13). Given the effect of the capital raise ($3.8 million in gross proceeds, net of $400,000 in costs) closed to date in November, we believe that at the time of this filing it is compliant with the terms and provisions of its SVB lending agreement and expect to continue to meet the requirements of our SVB financial covenants over the short and long term. The Company is in currently discussions with SVB regarding the Tangible Net Worth covenant and a reduction of the 50% of additional capital raised to 25% of capital raised in November 2013. Should we continue to incur losses in a manner consistent with its recent historical financial performance, we will violate this covenant without additional net capital raises in amounts that are approximately twice the amount of the losses incurred.
Common Stock Private Placement
On August 15, 2013, we entered into a Securities Purchase Agreement (the “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 we issue or grant 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 we 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 investor per share of Common Stock equal to such lower price.
If we 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, 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.
Pursuant to the terms in the Purchase Agreement, on September 23, 2013, the Company filed a Registration Statement on Form S-1 (the “Form S-1”) for the registration of the 2,927,333 shares of Common Stock and the 1,463,667 shares issuable upon exercise of the Investor Warrants sold under the Purchase Agreement. On October 4, 2013, the Form S-1 was declared effective by the SEC.
We 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 stocksold 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.
If we 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 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, the exercise price of the Placement Agent Warrants then in effect will be reduced to equal to such lower price.
We recorded the Investor Warrants and Placement Agent Warrants as a liability (see further disclosure at Note 3 – “Warrant Liability” in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements)). 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).
Preferred Series E Private Placement
In November 2013, the Company entered into definitive subscription agreements (“Series E Purchase Agreement”) with accredited investors for the sales of $3,835,000 in gross proceeds for 383,500 shares of Series E Convertible Preferred Stock (“Series E Preferred Shares”) for a purchase price of $10.00 per share. The initial Conversion Price is $0.50, subject to adjustment in the event of stock splits, stock dividends and similar transactions, and in the event of subsequent equity sales at a lower price per share, subject to certain exceptions. The Company received net proceeds of approximately $3.4 million (net of the fair value of placement agent warrants) from the initial closing, after deducting the placement agent’s fees of 8% and other offering expenses. The Company paid the Placement Agent $306,800 in commissions (equal to 8% of the gross proceeds), and issued to the Placement Agent five-year warrants to purchase 767,000 shares of our common stock (equal to 10% of the number of shares of common stock underlying the Series E Preferred Shares sold under the Series E Purchase Agreement) at an exercise price of $0.55 per share, in connection with the Series E Purchase Agreement initial closing. The Company expects to close a second round of Series E Preferred Shares with gross proceeds of $300,000-$700,000 shortly thereafter (see Note 13 – “Subsequent Event” in the accompanying Notes to the Unaudited Condensed Consolidated Financial Statements).
2012 Financing and Preferred Series D Private Placement
Royal Bank of Canada and BDC Capital, Inc. Financing
On June 4, 2012, Apex entered into a Credit Agreement (“RBC Credit Agreement”) with Royal Bank of Canada (“RBC”), pursuant to which RBC made available certain credit facilities in the aggregate amount of up to CDN$2,750,000 (US$2,641,000 at the Closing Date), including a revolving demand facility with an authorized limit of CDN$200,000 (US$192,000 at the Closing Date). The RBC Term Loan accrues interest at RBP plus 4% (7% at December 31, 2012). Principal and interest is payable over a three year period at a fixed principal amount of CDN$69,444 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 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. As of September 30, 2013 and December 31, 2012, the Company estimates that the mandatory repayment based on 20% of Apex’s free cash flow will be $0.
The RBC Term Loan has certain financial covenants and other non-financial covenants. As of June 30, 2013 and December 31, 2012, Apex was not in compliance with the Fixed Charge Coverage ratio (as defined by the RBC Credit Agreement). Under the RBC Credit Agreement, violation of this covenant is an Event of Default which grants RBC the right to demand immediate payment of outstanding balances. In March 2013, May 2013 and August 2013, we received waivers for non-compliance of these covenants at December 31, 2012, March 31, 2013 and June 30, 2013. On August 16, 2013 the RBC Credit Agreement was amended and certain financial covenants were modified. Pursuant to the amended credit agreement and commencing with the fiscal year ending December 31, 2013, We are required to maintain a fixed coverage ratio, calculated on a consolidated basis of not less than 1.15:1 with a step-up to 1.25:1 as of March 31, 2014, tested on a rolling four quarter basis thereafter and a ratio of funded debt to EBITDA, calculated on an annual consolidated basis of not greater than 3.0:1, tested on a rolling four quarter basis thereafter. As part of the revised financial covenants, covenant testing was waived for September 30, 2013. We do not believe that we will be in compliance with the reset covenants at December 31, 2013. Although we believe it is improbable 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, we have classified the term debt obligation as current at September 30, 2013.
