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DecisionPoint Systems, Inc. - Quarter Report: 2023 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2023

 

☐ 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: 001-41376 

 

DECISIONPOINT SYSTEMS, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   37-1644635
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     

1615 South Congress Avenue Suite 103

Delray Beach, FL

  33445
 (Address of principal executive offices)   (Zip Code)

 

(561) 900-3723

Registrant’s telephone number, including area code

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class   Trading Symbol   Name on Each Exchange on
Which Registered
Common Stock, $0.001 par value   DPSI   NYSE American

 

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 ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐  Accelerated filer ☐ 
Non-accelerated Filer ☒  Smaller reporting company ☒ 
    Emerging growth company ☐ 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 7, 2023 there were 7,654,805 shares of common stock, $0.001 par value, outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements (Unaudited) 1
  Condensed Consolidated Balance Sheets 1
  Condensed Consolidated Statements of Income and Comprehensive Income 2
  Condensed Consolidated Statements of Stockholders’ Equity 3
  Condensed Consolidated Statements of Cash Flows 4
  Notes to Condensed Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION  
Item 1. Legal Proceedings 26
Item 1A. Risk Factors 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 6. Exhibits 27
  Signatures 28

 

i

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

DecisionPoint Systems, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except par value)

(Unaudited)

 

   September 30,   December 31, 
   2023   2022 
ASSETS        
Current assets:        
Cash  $3,645   $7,642 
Accounts receivable, net   18,939    17,085 
Inventory, net   3,002    4,417 
Deferred costs   3,443    2,729 
Prepaid expenses and other current assets   259    399 
Total current assets   29,288    32,272 
Operating lease assets   3,586    2,681 
Property and equipment, net   2,980    1,817 
Deferred costs, net of current portion   3,365    2,868 
Deferred tax assets   
-
    848 
Intangible assets, net   8,404    4,531 
Goodwill   24,555    10,499 
Other assets   140    41 
Total assets  $72,318   $55,557 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $12,848   $19,755 
Accrued expenses and other current liabilities   5,826    5,357 
Deferred revenue   6,886    6,021 
Current portion of earnout consideration   5,520    
-
 
Current portion of long-term debt   1,003    3 
Current portion of operating lease liabilities   870    529 
Total current liabilities   32,953    31,665 
Deferred revenue, net of current portion   4,845    4,331 
Long-term debt   5,693    143 
Noncurrent portion of operating lease liabilities   3,315    2,706 
Long-term portion of earnout consideration   4,316    
-
 
Deferred tax liabilities   1,451    
-
 
Other liabilities   6    130 
Total liabilities   52,579    38,975 
Commitments and contingencies (Notes 6 and 10)   
 
    
 
 
Stockholders’ equity:          
Preferred stock, $0.001 par value; 10,000 shares authorized; no shares issued or outstanding   
-
    
-
 
Common stock, $0.001 par value; 50,000 shares authorized; 7,654 and 7,416 shares issued and outstanding, respectively   8    7 
Additional paid-in capital   38,831    38,429 
Accumulated deficit   (19,100)   (21,854)
Total stockholders’ equity   19,739    16,582 
Total liabilities and stockholders’ equity  $72,318   $55,557 

 

See Accompanying Notes to the Condensed Consolidated Financial Statements. 

 

1

 

 

DecisionPoint Systems, Inc.

Condensed Consolidated Statements of Income and Comprehensive Income

(in thousands, except per share data)

