Attached files
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EX-32.1 - EXHIBIT 32.1 - DPAC TECHNOLOGIES CORP | c17087exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - DPAC TECHNOLOGIES CORP | c17087exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
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 (State or Other Jurisdiction of Incorporation or Organization) |
33-0033759 (IRS Employer Identification No.) |
|
5675 HUDSON INDUSTRIAL PARK, HUDSON, OHIO (Address of Principal Executive Offices) |
44236 (Zip Code) |
(800) 553-1170
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES 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).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:
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 number of shares of common stock, no par value, outstanding as of April 28, 2011 was
141,995,826.
Table of Contents
CAUTIONARY STATEMENT RELATED TO FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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 under Part I, Item 2, 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 and Annual Reports on Form 10-K.
HOW TO OBTAIN DPACS SEC FILINGS
All reports filed by DPAC 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, DC 20549
3
Table of Contents
PART IFINANCIAL INFORMATION
Item 1. Financial Statements. |
DPAC Technologies Corp.
Condensed Consolidated Balance Sheets
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 56,060 | $ | 47,870 | ||||
Accounts receivable, net |
1,152,661 | 1,159,122 | ||||||
Inventories |
973,168 | 898,418 | ||||||
Prepaid expenses and other current assets |
130,653 | 37,358 | ||||||
Total current assets |
2,312,542 | 2,142,768 | ||||||
PROPERTY, net |
591,650 | 631,769 | ||||||
DEFERRED FINANCING COSTS, net |
60,096 | 68,291 | ||||||
TRADEMARKS |
2,583,000 | 2,583,000 | ||||||
GOODWILL |
3,822,503 | 3,822,503 | ||||||
AMORTIZABLE INTANGIBLE ASSETS, net |
37,000 | 121,664 | ||||||
OTHER ASSETS |
16,133 | 16,133 | ||||||
TOTAL |
$ | 9,422,924 | $ | 9,386,128 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Revolving credit facility |
$ | 1,500,000 | $ | 1,500,000 | ||||
Short term note |
35,088 | | ||||||
Current portion of long-term debt |
320,000 | 320,000 | ||||||
Accounts payable |
1,206,790 | 1,127,512 | ||||||
Put warrant liability |
119,100 | 110,900 | ||||||
Other accrued liabilities |
614,451 | 512,410 | ||||||
Total current liabilities |
3,795,429 | 3,570,822 | ||||||
LONG-TERM LIABILITIES: |
||||||||
Ohio Development loan, less current portion |
1,945,037 | 1,971,972 | ||||||
Subordinated debt, less current portion |
1,176,594 | 1,191,724 | ||||||
Total long-term liabilities |
3,121,631 | 3,163,696 | ||||||
COMMITMENTS AND CONTINGENCIES |
||||||||
STOCKHOLDERS EQUITY: |
||||||||
Convertible, voting, cumulative, 15% series A preferred stock, $100 par value;
30,000 shares authorized; 30,000 shares issued and outstanding at
March 31, 2011 and December 31, 2010 |
2,499,203 | 2,499,203 | ||||||
Common stock, no par value, 500,000,000 shares authorized;
141,995,826 and 109,414,896 shares issued and outstanding at
March 31, 2011 and December 31, 2010, respectively |
6,266,018 | 5,755,728 | ||||||
Preferred stock dividends distributable in common stock; 2,250,883 and
32,580,930 common shares at March 31, 2011 and December 31, 2010, respectively |
112,500 | 465,000 | ||||||
Accumulated deficit |
(6,371,857 | ) | (6,068,321 | ) | ||||
Total stockholders equity |
2,505,864 | 2,651,610 | ||||||
TOTAL |
$ | 9,422,924 | $ | 9,386,128 | ||||
See accompanying notes to consolidated financial statements.
4
Table of Contents
DPAC Technologies Corp.
Condensed Consolidated Statements of Operations
(Unaudited)
(Unaudited)
For the three months ended: | ||||||||
March 31, | March 31, | |||||||
2011 | 2010 | |||||||
NET SALES |
$ | 2,012,419 | $ | 1,769,020 | ||||
COST OF GOODS SOLD |
1,173,045 | 927,027 | ||||||
GROSS PROFIT |
839,374 | 841,993 | ||||||
OPERATING EXPENSES |
||||||||
Sales and marketing |
237,107 | 175,431 | ||||||
Research and development |
214,096 | 187,727 | ||||||
General and administrative |
343,525 | 289,876 | ||||||
Amortization of intangible assets |
94,246 | 132,087 | ||||||
Total operating expenses |
888,974 | 785,121 | ||||||
INCOME (LOSS) FROM OPERATIONS |
(49,600 | ) | 56,872 | |||||
OTHER EXPENSES: |
||||||||
Interest expense |
133,236 | 152,692 | ||||||
Fair value adjustment for put warrant liability |
8,200 | | ||||||
141,436 | 152,692 | |||||||
LOSS BEFORE INCOME TAX PROVISION |
(191,036 | ) | (95,820 | ) | ||||
INCOME TAX PROVISION |
| | ||||||
NET LOSS |
$ | (191,036 | ) | $ | (95,820 | ) | ||
PREFERRED STOCK DIVIDENDS |
112,500 | 112,500 | ||||||
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS |
$ | (303,536 | ) | $ | (208,320 | ) | ||
NET LOSS PER SHARE: |
||||||||
Net Loss Basic and diluted |
$ | 0.00 | $ | 0.00 | ||||
WEIGHTED AVERAGE SHARES OUTSTANDING: |
||||||||
Basic and diluted |
120,275,000 | 109,415,000 | ||||||
See accompanying notes to consolidated financial statements.
