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EX-23.1 - EXHIBIT 23.1 - DPAC TECHNOLOGIES CORP | c99160exv23w1.htm |
EX-21.1 - EXHIBIT 21.1 - DPAC TECHNOLOGIES CORP | c99160exv21w1.htm |
EX-31.1 - EXHIBIT 31.1 - DPAC TECHNOLOGIES CORP | c99160exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - DPAC TECHNOLOGIES CORP | c99160exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - DPAC TECHNOLOGIES CORP | c99160exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - DPAC TECHNOLOGIES CORP | c99160exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM l0-K
(Mark One)
þ | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2009
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number: 0-14843
DPAC TECHNOLOGIES CORP.
(Exact name of registrant as specified in its charter)
California | 33-0033759 | |
(State or other jurisdiction | (I.R.S. Employer Identification No.) | |
of incorporation or organization) | ||
5675 HUDSON INDUSTRIAL PARK, HUDSON, OHIO | 44236 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (800) 553-1170
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, without par value
Common Stock, without par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
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 the filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 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 o
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 Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or in any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non accelerated filer, or a smaller reporting company. See definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act) Yes o No þ
The issuers revenues for the year ended December 31, 2009 were $6,807,418.
The aggregate market value of the registrants Common Stock, no par value, held by
non-affiliates of the registrant on March 22, 2010 based on a closing price of $0.02 for the Common
Stock of the Company was $685,000.
The number of shares of registrants Common Stock outstanding at March 12, 2010 was
109,414,896 shares.
Documents Incorporated By Reference
None.
DPAC TECHNOLOGIES CORP.
FORM 10-K
for the year ended December 31, 2009
I N D E X
FORM 10-K
for the year ended December 31, 2009
I N D E X
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PART III |
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PART IV |
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Exhibit 21.1 | ||||||||
Exhibit 23.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
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CAUTIONARY STATEMENT RELATED TO FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements as defined within Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, relating to revenue, revenue composition, market conditions, demand and pricing
trends, future expense levels, competition in our industry, trends in average selling prices and
gross margins, product and infrastructure development, market demand and acceptance, the timing of
and demand for next generation products, customer relationships, employee relations, and the level
of expected future capital and research and development expenditures. Such forward-looking
statements are based on the beliefs of, estimates made by, and information currently available to
DPAC Technologies Corp.s (DPAC or the Company) management and are subject to certain risks,
uncertainties and assumptions. Any other statements contained herein (including without limitation
statements to the effect that DPAC or management estimates, expects, anticipates, plans,
believes, projects, continues, may, will, could, or would or statements concerning
potential or opportunity or variations thereof or comparable terminology or the negative
thereof) that are not statements of historical fact are also forward-looking statements. The actual
results of DPAC may vary materially from those expected or anticipated in these forward-looking
statements. The realization of such forward-looking statements may be impacted by certain important
unanticipated factors, including those discussed in Managements Discussion and Analysis of
Financial Condition and Results of Operations. Because of these and other factors that may affect
DPACs operating results, past performance should not be considered as an indicator of future
performance, and investors should not use historical results to anticipate results or trends in
future periods. We undertake no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. Readers should carefully review the
risk factors described in this and other documents that DPAC files from time to time with the
Securities and Exchange Commission, including subsequent Current Reports on Form 8-K, Quarterly
Reports on Form 10-Q or Form 10-QSB and Annual Reports on Form 10-K or Form 10-KSB.
HOW TO OBTAIN DPAC TECHNOLOGIES SEC FILINGS
All reports filed by DPAC Technologies with the SEC are available free of charge via EDGAR
through the SEC website at www.sec.gov. In addition, the public may read and copy materials filed
by the Company with the SEC at the SECs public reference room located at 100 F Street, N.E.,
Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained
by calling the SEC at 1-800-SEC-0330. DPAC also provides copies of its Forms 8-K, 10-K, 10-Q, Proxy
and Annual Report at no charge to investors upon request and makes electronic copies of its most
recently filed reports available through its website at www.dpactech.com as soon as reasonably
practicable after filing such material with the SEC.
PART I
ITEM 1: BUSINESS
DPAC Technologies Corp., a California corporation (DPAC) through its wholly owned
subsidiary, Quatech, Inc. (Quatech), designs, manufactures, and sells device connectivity and
device networking solutions for a broad market. Quatech sells its products through a global network
of distributors, system integrators, value added resellers, and original equipment manufacturers
(OEM). The Company sells to customers in both domestic and foreign markets.
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Merger
On April 28, 2005, DPAC entered into a merger agreement, as subsequently amended, with Quatech
for a transaction to be accounted for as a purchase under accounting principles generally accepted
in the United States of America. The merger was approved by both Quatech and DPAC shareholders on
February 23, 2006 and was consummated on February 28, 2006. For accounting purposes, the
transaction is considered a reverse merger under which Quatech is considered the acquirer of
DPAC. Accordingly, the purchase price was allocated among the fair values of the assets and
liabilities of DPAC, while the historical results of Quatech are reflected in the results of the
combined company. Except where otherwise noted, the financial information contained herein
represents the results of operations of Quatech through the merger date, and combined Quatech and
DPAC after the merger date of February 28, 2006.
General Description of Business
Quatech is an industry leader in device networking and connectivity solutions. Through design,
manufacturing and support, Quatech maintains high standards of reliability and performance.
Customers include OEMs, value added resellers (VARs) and System Integrators, as well as end-users
in many industries, including banking, retail/POS, access control, building automation and
security, and energy management. Quatech is a leading supplier of data connectivity products to
financial institutions, serving five of the top ten U.S. banks.
DPAC was incorporated in California in September 1983, originally under the name Dense-Pac
Microsystems, Inc., and changed its name to DPAC Technologies Corp. in August 2001.
Quatech was incorporated in Ohio in 2000 as W.R. Acquisition, Inc. In July 2000, W.R.
Acquisition acquired the assets and business of Quatechs predecessor, Qua Tech, Inc., an Ohio
corporation, and the company changed its name to Quatech, Inc. The Company has its worldwide
headquarters in Hudson, OH.
At the time of the acquisition in July 2000, Qua Tech, Inc. developed and marketed a data
acquisition product line as well as a device connectivity product line. The data acquisition
product line consisted of analog-to-digital converters, digital I/O hardware, signal conditioning
hardware, and related software. The analog to digital converters as well as the digital I/O
products were available for a number of computer bus architectures including ISA, PCI, and PC Card.
The device connectivity product line included a number of multi-port serial adapters supporting
asynchronous and synchronous transmissions. The products were also available on multiple computer
bus architectures including ISA, PCI and PC Card. In addition, Qua Tech, Inc. had just completed
the release of the initial USB to Serial product line.
Subsequent to the acquisition, Quatech evaluated the market opportunities in both the data
acquisition and device connectivity markets and made the determination to focus product
development, along with sales and marketing activities, on the device connectivity product lines.
All product development activities related to the data acquisition products were suspended. Sales
and marketing activities in support of the data acquisition products were restricted to the support
of a limited number of existing original equipment manufacturers and resellers.
Quatech has continued to enhance the device connectivity product line through the development
and release of additional products. These products have been developed as a reaction to both
general market and specific customer demand. Significant new products released in this timeframe
include a full line of universal PCI multi-port serial cards that support both 5V and 3.3V PCI
slots, 8 and 16 port versions of the USB to Serial products, ruggedized multi-port, serial PC Card
products, and multi-port serial Compact Flash products.
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In 2001, Quatech initiated the development of its serial device server product line that would
allow devices with traditional serial ports to be connected to a Local Area Network (LAN) through a
TCP/IP connection. This product line was released for commercial availability in late 2003. Quatech
has continued the development of this product line through the release of new product models,
including products capable of connecting to the network through a wireless 802.11 interface.
In October 2009, Quatech acquired the SocketSerial product line from Socket Mobile. The
products in the SocketSerial product line consist of a CompactFlash serial card, a PC serial
card, a PC dual serial card, and a PC quad serial card, all with fixed and removable cable models.
Also included are a USB to Serial Adapter, USB to Ethernet Adapter and a license to sell the
Cordless Serial Adapter. In addition, Quatech has added several of the North American and
International distribution partners that had historically sold the SocketSerial products to its
list of distribution partners for both its device and networking
connectivity product lines.
Products
Quatech products can be categorized into two broad product lines:
Our Device Connectivity products include:
| Multi-port serial boards that add ports to desktop computers to allow for the
connection of multiple peripherals with standard interfaces. These products are used in a
variety of industries including banking, transportation management, kiosks, satellite
communications, and retail point of sale. |
| Mobile products that add ports for laptop and handheld computers. These products
include multi-port serial adapters, parallel port adapters, and Bluetooth products. |
| USB to Serial products that add standard serial ports to any computing environment
through a USB port. These products address the need to add connectivity through a solution
that is external to the computer. These products are used in several markets including
retail point of sale and kiosks. |
Our Device Networking products include:
| Serial device server products that connect peripherals to a local area network
through a standard TCP/IP interface. This product line was introduced in 2003 and was
extended in 2004 through the introduction of product models that connect to the local area
network through a wireless 802.11 interface. |
| Industrial rated, embedded wireless modules that enable OEM customers to add standard
802.11 connectivity capabilities to their products. These modules address the needs of a
number of industries including transportation, telematics, warehouse and logistic, and
point of sale. |
Multi-port serial boards consists primarily of ISA bus and PCI bus products with 1, 2, 4, or 8
asynchronous serial ports as well as single port synchronous serial ports.
Mobile products consists primarily of PC Card and Compact Flash products with 1, 2, or 4
asynchronous serial ports, PC Cards with a single synchronous serial port and a PC Card with a
single parallel port.
In March 2005, Quatech announced the introduction of new four and eight port multiple
electrical interface (MEI) products to the device server product line. These products were released
for general availability in May 2005.
In March 2005, Quatech announced the introduction of six new wireless products to the device
server product line. These products were released for general availability in March 2005.
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In June 2004, Quatech announced its intention of developing a line of RFID reader products. A
prototype was developed and demonstrated at the RFID World conference in April 2004. No further
work has been done in the development of this product line since the development of the initial
prototype. Quatech is continuing to monitor this market prior to committing the resources necessary
to complete the development of this product line.
AirborneTM wireless product line - the Airborne wireless product line was acquired
with the merger of DPAC and Quatech and was originally announced by DPAC in September 2003 to
address needs in the industrial wireless marketplace with a product known as the Airborne Wireless
LAN Node module. The wireless product utilizes the 802.11 standard communications protocol (also
known as WiFi) and targets the identified growth opportunities in embedded and plug-and-play
applications, where we believe OEM customers as well as end-user customers have a need for an
integrated local area network wireless connectivity solution. The wireless module includes a
radio, base-band processor, an application processor and software for a drop-in web-enabled WiFi
solution for connecting equipment, instrumentation and other devices to a local area network. An
additional plug-and-play version of the product was developed and named AirborneDirect. This
product provides a web-enabled wireless connectivity solution for industrial equipment already in
field use. Since, for the customer, there is no need to develop the software, or develop the radio
frequency and communications expertise in-house, customers can realize reduced product development
costs and a quick time-to-market. The AirborneDirect modules provide instant local area network
and Internet connectivity, and connect through standard serial or Ethernet interfaces to a wide
variety of applications.
The Airborne modules are designed to provide wireless local area network and Internet
connectivity in transportation, logistics, point of sale devices, medical equipment, and other
industrial products and applications. The product was designed to address the needs of small to
medium volume applications where time to market, industrial temperature compatibility and ease of
implementation are key factors in the decision to implement a wireless connectivity solution.
Equipment with an Airborne module, either embedded or attached, can be monitored and controlled by
a handheld device, by a personal computer in a central location or over the Internet. This
eliminates cabling, allows the equipment to be portable and provides an effective mode of supplying
the non-PC device to a local area network and the Internet. For example, the module can be a
solution for communicating remote sensing and data collection activities through the Internet to a
users PC or network database software.
Distribution, Marketing and Customers
Quatech sells its products through a global network of distributors, system integrators, value
added resellers, and original equipment manufacturers. Internationally, Quatech sells and markets
its products through over 50 distributors and resellers in more than 30 countries. Quatech
customers operate in a broad array of markets including retail point of sale, industrial
automation, financial services and banking, telecommunications, transportation management, access
control and security, gaming, data acquisition, and homeland security. All customers are supported
from Quatechs headquarters in Hudson, OH or from sales and technical support personnel located in
Southern California. No single customer accounted for more than 10% of net sales in 2009.
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International Sales
The Company had export sales that accounted for 23% and 26% of total net sales in 2009 and
2008, respectively. Export sales were primarily to Canada and Western European and South American
countries. Foreign sales are made in U.S dollars. Specific demand shifts by customers could result
in significant changes in our export sales from year to year.
All of Quatechs assets are located in the United States. The Company does not own or operate
any manufacturing operations or sales offices in foreign countries.
Operations
Quatech procures all parts and certain services involved in the production of its products,
and subcontracts almost all of its product manufacturing to outside partners who specialize in such
services. Quatech believes that this approach is optimal as it reduces fixed costs, extends
manufacturing capacity and increases production flexibility.
Quatechs products are manufactured using both standard and semi-custom components. Most of
these components are available from multiple sources in the domestic electronics distribution
market. There are, however, several components that are provided only by single-source providers.
The manufacturing for the wireless product is being done offshore. We are reliant on the
offshore manufacturer to provide a quality product and meet our production requirements. We
currently have a ten to fifteen week lead-time on various products and schedule the manufacturing
requirements based on our sales forecasts. Changes to the sales forecast could affect the inventory
level of the wireless product. There is currently no second source for the production of the
wireless module, but Quatech does have the right to transfer production to another manufacturer if
there are problems with the manufacturer. If Quatech were required to change its primary offshore
manufacturer, it would require significant time. This may lead to not having sufficient inventory
to meet pending sales requirements. We believe that the offshore manufacturer is of sufficient size
and resources to meet any production requirements that we may have, including any foreseeable
increased volume needs for the wireless products.
Our reliance on certain single-source and limited-source components exposes us to quality
control issues if these suppliers experience a failure in their production process or otherwise
fail to meet our quality requirements. A failure in single-source or limited-source components or
products could force us to repair or replace a product utilizing replacement components. If we
cannot obtain comparable replacements or effectively retune or redesign our products, we could lose
customer orders or incur additional costs, which could have a material adverse effect on our gross
margins and results of operations.
Research and Development
Our future success will depend in major part on our ability to develop new products or product
enhancements to keep up with technological advances and to meet customer needs. Our research and
development efforts for 2010 will focus on developing new wireless and related products and
expanding our product offerings.
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Quatechs engineering, research and development expenses were $775,000 in 2009 and $836,000 in
2008. Additionally, the Company capitalized, $29,000 and $162,000 of software development costs
incurred in 2009 and 2008, respectively. Quatech does not rely upon patent protection to protect
its competitive position. The nature of the market Quatech competes in places a heavy emphasis on
the ability of Quatech to service and support the customer along with the reliability of the
products design and manufacturing. Engineering activities consist of the design and development of
new products and the redesign of existing products to keep current with changes in the industry and
products offered by the Companys competitors. The Company also designs and develops new products
for specific customers and such activities are often conducted in partnership with our customers.
We are currently involved in research and development for new software and hardware approaches
for utilization in our wireless product line, as well as the development of package level products
that may incorporate our wireless products as part of the overall system design. Our product
development activities are solution driven, and our goal is to create technological advancements by
working with each customer to develop advanced cost-effective products that solve each customers
specific requirements. However, we, for the most part, develop products within the 802.11 standard
and infrequently might develop patentable inventions. The 802.11 standards on which our products
are based are defined by IEEE and designed to insure interoperability of all products purporting to
meet the standard.
Service and Warranty
We offer warranties of various lengths, which differ by customer and product type and
typically cover defects in materials and workmanship. We perform warranty and other maintenance
services for our products in Ohio and at our contract manufacturer overseas.
Competitive Conditions
Quatech competes in the device connectivity and device networking markets. Both of these
markets are characterized by a broad number of competitors, both domestic and foreign, of varying
size. Quatech competes on the basis of providing reliable products, marketed at a mid-level price
compared to other competitive offerings. Quatech emphasizes customer service and support as a key
differentiator. Quatechs ability to meet rapid delivery requirements is a key element of our
ability to service the customer. This requires us to carry significant amounts of inventory to meet
our customers forecasted needs.
As the markets for multi-port serial adapters in both the PC Card form factor and PCI form
factor mature, Quatech has placed emphasis on the development and marketing of products that
address the growth markets of multi-port USB to serial adapters and device servers that connect
devices to Ethernet Local Area Networks. Quatech believes that these emerging product lines are
significant to its future growth.
We have competition from other wireless products using 802.11 technology. There are also
other companies that offer similar products with the same or other configurations and radio
communication protocols, including cellular, Bluetooth and proprietary radio solutions that will
compete with our Airborne wireless module. The primary competitors in providing embedded 802.11
wireless solutions to OEM customers are Lantronix Inc. and Digi International Inc. Other
competitors may provide alternative radio protocols such as cellular or other proprietary
technologies for sale to OEMs. These competitors include Wavecom SA, Maxstream, and Skybility.
Other companies such as Symbol Technologies Inc. and Cisco Systems Inc. make wireless solutions
that are not primarily aimed at OEM customers, but may be used in those applications and have been
in certain circumstances. Many of these companies in the wireless market have greater financial,
manufacturing and marketing capabilities than we have.
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Backlog
As of December 31, 2009 Quatech had backlog orders which management believed to be firm
commitments of approximately $540,000. As of December 31, 2008 Quatech had backlog orders which
management believed to be firm commitments of approximately $300,000. All of these orders pending
as of December 31, 2009 are expected to ship in calendar year 2010. Backlog as of any particular
date is not necessarily indicative of Quatechs future sales trends.
Product orders in our backlog are subject to changes in delivery schedules or to cancellation
at the option of the purchaser without significant penalty. While we regularly review our backlog
of orders to ensure that it adequately reflects product orders expected to ship within the one year
period, we cannot make any guarantee that such orders will actually be shipped or that such orders
will not be delayed or cancelled in the future. We make regular adjustments to our backlog as
customer delivery schedules change and in response to changes in our production schedule.
Accordingly, we stress that backlog as of any particular date should not be considered a reliable
indicator of sales for any future period and our revenues in any given period may depend
substantially on orders placed in that period.
Personnel
As of December 31, 2009, Quatech employed 19 full time employees, 16 of which are located at
Quatechs facility in Hudson, Ohio, 3 of which are located in Southern California. Of the 19
full-time employees, 3 were in general and administration, 6 were in sales, marketing and customer
support, 6 were in engineering, research and development, and 4 were in operations and
manufacturing. The Company occasionally hires part-time employees. The Company believes that it has
a good relationship with its employees and no employees are represented by a union.
ITEM 1A: RISK FACTORS
Cautionary Statements
Investors should carefully consider the risks described below and all other information in the
Form 10-K. The risk and uncertainties described below are not the only one facing the Company.
Additional risks and uncertainties not presently known to the Company may also impair the Companys
business and operations.
Statements in this Report that are not historical facts, including all statements about our
business strategy or expectations, or information about new and existing products and technologies
or market characteristics and conditions, are forward-looking statements that involve risks and
uncertainties. These include, but are not limited to, the factors described below which could cause
actual results to differ from those contemplated by the forward-looking statements.
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Potential Future Insufficiency of Capital and Financial Resources
Our financial statements have been prepared on a going concern basis. The report of our
Independent Registered Public Accounting Firm on our financial statements for the year ended
December 31, 2009 contains an explanatory paragraph noting that certain conditions raise
substantial doubt about our ability to continue as a going concern. Our ability to continue as a
going concern is dependent upon our ability to establish profitable operations and to raise
additional financing. We have been taking steps intended to achieve positive cash flows, including
the acquisition of a product line and reduction and management of our operating costs. Our current
senior credit facility will mature and become payable in July of 2010, and
we will be required to refinance this credit facility. We may require additional financing to meet
our ongoing obligations through the end of the year ending December 31, 2010. Our continued ability
to obtain financing when needed may be unavailable if and when needed. If we obtain additional
financing, the terms and conditions of the financing could have material adverse effects on the
market price of the common stock. Problems that we could encounter because of insufficient capital
include but are not limited to additional costs and expenses, including higher interest rates and
the acceleration of maturity dates on other debt financing. Some additional costs might be
associated with complying with or defending legal actions by or for creditors, or paying fees,
charges or costs of creditors. Our financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets or the amounts and
classification of assets and liabilities that may result from the outcome of this uncertainty.
Product Development and Technological Change
The wireless connectivity industry is characterized by rapid technological change and is
highly competitive with respect to timely product innovation. Our wireless products are subject to
obsolescence or price erosion because competitors are continuously introducing technologies with
the same or greater capacity as our technology. As a result, wireless products may have a product
life of not more than one to three years.
Our future success depends on our ability to develop new wireless products and product
enhancements to keep up with technological advances and to meet customer needs. Any failure by us
to anticipate or respond adequately to technological developments and customer requirements, or any
significant delays in product development, firmware or software development, or introduction of
wireless technologies could have a material adverse effect on our financial condition and results
of operations. Additionally, the Company could incur additional operating costs with the
introduction of new products.
There can be no assurance that we will be successful in planned product development or
marketing efforts, or that we will have adequate financial or technical resources for planned
product development and promotion.
Uncertainty of Market Acceptance or Profitability of New Products
The introduction of new products, such as our product for the wireless marketplace, could
require the expenditure of an unknown amount of funds for research and development, tooling,
software development, manufacturing processes, inventory and marketing. In order to successfully
develop products, we will need to successfully anticipate market needs and may need to overcome
rapid technological change and competition. In order to achieve high volume production, we will
need to out-source production to third parties or enter into licensing arrangements and be
successful in the management of sub-contractors overseas. We are inexperienced in the wireless
industry, and our plans in that industry are unproven. We have limited marketing capabilities and
resources and are dependent upon internal sales and marketing personnel and a network of
independent sales representatives for the marketing and sale of our products. There can be no
assurance that our products will achieve or maintain market acceptance, result in increased
revenues, or be profitable.