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2023   2022   2023   2022 
Net sales:                
Product  $15,436   $20,988   $57,348   $59,259 
Service   11,704    4,725    27,743    13,681 
Net sales   27,140    25,713    85,091    72,940 
Cost of sales:                    
Product   12,340    16,923    46,205    47,213 
Service   7,317    3,036    17,604    8,971 
Cost of sales   19,657    19,959    63,809    56,184 
Gross profit   7,483    5,754    21,282    16,756 
Operating expenses:                    
Sales and marketing expense   2,129    2,291    6,988    6,850 
General and administrative expenses   3,838    1,936    10,242    6,155 
Total operating expenses   5,967    4,227    17,230    13,005 
Operating income   1,516    1,527    4,052    3,751 
Interest expense   (162)   (7)   (385)   (42)
Other income (expense)   15    
-
    23    (17)
Income before income taxes   1,369    1,520    3,690    3,692 
Income tax expense   (316)   (409)   (935)   (1,008)
Net income and comprehensive income attributable to common stockholders  $1,053   $1,111   $2,755   $2,684 
Earnings per share attributable to stockholders:                    
Basic  $0.14   $0.15   $0.37   $0.37 
Diluted  $0.13   $0.15   $0.36   $0.36 
Weighted average common shares outstanding                    
Basic   7,640    7,290    7,514    7,210 
Diluted   7,812    7,593    7,659    7,510 

 

See Accompanying Notes to the Condensed Consolidated Financial Statements.

 

2

 

 

DecisionPoint Systems, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

For the Three and Nine Months Ended September 30, 2023 and 2022

(in thousands)

(Unaudited)

 

   Common Stock   Additional
Paid-in
   Accumulated   Total
Stockholders’
 
   Shares   Amount   Capital   Deficit   Equity 
Balance at December 31, 2022   7,416   $       7   $38,429   $(21,854)  $      16,582 
Net income   -    
-
    
-
    866    866 
Share-based compensation expense   -    
-
    196    
-
    196 
Exercise of stock options   1    
-
    6    
-
    6 
Balance at March 31, 2023   7,417   $7   $38,631   $(20,988)  $17,650 
Net income   -    
-
    
-
    835    835 
Share-based compensation expense   -    
-
    20    
-
    20 
Exercise of warrants   195    1    195    
-
    196 
Exercise of stock options   7    
-
    7    
-
    7 
Cashless exercise of warrants (see Note 8)   9    
-
    
-
    
-
    
-
 
Balance at June 30, 2023   7,628   $8   $38,853   $(20,153)  $18,708 
Net income   -    
-
    
-
    1,053    1,053 
Share-based compensation expense   -    
-
    45    
-
    45 
Cashless exercise of stock options (see Note 8)   23    
-
    (67)   
-
    (67)
Cashless exercise of warrants (see Note 8)   3    
-
    
-
    
-
    
-
 
Balance at September 30, 2023   7,654   $8   $38,831   $(19,100)  $19,739 

 

   Common Stock  

Additional

Paid-in

   Accumulated  

Total

Stockholders’

 
   Shares   Amount   Capital   Deficit   Equity 
Balance at December 31, 2021   7,007   $            7   $39,216   $(24,965)  $14,258 
Net income   -    
-
    
-
    852    852 
Share-based compensation expense   -    
-
    225    
-
    225 
Cashless exercise of stock options (Note 9)   214    
-
    (1,403)   
-
    (1,403)
Balance at March 31, 2022   7,221   $7   $38,038   $(24,113)  $13,932 
Net income   -    
-
    
-
    721    721 
Share-based compensation expense   -    
-
    50    
-
    50 
Exercise of stock options   13    
-
    25    
-
    25 
Balance at June 30, 2022   7,234   $7   $38,113   $(23,392)  $14,728 
Net income   -    
-
    
-
    1,111    1,111 
Share-based compensation expense   -    
-
    50    
-
    50 
Exercise of stock options   66    
-
    129    
-
    129 
Exercise of warrants (Note 8)   97    
-
    
-
    
-
    
-
 
Balance at September 30, 2022   7,397   $7   $38,292   $(22,281)  $16,018 

 

See Accompanying Notes to the Condensed Consolidated Financial Statements.

