| Basis of Presentation and Summary of Significant Accounting Policies | Note 2: Basis of Presentation and Summary of
Significant Accounting Policies Basis of Presentation The consolidated financial statements of DecisionPoint
Systems, Inc. and its subsidiaries have been prepared on an accrual basis of accounting in accordance with United States Generally Accepted
Accounting Principles (“U.S. GAAP”). The accompanying consolidated financial statements include the accounts of DecisionPoint
Systems, Inc. and its wholly owned subsidiaries, DecisionPoint Systems International (“DPSI”), DecisionPoint Systems Group,
Inc. (“DPS Group”), RDS, ExtenData and AMG. AMG was acquired on January 31, 2022, and as such, has been consolidated into
our financial position and results of operations beginning February 1, 2022. All our identifiable assets are in the United States and
all intercompany transactions have been eliminated in consolidation. Reverse Stock Split In December 2021, we effectuated a reverse stock
split of our outstanding shares of common stock at a ratio of 1-for-2. See Note 11, Stockholders’ Equity COVID-19 COVID-19 and the response to the pandemic have,
at times, negatively impacted overall economic conditions (including contributing to supply chain disruptions, labor shortages and an
inflationary economic environment). The potential future impacts of COVID-19, while uncertain, could materially adversely impact the Company’s
results of operations. Operating Segments Under the Financial Accounting Standards Board
Accounting Standards Codification 280-10, two or more operating segments may be aggregated into a single operating segment for financial
reporting purposes if aggregation is consistent with the objective and basic principles, if the segments have similar characteristics,
and if the segments are similar in each of the following areas: (i) the nature of products and services, (ii) the nature of the production
processes, (iii) the type or class of customer for their products and services, and (iv) the methods used to distribute their products
or provide their services. We believe each of the Company’s segments meet these criteria as they provide similar products and services
to similar customers using similar methods of production and distribution. Because we believe each of the criteria set forth above has
been met and each of the Company’s segments has similar characteristics, we aggregate results of operations in one reportable operating
segment. Use of Estimates The preparation of consolidated financial statements
in conformity with U.S. GAAP 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 period. Certain
accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different
amounts could have been reported under different conditions, or if different assumptions had been used. We evaluate our estimates and
assumptions on a regular basis. Accounts Receivable Accounts receivable are stated at net realizable
value, and as such, earnings are charged with a provision for doubtful accounts based on our best estimate of the amount of probable credit
losses in our existing accounts receivable. We determine an allowance based on historical write-off experience and specific account information
available. Accounts receivable are reflected in the accompanying consolidated balance sheets net of a valuation allowance of $262,000
and $20,000 as of December 31, 2022 and 2021, respectively. When internal collection efforts on accounts have been exhausted, the accounts
are written off by reducing the allowance for doubtful accounts and the related customer receivable. Inventory Inventory consists solely of finished goods and
is stated at the lower of cost or net realizable value. 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. The creation of such provisions results
in a reduction of inventory to net realizable value and a charge to cost of sales. Inventories are reflected in the accompanying consolidated
balance sheets net of a valuation allowance of $42,000 and $59,000 as of December 31, 2022 and 2021, respectively. Deferred Costs Deferred costs consist primarily of customer-related
third-party extended hardware and software maintenance services which we have paid for in advance. The costs are ratably amortized over
the life of the contract, generally one to five years. Property and Equipment Property and equipment are recorded at cost and
depreciated using the straight-line method over the estimated useful lives of the assets, generally from three to five years. Leasehold
improvements are recorded at cost and amortized over the shorter of the lease term or the life of the improvements. Cost incurred for
repairs and maintenance are expensed as incurred. Upon retirement or sale, the cost and related accumulated depreciation and amortization
of disposed assets are removed from the accounts and any resulting gain or loss is included in other income or expense. Operating Leases We recognize a right-of-use asset and lease liability
for all of our long-term leases at the commencement date. Lease liabilities are measured based on the present value of the minimum lease
payments discounted at our incremental borrowing rate as of the date of commencement, which is determined based on information available
at lease commencement and is equal to the rate of interest that we would have to pay to borrow on a collateralized basis over a similar
term in an amount equal to the lease payments in a similar economic environment. Right-of-use assets are measured based on the lease liability
adjusted for any initial direct costs, prepaid rent, or lease incentives. Operating lease costs are included within general and administrative
expenses on the consolidated statements of income and comprehensive income. Capitalized Software Development Costs The capitalization of software development costs
for external use begins when technological feasibility has been established and ends when the software is available for sale. Software
development costs are amortized on a straight-line line basis over the remaining economic life, generally three years. Amortization of
the capitalized software is classified within cost of sales for services in the consolidated statements of income and comprehensive income. Intangible Assets and Long-lived Assets We evaluate our intangible and long-lived assets