Parts Shortages and Over-Supplies and Dependence on Suppliers
The electronics and components industry is characterized by periodic shortages or
over-supplies of parts that have in the past and may in the future negatively affect our
operations. We are dependent on a
limited number of suppliers and contractors for wireless and semiconductor devices used in our
products, and we have no long-term supply contracts with any of them.
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Due to the cyclical nature of these industries and competitive conditions, we, or our
sub-contractors, may experience difficulties in meeting our supply requirements in the future. Any
inability to obtain adequate deliveries of parts, either due to the loss of a supplier or
industry-wide shortages, could delay shipments of our products, increase our cost of goods sold and
have a material adverse effect on our business, financial condition and results of operations.
Credit Risks and Dependence on Major Customers
We grant credit to customers in a variety of commercial industries. Credit is extended based
on an evaluation of the customers financial condition and collateral is not required. Estimated
credit losses are provided for in the financial statements. Our inability to collect receivables
from any larger customer could have a material adverse effect on our business, financial condition,
and results of operations.
Intellectual Property Rights
Our ability to compete effectively is dependent on our proprietary know-how and our ability to
develop and apply technology. We have applied for patents in the wireless area. There can be no
assurance that our patent applications will be approved, that any issued patents will afford our
products any competitive advantage or that any of our products will not be challenged or
circumvented by third parties, or that patents issued to others will not adversely affect the
sales, development or commercialization of our present or future products.
We are involved from time to time in claims and litigation over intellectual property rights,
which may adversely affect our ability to manufacture and sell our products.
The wireless industry is characterized by vigorous protection and pursuit of intellectual
property rights. We believe that it may be necessary, from time to time, to initiate litigation
against one or more third parties to preserve our intellectual property rights. In addition, from
time to time, we have received, and may continue to receive in the future, notices that claim we
have infringed upon, misappropriated or misused other parties proprietary rights, which claims
could result in litigation. Such litigation would likely result in significant expense to us and
divert the efforts of our technical and management personnel. In the event of an adverse result in
such litigation, we could be required to pay substantial damages, cease the manufacture, use and
sale of certain products, expend significant resources to develop non-infringing technology, and
discontinue the use of certain processes or obtain licenses to use the infringed technology. Such a
license may not be available on commercially reasonable terms, if at all. Our failure to obtain a
license or our failure to obtain a license on commercially reasonable terms could cause us to incur
substantial costs and suspend manufacturing products using the infringed technology. If we obtain a
license, we would likely be required to make royalty payments for sales under the license. Such
payments would increase our costs of revenues and reduce our gross profit. In addition, any
litigation, whether as plaintiff or as defendant, would likely result in significant expense to us
and divert the efforts of our technical and management personnel, whether or not such litigation is
ultimately determined in our favor. In addition, the results of any litigation are inherently
uncertain.
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Management of Growth or Diversification
Successful expansion or diversification of the Companys operations will depend on the ability
to obtain new customers, to attract and retain skilled management and other personnel, to secure
adequate sources of supply on commercially reasonable terms and to successfully manage new product
introductions. To manage growth or diversification effectively, we will have to continue to
implement and improve our operational, financial and management information systems, procedures and
controls. As we expand or diversify, we may from time to time experience constraints that will
adversely affect our ability to satisfy customer demand in a timely fashion. Failure to manage
growth or diversification effectively could adversely affect our financial condition and results of
operations.
Competition
There are companies that offer or are in the process of developing similar types of wireless
products, including Lantronix, Digi-International and others. We could also experience competition
from established and emerging network companies. There can be no assurance that our products will
be competitive with existing or future products, or that we will be able to establish or maintain a
profitable price structure for our products.
We expect to face competition from existing competitors and new and emerging companies that
may enter our existing or future markets with similar or alternative products, which may be less
costly or provide additional features. In addition, some of our significant suppliers are also our
competitors, many of whom have the ability to manufacture competitive products at lower costs as a
result of their higher levels of integration. We also face competition from current and prospective
customers that evaluate our capabilities against the merits of manufacturing products internally.
Competition may arise due to the development of cooperative relationships among our current and
potential competitors or third parties to increase the ability of their products to address the
needs of our prospective customers. Accordingly, it is possible that new competitors or alliances
among competitors will emerge and rapidly acquire significant market share.
We expect our competitors will continue to improve the performance of their current products,
reduce their prices and introduce new products that may offer greater performance and improved
pricing, any of which could cause a decline in sales or loss of market acceptance of our products.
In addition, our competitors may develop enhancements to or future generations of competitive
products that may render our technology or products obsolete or uncompetitive.
Product Liability
In the course of our business, we may be subject to claims for product liability for which our
insurance coverage is excluded or inadequate.
Variability of Gross Margin
Gross profit as a percentage of sales was 41% for the year ended December 31, 2009 as compared
to 43% for the year ended December 31, 2008. In the first quarter of 2009, we sold our
manufacturing capability to one of our contract manufacturers. This resulted in lower fixed costs
but may negatively impact future gross margins due to higher variable costs. Any change in the
gross margins can typically be attributed to the mix of products, average selling prices, revenue
levels, the use of outside contract
manufacturers, and increases to our fixed cost structure. As we market our products, the
product mix may change over time and result in changes in the gross margin.
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We expect that our net sales and gross margin may vary significantly based on these and other
factors, including the mix of products sold and the manufacturing services provided, the channels
through which our products are sold, changes in product selling prices and component costs, the
level of manufacturing efficiencies achieved and pricing by competitors. The selling prices of our
products may decline depending upon the price changes of our cost of sales, which would have a
material adverse effect on our net sales and could have a material adverse effect on our business,
financial condition and results of operations. Accordingly, our ability to maintain or increase net
sales will be highly dependent upon our ability to increase unit sales volumes of existing products
and to introduce and sell new products in quantities sufficient to compensate for the anticipated
declines in selling prices.
Declining product-selling prices may also materially and adversely affect our gross margin
unless we are able to reduce our cost per unit to offset declines in product selling prices. There
can be no assurance that we will be able to increase unit sales volumes, introduce and sell new
products or reduce our cost per unit. We also expect that our business may experience significant
seasonality to the extent it sells a material portion of our products in Europe (due to vacation
cycles) and to the extent, our exposure to the personal computer market remains significant.
Decline of Demand for Product Due to Downturn of Related Industries
We may experience substantial period-to-period fluctuations in operating results due to
factors affecting the wireless, computer, telecommunications and networking industries. From time
to time, each of these industries has experienced downturns, often in connection with, or in
anticipation of, declines in general economic conditions. A decline or significant shortfall in
growth in any one of these industries or a technology shift, could have a material adverse impact
on the demand for our products, and therefore, a material adverse effect on our business, financial
condition and results of operations. There can be no assurance that our net sales and results of
operations will not be materially and adversely affected in the future due to changes in demand
from individual customers or cyclical changes in the wireless, computer, telecommunications,
networking or other industries utilizing our products.
Our suppliers, contract manufacturers or customers could become competitors
Many of our customers internally design and/or manufacture their own wireless communications
network products. These customers also continuously evaluate whether to manufacture their own
wireless communications network products or utilize contract manufacturers to produce their own
internal designs. Certain of our customers and prospective customers regularly produce or design
wireless communications network products in an attempt to replace products manufactured by us. We
believe that this practice will continue. In the event that our customers manufacture or design
their own wireless communications network products, such customers could reduce or eliminate their
purchases of our products, which would result in reduced revenues and would adversely impact our
results of operations and liquidity. Wireless infrastructure equipment manufacturers with internal
manufacturing capabilities, including many of our customers, could also sell wireless
communications network products externally to other manufacturers, thereby competing directly with
us. In addition, our suppliers or contract manufacturers may decide to produce competing products
directly for our customers and, effectively, compete against us. If, for any reason, our customers
produce their wireless communications network products internally, increase the percentage of their
internal production, require us to participate in joint venture manufacturing with them, engage our
suppliers or contract manufacturers to manufacture competing products, or otherwise compete
directly against us, our revenues would decrease, which would adversely impact our results of
operations.
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International Sales
International sales may be subject to certain risks, including changes in regulatory
requirements, tariffs and other barriers, timing and availability of export licenses, political and
economic instability, difficulties in accounts receivable collections, natural disasters,
difficulties in staffing and managing foreign subsidiary and branch operations, difficulties in
managing distributors, difficulties in obtaining governmental approvals for telecommunications and
other products, foreign currency exchange fluctuations, the burden of complying with a wide variety
of complex foreign laws and treaties, potentially adverse tax consequences and uncertainties
relative to regional, political and economic circumstances. Moreover, and as a result of currency
changes and other factors, our competitors may have the ability to manufacture competitive products
in Asia or otherwise at lower cost than we would incur to have them manufactured.
We are also subject to the risks associated with the imposition of legislation and regulations
relating to the import or export of high technology products. We cannot predict whether the United
States or other countries will implement quotas, duties, taxes or other charges or restrictions
upon the importation or exportation of our products. Because sales of our products have been
denominated to date in United States dollars, increases in the value of the United States dollar
could increase the price of our products so that they become relatively more expensive to customers
in the local currency of a particular country, leading to a reduction in sales and profitability in
that country. Future international activity may result in foreign currency denominated sales. Gains
and losses on the conversion to United States dollars of accounts receivable, accounts payable and
other monetary assets and liabilities arising from international operations may contribute to
fluctuations in our results of operations. Some of our customers purchase orders and agreements
are governed by foreign laws, which may differ significantly from United States laws. Therefore, we
may be limited in our ability to enforce any rights under such agreements and to collect damages,
if awarded. These factors could have a material adverse effect on our business, financial
condition and results of operations.
Limited Experience in Business Combinations or Acquisitions
We may pursue a strategy of acquiring additional companies or businesses. We may pursue
selective acquisitions to complement our internal growth. We have limited experience in acquiring
other businesses, product lines and technologies. In addition, the attention of our management team
may be diverted from our core business if we undertake an acquisition. Potential acquisitions also
involve numerous risks, including, among others:
| Problems assimilating the purchased operations, technologies or products; |
||
| Costs associated with the acquisition; |
||
| Adverse effects on existing business relationships with suppliers and customers; |
||
| Sudden market changes; |
||
| Risks associated with entering markets in which we have no or limited prior experience; |
||
| Potential loss of key employees of purchased organizations; and |
||
| Potential litigation arising from the acquired companys operations before the acquisition. |
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Our inability to overcome problems encountered in connection with such acquisitions could
divert the attention of management, utilize scarce corporate resources and harm our business. In
addition, we are unable to predict whether or when any prospective acquisition candidate will
become available or the likelihood that any acquisition will be completed.
Cyclical Nature of Wireless and Electronics Industries
The wireless and the electronics industries are highly cyclical and are characterized by
constant and rapid technological change, rapid product obsolescence and price erosion, evolving
standards, short product life cycles and wide fluctuations in product supply and demand. The
industry has experienced significant downturns, often connected with, or in anticipation of,
maturing product cycles of both the producing companies and their customers products and declines
in general economic conditions. These downturns have been characterized by diminished product
demand, production overcapacity, high inventory levels and accelerated erosion of average selling
prices. Any future downturns could have a material adverse effect on our business and operating
results. Furthermore, any upturn in these industries could result in increased demand for, and
possible shortages of, components we use to manufacture and assemble our products. Such shortages
could have a material adverse effect on our business and operating results.
Our reliance on contract manufacturers exposes us to risks of excess inventory or inventory
carrying costs
If our contract manufacturer is unable to respond promptly and timely to changes in customer
demand, we may be unable to produce enough products to respond to sudden increases in demand
resulting in lost revenues, or alternatively, in the case of order cancellations or decreases in
demand, we may be liable for excess or obsolete inventory or cancellation charges resulting from
contractual purchase commitments that we have with our contract manufacturers. We regularly provide
rolling forecasts of our requirements to our contract manufacturers for planning purposes, pursuant
to our agreements, a portion of which is binding upon us. Additionally, we are committed to accept
delivery on the forecasted terms for a portion of the rolling forecast. Cancellations of orders or
changes to the forecasts provided to any of our contract manufacturers may result in cancellation
costs payable by us.
By using contract manufacturers, our ability to directly control the use of all inventory is
reduced because we do not have full operating control over their operations. If we are unable to
accurately forecast demand for our contract manufacturers and manage the costs associated with our
contract manufacturers, we may be required to pay inventory carrying costs or purchase excess
inventory. If we or our contract manufacturers are unable to utilize such excess inventory in a
timely manner, and are unable to sell excess components or products due to their customized nature,
our operating results and liquidity would be negatively impacted.
Product Returns and Order Cancellation
To the extent we have products manufactured in anticipation of future demand and that does not
materialize, or in the event a customer cancels outstanding orders, we could experience an
unanticipated increase in our inventory. In addition, while we may not be contractually obligated
to accept returned products, and have typically not done so in the past, we may determine that it
is in our best interest to accept returns in order to maintain good relations with our customers.
Product returns would increase our inventory and reduce our revenues. We have had to write-down
inventory in the past for reasons such as obsolescence, excess quantities and declines in market
value below our costs.
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We have no long-term volume commitments from our customers that are not subject to
cancellation by the customer. Sales of our products are made through individual purchase orders
and, in certain cases, are made under master agreements governing the terms and conditions of the
relationships. Customers may change, cancel or delay orders with limited or no penalties. We have
experienced cancellations of orders and fluctuations in order levels from period-to-period and we
expect to continue to experience similar cancellations and fluctuations in the future that could
result in fluctuations in our revenues.
Additional Capital Funding May Impair Value of Investment
We may need to raise additional capital. Our potential means to raise capital potentially
include public or private equity offerings or debt financings. Our future capital requirements
depend on many factors including our research, development, sales and marketing activities,
acquisitions, and other costs. We do not know whether additional financing will be available when
needed, or will be available on terms favorable to us. To the extent we raise additional capital by
issuing equity securities, our shareholders may experience substantial dilution and the new equity
securities may have greater rights, preferences or privileges than our existing common stock. To
the extent we raise additional capital by issuing debt, our shareholders would incur additional
interest expenses that would reduce earnings and cash flow of the Company. Also, plans to borrow
and repay the debt are subject to numerous risks. In the event the debt is not repaid as and when
due, additional costs and debt would be incurred to satisfy and refinance the obligation, and the
debt therefore could grow. If a companys debt coverage costs are excessive, its equity can lose
value for reasons including a decline in creditworthiness.
Geographic Concentration of Operation
Our wireless product line is manufactured overseas in Taiwan, with some contract manufacturing
conducted locally. Due to the geographic concentration, a disruption of the manufacturing
operations resulting from sustained process abnormalities, human error, government intervention or
natural disasters such as earthquakes, fires or floods could cause us to cease or limit our
sub-contractors operations and consequently harm our business, financial condition and results of
operations.
Compliance with Environmental Laws and Regulations
We are subject to a variety of environmental laws and regulations governing, among other
things, air emissions, waste water discharge, waste storage, treatment and disposal, and
remediation of releases of hazardous materials. Our failure to comply with present and future
requirements could harm our ability to continue manufacturing our products. Such requirements could
require us to acquire costly equipment or to incur other significant expenses to comply with
environmental regulations. The imposition of additional or more stringent environmental
requirements, the results of future testing at our facilities, or a determination that we are
potentially responsible for remediation at other sites where problems are not presently known to
us, could result in expenses in excess of amounts currently estimated to be required for such
matters.
Key Personnel
The Company may fail to attract or retain the qualified technical sales, marketing and
managerial personnel required to operate its business successfully.
DPACs future success depends, in part, upon ability to attract and retain highly qualified
technical, sales, marketing and managerial personnel. Personnel with the necessary expertise are
scarce and competition for personnel with proper skills is intense. Also, attrition in personnel
can result from, among
other things, changes related to acquisitions, as well as retirement or disability. The Company
may not be able to retain existing key technical, sales, marketing and managerial employees or be
successful in attracting, assimilating or retaining other highly qualified technical, sales,
marketing and managerial personnel in the future. If the Company is unable to retain existing key
employees or is unsuccessful in attracting new highly qualified employees, business, financial
condition and our results of operations could be materially and adversely affected.
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Stock Price Volatility and Market Overhang
Existing shareholders may suffer with each adverse change in the market price of our common
stock. The market price of our common stock will be affected by a variety of factors in the
future. Most obviously, our shares may suffer adversely if and when our future operating results
are below the expectations of investors. The stock market in general, and the market for shares of
technology companies in particular, experiences extreme price fluctuations. Our common stock
market price is made more volatile because of the relatively low volume of trading in our common
stock. When trading is sporadic, significant price movement can be caused by a relatively small
number of shares.
Another factor that may affect our common stock price will be the number of our outstanding
shares and, at times, the number and prices of warrants that could be exercised. At December 31,
2009, we have reserved a total of 12,304,000 shares for issuance upon exercise of outstanding
warrants. Holders of our warrants hold registration rights that are intended to make the warrant
shares immediately available for public sale upon exercise, and warrants may be exercised at any
time until their expiration. It is foreseeable that when a warrant has an intrinsic value, which
is usually called being in-the-money, the holder may desire to exercise the warrant and
immediately sell the stock. If our common stock trades at prices higher than a warrants exercise
price, the shares can be sold at a profit. At such times, sales of large numbers of shares
received upon exercises of warrants might materially and adversely affect the market price of our
common stock.
Other Contingent Contractual Obligations
The Company has not recorded any liability for these indemnities, commitments and guarantees
in the accompanying balance sheets. However, during its normal course of business, the Company has
made certain indemnities, commitments and guarantees under which it may be required to make
payments in relation to certain transactions. These include indemnities to all directors and
officers pertaining to claims on account of acting as a director or officer. In the event that the
Company has, or is claimed to have, any indemnification obligation related to current or former
directors or officers, the costs and expenses could be material to the Company and the amount of
cost and expense of such an obligation would not necessarily be limited whatsoever. Other
indemnities are made to various lessors in connection with facility leases for certain claims
arising from such facility or lease; other indemnities are made to vendors and service providers
pertaining to claims based on the negligence or willful misconduct of the Company; and other
indemnities involve the accuracy of representations and warranties in certain contracts and are
made in favor of the other contractual party. The duration of these indemnities, commitments and
guarantees varies and, in certain cases, may be indefinite. The majority of these indemnities,
commitments and guarantees do not provide for any limitation of the maximum potential for future
payments the Company could be obligated to make. The Company may also issue a guarantee in the
form of a standby letter of credit as security for contingent liabilities under certain customer
contracts, which would customarily be for a limited amount. Product warranty costs are not
significant.
ITEM 1B: UNRESOLVED STAFF COMMENTS
Not applicable.
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ITEM 2: PROPERTIES
Quatechs principal place of business is located at 5675 Hudson Industrial Parkway, Hudson,
Ohio 44236 where the company leases approximately 17,100 square feet of combined office,
warehousing and product assembly space. Quatech has leased the space through April 2014. Quatech
has sublet 4,911 square feet of manufacturing space in this facility to one of its contract
manufacturers. The sublease is on an open end basis.
ITEM 3: LEGAL PROCEEDINGS
We are subject to various legal proceedings and threatened legal proceedings from time to time
as part of our business. We are not currently party to any legal proceedings, the adverse outcome
of which, individually or in the aggregate, we believe would have a material adverse effect on our
business, financial condition and results of operations or which for damages would exceed 10% of
the current assets of the Company. However, any potential litigation, regardless of its merits,
could result in substantial costs to us and divert managements attention from our operations. Such
diversions could have an adverse impact on our business, results of operations and financial
condition.
ITEM 4: (REMOVED AND RESERVED)
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PART II
ITEM 5: MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock trades on the Over The Counter Bulletin Board under the symbol DPAC.OB. The
following table sets forth the high and low closing sale prices on the Nasdaq Small Cap Market as
reported by The Nasdaq Stock Market.
High | Low | |||||||
Fiscal Year ended December 31, 2008: |
||||||||
Quarter Ended |
||||||||
March 31, 2008 |
$ | 0.05 | $ | 0.01 | ||||
June 30, 2008 |
$ | 0.05 | $ | 0.03 | ||||
September 30, 2008 |
$ | 0.06 | $ | 0.03 | ||||
December 31, 2008 |
$ | 0.05 | $ | 0.01 | ||||
Fiscal Year ended December 31, 2009: |
||||||||
Quarter Ended |
||||||||
March 31, 2009 |
$ | 0.03 | $ | 0.01 | ||||
June 30, 2009 |
$ | 0.04 | $ | 0.01 | ||||
September 30, 2009 |
$ | 0.03 | $ | 0.01 | ||||
December 31, 2009 |
$ | 0.04 | $ | 0.01 |
Holders
There were approximately 196 shareholders of record as of March 22, 2010. Development Capital
Ventures, LP, holds approximately 59% of the common shares outstanding at March 22, 2010.
Dividends
We have not paid dividends on our common stock in either of the past two fiscal years. We do
not expect to pay any dividends on our common stock in the foreseeable future. There are currently
contractual arrangements in our loan agreements and other restrictions that preclude our ability to
pay dividends.
ITEM 6: SELECTED FINANCIAL DATA
Not applicable
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ITEM 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with the financial statements and notes to those statements included
elsewhere in this Report. This discussion contains certain forward-looking statements that involve
risks and uncertainties, such as statement of our plans, objectives, expectations and intentions.
