Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
The number of shares of common stock, par value $0.001 per share of DecisionPoint Systems, Inc. issued and outstanding as of the close of business on May 13, 2010 was 29,010,000.
DECISIONPOINT SYSTEMS, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DECISIONPOINT SYSTEMS, INC.
Condensed Consolidated Balance Sheets
| | | March 31, | | | December 31, | |
| | | 2010 | | | 2009 | |
| | | (unaudited) | | | | |
| ASSETS | | | | | | |
| Current assets | | | | | | |
| Cash and cash equivalents | | $ | 166,450 | | | $ | 140,740 | |
| Accounts receivable, net | | | 5,784,560 | | | | 8,877,527 | |
| Inventory, net | | | 2,254,161 | | | | 1,247,944 | |
| Deferred costs | | | 4,010,408 | | | | 4,301,727 | |
| Deferred tax assets | | | 360,000 | | | | 385,000 | |
| Prepaid expenses | | | 129,542 | | | | 90,531 | |
| Total current assets | | | 12,705,121 | | | | 15,043,469 | |
| | | | | | | | | |
| Property and equipment, net | | | 47,946 | | | | 52,721 | |
| Other assets, net | | | 406,272 | | | | 377,280 | |
| Goodwill | | | 4,860,663 | | | | 4,860,663 | |
| Total assets | | $ | 18,020,002 | | | $ | 20,334,133 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' DEFICIT | | | | | | | | |
| Current liabilities | | | | | | | | |
Accounts payable | | $ | 7,993,011 | | | $ | 7,363,059 | |
Accrued expenses and other current liabilities | | | 2,631,073 | | | | 3,523,725 | |
Line of credit | | | 2,465,129 | | | | 2,575,326 | |
Current portion of debt | | | 1,013,012 | | | | 731,793 | |
Warrant liability | | | 162,300 | | | | 72,710 | |
Unearned revenue | | | 6,756,851 | | | | 7,611,241 | |
Holding share liability | | | 200,576 | | | | 249,986 | |
| Total current liabilities | | | 21,221,952 | | | | 22,127,840 | |
| | | | | | | | | |
| Long term liabilities | | | | | | | | |
| Debt, net of current portion | | | 1,422,950 | | | | 1,751,898 | |
| Total liabilities | | | 22,644,902 | | | | 23,879,738 | |
| | | | | | | | | |
| Commitments and contingencies | | | - | | | | - | |
| | | | | | | | | |
| STOCKHOLDERS' DEFICIT | | | | | | | | |
| Preferred stock, $0.001 par value, 10,000,000 shares authorized, | | | | | | | | |
| 10,000 designated Convertible Series A, 975 shares | | | | | | | | |
| Series A issued and outstanding with | | | | | | | | |
| liquidation value of $975,000 | | | 1 | | | | 1 | |
| Common stock, $0.001 par value, 100,000,000 shares | | | | | | | | |
| authorized, 29,010,000 and 28,700,000 shares issued | | | | | | | | |
| and outstanding, respectively | | | 29,010 | | | | 28,700 | |
| Additional paid-in capital | | | 6,926,835 | | | | 6,805,034 | |
| Accumulated deficit | | | (10,468,280 | ) | | | (9,237,239 | ) |
| Unearned ESOP shares | | | (1,112,466 | ) | | | (1,142,101 | ) |
| Total stockholders’ deficit | | | (4,624,900 | ) | | | (3,545,605 | ) |
| | | | | | | | | |
| Total liabilities and stockholders' deficit | | $ | 18,020,002 | | | $ | 20,334,133 | |
See accompanying notes to condensed consolidated financial statements
DECISIONPOINT SYSTEMS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
| | | Three months ended March 31, | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| Net sales | | $ | 11,072,263 | | | $ | 11,664,426 | |
| | | | | | | | | |
| Cost of sales | | | 9,035,968 | | | | 9,624,448 | |
| | | | | | | | | |
| Gross profit | | | 2,036,295 | | | | 2,039,978 | |
| | | | | | | | | |
| Selling, general and administrative expense | | | 2,435,365 | | | | 2,216,245 | |
| | | | | | | | | |
| Operating loss | | | (399,070 | ) | | | (176,267 | ) |
| | | | | | | | | |
| Other (expense) income : | | | | | | | | |
| Interest expense | | | (469,811 | ) | | | (269,113 | ) |
| Other (expense) income, net | | | (320,685 | ) | | | 26,524 | |
| Total other expense | | | (790,496 | ) | | | (242,589 | ) |
| | | | | | | | | |
| Net loss before income taxes | | | (1,189,566 | ) | | | (418,856 | ) |
| | | | | | | | | |
| Provision for income taxes | | | 41,475 | | | | 1,000 | |
| | | | | | | | | |
| Net loss | | $ | (1,231,041 | ) | | $ | (419,856 | ) |
| | | | | | | | | |
| Net loss per share - | | | | | | | | |
| Basic and diluted | | $ | (0.05 | ) | | $ | (0.08 | ) |
| | | | | | | | | |
| Weighted average shares outstanding - | | | | | | | | |
| Basic and diluted | | | 22,612,924 | | | | 5,238,277 | |
See accompanying notes to condensed consolidated financial statements
DECISIONPOINT SYSTEMS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | Three Months ended March 31, | |
| | | 2010 | | | 2009 | |
| Cash flows from operating activities: | | | | | | |
| Net loss | | $ | (1,231,041 | ) | | $ | (419,856 | ) |
| Adjustments to reconcile net loss to net cash | | | | | | | | |
| provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 8,431 | | | | 9,741 | |
Amortization of deferred financing costs and note discount | | | 204,365 | | | | 1,354 | |
Employee stock-based compensation | | | 22,911 | | | | 12,500 | |
Non-employee stock-based compensation | | | 99,200 | | | | - | |
ESOP compensation expense | | | 29,635 | | | | 28,157 | |
Loss on change in fair value of warrant liability | | | 89,590 | | | | - | |
Deferred tax assets | | | 25,000 | | | | - | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable, net | | | 3,092,967 | | | | 1,312,603 | |
Inventory, net | | | (1,006,217 | ) | | | (476,968 | ) |
Deferred costs | | | 291,319 | | | | (172,886 | ) |
Prepaid expenses | | | (39,011 | ) | | | (28,222 | ) |
Other assets | | | (8,291 | ) | | | - | |
Accounts payable | | | 629,952 | | | | 493,935 | |
Accrued expenses and other current liabilities | | | (892,652 | ) | | | (260,813 | ) |
Unearned revenue | | | (854,390 | ) | | | 143,606 | |
| Net cash provided by operating activities | | | 461,768 | | | | 643,151 | |
| | | | | | | | | |
| Cash flows from investing activities | | | | | | | | |
| Capital expenditures | | | (3,656 | ) | | | - | |
