Attached files
file | filename |
---|---|
EX-32.1 - CERTIFICATIONS PURSUANT TO SECTION 906 OF SARBANES OXLEY ACT OF 2002 - DecisionPoint Systems, Inc. | f10k2009ex32i_decisionpnt.htm |
EX-31.2 - CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES OXLEY ACT OF 2002 - DecisionPoint Systems, Inc. | f10k2009ex31ii_decisionpnt.htm |
EX-32.2 - CERTIFICATIONS PURSUANT TO SECTION 906 OF SARBANES OXLEY ACT OF 2002 - DecisionPoint Systems, Inc. | f10k2009ex32ii_decisionpnt.htm |
EX-31.1 - CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES OXLEY ACT OF 2002 - DecisionPoint Systems, Inc. | f10k2009ex31i_decisionpnt.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2009 | |
OR | |
o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period ____________ to__________
DECISIONPOINT
SYSTEMS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
333-144279
|
74-3209480
|
||
(State
of Incorporation)
|
(Commission
File Number)
|
(IRS
Employer Identification No.)
|
19655
Descartes, Foothill Ranch, CA 92610-2609
(Address
of principal executive offices) (Zip code)
(949)
465-0065
(Registrant's
telephone number, including area code)
Securities
Registered Pursuant to Section 12(b) of the Act: None
Securities
Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value
$.001
Title
of Class
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
As of
June 30, 2009, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was $8,080,000.
The
number of shares outstanding of the registrant’s Common Stock, $0.001 par value,
was 28,700,000 as of March 31, 2010.
|
|
Page
No.
|
|
|
PART I
|
||||
|
|
|
||
Item
1.
Business
|
|
1
|
||
Item
1A. Risk Factors
|
|
|
10
|
|
Item
1B. Unresolved Staff
Comments
|
|
|
14
|
|
Item
2.
Properties
|
|
|
14
|
|
Item
3. Legal
Proceedings
|
|
|
14
|
|
Item
4.
Reserved
|
|
|
14
|
|
|
|
|
|
|
PART II
|
||||
|
|
|
|
|
Item
5.
Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
|
|
|
15
|
|
Item
6. Selected
Financial Data
|
|
|
16
|
|
Item
7.
Management's Discussion and Analysis of Financial Condition and
Results Of Operations
|
|
|
17
|
|
Item
7A. Quantitative and Qualitative
Disclosures about Market Risk
|
|
|
20
|
|
Item
8. Financial
Statements and Supplementary Data
|
|
|
20
|
|
Item
9. Changes in
and Disagreement with Accountants on Accounting and Financial
Disclosures
|
|
|
20
|
|
Item
9A(T). Controls and Procedures
|
|
|
21
|
|
Item
9B. Other
Information
|
|
|
22
|
|
|
|
|
|
|
PART III
|
||||
|
|
|
|
|
Item
10. Directors,
Executive Officers, and Corporate Governance
|
|
|
23
|
|
Item
11. Executive
Compensation
|
|
|
25
|
|
Item
12. Security
Ownership of Certain Beneficial Owners, Management and other related
Stockholder Matters
|
|
|
26
|
|
Item
13. Certain
Relationships and Related Transactions and Director
Independence
|
|
|
28
|
|
Item
14. Principal
Accounting Fees and Services
|
|
|
28
|
|
|
|
|
|
|
PART IV
|
||||
|
|
|
|
|
Item
15. Exhibits,
Financial Statement Schedules
|
|
|
29
|
|
Signatures
|
|
|
30
|
|
PART
I
Forward
Looking Statements
Some of
the statements contained in this Form 10-K 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-K, reflect our current beliefs with respect to future events and
involve known and unknown risks, uncertainties and other factors affecting our
operations, market growth, services, products and licenses. No
assurances can be given regarding the achievement of future results, as actual
results may differ materially as a result of the risks we face, and actual
events may differ from the assumptions underlying the statements that have been
made regarding anticipated events. Factors that may cause actual
results, our performance or achievements, or industry results, to differ
materially from those contemplated by such forward-looking statements include
without limitation:
·
|
Our
ability to attract and retain management, and to integrate and maintain
technical information and management information
systems;
|
·
|
Our
ability to raise capital when needed and on acceptable terms and
conditions;
|
·
|
The
intensity of competition; and
|
·
|
General
economic conditions.
|
All written and oral forward-looking statements made in connection with this Form 10-K 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.
ITEM 1. BUSINESS
History
DecisionPoint
Systems, Inc., f/k/a Canusa Capital Corp. (the “Company”) was incorporated on
December 27, 2006, under the laws of the State of Delaware. On June
17, 2009, we entered into an Agreement and Plan of Merger (“Merger Agreement”)
among the Company, DecisionPoint Acquisition, Inc., a Delaware corporation which
is a wholly-owned subsidiary of the Company (“Merger Sub”), and DecisionPoint
Systems Holding, Inc., a California corporation (“Holding”). Holding
merged with and into Merger Sub with Merger Sub surviving the merger
(“Merger”)as a wholly-owned subsidiary of the Company under the name
DecisionPoint Systems Group, Inc. (“DecisionPoint”). Prior to the
Merger, the Company was a “shell company” (as such term is defined in Rule 12b-2
under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Pursuant to the terms of the Merger Agreement, the Company
acquired all of the issued and outstanding capital stock of DecisionPoint from
DecisionPoint’s shareholders in exchange for 20,000,000 shares of the Company’s
common stock and assumed all of DecisionPoint’s obligations under
DecisionPoint’s outstanding stock options and warrants.
DecisionPoint
has two wholly owned subsidiaries, DecisionPoint Systems CA, Inc. formerly known
as Creative Concepts Software, Inc. (“CCS”) and DecisionPoint Systems CT, Inc.
formerly known as Sentinel Business Systems, Inc. (“SBS”). The
combined company is a data collection systems integrator that sells and installs
mobile devices, software, and related bar coding equipment, radio frequency
identification systems technology and provides custom solutions.
In
December 2003, DecisionPoint formed an Employee Stock Ownership Plan (“ESOP”)
and loaned the ESOP $1,950,000 that the Employee Stock Ownership Plan Trust
(“Trust”) used to acquire all of its stock from its former CCS
stockholder. The Company also adopted a fiscal year end of December
31st. DecisionPoint completed its acquisition of SBS in March
2006.
Founded
in 1995, CCS was a leading provider of Enterprise Mobility Solutions. Industry
expertise included grocery, retail general merchandise and warehousing primarily
in the western United States. CCS provided all of the services
necessary to ensure a successful project. They provided turnkey
solutions which included: project management, system design, application
development, system integration, hardware configuration and staging, wireless
system installation, user training, help desk support and hardware
maintenance.
Founded
in 1976 and incorporated in 1983, SBS developed over time a family of powerful
enterprise data collection software solutions, products and
services. Their flagship product, CASE Tools/Pathfinder™, was
introduced in 1992. In 1980, Sentinel Business Solutions became
Intermec, Inc’s, (“Intermec”) first Value Added Reseller. In 2000,
SBS also joined forces with Symbol Technologies, Inc. (“Symbol”) as a Solution
Partner. SBS maintained their leadership in the data collection
industry for over 25 years. They offered complete enterprise data
collection solutions: rapid application development tools, transaction server,
hardware, services, media and support. The combination of these
companies, created a National Mobile Solutions and radio frequency
identification systems (“RFID”) company that can provide solutions from
historical knowledge and added expertise.
1
Overview
DecisionPoint
delivers to its customers the ability to make better, faster, and more accurate
business decisions by implementing industry-specific, enterprise wireless and
mobile computing systems for their front-line employees. It is these
systems which provide the information to improve the hundreds of individual
business decisions made each day. The “productivity paradox” is that
the information remains locked away in their organization’s enterprise computing
system, accessible only when employees are at their
desk. DecisionPoint solves this productivity issue. The
result for our customers is they are able to move their business decision points
closer to their own customers whom in turn, drive their own improved
productivity and operational efficiencies.
DecisionPoint
does this by providing our 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”).
A graphical view of DecisionPoint’s business process is presented below:
DecisionPoint’s
typical solution that we deliver consists of a combination of the
following:
·
|
specialized
mobile computers
|
·
|
a
wireless network infrastructure (or the use of a national wireless
carrier)
|
·
|
specialized
mobile application software
|
·
|
integration
software to our customer’s existing enterprise systems,
and
|
·
|
a
range of professional services needed to make it all
‘work’.
|
Delivering
this value requires a full range of services and a substantial and unique set of
resources and experience. DecisionPoint employs a highly talented and
experienced staff of architects, engineers, and support personnel to guide our
customers through this process to success.
During
the business cycle our highly experienced professionals will:
·
|
consult
with customers about their business needs
|
·
|
design
the overall enterprise mobile solution to fit the need
|
·
|
build
or acquire the software needed for the solution
|
·
|
acquire
the wireless and mobile computers needed
|
·
|
deliver
the services to deploy it all, and
|
·
|
support
the system after it has been
installed.
|
2
DecisionPoint’s
deliverable of this value to enterprise customers is very different than
delivering similar technology to the consumer. Unlike buying and
activating a personal mobile phone or buying a laptop computer with Windows®,
bringing mobile computing to the front-line enterprise worker is orders of
magnitude more challenging. This is because, unlike the individual
consumer, the enterprise has significant performance, reliability, and security
requirements. This is in addition to the fact that any system must be
integrated with the complex enterprise computing systems already in
place. Therefore, DecisionPoint must possess the required knowledge
and manage a myriad of technical details and nuances to achieve our customer’s
desired outcome.
As a part of delivering this value, DecisionPoint has developed an ‘ecosystem’ of partners which we bring to every customer situation. The standout partner in this ecosystem is the Motorola Enterprise Mobility Solutions Division, (“EMS”) for which we consistently are one of the nation’s top Value Added Resellers (“VAR”). We also partner with other top equipment and software suppliers such as Zebra Technologies Corporation (“Zebra”), Datamax - O’Neil (“O’Neil”) — a unit of the Dover Corporation, in addition to a host of specialized independent software vendors (“ISV”) such as AirVersent, Inc., Antenna Software, GlobalBay Mobile Technologies, Inc., Mobileframe LLC, Syclo LLC and Wavelink Corporation.
Major vendors and other top partners have come to depend on the VAR channel in order to grow their own businesses. This is because they cannot cost-effectively penetrate their target markets alone given the number and variety of ways their product is applied and because of the myriad of complex integration requirements. They have come to view their role as providing the best-of-breed wireless and mobile computing technology to the market and partner with companies like DecisionPoint to extend their business. This applies not only to Motorola with wireless and mobile computing technology, but also with other high tech manufacturers who produce printers, labels, RFID and other technology products.
As our
markets have grown and have become more sophisticated, DecisionPoint has grown
both in size and in the nature and type of offerings. As our
customers come to depend more and more on enterprise wireless and mobile
computing to run their businesses, DecisionPoint continues to deliver and expand
the services to keep those systems running. We are actively moving
into the areas of enterprise managed services and software-as-a-service (“SaaS”)
to continue to deliver our value and build ongoing revenue streams for the
Company.
DecisionPoint has made several investments in SaaS offerings in response to what we believe will be a fundamental shift in our customers’ buying behavior. And we are monitoring the results closely. Customers are fundamentally beginning to realize that they do not have to own the entire end-to-end solution in order to reap its benefits. And, in fact, there could be major cost savings for them if they chose instead to receive part of the value of what DecisionPoint has to offer in a SaaS model. We are a believer in this theory ourselves, as we are an avid salesforce.com customer. Salesforce.com is one of the world’s largest SaaS companies.
Marketplace
Industry
Over the
past five years, the enterprise mobile computing industry has standardized
several key technologies. This standardization has enabled the market
to grow. Examples of this include the WindowsMobile operating system
for mobile devices, 802.11 a/b/g “Wi-Fi” wireless local area networks, and
robust nationwide wireless carrier data networks such as AT&T and T-Mobile
(HSDPA technology), and Verizon and Sprint (EVDO technology).
This
standardization has allowed mobile computing manufacturers to build product to
these widely adopted standards, creating the opportunity to automate workers
using these standards. These developments have created many
opportunities for DecisionPoint to build enterprise wireless and mobile
computing solutions for our customers’ needs.
Determining
which enterprise wireless and mobile solutions DecisionPoint delivers to its
customers highly depends on several key factors including the customers’
industry. It requires that DecisionPoint possess domain expertise in
our customers’ industry. It also requires business application
software expertise, and mobile computing and wireless networking technical
acumen.
The
customers’ industry is very important because unlike generic wireless business
applications such as email, the applications that DecisionPoint provide involve
business processes which are very specific to a vertical market. An
example is Proof-of-Delivery (“POD”). In order for a POD application
to deliver value it must not only be tailored to a specific industry such as
couriers, but it must also be tailored to each specific courier company
depending on how they run their business process.
DecisionPoint’s
key to delivering customer value profitably is for us to know where standardized
system hardware and software components will deliver the required result and
where they cannot and therefore, more custom components need to be
utilized. This capability comes from our years of experience, our
talented professionals and our highly developed ecosystem of
partners.
DecisionPoint
provides 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.
3
Current Market
Environment
Over the last several years, DecisionPoint has been repositioning itself 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. Small resellers and large catalog resellers simply do not want to, or cannot, provide the types of services needed to make these systems a success. Our major ecosystem partners, such as Motorola, recognize this and have come to depend more and more on DecisionPoint to deliver the business value that their products enable.
By
referring more end-user demand to DecisionPoint, manufacturers can leverage
DecisionPoint’s personnel and skill to provide customers with enhanced personal
service. With deep expertise about specific customers’ operations,
resellers are very effective in promoting sales of key vendor’s
products. Today, a majority of Motorola’s sales of mobile computers
are through the sales channel in which DecisionPoint participates.
DecisionPoint benefits from other advantages by participating in this sales channel. The industry leaders have established program rewards, such as favorable pricing structure incentives, for those top-tier VARs who invest in their programs and technologies. Not only does this reward our investments in personnel, it also creates a high bar for entry by requiring that other potential competitors must pass the same training and certification requirements that DecisionPoint personnel have passed.
Within
our commercial enterprise market, we believe there continues to be long-term
opportunity for growth as the global workforce continues to become more mobile
and the industries and markets that purchase our products and services continue
to expand. The markets in which we compete include mobile computing
products and services, enterprise wireless services, bar code scanning, RFID
products and services and mobile network management
platforms. Organizations looking to increase productivity and derive
benefits from mobilizing their applications and workforces are driving adoption
in this market. In 2009, given the current global economic conditions
and customer capital expenditure constraints, we had expected reduced spending
in the commercial enterprise market.
DecisionPoint’s
strategy in our target market is to enable our customers to focus on their
missions, not the technology. This is accomplished by providing
mission-critical systems, seamless connectivity through highly reliable voice
and data networks and a suite of advanced and/or custom applications that
provide real-time information to end users.
DecisionPoint Target
Market(s)
The
markets for enterprise wireless and mobile computing are very fragmented while
also being extremely complex in nature. But generally they can be
characterized by the following attributes:
1 .
|
Vertical
market industries which require specific domain
expertise.
|
2.
|
Industries
which track goods or deliver a service in the field (or
both).
|
3.
|
Industries
which have a significant group of mobile workers, whether they operate
primarily in one place or in the
field.
|
In the
commercial enterprise market, our approach is to deliver products and services
that are designed to empower the mobile workforce to increase productivity,
drive cost effectiveness and promote faster execution of critical business
processes.
Vertical
Markets
The
attractiveness of any vertical market for DecisionPoint depends directly on the
size and nature of the problems which that market faces that can be addressed by
enterprise wireless and mobile computing. Historically, retail,
warehousing, and manufacturing were the largest industries. Each typically had
large amounts of goods in constant motion which needed to be
tracked. And each had a workforce which primarily operated in one
place (i.e. a retail store, a distribution center or a factory).
Although
these markets are still attractive for DecisionPoint and comprise a significant
portion of our business, new markets are emerging which hold as great or even
greater promise than our historical markets.
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 under one roof.
4
DecisionPoint’s Field
Mobility Practice
DecisionPoint believes that the growth of Field Mobility-based markets will be so significant over the next several years, that we have created a dedicated specialty business practice inside of DecisionPoint 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.
We are
not alone in our expectations of growth for Field Mobility. Motorola,
as demonstrated through its strong on-going support, is also counting on
significant growth as well. They believe that as wireless carrier
networks become ubiquitous, it will increase their market opportunity to put
greater numbers of mobile computers into the hands of entire groups of
field-based workers who may have never had a mobile computer
before.
Products
and Services
Mobile
Applications
DecisionPoint
deploys mobile applications for a wide variety of business processes, depending
on the industry. Below is a brief overview of some of those
applications by industry:
Retail Store: Stock locator,
shelf price marking, markdowns, inventory control, physical inventory,
merchandising, customer service and mobile point-of-sale (“POS”).
Warehousing and Distribution:
Order shipping, order picking and packing, stock move and replenishments,
product receipt and putaway, labeling, physical inventory and cycle
counts.
Manufacturing: Production
count, work-in-process tracking, raw material consumption, quality control and
assurance, lot/batch/serial number control and scrap reporting.
Transportation and Logistics:
Proof-of-delivery, turn-by-turn directions, route optimization, cross-docking,
returns and driver logging.
Field Mobility: Field service
and repair, enterprise asset management, inspection, preventative maintenance,
surveys, rounds and readings.
Software
Unlike
the market for standardized business software such as email or accounting, the
market for enterprise mobile software is more customized. One size
does not fit all. Software for enterprise mobile systems must support
the specialized business processes in an industry-specific and sometimes
customer-specific way. For this reason, DecisionPoint utilizes
several avenues to provide the mobile software solutions to meet its customers’
needs depending on their situation and requirements.
·
|
Software
sourced from specialized Independent Software Vendors. The
software produced by key ISVs is designed to fit a need in a particular
vertical market and application. Even still, it must be
tailored to meet the needs of each customer. Depending on the situation,
this tailoring is done by DecisionPoint or by the ISV themselves under
contract to DecisionPoint. DecisionPoint has built a network of
ISVs in its ecosystem specializing in Field Mobility applications for this
purpose.
|
·
|
CASE
Tools/Pathfinder™ is DecisionPoint’s own application development
platform. Developed over the past 20 years, it is a stable and
capable software platform for many typical application uses but generally
not for Field Mobility
applications.
|
·
|
Custom
software created in-house using standardized programming tools like
Microsoft .NET® framework and Java™. These are used by
customer demand or when there is simply no other “off-the-shelf” way to
meet the customer’s requirements.
|
DecisionPoint
has multiple software options available which gives us the ability to meet the
customer’s total need at the best value to them. We intentionally
have made a point not to be “married” to any single vendor, product offering
and/or solution in order to be focused on the customers’ ultimate
needs.
5
Professional
Services
DecisionPoint’s
professional services offerings fall into one of three categories: business
consulting, technical consulting and technical development. Business
consulting is where we engage with our customer to help them understand the
potential ROI of implementing mobile computing, as an example, for a particular
business process. Technical consulting services help determine the
technology to be used and how it is to be implemented. Technical
development includes actual software programming and configuration of the mobile
application itself as well as interface software needed to connect to our
customer’s existing back-office systems.