Our actual results could differ materially from those discussed here. The cautionary statements
made in this Report should be read as being applicable to all forward-looking statements wherever
they appear. Numerous important factors, risks and uncertainties affect our operations and could
cause actual results to differ materially from those expressed or implied by these or any other
forward-looking statements made by us or on our behalf. Factors that could cause or contribute to
such differences include those discussed in Risk Factors, as well as those discussed elsewhere
herein. We undertake no obligation to publicly release the result of any revisions to these
forward-looking statements that may be required to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Period-to-period comparisons of our financial results are not necessarily meaningful and
should not be relied upon as indications of future performance. It is likely that from time to time
our operating results will be below the expectations of some investors and not above the
expectations of enough investors. In such events, the market price of our Common Stock would be
adversely affected, in some proportion, and perhaps disproportionately. We ourselves have
difficulties forecasting, and there are numerous risks and uncertainties concerning, the timing of
our customers initiating their production orders and the amounts of such orders, fluctuating
market demand for and declines in the selling prices of similar products, decreases or increases in
the costs of the components, uncertain market acceptance, our competitors, delays, or other
problems with new products, software, manufacturing, inefficiencies, cost overruns, fixed overhead
costs, competition from new wireless products using 802.11 with newer technology, and challenges
managing production from overseas suppliers, among other factors, each of which will make it more
difficult for us to meet expectations.
Successful implementation of the Airborne wireless products and new product lines will
require, among other things, best-in-class designs, exceptional customer service and patience. Also
timing of revenue may be affected by the length of time it may take our customers in designing our
Airborne product into their product lines and introducing their products. In addition, our revenues
are ultimately limited by the success of our customers products in relation to their competition.
Fluctuations in Operating Results
The primary factors that may in the future create material fluctuations in our results of
operations include the following: timing and amount of shipments, changes in the mix of products
sold, any inability to procure required components, whether new customer orders are for immediate
or deferred delivery, the sizes and timing of investments in new technologies or product lines, a
partial or complete loss of any principal customer, any addition of a significant new customer, a
reduction in orders or delays in orders from a customer, excess product inventory accumulation by a
customer, and other factors.
The need for continued significant operating expenditures for research and development,
software and firmware enhancements, ongoing customer service and support, and administration, among
other factors, will make it difficult for us to reduce our operating expenses in any particular
period, even if our expectations for net sales for that period are not met. Therefore, our fixed
overhead may negatively impact our operating results.
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Critical Accounting Policies and Estimates
We prepare our financial statements in conformity with accounting principles generally
accepted in the United States of America. As such, we are required to make certain estimates,
judgments and assumptions that we believe to be reasonable based upon the information available.
These estimates and assumptions affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the periods
presented. In order to aid you in fully understanding and evaluating our reported financial
results, the significant accounting policies which we believe to be the most subjective and
critical include the following:
Revenue Recognition
The majority of our revenue is derived from the sales of products. We recognize product
revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price
is fixed or determinable and collectibility is probable and there are no post-delivery obligations
other than warranty. Revenue is recognized from the sale of products at the point of passage of
title, which is at the time of shipment to customers, including OEMs, distributors and other
strategic end user customers. Revenue recognition is deferred in all instances when the earnings
process is incomplete, such as sales to certain customers that may have certain rights of return
and price protection provisions. Revenue on sales to distributors where a right of return exists is
recognized upon sell-through, when products are shipped from the distributor to the distributors
customer. Revenue related to those products in our distribution channel at the end of each
reporting period which has not sold-through is deferred. Quatech also offers marketing incentives
to certain customers. These incentives are incurred based on the level of expenses the customers
incur and are charged to operations as expenses in the same period.
Accounts Receivable
We maintain allowances for doubtful accounts for estimated losses resulting from the inability
of our customers to make required payments. The amount of our reserves is based on historical
experience and our analysis of the accounts receivable balances outstanding. If the financial
condition of our customers were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required which would result in an additional general and
administrative expense in the period such determination was made. While such credit losses have
historically been within our expectations and the provisions established, we cannot guarantee that
we will continue to experience the same credit loss rates that we have in the past, which could
adversely affect our operating results.
Inventories
We value our inventory at the lower of the actual cost to purchase and/or manufacture or the
current estimated market value of the inventory. We regularly review inventory quantities on hand
and record a provision for excess and obsolete inventory based primarily on our estimated forecast
of product demand and production requirements for the next twelve months. We additionally consider
additional facts and circumstances in order to determine whether any condition exists that would
confirm or deny the need for recording a write-off. A significant increase in the demand for our
products could result in a short-term increase in the cost of inventory purchases while a
significant decrease in demand could result in an increase in the amount of excess inventory
quantities on hand. Additionally, our estimates of future product demand may prove to be
inaccurate, in which case we may have understated or overstated the provision required for excess
and obsolete inventory. In the future, if our inventory is determined to be overvalued, we would be
required to recognize such costs in our cost of goods sold at the time of such determination.
Likewise, if our inventory is determined to be undervalued, we may have over-reported our costs of
goods sold in previous periods and would be required to recognize such additional operating income
at the time of sale of the related inventory. Therefore, although we make every effort to ensure
the accuracy of our
forecasts of future product demand, any significant unanticipated changes in demand or
technological developments could have a significant impact on the value of our inventory and our
reported operating results.
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Property, Plant and Equipment
The Company periodically reviews the recoverability of its long-lived assets. The Company
also reviews these assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of these assets is
determined by comparing the forecasted undiscounted future net cash flows from the operations to
which the assets relate, based on managements best estimates using appropriate assumptions and
projections at the time, to the carrying amount of the assets. If the carrying value is determined
not to be recoverable from future operating cash flows, the asset is deemed impaired and an
impairment loss is recognized equal to the amount by which the carrying amount exceeds the
estimated fair value of the asset.
Capitalized Developed Software
Certain software development costs are capitalized after a product becomes technologically
feasible and before its general release to customers. Significant judgment is required in
determining when a product becomes technologically
feasible. Capitalized development costs are
then amortized over the products estimated life beginning upon general release of the product.
Periodically, we compare a products unamortized capitalized cost to the products net realizable
value. To the extent unamortized capitalized cost exceeds net realizable value based on the
products estimated future gross revenues (reduced by the estimated future costs of completing and
selling the product) the excess is written off. This analysis requires us to estimate future gross
revenues associated with certain products and the future costs of completing and selling certain
products. Changes in these estimates could result in write-offs of capitalized software costs.
Goodwill and Intangibles
We review the recoverability of the carrying value of goodwill and intangibles on an annual
basis or more frequently when an event occurs or circumstances change to indicate that an
impairment of goodwill or intangibles has possibly occurred. Since we operate in a single business
segment as a single business unit, the determination of whether any potential impairment of
goodwill exists is based on a comparison of the fair value of the entire Company to its carrying
value. In estimating the fair value of the entire Company, the Market Approach and Income Approach
were the methodologies deemed the most reliable and were the primary methods used for our
impairment analysis. The valuation analysis is dependent upon a number of various factors including
estimates of forecasted revenues and costs, appropriate discount rates and other variables. The
first step of the goodwill impairment test consists of comparing the carrying value of the
reporting unit to its fair value. If the fair value of the entire Company is determined to be less
than the carrying value of goodwill, we would be required to take the second step of the goodwill
impairment test to measure the amount of impairment loss, if any, and to record such impairment
loss for our goodwill. Recording an impairment charge for goodwill could have a material adverse
impact on our operating results for the period in which such charge was recorded. As of December
31, 2009, based on the Companys most recent analysis, there was no impairment of goodwill.
Deferred Taxes
Deferred tax assets and liabilities are determined based on temporary differences between
financial reporting and tax bases of assets and liabilities and are measured using enacted tax
rates and laws that will
be in effect when the differences are expected to reverse. The Company records a valuation
allowance against deferred tax assets when it is more likely than not that such assets will not be
realized. During the years ended December 31, 2009 and 2008, the Company recorded a full valuation
allowance associated with its net deferred tax assets.
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The Company records an estimated income tax liability to recognize the amount of income taxes
payable or refundable for the current year and deferred income tax liabilities and assets for the
future tax consequences of events that have been recognized in our financial statements or income
tax returns. Judgment is required in estimating the future income tax consequences of events that
have been recognized in the Companys financial statements or the income tax returns. The Company
estimates and provides an allowance for deferred tax assets based on estimated realization of the
asset utilizing information related to historical taxable income and projected taxable income.
Included in the total deferred tax assets, the Company has an income tax carryforward for
federal net operating losses. The cumulative federal net operating loss carryforward of
approximately $11,861,000 expires through 2029; however, as a result of the merger between Quatech,
Inc. and DPAC Technologies Corp, a substantial portion of DPACs federal net operating loss
carryforward is subject to the provisions of Sec. 382 of the Internal Revenue Code (IRC), and
therefore, is not available for immediate benefit to the company. The realization of the Companys
deferred tax assets, including this federal net operating loss, and the related valuation allowance
are significant estimates requiring assumptions regarding the sufficiency of future taxable income
to realize the future tax deduction from the reversal of deferred tax assets and the net operating
loss prior to their expiration. The valuation allowance has been provided based upon the Companys
assessment of future realizability of certain deferred tax assets, as it is more likely than not
that sufficient taxable income will not be generated to realize these temporary differences. The
net increase in the valuation allowance was $419,790 for 2009 and $229,170 for 2008. The amount of
the corresponding valuation allowance could change significantly in the near term if estimates of
future taxable income are changed.
On January 1, 2007, the Company adopted the provision of ASC 740, Income Taxes. ASC 740
prescribes a recognition threshold that a tax position is required to meet before being recognized
in the financial statements, and provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods, disclosure, and transition issues. There
were no adjustments to the financial statements as a result of the adoption of ASC 740. It is the
Companys practice to recognize penalties and/or interest related to income tax matters in interest
and penalties expense.
Recently Issued Accounting Standards
In January 2009, the Securities and Exchange Commission (SEC) issued Release No. 33-9002,
Interactive Data to Improve Financial Reporting. The final rule requires companies to provide
their financial statements and financial statement schedules to the SEC and on their corporate
websites in interactive data format using the eXtensible Business Reporting Language (XBRL). The
rule was adopted by the SEC to improve the ability of financial statement users to access and
analyze financial data. The SEC adopted a phase-in schedule indicating when registrants must
furnish interactive data. Under this schedule, the Company will be required to submit filings with
financial statement information using XBRL commencing with its June 30, 2011 quarterly report on
Form 10-Q. The Company is currently evaluating the impact of XBRL reporting on its financial
reporting process.
Effective July 1, 2009, the Company adopted The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles (formerly SFAS No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162). This standard establishes only two levels of U.S.
generally accepted accounting principles (GAAP), authoritative and nonauthoritative. The
Financial Accounting Standard Board (FASB) Accounting Standards Codification (the Codification)
became the source of authoritative, nongovernmental GAAP, except for rules and interpretive
releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other
non-grandfathered, non-SEC accounting literature not included in the Codification became
nonauthoritative. The Company began using the new
guidelines and numbering system prescribed by the Codification when referring to GAAP in the
third quarter of fiscal 2009. As the Codification was not intended to change or alter existing
GAAP, adoption did not have any impact on the Companys financial condition, results of operations
or cash flows.
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In October 2009, the FASB amended revenue recognition guidance for arrangements with multiple
deliverables. The guidance eliminates the residual method of revenue recognition and allows the use
of managements best estimate of selling price for individual elements of an arrangement when
vendor specific objective evidence (VSOE), vendor objective evidence (VOE) or third-party
evidence (TPE) is unavailable. This guidance should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15,
2010, with early adoption permitted. Full retrospective application of the guidance is optional.
The Company is currently evaluating the impact of adopting this guidance on its financial
statements.
In October 2009, the FASB issued guidance which amends the scope of existing software revenue
recognition accounting. Tangible products containing software components and non-software
components that function together to deliver the products essential functionality would be scoped
out of the accounting guidance on software and accounted for based on other appropriate revenue
recognition guidance. This guidance should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15,
2010, with early adoption permitted. Full retrospective application of the new guidance is
optional. This guidance must be adopted in the same period that the Company adopts the amended
accounting for arrangements with multiple deliverables described in the preceding paragraph. The
Company is currently evaluating the impact of adopting this guidance on its financial statements.
In January 2010, the FASB issued guidance which clarifies and provides additional disclosure
requirements related to recurring and non-recurring fair value measurements. The Company must
implement these new requirements in its first quarter of fiscal 2010. Certain additional
disclosures about purchases, sales, issuances and settlements in the roll forward of activity in
Level 3 fair value measures are not effective until fiscal years beginning after December 15, 2010.
Other than requiring additional disclosures, implementation of this new guidance will not have a
material impact on the Companys financial statements.
Introduction/Business Overview
DPAC, through its wholly-owned subsidiary, Quatech, designs, manufactures, and sells device
connectivity and device networking solutions for a broad market. Quatech sells its products through
a global network of distributors, system integrators, value added resellers, and original equipment
manufacturers (OEM).
Quatech products can be categorized into two broad product lines:
Our Device Connectivity products include:
| Multi-port serial boards that add ports to desktop computers to allow for the
connection of multiple peripherals with standard interfaces. These products are used in a
variety of industries including banking, transportation management, kiosks, satellite
communications, and retail point of sale. |
| Mobile products that add ports for laptop and handheld computers. These products
include multi-port serial adapters, parallel port adapters, and Bluetooth products. |
| USB to Serial products that add standard serial ports to any computing environment
through a USB port. These products address the need to add connectivity through a solution
that is external
to the computer. These products are used in several markets including retail point of sale
and kiosks. |
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Our Device Networking products include:
| Serial device server products that connect peripherals to a local area network
through a standard TCP/IP interface. This product line was introduced in 2003 and was
extended in 2004 through the introduction of product models that connect to the local area
network through a wireless 802.11b interface. |
| Industrial rated, embedded wireless modules that enable OEM customers to add standard
802.11 connectivity capabilities to their products. These modules address the needs of a
number of industries including transportation, telematics, warehouse and logistic, and
point of sale. |
This overview of our business reflects DPACs acquisition of Quatech which was completed by
way of a reverse merger (the Merger) in which Quatech became a wholly-owned subsidiary of DPAC.
The Merger, as previously reported, was consummated on February 28, 2006.
Results of Operations
The following table summarized DPACs results of operations as a percentage of net sales for
the two years ended December 31, 2009 and 2008:
2009 | 2008 | Change | ||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Amount | Sales | Amount | Sales | Amount | % | |||||||||||||||||||
Net sales |
$ | 6,807,418 | 100 | % | $ | 9,156,889 | 100 | % | $ | (2,349,471 | ) | -26 | % | |||||||||||
Cost of goods sold |
4,008,510 | 59 | % | 5,252,895 | 57 | % | (1,244,385 | ) | -24 | % | ||||||||||||||
Gross profit |
2,798,908 | 41 | % | 3,903,994 | 43 | % | (1,105,086 | ) | -28 | % | ||||||||||||||
Sales and marketing expenses |
824,659 | 12 | % | 1,163,757 | 13 | % | (339,098 | ) | -29 | % | ||||||||||||||
Research and development |
775,106 | 11 | % | 835,863 | 9 | % | (60,757 | ) | -7 | % | ||||||||||||||
General and administrative expenses |
1,247,519 | 18 | % | 1,530,999 | 17 | % | (283,480 | ) | -19 | % | ||||||||||||||
Amortization of intangible assets |
509,185 | 7 | % | 490,020 | 5 | % | 19,165 | 4 | % | |||||||||||||||
Restructuring costs |
12,097 | 0 | % | | 0 | % | 12,097 | |||||||||||||||||
Total operating expenses |
3,368,566 | 49 | % | 4,020,639 | 44 | % | (652,073 | ) | -16 | % | ||||||||||||||
Loss from operations |
(569,658 | ) | -8 | % | (116,645 | ) | -1 | % | (453,013 | ) | 388 | % | ||||||||||||
Interest expense |
579,553 | 9 | % | 694,909 | 8 | % | (115,356 | ) | -17 | % | ||||||||||||||
Fair value adjustment for warrant liability |
(15,800 | ) | 0 | % | (12,900 | ) | 0 | % | (2,900 | ) | 22 | % | ||||||||||||
Loss before income taxes |
(1,133,411 | ) | -17 | % | (798,654 | ) | -9 | % | (334,757 | ) | 42 | % | ||||||||||||
Income tax provision |
| 0 | % | | 0 | % | | |||||||||||||||||
Net loss |
$ | (1,133,411 | ) | -17 | % | $ | (798,654 | ) | -9 | % | (334,757 | ) | 42 | % | ||||||||||
Preferred stock dividends |
210,939 | 3 | % | 174,027 | 2 | % | 36,912 | 21 | % | |||||||||||||||
Net loss attributable to commons
shareholders |
$ | (1,344,350 | ) | -20 | % | $ | (972,681 | ) | -11 | % | $ | (371,669 | ) | 38 | % |
Net Sales
Net sales for the year ended December 31, 2009 of $6,807,000 decreased by $2,349,000 or 26%
compared to net sales for the year ended December 31, 2008. Net sales related to the Companys
Device Connectivity products decreased $1,439,000 or 26%, and net sales related to the Companys
Device Networking products, including the Airborne wireless product line, decreased by
$910,000, or 25% from the year ended December 31, 2008. The decrease in revenues for both product
lines is primarily due to the global economic decline and a general decrease in IT infrastructure
spending across the industries to which
we sell, which impacted the majority of our customer base beginning in the second half of 2008 and
continued through 2009.
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Gross Profit
Gross profit decreased by $1,105,000 or 28% to $2,799,000 in 2009 from $3,904,000 in 2008 due
to the decrease in net sales. Gross profit as a percentage of sales decreased to 41% in 2009 from
43% in 2008. The decrease in gross profit percentage is due to fixed operating expenses spread over
a lower revenue base as fixed expenses represented a larger percentage of cost of goods sold as a
result of the lower revenue figures.
Sales and Marketing
Sales and marketing expenses of $825,000 decreased by $339,000 or by 29% from $1,164,000 in
2008. The decrease is due primarily to a decrease in salaries and related expenses of $130,000, a
decrease in advertising, Internet search engine costs and trade show and travel expenses of
$169,000, and a decrease in commissions of $33,000.
Research and Development
Research and development expenses of $775,000 in 2009 decreased by $61,000, or 7%, as compared
to 2008. The decrease is due to a decrease in personnel and consulting costs incurred, including
benefits and travel related costs, of $192,000. These reductions were partially offset by incurred
software developments costs of $29,000 being capitalized in 2009 versus $162,000 of incurred costs
capitalized in 2008. The Company will continue to invest in research and development to expand and
develop new wireless products. See Forward-Looking Statements.
General and Administrative Expense
General and administrative expenses incurred for 2009 of $1,248,000 decreased by $283,000 or
19% from the prior year. The decrease was due primarily to decreases in salaries and
benefits of $108,000, facilities and depreciation expenses of $56,000, bad debt expense of $25,000,
director fees of $21,000, legal and accounting fees of $37,000 and a general decrease in most
expense line items.
Amortization Expense
Amortization expense is for the amortization of purchased intangible assets acquired in the
Merger on February 28, 2006 being amortized over 5 years of $490,000, and an additional $19,000 of expense in 2009 for the amortization of internally developed
software being capitalized over 5 years.
Interest Expense
The Company incurred interest and financing costs of $580,000 in 2009 as compared to $695,000
incurred in 2008. Interest expense in 2008 included the payment and write-off of deferred financing
fees in the amount of $50,000 due to the termination of a financing placement agreement. The
following non-cash charges are included in interest expense during 2009: accretion of success fees
of $46,000, amortization of deferred financing costs of $50,000, and amortization of the discount
for warrants of $13,000. The following non-cash charges are included in interest expense during
2008: accretion of success fees of
$46,000, amortization of deferred financing costs of $58,000, and amortization of the discount
for warrants of $12,000.
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Fair Value Adjustment of Put Warrant Liability.
For 2009, the Company recorded a net gain of $15,800 related to the adjustment of the
liability for the put warrant compared to a net gain of $12,900 for 2008. The Company is required
to adjust the put warrant liability to its fair value through earnings at the end of each reporting
period. At December 31, 2009, based on the Companys common stock average share price of $0.015,
the Company calculated the fair value of the put warrants to be $100,300. The actual settlement
amount of the put warrant liability could differ materially from the value determined based on the
Companys stock price.
Income Taxes
The Company recognizes deferred tax assets and liabilities based on the differences between the
financial statement carrying values and the tax bases of assets and liabilities. A full valuation
allowance was recorded against the Companys related deferred tax assets for 2009 and 2008. The
Company recorded no income tax provision for 2009 or 2008.
DPAC regularly reviews its deferred tax assets for recoverability and establishes a valuation
allowance based on historical taxable income, projected future taxable income, and the expected
timing of the reversals of existing temporary differences. To the extent that recovery is not
believed to be more likely than not, a valuation allowance is established. Recent net operating
losses represent sufficiently negative evidence to require a continued valuation allowance against
the net deferred tax assets. This valuation allowance will be evaluated periodically and could be
reversed partially or totally if business results have sufficiently improved to support realization
of our deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred a net loss of $1.1 Million for 2009 and ended the year with a cash
balance of $18,000 and a deficit in working capital of $1.3 million. The Company incurred a net
loss of $799,000 for 2008 and ended the year with a cash balance of $9,000 and a deficit in working
capital of $805,000.
Although the Company has reported net losses in recent periods, a significant portion of our
operating expenses are non-cash. During 2009, non-cash operating expenses included depreciation and
amortization of $595,000, non-cash compensation for stock options of $119,000, and non-cash
interest expense of $108,000. For the year ended December 31, 2008, non-cash expenses included
depreciation and amortization of $603,000, non-cash interest expense of $116,000, and non-cash
compensation expense for stock options of $74,000.
During the quarter ended March 31, 2008, the Company consummated an equity and financing
transaction that provided $491,000 in net cash after paying off the then due existing debt of
$2,113,000, and which funds were used for working capital purposes and to bring our payables to a
more current position. In addition, in October 2008, the Company secured additional Senior
Subordinated Debt financing of $250,000.
In the third quarter of 2008, the Company took actions to reduce its cash operating expenses
to align its cost structure with the then current economic conditions and a downturn in the
Companys revenue levels. These reductions resulted in annualized operating cost savings of
approximately $600,000. Additionally, during the first quarter of 2009, the Company consummated an
agreement with one of its
contract manufacturers and sold certain equipment and inventory, sublet a portion of its
facility to the manufacturer, and will further engage the manufacturer to produce more of the
Companys products. This transaction provided $150,000 in cash.