| | | | | | | | | |
| Cash flows from financing activities | | | | | | | | |
Borrowings from line of credit | | | 13,105,000 | | | | 13,158,050 | |
Repayments on line of credit | | | (13,215,197 | ) | | | (14,246,258 | ) |
Repayment of debt | | | (171,729 | ) | | | (336,183 | ) |
Paid financing costs | | | (101,066 | ) | | | (85,000 | ) |
Holding share liability | | | (49,410 | ) | | | - | |
| Net cash used in financing activities | | | (432,402 | ) | | | (1,509,391 | ) |
| Net increase (decrease) in cash and cash equivalents | | | 25,710 | | | | (866,240 | ) |
| Cash and cash equivalents at beginning of period | | | 140,740 | | | | 944,941 | |
| Cash and cash equivalents at end of period | | $ | 166,450 | | | $ | 78,701 | |
| | | | | | | | | |
See accompanying notes to condensed consolidated financial statements
DECISIONPOINT SYSTEMS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 - DESCRIPTION OF BUSINESS AND THE MERGER
Nature of Business - DecisionPoint Systems, Inc., (the “Company”) is an enterprise mobility systems integrator that sells and installs mobile computing and wireless systems that are used both within a company’s facilities in conjunction with wireless networks and in the field using carrier-based wireless networks. These systems generally include mobile computers, mobile application software, and related data capture equipment including bar code scanners and radio frequency identification ("RFID") readers. Also integral to the systems that the Company deploys are professional ser vices, proprietary and third party software and software customization.
Canusa Capital Corp. (“Canusa”) was incorporated on December 27, 2006, under the laws of the State of Delaware. On June 17, 2009, Canusa entered into an Agreement and Plan of Merger (“Merger” or “Merger Agreement”) among Canusa, DecisionPoint Acquisition, Inc., a Delaware corporation which is a wholly-owned subsidiary of Canusa (“Merger Sub”), and DecisionPoint Systems Holding, Inc., a California corporation (“Holding”). Holding merged with and into Merger Sub with Merger Sub surviving the Merger as a wholly-owned subsidiary of Canusa under the name DecisionPoint Systems Group, Inc. (“DecisionPoint”). DecisionPoint ha s two wholly owned subsidiaries, DecisionPoint Systems CA, Inc. formerly known as Creative Concepts Software, Inc. (“CCS”) which was originally incorporated in 1995 and DecisionPoint Systems CT, Inc. formerly known as Sentinel Business Systems, Inc. (“SBS”) which was originally incorporated in 1982. All costs incurred in connection with the Merger have been expensed. Upon completion of the Merger, the Company adopted DecisionPoint’s business plan.
Description of the Merger – On June 18, 2009, Canusa completed the Merger. Immediately prior to the Merger, Canusa had 2,500,000 common shares outstanding and Holding had 10,000 common shares outstanding. Pursuant to the Merger Agreement, 1,500,000 outstanding shares of Canusa common stock owned by the Company’s Chief Executive Officer were cancelled resulting in 1,000,000 shares outstanding. Contemporaneously with the Merger, $2,794,524 of Holding’s subordinated convertible debt was converted into 6,336 shares of the Holding’s common stock. In accordance with the t erms of the Merger, each of the 16,336 shares of Holding’s common stock outstanding immediately prior to the Merger were exchanged for 153.04 shares of the Company’s common stock, giving Holding’s shareholders 2,500,000 shares and former Canusa shareholders 1,000,000 shares of the Company’s common stock. After the Merger, pursuant to an 8 for 1 stock dividend, each of the Company’s 3,500,000 shares of common stock was exchanged for eight shares of common stock, resulting in 28,000,000 total outstanding shares. This transaction was treated as a stock split for accounting purposes.
Following the Merger, the business conducted by the Company is the business conducted by Holding prior to the Merger. In addition, the directors and officers of Canusa were replaced by the directors and officers of Holding.
All references to share and per share amounts have been restated to retroactively reflect the number of shares of DecisionPoint common stock issued pursuant to the Merger.
Accounting Treatment of the Merger; Financial Statement Presentation
The Merger was accounted for as a reverse acquisition pursuant to the guidance in the “SEC’s Division of Corporation Finance Financial Reporting Manual”. These transactions are considered by the Securities and Exchange Commission to be capital transactions in substance, rather than business combinations. Accordingly, the Merger has been accounted for as a recapitalization and, for accounting purposes, DecisionPoint is considered the acquirer in the reverse acquisition. The accompanying historical condensed consolidated financial statements are those of DecisionPoint. Effective on the closing date the Company adopted DecisionPoint’s year end of December 3 1.
DECISIONPOINT SYSTEMS, INC.Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company at the dates and for the periods indicated. The interim results for the period ended March 31, 2010, are not necessarily indicative of results for the full 2010 fiscal year or any other future interim periods. Because the Merger was accounted for as a reverse acquisition under U.S. generally accepted accounting principles, the consolidated financial statements for periods prior to June 18, 2009, reflect only the operations of DecisionPoint.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, DecisionPoint. All significant intercompany accounts and transactions have been eliminated in consolidation. The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the recorded amounts reported therein. A change in facts or circumstances surrounding the estimate could result in a change to estimates and impact future operating results.