On June 4, 2012, Apex also entered into the BDC Loan Agreement with BDC Capital Inc. (“BDC”), a wholly-owned subsidiary of Business Development Bank of Canada, pursuant to which BDC made available to Apex a term credit facility (“BDC Credit Facility”) in the aggregate amount of CDN $1,700,000 (USD $1,632,340 at the Closing Date). The BDC Term Loan initially accrued interest at the rate of 12% per annum, and matures on June 23, 2016, with an available one year extension for a fee of 2%, payable at the time of extension. On April 29, 2013, the BDC Term Loan was amended to accrue interest at the rate of 12.5% per annum. In addition to the interest payable, consecutive quarterly payments of CDN$20,000 as additional interest are due beginning on June 23, 2012, and subject to compliance with bank covenants, Apex will make a mandatory annual principal payment in the form of a cash flow sweep which will be equal to 50% of the Excess Available Funds (as defined by the BDC Loan Agreement) before discretionary bonuses based on the annual year end audited financial statements of Apex. The maximum annual cash flow sweep in any year will be CDN$425,000. As of December 31, 2012 and at September 30, 2013, the Company estimated 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 has been recorded as deferred financing costs and is being amortized to interest expense over the term of the loan.
The BDC Loan Agreement contains certain financial and non-financial covenants which may materially impact our liquidity, including minimum working capital requirements, tangible net worth requirements and limitations on additional indebtedness. Under the BDC Loan Agreement, violation of this covenant is an Event of Default which grants BDC the right to demand immediate payment of outstanding balances. In March 2013, May 2013 and August 2013, we received waivers for non-compliance of these covenants at December 31, 2012, March 31, 2013 and June 30, 2013. On August 22, 2013, the BDC Term Loan was amended and certain financial covenants were modified. Pursuant to the amended loan agreement, the Company is required to maintain, for the duration of the investment, a term debt to equity ratio not exceeding 1.1:1 (measured annually); and an adjusted current ratio of 0.40:1 (measured annually) and revised yearly 120 days after each year end. We were in compliance with all of our BDC financial covenants as of September 30, 2013. Currently, we expect to continue to meet the requirements of our BDC financial covenants over the short and long term.
In connection with the BDC Loan Agreement, BDC executed a subordination agreement in favor of Silicon Valley Bank, pursuant to which BDC agreed to subordinate any security interest in assets of the Company granted in connection with the BDC Loan Agreement to Silicon Valley Bank’s existing security interest in assets of the Company. The subordination agreement contains cross-default provisions which may materially impact our liquidity.
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. The Company does not have alternative sources of financing.
Preferred Series D Private Placement
On December 20, 2012, we entered into and closed a securities purchase agreement (the “Series D Purchase Agreement”) with accredited investors (the “Investors”), pursuant to which we sold an aggregate of 633,600 shares of Series D Convertible Preferred Stock (the “Series D Preferred Shares”) for a purchase price of $10.00 per share, for aggregate gross proceeds of $6,336,000 (the “Series D First Closing”).
We retained Taglich Brothers, Inc. (the “Placement Agent”) as the placement agent for the Series D First Closing. We paid the Placement Agent $506,880 in commissions (equal to 8% of the gross proceeds), and issued to the Placement Agent five-year warrants (the “Placement Agent Warrants”) to purchase 633,600 shares of our common stock (equal to 10% of the number of shares of common stock underlying the Series D Preferred Shares sold under the Purchase Agreement) at an exercise price of $1.10 per share, in connection with the Series D First Closing. The Investors included certain of our officers, directors and employees, who purchased an aggregate of 20,700 Series D Preferred Shares. We used $4.7 million of the proceeds from the Series D Closing to redeem all of our outstanding shares of Series C Preferred Stock.
On December 31, 2012, we sold an additional 70,600 shares of Series D Preferred Stock for a purchase price of $10.00 per share, for aggregate gross proceeds of $706,000 (the “Series D Second Closing”, and together with the Series D First Closing, the “Series D Closings”) pursuant to the Series D Purchase Agreement for an aggregate of 704,200 shares of Series D Preferred Stock sold. The Placement Agent acted as the placement agent for the Series D Second Closing as well. We paid the Placement Agent $56,480 in commissions (equal to 8% of the gross proceeds), and issued to the Placement Agent Placement Agent Warrants to purchase 70,600 shares of common stock (equal to 10% of the number of shares of common stock underlying the Series D Preferred Shares sold under the Series D Purchase Agreement) at an exercise price of $1.10 per share, in connection with the Series D Second Closing for an aggregate of 704,200 such Placement Agent Warrants. The Investors included one of our officers who purchased an aggregate of 2,500 Series D Preferred Shares.