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Table of Contents
DPAC Technologies Corp.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Unaudited)
For the three months ended | ||||||||
March 31, | March 31, | |||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (191,036 | ) | $ | (95,820 | ) | ||
Adjustments to reconcile net loss to net cash
provided by operating activities: |
||||||||
Depreciation and amortization |
128,783 | 170,681 | ||||||
Provision for obsolete inventory |
12,000 | 12,000 | ||||||
Accretion of discount and success fees on debt |
(10,815 | ) | 7,504 | |||||
Amortization of deferred financing costs |
8,195 | 9,151 | ||||||
Fair value adjustment for put warrant liability |
8,200 | | ||||||
Non-cash compensation expense |
45,290 | 19,677 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
6,461 | (41,441 | ) | |||||
Inventories |
(86,750 | ) | 115,294 | |||||
Prepaid expenses and other assets |
(93,295 | ) | (53,757 | ) | ||||
Accounts payable |
79,278 | (392,612 | ) | |||||
Other accrued liabilities |
102,041 | 271,853 | ||||||
Net cash provided by operating activities |
8,352 | 22,530 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Property additions |
(4,000 | ) | (19,230 | ) | ||||
Net cash used in investing activities: |
(4,000 | ) | (19,230 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Net borrowings under revolving credit facility |
| 74,757 | ||||||
Net borrowing under short term notes |
35,088 | 35,060 | ||||||
Repayments on Ohio Development loan |
(31,250 | ) | | |||||
Repayments on Subordinated Debt |
| (25,000 | ) | |||||
Dividends paid |
| (17,500 | ) | |||||
Net cash provided by financing activities |
3,838 | 67,317 | ||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
8,190 | 70,617 | ||||||
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD |
47,870 | 17,532 | ||||||
CASH & CASH EQUIVALENTS, END OF PERIOD |
$ | 56,060 | $ | 88,149 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION: |
||||||||
Interest paid |
$ | 126,212 | $ | 96,246 | ||||
Accrued preferred stock dividends distributable in common stock |
$ | 112,500 | $ | 95,000 | ||||
Common stock issued in payment of preferred stock dividends |
$ | 465,000 | $ | | ||||
See accompanying notes to consolidated financial statements.
6
Table of Contents
DPAC TECHNOLOGIES CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(UNAUDITED)
NOTE 1 Summary of Significant Accounting Policies
Nature of Operations
DPAC Technologies Corp., (DPAC) through its wholly owned subsidiary, Quatech Inc., (Quatech)
designs 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 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 recent operating losses, deficit working capital balances and the inherent
risk in extending or refinancing our bank line of credit, which matures on May 31, 2011. Our
ability to continue as a going concern is dependent upon our ability to maintain positive cash
flows from operations and to raise additional financing. Management believes that it has taken the
necessary steps to achieve and maintain positive cash flows from operations, including the
acquisition of a product line and reduction and management of the Companys operating costs. 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.
Liquidity
At March 31, 2011, the Company had a cash balance of $56,000 and a deficit in working capital of
$1,483,000. At December 31, 2010, the Company had a cash balance of $48,000 and a deficit in
working capital of $1,428,000. Although the Company has reported net losses in recent periods, a
significant portion of our operating expenses are non-cash. During the first three months of 2011,
the Company reported a net loss of $191,000, which included the following non-cash operating
expenses: depreciation and amortization of $129,000, non-cash compensation expense for stock
options of $45,000, and a charge of $8,200 for the put warrant adjustment. For 2010, the Company
reported a net loss of $665,000, which included the following non-cash operating expenses:
depreciation and amortization of $684,000, provision for excess inventory of $166,000, non-cash
compensation expense for stock options of $68,000, and non-cash interest expense of $95,000.
The Company has taken the following actions to reduce expenses and increase capital: During the
first quarter of 2009, the Company entered into an agreement with one of its contract manufacturers
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. This transaction
provided $150,000 in cash and has improved 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. Margins generated from revenues of this
product line have helped enable the Company to achieve a cash flow break even from operations. In
March 2011, the Company entered into a Fourth Amendment to Credit Agreement extending the maturity
date of its Bank revolving credit facility to May 31, 2011.
Going forward, the Company is dependent on financing its operations from the contributions
generated from future revenues and the use of its bank line of credit. 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 over shipments during
the first three months of 2011, resulting in a 81% increase in the size of its backlog of firm
orders from $664,000 at December 31, 2010 to $1,200,000 at the beginning of the second quarter of
2011. However, a 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. The Company is currently talking to its current lender to extend the maturity
date and also to a number of other potential lenders with the intent of replacing the bank line of
credit, which matures on May 31, 2011 (as previously reported on the Companys Current Report on
Form 8-K, filed March 31, 2011).The Company was fully drawn on its line of credit at March 31,
2011. 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.
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Table of Contents
Interim financial Statements
The accompanying unaudited consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim financial
information and in accordance with the instructions to Form 10-Q and Article 8-03 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial statements. In
the opinion of management, all material adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation have been included. Operating results for the three months ended
March 31, 2011 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2011.
All intercompany transactions and balances have been eliminated in
consolidation.
For further information, refer to the audited financial statements and footnotes thereto of DPAC
for the year ended December 31, 2010
which were filed on Form 10-K on April 15, 2011.
Use of Estimates
In accordance with accounting principles generally accepted in the United States, management
utilizes estimates and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial statements as well
as the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates. These estimates and assumptions relate to recording net revenue,
collectibility of accounts receivable, useful lives and impairment of tangible and intangible
assets, accruals, income taxes, inventory realization, stock-based compensation expense and other
factors. Management believes it has exercised reasonable judgment in deriving these estimates.
Consequently, a change in conditions could affect these estimates.