These unaudited condensed consolidated financial statements have been prepared by management and should be read in conjunction with the audited consolidated financial statements for DecisionPoint Systems, Inc. and notes thereto for the year ended December 31, 2009, included in Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2010.
Reference is made to “Summary of Significant Accounting Policies” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. As of the date of the filing of this Quarterly Report, the Company did not identify any significant changes to the critical accounting policies discussed in its Annual Report for the year ended December 31, 2009.
New Accounting Standards
In January 2010, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update (“ASU”) regarding improving disclosure about fair value measurements, which amends the existing disclosure requirements under fair value measurements and disclosures by adding required disclosure about items transferring into and out of Levels 1 and 2 fair value measurements; adding separate disclosure about purchases, sales, issuances, and settlements relative to the Level 3 fair value measurements; and clarifying certain aspects of the existing disclosure requirements. This ASU was effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll-forward of activity in Level 3 fair value measurements, which is effective for years beginning after December 15, 2010, and for interim periods within those fiscal years. This ASU does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, the ASU requires comparative disclosures only for periods ending after the initial adoption. The Company adopted the first component of the disclosure requirement under this ASU during the first quarter of 2010. Its adoption did not have a significant impact on the Company’s consolidated financial statements. In addition, the Company will adopt the latter part of the disclosure requirement under this ASU in the first quarter of 2011, and does not anticipate its adoption will have a significant impact on the Company’s consolid ated financial statements.
NOTE 3 - LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2010, the Company has negative working capital of $8.5 million and total stockholders’ deficit of $4.6 million. Included in current liabilities is unearned revenue of $6.8 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 outlay requirements. Included in current assets are deferred costs of $4.0 million which reflect costs paid for third party extended maintenance services that are being amortized over their respective service periods.
DECISIONPOINT SYSTEMS, INC.Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)
The Company has an $8.5 million line of credit, which provides for borrowings based upon eligible accounts receivable. Availability under the line of credit was approximately $1.8 million as of March 31, 2010.
The Company believes 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 from borrowings available under the line of credit, will be sufficient to support its operations through March 31, 2011. If the Company is unable to raise funds through private placements, any growth plans may need to be modified to the extent of available funding, if any. In addition, the Company may need to reduce its selling, general and administrative expenses.
NOTE 4 – LOSS PER COMMON SHARE
Basic loss per share is computed by dividing the loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similarly to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
For all periods presented, potentially dilutive securities are excluded from the computation of fully diluted net loss per share as their effect is anti-dilutive.
Potentially dilutive securities include:
| | | March 31, 2010 | | | March 31, 2009 | |
| | | | | | | |
| Convertible preferred stock | | | 1,950,000 | | | | - | |
| Convertible note payable | | | 500,000 | | | | 7,756,776 | |
| Warrants to purchase common stock | | | 3,605,000 | | | | 100,000 | |
| Options to purchase common stock | | | 6,558,097 | | | | 6,588,705 | |
| | | | | | | | | |
| Total potentially dilutive securities | | | 12,613,097 | | | | 14,445,481 | |
NOTE 5 – FAIR VALUE MEASUREMENT
The Company defines fair value as the amount at which an asset or liability could be bought or incurred or sold or settled in a current transaction between willing parties, that is, other than in a forced or liquidation sale. The fair value estimates presented in the following table are based on information available to the Company as of March 31, 2010.
The accounting standard regarding fair value measurements discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
| · | Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. |
· | Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. |
· | Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions. |
The Company has determined the fair value of certain liabilities as of March 31, 2010, as follows:
| Warrants to acquire common stock | | $ | 162,300 | |
DECISIONPOINT SYSTEMS, INC.Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)
The following table presents the Company’s fair value hierarchy for the above liabilities measured at fair value on a recurring basis as of March 31, 2010:
| | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | | | | | | | |
| Warrants to acquire common stock | | $ | -0- | | | $ | 162,300 | | | $ | -0- | |
The following table provides a summary of changes in fair value of the Company’s liabilities, as well as the portion of gains or losses included in income attributable to a realized gain that relates to those liabilities held at:
| Description | | March 31, 2010 | |
| | | | | |
| Beginning balance - January 1, 2010 | | $ | 72,710 | |
| | Issuances | | | - | |
| | Loss (1) | | | 89,590 | |
| | | | | | |
| Ending balance - March 31, 2010 | | $ | 162,300 | |
(1) | The realized loss is included in other expense in the condensed consolidated statement of operations. | |
The fair value of warrants issued by the Company in connection with the issuance of convertible debt has been estimated by management in the absence of a readily ascertainable market value. At March 31, 2010, the Company has determined, based upon the Black-Scholes option-pricing model, that the fair value of these warrants is $162,300. The assumptions used in the Black-Scholes option-pricing model were strike price of $0.30, share price of $0.50, contractual life of 4.25 years, volatility of 66.36% and a risk free interest rate of 2.43%. Because of the inherent uncertainty of valuation, the estimated fair value may differ significantly from the fair value that would have been used had a ready market for the warrants existed, and the difference could be material.
NOTE 6 – LINE OF CREDIT
The Company has an $8.5 million line of credit with a bank, which provides for borrowings based upon eligible accounts receivable, as defined in the Loan Agreement (the “Loan Agreement”). Under the terms of the Loan Agreement, interest accrues at prime plus 4% with a potential interest rate reduction of 0.50% based on future profitability. The Loan Agreement is secured by substantially all the assets of the Company and matures in March 2011. As of March 31, 2010, the interest rate is 8%.
The line of credit allows the Company to cause the issuance of letters of credit on account of the Company to a maximum of the borrowing base as defined in the Loan Agreement. No letters of credit were outstanding as of March 31, 2010 or 2009. Availability under the line of credit was $1,761,000 as of March 31, 2010.
For the three months ended March 31, 2010 and 2009, the Company’s interest expense, including fees paid to secure lines of credit, totaled $63,344 and $69,061, respectively.