for impairment when events or circumstances arise that indicate intangible and long-lived assets may be impaired. Indicators of impairment
include, but are not limited to, a significant deterioration in overall economic conditions, a decline in the market capitalization, the
loss of significant business, or other significant adverse changes in industry or market conditions. We completed the qualitative assessment
for impairment and determined that there was no impairment during the years ended December 31, 2022 and 2021. There can be no assurance,
however, that market conditions will not change or demand for our products will continue, which could result in an impairment of intangible
and long-lived assets in the future. Intangible assets with finite useful lives are
amortized over their respective estimated useful lives using an accelerated method to their estimated residual values, if any. Our intangible
assets consist of customer lists, customer relationships and trade names. Refer to Note 4 for further information on our intangible assets. Goodwill Goodwill represents the excess of the purchase
price paid over the fair value of the net assets acquired. Goodwill is not amortized but tested for impairment at least annually or whenever
events or changes in circumstance indicate that carrying values may not be recoverable. We assess the impairment of goodwill annually
at each year-end and when indicators of impairment are present. We completed our annual assessment for goodwill
impairment and determined that goodwill was not impaired as of December 31, 2022 and 2021. Factors that we consider important that could
trigger an impairment assessment include, but not limited to, the following:
● significant under-performance relative to historical and projected operating results;
● significant changes in the manner of use of the acquired assets or business strategy; and
● significant negative industry or general economic trends. When performing the impairment review, we determine
the carrying amount of a reporting unit by assigning assets and liabilities, including the existing goodwill, to each reporting unit.
To evaluate whether goodwill is impaired, we compare the estimated fair value of each reporting unit to which the goodwill is assigned
to the reporting unit’s carrying amount. If the carrying amount of a reporting unit exceeds its fair value, the amount of the impairment
loss will be recognized as the difference of the estimated fair value and the carrying value of the reporting unit. Determining the fair value of a reporting unit
is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include determining
enterprise fair value and the allocation of enterprise fair value to the Company’s operating segments, revenue and expense growth
rates, capital expenditures and the depreciation and amortization related to capital expenditures, changes in working capital, discount
rates, risk-adjusted discount rates, future economic and market conditions and the determination of appropriate comparable companies.
Due to the inherent uncertainty involved in making these estimates, actual future results related to assumed variables could differ from
these estimates. Fair Value Measurement Fair value is the price that would be received
from selling an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides a hierarchy
for inputs used in measuring fair value that prioritize the use of observable inputs over the use of unobservable inputs when such observable
inputs are available. The three levels of inputs that may be used to measure fair value are as follows:
● Level 1 - Quoted prices in active markets for identical assets or liabilities.
● Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data.
● Level 3 - Fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including assumptions and judgments made by us. The carrying amounts of cash, accounts receivable,
accounts payable and accrued expenses, and line of credit approximate fair value due to the short-term nature of these financial instruments.
The carrying amount of our debt approximates its fair value as the credit markets have not materially changed since the original borrowing
dates. Business Combinations We utilize the acquisition method of accounting
for business combinations which allocates the purchase price of an acquisition to the various tangible and intangible assets acquired
and liabilities assumed based on their estimated fair values. We primarily establish fair value using the income approach based upon a
discounted cash flow model. The income approach requires the use of many assumptions and estimates including future revenues and expenses,
as well as discount factors and income tax rates. Other estimates include:
● Estimated step-ups or write-downs for fixed assets and inventory;
● Estimated fair values of intangible assets; and
● Estimated liabilities assumed from the target. While we use our best estimates and assumptions
as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business acquisition
date, these estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchase price allocation
period, which is generally no more than one year from the business acquisition date, we may record adjustments to the assets acquired
and liabilities assumed, with the corresponding offset to goodwill. Revenue Recognition We determine revenue recognition through the following
steps: (1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination
of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition
of revenue when, or as, a performance obligation is satisfied. We combine contracts with the same customer into
a single contract for accounting purposes when the contracts are entered into at or near the same time and the contracts are negotiated
as a single commercial package, consideration in one contract depends on the other contract, or the services are considered a single performance
obligation. If an arrangement involves multiple performance obligations, the items are analyzed to determine the separate units of accounting,
whether the items have value on a standalone basis and whether there is objective and reliable evidence of their standalone selling price.