Rollout, Support and
Management Services
These services involve actually installing a solution into the customer’s computer systems infrastructure (“implementation”) and then replicating that implementation out to all their operating locations (“rollout”). The rollout is critical because unless the mobile computing solution is rolled out across all operating locations, the desired ROI will most likely be limited.
DecisionPoint offers a wide range of services in this category. They include everything from assembling kits of everything needed for the system on a per location basis (“kitting”) to providing logistical services for rollout (“staging”), to advanced exchange services for broken units in the field, to help desk support and to a self-service portal where a customer can check the status of a service case or equipment repair.
For Field Mobility projects, carrier activation is a key service. Activation is where DecisionPoint actually activates mobile computers and/or devices to run on the carrier networks. Not only is this a key service to complete projects, but it is also a source of revenue for DecisionPoint from the carriers when DecisionPoint activates mobile computers and/or devices to operate on the carrier networks.
Finally,
DecisionPoint is adding offerings in the managed services and SaaS
categories. Increasingly, customers want to outsource various aspects
of operating and maintaining their enterprise mobile
systems. DecisionPoint is providing various service offerings to
remotely manage customers’ mobile computers and wireless networks as well as
offer mobile software on a SaaS subscription basis.
Hardware
DecisionPoint’s
hardware reseller sales strategy is designed to avoid competing for hardware
sales based solely on low cost provider status. Throughout the sales
cycle, DecisionPoint is diligent to point out to a customer that hardware is
only one component of the complete solution they are looking for. And
by bundling the software and services, mentioned above together with the
hardware, DecisionPoint positions itself as the value-added solution
provider. This positioning differentiates DecisionPoint from the
low-price, ‘discount’ hardware resellers who do not have this
capability.
DecisionPoint offers the following types of enterprise wireless and mobile computing hardware on a cost competitive basis:
·
|
Handheld
and vehicle-mounted, ruggedized mobile computers
|
·
|
802.11
a/b/g wireless LAN (“Wi-Fi”) infrastructure
|
·
|
Mesh
networking wireless infrastructure, such as the Motorola Canopy product
line
|
·
|
RFID
tag readers and related infrastructure
|
·
|
GPS
receivers
|
·
|
Two-way
radios
|
·
|
Handheld
bar code scanners
|
·
|
Bar
code label and RFID tag printers and
encoders.
|
Consumables
DecisionPoint
has extensive expertise in bar code and RFID consumables
solutions. We offer a full line of high quality labels, RFID tags,
and printer ribbons to meet the demands of every printing system. We
select the right components from a wide range of products on the market from
both independent and original equipment manufacturers of printers and RFID
printers/encoders. Matching media to the unique application is what
makes the system work. In addition, consumables are essentially a
recurring revenue stream once a customer has their system up and
running.
Sales
and Marketing
Customer
Base
DecisionPoint’s
historical success has largely followed the broad adoption of enterprise
wireless and mobile computing technology industry by industry. As
mentioned above, this adoption pattern started with retail stores and moved
backward through the retail supply chain into distribution and then
manufacturing. It also spread horizontally from the retail supply
chain into the supply chain of industrial goods as well. Since the
roots of DecisionPoint go back to the mid 1970’s, our customer base mirrors this
fact as well. Our products and services are sold nationwide to a
diverse set of customers such as retail, utility, transportation and logistics,
manufacturing, wholesale and distribution and other commercial
customers.
6
A
cross-section of our customers includes:
·
|
Retailers
in various categories and sizes, including “Tier-1” companies such as Liz
Claiborne, Inc., PETCO Animal Supplies, Inc., Nike, Inc., Nordstrom, Inc.
, and Grocery Outlet (Canned Foods,
Inc.).
|
·
|
Manufacturing
companies such as Dade Behring (Division of Siemens), Sargent
Manufacturing Co. (Division of ASSA Abloy), Timken Corp., Swiss Army
Brands, Smith & Wesson and pharmaceutical companies such as Pfizer,
Inc., and Celgene Corp.
|
·
|
Transportation,
warehousing and distribution, including logistics companies such as Golden
State Overnight Delivery Service, Inc. and Frontier Logistics
LP.
|
Now that
the Field Mobility marketplace is starting to grow significantly, we are working
with customers such as Wackenhut Corp., for security services for their patrol
officers, Scientific Games Corp., for their field service technicians, and
Mobile Mini, Inc., a provider of mobile temporary storage
facilities.
Go-To-Market
Model
DecisionPoint
aims to deliver the ‘whole solution’ to a customer, from solution design through
to support. Our objective is to target markets that will permit the
delivery of as many of these products and services as possible, so as to
maximize the profit opportunity while minimizing the costs of sale and
delivery.
Thus,
DecisionPoint seeks to classify the type of end-user that it targets in order to
quickly and cost-effectively put the right amount of resources on each sales
opportunity. The three main end-user classifications
are:
·
|
Full Solution Customer -
This is a customer that wants us to provide not only the entire solution,
but also the ongoing support of the system. Such an end-user views the
entire system as critical to its business and wants to outsource it to
industry professionals. This is the ideal customer for
DecisionPoint, one that understands and values the cost effectiveness of
the entire solution and ongoing support of the
system.
|
·
|
Customer as their own
integrator - The end-user sources all the parts and pieces of the
system, programs it, installs it, commissions it and supports it. In
effect, the customer is their own integrator, and wants to buy products
and services only in a transactional relationship. DecisionPoint limits
its resources to provide these customers with competitive product and
service pricing.
|
·
|
Hybrid Customer - Such
customers have some systems integration capability themselves but have
also recognized that “they know what they don’t know” and are willing to
contract for certain services as part of an enhanced transactional
relationship. A Hybrid Customer is attractive on a case-by-case
basis depending on the circumstances of the
situation.
|
In each
of the three scenarios above, we strive to position our professional services as
a core value-added component to the customer. Our ability to reliably
test, configure, kit, stage, and deploy large rollouts of mobile computers for
specialized applications is a key service offering that enables our customers to
realize the ROI they were expecting on mobile computing in the first
place.
Sales and Sales
Support
DecisionPoint
supports its go-to-market model using field-based teams of seasoned account
executives with both pre- and post- sale systems architects who are experienced
in all areas of enterprise mobile computing. Their focus is to
develop customers’ enterprise wireless and mobile computing requirements in
order to develop solutions for them and ultimately close business for our
product and service set that fulfills those requirements.
DecisionPoint
fulfills the need for application software both in-house and through ISVs
depending on specific customer need. ISVs like this model because they are
generally looking for sales, marketing and integration partners like
DecisionPoint to expand their own reach.
We
currently employ 52 people in our marketing, sales and professional services
operation. We have 1 marketing person, 19 sales people, all of whom are
qualified in system technology design, installation and integration. They
receive substantial technical support and assistance from 22 systems engineers
and technicians and 6 software engineers. Supporting the sales effort are 4
sales administrators, who are responsible for the detailed order entry and for
the inputting of the related data into our MAS accounting
system.
Geographically,
the sales team is spread throughout the United States and can handle projects on
a national and international basis from its East and West coast
facilities. When a situation dictates, we may utilize independent
contractors.
7
Sales System Support:
salesforce.com
DecisionPoint
makes extensive use of the salesforce.com customer relationship management
(“CRM”) system to support its sales and marketing operations. All
business processes from demand creation through closing orders are tracked using
salesforce.com. This includes the following business processes:
marketing campaign management, lead generation, sales opportunity and pipeline
management, sales forecasting, sales territory and account management, and
strategic account planning.
In
addition, all professional services projects are tracked using salesforce.com as
well as time tracking. These tools allow us to get a picture of
project profitability which helps us manage our key project
resources.
Marketing
Activities
DecisionPoint
addresses our target markets through a combination of our own marketing
activities, relationship selling and vendor-supplied leads. The
common aim is to establish our credibility in the space, and then definitively
demonstrate to the potential customer that DecisionPoint can tailor solutions to
that customer’s needs.
Our seasoned sales team also provides many sales opportunities through past relationships and detailed domain knowledge of the operations of the top companies in the target market space. Given that enterprise wireless and mobile computing systems are a complex sale, it is very beneficial to have knowledge of how individual companies actually operate, how they address IT systems issues, and how they buy and manage complex technology. Our sales teams use such information to their advantage against some of the commodity-type resellers in the space.
Vendor-supplied
leads play a part in our success as well, in that vendors see it to their
advantage to funnel sales opportunities to DecisionPoint thereby minimizing
their selling costs. They are also willing to spend a sizeable portion of their
discretionary marketing development budget for demand generation
activities.
Our
investment in our Field Mobility practice is paying off in the form of wireless
carrier sales leads. We established key wireless carrier
relationships in 2008, and are now seeing the fruit of our labor. The
carriers in many areas of the country have DecisionPoint as ‘top-of-mind’ when
it comes to bringing specialized mobile applications to their existing
customers.
In early
2009, we added an internal sales development function. Currently
staffed by a seasoned industry veteran, this function is to continually cull all
sources of leads and nurture them to the qualification stage where it makes
economic sense for one of our account executives to get involved.
Realizing
that statistics show that the vast majority of B2B activity today starts with an
Internet search, we have invested in some forward-thinking tools and
technologies to help meet our future customers there. For 2009, this
includes not only a major revamp of our website, www.decisionpt.com,
but also piloting online, closed-loop demand generation technologies and
programs in order to productively increase the sales pipeline. This
includes email marketing with closed-loop feedback as well as email campaigns
that track recipient behavior after their receipt in real time. This
allows us to convert them into active prospects at the exact time they are
investigating solutions for their particular problem.
Competition
The
business in which DecisionPoint operates in is highly
competitive. Continued evolution in the industry, as well as
technological migration, is opening up the market to increased
competition. Other key competitive factors include: technology
offered; price; availability of financing; product and system performance;
product features, quality, availability and warranty; the quality and
availability of service; company reputation; relationship with key customers and
time-to-market. We believe we are uniquely positioned in the industry
due to our strong customer and vendor relationships, our technological
leadership and capabilities and our comprehensive range of
offerings.
DecisionPoint
competes with other VAR and system integrators/engineering organizations (“SI”)
in system design, integration and maintenance arenas. However, as a
Tier-1 reseller for major equipment vendors including Motorola and Zebra, we
encounter fewer than ten competitive Tier-1 VARs and SIs representing these
manufacturers in the marketplace.
8
DecisionPoint
typically wins business from such competitors based on its turnkey software
engineering skills and one-stop-shop technical capabilities. Recognizing
DecisionPoint as a significant VAR within its universe of Tier-1 partners,
Motorola has granted DecisionPoint variable pricing applicable to specific major
customers. These price discounts give us an edge in the marketplace through
greater margin flexibility. As a result, we do not typically lose contracts due
to price sensitivity.
Large
system integrators are seeking to move further into the segment that we compete
in. Competitors in this segment, including us, may also serve as
subcontractors to large system integrators and are selected based on a number of
competitive factors and customer requirements. Where favorable to us,
we may partner with other system integrators to make available our portfolio of
advanced mission-critical services, applications and devices.
DecisionPoint has identified the following ten (10) companies as primary competitors in the VAR and SI spaces:
·
|
Agilysys, Inc.
(Nasdaq:AGYS)
- Formerly known as Pioneer Standard Electronics, Agilysys is a
publicly traded NASDAQ company and is a distributor of enterprise computer
system solutions with $1.8 billion in revenue. One of their
divisions provides services similar to those offered by
DecisionPoint.
|
·
|
International Business
Machines Corp. (Nyse:IBM) – Although significantly larger than
DecisionPoint, IBM seeks to deliver the same type of value proposition to
the market. Their level of success varies. As with
any very large organization, enterprise wireless and mobile computing are
just one of a large set of competencies and services they advertise to the
marketplace.
|
·
|
Peak Technologies, Inc.
– Maryland based Peak is an integrator of AIDC equipment including
wireless RF, network and ERP integration solutions, enterprise printing,
bar code scanning, mobile computing, and terminal and software
technologies. Peak was originally built up by current
DecisionPoint executives, CEO Nicholas Toms and CFO Donald Rowley, who
then sold the company to Moore Corporation (now RR Donnelley) in
1997. RR Donnelley, as part of its strategy to focus on
commercial printing, sold Peak to Platinum Equities in December
2005. Peak sales for 2005 were about $240 million but, after
the disposal of certain business units during 2006, are estimated to be
somewhat in excess of $100 million, currently.
|
·
|
Catalyst International,
Inc. - Catalyst is a $50 million revenues supplier of supply chain
solutions on multiple technology platforms. It is a certified
SAP Services Provider, including wireless enabling of SAP
applications. The company claims 12,000 customers in 20
countries including Boeing, Abbott Laboratories and Sony Corporation.
Catalyst is wholly owned by CDC Corporation (Nasdaq:CHINA), a NASDAQ
traded company.
|
·
|
Stratix, Inc. -
Georgia-based Stratix is a substantial competitor of DecisionPoint,
especially in the South Eastern part of the US. Stratix had
estimated revenues of $100 million in 2009 which are primarily from large,
nationally based Tier-1 customers. Their customer base is well
balanced around retailers, distributors, major commercial airlines and
general manufacturers.
|
·
|
Miles Technologies Inc.
- Headquartered in Lake Zurich, IL, Miles is a service oriented reseller
of bar code printers, wireless data collection devices, RFID and
consumables. Miles is considered to be a niche player in the
upper Midwest.
|
·
|
Acsis, Inc. - Acsis is
a SAP-certified global enterprise software company that automates supply
chain operations with a platform, Data-Link Enterprise, which interfaces
with multiple types of equipment on the manufacturing/distribution floor,
such as barcode and RFID readers. Acsis is now part of
Safeguard Scientifics, Inc. (Nyse:SFE), a NYSE traded
company.
|
·
|
InfoLogix, Inc.
(Nasdaq:IFLG) – The company is a NASDAQ traded company and a supplier of
enterprise mobility solutions that is primarily focused on the hospital
systems marketplace.
|
·
|
Barcoding, Inc. - helps
organizations streamline their operations with automatic identification
and data collection systems (AIDC). Clients include
manufacturing, distribution, healthcare and warehousing enterprises, as
well as state, local and federal agencies. Based in Baltimore,
Maryland, they have eleven regional offices throughout North America, as
well as representation in Europe and
Australia.
|
·
|
CMAC, Inc. – They are
located Alpharetta, GA and are a logistics consulting and systems
integration firm focused on delivering operational and technical supply
chain solutions. They implement supply chain planning,
execution, and automated data collection
solutions.
|
·
|
Other Competitors in the
U.S - Certain ‘catalog and online’ AIDC equipment resellers offer
end-users deeply discounted, commodity oriented products; however, they
typically offer limited or no maintenance support beyond the
manufacturer’s warranty (which generally results in slower repair
turnaround time). More importantly, as end users have become
increasingly dependent on VARs and SIs to provide platform design,
integration and maintenance, end users typically do not place major
purchase orders with such
resellers.
|
Employees
As of
December 2009, DecisionPoint had a total of 60 full time and 2 part time
employees. DecisionPoint has not experienced any work disruptions or
stoppages and it considers relations with its employees to be good.
9
ITEM
1A. RISK FACTORS
Our limited operating history makes
it difficult for us to evaluate our future business prospects and make decisions
based on those estimates of our future performance.
Although
our management team has been engaged in software development for an extended
period of time, we did not begin operations of our current business until
December 2003, which was subsequently expanded with the acquisition of SBS in
March 2006. We have a limited operating history in our current
combined form, which makes it difficult to evaluate our business on the basis of
historical operations. As a consequence, it is difficult, if not
impossible, to forecast our future results based upon our historical
data. Reliance on our historical results may not be representative of
the results we will achieve. Because of the uncertainties related to
our lack of historical operations, we may be hindered in our ability to
anticipate and timely adapt to increases or decreases in sales, product costs or
expenses. If we make poor budgetary decisions as a result of
unreliable historical data, we could be less profitable or incur losses, which
may result in a decline in our stock price.
Our
results of operations have not been consistent, and we may not be able to
maintain profitability.
Although
we have realized a net profit of $0.3 million for the current year ended
December 31, 2009, we have incurred net losses of $0.9 million for the year
ended December 31, 2008. Our business plan is speculative and
historically unproven. Although our revenues grew substantially due
to our growth strategy, we achieved a loss in the three previous fiscal years,
and, as a result, there is no assurance that we will be successful in executing
our business plan or that even if we successfully implement our business plan,
that we will sustain profitability now or in the future. If we incur
significant operating losses, our stock price may decline, perhaps
significantly.
We expect that we will need to raise
additional funds, and these funds may not be available when we need
them.
We
believe that we will need to raise additional monies in order to fund our growth
strategy and implement our business plan. Specifically, we expect
that we will need to raise additional funds in order to pursue rapid expansion,
develop new or enhanced services and products, and acquire complementary
businesses or assets. Additionally, we may need funds to respond to
unanticipated events that require us to make additional investments in our
business. There can be no assurance that additional financing will be
available when needed, on favorable terms, or at all. If these funds
are not available when we need them, then we may need to change our business
strategy and reduce our rate of growth.
Our
competitors may be able to develop their business strategy and grow revenue at a
faster pace than us, which would limit our results of operations and may force
us to cease or curtail operations.
The
wireless mobile solutions marketplace, while highly fragmented, is very
competitive and many of our competitors are more established and have greater
resources. We expect that competition will intensify in the future.
Some of these competitors also have greater market presence, marketing
capabilities, technological and personnel resources than our
company. As compared with our company therefore, such competitors
may:
-
|
develop
and expand their infrastructure and service/product offerings more
efficiently or more quickly
|
-
|
adapt
more swiftly to new or emerging technologies and changes in client
requirements
|
-
|
take
advantage of acquisition and other opportunities more
effectively
|
-
|
devote
greater resources to the marketing and sale of their products and
services
|
-
|
leverage
more effectively existing relationships with customers and strategic
partners or exploit better recognized brand names to market and sell their
services.
|
These
current and prospective competitors include:
-
|
other
wireless mobile solutions companies such as Peak Technologies, Agilysys,
Acsis, Stratix, InfoLogix and Catalyst International
|
-
|
in
certain areas our existing hardware suppliers, in particular Motorola but
also Intermec, Zebra and others
|
-
|
the
in-house IT departments of many of our
customers.
|
A
significant portion of our revenue is dependent upon a small number of customers
and the loss of any one of these customers would negatively impact our revenues
and our results of operations.
We
derived approximately 25% of our revenues from two customers and 34% from five
customers in 2009. We derived approximately 23% of our revenues from
our two largest customer and 45% from our five largest customers in
2008. Customer mix shifts significantly from year to year, but a
concentration of the business with a few large customers is typical in any given
year. A decline in our revenues could occur if a customer which has
been a significant factor in one financial reporting period gives us
significantly less business in the following period.
10
Our
sales and profitability may be affected by changes in economic, business or
industry conditions.