DECISIONPOINT SYSTEMS, INC.Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)
NOTE 7 –LONG TERM DEBT
Long term debt as of March 31, 2010, consists of the following:
| | | | | | | | | Amortization | | | | |
| | | Balance | | | | | | of Note | | | Balance | |
| | | January 1 | | | Payments | | | Discount | | | March 31 | |
| | | | | | | | | | | | | |
| Bridge notes | | $ | 210,000 | | | $ | (125,000 | ) | | $ | - | | | $ | 85,000 | |
| | | | | | | | | | | | | | | | | |
| Subordinated convertible debt - June 2009 | | | 250,000 | | | | - | | | | - | | | | 250,000 | |
| Note discount | | | (114,583 | ) | | | - | | | | 62,500 | | | | (52,083 | ) |
| Subordinated debt, net | | | 135,417 | | | | - | | | | 62,500 | | | | 197,917 | |
| | | | | | | | | | | | | | | | | |
| Senior subordinated notes | | | 2,500,000 | | | | (46,729 | ) | | | - | | | | 2,453,271 | |
| Note discount | | | (361,726 | ) | | | - | | | | 61,500 | | | | (300,226 | ) |
| Senior subordinated notes, net | | | 2,138,274 | | | | (46,729 | ) | | | 61,500 | | | | 2,153,045 | |
| | | | | | | | | | | | | | | | | |
| Total debt | | $ | 2,483,691 | | | $ | (171,729 | ) | | $ | 124,000 | | | | 2,435,962 | |
| | | | | | | | | | | | | | | | | |
| Less current portion | | | | | | | | | | | | | | | (1,013,012 | ) |
| | | | | | | | | | | | | | | | | |
| Debt, net of current portion | | | | | | | | | | | | | | $ | 1,422,950 | |
Bridge Notes - As of March 31, 2010, the Bridge Notes with an interest rate of 15% per annum plus 2.5% quarterly have an outstanding balance of $85,000, which is payable to a Director of the Company.
Subordinated Convertible Debt - June 2009 – Immediately following the completion of the Merger in June 2009, pursuant to a Securities Purchase Agreement, the Company issued a convertible subordinated debenture (the “Note”) with a face value of $250,000, net of an Original Issue Discount of 10% and issuance costs of $32,500, with net proceeds totaling $192,500. Interest on the Note accrues at 6% per annum and is due monthly. Principal and any remaining accrued but unpaid interest are due in June 2010. The Note converts at the option of the holder into shares of the Com pany’s common stock at $0.50 per share.
Pursuant to the terms of the Note, the Company issued detachable warrants to purchase 500,000 shares of the Company’s common stock at an exercise price of $0.50 per share. The warrants are fully vested and have a contractual term of five years. The issuance of the warrants resulted in a note discount of $250,000 which is being amortized to interest expense using the effective interest method over the 12 month term of the Note. The terms of the warrants contain a price adjustment provision in the event that the Company issues common shares at a price below the exercise price of the warrants.
On December 16, 2009, the warrants were re-priced to $0.30 due to the issuance of common shares at $0.30 per share to the Senior Subordinated Note holders. The Company determined that the fair value of the warrants was $72,710 and $162,300 on December 31, 2009 and March 31, 2010, respectively. Gains and losses on the change in the value of the warrants are recorded as other income and expense in the accompanying condensed consolidated statements of operations.
Senior Subordinated Notes - During December 2009, the Company entered into a Securities Purchase Agreement (‘Financing Agreement”) with four purchasers pursuant to which it issued $2,500,000 of non-convertible senior secured promissory notes (the “Notes”). The Notes bear interest at a rate of 15% per annum and mature on May 31, 2011. The Company has the ability to extend the maturity date to November 30, 2011. The Notes are secured by all of the assets of the Company subject and subordinated only to liens securing the Company’s obligations under the line o f credit.
Pursuant to the terms of the Financing Agreement, the Company issued 500,000 shares of common stock to the noteholders. The common stock was valued at $0.30 per share, the closing price of the stock on the date of the Financing Agreement, and is recorded as a deferred financing cost in the accompanying condensed consolidated balance sheets. Other expenses related to the issuance of the Notes of $177,193 and closing fees of $75,000 were also included in deferred financing costs which are being amortized to interest expense over the term of the Notes using the effective interest method.
DECISIONPOINT SYSTEMS, INC.Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)
As part of the Financing Agreement, the Company also issued warrants to purchase 2,000,000 shares of common stock, of which 1,000,000 have an exercise price of $0.50 per share and 1,000,000 have an exercise price of $0.60 per share. The warrants are fully vested and have a contractual term of five years. The warrants were valued at $369,000 and have been recorded as a discount to the Notes and a credit to additional paid-in capital.
For the three months ended March 31, 2010 and 2009, the Company’s interest expense, including all extension and commitment fees, totaled $314,764 and $127,103, respectively.
NOTE 8 – STOCKHOLDERS’ EQUITY
The Company’s authorized capital stock consists of 100,000,000 shares of common stock with a par value of $0.001 per share, and 10,000,000 shares of preferred stock with a par value of $0.001 per share. After the Merger, there were 28,000,000 shares of the Company’s common stock issued and outstanding and 975 shares of the Company's Series A Cumulative Convertible Preferred Stock (“Series A Preferred Stock”) issued and outstanding.
(a) Common Stock
On January 1, 2010, the Company agreed to issue 48,000 shares of its common stock in exchange for future services to be provided to the Company. As of March 31, 2010, the shares have not been issued. The shares will vest pro rata over a twelve month service period beginning January 1, 2010, and any unvested shares are subject to return to the Company if the agreement is terminated before the end of the twelve month service period. An expense totaling approximately $5,000, based on the closing share price of the vested shares, has been recorded in accrued liabilities and selling, general and administrative expense in the accompanying condensed consolidated statement of operations.
On February 1, 2010, the Company issued 250,000 fully vested shares of its common stock in exchange for future services to be provided to the Company over a six month period. The value of the shares of $80,000 was based on the closing price of the common stock on the date of the agreement and was recorded as a prepaid expense in the accompanying condensed consolidated balance sheet as of March 31, 2010. The prepaid expense is being amortized over the six month service period to selling, general and administrative expense in the accompanying condensed consolidated statement of operations.