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 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 |
||||||||||||||||
March 31, 2011 |
$ | 119,100 | | $ | 119,100 | | ||||||||||
December 31, 2010 |
$ | 110,900 | | $ | 110,900 | | ||||||||||
Success Fee |
||||||||||||||||
March 31, 2011 |
$ | | | $ | | | ||||||||||
December 31, 2010 |
$ | 18,319 | | $ | 18,319 | | ||||||||||
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The Company values the put warrant liability at the end of each reporting period by calculating the
difference between the put price per share as defined in the Warrant Agreement 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 a loss of $8,200 for the three months ended
March 31, 2011 and no gain or loss for the comparable period in 2010, related to the change in
value of the put warrant liability. In the current year period, the Company calculated the put
price per share by using the Companys stock book value as defined in the Warrant Agreement,
resulting in a per share value of $0.019. In prior periods, the Company has used the closing stock
price to value the put warrant liability as it has approximated the per share book value. In
addition, the actual settlement amount of the put warrant liability could differ materially from
the value determined.
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 6.0%, 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. Based on the results of the above
calculation, the Company recorded no liability for the success fee as of March 31, 2011, resulting
in a gain of $18,319 for the three months ended March 31, 2011. There was no change in the
valuation technique used by the Company since the last reporting period.
New Accounting Pronouncements
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.
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 provision was adopted and did not have a material effect on the financial position, results of
operations or cash flows of the Company.
In April 2010, the FASB issued Accounting Standards Update 2010-13 (ASU 2010-13),
CompensationStock Compensation (Topic 718). ASU 2010-13 provides amendments to ASC Topic 718 to
clarify that an employee share-based payment award with an exercise price denominated in the
currency of a market in which a substantial portion of the entitys equity securities trades should
not be considered to contain a condition that is not a market, performance, or service condition.
Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as
equity. The amendments in ASU 2010-13 are effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2010. The adoption of the provisions of ASU
2010-13 did not have a material effect on the financial position, results of operations or cash
flows of the Company.
In December 2010, the FASB issued an Accounting Standards Update 2010-28(ASU 2010-28),
IntangiblesGoodwill and Other (Topic 350). ASU 2010-28 amends ASC Topic 350. ASU 2010-28
clarifies the requirement to test for impairment of goodwill. ASC Topic 350 requires that goodwill
be tested for impairment if the carrying amount of a reporting unit exceeds its fair value. Under
ASU 2010-28, when the carrying amount of a reporting unit is zero or negative an entity must assume
that it is more likely than not that a goodwill impairment exists, perform an additional test to
determine whether goodwill has been impaired and calculate the amount of that impairment. The
modifications to ASC Topic 350 resulting from the issuance of ASU 2010-28 are effective for fiscal
years beginning after December 15, 2010 and interim periods within those years. Early adoption is
not permitted. The adoption of the provisions of ASU 2010-28 did not have a material effect on the
financial position, results of operations or cash flows of the Company.
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NOTE 2 Inventories
Inventories consist of the following:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Finished goods |
$ | 710,447 | $ | 613,009 | ||||
Raw materials and sub-assemblies |
262,721 | 285,409 | ||||||
$ | 973,168 | $ | 898,418 | |||||
Purchases of finished assemblies and components from three major vendors represented 40%, 29% and
22% of the total inventory purchased in the three months ended March 31, 2011, and four vendors
accounted for 36, 24%, 12% and 12% for the three month period ended March 31, 2010. The Company has
arrangements with these vendors to purchase product based on purchase orders periodically issued by
the Company.
NOTE 3 Property
Property consists of the following:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Leasehold improvements |
$ | 103,714 | $ | 103,714 | ||||
Machinery and equipment |
384,773 | 380,773 | ||||||
Computer software and equipment |
628,683 | 628,683 | ||||||
Office funiture and equipment |
79,602 | 79,602 | ||||||
Internally developed software |
191,657 | 191,657 | ||||||
Developed embedded software |
390,000 | 390,000 | ||||||
1,778,429 | 1,774,429 | |||||||
Less: accumulated depreciation and amortization |
(1,186,779 | ) | (1,142,660 | ) | ||||
Net property |
$ | 591,650 | $ | 631,769 | ||||
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Table of Contents
NOTE 4 Debt
At March 31, 2011 and December 31, 2010, outstanding debt is comprised of the following:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Revolving credit facility |
$ | 1,500,000 | $ | 1,500,000 | ||||
Long term debt: |
||||||||
Ohio Development Loan: |
||||||||
Principal balance |
$ | 1,875,018 | $ | 1,906,268 | ||||
Accrued participation fee |
195,019 | 190,704 | ||||||
2,070,037 | 2,096,972 | |||||||
Less: current portion |
(125,000 | ) | (125,000 | ) | ||||
Net long-term portion |
1,945,037 | 1,971,972 | ||||||
Subordinated debt: |
||||||||
Principal balance |
$ | 1,395,000 | $ | 1,395,000 | ||||
Accrued success fee |
| 18,319 | ||||||
Less: Unamortized discount for stock warrants |
(23,406 | ) | (26,595 | ) | ||||
1,371,594 | 1,386,724 | |||||||
Less: current portion |
(195,000 | ) | (195,000 | ) | ||||
Net long-term portion |
$ | 1,176,594 | $ | 1,191,724 | ||||
Total Current Portion of Long-term Debt |
$ | 320,000 | $ | 320,000 | ||||
Total Net Long-term Debt |
$ | 3,121,631 | $ | 3,163,696 | ||||
Revolving Credit Facility
The Company has a revolving line of credit with a Bank providing for a maximum facility of
$1,500,000 working capital line of credit through May 31, 2011. At March 31, 2011, the facility had
a floating interest rate at the 30 day LIBOR (.24% at March 31, 2011) plus 8.5%. Interest is
payable monthly on the last day of each month, until maturity. The Company is obligated to pay to
the Bank an extension fee of $17,500 per the terms of the Fourth Amendment, which extended the line
from December 15, 2010 to May 31, 2011, with $7,500 paid with the signing of the agreement in March
2011, and $10,000 due at maturity. 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
March 31, 2011 the Company had availability to draw up to the maximum line amount of $1,500,000.