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In the third quarter of 2009, the Company implemented additional cost reduction measures by
reducing headcount by 3 individuals and implementing a salary reduction program for all employees
of 10%. These measures are expected to result in annual operating costs reductions of approximately
$400,000.
On September 30, 2009, the Company acquired the SocketSerial product line in a non-cash
transaction for the Company. Management believes that margins generated from future revenues of
this product line will help enable the Company to achieve a cash flow break even from operations.
Net cash used in operating activities for 2009 was $4,000 compared to $573,000 used in 2008.
The net loss of $1,133,000 incurred in 2009 was partially offset by non-cash items totaling
$831,000, including depreciation and amortization of $595,000, non-cash compensation expense of
$119,000, and accretion of success fees and amortization of deferred financing costs totaling
$108,000. Cash was used to fund an increase in accounts receivable of $214,000 and prepaid assets
of $33,000, pay down other accrued liabilities by $70,000 and accrued restructuring costs by
$42,000. An increase in accounts payable of $616,000 contributed to cash. 2008 consisted of the net
loss of $799,000, offset by net non-cash sources of cash totaling $856,000, which included:
depreciation and amortization of $603,000, non-cash compensation expense of $74,000, provisions for
bad debt and obsolete inventory totaling $76,000, amortization of deferred financing costs of
$58,000, and the accretion of discount and success fees on debt of $57,000. Additionally, net cash
was used for the decrease in accounts payable of $895,000, other accrued liabilities of $137,000
and the payment of restructuring charges of $278,000, and partially offset by the decrease in
accounts receivable of $734,000.
Net
cash provided by investing activities of $124,000 for 2009 consisted of cash received from
the sale of assets of $190,000 and partially offset by property additions of $37,000 and
capitalized developed software of $29,000. Net cash used in investing
activities in 2008 consisted of increases to
capitalized developed software of $162,000 and property additions of $61,000.
Net cash used in financing activities for 2009 was $122,000 as compared to $548,000 provided
during 2008. Cash used in the current year consisted of principal repayments on the Ohio
Development loan of $104,000, principal repayments on subordinated debt of $20,000, and financing
costs incurred of $20,000, partially offset by proceeds from the issuance of preferred stock of
$35,000. Cash provided in the prior year consisted of proceeds from the issuance of preferred stock
of $2.1 million and proceeds from new subordinated term debt of $1.5 million. These amounts were
partially offset by the principal pay-off of the previously existing subordinated term debt of $2.0
million, net repayments under revolving credit facilities of $557,000, pay-off of bank term debt of
$113,000, principal payments on the Ohio Development loan of $125,000, and deferred financing costs
incurred of $158,000.
The Company operates at leased premises in Hudson, Ohio which are adequate for the Companys
needs for the near term.
The Company does not expect acquiring more than $100,000 in capital equipment during fiscal
year 2010.
As of December 31, 2009, we were not in compliance with our bank financial covenants. Defaults
were waived by the bank by agreement reached on March 30, 2010, as previously reported.
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The report of the
independent registered public accounting firm included an explanatory
paragraph regarding certain conditions that raise substantial doubt about our ability to continue
as a going concern. These conditions include the inherent uncertainty in refinancing our bank line
of credit, which matures on July 31, 2010 as well as continuing operating losses and declines in
our working capital balances. Our ability to continue as a going concern is dependent upon our
ability to establish positive cash flows from operations and to refinance or extend our line of
credit. We believe that the steps we have taken, including the acquisition of a product line and
the reduction of our operating expenses as described above will enable us to achieve positive cash
flows from operations. Additionally, the Company experienced an increase in the rate of new orders
during the first quarter of 2010, resulting in a 75% increase in the size of its backlog of firm
orders from $540,000 at December 31, 2009 to $945,000 at the beginning of the second
quarter of 2010. There can be no assurance that we will be successful in achieving any of
these steps, and there can be no assurance that additional financing will be available on
acceptable terms, if at all, and any such terms may be dilutive to existing stockholders. Our
inability to secure and maintain the necessary liquidity will have a material adverse effect on our
financial condition and results of operations. If we are unable to secure the necessary capital for
our business, we may need to suspend some or all of our current operations. The financial
statements do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of assets and
liabilities that may result from the outcome of this uncertainty. If we can return to revenue
growth and attain positive cash flow from operations, we anticipate requirements for cash will
include funding of higher receivable and inventory balances.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist primarily of conventional operating leases,
purchase commitments and other commitments arising in the normal course of business, as further
discussed below under Contractual Obligations and Commercial Commitments. As of December 31,
2009, we did not have any other relationships with unconsolidated entities or financial partners,
such as entities often referred to as structured finance, special purpose entities or variable
interest entities, which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes.
Contractual Obligations and Commercial Commitments
We incur various contractual obligations and commercial commitments in our normal course of
business. Such obligations and commitments consist primarily of the following:
Operating Lease Obligations
As of December 31, 2009, we have operating leases for our facilities with future minimum
payments of $680,000 extending through March 31, 2014.
Purchase Commitments with Contract Manufacturers
We generally issue purchase orders to our contract manufacturers with delivery dates from four
to six weeks from the purchase order date. In addition, we regularly provide such contract
manufacturers with rolling six-month forecasts of material and finished goods requirements for
planning and long-lead time parts procurement purposes only. We are committed to accept delivery of
materials pursuant to our purchase orders subject to various contract provisions which allow us to
delay receipt of such orders or cancel orders beyond certain agreed lead times. Such cancellations
may or may not result in cancellation costs payable by us. In the past, we have been required to
take delivery of materials from our suppliers that were in excess of our requirements and we have
previously recognized charges and expenses related to such excess material. If we are unable to
adequately manage our contract manufacturers and adjust such
commitments for changes in demand, we may incur additional inventory expenses related to excess and
obsolete inventory. Such expenses could have a material adverse effect on our business, financial
condition and results of operations.
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Other Purchase Commitments
We also incur various purchase obligations with other vendors and suppliers for the purchase
of inventory, as well as other goods and services, in the normal course of business. These
obligations are generally evidenced by purchase orders with delivery dates from four to six weeks
from the purchase order date, and in certain cases, supply agreements that contain the terms and
conditions associated with these purchase arrangements. We are committed to accept delivery of such
materials pursuant to such purchase orders subject to various contract provisions which allow us to
delay receipt of such orders or cancel orders beyond certain agreed lead times. Such cancellations
may or may not result in cancellation costs payable by us. In the past, we have been required to
take delivery of materials from our suppliers that were in excess of our requirements and we have
previously recognized charges and expenses related to such excess material. If we are not able to
adequately manage our supply chain and adjust such commitments for changes in demand, we may incur
additional inventory expenses related to excess and obsolete inventory. Such expenses could have a
material adverse effect on our business, financial condition and results of operations.
Inflation
Management believes that inflation has not had a significant impact on the price of our
products, the cost of our materials, or our operating results for either of the two years ended
December 31, 2009.
ITEM7A: QUANTITIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK |
Not applicable.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of the Company with related Notes and Report of Independent
Registered Public Accounting Firm are attached hereto commencing at page F-l.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Companys Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) as of the fiscal year ending December 31, 2009 covered by
this Annual Report on Form 10-K. Our disclosure controls and procedures are intended to ensure that
the information we are required to
disclose in the reports that we file or submit under the Securities Exchange Act of 1934 is
(i) recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms and (ii) accumulated and communicated to our
management, including the Chief Executive Officer and Chief Financial Officer, as the principal
executive and financial officers, respectively, to allow timely decisions regarding required
disclosures. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer
have concluded that, as of the end of such period, the Companys disclosure controls and procedures
were effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
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Managements Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) of the
Company. Internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the
United States of America.
The Companys internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with accounting principles generally accepted in the United States of America, and
that receipts and expenditures of the Company are being made only in accordance with authorizations
of management and directors of the Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the Companys
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, under the supervision of the Companys Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of internal control over financial
reporting based on the framework in Internal ControlIntegrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management
concluded that the Companys internal control over financial reporting was effective as of
December 31, 2009 under the criteria set forth in the in Internal ControlIntegrated Framework.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls and procedures or our internal controls will prevent all error
and all fraud. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within DPAC have been detected.
This annual report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting firm pursuant to temporary
delay by the
Securities and Exchange Commission that permit the Company to provide only managements report
in this annual report.
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Changes in Internal Control Over Financial Reporting
No change in the Companys internal control over financial reporting occurred during the
quarter ended December 31, 2009, that materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.
ITEM 9B: OTHER INFORMATION
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following table sets forth certain information regarding our directors as of December 31, 2009:
Name | Since | Age | Positions | |||||||
Samuel W. Tishler
|
2000 | 72 | Chairman of the Board of Directors | |||||||
Steven D. Runkel
|
2006 | 48 | President, Chief Executive Officer, and Director | |||||||
Don Murfin
|
2009 | 66 | Director | |||||||
Dennis R. Leibel
|
2006 | 65 | Director | |||||||
William Roberts
|
2006 | 55 | Director | |||||||
Mark Chapman
|
2006 | 48 | Director | |||||||
James Bole
|
2006 | 47 | Director |
Position with Company (in addition to Director) and Principal Occupations during the Past Five
Years
Samuel W. Tishler, Chairman of our Board of Directors, is an independent consultant, retired
in 2003 as vice president for Corporate Development for Acterna Corporation, a manufacturer of
telecommunications test equipment, and is an experienced strategic planning and venture investment
professional. He was a vice president of Arthur D. Little Enterprises, Inc. from 1977 to 1986 and
a founder of Arthur D. Little Ventures. He also was a vice president of Raytheon Ventures from
1987 to 1994, and in that capacity was responsible for its venture capital portfolio. Mr. Tishler
has also served on many of the Boards of venture-backed companies, including Viewlogic Systems and
Kloss Video Corporation.
Mr. Tishlers broad strategic planning background includes the early development of technology
concepts from planning to development and execution. This strategic background and experience with
smaller companies allow him to provide significant leadership to the Board of Directors and the
Company, as a smaller reporting company.
Steven D. Runkel is our Chief Executive Officer (CEO) and President, and has served in that
role since February, 2006. From July, 2000 until February, 2006 he was Quatech, Inc.s CEO and
President. Quatech, Inc. and DPAC merged in February of 2006. From May of 1999 until July 2000, he
was a Sr. Practice Director for Oracle Corporation with a focus on Customer Relationship Management
(CRM) system implementations. From April 1995 to April 1999 he served in a number of executive
management positions for Innovative Systems Inc., a CRM software and services company. These
positions included President and Chief Operating Officer from June 1997 to April 1999. Prior to
joining Innovative Systems, Mr. Runkel held leadership positions at Formtek, Inc. and Harris
Corporation. Mr. Runkel has a BS from Pennsylvania State University.
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The company believes that Mr. Runkels background in customer relationship management is
critical to DPACs core business strategy of service and support to its customers.
Donald L. Murfin joined the DPAC Board of Directors in September 2009. Previously, Mr. Murfin
had been a Director of Quatech from July 2000 until August 2005. Mr. Murfin is a founding General
Partner of DCC Growth Fund, LP and Development Capital Ventures, LP, a small business investment
company licensed by the U.S. Small Business Administration. Prior to those organizations, Mr.
Murfin was a founding General Partner of Chemicals & Materials Enterprise Associates, LP, a venture
capital limited partnership affiliated with New Enterprise Associates. From 1965 through 1988, Mr.
Murfin was employed by The Lubrizol Corporation in various research and management positions
including Vice President of the corporation and President of Lubrizol Enterprises, Inc., the
corporations venture capital subsidiary. Mr. Murfin holds a BS in Organic Chemistry from The
University of Iowa, attended the graduate school of chemistry at The University of Akron, and
attended business school at Garfield College.
Mr. Murfins background in finance is considered a significant
benefit to the Company.
Dennis R. Leibel has served as a Director of the Company since February 2006 and chairs the
Audit Committee. Mr. Leibel is a private investor and a retired financial and legal executive. Mr.
Leibel also serves on the Board of Directors of Microsemi Corporation, where he is Chairman, and
was formerly a member of the Board of Directors or Commerce Energy Group, Inc. until 2008. Mr.
Leibel holds a B.S. degree in accounting, a Juris Doctor degree and an L.L.M. degree.
Mr. Leibels experience both in financial matters and as a practicing attorney are significant
benefits to DPAC as a smaller reporting company.
William Roberts is a 30 year veteran in retailing. He currently is Chairman, Belk Northern
Division, a division of Belk Inc. Belk is a $4 billion private retail chain based out of Charlotte,
NC. Prior to Belk, Mr. Roberts has held various merchandising positions with May Department Stores
and Macys.
Mr. Roberts experience in the retailing and merchandising fields benefit the company insofar
as its core business (as described above) primarily relates to establishing strong relationships
with its customers.
Mark Chapman is an independent wireless consultant. Most recently, he was Senior Vice President and
General Manager at Comarco Inc (NASDAQ: CMRO), and President of Ascom Inc , a division of Ascom
(ASCN.SW), a Swiss provider of wireless network test equipment which acquired Comarcos WTS
division in Jan 2009. Prior roles included acting Vice President of Business Development for
WiSpry, a venture funded fabless semiconductor company targeting broadband and wireless
communications as well as various consulting assignments. From 2001 to 2003, Mr. Chapman served as
President and CEO of Ditrans Corp, a developer of Digital Transceiver products. Mr. Chapmans prior
experience also includes various management, sales and marketing positions at Rockwell
Semiconductor (now Conexant) where he had responsibility for various modem products and later
wireless data products. Mr. Chapman received a BSEE with first class honors from Robert Gordons
University, Aberdeen, Scotland.
Mr. Chapmans technical background and wide ranging experience in industries similar to DPACs
represent knowledge, skills and experience that are highly beneficial to the company.
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James Bole is President and CEO of Almaden Systems LLC, a private information technology
consultancy. Prior to founding Almaden Systems, Jim served as Vice President of Products and
Services at RNA Networks, and previous to that Vice President of SOA Solutions at Software AG, a
German global enterprise software company. Mr. Bole has more than 25 years of entrepreneurial
software development and technical management experience in both startups and Fortune 100
companies. From 2001 to September 2006, Mr. Bole was Vice President of Products and Professional
Services at Infravio, a venture capital-backed software startup acquired by Software AG/webMethods.
Prior to joining Infravio, Mr. Bole held executive positions at Lockheed Martin (NYSE: LMT),
Formtek (acquired by Lockheed Martin), and WorkExchange Technologies. Mr. Bole holds a BS in
Applied Mathematics/Computer Science from Carnegie Mellon University.
Mr. Boles technical background and management experience, both with large enterprises and
smaller companies, are highly valuable to the company as a smaller reporting company.
Executive Officers
The following information is provided with respect to DPACs current executive officers.
Information for Mr. Steven D. Runkel is provided under the heading Directors above.
DPACs executive officers and their ages as of December 31, 2009 are as follows:
Name | Age | Positions | ||||
Stephen J. Vukadinovich
|
61 | Mr. Vukadinovich has served as Chief Financial Officer of DPAC since 2004, having previously served as Controller to DPAC since May of 2000. |
Board of Director Meetings and Committees
During the year ended December 31, 2009, the board of Directors held 6 meetings. All members
of the Board of directors hold office until the next Annual Meeting of Stockholders or the election
and qualification of their successors. Executive officers serve at the discretion of the Board of
Directors.
During the year ended December 31, 2009, each Board of Directors member attended at least 75%
of the meetings of the board of Directors and at least 75% of the meetings of the committees on
which he served.
We currently have two committees of our Board of Directors: the Audit Committee and the
Compensation Committee.
The Audit Committee meets periodically with the companys management and independent
registered public accounting firm to, among other things, review the results of the annual audit
and quarterly reviews and discuss the financial statements. The audit committee also hires the
independent registered public accounting firm, and receives and considers the accountants comments
as to controls, adequacy of staff and management performance and procedures. As of the end of 2009
the Audit Committee was composed of Mr. Leibel, Mr. Tishler and Mr. Chapman, all of whom are
independent directors. Mr. Leibel is the Chairman of the Audit Committee, and also serves as our
audit committee financial expert, as defined in Item 407(d)(5)(ii) of Regulation S-K. The Audit
Committee operates under a formal charter that governs its duties and conduct.
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The compensation committee determines the salaries and incentive compensation of our officers
and provides recommendations for the salaries and incentive compensation of our other employees.
There are currently two members of the Compensation Committee, Mr. Roberts and Mr. Bole. The
compensation committee does not operate under a charter.
The Board of Directors does not maintain a standing nominating committee. The board believes
that given its small relative size and familiarity with the company, the costs associated with
maintaining such an additional committee are outweighed and that the board and the company would
not benefit materially by expending board time and resources with such a formal process. In
connection with the resignation by Mr. Creighton K. Early and his replacement by Mr. Murfin, the
board believes that the informal process of selecting and evaluating Mr. Murfin was appropriate
given the size of the company and the board. The Board does not have a specific policy as to
diversity of the Board. However, with respect to diversity in its deliberations, the Board
considers the extent to which potential candidates possess sufficiently beneficial skill sets and
characteristics that would contribute to the Boards overall effectiveness.
Board Leadership Structure. Mr. Tischler serves as our Chairman of the Board of Directors.
Mr. Runkel has served as our CEO since the acquisition of Quatech by the company in 2006. The Board
believes that the company benefits from having a non-employee chairperson, which affords management
greater time resources with which to focus on the core business of the company. The Board does not
currently have a designated lead independent director. The Board believes that the appointment of a
designated lead independent director is not necessary at this time because of the Companys small
size and because the independent directors play an active role in Board matters.
Board Role in Risk Oversight. The Board administers its risk oversight function directly
and through the Audit Committee. The Board and the Audit Committee regularly discuss with
management the Companys major risk exposures, their potential financial impact on the Company, and
the steps taken to monitor and control those risks.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers and
directors and those persons who beneficially own more than 10% of our outstanding shares of common
stock to file reports of securities ownership and changes in such ownership with the Securities and
Exchange Commission. Officers, directors and greater than 10% beneficial owners are also required
by rules promulgated by the SEC to furnish us with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of such forms furnished to us, we believe that during
2009 all Section 16(a) filing requirements applicable to our officers, directors and greater than
10% beneficial owners were complied with, except with respect to an initial filing on Form 3 for
Mr. Murfin and a late Form 4 by Development Capital Ventures, LP, our largest stockholder.
Code of Ethics for Financial Professionals
Our code of ethics, which we adopted in 2004, will be provided free of charge to anyone upon
written request. Request can be made by mail or fax to:
DPAC Technologies Corp.
5675 Hudson Industrial Park
Hudson, Ohio 44236
Fax: 330-655-9020
5675 Hudson Industrial Park
Hudson, Ohio 44236
Fax: 330-655-9020
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ITEM 11: EXECUTIVE COMPENSATION
The following table sets forth compensation for services rendered in all capacities to the
Company for each person who served as an executive officer during the year ended December 31, 2009
(the Named Executive Officers). No other executive officer of the Company received salary and
bonus, which exceeded $100,000 in the aggregate during the year ended December 31, 2009:
Summary Compensation Table
Change in Pension | ||||||||||||||||||||||||||||||||||||
Non-Equity | Value and | |||||||||||||||||||||||||||||||||||
Incentive Plan | Nonqualified | |||||||||||||||||||||||||||||||||||
Compen- | Deferred Compen- | All Other | ||||||||||||||||||||||||||||||||||
Name and Principal | Salary | Bonus | Stock Awards | Option Awards | sation | sation Earnings | Compensation | Total | ||||||||||||||||||||||||||||
Position | Year | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||||||||
Steven D. Runkel |
2009 | 190,700 | 0 | 0 | 0 | 0 | 0 | 9,000 | 199,700 | |||||||||||||||||||||||||||
Chief Executive Officer (1) |
2008 | 250,000 | 20,000 | 0 | 39,836 | 0 | 0 | 27,908 | 337,744 | |||||||||||||||||||||||||||
Stephen J. Vukadinovich |
2009 | 140,000 | 0 | 0 | 0 | 0 | 0 | 6,000 | 150,000 | |||||||||||||||||||||||||||
Chief Financial Officer (2) |
2008 | 145,000 | 5,500 | 0 | 8,963 | 0 | 0 | 6,000 | 165,463 |
(1) | Mr. Runkels base salary was voluntarily reduced in July 2009 from $200,000 to
$180,000. Mr. Runkels 2008 salary includes $23,000 in payments which were voluntary
deferred from 2007 because of the Companys cash flow restraints. Mr. Runkels other
compensation for 2009 consisted of a vehicle allowance and for 2008 consisted of a vehicle
allowance and apartment rental costs. Because Mr. Runkel did not live in Hudson, OH until
January 2009, the Company maintained an apartment in Hudson, OH for Mr. Runkel until that
time. Additionally, Mr. Runkel, who serves as a director of the Company, does not receive
compensation for such service as a director. |
|
(2) | Mr. Vukadinovichs base salary was reduced
in July 2009 from $145,000 to $131,000 due
to the Companys cash flow constraints. Mr. Vukadinovichs other compensation
consisted of a vehicle allowance. |
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Option Grants
During 2009, excluding non-employee Directors, the Company issued no stock options to
employees or officers.
The following tables contain information concerning the stock option grants to the Companys
Named Executive Officers for the year ended December 31, 2009.
Option Grants in Last Fiscal Year
% of Total | ||||||||||||||||
Securities | Options | |||||||||||||||
Underlying | Granted to | |||||||||||||||
Options | Employees in | Base Price | Expiration | |||||||||||||
Name | Granted (#) | Fiscal Year | ($/Share) | Date | ||||||||||||
Steven D. Runkel
Chief Executive Officer |
| N/A | N/A | N/A | ||||||||||||
Stephen J.