Our proceeds from the Series D Closings, before deducting placement agent fees and other expenses, were approximately $7.0 million. We used $4.7 million for redemption of all of our outstanding shares of Series C Preferred Stock. Approximately $1.0 million was used to pay fees and expenses of the offering, and $1.3 million are funds are available for general corporate purposes. Pursuant to the Stock Purchase Agreement, we are required to place 25% of net offering proceeds, as defined, in an escrow account to satisfy our payment obligations of certain earn-out provisions. These funds have not been placed into escrow pending agreement between the Company and the sellers under the stock purchase agreement 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.
In connection with the Series D First Closing, on December 20, 2012, we filed a Certificate of Designation of Series D Preferred Stock (the “Series D Certificate of Designation”) with the Secretary of State of Delaware. Pursuant to the Series D Certificate of Designation, we designated 4,000,000 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 (see Note 9(b)), the Conversion Price of the Series D Preferred Stock was reduced to $0.90. The Series D Preferred Stock entitles the holder to cumulative dividends, payable quarterly, at an annual rate of (i) 8% of the Stated Value during the three year period commencing on the date of issue, and (ii) 12% of the Stated Value commencing three years after the date of issue. We may, at our option, pay dividends in PIK Shares, in which event the applicable dividend rate will be 12% and the number of such PIK Shares issuable will be equal to the aggregate dividend payable divided by the lesser of (x) the then effective Conversion Price or (y) the average volume weighted average price of the Company’s common stock for the five prior consecutive trading days.
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, we may, in our 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).
The Series D Preferred Stock holders also were granted registration rights which required the Company to file a registration statement with the SEC within 60 days of the final closing date (December 31, 2012), and to have the registration statement declared effective within 90 days thereafter. The initial registration statement was filed on February 12, 2013. Failure of the registration statement to be declared effective by May 12, 2013, resulted in a partial liquidated damage equal to 0.1% of the purchase price paid by each investor to become payable on each monthly anniversary until the registration statement was declared effective. On July 30, 2013, the registration statement was declared effective by the U.S. Securities and Exchange Commission. On October 15, 2013, the Company paid liquidated damages of $18,000.
Cash Flows from Operating, Investing and Financing Activities
Information about our cash flows, by category, is presented in the accompanying unaudited condensedCondensed Consolidated Statements of Cash Flows. The following table summarizes our cash inflows (outflows) for the nine months ended September 30, 2013 and 2012 (in millions):
| | | Nine Months Ended | | | | | | | |
| | | September 30, | | | | | | | |
| | | 2013 | | | 2012 | | | Increase/(Decrease) | |
| | | | | | | | | | | | | |
| Operating activities | | $ | (2.2 | ) | | $ | 0.7 | | | $ | (2.8 | ) | | | (409.4 | %) |
| Investing activities | | | (0.0 | ) | | | (5.1 | ) | | | (5.1 | ) | | | (99.4 | %) |
| Financing activities | | | 1.4 | | | | 4.5 | | | | (3.2 | ) | | | (70.0 | %) |
| | | | | | | | | | | | | | | | | |
Cash provided by operating activities during the first nine months of 2013 decreased by $2.8 million over the prior year. The decrease in cash from operations was primarily driven by a decrease in gross profit of $1.7 million resulting in an increase in net loss in the first nine months of 2013 of $0.9 million. Additionally, the changes in net working capital and other balance sheet changes contributed to a $2.5 million increase in cash used in operating activities, offset from a $4.4 million decrease in accounts receivable due to timing of receivable collections.
During the nine months ended September 30, 2013, net cash used in operating activities was $2.2 million. Our net loss was $3.5 million in the first nine months of 2013, a portion of which was the result of non-cash transactions during the year. Specifically, we had a $0.8 million of other non-cash transactions including, but not limited to depreciation and amortization, employee stock-based compensation and ESOP compensation expense.
For the nine months ended September 30, 2012, net cash provided by operating activities was $0.7million. Our net loss was $2.5 million during the first nine months of 2012, most of which was the result of non-cash transactions during the quarter. Specifically, we had a $1.2 million non-cash expense such as depreciation and amortization, employee and non-employee stock-based compensation, and deferred taxes.
Net cash used in investing activities was negligible during the nine months ended September 30, 2013. Net cash used in investing activities was $5.1 million for the nine months ended September 30, 2012 and primarily related to the cash payment for the acquisition of Apex System Integrators, Inc. in June 2012.