The total contract transaction price is allocated to the identified performance obligations based upon the relative standalone selling
prices of the performance obligations. The standalone selling price is based on an observable price for services sold to other comparable
customers, when available, or an estimated selling price using a cost-plus margin approach. We estimate the amount of total contract consideration
we expect to receive for variable arrangements by determining the most likely amount we expect to earn from the arrangement based on the
expected quantities of services we expect to provide, and the contractual pricing based on those quantities. We only include some or a
portion of variable consideration in the transaction price when it is probable that a significant reversal in the amount of cumulative
revenue recognized will not occur or when the uncertainty associated with the variable consideration is subsequently resolved. We consider
the sensitivity of the estimate, our relationship and experience with our client and variable services being performed, the range of possible
revenue amounts and the magnitude of the variable consideration to the overall arrangement. As discussed in more detail below, revenue is
recognized when a customer obtains control of promised goods or services under the terms of a contract and is measured as the amount of
consideration we expect to receive in exchange for transferring goods or providing services. We do not have any material extended payment
terms, as payment is due at or shortly after the time of the sale. Sales, value-added and other taxes collected concurrently with revenue
producing activities are excluded from revenue. We recognize contract assets or unbilled receivables
related to revenue recognized for services completed but not yet invoiced to our clients. Unbilled receivables are recorded when we have
an unconditional right to contract consideration. A contract liability is recognized as deferred revenue when we invoice clients, or receive
customer cash payments, in advance of performing the related services under the terms of a contract. Remaining performance obligations
represent the transaction price allocated to the performance obligations that are unsatisfied as of the end of each reporting period.
Deferred revenue is recognized as revenue when we have satisfied the related performance obligation. As of December 31, 2022, the total aggregate transaction
price allocated to the unsatisfied performance obligations was approximately $10.4 million, of which approximately $6.0 million is expected
to be recognized over the next 12 months. As of December 31, 2021, the total aggregate transaction
price allocated to the unsatisfied performance obligations was approximately $7.1 million, of which approximately $4.6 million is expected
to be recognized over the next 12 months. Hardware, consumables, and software products -
We recognize product revenue at the point in time when a client takes control of the hardware, consumables and/or software, which typically
occurs when title and risk of loss have passed to the client. Our selling terms and conditions reflect that F.O.B ‘dock’ contractual
terms establish that control is transferred from us at the point in time when the product is shipped to the customer. Revenues from software license sales are recognized
as a single performance obligation on a gross basis as we are acting as a principal in these transactions at the point the software license
is delivered to the customer. Generally, software licenses are sold with accompanying third-party delivered software assurance, which
allows customers to upgrade, at no additional cost, to the latest technology if new capabilities are introduced during the period that
the software assurance is in effect. In most instances, we determined that the accompanying third-party delivered software assurance is
critical or essential to the core functionality of the software license because we do not sell the software license and standard warranty
on a standalone basis (which indicates that the customer cannot benefit from the software license and standard warranty on its own), the
software license and the standard warranty are not separately identifiable, the software license assurance warranty are inputs of a combined
item in the contract, the assurance warranty and software license are highly interdependent and interrelated because the core functionality
of the license is dependent on the assurance warranty, and our promise to provide the assurance warranty that is necessary for the software
license to continue to provide significant benefit to the customer. As a result, the software license and the accompanying third-party
delivered software assurance are recognized as a single performance obligation. We consider several factors to determine whether we are
acting as a principal or an agent, including whether we are the primary obligor to the customer, have established our own pricing and
have inventory and credit risks. Our internally developed software solution generates
SaaS revenues from implementation, training and subscription fees. The initial term of the SaaS agreements is generally one year. The
subscription fees are recognized over the subscription period. The implementation fees are necessary and integral for the customer to
utilize the software. As such, the implementation fees are deferred and amortized over the subscription period. We also offer third-party SaaS subscriptions to
our customers. The third-party subscriptions are recognized on a net basis as we are acting as an agent in these transactions, whereas
our internally developed software solution offering is recognized on a gross basis. We leverage drop-ship shipments with many of our
partners and suppliers to deliver hardware and consumable products to our clients without having to physically hold the inventory at our
warehouses, thereby increasing efficiency and reducing costs. We recognize revenue for drop-ship arrangements on a gross basis as the
principal in the transaction when the product is received by the client because we control the product prior to transfer to the client.