Vukadinovich Chief Financial Officer |
| N/A | N/A | N/A |
Outstanding Equity Awards at Year End
Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||
Option Awards | Equity Incentive | Equity Incentive | ||||||||||||||||||||||||||||||||||
Equity Incentive | Plan Awards: | Plan Awards: | ||||||||||||||||||||||||||||||||||
Number of | Number of | Plan Awards: | Number of | Market or Payout | ||||||||||||||||||||||||||||||||
Securities | Securities | Number of | Number of | Market Value | Unearned | Value of Unearned | ||||||||||||||||||||||||||||||
Underlying | Underlying | Securities | Shares or | of Shares or | Shares, Units or | Shares, Units or | ||||||||||||||||||||||||||||||
Unexercised | Unexercised | Underlying | Option | Units of Stock | Units of Stock | Other Rights | Other Rights | |||||||||||||||||||||||||||||
Options | Options | Unexercised | Exercise | Option | That Have | That Have | That Have | That Have | ||||||||||||||||||||||||||||
(#) | (#) | Unearned Options | Price | Expiration | Not Vested | Not Vested | Not Vested | Not Vested | ||||||||||||||||||||||||||||
Name | Exercisable | Unexercisable | (#) | ($) | Date | (#) | ($) | (#) | ($) | |||||||||||||||||||||||||||
Steven D. Runkel |
697,874 | 0 | $ | 0.02 | 02/28/2011 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
697,874 | $ | 0.03 | 02/28/2012 | |||||||||||||||||||||||||||||||||
697,874 | $ | 0.06 | 02/28/2014 | |||||||||||||||||||||||||||||||||
500,000 | 500,000 | $ | 0.10 | 04/11/2017 | ||||||||||||||||||||||||||||||||
250,000 | 750,000 | $ | 0.04 | 04/01/2018 | ||||||||||||||||||||||||||||||||
Stephen J. |
40,000 | 0 | $ | 5.63 | 05/08/2010 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Vukadinovich |
7,500 | $ | 2.56 | 11/22/2010 | ||||||||||||||||||||||||||||||||
7,500 | $ | 1.91 | 12/29/2010 | |||||||||||||||||||||||||||||||||
8,000 | $ | 1.50 | 03/22/2011 | |||||||||||||||||||||||||||||||||
12,000 | $ | 1.78 | 06/01/2011 | |||||||||||||||||||||||||||||||||
4,000 | $ | 1.97 | 10/22/2011 | |||||||||||||||||||||||||||||||||
5,000 | $ | 2.12 | 12/03/2011 | |||||||||||||||||||||||||||||||||
12,000 | $ | 1.71 | 07/25/2012 | |||||||||||||||||||||||||||||||||
35,000 | $ | 0.94 | 04/10/2013 | |||||||||||||||||||||||||||||||||
100,000 | $ | 0.38 | 11/04/2014 | |||||||||||||||||||||||||||||||||
120,000 | $ | 0.16 | 02/28/2016 | |||||||||||||||||||||||||||||||||
112,500 | 112,500 | $ | 0.10 | 04/11/2017 | ||||||||||||||||||||||||||||||||
56,250 | 168,750 | $ | 0.04 | 04/01/2018 |
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Employment Agreements
The
Company had a written employment agreement with Mr. Runkel that
specified a base salary of
$250,000 per year, an auto allowance of $750 per month and eligibility to participate in any
incentive compensation program of the Company and all other benefit programs generally applicable
to the Companys senior executives. If DPAC terminates Mr. Runkels employment for any reason other
than for cause or if Mr. Runkel terminates his employment for good reason, as those terms are
defined in the agreement, Mr. Runkel will be entitled to a severance equal to the continuation of
his base salary and auto
allowance for twelve months from the termination of his employment. In addition, upon such an
event, all unvested stock options to purchase Company common stock held by Mr. Runkel, if any,
shall become fully vested and may be exercised by him for two years from the date of his
termination. The employment agreement with Mr. Runkel expired on March 31, 2009. The Compensation
Committee is currently considering a new employment contract for Mr. Runkel, the terms of which are
expected to be similar to those in his expired agreement.
Notwithstanding the salary that as specified by Mr. Runkels employment agreement, on July 18,
2008 he voluntarily agreed to a reduction in his total base salary from $250,000 annually to
$200,000 annually. Additionally, the Company would pay to Mr. Runkel a quarterly bonus based on the
achievement by the Company of certain quarterly performance targets (measured by reference to the
Companys earnings before interest, taxes, depreciation and amortization (EBITDA). Mr. Runkel would
receive a bonus (in cash) of $6,250 for quarterly Company EBITDA of $250,000; $12,500 for EBITDA of
$375,000 and $25,000 for EBITDA of $500,000. Additionally, in July 2009, Mr. Runkel voluntarily
agreed to a further reduction in his total base salary from $200,000 to $180,000.
The
Company had a written employment agreement with Mr. Vukadinovich
that specified a base
salary of $146,000 per year, an auto allowance of $500 per month and eligibility to participate in
any incentive compensation program of the Company and all other benefit programs generally
applicable to the Companys senior executives. If DPAC terminates Mr. Vukadinovichs employment for
any reason other than for cause or if Mr. Vukadinovich terminates his employment for good
reason, as those terms are defined in the agreement, Mr. Vukadinovich will be entitled to a
severance equal to the continuation of his base salary and auto allowance for six months from the
termination of his employment. In addition, upon such an event, all unvested stock options to
purchase Company common stock held by Mr. Vukadinovich, if any, shall become fully vested and may
be exercised by him for two years from the date of his termination. The employment agreement with
Mr. Vukadinovich expired on March 31, 2009. The Compensation Committee is currently considering a
new employment contract for Mr. Vukadinovich, the terms of which are expected to be similar to
those in his expired agreement.
Notwithstanding the salary that as specified by Mr. Vukadinovichs employment agreement, in
July 2009, he voluntarily agreed to a reduction in his total base salary from $146,000 annually to
$131,000 annually.
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Compensation of Directors
The following table sets forth the compensation of the Board for the 2009 fiscal year:
Change in Pension | ||||||||||||||||||||||||||||
Value and | ||||||||||||||||||||||||||||
Nonqualified | ||||||||||||||||||||||||||||
Non-Equity | Deferred | |||||||||||||||||||||||||||
Fees Earned or | Incentive Plan | Compensation | All Other | |||||||||||||||||||||||||
Name | Paid in Cash | Stock Awards | Option Awards | Compensation | Earnings | Compensation | Total | |||||||||||||||||||||
(1) | ($) | ($) | ($)(2) | ($) | ($) | ($) | ($) | |||||||||||||||||||||
(a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | |||||||||||||||||||||
Samuel W. Tishler |
0 | 0 | 6,333 | 0 | 0 | 0 | 6,333 | |||||||||||||||||||||
Steven D. Runkel |
0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Creighton K. Early |
0 | 0 | 6,667 | 0 | 0 | 0 | 6,667 | |||||||||||||||||||||
Dennis R. Leibel |
0 | 0 | 9,000 | 0 | 0 | 0 | 9,000 | |||||||||||||||||||||
William Roberts |
0 | 0 | 6,333 | 0 | 0 | 0 | 6,333 | |||||||||||||||||||||
Mark Chapman |
0 | 0 | 6,333 | 0 | 0 | 0 | 6,333 | |||||||||||||||||||||
James Bole |
0 | 0 | 6,333 | 0 | 0 | 0 | 6,333 | |||||||||||||||||||||
Don Murfin |
0 | 0 | 0 | 0 | 0 | 0 | 0 |
(1) | Mr. Runkels compensation is included in the Executive Compensation summary table. Mr.
Runkel does not receive any compensation related to being a director of the Company. Mr.
Early resigned from the Board effective November 18, 2009 and was replaced by Mr. Murfin
effective the same date. |
|
(2) | The Company recognized $41,000 of non-cash compensation expense in its consolidated
financial statements related to stock option grants issued to directors for 2009. |
Prior to 2009, the Company paid its non-employee directors a cash retainer of $2,000 per
quarter. The Chair of the Audit Committee and the Chair of the Compensation Committee are each paid
an additional $1,000 and $500 per quarter, respectively. In addition to such retainers,
non-employee directors receive fees of $1,500 for each Board meeting attended. In addition,
non-employee directors receive fees of $500 for each Audit Committee or Compensation Committee
meeting attended. The Board members are reimbursed their out-of-pocket expenses for attending Board
and committee meetings. For 2009, the Directors agreed to forgo all cash payments and receive
compensation in the form of additional stock option grants. The Compensation Committee is currently
taking under consideration future Director compensation.
Each non-employee director is granted annually an option to purchase up to 50,000 shares of
the Companys Common Stock at the fair market value of such shares at the time of such grant. Such
option grants have a 10 year life and are immediately exercisable and fully vested at the time of
grant. The annual stock options are granted on the first business day of each fiscal year. For the
year ended December 31, 2009, options to purchase 50,000 shares, plus additional shares in lieu of
cash compensation, of common stock were granted to each of the following directors in the total
amount of shares per director as indicated: Mr. Early 333,333 shares, Mr. Roberts 316,667
shares, Mr. Tishler 316,667 shares, Mr. Chapman
316,667 shares, Mr. Bole 316,667 shares, and Mr. Leibel 450,000
shares. All options granted had an exercise price of $0.03 per share.
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Table of Contents
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following tables sets forth certain information as of January 31, 2010, with respect to
ownership of the Companys Common Stock by each person who is known by the Company to own
beneficially 5% or more of the Common Stock, each Named Officer, each director of the Company, each
nominee for director, and all executive officers and directors of the Company as a group.
Amount and Nature of | Percentage of | |||||||
Name of Beneficial Owner (and Address of Each 5% Beneficial Owner) | Beneficial Ownership | Class (1) | ||||||
Development Capital Ventures, LP |
132,535,665 | (2) | 74.9 | % | ||||
7500 Iron Bar Lane, Suite 209 Fort Mill, SC 29708-6908 |
||||||||
The HillStreet Fund, L.P. |
5,443,457 | (3) | 4.7 | % | ||||
300 Main Street, Suite 1C Cincinnati, Ohio 45202 |
||||||||
Current directors, director nominees, and executive officers: |
||||||||
Steven Runkel |
4,425,638 | (4) | 3.9 | % | ||||
William Roberts |
12,360,429 | (5) | 10.9 | % | ||||
James Bole |
3,171,239 | (6) | 2.8 | % | ||||
Mark Chapman |
466,667 | (7) | * | |||||
Dennis Leibel |
600,000 | (7) | * | |||||
Samuel Tishler |
727,667 | (8) | * | |||||
Don Murfin |
| * | ||||||
Stephen Vukadinovich |
519,750 | (7) | * | |||||
All executive officers and directors as a group (eight) |
22,271,390 | 18.3 | % |
(1) | Shares of Common Stock, which were not outstanding but which could be acquired upon
exercise of a warrant or option within 60 days from the date of this filing, are considered
outstanding for the purpose of computing the percentage of outstanding shares beneficially
owned. However, such shares are not considered to be outstanding for any other purpose. |
|
(2) | Includes the equivalent of 67,647,059 common shares for the potential conversion of
28,750 shares of Class A Preferred Shares. |
|
(3) | Consists of 5,443,457 shares subject to warrants that are exercisable within 60 days. |
|
(4) | Includes 2,843,622 shares subject to options that are exercisable within 60 days. |
|
(5) | Includes 466,667 shares subject to options that are exercisable within 60 days and
1,764,706 shares for the potential conversion of 750 shares of Class A Preferred Shares. |
|
(6) | Includes 466,667 shares subject to options that are exercisable within 60 days and
1,176,471 shares for the potential conversion of 500 shares of Class A Preferred Shares. |
(7) | Consists only of shares subject to options that are exercisable within 60 days. |
|
(8) | Includes 726,667 shares subject to options that are exercisable within 60 days. |
|
* | Represents less than 1% of the outstanding shares. |
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Equity Compensation Plan Information
No. of Shares of | ||||||||||||
Common Stock | ||||||||||||
Remaining Available | ||||||||||||
for future Issuance | ||||||||||||
Number of Shares of | under the Equity | |||||||||||
Common Stock to be | Weighted-Average | Compensation Plans | ||||||||||
Issued upon Exercise of | Exercise Price of | (excluding shares | ||||||||||
Outstanding Options | Outstanding Options | reflected in column 1) | ||||||||||
Equity Compensation Plans Approved by Shareholders |
14,550,936 | $ | 0.42 | 16,512,000 | ||||||||
Equity Compensation Plans not Approved by Shareholders |
| | | |||||||||
Total |
14,550,936 | $ | 0.42 | 16,512,000 | ||||||||
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
As previously reported in the companys current report on Form 8-K (filed with the SEC on
October 6, 2009) in connection with the acquisition of the SocketSerial assets reported therein,
our majority stockholder Development Capital Ventures, LP (DCV) facilitated the purchase of such
assets through the purchase of shares of our Series A Preferred Stock for an approximate dollar
value of $500,000. Mr. Don Murfin, a director of DPAC, is also a shareholder, director and officer
of DCVs sole general partner.
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ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
Maloney + Novotny LLC (formerly Hausser + Taylor LLC) (Maloney + Novotny) served as the
companys independent auditor for the years ended December 31, 2009 and 2008. The following is a
summary of the fees billed to the Company by Maloney + Novotny for professional services rendered
during the years ended December 31, 2009 and 2008:
Fee Catgegory | 2009 | 2008 | ||||||
Audit Fees |
$ | 92,300 | $ | 91,340 | ||||
Audit-Related Fees |
| | ||||||
Tax Fees |
| | ||||||
All Other Fees |
4,055 | | ||||||
Total Fees |
$ | 96,355 | $ | 91,340 | ||||
Audit fees consist of fees billed for professional services rendered for the audit of the
Companys consolidated financial statements and review of the interim financial statements included
in quarterly reports and services that are normally provided in connection with statutory and
regulatory filings or engagements.
Our audit committee pre-approves all fees for services to be performed by our principal
accountant in accordance with our audit committee charter.
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ITEM 15: EXHIBITS
The following documents are filed as part of this Form 10-K:
2.1 | Agreement dated March 7, 2005 between the Registrant and Quatech, Inc.,
which is
incorporated by reference to Exhibit 2.3 to the Registrant s Form 8-K as filed March 8,
2005. |
|||
2.2 | Agreement and Plan of Reorganization dated April 26, 2005 among the
Registrant,
DPAC Acquisition Sub, Inc. and Quatech, Inc., is incorporated by reference to the to 2.4
to Form 8-K/A as filed by the Registrant on April 27, 2005. |
|||
3.1 | Articles of Incorporation, as amended, which are incorporated by reference to
the Registrants Current Report on Form 8-K, Date of Event July 11, 1988. |
|||
3.2 | By-laws, as amended, which are incorporated by reference to Registrants Current
Report on Form 8-K, Date of Event July 11, 1988. |
|||
3.3 | Certificate of Determination dated January 3, 2008, which is incorporated by
reference to Exhibit 3.1 to the Registrants Form 8-K as filed February 5, 2008. |
|||
4.1 | Common Stock Purchase Warrant dated January 31, 2008 between the Registrant
and Canal Mezzanine Partners, L.P., which is incorporated by reference to Exhibit 4.1
to the Registrants Form 8-K as filed February 5, 2008. |
|||
10.1 | Lease for Premises at 7321 Lincoln Way, Garden Grove, California, dated June 19,
1997, incorporated by reference to Registrants Annual Report on Form l0-KSB
for the year ended February 29, 1996. |
|||
10.2 | Renewal of Garden Grove lease, incorporated by reference to Exhibit 10.2.1 to the
Registrants Form 10-K filed June 1, 2004 for the year ended February 29, 2004. |
|||
10.3 | 1996 Stock Option Plan as incorporated by reference to Exhibit 10.3 to the
Registrants Annual Report on Form l0-KSB for the year ended February 29, 1996.* |
|||
10.4 | 1985 Stock Option Plan, as amended and incorporated by reference to Registrants
Annual Report on Form l0-KSB for the year ended February 28, 1994.* |
|||
10.5 | Form of Indemnification Agreement with officers and directors as incorporated by
reference to Registrants Annual Report on Form l0-KSB for the year ended
February 28, 1994.* |
|||
10.6 | Description of CEO Severance Agreement dated March 18, 2004, incorporated by
reference to Exhibit 10.15 to the Registrants Quarterly Report on Form 10-Q filed January
14, 2005. |
|||
10.7 | Description of Supplemental Severance Policy, incorporated by reference to Exhibit
10.15 to the Registrants Current Report on Form 8-K filed February 23, 2005.* |
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10.8 | Employment Agreement, between Steven D. Runkel and DPAC Technologies Corp.,
effective as of February 28, 2006 incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K, as filed on March 6, 2006. |
|||
10.9 | Subordinated Loan and Security Agreement, between WR Acquisition, Inc., as Borrower,
and The HillStreet Fund, L.P., as Lender, as dated as of July 28, 2000 (the HillStreet
Loan Agreement) incorporated by reference to Exhibit 10.2 to the Registrants Current
Report on Form 8-K, as filed on March 6, 2006. |
|||
10.10 | First Amendment to the HillStreet Loan Agreement, dated as of August 5, 2005
incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8- K,
as filed on March 6, 2006. |
|||
10.11 | Second Amendment to the HillStreet Loan Agreement, dated as of January 27, 2006
incorporated by reference to Exhibit 10.4 to the Registrants Current Report on Form 8- K,
as filed on March 6, 2006. |
|||
10.12 | Third Amendment to the HillStreet Loan Agreement, dated as of February 28, 2006
incorporated by reference to Exhibit 10.5 to the Registrants Current Report on Form 8- K,
as filed on March 6, 2006. |
|||
10.13 | Credit Agreement, between WR Acquisition, Inc., as Borrower, and National City Bank,
as Lender, dated as of July 28, 2000 (the National City Credit Agreement) incorporated by
reference to Exhibit 10.5 to the Registrants Current Report on Form 8- K, as filed March
6, 2006. |
|||
10.14 | First Amendment to the National City Credit Agreement, dated as of March 25, 2002
incorporated by reference to Exhibit 10.7 to the Registrants Current Report on Form 8- K,
as filed March 6, 2006. |
|||
10.15 | Second Amendment to the National City Credit Agreement, dated as of September 4, 2002
incorporated by reference to Exhibit 10.8 to the Registrants Current Report on Form 8-K,
as filed March 6, 2006. |
|||
10.16 | Third Amendment to the National City Credit Agreement, dated as of November 25, 2003
incorporated by reference to Exhibit 10.9 to the Registrants Current Report on Form 8-K,
as filed March 6, 2006. |
|||
10.17 | Fourth Amendment to the National City Credit Agreement, dated as of July 21, 2005
incorporated by reference to Exhibit 10.10 to the Registrants Current Report on Form 8-K,
as filed March 6, 2006. |
|||
10.18 | Fifth Amendment to the National City Credit Agreement, dated as of February 28, 2006
incorporated by reference to Exhibit 10.11 to the Registrants Current Report on Form 8-K,
as filed March 6, 2006. |
|||
10.19 | Loan Agreement, between Quatech, Inc., as Borrower, and the Director of Development
of the State of Ohio, as Lender, dated as of January 27, 2006 incorporated by reference to
Exhibit 10.12 to the Registrants Current Report on Form 8-K, as filed March 6, 2006. |
44
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10.20 | Description of Director Compensation adopted March 14, 2006, incorporated by
reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K, as filed March
20, 2006. |
|||
10.21 | Letter Agreement dated December 5, 2007 between Quatech, Inc. and National
City Bank, which is incorporated by reference to Exhibit 10.1 to the Registrants Form
8-K as filed December 7, 2007. |
|||
10.22 | Credit Agreement dated January 30, 2008 between the Registrant, Quatech,
Inc. and Fifth Third Bank, which is incorporated by reference to Exhibit 10.1 to the
Registrants Form 8-K as filed February 5, 2008. |
|||
10.23 | Revolving Credit Promissory Note dated January 30, 2008 between the
Registrant, Quatech, Inc. and Fifth Third Bank, which is incorporated by reference to
Exhibit 10.2 to the Registrants Form 8-K as filed February 5, 2008. |
|||
10.24 | Security Agreement dated January 30, 2008 between the Registrant, Quatech,
Inc. and Fifth Third Bank, which is incorporated by reference to Exhibit 10.3 to the
Registrants Form 8-K as filed February 5, 2008. |
|||
10.25 | Subordination Agreement dated January 30, 2008 between the Registrant,
Quatech, Inc., Canal Mezzanine Partners, L.P. and Fifth Third Bank, between the
Registrant, Quatech, Inc. and Fifth Third Bank, which is incorporated by reference to
Exhibit 10.4 to the Registrants Form 8-K as filed February 5, 2008. |
|||
10.26 | Acknowledgement Agreement dated January 30, 2008 between Fifth Third Bank
and Development Capital Ventures, L.P., which is incorporated by reference to Exhibit
10.5 to the Registrants Form 8-K as filed February 5, 2008. |
|||
10.27 | Senior Subordinated Note and Warrant Purchase Agreement dated January 31,
2008 between the Registrant, Quatech, Inc. and Canal Mezzanine Partners, L.P., which
is incorporated by reference to Exhibit 10.6 to the Registrants Form 8-K as filed
February 5, 2008. |
|||
10.28 | Senior Subordinated Note dated January 31, 2008 between the Registrant,
Quatech, Inc. and Canal Mezzanine Partners, L.P., which is incorporated by reference
to Exhibit 10.7 to the Registrants Form 8-K as filed February 5, 2008. |
|||
10.29 | Security Agreement dated January 31, 2008 between the Registrant, Quatech,
Inc. and Canal Mezzanine Partners, L.P., which is incorporated by reference to Exhibit
10.8 to the Registrants Form 8-K as filed February 5, 2008. |
|||
10.30 | Co-Sale Agreement dated January 31, 2008 between the Registrant, Development
Capital Ventures, LP, William Roberts, Steven D. Runkel, and Canal Mezzanine
Partners, L.P., which is incorporated by reference to Exhibit 10.9 to the
Registrants Form 8-K as filed February 5, 2008. |
45
Table of Contents
10.31 | Registration Rights Agreement dated January 31, 2008 between the Registrant
and Canal Mezzanine Partners, L.P., which is incorporated by reference to Exhibit
10.10 to the Registrants Form 8-K as filed February 5, 2008. |
|||
10.32 | Acknowledgement Agreement dated January 31, 2008 between Canal Mezzanine
Partners, L.P. and Development Capital Ventures, LP, which is incorporated by
reference to Exhibit 10.11 to the Registrants Form 8-K as filed February 5, 2008. |
|||
10.33 | Subscription Agreement dated December 17, 2007 between the Registrant and
Development Capital Ventures, LP, which is incorporated by reference to Exhibit 10.12
to the Registrants Form 8-K as filed February 5, 2008. |
|||
10.34 | Equipment Purchase Agreement dated as of December 30, 2008 between the
Registrant and Tetrad Electronics, Inc., which is incorporated by reference to Exhibit
10.34 to the Registrants Form 10-K for the fiscal year ended December 31, 2008. |
|||
10.35 | Asset Purchase Agreement By and Among Socket Mobile, Inc., Development
Capital Ventures, L.P. and Quatech Inc., made as of the close of business on September
30, 2009, which is incorporated by reference to Exhibit 10.1 to the Registrants Form
8-K as filed October 6, 2009. |
|||
10.36 | Supply and Licensing Agreement between Quatech, Inc. and Socket Mobile,
Inc., effective as of September 30, 2009, which is incorporated by reference to
Exhibit 10.2 to the Registrants Form 8-K as filed October 6, 2009. |
|||
10.37 | First Amendment to Credit Agreement dated January 31, 2009 among the
Registrant, Quatech, Inc. and Fifth Third Bank, which is incorporated by reference to
Exhibit 10.35 to the Registrants Form 10-K for the fiscal year ended December 31,
2008. |
|||
10.38 | Revolving Credit Promissory Note dated January 31, 2009 among the
Registrant, Quatech, Inc. and Fifth Third Bank, which is incorporated by reference
to Exhibit 10.35 to the Registrants Form 10-K for the fiscal year ended December
31, 2008. |
|||
10.39 | Second Amendment to Credit Agreement, by and among DPAC Technologies Corp.,
Quatech, Inc. and Fifth Third Bank, dated as of March 30, 2010, which is incorporated
by reference to Exhibit 10.1 to the Registrants Form 8-K as filed April 5, 2010. |
|||
10.40 | Amended and Restated Revolving Note made by DPAC Technologies Corp. and
Quatech, Inc. in favor of Fifth Third Bank, dated as of March 30, 2010, which is
incorporated by reference to Exhibit 10.2 to the Registrants Form 8-K as filed April
5, 2010. |
|||
10.41 | Letter Agreement among DPAC Technologies Corp. and Development Capital
Ventures, LP dated September 30, 2009, which is incorporated by reference to Exhibit 7
to Development Capital Ventures, LPs Schedule 13D, Amendment No. 2 with respect to
the Registrant. |
|||
14.1 | Code of Business Conduct and Ethics, incorporated by reference to Exhibit 14.1 to the
Registrants Annual Report on Form 10-K filed on June 1, 2004 for the fiscal year ended February
29, 2004. |
46
Table of Contents
16.1 | Letter from Bober, Markey, Fedorovich & Company, dated March 6, 2006,
incorporated by reference to Exhibit 16.1 to the Registrants Current Report on Form 8-K,
as filed March 6, 2006. |
|||
21.1 | List of Subsidiaries |
|||
23.1 | Consent of Maloney + Novotny, LLC, a Registered Independent Public
Accounting Firm. |
|||
24.1 | Power of Attorney (contained on the signature page to this report). |
|||
31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|||
32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|||
* | Management compensatory plan or arrangement |
(c) Financial Statement Schedules Excluded from Annual Report: None
47
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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.