The Credit Facility is secured by substantially all of the assets of the Company and expires on May
31, 2011.
As of March 31, 2011, we were not in compliance with certain of our bank financial covenants, which
included purchasing assets in excess of $100,000.00 from Socket Mobile, Inc. through the assistance
of Development Capital Venture, L.P. without the express written consent of the bank. These
defaults were waived by Fifth Third Bank by agreement (entered into in March, 2011), but any other
events of default were not waived. Each of the loan agreements with Canal Mezzanine Partners and
the State of Ohio provide for cross-default of such loans in the event the Company defaults on a
material agreement (such as the Bank credit facility) under certain terms. Further, each of the
loan agreements provide for restrictive covenants, including the incurrence of additional
indebtedness and certain equity financings, which restrict the Companys ability to access other
sources of liquidity, absent refinancing all of the existing indebtedness. The Company is currently
talking to a number of other potential lenders with the intent of replacing the bank line of credit
with a new facility; however, we have not at this time received a commitment from another source
that could replace the Bank line in its entirety. The Bank line currently is set to mature in May,
2011. Additionally, the Canal Mezzanine and State of Ohio loan agreements contain provisions that
accelerate the maturity and repayment of outstanding borrowings upon the acceleration of the Bank
debt.
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Short Term Note
The short term note is with a financial institution and was funded for $39,474 to finance insurance
premiums. The note bears interest at 7.0% per annum and calls for 9 monthly payments of $4,514,
beginning in March 2011.
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. During the second quarter of 2010, the repayments terms of the
note were modified by means of an Allonge to the original instrument and provided a new debt
amortization table. The modification deferred all monthly principal payments for a period of 11
months from October 2009 through September 2010 and extended the maturity date of the note. Per the
modified agreement, the Company was obligated to make only monthly interest payments from November
2009 through September 2010. Thereafter, Quatech is obligated to make monthly principal payments of
$10,417 plus interest through January 2013, with the remaining balance due in January 2013. The
Company is current on all payments through March 31, 2011. At maturity, Quatech is obligated to 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.
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. Effective March 1, 2011, the interest rate was
increased to 16%. 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. At March 31, 2011, the Company was in compliance with the
financial covenants of the agreement.
In October 2008, the Company entered into an Amendment to the Agreement providing for a second
tranche of 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 established a modified payment schedule and increased the interest rate from 13% to 16%
per annum. The Company repaid $55,000 of the principal balance. In April 2011, the Company and
Canal came to agreement extending the maturity date to July 31, 2011.
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.
The success fee is defined as equal to 7.0 times the trailing twelve months EBITDA minus
indebtedness plus cash, times 6.0%, 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. Based on
the formula calculation, there was no success fee accrued at March 31, 2011 and $18,319 was accrued
at December 31, 2010.
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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
issued 5,443,457, and per certain default provisions could be 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 has determined
to value the put warrant liability by calculating the difference between the put price as defined
in the Warrant Agreement 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 recorded a loss of $8,200 for the three months ended March 31,
2011, and no gain or loss was recorded for the period ended March 31, 2010, for changes in the fair
value of the put warrant liability. The actual settlement amount of the put warrant liability could
differ materially from the value determined based on the Companys determination.
The aggregate amounts of combined long term debt, exclusive of the put warrant liability and the
unamortized discount for stock warrants, maturing as of March 31st in future years is $320,000 in
2012 and $3,121,631 in 2013.
NOTE 5 Concentration of Customers
Two customers accounted for 12% and 11% and no single customer accounted for more than 10% of net
sales for the three months ended March 31, 2011 and 2010, respectively. Two customers accounted for
12% and 11% of accounts receivable at March 31, 2011 and no single customer accounted for more than
10% of net accounts receivable at March 31, 2010. The Company has and will have customers ranging
from large OEMs to startup operations. Any inability to collect receivables from any such
customers could have a material adverse effect on the Companys financial position and liquidity.
NOTE 6 Net Income (Loss) Per Share
The Company computes net income (loss) per share by dividing the net income (loss) by the
weighted-average number of common shares outstanding for the period. Diluted earnings per share
reflect the potential dilution of securities by including other common stock equivalents, such as
stock options and warrants, in the weighted-average number of shares outstanding for a period.
Common stock equivalents are excluded from the calculation in loss periods, as the effect is
anti-dilutive.
The tables below set forth the reconciliation of the denominator of the income (loss) per share
calculations:
Three-months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Shares used in computing basic net income per share |
120,275,000 | 109,415,000 | ||||||
Dilutive effect of stock options and warrants(1)(2) |
| | ||||||
Shares used in computing diluted net income per share |
120,275,000 | 109,415,000 | ||||||
(1) | Potential common shares of 13,545,000 and 8,522,000 for the exercise of stock options
and warrants have been excluded from diluted weighted average common shares for the three
month periods ended March 31, 2011 and 2010, respectively, as the effect would be
anti-dilutive. |
|
(2) | Also excluded from both the March 31, 2011 and 2010 computations are the potential of
approximately 71 million common shares that would be issued upon the conversion of the
total number of shares of Preferred Stock outstanding, at the option of the preferred
shareholders. Also excluded are 2,251,000 and 7,170,000 common shares distributable in
payment of preferred stock dividends at March 31, 2011 and 2010, respectively. |
The number of shares of common stock, no par value, outstanding at April 28, 2011 was 141,995,826.