If the
economic climate in the U.S. or abroad deteriorates, customers or potential
customers could reduce or delay their technology investments. Reduced
or delayed technology investments could decrease our sales and
profitability. In this environment, our customers may experience
financial difficulty, cease operations and fail to budget or reduce budgets for
the purchase of our products and professional services. This may lead
to longer sales cycles, delays in purchase decisions, payment and collection,
and can also result in downward price pressures, causing our sales and
profitability to decline. In addition, general economic uncertainty
and general declines in capital spending in the information technology sector
make it difficult to predict changes in the purchasing requirements of our
customers and the markets we serve. There are many other factors
which could affect our business, including:
·
|
the
introduction and market acceptance of new technologies, products and
services;
|
·
|
new
competitors and new forms of competition;
|
·
|
|
·
|
the
size and timing of capital expenditures by our
customers;
|
·
|
adverse
changes in the credit quality of our customers and
suppliers;
|
·
|
changes
in the pricing policies of, or the introduction of, new products and
services by us or our competitors;
|
·
|
changes
in the terms of our contracts with our customers or
suppliers;
|
·
|
the
availability of products from our suppliers; and
|
·
|
variations
in product costs and the mix of products
sold.
|
These
trends and factors could adversely affect our business, profitability and
financial condition and diminish our ability to achieve our strategic
objectives.
We
rely on key vendors and the loss of any one of these relationships would
negatively impact our results of operations.
We rely
heavily on a number of privileged vendor relationships as a Tier-1, VAR and
PartnerSelect Business Partner for Motorola, a manufacturer of bar code scanners
and portable data terminals; as an Honors Solutions Provider for Intermec, a
manufacturer of bar code scanners and terminals; as a Premier Partner with
Zebra, a printer manufacturer, and O’Neil, the leading provider of ‘ruggedized’
handheld mobile printers. The loss of VAR status with any of these
manufacturers could have a substantial adverse effect on our
business.
We
have not sought to protect our proprietary knowledge through patents and, as a
result, our sales and profitability could be adversely affected to the extent
that competing products/services were to capture a significant portion of our
target markets.
We have
generally not sought patent protection for our products and services, relying
instead on our technical know-how and ability to design solutions tailored to
our customers’ needs. Our sales and profitability could be adversely affected to
the extent that competing products/services were to capture a significant
portion of our target markets. To remain competitive, we must continually
improve our existing personnel skill sets and capabilities and the provision of
the services related thereto. Our success will also depend, in part, on
management’s ability to recognize new technologies and services and make
arrangements to license in, or acquire such technologies so as to remain always
at the leading edge.
We
must effectively manage the growth of our operations, or our company will
suffer.
Our
ability to successfully implement our business plan requires an effective
planning and management process. If funding is available, we intend to increase
the scope of our operations and acquire complimentary businesses. Implementing
our business plan will require significant additional funding and resources. If
we grow our operations, we will need to hire additional employees and make
significant capital investments. If we grow our operations, it will place a
significant strain on our existing management and resources. If we grow, we will
need to improve our financial and managerial controls and reporting systems and
procedures, and we will need to expand, train and manage our workforce. Any
failure to manage any of the foregoing areas efficiently and effectively would
cause our business to suffer.
If
we fail to continue to introduce new products that achieve broad market
acceptance on a timely basis, we will not be able to compete effectively and we
will be unable to increase or maintain sales and profitability.
Our
future success depends on our ability to develop and introduce new products and
product enhancements that achieve broad market acceptance. If we are
unable to develop and introduce new products that respond to emerging
technological trends and customers’ mission critical needs, our profitability
and market share may suffer. The process of developing new technology
is complex and uncertain, and if we fail to accurately predict customers’
changing needs and emerging technological trends, our business could be
harmed. We must commit significant resources to developing new
products before knowing whether our investments will result in products the
market will accept. We may encounter delays in deploying new or
improved products.
11
We are
active in the identification and development of new products and technologies
and in enhancing our current products. However, in the enterprise
mobility solutions industry, such activities are complex and filled with
uncertainty. If we expend a significant amount of resources and our
efforts do not lead to the successful introduction of new or improved products,
there could be a material adverse effect on our business, profitability,
financial condition and market share.
We may
also encounter delays in the manufacturing and production of new
products. Additionally, new products may not be commercially
successful. Demand for existing products may decrease upon the
announcement of new or improved products. Further, since products
under development are often announced before introduction, these announcements
may cause customers to delay purchases of any products, even if newly
introduced, until the new or improved versions of those products are
available. If customer orders decrease or are delayed during the
product transition, we may experience a decline in revenue and have excess
inventory on hand which could decrease gross profit margins. Our
profitability might decrease if customers, who may otherwise choose to purchase
existing products, instead choose to purchase lower priced models of new
products. Delays or deficiencies in the development, manufacturing,
and delivery of, or demand for, new or improved products could have a negative
effect on our business or profitability.
We
face competition from numerous sources and competition may increase, leading to
a decline in revenues.
We
compete primarily with well-established companies, many of which we believe have
greater resources than us. We believe that barriers to entry are not
significant and start-up costs are relatively low, so our competition may
increase in the future. New competitors may be able to launch new
businesses similar to ours, and current competitors may replicate our business
model, at a relatively low cost. If competitors with significantly
greater resources than ours decide to replicate our business model, they may be
able to quickly gain recognition and acceptance of their business methods and
products through marketing and promotion. We may not have the
resources to compete effectively with current or future
competitors. If we are unable to effectively compete, we will lose
sales to our competitors and our revenues will decline.
We are heavily dependent on our
senior management, and a loss of a member of our senior management team could
cause our stock price to suffer.
If we
lose members of our senior management, we may not be able to find appropriate
replacements on a timely basis, and our business could be adversely affected.
Our existing operations and continued future development depend to a significant
extent upon the performance and active participation of certain key individuals,
including our Chief Executive Officer, Chief Financial Officer, Senior Vice
Presidents and certain other senior management individuals. We cannot guarantee
that we will be successful in retaining the services of these or other key
personnel. If we were to lose any of these individuals, we may not be able to
find appropriate replacements on a timely basis and our financial condition and
results of operations could be materially adversely affected.
Our
inability to hire, train and retain qualified employees could cause our
financial condition to suffer.
The
success of our business is highly dependent upon our ability to hire, train and
retain qualified employees. We face competition from other employers
for people, and the availability of qualified people is limited. We
must offer a competitive employment package in order to hire and retain
employees, and any increase in competition for people may require us to increase
wages or benefits in order to maintain a sufficient work force, resulting in
higher operation costs. Additionally, we must successfully train our
employees in order to provide high quality services. In the event of high
turnover or shortage of people, we may experience difficulty in providing
consistent high-quality services. These factors could adversely
affect our results of operations.
Our
internal controls over financial reporting have not been audited by our external
auditors, as will be required for the fiscal year 2010 to meet the standards
contemplated by Section 404 of the Sarbanes-Oxley Act of 2002; failure to
achieve and maintain effective internal controls over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a
material adverse effect on our business and common stock price.
Our
internal controls over financial reporting have not been audited by our
independent registered public accounting firm as will be required for fiscal
year 2010 by Section 404 of the Sarbanes-Oxley Act.
Because
our financial controls have not been audited to assess if we are in accordance
with Section 404, our independent registered public accounting firm will
not be able to certify as to the adequacy of our internal controls over
financial reporting. We do not have external certification that we do not have a
material weakness in our internal controls or a combination of significant
deficiencies that could result in the conclusion that we have a material
weakness in our internal controls. If we are not able to implement the
requirements of Section 404 in a timely manner or with adequate compliance,
our independent registered public accounting firm may not be able to certify as
to the adequacy of our internal controls over financial reporting. Matters
impacting our internal controls may cause us to be unable to report our
financial information on a timely basis and thereby subject us to adverse
regulatory consequences, including sanctions by the SEC or violations of
applicable stock exchange listing rules. There could also be a negative reaction
in the financial markets due to a loss of investor confidence in us and the
reliability of our financial statements. Confidence in the reliability of our
financial statements could also suffer if our independent registered public
accounting firm were to report a material weakness in our internal controls over
financial reporting. This could materially adversely affect us and lead to a
decline in the market price of our common stock.
12
SPECIFIC
RISKS RELATING TO OUR COMMON STOCK
We
have not paid dividends in the past and do not expect to pay dividends in the
future. Any return on investment may be limited to the value of our common
stock.
We have
never paid cash dividends on our common stock and do not anticipate paying cash
dividends in the foreseeable future. The payment of dividends on our
common stock would depend on earnings, financial condition and other business
and economic factors affecting it at such time as the Board of Directors may
consider relevant. If we do not pay dividends, our common stock may
be less valuable because a return on your investment will only occur if our
stock price appreciates.
There
is a limited market for our common stock which may make it more difficult to
dispose of your stock.
Our
common stock is currently quoted on the Over the Counter Bulletin Board under
the symbol "DNPI". There is a limited trading market for our common
stock. Accordingly, there can be no assurance as to the liquidity of
any markets that may develop for our common stock, the ability of holders of our
common stock to sell our common stock, or the prices at which holders may be
able to sell our common stock.
A
sale of a substantial number of shares of our common stock may cause the price
of our common stock to decline.
If our
stockholders sell substantial amounts of our common stock in the public market,
the market price of its common stock could fall. These sales also may
make it more difficult for the us to sell equity or equity-related securities in
the future at a time and price that the We deem reasonable or
appropriate. Stockholders who have been issued shares in
the merger will be able to sell their shares pursuant to Rule 144 under the
Securities Act of 1933, beginning one year after the stockholders acquired their
shares.
Our
common stock is subject to the "Penny Stock" rules of the SEC and the trading
market in our securities is limited, which makes transactions in our stock
cumbersome and may reduce the value of an investment in our stock.
The SEC
has adopted Rule 3a51-1 which establishes the definition of a "penny stock", for
the purposes relevant to us, as any equity security that has a market price of
less than $5.00 per share or with an exercise price of less than $5.00 per
share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, Rule 15g-9 requires:
·
|
that
a broker or dealer approve a person's account for transactions in penny
stocks; and
|
·
|
that
the broker or dealer receives from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased.
|
In order
to approve a person's account for transactions in penny stocks, the broker or
dealer must:
·
|
obtain
financial information and investment experience objectives of the person;
and
|
·
|
make
a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
|
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form:
·
|
sets
forth the basis on which the broker or dealer made the suitability
determination; and
|
·
|
that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
|
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have
to be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.
Generally,
brokers may be less willing to execute transactions in securities subject to the
"penny stock" rules. This may make it more difficult for investors to
dispose of our common stock and cause a decline in the market value of our
stock.
13
ITEM
1B.
|
UNRESOLVED
STAFF COMMENT.
|
Not
applicable.
ITEM
2.
|
PROPERTIES
|
As of
December 2009, our corporate headquarters, sales operations including sales
administration, software development, depot operation, and the financial
management of DecisionPoint are located in Foothill Ranch, California where we
lease 7,500 square feet. In Parsippany, New Jersey we lease 3,600
square feet of commercial office space as an ancillary administration
office. In addition, we lease 3,000 square feet in Shelton,
Connecticut for our East coast sales operations including sales administration
and software development, and an additional 4,000 square feet in Essex, New
Jersey for our East coast depot operation. These facilities are
suitable for our purposes and are expected to accommodate our needs for the
foreseeable future.
ITEM
3.
|
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. DecisionPoint is currently not aware of any such legal
proceedings or claims that they believe will have, individually or in the
aggregate, a material adverse affect on its business, financial condition or
operating results.
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 as of December 31,
2009. We are uncertain of the final resolution of this claim as of
the date of this report but based upon our 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
4.
|
(Removed
and Reserved).
|
14
PART II
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Our
common stock is currently quoted on the Over-The-Counter Bulletin Board under
the symbol “DNPI”. Until June 30, 2009, our stock was quoted on the
Over-The-Counter Bulletin Board under the symbol “CUSA”. There was no
trading in our stock through June 30, 2009. On March 29, 2010, the
last trade of our stock was at the price of $0.45 per share.
|
High
|
|
Low
|
||
First
Quarter 2008
|
N/A
|
|
N/A
|
||
Second
Quarter 2008
|
N/A
|
N/A
|
|||
Third
Quarter 2008
|
N/A
|
|
N/A
|
||
Fourth
Quarter 2008
|
N/A
|
|
N/A
|
||
|
|
|
|
||
First
Quarter 2009
|
N/A
|
|
N/A
|
||
Second
Quarter 2009
|
N/A
|
|
N/A
|
||
Third
Quarter 2009
|
$
1.25
|
$ |
0.36
|
||
Fourth
Quarter 2009
|
$
0.60
|
$ |
0.20
|
Number of Stockholders
As of March 29, 2010, there were approximately 40 holders of record of our Common Stock.
Dividend Policy
Common Stock – The holders of our Common Stock are entitled to receive dividends if and when declared by our Board of Directors out of funds legally available for distribution. Any such dividends may be paid in cash, property or shares of our Common Stock.
Preferred Stock - The holders of the Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, dividends at an annual rate of 8% of the stated value. Dividends shall be cumulative and shall accrue on each share of the outstanding Series A Preferred Stock from the date of its issue.
We have
not paid any dividends since our inception, and it is not likely that any
dividends on our Common Stock will be declared in the foreseeable
future. Any dividends will be subject to the discretion of our Board
of Directors, and will depend upon, among other things, our operating and
financial condition and our capital requirements and general business
conditions.
Securities Authorized for Issuance under Equity Compensation Plans
In January 2004, we established the 2004 Incentive and Non-Incentive Stock Option Plan (“2004 Plan”) which was originally adopted by the Board of Directors of DecisionPoint and was assumed by us on June 18, 2009, in connection with the Merger. The 2004 Plan authorized 5,385 shares of common stock for issuance of which 5,357 had been granted. On June 18, 2009, pursuant to the Merger, the 2004 Plan was amended and each share of common stock then subject to the 2004 Plan was substituted with 1224.3224 shares of common stock, for an aggregate of 6,592,976 shares authorized and 6,558,097 shares outstanding as of December 31, 2009. Under the 2004 Plan, common stock incentives may be granted to officers, employees, directors, consultants, and advisors. Incentives under the Plan may be granted in any 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.
In June
2009, we established the DecisionPoint Systems, Inc. Incentive Stock Plan ("2009
Plan") to retain directors, executives and selected employees and consultants
and reward them for making contributions to our success. These objectives are
accomplished by making long-term incentive awards under the 2009 Plan in the
form of options, stock awards and restricted stock purchase offers. The total
number of common shares which may be purchased or granted under the 2009 Plan
shall not exceed 1,000,000. There were no options granted under the 2009 Plan as
of December 31, 2009.
15
The 2004
and 2009 Plans, (collectively, 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 our 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
our stock, the exercise price shall not be less than 110% of the fair market of
a share of common stock on the date of grant.
Provided
below is information regarding our equity compensation plans under which our
equity securities are authorized for issuance as of December 31, 2009, subject
to the Company's available authorized shares.
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options, warrants,
and rights
(a)
|
Weighted-average
exercise price of outstanding options
(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
|||||||||
Equity
compensation plans approved by security holders
|
6,558,097
|
$
|
0.22
|
1,034,879
|
||||||||
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|||||||||
Total
|
6,558,097
|
$
|
0.22
|
1,034,879
|
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
Not
applicable.
16
Overview
DecisionPoint
designs, implements, and supports mobile computing and wireless systems for our
customers which they use to deliver improved productivity and better customer
service to their customers. The most valuable outcome of what we do
is to give our customers the capability to make better, faster, and more
accurate business decisions. It is these mobile computing and
wireless systems that empower people with the information to improve the
hundreds of individual business decisions they make each day.
DecisionPoint
does this by providing our customers with everything they need to bring their
ideas to reality by using the specialized skills and knowledge of our
people. The range of our offerings include the consulting and design
services, technical and programming services, mobile computing and wireless and
RFID hardware, software, and support services to carry it out.
We are
focused on several markets. These include retail, manufacturing,
distribution, transportation and logistics. We are also increasingly
focused on the markets for these systems in the markets where there are large
groups of field services workers. These markets include maintenance
and repair, inspections, deliveries, and other specialized business services
such as uniform rental. This part of our business did not exist a few
years ago. But with the continued explosive growth of the mobile
Internet, we expect to add resources in this area in order to take advantage of
the increasing opportunities.
Critical
Accounting Policies
Critical
Estimates
Our
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 consolidated financial statements and the reported amounts of
revenues and expenses during the reporting periods. Critical
accounting policies are those that require the application of management’s most
difficult, subjective, or complex judgments, often because of the need to make
estimates about the effect of matters that are inherently uncertain and that may
change in subsequent periods. In preparing the consolidated financial
statements, management has utilized available information, including our past
history, industry standards and the current economic environment, among other
factors, in forming its estimates and judgments, giving due consideration to
materiality. Actual results may differ from these
estimates. In addition, other companies may utilize different
estimates, which may impact the comparability of our results of operations to
those of companies in similar businesses. We believe that the
following critical accounting policies involve a high degree of judgment and
estimation:
Accounts
Receivable
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. Over the last two years ending
December 31, accounts receivable reserves varied from 3.6% to 6.7% of total
accounts receivable. Accounts receivable reserves as of December 31,
2009, were $332,000, or 3.6% of the balance due. Accounts receivable
reserves as of December 31, 2008, were $575,000, or 6.7% of the balance
due. We believe our reserve level is appropriate considering the
quality of the portfolio as of December 31, 2009. While credit losses
have historically been within expectations and the provisions established, we
cannot guarantee that our credit loss experience will continue to be consistent
with historical experience due to the current economic recession.
Inventory
Inventory
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.
17
Deferred
Tax Asset
The
increase of current deferred income tax assets is attributable to the release of
a portion of the valuation allowance recorded in the prior
periods. In the opinion of management, it is more likely than not the
$385,000 of the deferred tax assets will be realized.
Warrant
Liability
The
Company accounts for its warrant issued pursuant to the June 2009 subordinated
convertible debt in accordance with the guidance on Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity, which
provides that the Company classifies the warrant instrument as a liability at
its fair value and adjusts the instrument to fair value at each reporting
period. This liability is subject to re-measurement at each balance
sheet date until exercised, and any change in fair value is recognized as a
component of other income or expense. The fair value of warrants
issued by the Company, in connection with private placements of securities, has
been estimated by management in the absence of a readily ascertainable market
value using the Black-Scholes option-pricing model. Because of the
inherent uncertainty of valuation, the estimated 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.
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 unearned revenue and
is recognized over the life of the contract and we may be liable to refund a
customer for amounts paid in certain circumstances. This has not been an issue
for the Company historically.
We also
generate revenue from software customization and professional services on either
a fee-for-service or fixed fee basis. Revenue from software customization and
professional services that is contracted as fee-for-service, also referred to as
per-diem billing, is recognized in the period in which the services are
performed or delivered. For certain long-term proprietary service contracts with
fixed or “not to exceed” fee arrangements, we estimate proportional performance
using the labor costs incurred as a percentage of total estimated labor costs to
complete the project consistent with the percentage-of-completion method of
accounting. Accordingly, revenue for these contracts is recognized based on the
proportion of the work performed on the contract. If there is no sufficient
basis to measure progress toward completion, the revenues are recognized when
final customer acceptance is received consistent with the completed contract
method of accounting. Adjustments to contract price and estimated labor costs
are made periodically, and losses expected to be incurred on contracts in
progress are charged to operations in the period such losses are
determined.