On February 1, 2010, the Company issued 60,000 fully vested shares of its common stock as reimbursement for legal fees incurred by a third party related to a potential transaction. The value of the shares of $19,200 was based on the closing price of the common stock on the date of the agreement and is recorded as selling, general and administrative expense in the accompanying condensed consolidated statement of operations.
On February 1, 2010, the Company agreed to issue 78,125 shares of its common stock in exchange for future services to be provided to the Company over a five month period. As of March 31, 2010, the shares have not been issued and will be fully vested upon issuance. The value of the shares of $25,000 was based on the closing price of the common stock on the date of the agreement and was recorded as a prepaid expense and an accrued liability in the accompanying condensed consolidated balance sheet as of March 31, 2010. The prepaid expense is being amortized over the five month service period to selling, general and administrative expense in the accompanying condensed consolidated statement o f operations.
DECISIONPOINT SYSTEMS, INC.Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)
(b) Series A Preferred Stock
On June 8, 2009, the Company designated up to 10,000 shares of the Series A Preferred Stock, par value $0.001, with a stated value of $1,000 per share with such designations, powers, preferences and rights, qualifications, limitations and restrictions as set forth in the Certificate of Designation of Series A Preferred Stock. As of March 31, 2010, there were 975 shares issued and outstanding.
(c) Warrants
As of March 31, 2010, warrants outstanding consist of the following:
| | | | | | | | Total | | | | | | Weighted |
| | | | | | | | Warrants | | | Total | | | Average |
| | | | | Strike | | | Outstanding | | | Exercise | | | Exercise |
| | | Date Issued | | Price | | | and Exercisable | | | Price | | | Price |
| | | | | | | | | | | | | | |
| Bridge Notes | | 6/12/2007 | | $ | 1.00 | | | | 130,000 | | | $ | 130,000 | | | |
| Preferred Class A warrants | | 6/19/2009 | | | 1.00 | | | | 487,500 | | | | 487,500 | | | |
| Preferred Class B warrants | | 6/19/2009 | | | 1.25 | | | | 487,500 | | | | 609,375 | | | |
| Subordinated Convertible debt | | 6/19/2009 | | | 0.30 | | | | 500,000 | | | | 150,000 | | | |
| Senior Subordinated Notes | | 12/17/2009 | | | 0.50 | | | | 1,000,000 | | | | 500,000 | | | |
| Senior Subordinated Notes | | 12/17/2009 | | | 0.60 | | | | 1,000,000 | | | | 600,000 | | | |
| | | | | | | | | | | | | | | | | |
| Total | | | | | | | | | 3,605,000 | | | $ | 2,476,875 | | $ | 0.69 |
NOTE 9 - STOCK OPTION PLAN
In January 2004, the Company established the 2004 Incentive and Non-Incentive Stock Option Plan (“2004 Plan”). The 2004 Plan authorizes the issuance of 6,592,976 shares of common stock, of which 6,558,097 have been granted to officers, employees, directors, consultants and advisors. In June 2009, the Company established the DecisionPoint Systems, Inc. Incentive Stock Plan ("2009 Plan") to retain directors, executives and selected employees and consultants. The total number of common shares which may be purchased or granted under the 2009 Plan shall not exceed 1,000,000. Incentives under the 2004 and 2009 Plans (collectively, the “Plans”) may be granted in an y one or a combination of the following forms: (a) incentive stock options and non-statutory stock options; (b) stock appreciation rights; (c) stock awards; (d) restricted stock and (e) performance shares.
The Plans are administered by the Board of Directors, or a committee appointed by the Board of Directors, which determines recipients and types of awards to be granted, including the number of shares subject to the awards, the exercise price and the vesting schedule. The total number of shares authorized under the Plans is 7,592,976. The term of stock options granted under the Plans cannot exceed ten years. Options shall not have an exercise price less than 100% of the fair market value of the Company’s common stock on the grant date, and generally vest over a period of five years. If the individual possesses more than ten percent of the combined voting power of all classes of stock of the Company, the exercise price shall not be less than 110% of the fair market of a share of common stock on the date of grant.
DECISIONPOINT SYSTEMS, INC.Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)
A summary of the status of the Plans as of March 31, 2010 and information with respect to the changes in options outstanding is as follows:
| | | | | | | | | Weighted - | | | | |
| | | Options | | | | | | Average | | | Aggregate | |
| | | Available | | | Options | | | Exercise | | | Intrinsic | |
| | | for Grant | | | Outstanding | | | Price | | | Value | |
| | | | | | | | | | | | | |
| January 1, 2010 | | | 1,034,879 | | | | 6,558,097 | | | $ | 0.22 | | | | |
| Granted | | | - | | | | - | | | | - | | | | |
| Exercised | | | - | | | | - | | | | - | | | | |
| Forfeited | | | - | | | | - | | | | - | | | | |
| March 31, 2010 | | | 1,034,879 | | | | 6,558,097 | | | $ | 0.22 | | | $ | 1,814,251 | |
| | | | | | | | | | | | | | | | | |
| Exercisable options at March 31, 2010 | | | | | | | 5,460,613 | | | $ | 0.21 | | | $ | 1,558,365 | |
The following table summarizes information about stock options outstanding as of March 31, 2010:
| | | Options Outstanding | | Options Exercisable |
| | | | | | | Weighted- | | | | | | Weighted- |
| | | | | Weighted- | | Average | | | | Weighted- | | Average |
| Range of | | | | Average | | Remaining | | | | Average | | Remaining |
| Exercise | | Number | | Exercise | | Contractual | | Number | | Exercise | | Contractual |
| Prices | | Outstanding | | Price | | Life (Years) | | Exercisable | | Price | | Life (Years) |
| | | | | | | | | | | | | |
| $0.20 - $0.31 | | 6,558,097 | | $0.22 | | 4.81 | | 5,460,613 | | $0.21 | | 4.58 |
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the required service period, which is generally equal to the vesting period. There were no options granted during the three months ended March 31, 2010. For the three months ended March 31, 2009, the Company granted 61,216 to one executive. The fair value of the options of $6,304 was determined using the Black-Scholes option pricing model and the following assumptions: exercise price of $0.29, expected life of 5 years, expected volatility 44.19%, expected dividend yield of 0%, and a risk-free interest rate of 1.87%.