 

3

 

 

DecisionPoint Systems, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

   Nine Months Ended 
   September 30, 
   2023   2022 
Cash flows from operating activities        
Net income  $2,755   $2,684 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   2,028    1,750 
Amortization of inventory valuation adjustment   120    
-
 
Loss on fixed asset disposal   
-
    22 
Share-based compensation expense   261    325 
Provision for inventory obsolescense   7    
-
 
Deferred income taxes, net   (958)   460 
Provision for doubtful accounts   77    32 
Changes in operating assets and liabilities:          
Accounts receivable   8,193    (811)
Inventory, net   3,918    825 
Deferred costs   (1,211)   (1,155)
Prepaid expenses and other current assets   196    186 
Accounts payable   (9,716)   7,213 
Accrued expenses and other current liabilities   (3,054)   (139)
Operating lease liabilities   (68)   265 
Deferred revenue   235    2,279 
Net cash provided by operating activities   2,783    13,936 
Cash flows from investing activities          
Purchases of property and equipment   (546)   (1,299)
Cash paid for acquisitions, net of cash acquired   (12,917)   (4,525)
Net cash used in investing activities   (13,463)   (5,824)
Cash flows from financing activities          
Repayment of term debt   (253)   (3)
Line of credit, net   1,803    
-
 
Proceeds from term loan   5,000    
-
 
Cash paid for taxes on the cashless exercises of stock options   (67)   (1,403)
Proceeds from exercise of warrants   187    
-
 
Proceeds from exercise of stock options   13    154 
Net cash provided by (used in) financing activities   6,683    (1,252)
Change in cash   (3,997)   6,860 
Cash, beginning of period   7,642    2,587 
Cash, end of period  $3,645   $9,447 
Supplemental disclosures of cash flow information          
Cash paid for interest  $333   $38 
Cash paid for income taxes  $1,060   $497 
Supplemental disclosure of non-cash activities          
Right-of-use assets obtained in exchange for new operating lease liabilities  $
-
   $3,211 
Cashless exercise of warrants  $12   $3,508 
Cashless exercise of stock options  $25   $
-
 

 

See Accompanying Notes to the Condensed Consolidated Financial Statements.

 

4

 

 

DecisionPoint Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1: Description of Business

 

DecisionPoint Systems, Inc., which we sometimes refer to as the “Company”, “we” or “us”, is an enterprise mobility systems integrator that, through its subsidiaries, sells, installs, deploys and repairs mobile computing and wireless systems that are used both within a company’s facilities and in the field. These systems generally include mobile computers, mobile application software, and related data capture equipment including bar code scanners and radio frequency identification (“RFID”) readers. We also provide services, consulting, staging, kitting, deployment, maintenance, proprietary and third-party software and software customization as an integral part of our customized solutions for our customers. The suite of products utilizes the latest technologies with the intent to make complex mobile technologies easy to use, understand and keep running within all vertical markets such as merchandising, sales and delivery, field service, logistics and transportation and warehouse management.

 

In April 2023, we acquired 100% of the issued and outstanding shares of Macro Integration Services, Inc. (“Macro”). Macro is a value-added reseller (“VAR”) that buys point of sale mobile computing, scanning, printing, and wireless products from various manufacturers and distributors. Macro also provides professional services for project management, implementation, deployment, installations, upgrades, training, and support.

 

Note 2: Basis of Presentation and Summary of Significant Accounting Policies

 

Basis of Presentation

 

We have prepared the accompanying unaudited condensed consolidated financial statements of DecisionPoint Systems, Inc. and its subsidiaries on the accrual basis of accounting in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”). The accompanying condensed consolidated financial statements include the accounts of DecisionPoint Systems, Inc. and its wholly owned subsidiaries, DecisionPoint Systems International (“DPSI”), DecisionPoint Systems Group, Inc. (“DPS Group”), RDS, ExtenData, AMG, and Macro. Macro was acquired on April 1, 2023, and as such, has been consolidated into our financial position and results of operations beginning April 1, 2023. All intercompany accounts and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted from these interim financial statements as permitted by SEC rules and regulations. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2022.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the financial condition, results of operations and cash flows for the interim periods presented. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of results to be expected for the full fiscal year.