Date: April 15, 2010 | DPAC TECHNOLOGIES CORP. |
|||
By: | /s/ Steven D. Runkel | |||
Steven D. Runkel | ||||
Chief Executive Officer Director | ||||
By: | /s/ Stephen J. Vukadinovich | |||
Stephen J. Vukadinovich | ||||
Chief Financial Officer & Secretary (Principal Financial and Accounting Officer) |
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints Steven D. Runkel and Stephen J. Vukadinovich,
or either of them, his true and lawful attorney-in-fact and agent, with full power of substitution
and re-substitution, to sign the report on Form 10-K and any or all amendments thereto and to file
the same, with all exhibits thereto, and other documents in connection therewith with the
Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact,
or his substitute or substitutes, may do or cause to be done by virtue hereof in any and all
capacities.
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
dates indicated.
/s/ Samuel W. Tishler
|
April 15, 2010 | |
Chairman of the Board |
||
/s/ Steven D. Runkel
|
April 15, 2010 | |
Chief Executive Officer, Director |
||
(Principal Executive Officer) |
||
/s/ William Roberts
|
April 15, 2010 | |
/s/ Don Murfin
|
April 15, 2010 | |
48
Table of Contents
/s/ Mark Chapman
|
April 15, 2010 | |
/s/ Dennis R. Leibel
|
April 15, 2010 | |
/s/ Jim Bole
|
April 15, 2010 | |
/s/ Stephen J. Vukadinovich
|
April 15, 2010 | |
Chief Financial Officer & Secretary |
||
(Principal Financial and Accounting Officer) |
49
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DPAC TECHNOLOGIES CORP.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009 and 2008
Table of Contents
DPAC TECHNOLOGIES CORP.
TABLE OF CONTENTS
Page No. | ||||
F-2 | ||||
CONSOLIDATED FINANCIAL STATEMENTS: |
||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 F-24 |
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
DPAC Technologies Corp.
Hudson, Ohio
DPAC Technologies Corp.
Hudson, Ohio
We have audited the accompanying consolidated balance sheets of DPAC Technologies Corp. and
subsidiary as of December 31, 2009 and 2008, and the related consolidated statements of operations,
stockholders equity, and cash flows for the years then ended. These financial statements are the
responsibility of the Companys 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 has determined that it 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 Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, 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 consolidated financial position of DPAC Technologies Corp. and subsidiary as
of December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the financial statements, certain conditions
raise substantial doubt about its ability to continue as a going concern. Managements plans
regarding these matters are also described in Note 1. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
MALONEY + NOVOTNY LLC
Cleveland, Ohio
April 14, 2010
April 14, 2010
F-2
Table of Contents
DPAC Technologies Corp.
Consolidated Balance Sheets
December 31, 2009 and 2008
2009 | 2008 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 17,532 | $ | 9,157 | ||||
Accounts receivable, net |
1,124,598 | 886,489 | ||||||
Inventories |
1,076,739 | 1,365,947 | ||||||
Prepaid expenses and other current assets |
73,914 | 41,121 | ||||||
Total current assets |
2,292,783 | 2,302,714 | ||||||
PROPERTY, Net |
745,756 | 466,992 | ||||||
FINANCING COSTS, Net |
101,911 | 132,079 | ||||||
GOODWILL AND OTHER NON-AMORTIZING INTANGIBLES |
6,405,503 | 6,405,503 | ||||||
AMORTIZABLE INTANGIBLE ASSETS, Net |
621,684 | 1,061,704 | ||||||
OTHER ASSETS |
18,817 | 18,048 | ||||||
TOTAL |
$ | 10,186,454 | $ | 10,387,040 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Revolving credit facility |
$ | 1,425,243 | $ | 1,425,000 | ||||
Current portion of long-term debt |
230,000 | 125,000 | ||||||
Current portion of capital lease obligations |
| 9,140 | ||||||
Accounts payable |
1,513,568 | 971,104 | ||||||
Accrued restructuring costs current |
| 42,366 | ||||||
Put warrant liability |
100,300 | 116,100 | ||||||
Other accrued liabilities |
367,144 | 419,400 | ||||||
Total current liabilities |
3,636,255 | 3,108,110 | ||||||
LONG-TERM LIABILITIES: |
||||||||
Capital lease obligation, less current portion |
| 11,409 | ||||||
Ohio Development loan, less current portion |
2,106,724 | 2,040,262 | ||||||
Subordinated debt, less current portion |
1,160,649 | 1,397,893 | ||||||
Total long-term liabilities |
3,267,373 | 3,449,564 | ||||||
COMMITMENTS AND CONTINGENCIES |
||||||||
STOCKHOLDERS EQUITY: |
||||||||
Convertible, voting, cumulative, 9% series A preferred
stock, $100 stated value;
30,000 shares authorized; 30,000 and 21,250 shares issued
and outstanding at
December 31, 2009 and 2008, respectively |
2,499,203 | 2,014,203 | ||||||
Common stock, no par value - 120,000,000 shares authorized;
109,414,896 and 98,006,343 shares issued and
outstanding at
December 31, 2009 and 2008, respectively |
5,687,232 | 5,376,609 | ||||||
Preferred stock dividends distributable in common
stock; 3,571,429 and 4,041,633
common shares at December 31, 2009and 2008, respectively |
50,000 | 47,813 | ||||||
Accumulated deficit |
(4,953,609 | ) | (3,609,259 | ) | ||||
Total
stockholders equity |
3,282,826 | 3,829,366 | ||||||
TOTAL |
$ | 10,186,454 | $ | 10,387,040 | ||||
See accompanying notes to consolidated financial statements.
F-3
Table of Contents
DPAC Technologies Corp.
Consolidated Statements of Operations
For the Years Ended December 31, 2009 and 2008
2009 | 2008 | |||||||
NET SALES |
$ | 6,807,418 | $ | 9,156,889 | ||||
COST OF GOODS SOLD |
4,008,510 | 5,252,895 | ||||||
GROSS PROFIT |
2,798,908 | 3,903,994 | ||||||
OPERATING EXPENSES |
||||||||
Sales and marketing |
824,659 | 1,163,757 | ||||||
Research and development |
775,106 | 835,863 | ||||||
General and administrative |
1,247,519 | 1,530,999 | ||||||
Amortization of intangible assets |
509,185 | 490,020 | ||||||
Restructuring costs |
12,097 | | ||||||
Total operating expenses |
3,368,566 | 4,020,639 | ||||||
LOSS FROM OPERATIONS |
(569,658 | ) | (116,645 | ) | ||||
OTHER (INCOME) EXPENSES: |
||||||||
Interest expense |
579,553 | 694,909 | ||||||
Fair value adjustment for put warrant liability |
(15,800 | ) | (12,900 | ) | ||||
Total other expenses |
563,753 | 682,009 | ||||||
LOSS BEFORE INCOME TAXES |
(1,133,411 | ) | (798,654 | ) | ||||
INCOME TAX PROVISION |
| | ||||||
NET LOSS |
(1,133,411 | ) | (798,654 | ) | ||||
PREFERRED STOCK DIVIDENDS |
210,939 | 174,027 | ||||||
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS |
$ | (1,344,350 | ) | $ | (972,681 | ) | ||
NET LOSS PER SHARE: |
||||||||
Basic and diluted |
$ | (0.01 | ) | $ | (0.01 | ) | ||
WEIGHTED AVERAGE SHARES OUTSTANDING: |
||||||||
Basic and diluted |
104,367,000 | 94,893,000 | ||||||
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
DPAC Technologies Corp.
Consolidated Statements
of Stockholders Equity
For the Years Ended December 31, 2009 and 2008
Preferred stock | ||||||||||||||||||||||||||||
dividends | ||||||||||||||||||||||||||||
Preferred Stock | Common Stock | distributable in | Accumulated | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Common Stock | Deficit | Total | ||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2007 |
| $ | | 92,890,836 | $ | 5,062,528 | $ | | $ | (2,636,578 | ) | $ | 2,425,950 | |||||||||||||||
ISSUANCE OF PREFERRED STOCK |
21,250 | 2,014,203 | | | | | 2,014,203 | |||||||||||||||||||||
PREFERRED STOCK DIVIDENDS PAID OR DISTRIBUTABLE IN COMMON STOCK |
| | 3,755,887 | 126,214 | 47,813 | (174,027 | ) | | ||||||||||||||||||||
COMPENSATION EXPENSE ASSOCIATED WITH STOCK OPTIONS |
| | | 74,067 | | | 74,067 | |||||||||||||||||||||
FAIR VALUE OF CANAL WARRANT |
| | | 63,800 | | | 63,800 | |||||||||||||||||||||
PREFERRED STOCK FEES PAID IN COMMON STOCK |
| | 1,250,000 | 50,000 | | | 50,000 | |||||||||||||||||||||
EXERCISE OF COMMON STOCK WARRANTS |
| | 109,620 | | | | | |||||||||||||||||||||
NET LOSS |
| | | | | (798,654 | ) | (798,654 | ) | |||||||||||||||||||
BALANCE AT DECEMBER 31, 2008 |
21,250 | 2,014,203 | 98,006,343 | 5,376,609 | 47,813 | (3,609,259 | ) | 3,829,366 | ||||||||||||||||||||
ISSUANCE OF PREFERRED STOCK |
8,750 | 485,000 | 485,000 | |||||||||||||||||||||||||
PREFERRED STOCK DIVIDENDS PAID OR DISTRIBUTABLE IN COMMON STOCK |
11,408,553 | 191,252 | 2,187 | (210,939 | ) | (17,500 | ) | |||||||||||||||||||||
COMPENSATION EXPENSE ASSOCIATED WITH STOCK OPTIONS |
119,371 | 119,371 | ||||||||||||||||||||||||||
NET LOSS |
| | | | | (1,133,411 | ) | (1,133,411 | ) | |||||||||||||||||||
BALANCE AT DECEMBER 31, 2009 |
30,000 | $ | 2,499,203 | 109,414,896 | $ | 5,687,232 | $ | 50,000 | $ | (4,953,609 | ) | $ | 3,282,826 | |||||||||||||||
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
DPAC Technologies Corp.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2009 and 2008
2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (1,133,411 | ) | $ | (798,654 | ) | ||
Adjustments to reconcile net loss
to net cash used in operating activities: |
||||||||
Depreciation and amortization |
594,997 | 603,383 | ||||||
Provision for bad debts |
(23,773 | ) | 25,000 | |||||
Provision for obsolete inventory |
48,000 | 51,000 | ||||||
Accretion of discount and success fees on debt |
58,385 | 57,322 | ||||||
Amortization of deferred financing costs |
50,068 | 57,768 | ||||||
Fair value adjustment of liability for warrants |
(15,800 | ) | (12,900 | ) | ||||
Non-cash compensation expense |
119,371 | 74,067 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(214,336 | ) | 734,051 | |||||
Inventories |
41,208 | (79,356 | ) | |||||
Prepaid expenses and other assets |
(33,079 | ) | 25,772 | |||||
Accounts payable |
616,464 | (894,948 | ) | |||||
Accrued restructuring charges |
(42,366 | ) | (278,314 | ) | ||||
Other accrued liabilities |
(69,756 | ) | (136,728 | ) | ||||
Net cash used in operating activities |
(4,028 | ) | (572,537 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Net cash from sales of assets |
190,901 | | ||||||
Property additions |
(37,140 | ) | (61,464 | ) | ||||
Developed software |
(29,282 | ) | (162,375 | ) | ||||
Net cash provided by (used in) investing activities: |
124,479 | (223,839 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Net borrowing (payments) under revolving credit facility |
243 | (557,000 | ) | |||||
Repayments on bank term loan |
| (112,699 | ) | |||||
Repayments on Ohio Development loan |
(104,167 | ) | (125,000 | ) | ||||
Proceeds from Subordinated Debt |
| 1,450,000 | ||||||
Repayments of Subordinated Debt |
(20,000 | ) | (2,000,000 | ) | ||||
Financing costs incurred |
(19,900 | ) | (158,180 | ) | ||||
Principal payments on capital lease obligations |
(3,252 | ) | (12,980 | ) | ||||
Net proceeds from issuance of preferred stock |
35,000 | 2,064,203 | ||||||
Net cash provided by (used in) financing activities |
(112,076 | ) | 548,344 | |||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
8,375 | (248,032 | ) | |||||
CASH and CASH EQUIVALENTS, BEGINNING OF PERIOD |
9,157 | 257,189 | ||||||
CASH and CASH EQUIVALENTS, END OF PERIOD |
$ | 17,532 | $ | 9,157 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION: |
||||||||
Interest paid |
$ | 463,397 | $ | 543,624 | ||||
Income taxes paid |
$ | | $ | 5,755 | ||||
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES: |
||||||||
Preferred stock fees and dividends paid in common stock |
$ | 143,149 | $ | 224,027 | ||||
Issuance of preferred stock for acquisition of
SocketSerial assets |
$ | 450,000 | $ | | ||||
See accompanying notes to consolidated financial statements.
F-6
Table of Contents
DPAC Technologies Corp.
Notes to Consolidated Financial Statements
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
DPAC Technologies Corp., (DPAC) through its wholly owned subsidiary, Quatech Inc., (Quatech)
designs, manufactures, and sells device connectivity and device networking solutions for a broad
market. Quatech sells its products through a global network of distributors, system integrators,
value added resellers, and original equipment manufacturers (OEM). Quatech designs and
manufactures communication and data acquisition products for personal computer based systems. The
Company sells to customers in both domestic and foreign markets.
Going
Concern
The Companys financial statements have been prepared on a going concern basis. Certain conditions
exist that raise substantial doubt about the Companys ability to continue as a going concern.
These conditions include continued operating losses, declines in working capital balances and the
inherent risk in extending or refinancing our bank line of credit, which matures on July 31, 2010.
Our ability to continue as a going concern is dependent upon our ability to establish positive cash
flows from operations and to raise additional financing. Management believes that it has taken the
necessary steps to achieve positive cash flows from operations, including the acquisition of a
product line and reduction and management of the Companys operating costs. The Companys continued
ability to obtain financing may be unavailable if and when needed. The accompanying financial
statements have been prepared assuming that the Company will continue as a going concern. As such,
they do not include adjustments relating to the recoverability of recorded asset amounts and
classification of recorded assets and liabilities that might result from the outcome of this
uncertainty.
The accompanying financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. Some historical amounts have been reclassified
to be consistent with the current financial presentation.
Liquidity
The Company ended 2009 with a cash balance of $17,000 and a deficit in working capital of
$1,343,000 and ended 2008 with a cash balance of $9,000 and a deficit in working capital of
$805,000. This compares to a cash balance of $257,000 and a deficit in working capital of
$3,745,000 at the end of 2007. The Company has taken the following actions to reduce expense and
increase capital. During the quarter ended March 31, 2008, the Company consummated an equity and
financing transaction that provided $491,000 in net cash after paying off the then due existing
debt. In October 2008, the Company secured additional Senior Subordinated Debt financing of
$250,000. In the third quarter of 2008, the Company took actions to reduce its cash operating
expenses to align its cost structure with current economic conditions and a downturn in the
Companys revenue levels, resulting in annualized operating cost savings of approximately $600,000.
Additionally, during the first quarter of 2009, the Company entered into an agreement with one of
its contract manufactures to sell certain equipment and inventory, lease a portion of its facility
to the manufacturer, and further engage the manufacturer to produce more of the Companys products
(see Note 13 for more information). This transaction provided $150,000 in cash and is expected to
improve the operating efficiency of the Company. In the third quarter of 2009, the Company
implemented additional cost reduction measures by reducing headcount and implementing a salary
reduction program for all employees resulting in annual operating costs reductions of approximately
$400,000. On September 30, 2009, the Company acquired the SocketSerial product line in a non cash
transaction for the Company (see Note 2 for more information), and management believes that margins
generated from future revenues of this product line will help enable the Company to achieve a cash
flow break even from operations.
F-7
Table of Contents
Although the Company reported a loss of $1,133,000 for 2009, a significant portion of our operating
expenses are non-cash, including depreciation and amortization of $595,000, non-cash compensation
expense for stock options of $119,000, and non-cash interest expense of $108,000. Going forward,
the Company is dependent on financing its operations through the use of its bank line of credit and
the contribution from future revenues. Management believes that the actions it has taken will help
enable the Company to generate positive cash flows from operations. Additionally, the Company
experienced an increase in the rate of new orders during the first quarter of 2010, resulting
in a 75% increase in the size of its backlog of firm orders from
$540,000 at December 31, 2009
to $945,000 at the beginning of the second quarter of 2010. However, a further downturn in
our revenue levels can severely impact the availability under our line of credit and limit our
ability to meet our obligations on a timely basis and finance our operations as needed. At December
31, 2009 we had remaining net availability under our line of credit of approximately $131,000. The
Company may find it necessary to raise additional capital to fund its operations, however, there
can be no assurance that additional capital will be available on acceptable terms, if at all, if
and when it may be needed.
Merger
On April 28, 2005, DPAC entered into a merger agreement, as amended, with Quatech for a transaction
to be accounted for as a purchase under accounting principles generally accepted in the United
States of America. The merger was approved by both Quatech and DPAC shareholders on February 23,
2006 and was consummated on February 28, 2006. For accounting purposes, the transaction is
considered a reverse merger under which Quatech is considered the acquirer of DPAC. Accordingly,
the purchase price was allocated among the fair values of the assets and liabilities of DPAC, while
the historical results of Quatech are reflected in the results of the combined company (the
Company) prior to the merger date. The results of operations are those of Quatech and DPAC combined after the merger
date. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Actual results could differ from those estimates.
The Company calculates its reserve for excess and obsolete inventory based on the best estimate
available as to the value of the items, and capitalizes labor and overhead to inventory based on
estimates of applicable expenses. The Company estimates an allowance for doubtful accounts of its
accounts receivable based upon a review of delinquent accounts and an assessment of the Companys
historical evidence of collections. Additionally, the Company calculated its warranty reserve on
the best available measure of claims. Because of the inherent uncertainties in estimating the
above, it is at least reasonably possible that the estimates used could change within the near
term.
F-8
Table of Contents
Cash and Cash Equivalents
The Company considers all short-term debt securities purchased with an initial maturity of three
months or less to be cash equivalents.