Stock-based
compensation
We record the fair value of stock-based payments as an expense in our consolidated financial statements. When more precise pricing data is unavailable, 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 11 of the accompanying notes to our consolidated financial statements.
18
Results
of Operations
For
comparison purposes, all dollar amounts have been rounded to nearest million
while all percentages are actual.
Revenues
were $48.3 million for the year ended December 31, 2009, compared to $53.3
million for the same period ended December 31, 2008, a decrease of $5.0 million
or 9.4%. The decrease in revenue was primarily due to the weakened
economic conditions in the U.S. which had began in the latter half of 2008, and
continued into and throughout 2009. A reduction of $5.4
million in traditional workforce mobility solutions revenue has been partially
offset by an increase in our field mobility solutions of $0.2 million and
consumable revenue of $0.2 million.
Cost of
sales were $38.6 million for the year ended December 31, 2009, compared to $43.2
million for the same period ended December 31, 2008, a decrease of $4.6 million
or 10.8%. Our gross profit was $9.7 million for the year ended
December 31, 2009, compared to $10.1 million for the same period ended December
31, 2008, a decrease of $0.4 million or 3.5%. Although the actual
dollar amount of gross profit is lower in the 2009 period, our realized gross
margin has increased to 20.2% in 2009, above the 18.9% in the comparable period
of 2008. This improvement is directly due to the increased emphasis
on cost control of the products and services that we resell as well as improved
utilization and efficiency of our professional services personnel and related
costs.
Selling,
general and administrative expenses were $8.0 million for the year ended
December 31, 2009, compared to $9.2 million for the same period ended December
31, 2008, a decrease of $1.2 million or 12.9%. The decrease in the
year ended December 31, 2009, was the result of tighter cost management and
lower commission expense associated with lower revenues combined with lower
salaries and related travel expenses of approximately $1.0
million. Finance and administration expenses were lower due to
reduced bad debt expense and insurance expense.
Interest
expense, which is related to our line of credit and subordinated debt, was $1.1
million for the year ended December 31, 2009, compared to $1.3 million for the
same period ended December 31, 2008. The $0.2 million decrease in
interest expense was the result of lower interest charges and lower amounts
borrowed on our line of credit and the conversion of $2.8 million of
subordinated debt into equity in June 2009. The conversion of debt to
equity concurrent with the Merger was offset by an additional $2.5 million
subordinated debt financing during December 2009.
The
change in other expense to $0.3 million from $0.6 million for the year ended
December 31, 2009 and 2008, respectively, consists primarily of expenses related
to the reverse merger transaction in which we initially started incurring during
2008. Also, in 2008, we wrote-off an investment in a potential
acquisition that did not materialize in the amount of $0.6 million.
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 9.4%, due to the weakened economic conditions in the U.S. which
have continued into and throughout 2009. We have been able to improve
our gross margins and reduce our selling, general and administrative expenses
which have resulted in improved operating income. We believe that our
strategic 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
December 31, 2009 and 2008, we had cash and cash equivalents of approximately
$0.1 million and $0.9 million, respectively. We have used, and plan
to use, such cash for general corporate purposes, including working
capital.
As of
December 31, 2009, we have negative working capital of $7.1 million and total
stockholders’ deficit of $3.5 million. As of December 31, 2008, we had negative
working capital of $10.5 million and total stockholders’ deficit of $8.6
million.. Included in current liabilities is unearned revenue of $7.6 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 $4.3 million which reflect costs paid for third party extended
maintenance services that are being amortized over their respective service
periods. The increase in the unearned revenue, offset by the deferred costs,
will provide a benefit in future periods as the amounts convert to realized
revenue.
19
In December 2006, pursuant to a Loan and Security Agreement (“Loan Agreement”), we obtained a $6.5 million line of credit, which provides for borrowings based upon eligible accounts receivable, as defined in the Loan Agreement. Under the terms of the Loan Agreement, interest accrues at Prime plus 2.5% with an interest rate reduction of 0.75% based on future profitability. The Loan Agreement is secured by substantially all of our assets and matured in December 2008, at which time it was amended to extend the maturity date to March 2009, in exchange for an extension fee of $12,185.
In March 2009, pursuant to an Amendment to the Loan Agreement (“Amendment”) the line of credit was renewed for an additional two year period and the amount available for borrowing was increased to $8.5 million. Pursuant to the Amendment, the rate at which interest accrues increased to Prime plus 4%, with a potential interest rate reduction of 0.50% based on future profitability. The Amendment also modified the definition of “prime rate” to a rate not less than 4% on any day. We paid an annual renewal fee of $85,000. The amounts outstanding under the line of credit at December 31, 2009 and 2008, were approximately $2.6 million with interest accruing at 8%, and $3.4 million with interest accruing at 10.25%, 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 $4.3 million and $1.6 million as of December 31, 2009 and 2008, 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 December 2010. 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 year ended December 31, 2009, net cash used in operating activities was $1.4 million, primarily due to a $0.8 million increase in accounts receivable, a decrease in inventory of $1.4 million, a $0.5 million reduction in accrued expenses, a reduction in accounts payable of $0.5 million and net change in our unearned revenue of an additional $0.5 million. All of these offset our net income of $0.3 million in the current year. Net cash provided by financing activities was $0.6 million for the year ended December 31, 2009, primarily from the sale of $2.5 million of subordinated debt in December 2009.
During
the year ended December 31, 2008, net cash provided by operating activities was
$2.0 million, primarily due to the increase in net changes in working capital,
and more specifically, the net change in accounts receivable of $3.7 million.
All of which offset our net loss of $0.9 million for the year. Net cash used in
financing activities was $1.6 million for the year ended December 31, 2008,
primarily due to a net reduction in the amount outstanding on our line of credit
and bank term loan during the period.
Off-Balance
Sheet Arrangements
There
were no off-balance sheet arrangements as of December 31, 2009.
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Not
applicable.
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
In June
2009, and in connection with the acquisition of DecisionPoint, the Company
terminated the services of George Stewart, Certified Public Accountant (“Former
Auditor”), as the Company’s independent auditor. The Former Auditor
performed the audits for the two year period ended April 30, 2008 and 2007, did
not contain any adverse opinion or a disclaimer of opinion, nor was it qualified
as to audit scope or accounting principles but did carry a modification as to
going concern. During the Company’s two most recent fiscal years and
during any subsequent interim period prior to the June 2009, termination as the
Company’s independent auditors, there were no disagreements with the Former
Auditor, with respect to accounting or auditing issues of the type discussed in
Item 304(a)(iv) of Regulation S-K.
In June
2009, the Company provided the Former Auditor with a copy of this disclosure and
requested that it furnish a letter to the Company, addressed to the SEC, stating
that it agreed with the statements made herein or the reasons why it
disagreed.
In June
2009, the Company’s Board of Directors approved the engagement of the firm of
Crowe Horwath LLP (“New Auditor”) as the Company’s independent
auditors. During the Company’s two most recent fiscal years or any
subsequent interim period prior to engaging the New Auditor, the Company had not
consulted the New Auditor regarding any of the accounting or auditing concerns
stated in Item 304(a)(2) of Regulation S-K.
20
ITEM
9A(T). CONTROLS AND PROCEDURES
(a) Evaluation
of Disclosure Controls and Procedures
We have
adopted and maintain disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to
ensure that information required to be disclosed in our reports under the
Exchange Act, is recorded, processed, summarized and reported within the time
periods required under the SEC’s rules and forms and that the information is
gathered and communicated to our management, including our Chief Executive
Officer (Principal Executive Officer) and Chief Financial Officer (Principal
Financial Officer), as appropriate, to allow for timely decisions regarding
required disclosure.
Management, together with our
CEO and CFO, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e) as of the end of the
period covered by this report. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were not effective as of the end of the period covered by this
report.
This
annual report does not include an attestation report of the Company’s registered
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission.
MANAGEMENT'S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. Our internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles. Our internal control over financial reporting includes
those policies and procedures that:
|
1.
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our
assets;
|
|
2.
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. GAAP, and that
our receipts and expenditures are being made only in accordance with the
authorization of our management and directors; and
|
|
3.
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2009. Based on this assessment, management concluded
that we did not maintain effective internal controls over financial reporting as
a result of the identified material weakness in our internal control over
financial reporting described below. In making this assessment,
management used the framework set forth in the report entitled Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO. The COSO framework summarizes
each of the components of a company's internal control system, including (i) the
control environment, (ii) risk assessment, (iii) control activities, (iv)
information and communication, and (v) monitoring.
IDENTIFIED
MATERIAL WEAKNESS
A
material weakness in our internal control over financial reporting is a control
deficiency, or combination of control deficiencies, that results in more than a
remote likelihood that a material misstatement of the financial statements will
not be prevented or detected.
Management
identified the following material weakness during its assessment of internal
controls over financial reporting as of December 31, 2009:
In the
third quarter of 2009, our controls were ineffective in capturing the issuance
of common stock as part of payment for administrative services. The
lack of controls did not have a material impact to the financial statements, but
our controls were not in place to ensure there would not have been a material
adjustment. As a result, our internal controls and procedures were
not effective.
21
MANAGEMENT'S
REMEDIATION INITIATIVES
Subsequent to the date of the financial statements, we have taken remedial measures to establish effective disclosure controls and procedures and internal control over financial reporting, including improved supervision of and the issuance of any future common stock and/or equivalents to anyone. As part of this additional control and procedure, we have instituted specific instructions to our stock transfer agent that no shares of stock may be issued without the prior written consent of a Vice President of Finance and further counter-signed by the Chief Financial Officer or another Executive Officer.
In light
of the identified material weaknesses, management, performed (1) significant
additional substantive review of those areas described above, and (2) performed
additional analyses, including but not limited to a detailed balance sheet and
statement of operations analytical review that compared changes from the prior
period's financial statements and analyzed all significant
differences. These procedures were completed so management could gain
assurance that the financial statements and schedules included in this Form 10-K
fairly present in all material respects the Company's financial position,
results of operations and cash flows for the periods presented.
(b)
|
Changes
In Internal Control Over Financial
Reporting
|
There was
no change in our internal control over financial reporting during
the three months ended December 31, 2009, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
ITEM
9B.
|
OTHER
INFORMATION
|
None.
22
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Directors
and Executive Officers
Below are
the names and certain information regarding the Company’s officers and
directors.
Name
|
Age
|
Position
|
||
Nicholas
R. Toms
|
61
|
Chief
Executive Officer, President, Chairman and
Director
|
||
Donald
W. Rowley
|
58
|
Chief
Financial Officer and Director
|
||
John
E. Chis
|
53
|
Senior
Vice President, Sales
|
||
Matthew
J. Lombardi
|
57
|
Senior
Vice President, Business Development
|
||
Gregory
A. Henry
|
47
|
Vice
President, Technology and Operations
|
||
Brent
Felker
|
49
|
Vice
President, Field Mobility
|
||
Melinda
Wohl
|
39
|
Vice
President, Finance – Controller and Treasury
|
||
Roy
A. Ceccato
|
51
|
Vice
President, Finance – SEC Reporting and Compliance
|
||
David
M. Rifkin
|
54
|
Director
|
||
Jay
B. Sheehy
|
54
|
Director
|
Set forth
below is a brief description of the background and business experience of each
of our executive officer and directors for the past five years.
Nicholas R. Toms, Chairman, Chief Executive Officer, President and Director
Mr. Toms
became CEO of DecisionPoint as of December 2003, when an ESOP that he organized
together with Mr. Rowley acquired DecisionPoint. As a former
corporate finance/M&A attorney with Skadden Arps Slate Meagher & Flom,
Mr. Toms is an entrepreneur and has been involved with middle market businesses
for the past several years. He also serves as CEO of Cape Systems
Group, Inc. (formerly Vertex Interactive, Inc.), a provider of warehouse
management software systems. In 1989, Mr. Toms founded Peak
Technologies where he served as Chairman, President and CEO. In 1997,
Peak was sold to Moore Corporation in a transaction valued at approximately $300
million. In 1986, an investor group of which Mr. Toms was a
principal, orchestrated the buyout of Thomson T-Line Plc, a publicly traded
company based in London, England. Mr. Toms is a graduate of Stellenbosch
University (South Africa) in economics and law (LL.B) and New York University
(LL.M).
Donald
W. Rowley, Chief Financial Officer and Director
Mr.
Rowley joined DecisionPoint in December 2003, when an ESOP that he organized
together with Mr. Toms acquired DecisionPoint. He has over thirty
years of business experience including top-level officer positions with both
publicly quoted and privately held companies. Mr. Rowley has almost
twenty years of experience, specifically in the data capture industry, including
working with Mr. Toms in founding Peak Technologies and serving as
CFO. He was previously Executive Vice President Strategic Planning at
Vertex Interactive, Inc. (now Cape Systems Group, Inc.) from 2000 to
2003. Additionally, his AIDC industry experience includes serving as
CFO of publicly traded Norand Corporation, now part of Intermec, and as a
consultant to Cerplex Group, a publicly traded company that provided depot
computer and computer peripheral repair and logistics services.
John
E. Chis, Senior Vice President, Sales
Mr. Chis
joined DecisionPoint in November 2004, as General Manager and Vice President of
Sales. He previously worked at Symbol Technologies, Inc. and Telxon
(which was acquired by Symbol) for more than 20 years in various sales,
marketing and operations management positions.
Matthew
J. Lombardi, Senior Vice President, Business Development
Mr.
Lombardi joined Sentinel Business Systems, Inc. in 2004, as CEO until March
2006, when the company merged with DecisionPoint. Mr. Lombardi was
previously the co-founder of Planet Technology Solutions, before merging it with
Vytek Corporation, a national wireless systems integrator, where he became
President of the IT Solutions Group. From 1983 to 1998, he was at
Toys “R” Us, and in the last 7 years served as Vice President – Information
Technology.
23
Gregory
A. Henry, Vice President, Technology and Operations
Mr. Henry
joined DecisionPoint in February 2001, after 13 years with Symbol Technologies,
Inc. (now part of Motorola) in systems engineering, product development, sales
and service management. Mr. Henry is responsible for DecisionPoint’s
professional services, software development and operations.
Brent
L. Felker, Vice President, Field Mobility
Mr.
Felker joined DecisionPoint in December 2007. He is responsible for
the company’s Go-To-Market strategy for “Outside the 4 walls” business, setting
strategy, identifying and managing key alliances and acting as Subject Mater
Expert for the field. For more than 20 years, Mr. Felker has been
involved in helping a wide variety of mobile computing companies increase sales,
revenue and market share in North America. He has held senior
leadership positions at PEAK Technologies, Symbol Technologies (now Motorola),
Comtech, Tolt and most recently Psion Teklogix where he was Americas Vice
President of Mobile Solutions.
Melinda
Wohl, Vice President, Finance - Controller and Treasury
Ms. Wohl
joined DecisionPoint in August 2004. Ms. Wohl is responsible for
DecisionPoint’s consolidated internal financial reporting, sales administration
and treasury. Prior to working for DecisionPoint, Ms. Wohl served as
Controller for an international manufacturer/distributor of electronic
components and as an accountant for a lighting products
manufacturer.
Roy
A. Ceccato, Vice President, Finance – SEC Reporting and Compliance
Mr.
Ceccato joined DecisionPoint in July 2007. He is responsible for
external financial reporting for the SEC public reporting requirements and will
include Sarbanes-Oxley compliance. Prior to joining DecisionPoint,
Mr. Ceccato was a Director and CFO for an environmental remediation contractor
where he was brought in to structure the purchase of the prior company’s assets
out of bankruptcy. He has also worked in various roles as Director
and Treasurer, Chief Financial Officer and Director of Finance, of several
public companies in service and manufacturing industries.
David
M. Rifkin, Director
Mr.
Rifkin has been an investor in DecisionPoint Systems and a Director since
2003. Mr. Rifkin is the President and CEO and co-owner of
eGlobalfares, LLC, a software and solution provider to the travel
industry. Prior to investing in and joining eGlobalfares in 2006, Mr.
Rifkin was the SVP of Corporate Sales and a member of the executive team at
Adelman Travel Group, a top 10 U.S. travel management company from
2003. After graduating Bucknell University in 1977 with a bachelor’s
degree in business administration, Mr. Rifkin joined the family businesses in
insurance, real estate and travel. As a result, Mr. Rifkin has had
experience with owning, managing and selling commercial properties and he was
licensed in personal and commercial insurance lines. Rifkin Travel was sold to
the Adelman Travel Group in 2003. Mr. Rifkin has been involved at
executive board levels with many community and not-for-profit
organizations. This includes challenging experiences of successfully
executing several turn-arounds of critical community agencies and
institutions.
Jay
B. Sheehy, Director
Mr.
Sheehy became associated with DecisionPoint System’s as an early investor in
2003. Mr. Sheehy has been the President and Principal of Kamco Supply
of New England, a $100 million building materials distribution business since
1996. From 1984-1995, Mr. Sheehy was President and Principal of
Stanley Svea Building Supply until he merged the company into
Kamco. Previously, Mr. Sheehy held an internal audit position at
Connecticut Bank and Trust, Budget Analyst post with Combustion Engineering and
was a Manager of Financial Analysis with Pepsico. After graduating
Bucknell University in 1977 with a bachelor’s degree in business administration
he went on to earn an MBA from the University of Connecticut, APC from NYU and
his CPA accreditation. Mr. Sheehy is a Trustee of The Gunnery School,
a Board Member of the Connecticut Business and Industry Association (CBIA) and a
an officer of Churchill Casualty Insurance.
Employment
Agreements
None
Committees
of the Board
The Audit
Committee members are Jay B. Sheehy and David Rifkin. The Audit
Committee Chairman is Jay B. Sheehy.
The
Compensation Committee members are David M. Rifkin and Jay B.
Sheehy. The Compensation Committee Chairman is David M.
Rifkin.
24
Family
Relationships
There are
no family relationships between any of our directors or executive officers and
any other directors or executive officers.
Code
of Ethics
We
currently do not have a code of ethics that applies to our officers, employees
and directors, including our Chief Executive Officer and senior executives,
however, we intend to adopt one in the near future.
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
The
following table summarizes all compensation recorded by DecisionPoint in each of
the last two completed fiscal years for our principal executive officers and our
three most highly compensated executive officers who were serving as executive
officers as of the end of the last fiscal year. Such officers are
referred to herein as our “Named Officers.”