  

Operating Segments

 

Under the Financial Accounting Standards Board Accounting Standards Codification 280-10, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles, if the segments have similar characteristics, and if the segments are similar in each of the following areas: (i) the nature of products and services, (ii) the nature of the production processes, (iii) the type or class of customer for their products and services, and (iv) the methods used to distribute their products or provide their services. We believe each of the Company’s segments meet these criteria as they provide similar products and services to similar customers using similar methods of production and distribution. Because we believe each of the criteria set forth above has been met and each of the Company’s segments has similar characteristics, we aggregate results of operations in one reportable operating segment.

 

5

 

 

DecisionPoint Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. We evaluate our estimates and assumptions on a regular basis.

 

Inventory

 

Inventory consists solely of finished goods and is stated at the lower of cost or net realizable value. Cost is determined under the first-in, first-out (FIFO) method. We periodically review our inventory and make provisions as necessary for estimated obsolete and slow-moving goods. The creation of such provisions results in reduction of inventory to net realizable value and a charge to cost of sales. Inventories are reflected in the accompanying condensed consolidated balance sheets net of a valuation allowance of $96,000 and $42,000 as of September 30, 2023 and December 31, 2022, respectively.

 

We recorded a fair value adjustment of approximately $359,000 to reflect the acquired cost of inventory related to the April 1, 2023 acquisition of Macro. Approximately $120,000 and $240,000 of this amount was amortized during the three and nine months ended September 30, 2023, respectively, and is included in total cost of sales in the condensed consolidated statements income and comprehensive income.

 

Income Taxes

 

Our quarterly provision for income taxes uses an annual effective tax rate based on the expected annual income and statutory tax rates. Our effective tax rate, including discrete items as more fully described below, was 25.3% for the nine months ended September 30, 2023 and 27.3% for the nine months ended September 30, 2022.

 

The change in the effective tax rate was primarily due to a combination of an increase in projected annual pre-tax income and a decrease to estimated annual non-deductible permanent items in 2023.

 

Operating Leases

 

For non-cancelable operating lease agreements, operating lease assets and operating lease liabilities are established for leases with an expected term greater than one year and we recognize lease expense on a straight-line basis.

  

We have an operating lease for the office and warehouse space in Laguna Hills, California. Pursuant to the lease agreement, the base rent of $39,778 per month began on June 1, 2022 and increases 3% annually. The lease expires on April 30, 2029. In February 2022, we established an operating lease liability of $3.1 million and operating lease assets of $3.0 million, net of the sublease. In connection with this lease agreement, we entered into a sublease agreement for a portion of the Laguna Hills office and warehouse location, in which we received $24,254 per month commencing in February 2022 through expiration on October 31, 2023. Commencing November 1, 2023, this sublease continues on a month-to-month basis.

 

We also have one operating lease for office and warehouse space in Greensboro, North Carolina with fixed minimum monthly payments of $34,413 per month which increases 3% annually. The lease expires on December 31, 2026.

 

Furthermore, we have operating leases for office space in Delray Beach, Florida, Southbury, Connecticut, and Doylestown, Pennsylvania with various fixed minimum monthly payments totaling $5,840. These leases have a combined operating lease liability of $22,000 and operating lease assets of $22,000.

 

At September 30, 2023, the total operating lease liability was $4.2 million and the total operating lease asset was $3.6 million.

 

6

 

 

DecisionPoint Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Revenue Recognition

 

We recognize revenue when a customer obtains control of promised goods or services under the terms of a contract and is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. We do not have any material extended payment terms, as payment is due at or shortly after the time of the sale. Sales and other taxes collected concurrently with revenue producing activities are excluded from revenue.

 

We recognize contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced to our clients. Unbilled receivables are recorded when we have an unconditional right to contract consideration. A contract liability is recognized as deferred revenue when we invoice clients, or receive customer cash payments, in advance of performing the related services under the terms of a contract. Remaining performance obligations represent the transaction price allocated to the performance obligations that are unsatisfied as of the end of each reporting period. Deferred revenue is recognized as revenue when we have satisfied the related performance obligation.

 

As of September 30, 2023, the total aggregate transaction price allocated to the unsatisfied performance obligations was approximately $11.7 million, of which approximately $6.9 million is expected to be recognized over the next 12 months.