Accounts Receivable
The Company extends unsecured credit to customers under normal trade agreements, which generally
require payment within 30 days. Accounts greater than 90 days past due are considered delinquent.
The Company does not charge interest on delinquent trade accounts receivable. Unless specified by
the customer, payments are applied to the oldest unpaid invoice. Accounts receivable are presented
at the amounts billed.
Management estimates an allowance for doubtful accounts, which was $26,674, and $50,447 as of
December 31, 2009 and 2008, respectively. The estimate is based upon managements review of
delinquent accounts and an assessment of the Companys historical evidence of collections. The
Company incurred $1,000 and $25,000 of bad debt expense for the years ended December 31, 2009 and
2008, respectively. Specific accounts are charged directly to the reserve when management obtains
evidence of a customers insolvency or otherwise determines that the account is uncollectible.
Charge-offs of specific accounts for the years ended December 31, 2009 and 2008 totaled $24,773 and
$0, respectively.
Inventories
Inventories, consisting principally of raw materials, sub-assemblies and finished goods, are stated
at the lower of average cost or market. The Company regularly monitors inventories for excess or
obsolete items and records a provision to write-down excess or obsolete items as required.
Property
Property is stated at cost less accumulated depreciation and amortization. Depreciation is computed
using the straight-line method over the estimated useful lives of the related assets, generally
ranging from 3 to 11 years. Leasehold improvements are amortized on a straight-line basis over the
shorter of the useful lives of the improvements or the term of the related lease.
Capitalized Developed Software
Certain software development costs are capitalized after a product becomes technologically feasible
and before its general release to customers. Significant judgment is required in determining when a
product becomes technologically feasible. Capitalized development costs are then amortized over
the products estimated life beginning upon general release of the product. Periodically, we
compare a products unamortized capitalized cost to the products net realizable value. To the
extent unamortized capitalized cost exceeds net realizable value based on the products estimated
future gross revenues (reduced by the estimated future costs of completing and selling the product)
the excess is written off. This analysis requires us to estimate future gross revenues associated
with certain products and the future costs of completing and selling certain products. Changes in
these estimates could result in write-offs of capitalized software costs. The Company capitalized
software development costs of $29,282 and $162,375 for the years ended December 31, 2009 and 2008,
respectively.
F-9
Table of Contents
Financing Costs
Financing costs incurred are amortized over the life of the associated financing arrangements using
the effective interest method. Amortization expense totaled approximately $50,000 and $58,000 for
the years ended December 31, 2009 and 2008, respectively.
Long-lived Assets
The Company assesses potential impairments to its long-lived assets when there is evidence that
events or changes in circumstances indicate the carrying amount of an asset may not be recovered.
An impairment loss is recognized when the undiscounted cash flows expected to be generated by an
asset (or group of assets) is less than its carrying amount. Any required impairment loss is
measured as the amount by which the assets carrying value exceeds its fair value, and is recorded
as a reduction in the carrying value of the related asset and a charge to operations.
Goodwill and Intangible Assets
Goodwill is tested for impairment annually or more frequently when events or circumstances indicate
that the carrying value of the Companys single reporting unit more likely than not exceeds its
fair value. The Company utilizes the two step test as required to assess goodwill for impairment.
The first step of the goodwill impairment test consisted of comparing the carrying value of the
reporting unit to its fair value. Management estimated the fair value of the Company using various
methods and compared the fair value to the carrying amount (net book value) to ascertain if
potential goodwill impairment existed. The Company utilized methods that focused on its ability to
produce income (Income Approach) and the estimated consideration it would receive if there were a
sale of the Company (Market Approach). Key assumptions utilized in the determination of fair
value in step one of the test included the following: the Companys market capitalization; market
multiples of comparable companies within its industry; revenue and expense forecasts used in the
evaluation were based on trends of historical performance and managements estimate of future
performance; cash flows utilized in the discounted cash flow analysis were estimated using a
weighted average cost of capital determined to be appropriate for the Company. If the fair value of
the Company is determined to be less than the fair value of the net assets, goodwill is deemed
impaired and an impairment loss is recognized to the extent that the carrying value of goodwill and
other intangibles exceed the difference between the fair value of the Company and the fair value of
all other assets and liabilities. At December 31, 2009, there was no impairment of goodwill and
other intangibles based on the Companys most recent analysis.
Intangible assets with indefinite lives at December 31, 2009 and 2008 are comprised of goodwill of
$3,822,503 and the Quatech trade name and customer list of $2,583,000.
Amortizable Intangible Assets
Net amortizable intangible assets at December 31, 2009 and 2008 of $621,684 and $1,061,704,
respectively, consists of developed technology and customer related intangibles acquired in the
DPAC Quatech merger on February 28, 2006. The fair value was determined to be $2,450,094 at the
acquisition date and is being amortized over its estimated life of 5 years, with accumulated
amortization of $1,878,310 and $1,388,390 at December 31, 2009 and 2008. Additionally, the 2009
balance includes $50,000 for the fair value of the customer list acquired on September 30, 2009
with the SocketSerial product line. Amortization expense for 2009 and 2008 was $490,020 per year
and is expected to remain approximately $490,000 annually until the intangible assets are fully
amortized. The SocketSerial customer list has an expected life of 5 years and will begin to be
amortized in January 2010.
F-10
Table of Contents
Revenue Recognition
Revenue on sales to customers is recognized upon shipment provided that persuasive evidence of a
sales arrangement exists, the price is fixed or determinable, title has transferred, collection of
resulting receivables is reasonably assured, and there are no remaining significant obligations.
Revenue on sales to distributors where a right of return exists is recognized upon sell-through,
when products are shipped from the distributor to the distributors customer. Revenue related to
those products in our distribution channel at the end of each reporting period which has not
sold-through is deferred. The amount of deferred revenue net of related cost of revenue is
classified as an other current liability on the Companys balance sheet.
A reserve for defective products is recorded for customers based on historical experience or
specific identification of an event necessitating a reserve. Development revenue is recognized when
services are performed and was not significant for any of the periods presented.
The Company also offers marketing incentives to certain customers. These incentives are incurred
based on the level of expenses the customers incur and are charged to operations as expenses in the
same period.
Advertising Costs
The cost of advertising is charged to expense as incurred. Advertising expense for the years ended
December 31, 2009 and 2008 totaled approximately $64,000 and $179,000, respectively.
Shipping and Handling Costs
The costs of shipping and handling billed to customers in sale transactions are recorded as
revenue. Costs incurred for shipping and handling to customers are reported in cost of good sold.
Total shipping and handling costs incurred to ship goods to customers were approximately $68,000
and $88,000 for the years ended December 31, 2009 and 2008, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit
risk consist principally of accounts receivable, which are derived primarily from distributors,
original equipment manufacturers, and end customers.
The Company maintains its cash balances primarily in one financial institution which is insured
under the Federal Deposit Insurance Corporation. The Company had no uninsured cash balances at
December 31, 2009.
Stock-Based Compensation
The Company recognizes compensation expense, using a fair-value based method, for costs related to
all share-based payments including stock options and stock issued under our employee stock plans.
The Company estimates the fair value of share-based payment awards on the date of grant using a
Black-Scholes option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense on a straight-line basis over the requisite service
periods in our consolidated statements of operations.
F-11
Table of Contents
Income Taxes
Deferred tax assets and liabilities are determined based on temporary differences between financial
reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The Company records a
valuation allowance against deferred tax assets when it is more likely than not that such assets
will not be realized. During the years ended December 31, 2009 and 2008, the Company recorded a
full valuation allowance associated with its net deferred tax assets.
As of December 31, 2009, the Companys income tax years from
2006 and thereafter remain subject to examination by the Internal
Revenue Service, as well as various state and local taxing
authorities.
Net Income (Loss) per Share
Basic earnings per share are computed by dividing net income (loss) by the weighted-average number
of common shares outstanding for the period. Diluted earnings (loss) per share reflect the
potential dilution of securities by including other common stock equivalents, including stock
options, in the weighted-average number of common shares outstanding for a period, if dilutive.
The table below sets forth the reconciliation of the denominator of the earnings per share
calculation:
2009 | 2008 | |||||||
Shares used in computing basic net income
(loss) per share |
104,367,000 | 94,893,000 | ||||||
Dilutive effect of stock options and warrants (1)(2) |
| | ||||||
Shares used in computing diluted net income
(loss) per share |
104,367,000 | 94,893,000 | ||||||
(1) | For the 2009 and 2008 periods presented, the diluted net loss per share is equivalent
to the basic net loss per share because the Company experienced losses in these years and
thus no potential common shares underlying stock options, warrants, or convertible
preferred stock have been included in the net loss per share calculation. Options and
warrants to purchase 8,181,000 and 7,749,000 shares of Common Stock in 2009 and 2008,
respectively, have been omitted from the loss per share calculation as their effect is
anti-dilutive. |
|
(2) | Also excluded from both the 2009 and 2008 periods computations are the potential of
approximately 71 million and 50 million common shares that would have been issued upon the
conversion of the total number of shares of Preferred Stock outstanding at each date,
respectively, at the option of the preferred shareholders. |
The number of shares of common stock, no par value, outstanding at December 31, 2009 and 2008
was 109,414,896 and 98,006,343, respectively.
Preferred Stock
At December 31, 2009 the Company had outstanding 30,000 shares of convertible, voting, cumulative,
9% Series A preferred stock. Dividends accrue and are payable quarterly in arrears at the annual
rate of 9% of the Original Issue Price of $100 per share, either in cash or common stock, at the
decision of the Company. If the Company is not listed for trading on the American Stock Exchange, a
NASDAQ Stock Market or the New York Stock Exchange on December 31, 2009, effective beginning
January 1, 2010 dividends shall accrue and be paid quarterly in arrears at the annual rate of 15%.
For purposes of valuing the common stock payable to holders of Series A Preferred in lieu of cash
with respect to such quarterly dividends, the value shall be deemed to be the average of the
closing bid or sale prices (whichever is applicable) over the 10 day period ending the day prior
the dividend payment date. All dividends paid through December 31, 2009, have been paid with the
issuance of common shares. During the year ended December 31, 2009, the Company issued 11,408,553
common shares in payment of dividends of $191,252. At December 31, 2009, the Company had accrued
dividends of $67,500, of which $50,000 is distributable in common stock, equating to 3,571,429
common shares issuable, and $17,500 of which is accrued to be paid in cash.
F-12
Table of Contents
Series A preferred stock can, at the option of the holder, be converted into fully paid shares of
common stock. The number of shares of common stock into which shares of Series A preferred may be
converted shall be obtained by multiplying the number of shares of Series A preferred to be
converted by the Original Issue Price of $100 and dividing the result by the product of $0.034 (the
Reference Price) times 1.25, which equates to approximately 71 million common shares should the
total number of outstanding preferred shares be converted. After December 31, 2009, the Company can
redeem the Series A preferred shares at a price per share equal to the Original Issue Price. The
holders of preferred stock have preference in the event of liquidation or dissolution of the
Company over the holders of common stock.
Fair Value of Financial Instruments
The carrying value of the Companys cash and cash equivalents, accounts receivable, accounts
payable, and debt approximate fair value due to the relatively short period of time to maturity.
Fair Value Measurements
In September 2006, the FASB issued ASC No. 820, Fair Value Measurements (ASC 820, and previously
referred to as Statement No. 157). The accounting pronouncement establishes a three-level hierarchy
which prioritizes the inputs used in measuring fair value. In general, fair value determined by
Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities. Fair
values determined by Level 2 inputs utilize data points that are observable such as quoted prices,
interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data
points for the asset or liability, and includes situations in which there is little, if any, market
activity for the asset or liability.
The following table represents our financial assets and liabilities measured at fair value on a
recurring basis and the basis for that measurement:
Fair Value Measurement at December 31, 2009 Using: | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Total | Active Markets | Observable | Unobservable | |||||||||||||
Fair Value | for Identical Assets | Inputs | Inputs | |||||||||||||
Measurement | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Put Warrant Liability: |
||||||||||||||||
December 31, 2009 |
$ | 100,300 | | $ | 100,300 | | ||||||||||
December 31, 2008 |
$ | 116,100 | | $ | 116,100 | | ||||||||||
The Company values the put warrant liability by calculating the difference between the Companys
closing stock price at the end of a reporting period and the exercise price per share multiplied by
the number of warrants granted. The Company has classified the fair value of the warrants as a
liability and changes in the fair value of the warrants are recognized in the earnings of the
Company. The Company recognized gains of $15,800 and $12,900 for the years ended December 31, 2009
and 2008, respectively, related to the change in value of the put warrant liability. In addition,
the actual settlement amount of the put warrant liability could differ materially from the value
determined based on the Companys stock price. There was no change in the valuation technique used
by the Company since the last reporting period.
F-13
Table of Contents
The Subordinated Debt Agreement, which funded on January 31, 2008, provides for a formula driven
success fee equal to 7.0 times the trailing twelve months EBITDA minus indebtedness plus cash,
times 5.5%, to be paid at maturity or a triggering event. The success fee is being accounted for as
a separate contingent component of the note and will be revalued at each reporting period. The
success fee is calculated at the end of each reporting period based on the trailing twelve months
EBITDA, with the resultant amount multiplied by the percentage of the loan period remaining at each
measurement date. As such, the liability is trued up at each reporting period based on the time
elapsed, with the remaining unamortized portion of the success fee accreted monthly as additional
interest expense over the remaining term of the loan. Based on the results of the above
calculation, the Company recorded no liability for the success fee as of December 31, 2009 or 2008.
There was no change in the valuation technique used by the Company since the last reporting period.
Comprehensive Income
The Company had no items of other comprehensive income for 2009 and 2008.
Recently Issued Accounting Standards
In January 2009, the Securities and Exchange Commission (SEC) issued Release No. 33-9002,
Interactive Data to Improve Financial Reporting. The final rule requires companies to provide
their financial statements and financial statement schedules to the SEC and on their corporate
websites in interactive data format using the eXtensible Business Reporting Language (XBRL). The
rule was adopted by the SEC to improve the ability of financial statement users to access and
analyze financial data. The SEC adopted a phase-in schedule indicating when registrants must
furnish interactive data. Under this schedule, the Company will be required to submit filings with
financial statement information using XBRL commencing with its June 30, 2011 quarterly report on
Form 10-Q. The Company is currently evaluating the impact of XBRL reporting on its financial
reporting process.
Effective July 1, 2009, the Company adopted The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles (formerly SFAS No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162). This standard establishes only two levels of U.S.
generally accepted accounting principles (GAAP), authoritative and nonauthoritative. The
Financial Accounting Standard Board (FASB) Accounting Standards Codification (the Codification)
became the source of authoritative, nongovernmental GAAP, except for rules and interpretive
releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other
non-grandfathered, non-SEC accounting literature not included in the Codification became
nonauthoritative. The Company began using the new guidelines and numbering system prescribed by the
Codification when referring to GAAP in the third quarter of fiscal 2009. As the Codification was
not intended to change or alter existing GAAP, adoption did not have any impact on the Companys
financial condition, results of operations or cash flows.
In October 2009, the FASB amended revenue recognition guidance for arrangements with multiple
deliverables. The guidance eliminates the residual method of revenue recognition and allows the use
of managements best estimate of selling price for individual elements of an arrangement when
vendor specific objective evidence (VSOE), vendor objective evidence (VOE) or third-party
evidence (TPE) is unavailable. This guidance should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15,
2010, with early adoption permitted. Full retrospective application of the guidance is optional.
The Company is currently evaluating the impact of adopting this guidance on its financial
statements.
F-14
Table of Contents
In October 2009, the FASB issued guidance which amends the scope of existing software revenue
recognition accounting. Tangible products containing software components and non-software
components that function together to deliver the products essential functionality would be scoped
out of the accounting guidance on software and accounted for based on other appropriate revenue
recognition guidance. This guidance should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15,
2010, with early adoption permitted. Full retrospective application of the new guidance is
optional. This guidance must be adopted in the same period that the Company adopts the amended
accounting for arrangements with multiple deliverables described in the preceding paragraph. The
Company is currently evaluating the impact of adopting this guidance on its financial statements.
In January 2010, the FASB issued guidance which clarifies and provides additional disclosure
requirements related to recurring and non-recurring fair value measurements. The Company must
implement these new requirements in its first quarter of fiscal 2010. Certain additional
disclosures about purchases, sales, issuances and settlements in the roll forward of activity in
Level 3 fair value measures are not effective until fiscal years beginning after December 15, 2010.
Other than requiring additional disclosures, implementation of this new guidance will not have a
material impact on the Companys financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current years presentation.
NOTE 2 PRODUCT LINE ACQUISITION
On September 30, 2009, in a non-cash transaction for the Company, the Company acquired from Socket
Mobile, Inc. (Socket) the SocketSerial product line and all assets of Socket which pertain to
Sockets serial card business (the Business), including the tangible personal property and assets
of Socket related to the Business; rights to any contract, purchase order, license or other
agreement to the ownership, manufacture and distribution of the assets; certain rights to the
intellectual property and proprietary rights related to or useful in connection with the Business
and customer lists; the SocketSerial brand name and the SocketSerial website. The products in the
SocketSerial product line consist of a CompactFlash serial card, a PC serial card, a PC dual serial
card, and a PC quad serial card, all with fixed and removable cable models. Also included are a USB
to Serial Adapter, USB to Ethernet Adapter and a license to sell the Cordless Serial Adapter.
Quatech intends to continue to manufacture and distribute the SocketSerial product line and assumed
existing customer support responsibilities. The transaction was completed with the assistance of
Development Capital Ventures, LP (DCV), the Companys majority shareholder. DCV initially
purchased the Assets from Socket and immediately transferred the Assets to the Company in exchange
for 8,750 shares of the Companys Series A Preferred Stock.
The Assets were acquired for a purchase price of $500,000, of which $450,000 was payable at
closing, and a contingent $50,000 payment will be payable upon the attainment by Quatech of
$250,000 in quarterly sales revenue from the sale of SocketSerial products in any quarter through
the quarter ending December 31, 2010. The purchase price was allocated as follows:
Equipment |
$ | 10,000 | ||
Developed software |
390,000 | |||
Customer list |
50,000 | |||
Total |
$ | 450,000 | ||
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Table of Contents
The acquired Assets were not placed fully into service until December 31, 2009 and will begin being
depreciated in January 2010 under their respective lives, estimated to be 5 years, on a straight
line basis.
NOTE 3 INVENTORIES
At December 31, 2009 and 2008, inventories are comprised of the following:
2009 | 2008 | |||||||
Raw materials and sub-assemblies |
$ | 811,600 | $ | 878,669 | ||||
Finished goods |
547,816 | 671,955 | ||||||
Less: reserve for excess and obsolete inventory |
(282,677 | ) | (184,677 | ) | ||||
$ | 1,076,739 | $ | 1,365,947 | |||||
Purchases of finished assemblies from two major vendors represented 43% and 23% of the total
inventory purchased in 2009 and purchases from three major vendors represented 29%, 12%, and 10% of
inventory purchased in 2008. The Company has arrangements with these vendors to purchase product
based on purchase orders periodically issued by the Company.
NOTE 4 PROPERTY
At December 31, 2009 and 2008, property consisted of the following:
2009 | 2008 | |||||||
Leasehold improvements |
$ | 103,714 | $ | 103,714 | ||||
Machinery and equipment |
328,197 | 519,288 | ||||||
Computer software and equipment |
611,462 | 609,792 | ||||||
Office furniture and equipment |
79,602 | 79,602 | ||||||
Internally developed software |
191,657 | 162,375 | ||||||
Developed embedded software |
390,000 | | ||||||
1,704,632 | 1,474,771 | |||||||
Less: Accumulated depreciation |
(958,876 | ) | (1,007,779 | ) | ||||
Net property |
$ | 745,756 | $ | 466,992 | ||||
Depreciation expense totaled approximately $86,000 and $113,000 for the years ended December 31,
2009 and 2008, respectively.
The Company had $0 and $46,919 of equipment purchased under Capital Leases included in Machinery
and equipment at December 31, 2009 and 2008, respectively.
F-16
Table of Contents
NOTE 5 INCOME TAXES
The income tax benefit consists of the following for the years ended December 31, 2009 and 2008:
2009 | 2008 | |||||||
Current: |
||||||||
Federal |
$ | | $ | | ||||
State |
| | ||||||
Total current |
| | ||||||
Deferred: |
||||||||
Federal |
(375,602 | ) | (205,047 | ) | ||||
State |
(44,188 | ) | (24,123 | ) | ||||
Total deferred |
(419,790 | ) | (229,170 | ) | ||||
Change in valuation allowance |
419,790 | 229,170 | ||||||
Deferred income tax provision net |
| | ||||||
Total income tax provision |
$ | | $ | | ||||
At December 31, 2009 and 2008, net deferred tax balances consisted of the following:
2009 | 2008 | |||||||
Deferred tax assets |
||||||||
Accounts receivable |
$ | 10,136 | $ | 19,170 | ||||
Accrued expenses |
40,911 | 44,572 | ||||||
Inventory |
115,853 | 77,729 | ||||||
Intangibles |
646,507 | 554,036 | ||||||
General business credits |
135,562 | 146,099 | ||||||
Nonqualified stock options |
62,606 | 17,245 | ||||||
Stock warrants |
38,114 | 44,118 | ||||||
Net operating loss caryforward |
4,507,300 | 4,136,009 | ||||||
5,556,989 | 5,038,978 | |||||||
Valuation allowance |
(4,460,376 | ) | (4,040,586 | ) | ||||
Deferred tax assets, net |
1,096,613 | 998,392 | ||||||
Deferred tax liabilities |
||||||||
Property, plant and equipment |
(33,743 | ) | (11,176 | ) | ||||
Intangibles |
(1,062,870 | ) | (987,216 | ) | ||||
Deferred tax liabilities, net |
(1,096,613 | ) | (998,392 | ) | ||||
Deferred taxes, net |
$ | | $ | | ||||
Amounts included in balance sheets: |
||||||||
Current deferred tax assets |
$ | | $ | | ||||
Long-germ deferred tax liability |
| | ||||||
Deferred taxes, net |
$ | | $ | | ||||
Included in the total deferred tax assets, the Company has an income tax carryforward for federal
net operating losses. The cumulative federal net operating loss carryforward of approximately
$11,861,000 expires through 2029; however, as a result of the merger between Quatech, Inc. and DPAC
Technologies Corp, a substantial portion of DPACs federal net operating loss carryforward is
subject to the provisions of Sec. 382 of the Internal Revenue Code (IRC), and therefore, is not
available for immediate benefit to the company. Management has not yet determined the final impact
of the IRC Sec. 382 limitation on the federal net operating loss carryforward. The realization of
the Companys deferred tax assets, including this federal net operating loss, and the related
valuation allowance are significant estimates requiring assumptions regarding the sufficiency of
future taxable income to realize the future tax deduction from the reversal of deferred tax assets
and the net operating loss prior to their expiration. The valuation allowance has been provided
based upon the Companys assessment of future realizability of certain deferred tax assets, as it
is more likely than not that sufficient taxable income will not be generated to realize these
temporary differences. The net increase in the valuation allowance was $419,790 for 2009 and
$229,170 for 2008. The amount of the corresponding valuation allowance could change significantly
in the near term if estimates of future taxable income are changed.