At March 31, 2011 the Company had outstanding 30,000 shares of convertible, voting, cumulative,
Series A preferred stock. Through December 31, 2009, dividends accrued and were 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. Effective January 1, 2010, dividends accrue and
are payable quarterly in arrears at the annual rate of 15% given that the Company is not listed for
trading on the American Stock Exchange, a NASDAQ Stock Market or the New York Stock Exchange. 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 to the
dividend payment date. At March 31, 2011, the Company has accrued dividends distributable in common
stock of $112,500, which equates to approximately
2,251,000 common shares issuable, and $17,500 of accrued dividends payable in cash. In March 2011,
the Company issued 32,580,930 shares of common stock in payment of accrued preferred stock
dividends payable in common stock of $465,000.
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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.
NOTE 7 Stock Options
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.
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 authorized
15,000,000 option shares with an annual increase to the total number of option shares available in
the plan equal to 4% of the total number of common shares outstanding 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 March 31, 2011, no additional shares are authorized to be granted since the plan has
terminated.
Options issued under this Plan are granted with exercise prices equal to the closing stock price on
the date of grant 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.
In January 2011, the Company granted stock options under the standard plan provisions of 1,000,000
shares to directors and 8,100,000 shares to employees for a total of 9,100,000 shares granted.
During the three-month periods ended March 31, 2011 and 2010, the Company recognized compensation
expense for stock options of $45,290 and $19,677 respectively. 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 March 31, 2011 was $160,000,
which is expected to be recognized over a weighted-average period of 1.9 years. The Companys
calculations were made using the Black-Scholes option-pricing model, with the following weighted
average assumptions:
For the Three Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 (1) | |||||||
Expected life |
6.5 Years | N/A | ||||||
Volatility |
369 | % | N/A | |||||
Interest rate |
2.5 | % | N/A | |||||
Dividend yield |
None | N/A |
(1) | No options were granted during the three months ended March 31, 2010. |
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.
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The following table summarizes stock option activity under DPACs 1996 Stock Option Plans for the
three months ended March 31, 2011:
Weighted- | ||||||||||||||||
Average | Weighted-Average | Aggregate | ||||||||||||||
Number of | Exercise | Remaining | Intrinsic | |||||||||||||
Shares | Price | Contractual Life | Value | |||||||||||||
Outstanding December 31, 2010 |
12,784,699 | $ | 0.21 | |||||||||||||
Granted |
9,100,000 | $ | 0.02 | |||||||||||||
Exercised |
| | ||||||||||||||
Canceled |
(1,066,256 | ) | $ | 0.36 | ||||||||||||
Outstanding March 31, 2011 |
20,818,443 | $ | 0.12 | 7.3 Years | $ | 451,400 | ||||||||||
Exercisable March 31, 2011 |
10,755,943 | $ | 0.21 | 6.0 Years | $ | 131,500 | ||||||||||
NOTE 8 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 as a whole. Therefore, the Company reports as a single
segment.
The Company had export sales of 21% and 29% of net sales for the three months ended March 31, 2011
and 2010, respectively. Export sales were primarily to Canada, Brazil, Singapore, and Western
European countries. Foreign sales are made in U.S. dollars. All long-lived assets are located in
the United States.
NOTE 9 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. The Company
exercises significant judgment relating to the projection of future taxable income to determine the
recoverability of any tax assets recorded on the balance sheet. 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. The Company has established a valuation allowance associated
with its net deferred tax assets.
As of March 31, 2011, the Companys prior three income tax years remain subject to examination by
the Internal Revenue Service, as well as various state and local taxing authorities.
The valuation allowance was calculated by 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.
NOTE 10 Commitments and Contingencies
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.
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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.
The Companys severance agreements with the current CEO and CFO provide 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.
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations.
Please refer to the Cautionary Statement Related to Forward-Looking Statements set forth on page 2
of this Report, which is incorporated herein by reference. The following discussion and analysis of
our financial condition and results of operations should be read in conjunction with the condensed
financial statements and notes to those statements included elsewhere in this Report.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Introduction/Business Overview
DPAC, through its wholly owned subsidiary, Quatech, designs 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).
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.
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 802.11 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. |
Risks
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 other 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.
Other primary factors that may in the future affect our results of operations include our efforts
to reduce our operating expenses and our fixed overhead. Our costs in any particular period could
include higher costs associated with stock-based compensation and / or higher costs associated with
adjusting the liability for warrants to their fair value through earnings at each reporting period.
These risks should be read in connection with the detailed risks associated with DPAC and Quatech
set forth under the caption Risk Factors contained in the Registrants Annual Report on Form 10-K
filed with the SEC on April 15, 2011.
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Table of Contents
Results of Operations and Financial Condition
Three Months Ended March 31, 2011 and 2010
The following table sets forth certain Condensed Consolidated Statement of Operations data in total
dollars, as a percentage of net revenues and as a percentage change from the same period in the
prior year. This information should be read in conjunction with the Consolidated Financial
Statements included elsewhere in this Form 10-Q.