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 Company has no historical basis for determining expected forfeitures and, as such, compensation expense for stock-based awards does not include an estimate for forfeitures.
Employee stock-based compensation costs for the three months ended March 31, 2010 and 2009, was $22,911 and $12,500, respectively, and are included in selling, general and administrative expense in the accompanying condensed consolidated statements of operations. As of March 31, 2010, total unrecognized estimated employee compensation cost related to stock options granted prior to that date was $87,661, which is expected to be recognized over a weighted-average vesting period of 1.36 years.
DECISIONPOINT SYSTEMS, INC.Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)
NOTE 10 – COMMITMENTS AND CONTINGENCIES
The Company is involved in certain litigation arising in the normal course of its business. Management, having consulted with its counsel, believes these matters will not, either individually or in the aggregate, have any material adverse impact on its operating results or financial position.
Currently, the Company is a creditor in a bankruptcy filing from one of its customers which revolves around ‘preference payments’ received 90 days prior to the actual bankruptcy filing date. The total amount of the potential claim is $182,000 which the Company has recorded as a liability in 2009. The Company is uncertain of the final resolution of this claim as of the date of this report but based upon counsel’s advice and knowledge of bankruptcy proceedings, it is probable that the Company will not be successful in defending the claim and will, ultimately be required to pay the sum to the court.
NOTE 11 - RELATED PARTY
The Company has purchased and sold certain products and services from a separate corporate entity which is wholly owned by an ESOP. This entity is affiliated with the Company through limited overlapping management and Board representation by the Company's Chief Executive Officer and Chief Financial Officer. During the three months ended March 31, 2010 and 2009, the Company purchased products and services for $161,700 and $54,951, respectively, from this affiliate. Sales to this affiliate during the three months ended March 31, 2010 and 2009 were $112,172 and $160,885, respectively. These sales to the affiliate were at no incremental margin over the Company’s actual cost.& #160; Amounts due from this affiliate included in accounts receivable in the accompanying condensed consolidated balance sheets as of March 31, 2010 and 2009, are $13,064 and $704,375, respectively. Additionally, the Company sub-leases its facility in Foothill Ranch, CA from this affiliate at a monthly rental expense of $11,763, which expires in July 2010.
The Company had accounts payable to its Chief Executive Officer and its Chief Financial Officer, of $80,078 and $911,129 at March 31, 2010 and 2009, respectively. The outstanding balance had previously accrued interest at 16% per annum. Beginning in 2010, the interest rate increased to 25% per annum. During the three months ended March 31, 2010 and 2009, the Company accrued interest of $65,710 and $51,515, respectively, on the accounts payable to the CEO and $210,372 and $80,160, respectively on the accounts payable to the CFO. The balance of the accounts payable is from purchases of products and services made on behalf of the Company, deferred compensation and interest on the accounts payable.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT’S DISCUSSION AND ANALYSIS
Forward Looking Statements
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 giv en 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:
· | Our ability to raise capital when needed and on acceptable terms and conditions; |
· | The intensity of competition; |
· | General economic conditions and, |
· | Our ability to attract and retain management, and to integrate and maintain technical information and management information systems. |
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. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result more information, future events or occurrences.
OVERVIEW
We are a enterprise mobility systems integrator that sells and installs mobile computing and wireless systems that are used both within a company’s facilities in conjunction with wireless networks and in the field using carrier-based wireless networks. These systems generally include mobile computers, mobile application software, and related data capture equipment including bar code scanners and radio frequency identification RFID readers. Also integral to the systems that we deploy are professional services, proprietary and third party software and software customization. We deliver to our customers the ability to make better, faster, and more accurate business decisions by implementing indu stry-specific, enterprise wireless and mobile computing systems for their front-line employees and fully integrating them into their back office systems.
We provide customers with everything they need through the process of achieving their enterprise mobility goals, starting with the planning of their systems, to the design and build stage, to the deployment and support stage, and finally to achieving their projected Return On Investment (“ROI”). Our business designs, sells, installs and services voice and data communications products and systems for private networks and wireless broadband systems to a wide range of enterprise markets, including retail, transportation and logistics, manufacturing, wholesale and distribution, as well as other commercial customers (which, collectively, are referred to as the “commercial enterprise market”) . We provide a complete line of deployment and integration services, including site surveys, equipment configuration and staging, system installation, depot services, software support, training programs and project management.
We have developed an ‘ecosystem’ of partners which we bring to every customer situation. The standout partner in this ecosystem is the Motorola Enterprise Mobility Division, for whom we consistently are rated one of the nation’s top Value Added Resellers. We also partner with other top equipment and software suppliers such as Zebra Technologies Corporation, Datamax - O’Neil — a unit of the Dover Corporation, in addition to a host of specialized independent software vendors such as AirVersent, Antenna Software, GlobalBay, Mobileframe, Syclo and Wavelink.
Over the last several years, we have been repositioning ourselves to focus more on providing higher margin, customer-driven, mobile wireless and RFID solutions rather than providing simply hardware and customized software as a reseller. This is the key to increasing our profitability and is also a major point of differentiation.
Transportation and logistics, and field services such as repair and maintenance, delivery and inspections are now emerging as great new markets. This is primarily due to the arrival of robust, national wireless carrier networks that can reach a field-based mobile worker almost anywhere they are. The general term for this new group of markets is referred to as “Field Mobility”. Although it cuts across multiple industries and business applications, it has one common characteristic: goods are tracked or services are being performed by field-based workforces, not workers operating in a single location un der one roof. We believe that the growth of Field Mobility-based markets will be very significant over the next several years, and we have created a dedicated specialty business practice to focus on it. This practice was established in 2008, with the express purpose of replicating our historical success with a new set of customers and challenges together with a new ecosystem of partners which includes the four major wireless carriers of AT&T, Sprint, T-Mobile and Verizon. The carriers not only bring potential new opportunities to DecisionPoint but also have attractive programs which allow us to earn additional revenue from them when we facilitate service of mobile computers and devices on their networks.