Non-
|
Change
in
|
|||||||||||||||||||||||||||||||||
Equity
|
Pension
Value &
|
|||||||||||||||||||||||||||||||||
Stock
|
Option
|
Incentive
|
Non-Qualified
|
All
|
||||||||||||||||||||||||||||||
Name
|
Year
|
Salary
|
Bonus
|
Award
|
Award
|
Plan
|
Deferred
Comp
|
Other
|
Total
|
|||||||||||||||||||||||||
Nicholas
R. Toms
|
||||||||||||||||||||||||||||||||||
2008
|
240,000 | - | - | - | - | - | 3,333 | 243,333 | ||||||||||||||||||||||||||
2009
|
350,000 | - | - | - | - | - | 11,597 | 361,597 | ||||||||||||||||||||||||||
Donald
W. Rowley
|
||||||||||||||||||||||||||||||||||
2008
|
240,000 | - | - | - | - | - | 3,333 | 243,333 | ||||||||||||||||||||||||||
2009
|
325,000 | - | - | - | - | - | 10,032 | 335,032 | ||||||||||||||||||||||||||
John
E. Chis
|
||||||||||||||||||||||||||||||||||
2008
|
200,000 | - | - | - | - | - | 6,344 | 206,344 | ||||||||||||||||||||||||||
2009
|
200,000 | 50,000 | - | - | - | - | 6,667 | 256,667 | ||||||||||||||||||||||||||
Matthew
J. Lombardi
|
||||||||||||||||||||||||||||||||||
2008
|
200,000 | - | - | - | - | - | 62,071 | 262,071 | ||||||||||||||||||||||||||
2009
|
200,000 | - | - | - | - | - | 6,000 | 206,000 | ||||||||||||||||||||||||||
Gregory
A. Henry
|
||||||||||||||||||||||||||||||||||
2008
|
200,000 | - | - | - | - | - | 7,583 | 207,583 | ||||||||||||||||||||||||||
2009
|
200,000 | - | - | - | - | - | 6,000 | 206,000 |
25
The following table sets forth certain information with respect to outstanding equity awards at December 31, 2009 for each of the executive officers.
Option
Awards
|
Stock
Awards
|
||||||||||||||||||||||||||||||||
Name
|
Number
|
Number
|
Equity
|
Option
|
Option
|
Number
|
Market
|
Equity
|
Equity
|
||||||||||||||||||||||||
of
|
of
|
Incentive
|
Exercise
|
Expiration
|
of
Shares
|
Value
of
|
Incentive
|
Incentive
|
|||||||||||||||||||||||||
Securities
|
Securities
|
Plan
|
Price
|
Date
|
or
Units
|
Shares
or
|
Plan
|
Plan
|
|||||||||||||||||||||||||
Underlying
|
Underlying
|
Awards:
|
of
Stock
|
Units
of
|
Awards:
|
Awards:
|
|||||||||||||||||||||||||||
Unexercised
|
Unexercised
|
Number
of
|
That
|
Stock
|
Number
of
|
Market
or
|
|||||||||||||||||||||||||||
Options
|
Options
|
Securities
|
Have
|
That
|
Unearned
|
Payout
|
|||||||||||||||||||||||||||
(#) | (#) |
Underlying
|
Not
|
Have
|
Shares,
|
Value
of
|
|||||||||||||||||||||||||||
Exercisable
|
Unexercisable
|
Unexercised
|
Vested
|
Not
|
Units
or
|
Unearned
|
|||||||||||||||||||||||||||
Unearned
|
(#) |
Vested
|
Other
|
Shares,
|
|||||||||||||||||||||||||||||
Options
|
(#) |
Rights
|
Units
or
|
||||||||||||||||||||||||||||||
(#) |
That
Have
|
Other
|
|||||||||||||||||||||||||||||||
Not
Vested
|
Rights
|
||||||||||||||||||||||||||||||||
(#) |
That
Have
|
||||||||||||||||||||||||||||||||
Not
Vested
|
|||||||||||||||||||||||||||||||||
Nicolas
R. Toms
|
|||||||||||||||||||||||||||||||||
1,880,559 | - | - | $ | 0.20 |
1/1/2014
|
- | - | - | $ | - | |||||||||||||||||||||||
146,919 | 97,946 | - | 0.26 |
12/31/2016
|
- | - | - | - | |||||||||||||||||||||||||
Donald
W. Rowley
|
|||||||||||||||||||||||||||||||||
1,880,559 | - | - | 0.20 |
1/1/2014
|
- | - | - | - | |||||||||||||||||||||||||
146,919 | 97,946 | - | 0.26 |
12/31/2016
|
- | - | - | - | |||||||||||||||||||||||||
John
E. Chis
|
|||||||||||||||||||||||||||||||||
146,919 | 97,946 | - | 0.26 |
12/31/2016
|
- | - | - | - | |||||||||||||||||||||||||
- | 61,216 | - | 0.29 |
2/12/2019
|
- | - | - | - | |||||||||||||||||||||||||
David
M. Rifkin (*)
|
|||||||||||||||||||||||||||||||||
44,076 | 176,302 | - | 0.26 |
12/31/2016
|
- | - | - | - |
(*) Mr.
David M. Rifkin is a Director of the Company.
Except as
set forth above, no other named officer of DecisionPoint has received an equity
award.
Director Compensation and
Committees
The
following table sets forth with respect to the named director, compensation
information inclusive of equity awards and payments made during the year ended
December 31, 2009.
Name
|
Fees
Earned or |
Stock Awards |
Option Awards |
Non-Equity Incentive
Plan |
Change
in Pension Value &
Nonqualified Deferred
Compensation
Earnings
|
All
Other Compensation |
Total
|
|||||||||||||||||||||
David
M. Rifkin
|
$ | 12,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 12,000 | ||||||||||||||
Jay
B. Sheehy (*)
|
12,000 | - | - | - | - | - | 12,000 |
(*) Mr. Sheehy was appointed a Director in June 2009.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
|
The
following table sets forth certain information, as of December 2009,
with respect to the beneficial ownership of the outstanding common stock by (i)
any holder of more than five (5%) percent; (ii) each of the Company’s executive
officers and directors; and (iii) the Company’s directors and executive officers
as a group. Except as otherwise indicated, each of the stockholders
listed below has sole voting and investment power over their shares beneficially
owned.
26
Common
Stock
|
Percentage
of
|
|||||||
Name
of Beneficial Owner (1)
|
Beneficially
Owned
|
Common
Stock (2)
|
||||||
Nicholas
R. Toms (*)
|
3,521,170 | (3) | 10.3 | % | ||||
Donald
W. Rowley (*)
|
2,906,659 | (4 | ) | 8.5 | ||||
John
E. Chis (**)
|
372,404 | (5 | ) | 1.1 | ||||
Melinda
Wohl (**)
|
220,838 | (6 | ) | 0.6 | ||||
Roy
A. Ceccato (**)
|
6,194 | (7 | ) | ***** | ||||
David
M. Rifkin (***)
|
715,986 | 2.1 | ||||||
Jay
B. Sheehy (***)
|
146,910 | ***** | ||||||
Frank
Landau (****)
|
1,913,331 | (8 | ) | 5.6 | ||||
North
Star Trust Company
|
12,243,224 | (9 | ) | 35.9 | ||||
All
Executive Officers and Directors
|
||||||||
as
a group (7 people)
|
7,890,161 | 23.1 | ||||||
(*) -
Executive Officer and Director of the Company
(**) -
Executive Officer of the Company
(***) –
Director
(****) –
Employee
(*****) -
Less than 1%.
All
beneficial ownership percentages as they relate to the ESOP plan are as at
December 31, 2009, the latest date of the ESOP share allocation.
(1)
|
Except
as otherwise indicated, the address of each beneficial owner is 19655
Descartes, Foothill Ranch, California 92610-2609.
|
(2)
|
Applicable
percentage ownership is based on 28,700,000 shares of common stock
outstanding as of December 31, 2009, together with securities exercisable
or convertible into shares of common stock within 60 days of December 31,
2010, for each stockholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of common stock that are currently exercisable or exercisable
within 60 days of December 31, 2009, are deemed to be beneficially owned
by the person holding such securities for the purpose of computing the
percentage of ownership of such person, but are not treated as outstanding
for the purpose of computing the percentage ownership of any other
person.
|
(3)
|
Represents
329,402 shares of common stock held by the ESOP. The shareholder
beneficially owns 2.7% of the ESOP.
|
(4)
|
Represents
331,533 shares of common stock held by the ESOP. The shareholder
beneficially owns 2.7% of the ESOP.
|
(5)
|
Represents
190,037 shares of common stock held by the ESOP. The shareholder
beneficially owns 1.6% of the ESOP.
|
(6)
|
Represents
81,097 shares of common stock held by the ESOP. The shareholder
beneficially owns 0.7% of the ESOP.
|
(7)
|
Represents
30,972 shares of common stock held by the ESOP. The shareholder
beneficially owns 0.3% of the ESOP.
|
(8)
|
Represents
74,208 shares of common stock held by the ESOP. The shareholder
beneficially owns 0.6% of the ESOP.
|
(9)
|
North
Star Trust Company, the trustee of the ESOP, is deemed to have the
dispositive and voting control over the shares held by the
ESOP.
|
27
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
|
We have
purchased and sold certain products and services from a separate corporate
entity which is wholly owned by an ESOP. This entity is affiliated with us
through limited overlapping management and Board representation by our CEO and
CFO. During the years ended December 31, 2009 and 2008, we purchased
products and services for $196,603 and $462,982, respectively, from this
affiliate. Sales to this affiliate during the years ended December 31,
2009 and 2008 were $590,407 and $1,276,582, respectively. These sales to
the affiliate were at no incremental margin over our actual cost. Amounts
due from this affiliate included in accounts receivable as of December 31, 2009
and 2008, are $70,424 and $594,403, respectively. Additionally, we
sub-lease our facility in Foothill Ranch, CA from this affiliate at a monthly
rental expense of $11,763, which expires in July 2010.
We had
accounts payable to Nicholas R. Toms, our Chief Executive Officer, of $407,496
at December 31, 2009. The highest loan balance owed by us to Mr.
Toms was $986,490 in December 2008. We had accounts payable to Donald W.
Rowley, our Chief Financial Officer, of $993,862 at December 31,
2009. The highest loan balance owed by us to Mr. Rowley was
$1,276,187 in December 2009. These accounts payable have an annual
interest rate payable of 16% per annum for the years ended December 31, 2009 and
2008. Subsequently, in 2010, the interest rate has been increased to 25%
per annum. During the years ended December 31, 2009 and 2008, we
accrued interest of $325,650 and $224,950, respectively, on the accounts payable
to Mr. Toms. During the years ended December 31, 2009 and 2008, we
accrued interest of $341,424 and $209,176, respectively on the accounts payable
to Mr. Rowley. The balance of the accounts payable is from purchases of
products and services on behalf of the Company, deferred compensation and
interest on the accounts payable. As of February 28, 2010, the balance
owed to Mr. Toms and Mr. Rowley were $369,012 and $1,209,889,
respectively.
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Audit
Fees
The
aggregate fees billed by Crowe Horwath LLP for the audit for the years ended
December 31, 2009 and 2008, and for the quarterly reviews of DecisionPoint’s
consolidated financial statements for 2009 was $174,538. These fees
were pre-approved by the Company’s audit committee.
All
Other Fees
The
Company did not pay any non-audit fees for fiscal year 2009 or
2008.
28
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
(a)
Consolidated Financial statements
(d)
Exhibits
2.1
|
Agreement
and Plan of Merger DecisionPoint Systems, Inc., DecisionPoint Acquisition,
Inc., and DecisionPoint Systems Holdings, Inc., dated June 17, 2009
(2)
|
|
3.1
|
Articles
of Incorporation (1)
|
|
3.2
|
Bylaws
(1)
|
|
3.3
|
Certificate
of Amendment with Certification of Correction
(2)
|
|
3.4
|
Certificate
of Designation for Class A Preferred Stock (2)
|
|
10.2
|
2009
Incentive Stock Plan (2)
|
|
10.3
|
Securities
Purchase Agreement, dated December 16, 2009 (3)
|
|
10.4
|
Form
of Note, dated December 16, 2009 (3)
|
|
10.5
|
Form
of Warrant, dated December 16, 2009 (3)
|
|
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
*
|
* Filed
herewith
(1)
Included in the Company’s Form SB-2 filed with the Securities and Exchange
Commission on July 2, 2007.
|
||
(2)
Included in the Company’s Form 8-K filed with the Securities and Exchange
Commission on June 23, 2009.
|
||
(3)
Included in the Company’s Form 8-K filed with the Securities and Exchange
Commission on December 21, 2009.
|
29
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 31, 2010.
DECISIONPOINT
SYSTEMS, INC.
|
|
|
|
By:
|
/s/
Nicholas R. Toms
|
|
Nicholas
R. Toms, Chief Executive Officer
Principal
Executive Officer and Principal Financial
Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated:
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed below by the following persons in the capacities and on the date
indicated.
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Nicholas R. Toms
|
|
Chairman
and Chief Executive Officer
|
|
March
31, 2010
|
Nicholas
R. Toms
|
|
Principal
Executive Officer
|
|
|
|
|
|
March
31, 2010
|
|
/s/
Donald W. Rowley
|
|
Chief
Financial Officer
|
|
|
Donald
W. Rowley
|
|
Principal
Financial Officer
|
|
|
/s/
David M. Rifkin
|
|
Director
|
|
March
31, 2010
|
David
M. Rifkin
|
|
|
|
|
|
|
|
|
|
/s/
Jay B. Sheehy
|
|
Director
|
|
March
31, 2010
|
Jay
B. Sheehy
|
|
|
|
|
30
Table
of Contents Page No.
Report of Independent Registered Public Accounting Firm | F-1 | |||
Consolidated Balance Sheets - December 31, 2009 and 2008 | F-2 | |||
Consolidated Statements of Operations - Years Ended December 31, 2009 and 2008 | F-3 | |||
Consolidated Statements of Stockholders’ Deficit - Years Ended December 31, 2008 and 2009 | F-4 | |||
Consolidated Statements of Cash Flows - Years Ended December 31, 2009 and 2008 | F-5 | |||
Notes to Consolidated Financial Statements - December 31, 2009 and 2008 | F-6 – F-25 |
Report
of Independent Registered Public Accounting Firm
Board
of Directors and Shareholders
DecisionPoint
Systems, Inc.
We have
audited the accompanying consolidated balance sheets of DecisionPoint Systems,
Inc. (“the Company”) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2009 and 2008, and the results of its operations and its cash flows for the
years then ended, in conformity with U.S. generally accepted accounting
principles.
/s/ Crowe Horwath LLP
New York,
New York
March 31,
2010
F-1
DECISIONPOINT
SYSTEMS, INC.
Consolidated
Balance Sheets
December
31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 140,740 | $ | 944,941 | ||||
Accounts
receivable, net
|
8,877,527 | 8,069,039 | ||||||
Inventory,
net
|
1,247,944 | 2,643,466 | ||||||
Deferred
costs
|
4,301,727 | 3,705,483 | ||||||
Deferred
tax assets
|
385,000 | 73,000 | ||||||
Prepaid
expenses
|
90,531 | 25,059 | ||||||
Total
current assets
|
15,043,469 | 15,460,988 | ||||||
Property
and equipment, net
|
52,721 | 78,161 | ||||||
Other
assets, net
|
377,280 | 24,875 | ||||||
Goodwill
|
4,860,663 | 4,860,663 | ||||||
Total
assets
|
$ | 20,334,133 | $ | 20,424,687 | ||||
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 7,363,059 | $ | 7,864,693 | ||||
Accrued
expenses and other current liabilities
|
3,523,725 | 4,032,667 | ||||||
Line
of credit
|
2,575,326 | 3,377,208 | ||||||
Current
portion of debt
|
731,793 | 1,953,800 | ||||||
Warrant
liability
|
72,710 | - | ||||||
Unearned
revenue
|
7,611,241 | 8,690,151 | ||||||
Current
portion of holding share liability
|
249,986 | 36,103 | ||||||
Total
current liabilities
|
22,127,840 | 25,954,622 | ||||||
Long-term
liabilities
|
||||||||
Holding
share liability, net of current portion
|
- | 235,587 | ||||||
Debt,
net of current portion
|
1,751,898 | 2,866,024 | ||||||
Total
liabilities
|
23,879,738 | 29,056,233 | ||||||
Commitments
and contingencies
|
||||||||
STOCKHOLDERS'
DEFICIT
|
||||||||
Preferred
stock, $0.001 par value, 10,000,000 shares authorized,
|
||||||||
10,000
designated Convertible Series A, 975 shares and 0
|
||||||||
Series
A issued and outstanding, respectively, with a
|
||||||||
liquidation
value of $975,000 and $-0-, respectively
|
1 | - | ||||||
Common
stock, $0.001 par value, 100,000,000 shares
|
||||||||
authorized,
28,700,000 and 12,243,224 shares issued
|
||||||||
and
outstanding, respectively
|
28,700 | 12,243 | ||||||
Additional paid-in capital
|
6,805,034 | 2,192,146 | ||||||
Accumulated deficit
|
(9,237,239 | ) | (9,581,209 | ) | ||||
Unearned ESOP shares
|
(1,142,101 | ) | (1,254,726 | ) | ||||
Total
stockholders’ deficit
|
(3,545,605 | ) | (8,631,546 | ) | ||||
Total liabilities and stockholders' deficit | $ | 20,334,133 | $ | 20,424,687 |
See
accompanying notes to consolidated financial statements
F-2
DECISIONPOINT
SYSTEMS, INC.
Consolidated
Statements of Operations
Year
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Net
sales
|
$ | 48,309,168 | $ | 53,310,607 | ||||
Cost
of sales
|
38,565,420 | 43,213,153 | ||||||
Gross
profit
|
9,743,748 | 10,097,454 | ||||||
Selling,
general and administrative expense
|
7,969,630 | 9,150,519 | ||||||
Operating
income
|
1,774,118 | 946,935 | ||||||
Other
income (expense):
|
||||||||
Interest expense
|
(1,078,140 | ) | (1,317,764 | ) | ||||
Other
income (expense), net
|
(280,832 | ) | (565,378 | ) | ||||
Total
other expense
|
(1,358,972 | ) | (1,883,142 | ) | ||||
Net
income (loss) before income taxes
|
415,146 | (936,207 | ) | |||||
Provision
(benefit) for income taxes
|
71,176 | (46,144 | ) | |||||
Net
income (loss)
|
$ | 343,970 | $ | (890,063 | ) | |||
Net
earnings (loss) per share -
|
||||||||
Basic
|
$ | 0.02 | $ | (0.18 | ) | |||
Diluted
|
$ | 0.02 | $ | (0.18 | ) | |||
|
||||||||
Weighted
Average Shares Outstanding -
|
||||||||
Basic
|
14,353,837 | 5,038,087 | ||||||
Diluted
|
19,564,203 | 5,038,087 |
See
accompanying notes to consolidated financial statements
F-3
DECISIONPOINT SYSTEMS,
INC.