We also assume primary responsibility for the fulfillment in the arrangement, we assume inventory risk if the product is returned by the
client, we set the price of the product charged to the client, we assume credit risk for nonpayment by our customer, and we work closely
with clients to determine their hardware specifications. Services - We provide Services which include consulting,
staging, deployment, installation, repair and customer specified software customization. The arrangement with a customer is based on either
a time and material basis or a fixed fee. For our time and materials service contracts, we recognize revenues as those services are provided
and consumed, as this is the best output measure of how the services are transferred to the customer. Fixed fee contracts are recognized
in the period in which the services are performed or delivered using a proportional service model. Except for installation services that
are recognized over the subscription period as previously described, all other Services are recognized on a gross basis in the period
in which the services are performed or delivered. Maintenance services - We sell certain Original
Equipment Manufacturer (“OEM”) hardware and software maintenance support arrangements to our clients. We also offer an internal
maintenance agreement related to hardware. These contracts are support service agreements for the hardware and/or software products that
were acquired from us and others. Although these are third-party support agreements for maintenance on the specific hardware and/or software
products, our internal help desk and systems engineers assist customers by providing technical assistance on the source of or how to fix
the problem. In addition, we provide a turn back feature, deploying replacements as needed while we manage the return and reverse logistics
of the product back to the OEM. Revenue related to service contracts is recognized ratably over the term of the agreement, generally over
one to three years. We generally act as the principal in the transaction
as the primary obligor for fulfillment in the arrangement, we set the price of the service charged to the customer, and we assume credit
risk for the amounts invoiced. In addition, we manage back-end warranties, service contracts and repairs for multiple products and suppliers.
We leverage our knowledge base of mobility best practices by consolidating multiple supplier’s maintenance requirements under a
single point in contact through us. Our internal support team assists our customers first by performing an initial technical triage to
determine the source of the problem including, but not limited to, physical damage and software issues and whether they can be handled
remotely by the client or returned for repair. Further, we receive the returned products, confirm that the equipment is operational or
not, either repair or refurbish the equipment internally or return it to the manufacturer directly to repair. We then obtain the product
turn back from the manufacturer and either send it back out to a specific customer location or place in a customer’s spare pool.
As a result, we recognize the revenue on a gross basis. For certain of our agreements, the accompanying third-party delivered software
assurance is recognized on a net basis when we are acting as an agent in these transactions. We defer costs to acquire contracts, including
commissions, incentives and payroll taxes if they are incremental and recoverable costs of obtaining a customer contract with a term exceeding
one year. Deferred contract costs are amortized to sales and marketing expense over the contract term, generally over one to three years.
We have elected to recognize the incremental costs of obtaining a contract with a term of less than one year as a selling expense when
incurred. We include deferred contract acquisition costs in “Prepaid expenses and other current assets” in the consolidated
balance sheets. As of December 31, 2022 and December 31, 2021, we deferred $204,000 and $136,000, respectively, of related contract acquisition
costs. The following table summarizes net sales by revenue
source (in thousands):
Year Ended
2022 2021
Hardware and software $ 71,774 $ 44,355
Consumables 7,305 6,125
Services 18,336 15,463
$ 97,415 $ 65,943 Concentration of Risk Financial instruments that potentially subject
us to a concentration of credit risk consist primarily of cash and accounts receivable. All our cash balances are insured by the Federal
Deposit Insurance Corporation up to $250,000 per depositor at each financial institution. As of December 31, 2022, we had approximately
$6,741,000 on deposit in excess of the insurance limits. We have not experienced any such losses in these accounts. In 2022, two customers accounted for approximately
17% and 11%, or $16.2 million and $8.3 million, of our net sales. No single customer in 2022 accounted for more than 10% of net sales.
Accounts receivable from one of these two customers at December 31, 2022 accounted for 27% of total accounts receivable. For the year ended December 31, 2022, we had purchases
from three suppliers that collectively represented 78% of total purchases and 75% of accounts payable at December 31, 2022. Loss of a
significant vendor could have a material adverse effect on our operations. In 2021, one customer accounted for
approximately 14%, or $9.0 million, of our net sales. No other single customer in 2021 accounted for more than 10% of net sales.