The Company recognizes deferred tax assets and liabilities based on the differences between the
financial statement carrying values and the tax bases of assets and liabilities. The 2009 and 2008
valuation allowances were calculated using an assessment of both negative and positive evidence
when measuring the need for a valuation allowance. Evidence evaluated by management included
operating results during the most recent three-year period and future projections, with more weight
given to historical results than expectations of future profitability, which are inherently
uncertain. The Companys net losses in recent periods represented sufficient negative evidence to
require a full valuation allowance against its net deferred tax assets. This valuation allowance
will be evaluated periodically and could be reversed partially or totally if business results have
sufficiently improved to support realization of deferred tax assets.
A reconciliation of the Companys effective tax rate compared to the federal statutory rate is as
follows:
2009 | 2008 | |||||||
Federal statutory rate |
(34 | )% | (34 | )% | ||||
State taxes |
0 | 0 | ||||||
Valuation allowance |
34 | 31 | ||||||
Other |
0 | 3 | ||||||
0 | % | 0 | % | |||||
F-17
Table of Contents
NOTE 6 DEBT
At December 31, 2009 and 2008, outstanding debt consisted of the following:
2009 | 2008 | |||||||
Revolving credit facility |
$ | 1,425,243 | $ | 1,425,000 | ||||
Long term debt: |
||||||||
Ohio Development Loan: |
||||||||
Principal balance |
$ | 1,933,279 | $ | 2,037,445 | ||||
Accrued participation fee |
173,445 | 127,817 | ||||||
2,106,724 | 2,165,262 | |||||||
Less: current portion |
| (125,000 | ) | |||||
Net long-term portion |
2,106,724 | 2,040,262 | ||||||
Subordinated debt: |
||||||||
Principal balance |
$ | 1,430,000 | $ | 1,450,000 | ||||
Accrued success fee |
| | ||||||
Less: Unamortized discount for stock warrants |
(39,351 | ) | (52,107 | ) | ||||
1,390,649 | 1,397,893 | |||||||
Less: current portion |
(230,000 | ) | | |||||
Net long-term portion |
$ | 1,160,649 | $ | 1,397,893 | ||||
Total Current Portion of Long-term Debt |
$ | 230,000 | $ | 125,000 | ||||
Total Net Long-term Debt |
$ | 3,267,373 | $ | 3,438,155 | ||||
On January 31, 2008, the Company consummated equity and financing transactions which consisted of
an issuance of preferred stock and the funding of a new senior bank line of credit and subordinated
term loan. In conjunction with the closing on January 31, 2008, the Company terminated its lending
relationships with and paid in full its debt obligations with National City Bank and the
Subordinated Loan Agreement with the Hillstreet Fund, notwithstanding the put warrant liability for
the Hillstreet Fund.
Revolving Credit Facility
The Company has a revolving line of credit with a Bank providing for a maximum $2,000,000 working
capital line of credit through December 31, 2009, and $1,500,000 thereafter. At December 31, 2009,
the facility had a floating interest rate at the 30 day LIBOR (.24% at December 31, 2009) plus
6.5%. On March 30, 2010, the Company entered into a Second Amendment to Credit Agreement, effective
as of January 31, 2010, extending the maturity date to July 31, 2010, and modifying the interest
rate to the Banks Revolver LIBOR Rate, plus 8.5%. Interest is payable monthly on the last day of
each month, until maturity. The Company must pay to the Bank an extension fee of $25,000 at
maturity (subject to reduction if all amounts owed to the Bank are repaid prior to the maturity
date). Additionally, the Company paid to the Bank $7,500 in fees. The Bank waived certain events
of default occurring under the Credit Agreement, including covenant non-compliance. All other
terms and conditions of the Credit Agreement remain unchanged by the Amendment. Availability under
the line of credit is formula driven based on applicable balances of the Companys accounts
receivable and inventories. Based on the formula, at December 31, 2009 the Company had availability
to draw up to a maximum of approximately $1,556,000, leaving net availability of $131,000. For
2009, the average debt balance on the line of credit was $1,409,000 and the weighted average
interest rate was 6.5%, with the interest rate ranging from 4.75% to 7.0%. The line of credit
contains certain financial covenants that the Company was in not in compliance with at December 31,
2009. As previously reported, defaults were waived by the Bank in an agreement dated March 30,
2010. The Credit Facility is secured by substantially all of the assets of the Company and expires
on July 31, 2010.
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Table of Contents
Ohio Development Loan
On January 27, 2006 Quatech entered into a Loan Agreement with the Director of Development of the
State of Ohio pursuant to which Quatech borrowed $2,267,000 for certain eligible project financing.
The State of Ohio debt accrues interest at the rate of 9.0% per year. Payments of interest only
were due and payable monthly from March 2006 through February 2007. Thereafter, Quatech was
obligated to make 48 consecutive monthly principal payments of $10,417 plus interest with the then
balance due on February 1, 2011. In November 2009, the Company and the Director of Development of
the State of Ohio came to an agreement of understanding to modify the repayment schedule and
extend the maturity date. Per the agreement of understanding, the Company is required to make only
monthly interest payments from November 2009 through
December 2010. Thereafter, Quatech is
obligated to make monthly principal payments of $10,417 plus interest
through January 2013, with
the remaining balance due January 31, 2013. At maturity, Quatech must also pay the State of Ohio a
participation fee equal to the lesser of 10% of the maximum principal amount borrowed or $250,000.
The State of Ohio debt is secured by all the assets of Quatech which security interest is
subordinated to the interest of the Bank. The participation fee is being accrued as additional
interest each month over the term of the loan. Documentation pertaining to finalizing the agreement
of understanding between the Company and the Director of Development of the State of Ohio was not
complete at the time of this filing.
Subordinated Debt
On January 31, 2008, the Company entered into a Senior Subordinated Note and Warrant Purchase
Agreement (Agreement) with Canal Mezzanine Partners, L.P. (Canal), for $1,200,000. The
subordinated note has a stated annual interest rate of 13% and a five year maturity date. Interest
only payments are payable monthly during the first five years of the note with all principal due
and payable on the fifth anniversary of the note. The Agreement also provides for a formula driven
success fee based on a multiple of the trailing twelve months EBITDA, to be paid at maturity or a
triggering event, and for issuance of warrants entitling Canal to purchase 3% of the Companys
fully diluted shares at time of exercise at a nominal purchase price.
In October 2008, the Company entered into an Amendment to the Agreement securing additional Senior
Subordinated Debt financing from Canal of $250,000, which was due and payable on February 15, 2009.
In March 2010, the Company and Canal came to agreement, effective November 1, 2009, that Quatech
would be obligated to make monthly principal payments of $20,000 plus interest through March 31,
2010 and beginning April 1, 2010, monthly principal payments of $25,000 plus interest until the
additional financing loan is paid in full. The agreement also increases the interest on the
additional financing from 13% to 16% per annum.
The warrants associated with the Canal debt have a 10 year life and are exercisable at any time.
The subordinated note has been discounted by the fair value of the detachable warrants, with a
corresponding contribution to capital. The discount, calculated to be $63,800 at time of issuance,
is being amortized as additional interest expense and accretes the note to face value at maturity.
The Company determined the fair value of the warrant by using the Black-Scholes pricing model and
calculating 3% of fully diluted shares at time of issuance, including a potential 50 million common
shares for the conversion of the outstanding Series A preferred stock, which equated to
approximately 4.9 million shares and using the closing stock price on the date of the transaction
of $0.014 per share.
F-19
Table of Contents
The success fee is defined as equal to 7.0 times the trailing twelve months EBITDA minus
indebtedness plus cash, times 5.5%, to be paid at maturity or a triggering event. The success fee
is being accounted for as a separate contingent component of the note and will be revalued at each
reporting period. The success fee is calculated at the end of each reporting period based on the
trailing twelve months EBITDA, with the resultant amount multiplied times the percentage of the
loan period remaining at each measurement date. As such, the liability is trued up at each
reporting period based on the time elapsed, with the remaining unamortized portion of the success
fee accreted monthly as additional interest expense over the remaining term of the loan. No success
fee was accrued at December 31, 2009 based on the formula calculation.
In connection with the Amendment for additional financing, Canal is entitled to increase the
multiplier in the success fee, as described above, from 5.5% to 6.0%.
Put Warrant Liability
In connection with the Subordinated Loan Agreement between the Company and the Hillstreet Fund,
entered into on February 28, 2006 and which was paid in full on January 31, 2008, the Company was
obligated to issue 5,443,457, and per certain default provisions is obligated to issue 1,006,000
additional, 10-year warrants (Put Warrants) at an exercise price of $0.00001 per share. The
warrants expire on February 28, 2016. The Put Warrants continue to remain outstanding and can be
put to the Company at any time based on criteria set forth in the warrant agreement at a price
equal to the greatest of (i) the fair market value as established by a capital transaction or
public offering; (ii) six times the Companys EBITDA for the trailing 12 month period; and (iii) an
appraised value. The Company values the put warrant liability by calculating the difference
between the Companys closing stock price at the end of a reporting period and the exercise price
per share multiplied by the number of warrants granted. The Company has classified the fair value
of the warrants as a liability and changes in the fair value of the warrants are recognized in the
earnings of the Company. The Company recognized gains of $15,800 and $12,900 for the years ended
December 31, 2009 and 2008, respectively, related to the change in value of the put warrant
liability. In addition, the actual settlement amount of the put warrant liability could differ
materially from the value determined based on the Companys stock price.
The aggregate amounts of combined long term debt, excluding the put warrant liability, maturing as
of December 31st in future years is $230,000 in 2010, $125,000 in 2011, $125,000 in 2012, and
$3,017,000 in 2013.
Interest expense incurred of $580,000 for the year ended December 31, 2009 included the following
non-cash charges: accretion of success fees of $46,000, amortization of deferred financing costs of
$50,000, and amortization of the discount for warrants of $13,000.
Interest expense incurred of $695,000 for the year ended December 31, 2008 included the following
non-cash charges: accretion of success fees of $46,000, amortization of deferred financing costs of
$58,000, and amortization of the discount for warrants of $12,000.
F-20
Table of Contents
NOTE 7 COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases office and operation facilities in Hudson, Ohio under an operating lease
arrangement that expires on March 31, 2014. The minimum annual rentals under this lease are being
charged to expense on a straight line basis over the lease term. Deferred rents were $13,500 as of
December 31, 2009 and $21,150 as of December 31, 2008. The facility lease requires additional
payments for property taxes, insurance and maintenance costs. Additionally, the Company leases
certain equipment under operating leases. The Company had no capital leases as of December 31,
2009.The following table summarizes the future minimum payments under the Companys operating
leases at December 31, 2009:
Fiscal Year Ending | Operating | |||
2010 |
$ | 160,000 | ||
2011 |
160,000 | |||
2012 |
160,000 | |||
2013 |
160,000 | |||
2014 |
40,000 | |||
Total minimum lease payments |
$ | 680,000 | ||
Rent expense under operating leases was approximately $122,000 and $199,000 for the years ended
December 31, 2009 and 2008, respectively. Rent expense of $122,000 for 2009 is net of rental
receipts of $59,000 as the Company has sublet a portion of its facility in Hudson, OH to one of its
contract manufacturers.
Legal Proceedings
We are subject to various legal proceedings and threatened legal proceedings from time to time as
part of our business. We are not currently party to any legal proceedings nor are we aware of any
threatened legal proceedings, the adverse outcome of which, individually or in the aggregate, we
believe would have a material adverse effect on our business, financial condition and results of
operations. However, any potential litigation, regardless of its merits, could result in
substantial costs to us and divert managements attention from our operations. Such diversions
could have an adverse impact on our business, results of operations and financial condition.
Other Contingent Contractual Obligations
Over time, the Company has made and continues to make certain indemnities, commitments and
guarantees under which it may be required to make payments in relation to certain transactions.
These include: indemnities to past, present and future directors, officers, employees and other
agents pursuant to the Companys Articles, Bylaws, resolutions, agreements or otherwise;
indemnities to various lessors in connection with facility leases for certain claims arising from
such facility or lease; indemnities to vendors and service providers pertaining to claims based on
the negligence or willful misconduct of the Company; and indemnities pursuant to contracts
involving protection of selling security holders against claims by third parties arising from any
alleged inaccuracy of information in registration statements filed by the Company with the SEC or
involving indemnification of the other parties to contracts from any damages arising from
misrepresentations made by the Company. The Company may also issue a guarantee in the form of a
standby letter of credit as security for contingent liabilities under certain customer contracts.
The duration of these indemnities, commitments and guarantees varies and, in certain cases, may be
indefinite. The majority of these indemnities, commitments and guarantees may not provide for any
limitation of the future payments that the Company could potentially be obligated to make. The
Company has not recorded any liability for these indemnities, commitments and guarantees in the
accompanying balance sheets.
F-21
Table of Contents
The Companys written severance agreements with the current CEO and CFO that provided for
compensation equivalent to one year of compensation and six months of compensation, respectively,
should either individual be terminated for any reason other than cause, expired as of June 30,
2009. The Company anticipates that new contracts with similar terms will be implemented.
NOTE 8 RESTRUCTURING COSTS
As a result of the merger on February 28, 2006, Quatech assumed accrued restructuring costs of
approximately $1,119,000, which consisted primarily of accrued severance costs for prior employees
of DPAC. During 2006, the Company incurred approximately $78,000 in restructuring costs which
consisted of severance costs for the termination of an employee of Quatech. Additionally, in 2009
the Company incurred $12,097 of restructuring costs related to severance expenses.
A summary of the activity that affected the Companys accrued restructuring costs for the years
ended December 31, 2009 and 2008 is as follows:
Balance December 31, 2007 |
$ | 320,680 | ||
Amounts expensed |
| |||
Amounts paid |
(278,314 | ) | ||
Balance December 31, 2008 |
$ | 42,366 | ||
Amounts expensed |
12,097 | |||
Amounts paid |
(54,463 | ) | ||
Balance December 31, 2009 |
$ | | ||
NOTE 9 STOCK OPTION PLANS
The Company recognizes compensation expense, using a fair-value based method, for costs related to
all share-based payments including stock options and stock issued under our employee stock plans.
The Company estimates the fair value of share-based payment awards on the date of grant using a
Black-Scholes option-pricing model. The value of the portion of the award that is ultimately
expected to vest is recognized as expense on a straight-line basis over the requisite service
periods in our consolidated statements of operations.
Under the terms of the Companys 1996 Stock Option Plan, (the Plan), qualified and nonqualified
options to purchase shares of the Companys common stock are available for issuance to employees,
officers, directors, and consultants. As amended on February 23, 2006, the Plan initially called
for options to purchase 15,000,000 shares with an increase to the total number of options available
in the plan of 4% of the number of outstanding shares of common stock each year until the end of
the option plan. On February 23, 2006, the termination date for the plan was extended to January
11, 2011. At December 31, 2009, 16,512,000 shares were available for future grants under the Plan.
Options issued under this Plan are granted with exercise prices at fair market value and generally
vest immediately for options granted to directors and at a rate of 25% per year for options granted
to employees, and expire within 10 years from the date of grant or 90 days after termination of
employment.
F-22
Table of Contents
During the years ended December 31, 2009 and 2008, the Company recognized compensation expense for
stock options of $119,371 and $74,067. The expense is included in the consolidated statement of
operations as general and administrative expense. Total unamortized compensation expense related to
non-vested stock option awards at December 31, 2009 was $129,000, which is expected to be
recognized over a weighted-average period of 1.1 years. The Companys calculations were made using
the Black-Scholes option-pricing model, with the following weighted average assumptions:
2009 | 2008 | |||||||
Expected life |
6.5 years | 6.5 years | ||||||
Volatility |
297 | % | 195 | % | ||||
Interest rate |
2.0 | % | 2.6 | % | ||||
Dividends |
None | None |
Expected volatilities are based on historical volatility of the Companys stock. The Company used
historical experience with exercise and post employment termination behavior to determine the
options expected lives. The expected life represents the period of time that options granted are
expected to be outstanding. The risk-free rate is based on the U.S. Treasury rate with a maturity
date corresponding to the options expected life. The dividend yield is based upon the historical
dividend yield.
The following table summarizes stock option activity under DPACs 1996 Stock Option Plans for the
year ended December 31, 2009 and 2008:
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | Aggregrate | ||||||||||||||
Number of | Exercise | Contractural | Intrinsic | |||||||||||||
Shares | Price | Life | Value | |||||||||||||
Outstanding December 31, 2007 |
10,545,001 | $ | 0.86 | |||||||||||||
Granted (weighted-average
fair value of $0.04) |
3,250,000 | $ | 0.04 | |||||||||||||
Exercised |
| $ | 0.00 | |||||||||||||
Canceled |
(912,876 | ) | $ | 0.95 | ||||||||||||
Outstanding December 31, 2008 |
12,882,125 | $ | 0.86 | |||||||||||||
Granted (weighted-average
fair value of $0.03) |
2,050,001 | $ | 0.03 | |||||||||||||
Exercised |
| $ | 0.00 | |||||||||||||
Canceled |
(381,190 | ) | $ | 1.04 | ||||||||||||
Outstanding December 31, 2009 |
14,550,936 | $ | 0.42 | 5.9 Years | $ | | ||||||||||
Exercisable December 31, 2009 |
11,175,936 | $ | 0.53 | 4.8 Years | $ | | ||||||||||
No options were exercised in 2009 and 2008.
F-23
Table of Contents
The outstanding and exercisable options at December 31, 2009 presented by price range are as
follows:
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Weighted- | Wgt. Avg. | Weighted- | ||||||||||||||||||||||
Average | Remaining | Average | ||||||||||||||||||||||
Range of | Number | Exerciese | Contractual | Number | Exercise | |||||||||||||||||||
Exercise Prices | Outstanding | Price | Life | Exercisable | Price | |||||||||||||||||||
$0.01 |
$ | 0.49 | 12,471,636 | $ | 0.07 | 6.55 | 9,096,636 | $ | 0.08 | |||||||||||||||
$0.50 |
$ | 1.49 | 950,000 | $ | 1.03 | 3.68 | 950,000 | $ | 1.03 | |||||||||||||||
$1.50 |
$ | 2.49 | 564,300 | $ | 1.74 | 1.61 | 564,300 | $ | 1.74 | |||||||||||||||
$2.50 |
$ | 7.56 | 565,000 | $ | 5.82 | 0.65 | 565,000 | $ | 5.82 | |||||||||||||||
14,550,936 | $ | 0.42 | 5.94 | 11,175,936 | $ | 0.53 | ||||||||||||||||||
NOTE 10 CONCENTRATION OF CUSTOMERS
One customer accounted for 11% of net sales for 2009 and no single customer accounted for more than
10% of net sales in 2008. The same customer accounted for 13% of accounts receivable at December
31, 2009.
NOTE 11 SEGMENT INFORMATION
Operating segments are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the Companys chief operating
decision-maker, or decision-making group, in deciding how to allocate resources and in assessing
performance. The Companys chief executive officer reviews financial information and makes
operational decisions based upon the Company taken as a whole. Therefore, the Company reports as a
single segment.
The Company had export sales that accounted for 23% and 26% of total net sales in 2009 and 2008,
respectively. Export sales were primarily to Western European countries, Canada, Brazil, and
Singapore. Foreign sales are made in U.S dollars. All long-lived assets are located in the United
States.
NOTE 12 EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan covering substantially all employees. The Company
matches 25% of employee deferral contributions up to 6% of eligible wages, as defined. The Company
contributed matching contributions of approximately $15,000 and $23,000 in the years ended December
31, 2009 and 2008, respectively.
NOTE 13 SALE OF MANUFACTURING CAPABILITY
The Company entered into an Equipment Purchase Agreement (the Agreement) that was consummated in
January 2009 with one of its contract manufacturers (Manufacturer) and sold certain of its
manufacturing equipment (consisting of manufacturing equipment, fixtures, tools, shelving and
tables) for a sale price of $74,000. The Manufacturer also assumed the obligations of Quatech
under a certain capital lease with a remaining balance of approximately $21,000 at December 31,
2008. Also pursuant to the Agreement, Quatech sold certain inventory valued at a sum of $150,000.
Quatech and Manufacturer have agreed that Manufacturer will purchase additional active inventory
thereafter from Quatech under terms and conditions to be determined. Also pursuant to the
Agreement, the Company sublet to Manufacturer 4,911 square feet of space at the Companys
manufacturing facility located in Hudson, OH. Additionally, The Company has agreed to utilize
Manufacturer as its manufacturer of all products and parts for existing products of the Company
(other than under the Companys Airborne wireless product line) for a period of 24 months under
terms and conditions to be determined by the parties. A negligible loss was recorded with regard to
the transaction as the assets were sold at the Companys approximate net carrying value of the
assets.
F-24