Consolidated
Statements of Stockholders’ Deficit
Convertible
Series A
|
Additional
|
Accumu-
|
Unearned
|
Total
|
||||||||||||||||||||||||||||
Preferred stock
|
Common stock
|
paid-in
|
lated
|
ESOP
|
stockholders’
|
|||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
capital
|
deficit
|
shares
|
deficit
|
|||||||||||||||||||||||||
Balance
at January 1, 2008
|
- | $ | - | 12,243,224 | $ | 12,243 | $ | 2,142,448 | $ | (8,691,146 | ) | $ | (1,361,733 | ) | $ | (7,898,188 | ) | |||||||||||||||
Employee
stock-based compensation
|
- | - | - | - | 49,698 | - | - | 49,698 | ||||||||||||||||||||||||
Principal
payment from ESOP
|
- | - | - | - | - | - | 107,007 | 107,007 | ||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | (890,063 | ) | - | (890,063 | ) | ||||||||||||||||||||||
Balance
at December 31, 2008
|
- | - | 12,243,224 | 12,243 | 2,192,146 | (9,581,209 | ) | (1,254,726 | ) | (8,631,546 | ) | |||||||||||||||||||||
Convertible
preferred shares sold in private placement
|
560 | 1 | - | - | 312,739 | - | - | 312,740 | ||||||||||||||||||||||||
A-Warrants
issued in connection with preferred stock
|
- | - | - | - | 142,740 | - | - | 142,740 | ||||||||||||||||||||||||
B-Warrants
issued in connection with preferred stock
|
- | - | - | - | 104,520 | - | - | 104,520 | ||||||||||||||||||||||||
Reverse
merger transaction:
|
||||||||||||||||||||||||||||||||
Elimination
of accumulated deficit
|
- | - | - | - | (38,000 | ) | - | - | (38,000 | ) | ||||||||||||||||||||||
Previously
issued Canusa Capital Corp. stock
|
- | - | 8,000,000 | 8,000 | 30,000 | - | - | 38,000 | ||||||||||||||||||||||||
Exchange
of bridge notes upon event of Merger
|
415 | - | - | - | 415,000 | - | - | 415,000 | ||||||||||||||||||||||||
Conversion
of subordinated notes upon event of Merger
|
- | - | 7,756,776 | 7,757 | 2,786,767 | - | - | 2,794,524 | ||||||||||||||||||||||||
Common
shares issued in connection with senior
|
||||||||||||||||||||||||||||||||
subordinated
notes
|
- | - | 500,000 | 500 | 149,500 | - | - | 150,000 | ||||||||||||||||||||||||
Beneficial
conversion feature of convertible note
|
- | - | - | - | 96,361 | - | - | 96,361 | ||||||||||||||||||||||||
Warrants
issued with senior subordinated notes
|
- | - | - | - | 369,000 | - | - | 369,000 | ||||||||||||||||||||||||
Non-employee
stock-based compensation
|
- | - | - | - | 13,500 | - | - | 13,500 | ||||||||||||||||||||||||
Common
shares issued in exchange for services
|
- | - | 200,000 | 200 | 179,800 | - | - | 180,000 | ||||||||||||||||||||||||
Employee
stock-based compensation
|
- | - | - | - | 50,961 | - | - | 50,961 | ||||||||||||||||||||||||
Principal
payment from ESOP
|
- | - | - | - | - | - | 112,625 | 112,625 | ||||||||||||||||||||||||
Net
income
|
- | - | - | - | - | 343,970 | - | 343,970 | ||||||||||||||||||||||||
Balance
at December 31, 2009
|
975 | $ | 1 | 28,700,000 | $ | 28,700 | $ | 6,805,034 | $ | (9,237,239 | ) | $ | (1,142,101 | ) | $ | (3,545,605 | ) |
See
accompanying notes to consolidated financial statements
F-4
DECISIONPOINT
SYSTEMS, INC.
Consolidated
Statements of Cash Flow
December
31,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income (loss)
|
$ | 343,970 | $ | (890,063 | ) | |||
Adjustments
to reconcile net income (loss) to net cash
|
||||||||
(used
in) provided by operating activities:
|
||||||||
Depreciation
and amortization
|
35,493 | 40,967 | ||||||
Amortization of deferred financing costs and note discount
|
234,067 | 125,798 | ||||||
Write off of investment
|
- | 632,500 | ||||||
Employee
stock-based compensation
|
50,961 | 49,698 | ||||||
Non-employee stock-based compensation
|
154,500 | - | ||||||
Principal payment from ESOP contribution
|
112,625 | 107,007 | ||||||
Gain on change in fair value of warrant liability
|
(55,929 | ) | - | |||||
Deferred tax assets
|
(312,000 | ) | - | |||||
Changes in operating assets and liabilities:
|
||||||||
Accounts receivable, net
|
(808,488 | ) | 3,681,162 | |||||
Inventory,
net
|
1,395,522 | (1,542,748 | ) | |||||
Deferred
costs
|
(596,244 | ) | 125,047 | |||||
Prepaid
expenses
|
(26,472 | ) | 151,445 | |||||
Other
assets
|
150,912 | (136,004 | ) | |||||
Accounts
payable
|
(501,634 | ) | (2,451,089 | ) | ||||
Accrued
expenses and other current liabilities
|
(508,942 | ) | 706,710 | |||||
Unearned
revenue
|
(1,078,910 | ) | 1,373,459 | |||||
Net
cash (used in) provided by operating activities
|
(1,410,569 | ) | 1,973,889 | |||||
Cash
flows from investing activities
|
||||||||
Capital
expenditures
|
(10,053 | ) | (7,756 | ) | ||||
Cash
flows from financing activities
|
||||||||
Borrowings from line of credit
|
50,206,153 | 54,959,000 | ||||||
Repayments
on line of credit
|
(51,008,035 | ) | (55,851,841 | ) | ||||
Repayment
of debt
|
(1,400,300 | ) | (600,000 | ) | ||||
Proceeds from sale of convertible note, net of issuance
cost
|
225,000 | - | ||||||
Proceeds from sale of senior subordinated notes
|
2,500,000 | - | ||||||
Issuance of convertible preferred stock
|
560,000 | - | ||||||
Paid
financing costs
|
(444,693 | ) | - | |||||
Holding
share liability
|
(21,704 | ) | (125,875 | ) | ||||
Net
cash provided by (used in) financing activities
|
616,421 | (1,618,716 | ) | |||||
Net
(decrease) increase in cash and cash equivalents
|
(804,201 | ) | 347,417 | |||||
Cash
and cash equivalents at beginning of period
|
944,941 | 597,524 | ||||||
Cash
and cash equivalents at end of period
|
$ | 140,740 | $ | 944,941 | ||||
Supplemental
disclosure of non-cash activities:
|
||||||||
Interest paid
|
$ | 926,194 | $ | 1,152,979 | ||||
Income
taxes paid
|
13,120 | 2,200 | ||||||
Supplemental
disclosure of non-cash financing activities:
|
||||||||
Conversion of bridge notes to preferred stock
|
415,000 | - | ||||||
Conversion of Holding subordinated debt
|
2,794,524 | - | ||||||
A-Warrants issued in connection with preferred stock
|
142,740 | - | ||||||
B-Warrants issued in connection with preferred stock
|
104,520 | - | ||||||
Beneficial conversion feature of convertible note
|
96,361 | - | ||||||
Warrants issued with convertible note
|
128,639 | - | ||||||
Warrants issued with senior subordinated notes
|
369,000 | - |
See
accompanying notes to consolidated financial statements
F-5
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
NOTE
1 - DESCRIPTION OF BUSINESS AND THE MERGER
Nature of Business -
DecisionPoint Systems, Inc. (the “Company”) is a data collection systems
integrator that sells and installs field mobility devices, software, and related
bar coding equipment, and provides radio frequency identification solutions,
more commonly known as “RFID”. The Company also provides professional
services and software customization solutions.
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
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 terms 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 for 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 now the business conducted
by Holding prior to the Merger. In addition, the directors and
officers of the 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
“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 consolidated financial statements are
those of DecisionPoint. Effective on the closing date the Company adopted
DecisionPoint’s year end of December 31.
Canusa’s
historical accumulated deficit for periods prior to June 18, 2009, in the amount
of $38,000, was eliminated against additional paid in capital, and the
accompanying consolidated financial statements present the previously issued
shares of Canusa common stock as having been issued pursuant to the Merger on
June 18, 2009. The shares of common stock of the Company issued to
the Holding stockholders in the Merger are presented as having been outstanding
since the original issuance of the shares.
F-6
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis
of Presentation
In June
2009, the Financial Accounting Standards Board (“FASB”) issued the FASB
Accounting Standards Codification (the “ASC”). The ASC has become the
single source of non-governmental accounting principles generally accepted in
the United States (“GAAP”) recognized by the FASB in the preparation of
financial statements. The ASC does not supersede the rules or
regulations of the Securities and Exchange Commission (“SEC”), therefore, the
rules and interpretive releases of the SEC continue to be additional sources of
GAAP for the Company. The Company adopted the ASC as of July 1,
2009. The ASC does not change GAAP and did not have an effect on the
Company’s financial position, results of operations or cash flows.
Summary
of Significant Accounting Policies
Basis of Consolidation - The
accompanying 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 Company operates in only one business
segment.
Use of Estimates - The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management 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. Actual results could differ
from those estimates. Certain accounting policies involve judgments
and uncertainties to such an extent that there is reasonable likelihood that
materially different amounts could have been reported under different
conditions, or if different assumptions had been used. The Company
evaluates its estimates and assumptions on a regular basis. The
Company uses historical experience and various other assumptions that are
believed to be reasonable under the circumstances to form the basis for making
judgments about carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates and assumptions used in preparation of the consolidated financial
statements.
Cash and Cash Equivalents -
The Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
Accounts Receivable - Accounts
receivable are stated at net realizable value, and as such, current earnings are
charged with an allowance for doubtful accounts based on management’s best
estimate of the amount of probable incurred credit losses in the Company’s
existing accounts receivable. The Company determines the 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 $332,484 and
$575,000, as of December 31, 2009 and 2008, respectively.
Inventory - Inventory is
stated at the lower of cost or market. Cost is determined under the
first-in, first-out (FIFO) method. The Company periodically reviews
its inventories and makes provisions as necessary for estimated obsolete and
slow-moving goods. The creation of such provisions results in a write
down 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 $210,000 and $175,000, as of
December 31, 2009 and 2008, respectively.
Deferred costs – Deferred
costs consist primarily of third party extended maintenance services which the
Company has paid in advance and then amortizes over the life of the contract
period. This is generally for a term of one to five
years.
Property and Equipment - Property
and equipment are recorded at cost. Repairs
and maintenance that do not improve or extend the lives of the respective assets
are expensed in the period incurred.
Depreciation
of property and equipment is provided for by the straight-line method over the
estimated useful lives of the related assets.
Computer
equipment 3
to 5 years
Office furniture and
fixtures 5
to 7 years
Leasehold
improvements are amortized over the shorter of the lease term or the life of the
improvements.
F-7
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
Impairment of Long-Lived
Assets - The Company reviews its long-lived assets and certain
identifiable intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets is measured by comparing the
carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to
be disposed of by sale are reflected at the lower of their carrying amount or
fair value less cost to sell. To date, the Company has not recorded
any impairment charges.
Goodwill – Goodwill is the
excess of the purchase price paid over the fair value of the net assets of the
acquired business. Amortization of goodwill is not
permitted. Goodwill is tested at least annually for impairment by
comparing the fair value of the reporting unit to its carrying amount including
goodwill. If the carrying amount of the reporting unit exceeds its
fair value, an impairment loss is recognized. The amount of
impairment loss is determined by comparing the implied fair value of reporting
unit goodwill with the carrying amount. If the carrying amount
exceeds the implied fair value then an impairment loss is recognized equal to
that excess. No impairment charges have been recorded as a result of
the Company’s annual impairment assessments.
Deferred Financing Costs -
Costs incurred by the Company in connection with the issuance of debt are
deferred and amortized to interest expense over the life of the underlying
indebtedness, adjusted to reflect any early repayments using the effective
interest rate method. Deferred financing costs net of amortization
totaled $353,318 and $-0-, as of December 31, 2009 and 2008, respectively, and
are included in other assets in the accompanying consolidated balance
sheets.
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. The
Company generates revenues from the sale of extended warranties on wireless and
mobile hardware and systems. Revenue related to extended warranty and
service contracts is recorded as unearned revenue and is recognized over the
life of the contract as the Company maintains financial risk throughout the term
of these contracts and may be liable to refund a customer for amounts paid in
certain circumstances.
The
Company also generates 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 is recognized in the period in which the services are performed
or delivered. For certain long-term proprietary service contracts with
fixed or “not to exceed” fee arrangements, the Company estimates proportional
performance using the labor costs incurred as a percentage of total estimated
labor costs to complete the project consistent with the percentage-of-completion
method of accounting. Accordingly, revenue for these contracts is
recognized based on the proportion of the work performed on the
contract. If there is no sufficient basis to measure progress toward
completion, the revenues are recognized when final customer acceptance is
received consistent with the completed contract method of
accounting. Adjustments to contract price and estimated labor costs
are made periodically, and losses expected to be incurred on contracts in
progress are charged to operations in the period such losses are
determined.
Concentration of Risk -
Financial instruments that potentially subject the Company to a concentration of
credit risk consist primarily of cash and cash equivalents, and accounts
receivable. Cash and cash equivalents are deposited with major
financial institutions and, at times, such balances with any one financial
institution may be in excess of the FDIC insured limits.
For the
year ended December 31, 2009, the Company had sales to one customer that
represented 16% of total net sales. Accounts receivable from a single
customer as of December 31, 2009, accounted for 19% of total accounts
receivable. For the
year ended December 31, 2008, the Company had sales to two customers, who
collectively represented a total of 23% of total revenues. Accounts
receivable from two customers at December 31, 2008, accounted for 33% of
accounts receivable.
The
Company had purchases from three vendors that collectively represent 59% and 58%
of total purchases for the years ended December 31, 2009 and 2008,
respectively. Accounts payable from three vendors represents 35% and
29% of total accounts payable as of December 31, 2009 and 2008,
respectively.
F-8
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
Fair Value of Financial Instruments -
The Company’s financial instruments include cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses and notes
payable. The carrying value of these financial instruments
approximates their fair values at December 31, 2009 and 2008, due to their
short-term maturities.
Warrant Liability - The
Company accounts for its warrant issued pursuant to the June 2009 subordinated
convertible debt in accordance with the guidance on Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity, which
provides that the Company classifies the warrant instrument as a liability at
its fair value and adjusts the instrument to fair value at each reporting
period. This liability is subject to re-measurement at each balance sheet date
until exercised, and any change in fair value is recognized as a component of
other income or expense.
Stock-Based Compensation - The
Company records the fair value of all stock-based compensation awards in its
consolidated financial statements. The terms and vesting schedules for
stock-based awards vary by type of grant and generally vest based on the passage
of time. The fair value of stock options and warrants are calculated using the
Black-Scholes option-pricing model and the expense is recognized on a
straight-line basis over the requisite service period, net of estimated
forfeitures.
Employee Stock Ownership Plan
(ESOP) - The cost of shares issued to the ESOP, but not yet earned is
shown as a reduction of equity. Compensation expense is based on the market
price of shares as they are committed to be released to participant accounts. As
of December 31, 2009, 800,760 shares have been allocated to eligible
participants in the DecisionPoint Employee Stock Ownership Plan. As shares of
common stock acquired by the ESOP are committed to be released to each employee,
the Company reports compensation expense equal to the current market price of
the shares, and the shares become outstanding for earnings per share
computations.
Earnings (Loss) per Common Share -
Basic earnings (loss) per share are computed by dividing the earnings
(loss) available to common shareholders by the weighted-average number of common
shares outstanding. Diluted earnings (loss) per share is computed
similarly to basic earnings (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.
F-9
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
The
components of basic and diluted earnings (loss) per common share for the years
ended December 31, 2009 and 2008 are as follows:
December
31,
|
||||||||
2009
|
2008
|
|||||||
Basic
earnings (loss) per common share
|
||||||||
Net
income (loss)
|
$ | 343,970 | $ | (890,063 | ) | |||
Weighted
average common shares outstanding
|
14,353,837 | 5,038,087 | ||||||
Basic
earnings (loss) per common share
|
$ | 0.02 | $ | (0.18 | ) | |||
Diluted
earnings (loss) per common share
|
||||||||
Net
income (loss)
|
$ | 343,970 | $ | (890,063 | ) | |||
Effect
of assumed conversion of debenture
|
8,055 | - | ||||||
Net
income applicable to diluted EPS
|
$ | 352,025 | $ | (890,063 | ) | |||
Weighted-average
common shares outstanding
|
14,353,837 | 5,038,087 | ||||||
Dilutive
potential common shares:
|
||||||||
Assumed
conversion of stock options
|
3,532,576 | - | ||||||
Assumed
conversion of preferred stock
|
1,041,781 | - | ||||||
Assumed
conversion of debenture
|
267,123 | - | ||||||
Assumed
conversion of warrants
|
368,886 | - | ||||||
Diluted
weighted-average common shares outstanding
|
19,564,203 | 5,038,087 | ||||||
Diluted
earnings (loss) per common share
|
$ | 0.02 | $ | (0.18 | ) |
The weighted average basic and diluted shares for the years ended December 31, 2009 and 2008 exclude the ESOP shares that have not been committed to be released of 6,404,377 and 7,205,137, respectively. In addition, for the year ending December 31, 2009, 1,105,000 warrants to purchase common stock have been excluded from the computation of dilutive earnings per share as their exercise price is greater than the average market price per common share and their effect is potentially anti-dilutive.
Income Taxes - The Company
accounts for income taxes using the asset and liability
method. Deferred tax assets and liabilities are determined based on
the differences between the financial reporting basis and the tax basis of
existing assets and liabilities, and are measured at the prevailing enacted tax
rates that will be in effect when these differences are settled or
realized. Deferred tax assets are reduced by a valuation allowance if
it is more likely than not that some portion or all of the deferred tax asset
will not be realized.
The
Company determined that there were no material liabilities for tax benefits for
past years and the current period. The Company has determined that
any future interest accrued, related to unrecognized tax benefits, will be
included in interest expense. In the event the Company must accrue
for penalties, they will be included as an operating expense.
Prior to
the Merger discussed above, the Company filed its Federal and State income tax
returns as a sub-chapter “S” corporation. Therefore, any income tax
liability from its operations was payable directly by its
shareholders. The Company's sub-chapter “S” corporation status was
terminated on June 18, 2009, upon the close of the Merger.
Reclassification - Certain
amounts in the prior period consolidated financial statements and related notes
have been reclassified to conform to the current period
presentation.
F-10
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
New
Accounting Standards
Effective
June 30, 2009, the Company adopted a new accounting standard issued by the FASB
related to the disclosure requirements of the fair value of financial
instruments. This standard expands the disclosure requirements of
fair value (including the methods and significant assumptions used to estimate
fair value) of certain financial instruments to interim period financial
statements that were previously only required to be disclosed in financial
statements for annual periods. In accordance with this standard, the
disclosure requirements have been applied on a prospective basis and did not
have a material impact on the Company’s consolidated financial
statements.
In August
2009, the FASB issued an amendment to the accounting standards related to the
measurement of liabilities that are recognized or disclosed at fair value on a
recurring basis. This standard clarifies how a company should measure
the fair value of liabilities and that restrictions preventing the transfer of a
liability should not be considered as a factor in the measurement of liabilities
within the scope of this standard. The adoption of this standard did
not have a material impact on the Company’s consolidated financial
statements.
In
October 2009, the FASB issued an amendment to the accounting standards related
to the accounting for revenue in arrangements with multiple deliverables
including how the arrangement consideration is allocated among delivered and
undelivered items of the arrangement. Among the amendments, this
standard eliminates the use of the residual method for allocating arrangement
consideration and requires an entity to allocate the overall consideration to
each deliverable based on an estimated selling price of each individual
deliverable in the arrangement in the absence of having vendor-specific
objective evidence or other third party evidence of fair value of the
undelivered items. This standard also provides further guidance on
how to determine a separate unit of accounting in a multiple-deliverable revenue
arrangement and expands the disclosure requirements about the judgments made in
applying the estimated selling price method and how those judgments affect the
timing or amount of revenue recognition. This standard, for which the
Company is currently assessing the impact, will become effective for the Company
on January 1, 2011.