Accounts receivable from this one customer at December 31, 2021 accounted for 11% of total accounts receivable. For the year ended December 31, 2021, we had purchases
from two suppliers that collectively represented 61% of total purchases and 76% of accounts payable at December 31, 2021. Loss of a significant
vendor could have a material adverse effect on our operations. Share-Based Compensation We account for share-based compensation in accordance
with the provisions of ASC Topic 718 “Compensation – Stock Compensation”. Under ASC 718, share-based compensation cost
is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite service
period (generally the vesting period of the equity grant). Share-based compensation expense recognized during
the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest during the period. Given
that share-based compensation expense recognized in the accompanying consolidated statements of income and comprehensive income is based
on awards ultimately expected to vest. We account for forfeitures as they occur, rather than estimate expected forfeitures. Compensation cost for stock awards, which from
time to time includes restricted stock units, is measured at the fair value on the grant date and recognized as expense, net of estimated
forfeitures, over the related service period. The fair value of stock awards is based on the estimated fair value of our common stock
on the grant date. The estimated fair value of common stock option
awards is calculated using the Black-Scholes option pricing model. The Black-Scholes model requires subjective assumptions regarding future
stock price volatility and expected time to exercise, along with assumptions about the risk-free interest rate and expected dividends,
all of which affect the estimated fair values of our common stock option awards. Given a lack of historical stock option exercises, the
expected term of options granted is calculated as the average of the weighted vesting period and the contractual expiration date of the
option. This calculation is based on a method permitted by the Securities and Exchange Commission in instances where the vesting and exercise
terms of options granted meet certain conditions and where limited historical exercise data is available. The expected volatility is based
on the historical volatility of the common stock of comparable public companies that operate in similar industries as us. The risk-free rate selected to value any particular
grant is based on the U.S. Treasury rate that corresponds to the expected term of the grant effective as of the date of the grant. The
expected dividend assumption is based on our history and management’s expectation regarding dividend payouts. Compensation expense for common stock option awards
with graded vesting schedules is recognized on a straight-line basis over the requisite service period for the last separately vesting
portion of the award, provided that the accumulated cost recognized as of any date at least equals the value of the vested portion of
the award. If there are any modifications or cancellations of the underlying vested or unvested stock-based awards, we may be required
to accelerate, increase or cancel any remaining unearned share-based compensation expense, or record additional expense for vested stock-based
awards. Future share-based compensation expense and unearned share- based compensation may increase to the extent that we grant additional
common stock options or other share-based awards. Income Taxes We utilize the asset and liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the consolidated
financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are
expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected
to be realized. Under ASC Topic 740, the impact of an uncertain
income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon
audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of
being sustained. Additionally, ASC Topic 740 provides requirements for derecognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition. Our policy is to recognize interest and/or penalties related to income tax matters in income
tax expense. At December 31, 2022 and 2021, we had no unrecognized
tax benefits that, if recognized, would affect our effective income tax rate over the next 12 months. As of December 31, 2022 and 2021,
we had no accrued interest or penalties. Accounting Standards Adopted On January 1, 2021, we adopted ASU 2020-10, “Codification
Improvements”. This ASU amended a variety of Topics, including presentation and disclosures of financial statements, interim reporting,
accounting changes and error corrections. The adoption of this guidance did not have an impact on our consolidated financial statements. On January 1, 2021, we adopted ASU 2019-12, “Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes,”. ASU 2019-12 removed certain exceptions to the general principles
in Topic 740 and clarifies and amends existing guidance to improve consistent application. The adoption of this guidance did not have
an impact on our consolidated financial statements. In March 2020, the FASB issued ASU No. 2020-04
(“ASU 2020-04”), “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial
Reporting.” ASU 2020-04 provides optional expedients and financial reporting and accounting exceptions for contracts, hedging accounting
and other transactions that reference London Interbank Offered Rate (“LIBOR”) and are expected to be discontinued because
of reference rate reform and will not apply to contracts entered into after December 31, 2022. In January 2021, the FASB issued ASU 2021-01,
which refines the scope of Topic 848 and clarifies some of its guidance as part of the FASB’s monitoring of global reference rate
activities. The new guidance was effective upon issuance, and we can elect to apply the amendments prospectively through December 31,
2022. The adoption of this guidance did not have an impact on our consolidated financial statements. Accounting Standards Not Yet Adopted In June 2016, the FASB issued ASU 2016-13, “Financial
Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” . Financial Instruments
– Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates There are no other accounting standards that have
been issued but not yet adopted that we believe could have a material impact on our consolidated financial statements. |