During the nine months ended September 30, 2013, net cash provided by financing activities was $1.4 million, primarily due to $1.0 million in proceeds from the bank term loan, net of $1.6 million in payments for term loans, a net $0.8 million in borrowings under our lines of credit, payment of $0.3 million for the Series D Preferred Stock dividend and $1.5 million in net proceeds from a common stock private placement.
During the nine months ended September 30, 2012, net cash provided by financing activities was $4.5 million, primarily due to the $4.0 million due to the issuance of term loan, $0.7 million in borrowings under our line of credit, $1.0 million in debt repayments, payment of $0.5 million for the Series C Preferred Stock dividend, $0.3 million of financing costs and $1.5 million received in reverse recapitalization.
Critical Accounting Policies
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the consolidated financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. We believe that the following critical accounting policies involve a high degree of judgment and estimation:
Accounts Receivable and Allowance for Doubtful Accounts
We have policies and procedures for reviewing and granting credit to all customer accounts, including:
• | ● | Credit reviews of all new customer accounts, |
• | ● | Ongoing credit evaluations of current customers, |
• | ● | Credit limits and payment terms based on available credit information, |
• | ● | Adjustments to credit limits based upon payment history and the customer’s current credit worthiness, and |
• | ● | An active collection effort by regional credit functions, reporting directly to the corporate financial officers. |
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These allowances are highly judgmental and require assumptions based on both recent trends of certain customers estimated to be a greater credit risk, as well as historical trends of the entire customer pool. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. To mitigate this credit risk we perform periodic credit evaluations of our customers.
Accounts receivable allowance as of September 30, 2012, were approximately $232,000, or 2.1% of the balance due. Accounts receivable allowance as of December 31, 2011, were approximately $245,500 or 1.7% of the balance due. We believe our reserve level is appropriate considering the quality of the portfolio as of September 30, 2012, based on the lack of any material write-offs of bad debt. While credit losses have historically been within expectations and the provisions established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience due to the current economic recession.Inventory
Inventory
Inventory is stated at the lower of cost or market. Cost is determined under the first-in, first-out (FIFO) method. We periodically review our inventory and make provisions as necessary for estimated obsolete and slow-moving goods. We mark down inventory by an amount equal to the difference between cost of inventory and the estimated market value based upon assumptions about future demands, selling prices and market conditions. The creation of such provisions results in a write-down of inventory to net realizable value and a charge to cost of sales.
Goodwill and Long-Lived Assets
Goodwill represents the excess purchase price paid over the fair value of the net assets of acquired companies. Goodwill is subject to impairment testing as necessary, (at least once annually at December 31) if changes in circumstances or the occurrence of certain events indicate potential impairment. In assessing the recoverability of our goodwill, identified intangibles, and other long-lived assets, significant assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets must be made, as well as the related estimated useful lives. The fair value of goodwill and long-lived assets is estimated using a discounted cash flow valuation model and observed earnings and revenue trading multiples of identified peer companies. If these estimates or their related assumptions change in the future as a result of changes in strategy or market conditions, we may be required to record impairment charges for these assets in the period such determination was made.
Intangible Assets
We make judgments about the recoverability of purchased finite-lived intangible assets whenever events or changes in circumstances indicate that impairment may exist. Recoverability of finite-lived intangible assets is measured by comparing the carrying amount of the asset to the future undiscounted cash flows that the asset is expected to generate. If it is determined that an individual asset is impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.
The assumptions and estimates used to determine future values and remaining useful lives of our intangible are complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our forecasts.
Comprehensive Loss
Comprehensive loss consists of net loss and accumulated other comprehensive loss, which includes certain changes in equity that are excluded from net income. Comprehensive loss for the nine months ended September 30, 2013 is equal to the net loss plus other comprehensive loss totaling $23,000 (relating to exchange translation adjustments arising from the consolidation of our Canadian Apex subsidiary). Comprehensive loss for the comparable nine months ended September 30, 2012 is $5,000.
Fair Value Measurement
Financial assets and liabilities are measured at fair value, which is defined as the exchange price that would be received for 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 on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The following is a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:
| • | Level 1 — Quoted prices in active markets for identical assets or liabilities. |
| • | Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| • | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Income Taxes
We account for income taxes usingin accordance with the asset and liability method. Deferred taxes are provided on an asset and liability method wherebyFinancial Accounting Standards Board (“FASB”) guidance, which requires deferred tax assets areand liabilities, be recognized as deductibleusing enacted tax rates to measure the effect of temporary differences and operating lossbetween book and tax credit carry-forwardsbases on recorded assets and liabilities. FASB guidance also requires that deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets arebe reduced by a valuation allowance, when, in the opinion of management,if it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferredrecognized.