Canusa Capital Corp. (“Canusa”) was incorporated on December 27, 2006 under the laws of the State of Delaware. On June 17, 2009, Canusa entered into an Agreement and Plan of Merger (“Merger” or “Merger Agreement”) among Canusa, DecisionPoint Acquisition, Inc., a Delaware corporation which is a wholly-owned subsidiary of Canusa (“Merger Sub”), and DecisionPoint Systems Holding, Inc., a California corporation (“Holding”). Holding merged with and into Merger Sub with Merger Sub surviving the Merger as a wholly-owned subsidiary of Canusa under the name DecisionPoint Systems Group, Inc. (“DecisionPoint”). DecisionPoint has two wholl y owned subsidiaries, DecisionPoint Systems CA, Inc. formerly known as Creative Concepts Software, Inc. (“CCS”) which was originally incorporated in 1995 and DecisionPoint Systems CT, Inc. formerly known as Sentinel Business Systems, Inc. (“SBS”) which was originally incorporated in 1982. All costs incurred in connection with the Merger have been expensed. Upon completion of the Merger, the Company adopted DecisionPoint’s business plan.
On June 18, 2009, we completed the Merger. Immediately prior to the Merger, we had 2,500,000 common shares outstanding and Holding had 10,000 shares common shares outstanding. Pursuant to the Merger Agreement, 1,500,000 outstanding shares of our common stock owned by our Chief Executive Officer were cancelled. Contemporaneously with the Merger, $2,794,524 of Holding’s subordinated convertible debt was converted into 6,336 shares of Holding’s common stock. In accordance with the terms of the Merger, each of the 16,336 shares of Holding’s common stock that was outstanding immediately prior to the Merger was exchanged for 153.04 shares of our common stock, giving Holding’s sha reholders 2,500,000 of common stock. After the Merger, pursuant to an 8 for 1 stock dividend, each of our 3,500,000 shares of common stock was exchanged for eight shares of common stock, resulting in 28,000,000 total outstanding shares. This transaction was treated as a stock split for accounting purposes.
All references to share and per share amounts in this Quarterly Report have been restated to retroactively reflect the number of shares of DecisionPoint Systems, Inc. common stock issued pursuant to the Merger.
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 months ended March 31, 2010 as compared to the same period ended March 31, 2009. These should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto contained elsewhere in this Form 10-Q.
Comparison of the Quarters Ended March 31, 2010 and March 31, 2009
Revenues were $11.1 million for the quarter ended March 31, 2010, compared to $11.7 million for the quarter ended March 31, 2009, a decrease of $0.6 million or 5.1%. The decrease in revenue was primarily due to an unexpected shortage of product availability from certain principal vendors of the Company and the continued after effects of the weakened economic conditions in the U.S. during 2009, which has continued to have some impact into early 2010. A reduction in traditional workforce mobility solutions revenue has been partially offset by an increase in our field mobility solutions revenue.
Cost of sales was $9.0 million for the quarter ended March 31, 2010, compared to $9.6 million for the quarter ended March 31, 2009, a decrease of $0.6 million or 6.1%. Our gross profit was $2.0 million for the quarter ended March 31, 2010, compared to $2.0 million for the quarter ended March 31, 2009. Although the actual dollar amount of gross profit is the same in for both periods, our realized gross margin has increased to 18.4% in 2010, from 17.5% in the comparable period of 2009. This improvement is directly due to the increased emphasis on cost control of the products and services which we resell as well as improved utilization of our professional services costs which has a direct ef fect of realizing greater margins on those services.
Selling, general and administrative expenses were $2.4 million for the quarter ended March 31, 2010, compared to $2.2 million for the quarter ended March 31, 2009, an increase of $0.2 million or 9.9%. The increase in the current quarter was the result of additional costs associated with being a public company which were not present in the same period of 2009. Specific new costs were approximately $0.1 million of Investor Relations and other non-cash compensation costs for services provided to the Company. Additionally, the Company has increased legal and accounting expenses of approximately $0.2 million in the current period directly related to changing from a private to a public entity.
Other expenses were $0.8 million for the quarter ended March 31, 2010 compared to $0.2 million for the quarter ended March 31, 2009. Other expenses for the three months ended March 31, 2010 and 2009, consists primarily of interest expense, which is related to our line of credit and subordinated debt, and was $0.5 million for the quarter ended March 31, 2010, compared to $0.3 million for the quarter ended March 31, 2009. The increase in interest expense was the result of the issuance of the $2.5 million of subordinated notes in December 2009. Other income (expense) increased by $0.3 million due to $0.1 million loss from the change in the fair value of a warrant liability and potential acqu isition related costs during the period.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash flow
The recent and on-going financial and credit crisis has reduced credit availability and liquidity for many companies. We have seen our revenue decrease approximately 5%, due to the weakened economic conditions in the U.S. which have continued into 2010 and throughout 2009. We have been able to improve our gross margins which were offset by an increase in our selling, general and administrative expenses, of approximately $0.2 million. This increase is directly attributable to increased professional fees related to regulatory filings in the current quarter as compared to being a private entity without the same requirements in the same period last year. We believe that our strateg ic shift to higher margin mobility solutions with additional software and service revenues along with tighter cost control will sustain us through this challenging period. As a matter of course, we do not maintain significant cash balances on hand since we are financed by a line 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 line 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.
As of March 31, 2010 and December 31, 2009, we had cash and cash equivalents of approximately $0.2 million and $0.1 million, respectively. We have used, and plan to use, such cash for general corporate purposes, including working capital.