For the Three Months Ended: | ||||||||||||||||||||||||
March 31, 2011 | March 31, 2010 | Change | ||||||||||||||||||||||
Results | % of Sales | Results | % of Sales | Dollars | % | |||||||||||||||||||
NET SALES |
$ | 2,012,419 | 100 | % | $ | 1,769,020 | 100 | % | $ | 243,399 | 14 | % | ||||||||||||
COST OF GOODS SOLD |
1,173,045 | 58 | % | 927,027 | 52 | % | 246,018 | 27 | % | |||||||||||||||
GROSS PROFIT |
839,374 | 42 | % | 841,993 | 48 | % | (2,619 | ) | 0 | % | ||||||||||||||
OPERATING EXPENSES |
||||||||||||||||||||||||
Sales and marketing |
237,107 | 12 | % | 175,431 | 10 | % | 61,676 | 35 | % | |||||||||||||||
Research and development |
214,096 | 11 | % | 187,727 | 11 | % | 26,369 | 14 | % | |||||||||||||||
General and administrative |
343,525 | 17 | % | 289,876 | 16 | % | 53,649 | 19 | % | |||||||||||||||
Amortization of intangible assets |
94,246 | 5 | % | 132,087 | 7 | % | (37,841 | ) | -29 | % | ||||||||||||||
Total operating expenses |
888,974 | 44 | % | 785,121 | 44 | % | 103,853 | 13 | % | |||||||||||||||
INCOME (LOSS) FROM OPERATIONS |
(49,600 | ) | -2 | % | 56,872 | 3 | % | (106,472 | ) | -187 | % | |||||||||||||
INTEREST EXPENSE |
133,236 | 7 | % | 152,692 | 9 | % | (19,456 | ) | -13 | % | ||||||||||||||
FAIR VALUE
ADJUSTMENT FOR PUT WARRANT LIABILITY |
8,200 | 0 | % | | 0 | % | 8,200 | |||||||||||||||||
LOSS BEFORE INCOME TAX PROVISION |
(191,036 | ) | -9 | % | (95,820 | ) | -5 | % | (95,216 | ) | 99 | % | ||||||||||||
INCOME TAX PROVISION |
| 0 | % | | 0 | % | | 0 | % | |||||||||||||||
NET LOSS |
$ | (191,036 | ) | -9 | % | $ | (95,820 | ) | -5 | % | $ | (95,216 | ) | 99 | % | |||||||||
PREFERRED STOCK DIVIDENDS |
112,500 | 6 | % | 112,500 | 6 | % | | 0 | % | |||||||||||||||
NET LOSS
ATTRIBUTABLE TO COMMON STOCKHOLDERS |
$ | (303,536 | ) | -15 | % | $ | (208,320 | ) | -12 | % | $ | (95,216 | ) | 46 | % | |||||||||
Net Sales. Net sales of $2.0 million for the quarter ended March 31, 2011 increased by
$243,000 or 14% as compared to the prior year first quarter. Net sales related to the Companys
Device Connectivity products increased by $42,000, or 4%, and net sales related to the Companys
Device Networking products, including the Airborne wireless product line, increased by $201,000, or
271% from the prior year period.
Gross Profit. Gross profit in absolute dollars decreased by $3,000. Gross profit as a
percentage of net sales decreased from 48% to 42%, due primarily to higher variable costs, with
direct material costs as a percentage of net sales increasing from 46% to 50%, due to the change in
product mix. Additionally, fixed overhead costs increased by $53,000 in the current year quarter
due to increased indirect material costs of $27,000, salaries and benefits of $13,000 and freight
and other cost of $13,000.
Sales and Marketing Expenses. Sales and marketing expenses for the quarter ended March 31,
2011 of $237,000 increased by $62,000 or 35% from the prior year first quarter, due to an increase
in salary and commissions of 28,000, advertising of $27,000 and travel related expenses of $7,000.
Research and Development Expenses. Research and development expenses of $214,000 for the
first quarter of 2011 increased by 26,000, or 14%, from the prior year period. The increase was due
to higher salaries and outside consulting expenses. The Company will continue to invest in research
and development to expand and develop new wireless products. See Forward-Looking Statements.
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General and Administrative Expenses. General and administrative expenses of $344,000
incurred for the first quarter of 2011 increased by $54,000 or 19% from the prior year period. The
increase was due primarily to higher salary expense of $28,000 and non-cash compensation expense
related to stock options of $25,000.
Amortization of Intangible Assets. Amortization expense decreased by $38,000, or 29%, due
to the technology acquired in the DPAC / Quatech merger being fully amortized as of February 28,
2011. $82,000 of the current year period amortization expense is for the amortization of purchased
technology acquired in the merger, and the balance of $12,000 in the current year period is the
amortization of capitalized developed software and customer lists being amortized over 5 years.
Interest Expense. The Company incurred interest and financing costs of $133,000 during the
first quarter of 2011, as compared to $153,000 for the same period in the prior year. The decrease
is due to the write down of $18,000 of accrued success fees for the Subordinated Debt in the
current year period. The following non-cash items are included in interest expense for the first
quarter of 2011: a gain for the adjustment of accrued success fees of $14,000, amortization of
deferred financing costs of $8,000, and amortization of the discount for warrants of $3,000. The
following non-cash charges are included in interest expense for the first quarter of 2010:
accretion of success fees of $4,000, amortization of deferred financing costs of $9,000, and
amortization of the discount for warrants of $3,000.
Fair Value Adjustment of Put Warrant Liability. The Company adjusts the liability for the
HillStreet Fund put warrant to its fair value, through earnings, at the end of each reporting
period. During the first quarter of 2011, the company recorded a loss of $8,200 compared to no gain
or loss for the first quarter of 2010.
Income Taxes. The Company has recorded a full valuation allowance against the Companys
related deferred tax assets. 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.
Preferred Stock Dividends. The Company has outstanding 30,000 shares of convertible,
cumulative, 15% Series A preferred stock, $100 stated value.
Liquidity and Capital Resources
At March 31, 2011, the Company had a cash balance of $56,000 and a deficit in working capital of
$1,483,000. At December 31, 2010, the Company had a cash balance of $48,000 and a deficit in
working capital of $1,428,000. Although the Company has reported net losses in recent periods, a
significant portion of our operating expenses are non-cash. During the first three months of 2011,
the Company reported a net loss of $191,000, which included the following non-cash operating
expenses: depreciation and amortization of $129,000, non-cash compensation expense for stock
options of $45,000, and a charge of $8,200 for the put warrant adjustment. For 2010, the Company
reported a net loss of $665,000, which included the following non-cash operating expenses:
depreciation and amortization of $684,000, provision for excess inventory of $166,000, non-cash
compensation expense for stock options of $68,000, and non-cash interest expense of $95,000.