We evaluate on an annual basis its ability to realize deferred tax assets by assessing its valuation allowance and liabilitiesby adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are adjusted forforecasts of future taxable income and available tax planning strategies that could be implemented to realize the effects of changes innet deferred tax laws and rates on the date of enactment.assets.
Under theIn accordance with FASB guidance on accounting for uncertainuncertainty in income taxes, we evaluate tax positions to determine whether the Company has clarified the recognition threshold and measurement attributes for financial statement disclosurebenefits of tax positions taken, or expected to be taken, on a tax return. The impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that isare more likely than not to beof being sustained upon audit bybased on the relevant taxing authority. An uncertaintechnical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, we recognize the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement. For tax positions that are not more likely than not of being sustained upon audit, we do not recognize any portion of the benefit. If the more likely than not threshold is not met in the period for which a tax position willis taken, we may subsequently recognize the benefit of that tax position if the tax matter is effectively settled, the statute of limitations expires, or if the more likely than not be recognized if it hasthreshold is met in a less than fifty percent likelihoodsubsequent period.
Translation of being sustained.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.
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. We generate 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 and we may be liable to refund a customer for amounts paid in certain circumstances. This has not been an issue for us historically.
We also generate revenue from software customization and professional services on either a fee-for-service or fixed fee basis. Revenue from software customization and professional services that is contracted as fee-for-service, also referred to as per-diem billing, 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.
We enter 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. 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 impact the timing of revenue recognition, which could affect the Company’s results of operations. When a sale involveswe enter into an arrangement that includes multiple elements, revenue is allocatedthe allocation of value to each respective element at inceptionis derived based on management’s best estimate of an arrangement using the relative selling price method. Selling price is determined based on a selling price hierarchy, consisting of sellerwhen vendor specific objective evidence (VSOE),or third party evidence or estimated selling price.
is unavailable.
Revenue from software licenses is recognized when all of the software revenue recognition criteria are met and, if applicable, when vendor specific objective evidence, or VSOE, exists to allocate the total license fee to each element of multiple-element software arrangements, including post-contract customer support. 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.
Stock-based compensation
We record the fair value of stock-based payments as an expense in our consolidated financial statements. When more precise pricing data is unavailable, weWe determine the fair value of stock options using the Black-Scholes option-pricing model. This valuation model requires us to make assumptions and judgments about the variables used in the calculation. These variables and assumptions include the weighted-average period of time that the options granted are expected to be outstanding, the volatility of our common stock, the risk-free interest rate and the estimated rate of forfeitures of unvested stock options. Additional information on the variables and assumptions used in our stock-based compensation are described in Note 10 of the accompanying notes to our unaudited condensed consolidated financial statements.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements as of September 30, 2012.2013.
Inflation
We do not believe that inflation has had a material impact on our business or operating results during the periods presented.
| ITEM 3. | | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not required for smaller reporting companies.
| ITEM 4. | | CONTROLS AND PROCEDURES |
Our independent accounting firm has not, nor is required, to perform any procedures to assess the effectiveness of management remediation efforts.
Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the 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 Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer), concluded that, as of the end of the period covered by this report, due to material weaknesses in our internal controls as discussed below, our disclosure controls and procedures are notdesigned at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer, principal financial officer), as appropriate, to allow timely decisions regarding required disclosure.
In the course of preparation of this report, management determined that we have material weaknesses in our internal controls over period end financial close and reporting processes and in our ability to account for complex transactions. Management believes that these material weaknesses are primarily due to the need to continue integrating our recent acquisitions.
We intend to devote resources to remediate any weaknesses we have discovered and improve our internal control over financial reporting and we believe that this will help mitigate and eventually remediate the material weaknesses described above. Our management intends to develop a plan to correct the primary issues that led to this material weakness by implementing additional review and reconciliation procedures. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future.
In light of these material weaknesses, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the quarter ended September 30, 2012, included in this Quarterly Report on Form 10-Q were fairly stated in accordance with US GAAP. Accordingly, management believes that despite our material weaknesses, our consolidated financial statements for the quarter ended September 30, 2012 are fairly stated, in all material respects, in accordance with US GAAP.
Changes in Internal Controls.
There were no changes in our internal controls over financial reporting during the fiscal quarter ended September 30, 2012,2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II-OTHER INFORMATION
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 its business. We are not currently party to any material legal proceedings.
There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Form 10K10-K as filed with the SEC on March 30, 2012.28, 2013.
None.None
Not applicable.
Not applicable.
Not applicable.