As of March 31, 2010, we have negative working capital of $8.5 million and total stockholders’ deficit of $4.6 million. Included in current liabilities is unearned revenue of $6.8 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 outlay requirements. Included in current assets are deferred costs of $4.0 million which reflect costs paid for third party extended maintenance services that are being amortized over their respective service periods. The net change in the unearned revenue, offset by the deferred costs, will provide a benefit in future period s as the amounts convert to realized revenue.
We have an $8.5 million line of credit, which provides for borrowings based upon eligible accounts receivable. Interest accrues at prime plus 4%, with a potential interest rate reduction of 0.50% based on future profitability. The amounts outstanding under the line of credit at March 31, 2010 and December 31, 2009, were approximately $2.5 million with interest accruing at 8%, and $2.6 million with interest accruing at 8%, respectively. The line of credit has a tangible net worth financial covenant and other non-financial covenants with which we have been in compliance. Availability under this line of credit was approximately $1.8 million and $4.3 million as of March 31, 2010 an d December 31, 2009, respectively.
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 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 March 31, 2011. 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.
For the three months ended March 31, 2010, net cash provided by operating activities was $0.5 million, primarily due to a $3.1 million decrease in accounts receivable, which was offset by net increase in inventory of $1.0 million, a $0.9 million reduction in accrued expenses, an increase in accounts payable of $0.6 million and net change in our unearned revenue of an additional $0.9 million. All of these have offset our net loss of $1.2 million in the current quarter. Net cash used in financing activities was $0.4 million for the three months ended March 31, 2010, primarily from the payments of subordinated debt and financing costs.
During the three months ended March 31, 2009, net cash provided by operating activities was $0.6 million, primarily due to the increase in net changes in working capital of $1.0 million, and more specifically, the net change in accounts receivable of $1 million which offset our net loss of $0.4 million for the quarter. Net cash used in financing activities was $1.5 million for the three months ended March 31, 2009, primarily due to a net reduction in the amount outstanding on our line of credit during the period.
CRITICAL ACCOUNTING ESTIMATES
Our unaudited condensed consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed 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 condensed consol idated 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 of our critical accounting policies, the following may involve a higher degree of judgment and estimation:
Accounts Receivable
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 reserve for estimated credit losses based upon historical experience and specific customer collection issues. Accounts receivable reserves as of March 31, 2010, were approximately $332,000, or 5.4% of the balance due. Accounts receivable reserves as of March 31, 2009, were approximately $567,000 or 7.8% of the balance due. We believe our reserve level is appropriate considering the quality of the portfolio as of March 31, 2010. 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 is stated at the lower of cost or market. Cost is determined under the first-in, first-out (FIFO) method. We periodically review our inventories and makes provisions as necessary for estimated obsolete and slow-moving goods. We mark down inventory to 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.
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 exits; (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 unearne d revenue and is recognized over the life of the contract and may be liable to refund a customer for amounts paid in certain circumstances.
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. Fixed fee services are accounted for in conformity with either the percentage-of-completion or the completed-contract method. Revenues recognized on the percentage-of-completion method, are measured by the percentage of cost incurred to date, primarily labor costs, to total costs estimated to be incurred for each contract. Management considers expended co sts to be the best available measure of progress on these contracts.
Stock-based compensation
We record the fair value of stock-based payments as an expense in our consolidated financial statements. We 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 9 of the accompanying notes to our unaudited condensed consolidated financial statements.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements as of March 31, 2010.
Employees
As of March 31, 2010, DecisionPoint had a total of 59 full time and 2 part time non-union employees. We have not experienced any work disruptions or stoppages and we consider relations with our employees to be good.
Inflation
We do not believe that inflation has had a material impact on our business or operating results during the periods presented
ITEM 3. QUANTITIATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
ITEM 4T. CONTROLS AND PROCEDURES
We review our disclosure controls and procedures on an ongoing basis and may from time to time make changes aimed at enhancing their effectiveness. We also review our internal control over financial reporting, on an ongoing basis and may from time to time make changes aimed at enhancing their effectiveness. Based on their evaluation and on the new procedures noted above, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that we are able to record, process, summarize and report in a timely manner the information required to be disclosed in reports we file under the Exchange Act.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, DecisionPoint 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.
Currently, we are a creditor in a bankruptcy filing from one of our customers which revolves around ‘preference payments’ received 90 days prior to the actual bankruptcy filing date. The total amount of the potential claim is $182,000 which we have recorded as a liability in 2009. We are uncertain of the final resolution of this claim as of the date of this report but based upon counsel’s advice and knowledge of bankruptcy proceedings, it is probable that we will not be successful in defending the claim and will ultimately be required to pay the sum to the court.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Form 10K as filed with the SEC on March 31, 2010.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During February 2010, the Company issued 310,000 common shares to two separate vendors in lieu of cash payment for services rendered. The total value of the shares issued were $99,200 based on the common share price for its common stock on the date of the agreements. These securities were issued in transactions that were exempt from registration under Section 4(2) of the Securities Act of 1933, as amended (“Securities Act”), as transactions by an issuer not involving a public offering. All of the investors were knowledgeable, sophisticated and had access to comprehensive information about the Company and represented their inten tion to acquire the securities for investment only and not with a view to distribute or sell the securities. The Company placed legends on the securities stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. REMOVED and RESERVED
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
(a) Exhibits
| Exhibit Number | | Description of Exhibit |
| | | |
| 31.1 | | Certification of the Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a) |
| 31.2 | | Certification of the Principal Financial and Accounting Officer pursuant to Exchange Act Rule 13a-14(a) |
| 32.1 | | Certification of the Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 |
| 32.2 | | Certification of the Principal Financial and Accounting Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | DecisionPoint Systems, Inc. |
| | | |
| Date: May 14, 2010 | By: | /s/ Nicholas E. Toms |
| | Nicholas E. Toms |
| | Principal Executive Officer |
| Date: May 14, 2010 | By: | /s/ Donald W. Rowley |
| | Donald W. Rowley |
| | Principal Financial and Accounting Officer |