The Company has taken the following actions to reduce expenses and increase capital: During the
first quarter of 2009, the Company entered into an agreement with one of its contract manufacturers
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. This transaction
provided $150,000 in cash and has improved 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. Margins generated from revenues of this
product line have helped enable the Company to achieve a cash flow break even from operations. In
March 2011, the Company entered into a Fourth Amendment to Credit Agreement extending the maturity
date of its Bank revolving credit facility to May 31, 2011.
Going forward, the Company is dependent on financing its operations from through the contribution
generated from future revenues and the use of its bank line of credit. 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 over shipments during
the first three months of 2011, resulting in a 81% increase in the size of its backlog of firm
orders from $664,000 at December 31, 2010 to $1,200,000 at the beginning of the second quarter of
2011. However, a 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. The Company is currently talking to a number of other
potential lenders with the intent of replacing the bank line of credit, which matures on May 31,
2011, with a new facility; however, we have not at this time received a commitment from another
source that could replace the Bank line in its entirety. The Company was fully drawn on its line of
credit at March 31, 2011. 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.
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The Company has a revolving line of credit with a Bank providing for a maximum $1,500,000 working
capital line of credit. The facility bears a floating interest rate at the Banks Revolver LIBOR
Rate (.24% at March 31, 2011) plus 8.5%. Availability under the line of credit is formula driven
based on applicable balances of the Companys accounts receivable and inventories. Based on the
formula calculation, the Company had availability to draw up to the maximum line amount of
$1,500,000, of which the Company was fully drawn at March 31, 2011. The Credit Facility is secured
by substantially all the assets of the Company and is scheduled to mature on May 31, 2011.
The actual amount and timing of working capital and capital expenditures that we may incur in
future periods may vary significantly and will depend upon many factors, including the amount and
timing of the receipt of revenues from operations, any potential acquisitions or divestitures, an
increase in manufacturing capabilities, the reduction of liabilities, the timing and extent of the
introduction of new products and services and growth in personnel and operations. If needed, there
can be no assurance that additional financing will be available on terms favorable to the Company,
if at all. If internally generated funds are inadequate, we may scale back expenditures or seek
other financing, which might include sales of equity securities that could dilute existing
shareholders. See Cautionary Statements.
Net cash provided by operating activities for the three months ended March 31, 2011 was $8,000 as
compared to $23,000 in the first three months of 2010. The net loss of $191,000 incurred in the
first three months of 2011 was offset by non-cash items, including depreciation and amortization,
non-cash compensation expense, accretion of success fees and amortization of deferred financing
costs, totaling $192,000. Cash was used to increase prepaids and other assets by $93,000, and fund
increases in inventories of $87,000. An increase in other accrued liabilities of $102,000 and in
accounts payable of $79,000 contributed to cash.
Net cash used in investing activities for property additions was $4,000 and $19,000 for the three
months ended March 31, 2011 and 2010, respectively.
Net cash provided by financing activities for the three months ended March 31, 2011 was $4,000 as
compared to $67,000 for the same period of 2010. Cash provided in the current year period
consisted of net borrowing of $35,000 in short term notes to finance insurance premiums, partially
offset by $31,000 in principal payments on the Ohio Development loan.
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 to acquire more than $50,000 in capital equipment during the remainder
of the fiscal year.
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 March 31, 2011, we did not
have any relationships with unconsolidated entities or financial partners, such as entities often
referred to as structured finance or special purpose 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
Purchase Commitments with Contract Manufacturers. We generally issue purchase orders to our
contract manufacturers with delivery dates from four to eight weeks from the purchase order date,
and longer when lead times dictate. 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 may in certain limited
circumstances allow us to delay receipt of such orders or cancel orders beyond certain agreed lead
times. Such cancellations, if any, may or may not result in cancellation costs payable by us.
Cancellation without contractual permission to do so would result in additional potential losses,
damages and costs. In the past, we have been
required to take delivery of materials from our suppliers that were in excess of our actual
requirements at the time of delivery, and we have previously recognized charges and expenses
related to such excess material. If we are unable to adequately manage our commitments to contract
manufacturers and adjust such commitments for changes in demand, we may incur additional costs and
expenses, including without limitation inventory expenses related to excess and obsolete inventory.
Such costs and 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. Because of macro
conditions impacting the entire electronics industry, lead times for certain components of the
Companys products have extended to beyond twenty weeks. 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.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting
principles generally accepted in the United States of America and the Companys discussion and
analysis of its financial condition and results of operations requires the Companys management to
make judgments, assumptions, and estimates that affect the amounts reported in its financial
statements and accompanying notes. Note 1 of the notes to DPACs audited financial statements,
filed on Form 10-K, describes the significant accounting policies and methods used in the
preparation of the Companys financial statements. Management bases its estimates on historical
experience and on various other assumptions that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities. Actual results may differ from these estimates.
Management believes the Companys critical accounting policies are those related to revenue
recognition, allowance for doubtful accounts, warranty reserves, inventory valuation, valuation of
long-lived assets including capitalized developed software, acquired intangibles, goodwill and
trademarks, accrual of income tax liability estimates, accounting for our put warrant liability,
and accounting for stock-based compensation. Management believes these policies to be critical
because they are both important to the portrayal of the Companys financial condition and results
of operations, and they require management to make judgments and estimates about matters that are
inherently uncertain.