In
October 2009, the FASB issued an amendment to the accounting standards related
to certain revenue arrangements that include software elements. This
standard clarifies the existing accounting guidance such that tangible products
that contain both software and non-software components that function together to
deliver the product’s essential functionality, shall be excluded from the scope
of the software revenue recognition accounting
standards. Accordingly, sales of these products may fall within the
scope of other revenue recognition accounting standards or may now be within the
scope of this standard and may require an allocation of the arrangement
consideration for each element of the arrangement. This standard, for
which the Company is currently assessing the impact, will become effective for
the Company on January 1, 2011.
Management
does not believe that any other recently issued, but not yet effective,
accounting pronouncements, if currently adopted, would have a material effect on
the Company’s financial statements.
F-11
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
NOTE
3 – 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 table below are based
on information available to the Company as of December 31,
2009.
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
December 31, 2009, as follows:
Warrants
to acquire common
stock $ 72,710
The
following table presents the Company’s fair value hierarchy for the above
liabilities measured at fair value on a recurring basis as of December 31,
2009:
Level
1 Level
2 Level 3
Warrants
to acquire common
stock $ -0-
$ 72,710 $ -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
|
December
31, 2009
|
||||||
Beginning
balance - January 1, 2009
|
$ | - | |||||
Issuances
|
128,639 | ||||||
Realized
gain (1)
|
(55,929 | ) | |||||
Ending
balance - December 31, 2009
|
$ | 72,710 | |||||
(1) The realized gain is included in other expense in the consolidated statement of operations. |
The fair
value of warrants issued by the Company in connection with private placements of
securities has been estimated by management in the absence of a readily
ascertainable market value. At December 31, 2009, the Company
has determined, based upon the Black-Scholes option-pricing model, that the fair
value of these warrants is $72,710. The assumptions used in the
Black-Scholes option-pricing model were strike price of $0.30, share price of
$0.29, contractual life of 4.5 years, volatility of 61.09% and a risk free
interest rate of 2.71%. Because of the inherent uncertainty of
valuation, the estimated 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.
F-12
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
NOTE
4 - PROPERTY AND EQUIPMENT
Property
and equipment consists of the following at:
December
31,
|
||||||||
2009
|
2008
|
|||||||
Computer
equipment
|
$ | 174,968 | $ | 171,444 | ||||
Office
furniture and fixtures
|
66,667 | 64,069 | ||||||
Leasehold
improvements
|
27,749 | 23,818 | ||||||
Total
property and equipment
|
269,384 | 259,331 | ||||||
Less
accumulated depreciation and amortization
|
(216,663 | ) | (181,170 | ) | ||||
Property
and equipment, net
|
$ | 52,721 | $ | 78,161 | ||||
Depreciation and amortization expense related to property and equipment for the years ended December 31, 2009 and 2008 totaled $35,493 and $40,967, respectively.
NOTE
5 – LINE OF CREDIT
In
December 2006, pursuant to a Loan Agreement (“Loan Agreement”), the Company
obtained a $6.5 million line of credit, which provided for borrowings based upon
eligible accounts receivable, as defined in the Loan Agreement. Under
the terms of the Loan Agreement, interest accrued at prime plus 2.5% with an
interest rate reduction of 0.75% based on future profitability. The
Loan Agreement is secured by substantially all the assets of the Company and
originally matured in December 2008, at which time it was amended to extend the
maturity date to March 15, 2009, in exchange for an extension fee of
$12,185.
In March
2009, pursuant to an Amendment to the Loan and Security Agreement (“Amendment”)
the line of credit was renewed for an additional two year period and the amount
available for borrowing was increased to $8.5 million. Pursuant to
the Amendment, the rate at which interest accrues was adjusted to prime plus 4%,
with a potential interest rate reduction of 0.50% based on future
profitability. The Amendment also modified the definition of “prime
rate” to a rate not less than 4% on any day. The Amendment also calls
for an annual renewal fee of $85,000. The amount outstanding under
the line of credit at December 31, 2009 and 2008, was $2,575,326 and $3,377,208,
with interest accruing at 8% and 10.25%, respectively. The line of
credit has a tangible net worth financial covenant and other non-financial
covenants with which the Company has been in compliance. Availability
under the line of credit was approximately $4,296,000 and $1,608,000, as of
December 31, 2009 and 2008, respectively.
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 December 31,
2009 or 2008.
For the
years ended December 31, 2009 and 2008, the Company’s interest expense related
to the line of credit, including fees paid to secure lines of credit, totaled
$354,534 and $455,221, respectively.
F-13
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
NOTE
6 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities consist of the following:
December
31,
|
||||||||
2009
|
2008
|
|||||||
Salaries
and benefits
|
$ | 1,364,067 | $ | 1,739,910 | ||||
Interest
payable
|
535,412 | 457,008 | ||||||
Professional
fees
|
169,410 | 981,860 | ||||||
Income
taxes payable
|
385,000 | - | ||||||
Vendor
purchases
|
410,820 | 624,874 | ||||||
Other
fees and expenses
|
659,016 | 229,015 | ||||||
Total
accrued expenses and other current liabilities
|
$ | 3,523,725 | $ | 4,032,667 |
As of December 31, 2009 and 2008, certain executives of the Company had elected to defer a portion of their compensation. This deferral amounted to $305,438 and $278,885 as of December 31, 2009 and 2008, respectively. Interest on the deferred compensation accrues monthly at an annual rate of 16%.
NOTE
7 – HOLDING SHARES LIABILITY
In March
2006, pursuant to a Stock Purchase Agreement (“Agreement”), the Company acquired
the common stock of SBS. As part of the purchase price, certain
employees and directors of SBS agreed to the cancellation of previously issued
options to acquire shares of SBS stock in exchange for Company
Holding Share equivalents (“Holding Shares”). The fair value of the
Holding Shares was determined to be $380,000 under the terms of the
Agreement. The recipients of these Holding Shares were entitled to
receive a cash settlement under one of three settlement options determined by
each recipient prior to the closing of the acquisition. The
settlement options were: Option A - settlement of 20% per year of the recipients
Holding Shares beginning on May 1, 2006, Option B - settlement of 100% of the
recipients Holding Shares on May 1, 2010, or Option C - settlement of the
recipients’ Holding Shares on the earliest to occur of the date on which the
recipient turns 65, terminates employment, or the Company experiences a change
in control (as defined in the Agreement). For those recipients who
elected to defer their cash payments under options B or C, the per-share value
is to be re-evaluated, and the related liability adjusted, to reflect changes in
the fair value of the underlying stock, based on the fair value of the ESOP
share price as determined annually on December 31 of each subsequent year until
maturity.
Future
settlements of these Holding Shares as of December 31, 2009 include the final
fixed payment of $47,631 due under option A, $142,967 due under Option B, and
$59,388 due under option C. The amounts due under options B and C
have been adjusted for the change to the fair value of the ESOP share
price. All amounts have been classified as
current.
F-14
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
NOTE
8 – DEBT
Debt as
of December 31, 2009 and 2008, consists of the following:
2009
|
Amortization
|
||||||||||||||||||||||||||||
Balance
|
Note
|
of
Note
|
Conversion
|
Balance
|
|||||||||||||||||||||||||
Debt
|
January
1
|
Additions
|
Discount
|
Payments
|
Discount
|
to
equity
|
December
31
|
||||||||||||||||||||||
Bank
term loan
|
$ | 600,000 | $ | - | $ | - | $ | (600,000 | ) | $ | - | $ | - | $ | - | ||||||||||||||
Subordinated
debt - CCS
|
353,800 | - | - | (353,800 | ) | - | - | - | |||||||||||||||||||||
Subordinated
convertible debt
|
1,666,024 | - | - | (71,500 | ) | - | (1,594,524 | ) | - | ||||||||||||||||||||
Subordinated
convertible debt - SBS
|
1,200,000 | - | - | - | - | (1,200,000 | ) | - | |||||||||||||||||||||
Bridge
notes
|
1,000,000 | - | (375,000 | ) | - | (415,000 | ) | 210,000 | |||||||||||||||||||||
Subordinated
convertible debt - June 2009
|
- | 250,000 | - | - | - | - | 250,000 | ||||||||||||||||||||||
Note
discount
|
- | - | (250,000 | ) | - | 135,417 | (114,583 | ) | |||||||||||||||||||||
Subordinated
debt, net
|
- | - | - | - | - | - | 135,417 | ||||||||||||||||||||||
Senior
subordinated notes
|
- | 2,500,000 | 2,500,000 | ||||||||||||||||||||||||||
Note
discount
|
(369,000 | ) | 7,274 | (361,726 | ) | ||||||||||||||||||||||||
Senior
subordinated notes, net
|
2,138,274 | ||||||||||||||||||||||||||||
Total
debt
|
$ | 4,819,824 | $ | 2,750,000 | $ | (619,000 | ) | $ | (1,400,300 | ) | $ | 142,691 | $ | (3,209,524 | ) | 2,483,691 | |||||||||||||
Less
current portion
|
(731,793 | ) | |||||||||||||||||||||||||||
Debt,
net of current portion
|
$ | 1,751,898 | |||||||||||||||||||||||||||
2008
|
Amortization
|
||||||||||||||||||||||||||||
Balance
|
Note
|
of
Note
|
Conversion
|
Balance
|
|||||||||||||||||||||||||
Debt
|
January
1
|
Additions
|
Discount
|
Payments
|
Discount
|
to
equity
|
December
31
|
||||||||||||||||||||||
Bank
term loan
|
$ | 1,200,000 | $ | - | $ | - | $ | (600,000 | ) | $ | - | $ | - | $ | 600,000 | ||||||||||||||
Subordinated
debt - CCS
|
353,800 | - | - | - | 353,800 | ||||||||||||||||||||||||
Subordinated
convertible debt
|
1,666,024 | - | - | - | - | 1,666,024 | |||||||||||||||||||||||
Subordinated
convertible debt - SBS
|
1,200,000 | - | - | - | - | - | 1,200,000 | ||||||||||||||||||||||
Bridge
notes
|
1,000,000 | - | - | - | - | - | 1,000,000 | ||||||||||||||||||||||
Total
debt
|
$ | 5,419,824 | $ | - | $ | - | $ | (600,000 | ) | $ | - | $ | - | 4,819,824 | |||||||||||||||
Less
current portion
|
(1,953,800 | ) | |||||||||||||||||||||||||||
Debt,
net of current portion
|
$ | 2,866,024 |
The
carrying amount of debt approximates fair value based on the short-term maturity
and variable interest rates. The Company’s debt is recorded at par
value adjusted for any unamortized discounts. Discounts and costs directly
related to the issuance of debt are capitalized and amortized over the life of
the debt using the effective interest rate method and is recorded in interest
expense in the accompanying statements of operations.
F-15
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
Bank Term Loan - During
December 2006, pursuant to a Loan Agreement, the Company borrowed $1.5 million
from a financial institution (“Loan”). The Loan is due as follows;
six months of interest only payments and thirty equal monthly payments of
principal and interest. Monthly principal payments are fixed at
$50,000 over the term of the loan. Under the terms of the Loan
Agreement, interest accrues at Prime plus 2.5% with a potential interest rate
reduction of 0.75% based on future profitability. The Loan is secured
by substantially all the assets of the Company. The Loan has a
tangible net worth financial covenant and other non-financial covenants with
which the Company has been in compliance. During December 2009, the
Loan was paid in full.
Subordinated Debt - CCS - In
December 2003, in connection with the acquisition of CCS, the Company issued
subordinated debt with a three year term in the amount of $650,000 to the
original owner of CCS. The terms of the debt called for interest only
payments at Prime plus 4%, not to exceed 12%. In December 2006, the
holder agreed to continue interest only payments and to extend the maturity date
of the then current principal balance of $353,800 for successive one year
periods. In January 2009, the terms of the agreement were modified to
extend the maturity date to November 30, 2009 and to provide for monthly
principal and interest payments of $43,092 through October 2009, and a final
payment of $9,066, which was made in November 2009.
Subordinated Convertible Debt –
Employees and Investors – During the years ended December 31, 2003, 2004,
2005, and 2006, the Company issued subordinated convertible debt totaling
$1,666,024 with ten year terms to employees and investors in connection with the
ESOP purchase transaction. Interest accrues at rates ranging from Prime
plus 6% to Prime plus 8% subject to minimum rates ranging from 12% to 14% and
maximum rates ranging from 14% to 16%. At the date of the Merger, there was
$1,666,024 of convertible debt outstanding. Concurrent with the completion
of the Merger, $1,594,524 of the subordinated convertible debt was converted
into 3,603,874 shares of the Company’s common stock. Two holders elected
not to convert their balances totaling $71,500 which was fully repaid in
September 2009.
F-16
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
Subordinated Convertible Debt - SBS -
During March 2006, the Company purchased all of the issued and
outstanding stock of SBS. As part of the payment for the purchase of
its common stock, the shareholders of SBS agreed to take subordinated
convertible debt in the aggregate amount of $1,200,000. Terms of
repayment were quarterly interest-only payments at a rate of 4%, with all unpaid
interest and principal due in March 2013. As of December 31, 2008,
$1,200,000 was outstanding. Concurrently with the completion of the
Merger, the entire amount of the debt was converted into 4,152,902 shares of the
Company’s common stock.
Bridge Notes - In June 2007,
the Company issued subordinated debt (“Bridge Notes”) totaling $1,000,000 to
certain members of management and an outside Director. The Bridge
Notes had a six month term, accrued interest at 15% per annum and were subject
to an initiation fee of 2.5% and an extension fee of 2.5% of the unpaid
principal to extend beyond September 2007. All principal and interest was
originally due on December 31, 2007. In August 2008 the Bridge Notes were
amended to extend the maturity date to December 31, 2008 in exchange for an
additional commitment fee of 2.5% per quarter. In January 2009,
$100,000 of the principal along with accrued interest was repaid. On
January 28, 2009, the remaining Bridge Notes were extended on a rolling basis
provided that the holders remained an employee or director of the
Company. The extended Bridge Notes bear an extension fee of 2.5% per
quarter as long as they remain outstanding. In the event of a
subsequent material transaction involving a merger, acquisition, initial public
offering, change in control, sale of substantially all of the Company’s assets
or a financing transaction (“Transaction”) in excess of $2 million that
contemplates the exchange or conversion of the Bridge Notes into some form of
equity, the holder has the option to either have the Bridge Note and all unpaid
interest, paid in full or converted in accordance with the terms of the
Transaction. Concurrent with the completion of the Merger, $415,000
of principal was exchanged for 415 shares of Convertible Series A Preferred
Stock. Subsequent to the Merger, additional principal payments
totaling $275,000 were made on certain Bridge Notes and the interest rate was
reduced from 25% (15% per annum plus 2.5% quarterly) to 16% per
annum. Effective January 2010, the interest rate on the notes has
increased to 25% per annum.
Pursuant
to the terms of the Bridge Notes, the Company issued fully vested warrants to
purchase 130,000 shares of common stock. The warrant amount was equal
to 10% of the principal amount of the Bridge Notes divided by the offering price
in any initial public offering under the Securities Act of 1933, as
amended. The warrants have an exercise price of $1.00 and a
contractual term of five years. The warrants were valued at $58,919
and have been recorded as a discount to the Bridge Notes and a credit to
additional paid-in capital. The note discount has been fully
amortized to interest expense as of December 31, 2009.
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 Company’s common stock at $0.50 per
share. The market value of the Company’s common stock was $1.00 per
share on the date of issuance.
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 fair value of the warrants was $314,850 using the
Black-Scholes option-pricing model on the date of issuance. 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. The proceeds from the issuance of the Note, $225,000, were
allocated between the Note and the warrants based on the relative fair values of
the components. The portion of the proceeds allocated to the
warrants, which had a fair value of $314,850 was limited to $128,639 and is
recorded as a current liability and a discount to the Note. The
remaining unallocated proceeds of $96,361 were compared to the fair value of the
stock that would be received upon conversion, and the Company determined that a
beneficial conversion feature in the amount of $405,000 existed, but was limited
to the unallocated Note value of $96,361. The Company recorded the
remaining proceeds from the Note reduced by the discounts previously recorded,
or $96,361, as an additional discount to the Note and additional paid-in
capital. The total discount of $250,000 is being amortized to
interest expense using the effective interest method over the 12 month term of
the Note.
On
December 16, 2009, the warrants were re-priced due to the issuance of common
shares at $0.30 per share to the Senior Subordinated Note holders. On
December 31, 2009, the Company determined that the fair value of the warrants
was $72,710, and recorded a gain on the change in the value of
$55,929. This is recorded as other income in the accompanying
consolidated statement of operations for the year ended December 31,
2009.
Senior Subordinated Notes - On
December 16, 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. Partial monthly amortization
payments are due as follows; a) $50,000 from March 31, 2010 to May 31, 2010, b)
$75,000 from June 30, 2010 to August 31, 2010, c)$100,000 from September 30,
2010 to November 30, 2010, and $125,000 from December 31, 2010 to April 30,
2011. The balance and all accrued but unpaid interest is due on May
31, 2011. For all repayments of principal before November 30, 2010, the Company
shall pay 107% of the principal payments to the purchasers. For all
repayments of principal after November 30, 2010, the Company shall pay 114% of
the principal to the purchasers. The principal premium would be
recorded as interest expense. Interest payments of 15% per annum are
due monthly in arrears beginning on December 31, 2009. On November
30, 2010 and May 31, 2011, (if the note is extended) the Company shall pay a fee
equal to 1.5% of the aggregate outstanding principal balance. 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 of credit and
bank term loan.
Pursuant
to the terms of the Financing Agreement, the Company issued 500,000 shares of
common stock. The common stock was valued at $0.30 per share, the
closing price of the stock on the date of the agreement, and is recorded as
deferred financing costs in the accompanying 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 straight-line method which approximates the effective interest
method.
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 years
ended December 31, 2009 and 2008, the Company’s interest expense related to the
above debt, including all extension and commitment fees, totaled $499,983 and
$511,268, respectively.
F-17
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
NOTE
9 – 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 10,000000 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
In August
2009, the Company issued 200,000 common shares in exchange for services provided
by an outside third party to the Company. The fair value of the
shares was $0.90 per share, or $180,000, the closing price on the date the
shares were issued. The service contract was for 6 months therefore,
the fair value of the shares was recorded as a prepaid expense on the
accompanying consolidated balance sheet and is being amortized over the service
period.
Pursuant
to the terms of the Financing Agreement entered into in December 2009, the
Company issued 500,000 shares of common stock. The fair value of the
common stock was $0.30 per share, the closing price of the Company’s common
stock on the date of the agreement, and is recorded as deferred financing costs
in the accompanying consolidated balance sheets.
(b)
Convertible 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. The rights and preferences are summarized as
follows:
Dividends - The
holders of the Series A Preferred Stock shall be entitled to receive, when, as
and if declared by the Board of Directors, dividends at an annual rate of 8% of
the stated value. Dividends shall be cumulative and shall accrue on each
share of the outstanding Series A Preferred Stock from the date of its
issue.