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
postdelivery obligations other than warranty. In those instances where customers have right of
return, which typically would be for initial stocking orders for distributors, revenue is deferred
until confirmation has been received from the customer indicating that the product has shipped and
completed the sales cycle. Some distributors have annual stock rotation or return provisions which
are typically limited to 5% of the previous twelve months of shipments. In these situations, we
reserve the appropriate percentage against shipments throughout the period as deferred revenue. We
do not typically have any post delivery obligations other than warranty. 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.
Development revenue is recognized when services are performed and was not material for any of the
periods presented.
We establish an allowance for doubtful accounts and a warranty reserve based on historical
experience and believe the collection of revenues, net of these reserves, is reasonably assured.
The allowance for doubtful accounts is an estimate for potential non-collection of accounts
receivable based on historical experience and known circumstances regarding collectibility of
customer accounts. Accounts will be written off as uncollectible if the company determines the
amount cannot be collected. The Company typically has not experienced a non-collection of accounts
receivable materially affecting its financial position or results of operations. If the financial
condition of the Companys customers were to deteriorate causing an impairment of their ability to
make payments, additional provisions for bad debts may be required in future periods.
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The Company records a warranty reserve as a charge against earnings based on historical warranty
claims and estimated costs. If actual returns are not consistent with the historical data used to
calculate these estimates, additional warranty reserves could be required.
Inventories consist principally of raw materials, sub-assemblies and finished goods, which are
stated at the lower of average cost or market. The Company records an inventory reserve as a charge
against earnings for potential slow-moving or obsolete inventory. The reserve is evaluated
quarterly utilizing both historical movement over a three year period as compared to quantities
on-hand and qualitative factors related to the age of product lines. Significant changes in market
conditions, including potential changes in technology, in the future may require additional
inventory reserves.
We capitalize certain internally developed software costs 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. As
of March 31, 2011, $191,657 of software development costs were capitalized with accumulated
amortization of $67,080. The assets are being amortized on a straight line basis over their
estimated life of 5 years.
Goodwill and trademarks are subject to an impairment assessment annually on December
31st of each year and more often if conditions should dictate, which may result in a
charge to operations if the fair value of the reporting unit in which the goodwill is reported
declines. Other intangible assets are amortized over their estimated useful lives. The
determination of related estimated useful lives of other intangible assets and whether goodwill and
trademarks are impaired involves judgments based upon long-term projections of future performance.
The Company operates in a single business segment as a single business unit and annually reviews
the recoverability of the carrying value of goodwill using the methodology prescribed in FASB
guidance. Recoverability of goodwill is determined by comparing the fair value of the entire
Company to the accounting value of the underlying net assets. Based on the results of the most
recently completed analysis, the Companys goodwill and trademarks were not impaired as of December
31, 2010. No event has occurred as of or since the period ended December 31, 2010 that would give
management an indication that an impairment charge was necessary that would adversely affect the
Companys financial position or results of operations.
Deferred tax assets and liabilities are recorded in accordance with FASB guidance. 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 the Companys 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.
The Company values the put warrant liability at the end of a reporting period by calculating the
difference between the put price per share as defined in the Warrant Agreement and the exercise
price per share multiplied by the number of warrants granted. In accordance with FASB guidance, the
Company has classified the fair value of the put warrants as a liability and changes in the fair
value of the warrants are recognized in the earnings of the Company. Changes in the put price price
can have a material impact to the put warrant valuation and, therefore, to our financial
statements. Additionally, the actual settlement amount of the put warrant liability could differ
materially from the value determined.
The Company amortizes deferred debt issuance costs using the effective interest method.
Item 4 Controls and Procedures. |
An evaluation was carried out under the supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer and the Companys Chief Financial
Officer, of the effectiveness of the design and operation of the Companys disclosure controls and
procedures as of March 31, 2011, the end of the period covered by this report, as required by
Exchange Act Rule 13a15(b). The Companys disclosure controls were designed to provide reasonable
assurance that information required to be disclosed in reports filed or furnished under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the rules and forms of the Securities and Exchange Commission. It should be noted that the design
of any system of controls is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions, regardless of how remote. However, the
Companys disclosure controls have been designed to provide reasonable assurance of achieving the
controls stated goals. Based on the foregoing evaluation, the Companys Chief Executive Officer
and Chief Financial Officer concluded that the Companys disclosure controls and procedures were
effective at the reasonable assurance level. There were no changes in the Companys internal
control over financial reporting that occurred during the Companys most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
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PART IIOTHER INFORMATION
Item 1 Legal Proceedings. |
We are or could be subject to various legal proceedings and threatened legal proceedings from time
to time as part of the conduct of our business. We believe we are not currently party to any
material legal proceedings nor are we aware of any threatened material legal proceedings, the
adverse outcome of which, individually or in the aggregate, 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 costs and diversions could have a material adverse impact on our
business, results of operations and financial condition.
Item 6 Exhibits. |
Exhibit No. | Description | |||
31.1 | Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to Securities Exchange Act Rule
13a-14(a)/15d-14(a). |
|||
32.1 | Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. |
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SIGNATURES
Pursuant to the requirements 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.
DPAC TECHNOLOGIES CORP. (Registrant) |
||||
Date: May 13, 2011 | By: | /s/ STEVEN D. RUNKEL | ||
Steven D. Runkel, | ||||
Chief Executive Officer | ||||
Date: May 13, 2011 | By: | /s/ STEPHEN J. VUKADINOVICH | ||
Stephen J. Vukadinovich, | ||||
Chief Financial Officer |
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EXHIBIT INDEX
Exhibit No. | Description | |||
31.1 | Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to Securities Exchange Act Rule
13a-14(a)/15d-14(a). |
|||
32.1 | Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. |
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