Voting Rights - The
Series A Preferred Stock shall have no voting rights except on matters affecting
their rights or preferences.
Liquidation - Upon
any liquidation, dissolution or winding-up of the Company, the holders of the
Series A Preferred Stock shall be entitled to receive an amount equal to the
stated value per share plus any accrued and unpaid dividends before any payments
shall be made to the holders of any common stock.
Conversion - Each
share of Series A Preferred Stock shall be convertible, at the option of the
holder, at a conversion price of $0.50 per share.
During
April 2009, the Company sold 560 shares of Convertible Series A Preferred Stock
at a price of $1,000 per share in a private placement. No underwriting
discounts or commissions were paid in connection with the sale. The
securities were offered and sold only to accredited investors within the meaning
of Rule 501(a) under the Securities Act of 1933, as amended (the “Act”), in a
transaction conducted pursuant to section 4(2) of the Act and Regulation D
thereunder. In connection with the sale, the Company issued warrants
to purchase 560,000 shares of common stock.
Concurrent
with the Merger, $415,000 of Bridge Notes issued in June 2007 were exchanged for
415 shares of Series A Preferred Stock and warrants to purchase 415,000 shares
of common stock.
(c)
Warrants
In
connection with the issuance of the Convertible Series A Preferred Stock
described above, the Company issued fully vested warrants to purchase 975,000
shares of common stock. For each share of Convertible Series A
Preferred Stock, the investor received a warrant, exercisable on or before
June 18, 2012, to purchase 500 shares of common stock with an exercise price of
$1.00 per share (“Class A Warrants”) and a warrant, exercisable on or before
June 18, 2012, to purchase 500 shares of common stock with an exercise
price of $1.25 per share (“Class B Warrants”). The fair value of the
warrants of $142,740 and $104,520 for the Class A Warrants and Class B warrants,
respectively, was determined based upon the Black-Scholes option-pricing model
and the following assumptions: stock price $1.00, contractual term 3 years,
expected volatility 40.72%, expected dividend yield of 0%, and a risk-free
interest rate of 1.76%. The warrants were recorded as additional
paid-in capital and are all exercisable and outstanding as of December 31,
2009.
F-18
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
In
connection with the Bridge Notes, in June 2007, the Company issued 130,000 fully
vested warrants to purchase common stock at an exercise price of $1.00 per
share. The warrants are valued at $58,919 based upon the
Black-Scholes option-pricing model and the following assumptions: stock price
$1.00, contractual term 5 years, expected volatility 44.19%, expected dividend
yield of 0%, and a risk-free interest rate of 5.03%. The warrants
were recorded as a discount to the Bridge Notes and a credit to additional
paid-in capital and are all exercisable and outstanding as of December 31,
2009.
Immediately
following the Merger, the Company issued a debenture in the amount of $250,000
including fully vested warrants to purchase up to 500,000 common shares with an
exercise price of $0.50 per share. The warrants were valued at
$314,850 based upon the Black-Scholes option-pricing model and the following
assumptions: stock price $1.00, contractual term 5 years, expected volatility
44.19%, expected dividend yield of 0%, and a risk-free interest rate of
2.71%. The terns 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. The warrants were recorded as a discount to
the Note and as a current liability based on the relative fair value allocated
between the warrants and the Note (see Note 7) which was $128,639. On
December 31, 2009 the Company determined that the current fair value of the
warrants was $72,710, and recorded a gain on the change in the value of
$55,929. This is recorded as other income in the accompanying
statement of operations. The warrants are all exercisable and
outstanding as of December 31, 2009.
In
connection with the Senior Subordinated Notes, the Company issued fully vested
warrants to purchase 2,000,000 shares of common stock. Of this
amount, 1,000,000 have an exercise price of $0.50 (Warrant A) and 1,000,000 have
an exercise price of $0.60 (Warrant B). The warrants were valued at
$369,000 based upon the Black-Scholes option-pricing model and the following
assumptions: stock price $0.30, contractual term 5 years, expected volatility
92.37%, expected dividend yield of 0%, and a risk-free interest rate of
2.23%. The warrants were recorded as a discount to the Senior
Subordinated Notes and a credit to additional paid-in capital. The
warrants are all exercisable and outstanding as of December 31,
2009.
The
following summarize s information about the Company’s common stock warrants as
of December 31, 2009:
Weighted
|
Weighted
|
|||||||||||||||
Total
|
Total
|
Average
|
Average
|
|||||||||||||
Warrants
|
Warrants
|
Exercise
|
Fair
|
|||||||||||||
Outstanding
|
Exercisable
|
Price
|
Value
|
|||||||||||||
Warrants
to purchase common stoock
|
3,605,000 | 3,605,000 | $ | 0.71 | $ | 0.21 |
NOTE 10 - ESOP PLAN
In
December 2003, the Company formed an Employee Stock Ownership Plan (the “ESOP”)
and loaned the ESOP $1,950,000 (the “ESOP Note”) that the ESOP Trust (“Trust”)
used to acquire 8,162,557 shares of the of the Company’s stock from its former
stockholder for $1,300,000 and 4,080,667 shares from the Company for
$650,000. The ESOP Note bears interest at a rate of 5.25% with annual
principal and interest payments and has a 15-year term. The amount
owed to the Company under the Note as of December 31, 2009 and December 31,
2008, was $1,142,101 and $1,254,726, respectively. The ESOP Note is
reflected in the accompanying consolidated balance sheet as unearned ESOP shares
in stockholders’ deficit.
The ESOP
covers all non-union employees. Employees are eligible to participate in
the Plan after three months of service. Plan participants start vesting
after two years of participation and are fully vested after six years of
participation. ESOP contributions are determined annually by the Board of
Directors, and are a minimum $130,000 per year, to repay the ESOP Note held by
the Company. The Company’s contribution expense for the year ended
December 31, 2009 was $178,498 representing $112,625 for the ESOP principal
payment and $65,873 for the ESOP interest. The Company’s contribution
expense for the year ended December 31, 2008, was $185,248 representing $107,007
for the ESOP principal payment and $78,241 for the ESOP interest. The ESOP
Note is secured by the unallocated Company stock held by the Trust.
ESOP
shares are allocated to individual employee accounts as the loan obligation of
the ESOP to the Company is reduced. These amounts are calculated on an
annual basis by an outside, independent financial advisor. The ESOP held
6,404,377 shares of unallocated Company stock and 5,838,847 shares of allocated
Company stock as of December 31, 2009. As at December 31, 2008, the
ESOP held 7,205,137 shares of unallocated Company stock and 5,038,087 shares of
allocated Company stock.
F-19
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
Compensation
costs relating to shares purchased are based on the fair value of shares
committed to be released. The unreleased shares are not considered
outstanding in the computation of earnings per common
share. Dividends received on ESOP shares are allocated based on
shares held for the benefit of each participant and used to purchase additional
shares of stock for each participant. The Company has not received
any dividends since the inception of the plan. ESOP compensation
expense consisting of both cash contributions and shares committed to be
released for 2009 and 2008,was $178,498 and $185,248,
respectively. The estimated fair value of the shares
released was estimated at $0.23 per share for 2009 as the actual cost has not
been completed by an outside third party valuation firm. The actual
cost basis of the shares released was $0.23 per share for 2008.
ESOP
shares as of December 31, 2009 and 2008 were as follows:
|
2009
|
2008
|
||||||
Allocated
shares
|
5,838,847 | 5,038,087 | ||||||
Shares
released for allocation
|
- | - | ||||||
Unreleased
shares
|
6,404,377 | 7,205,137 | ||||||
Total
ESOP shares
|
12,243,224 | 12,243,224 | ||||||
Fair
value of unreleased shares at December 31
|
$ | 1,473,007 | $ | 1,657,182 | ||||
NOTE 11 - STOCK OPTION PLAN
In
January 2004, the Company established the 2004 Incentive and Non-Incentive Stock
Option Plan (“2004 Plan”) which was originally adopted by the Board of Directors
of DecisionPoint and was assumed by the Company on June 18, 2009, in connection
with the Merger. The 2004 Plan authorized 5,385 shares of common stock for
issuance of which 5,357 were outstanding. On June 18, 2009, pursuant
to the Merger, the 2004 Plan was amended and each share of common stock then
subject to the 2004 Plan was substituted with 1224.32 shares of common stock,
for an aggregate of 6,592,976 shares authorized and 6,558,097
granted. Under the 2004 Plan, common stock incentives may be granted
to officers, employees, directors, consultants, and advisors. Incentives
under the Plan may be granted in any 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.
In June
2009, the Company established the DecisionPoint Systems, Inc. Incentive
Stock Plan ("2009 Plan") to retain directors, executives and selected employees
and consultants and reward them for making contributions to the success of the
Company. These objectives are accomplished by making long-term
incentive awards under the 2009 Plan in the form of options, stock awards and
restricted stock purchase offers. The total number of common shares which
may be purchased or granted under the 2009 Plan shall not exceed
1,000,000. There were no options granted under the 2009 Plan as of
December 31, 2009.
The 2004
and 2009 Plans, (collectively, 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.
F-20
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
A summary
of the status of the Plans as of December 31, 2009, 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, 2009
|
65,487 | 6,527,489 | $ | 0.24 | ||||||||||||
Additional
options authorized
|
1,000,000 | |||||||||||||||
Granted
|
(61,216 | ) | 61,216 | 0.29 | ||||||||||||
Exercised
|
- | - | - | |||||||||||||
Forfeited
|
30,608 | (30,608 | ) | 0.26 | ||||||||||||
December
31, 2009
|
1,034,879 | 6,558,097 | $ | 0.22 | $ | 317,003 | ||||||||||
Exercisable
options at December 31, 2009
|
5,448,371 | $ | 0.23 | $ | 324,343 | |||||||||||
The following table summarizes information about stock options outstanding as of December 31, 2009:
Options
Outstanding
|
Options
Exercisable
|
||||||
Weighted-
|
Weighted-
|
||||||
Average
|
Weighted-
|
Weighted-
|
Average
|
||||
Range
of
|
Remaining
|
Average
|
Average
|
Remaining
|
|||
Exercise
|
Number
|
Contractual
|
Exercise
|
Number
|
Exercise
|
Contractual
|
|
Prices
|
Outstanding
|
Life
(Years)
|
Price
|
Exercisable
|
Price
|
Life
(Years)
|
|
$0.20
- $0.31
|
6,558,097
|
5.06
|
$0.24
|
5,448,371
|
$0.23
|
4.81
|
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the required service period, which is generally equal to the vesting period. The fair value of options granted to employees during the year ended December 31, 2009, (no options were granted during the year ended December 31, 2008) was estimated using the Black-Scholes option-pricing model with the following assumptions:
Expected
term
|
5
years
|
|||
Expected
volatility
|
44.19 | % | ||
Dividend
yield
|
0 | % | ||
Risk-free
interest rate
|
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 years ended December 31, 2009 and 2008
was $50,961 and $49,698, respectively, and is included in selling, general and
administrative expense in the accompanying consolidated statements of
operations. As of December 31, 2009, total unrecognized estimated
employee compensation cost related to stock options granted prior to that date
was $288,274, which is expected to be recognized over a weighted-average vesting
period of 2.5 years.
The
weighted-average fair value on the grant date of options granted to employees
during the year ended December 31, 2009 was $0.26. The Company did
not grant any stock options during 2008.
F-21
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
NOTE
12 – COMMITMENTS AND CONTINGENCIES
Leases - The Company leases
its office and warehouse facilities under various operating
leases. The Company has an ancillary administration office
located in Parsippany, New Jersey where the Company leases 3,600 square
feet. The executive offices and West coast sales and operations are
located in Foothill Ranch, California where the Company leases 7,500 square
feet. In addition, the Company leases 3,000 square feet in Shelton,
Connecticut for its East coast sales and operations and 2,000 square feet in
South Plainfield, New Jersey for its East coast depot
operation. These facilities are expected to accommodate the Company’s
needs for the foreseeable future.
The lease
for Foothill Ranch, California, expires in July 2010. The lease for
Shelton, Connecticut, expires in April 2014. The lease for Parsippany, New
Jersey, expires June 2011. The South Plainfield, New Jersey, facility
lease is a month to month rental. Rent expense for the years ended
December 31, 2009 and 2008, was $321,014 and $302,624,
respectively.
The
aggregate remaining future minimum payments under these leases expiring after
December 31, 2009, are as follows:
Years
ending December 31:
|
||||
2010
|
$ | 223,947 | ||
2011
|
105,242 | |||
2012
|
60,925 | |||
2013
|
60,054 | |||
2014
|
16,868 | |||
$ | 467,036 |
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 the operating results or financial position of the Company.
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 as of December 31,
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.
F-22
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
NOTE
13 - INCOME TAXES
The
provision for income taxes for the years ended December 31, 2009 and 2008, is as
follows (all amounts are approximate):
December
31,
|
||||||||
2009
|
2008
|
|||||||
Current
income tax expense:
|
||||||||
Federal
|
$ | 322,000 | $ | - | ||||
State
|
61,000 | 16,000 | ||||||
383,000 | 16,000 | |||||||
Deferred
income tax expense (benefit):
|
||||||||
Federal
|
(265,000 | ) | - | |||||
State
|
(47,000 | ) | (62,000 | ) | ||||
(312,000 | ) | (62,000 | ) | |||||
Income
tax expense (benefit)
|
$ | 71,000 | $ | (46,000 | ) |
The Company’s deferred tax assets and liabilities are as follows:
December
31,
|
||||||||
2009
|
2008
|
|||||||
Allowance
for doubtful accounts
|
$ | 133,000 | $ | 7,000 | ||||
Inventory
reserve and uniform capitalization
|
107,000 | 4,000 | ||||||
Accrued
expenses and other liabilities
|
509,000 | 34,000 | ||||||
Unearned
revenue
|
887,000 | 28,000 | ||||||
Net
operating loss carryforward
|
518,000 | - | ||||||
Other
assets
|
4,000 | - | ||||||
Valuation
allowance
|
(1,769,000 | ) | - | |||||
Deferred
tax assets - current
|
389,000 | 73,000 | ||||||
Property
and equipment
|
(4,000 | ) | - | |||||
Deferred
tax assets
|
(4,000 | ) | - | |||||
Total
net deferred tax asset
|
$ | 385,000 | $ | 73,000 |
F-23
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
A
reconciliation of the United States statutory income tax rate to the effective
income tax rate for the years ended December 31, 2009 and 2008, is as
follows:
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
Amount
|
Rate
(%)
|
Amount
|
Rate
(%)
|
|||||||||||||
Tax
at the Federal statutory rate
|
$ | 141,000 | 34.0 | $ | - | - | ||||||||||
State
taxes
|
9,000 | 2.2 | 46,000 | 4.9 | ||||||||||||
Permanent
differences
|
89,000 | 21.4 | - | - | ||||||||||||
Valuation
allowance
|
1,769,000 | 426.3 | - | - | ||||||||||||
Impact
of change from S to
|
||||||||||||||||
C
Corporate tax status
|
(1,937,000 | ) | (466.8 | ) | - | - | ||||||||||
Effective
tax rate
|
$ | 71,000 | 17.1 | $ | 46,000 | 4.9 |
The Company’s deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. These assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse.
The
Company has net operating loss carryforwards available in certain jurisdictions
to reduce future taxable income. Future tax benefits for net
operating loss carryforwards are recognized to the extent that realization of
these benefits is considered more likely than not. This determination
is based on the expectation that related operations will be sufficiently
profitable or various tax business and other planning strategies will enable the
Company to utilize the net operating loss carryforwards. The
Company’s evaluation of the realizability of deferred tax assets considers both
positive and negative evidence. The weight given to potential effects
of positive and negative evidence is based on the extent to which it can be
objectively verified. During the six months ended December 31, 2009,
the Company recorded a valuation allowance related to the temporary items as it
was determined it is more likely than not that the Company will not be able to
fully use the assets to reduce future tax liabilities.
Prior to
the Merger discussed in Note 1, the Company filed its Federal and State income
tax returns as a sub-chapter “S” corporation. Therefore, any income
tax liability from its operations was payable directly by its
shareholders. As a result of the Merger, the Company’s sub-chapter
“S” corporation status was terminated on June 18, 2009. When the
Company changes its tax status from a nontaxable sub-chapter “S” corporation to
a taxable “C” corporation, deferred tax assets and liabilities shall be
recognized for timing differences at the date that a nontaxable enterprise
becomes a taxable enterprise. As a result, the Company recorded a net
deferred tax asset of $1,937,000 with the offset being recorded as an income tax
benefit with a valuation allowance reducing the effective tax asset and tax
benefit by $1,769,000 for the period ended December 31, 2009.
The
adoption of ASC 740-10 at January 1, 2009, had no impact on the Company’s
financial statements. At January 1, 2009 and December 31, 2009, the
Company had no unrecognized tax benefits recorded. The Company does
not expect the amount of unrecognized tax benefits to significantly change
within the next twelve months. T he Company will recognize any interest and
penalties as a component of income tax expense.
As of
June 18, 2009, the Company is subject to U.S. federal income tax as well as
income taxes in various state jurisdictions. The Company is no longer
subject to examination by federal and state taxing authorities for years prior
to 2006.
F-24
DECISIONPOINT
SYSTEMS, INC.
Notes
to Consolidated Financial Statements
December
31, 2009 and 2008
NOTE
14 - PROFIT SHARING PLAN
The
Company maintains a 401(k) Profit Sharing Plan (“401k
Plan”). Employees who are 21 years of age and have performed 90 days
of service are eligible to participate. Each year, employees can make
salary contributions of up to 25% of their salary. The Company
matches 100% of employee contributions up to 3% of eligible employee
compensation and 50% of employee contributions of 3% to 5% for a total of 4% of
employee compensation. Employer contributions to the 401k Plan were
$212,250 and $294,846, for the years ended December 31, 2009 and 2008,
respectively.
NOTE
15 - 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 CEO and CFO. During the years ended
December 31, 2009 and 2008, the Company purchased products and services for
$196,603 and $462,982, respectively, from this affiliate. Sales to this
affiliate during the years ended December 31, 2009 and 2008 were $590,407 and
$1,276,582, respectively. These sales to the affiliate were at no
incremental margin over the Company’s actual cost. Amounts due from
this affiliate included in accounts receivable in the accompanying consolidated
balance sheets as of December 31, 2009 and 2008, are $70,424 and $594,403,
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 $407,496 and 986,490 at December 31, 2009
respectively. The outstanding balance accrues interest at 16% per
annum for the years ended December 31, 2009 and 2008. Subsequently, in
2010, the interest rate increased to 25% per annum. During the years
ended December 31, 2009 and 2008, the Company accrued interest of $325,650 and
$224,950, respectively, on the accounts payable to the CEO and $341,424 and
$209,176, respectively on the accounts payable to the CFO. The balance of
the accounts payable is from purchases of products and services on behalf of the
Company, deferred compensation and interest on the accounts payable.
.
NOTE
16 - SUBSEQUENT EVENT
During
March 2010, the Company relocated its New Jersey warehouse facility to Essex,
New Jersey. The Company has a short-term six month lease with rental
payments of $3,700 for 4,000 square feet.
F-25