 

As of December 31, 2022, the total aggregate transaction price allocated to the unsatisfied performance obligations was approximately $10.4 million.

 

The following tables summarizes the deferred revenue activity for the nine months ending September 30, 2023 (in thousands):

 

Beginning Balance at December 31, 2022  $10,352 
Additions   22,076 
Revenue recognized from beginning of period   (6,936)
Revenue recognized from additions   (13,761)
Ending balance at September 30, 2023  $11,731 

 

We defer costs to acquire contracts, including commissions, incentives and payroll taxes if they are incremental and recoverable costs of obtaining a customer contract with a term exceeding one year. Deferred contract costs are amortized to sales and marketing expense over the contract term, generally over one to three years. We have elected to recognize the incremental costs of obtaining a contract with a term of less than one year as a selling expense when incurred. We include deferred contract acquisition costs in “Prepaid expenses and other current assets” in the consolidated balance sheets. As of September 30, 2023 and December 31, 2022, we deferred $0.2 million and $0.2 million, respectively, of related contract acquisition costs.

  

The following table summarizes net sales by revenue source (in thousands):

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2023   2022   2023   2022 
Hardware and software  $13,994   $19,205   $52,808   $54,105 
Consumables   1,442    1,783    4,540    5,154 
Professional services   11,704    4,725    27,743    13,681 
   $27,140   $25,713   $85,091   $72,940 

 

7

 

 

DecisionPoint Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Recently Adopted Accounting Standards

 

In September 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires the measurement of all expected credit losses for financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which, among other things, deferred the effective date of ASU 2016-13 for public filers that are considered smaller reporting companies, as defined by the SEC, to fiscal years beginning after December 15, 2022, including interim periods within those years. The Company adopted this accounting update in the first quarter of 2023 on a prospective basis. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.

 

Note 3: Acquisitions

 

Macro Integration Services, Inc.

 

On March 31, 2023, we entered into a Stock Purchase Agreement (the “Purchase Agreement”) with the Durwood Wayne Williams Revocable Trust and the Collins Family Living Trust, as sellers (collectively, the “Sellers”) and with Durwood W. Williams and Bartley E. Collins (the respective trustees of the Sellers), individually, pursuant to which the Company acquired all of the issued and outstanding equity of Macro from the Sellers (the “Acquisition”), effective April 1, 2023 (the “Effective Date”). Upon consummation of the Acquisition, Macro, a project management and professional services and integrated solutions company, became a wholly-owned subsidiary of the Company.

 

Total consideration for the acquisition has been recorded as $26.4 million ($26.3 million was recorded at closing and additional $0.1 million was paid during the third quarter of 2023 due to a net working capital adjustment) and is comprised of the following (in thousands):

 

Purchase price  $10,623 
Working capital excess   5,899 
Subtotal   16,522 
Earnout   9,836 
Other   30 
   $26,388 

 

Earnout payments are subject to the financial performance of Macro in each of the two years following closing and are presented at net present values. We may pay the Sellers a total of up to an additional $9.8 million in earnout payments. The earnout is based on achieving EBITDA targets in years one and two following the Effective Date of $3.3 million and $3.8 million, respectively.

  

The cash due at closing was $13.7 million which reflects the following (in thousands):

 

Purchase price  $10,500 
Working capital excess   5,899 
Less: bank indebtedness   (1,837)
Seller party expenses   (845)
   $13,717 

 

Actual consideration paid on the Effective Date was $11.0 million which reflects cash due at close less holdbacks for cash, accounts receivable, and inventory. An additional $0.1 million in consideration was paid during the third quarter of 2023 due to a net working capital adjustment.

 

8

 

 

DecisionPoint Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Also, customer payments on specified accounts receivable actually received by us through September 30, 2024, are to be remitted to the Sellers on a quarterly basis. The Sellers are also due certain payments from us if certain inventory is utilized by the Company before March 31, 2024.

 

The preliminary purchase price allocation is subject to change due to changes in the estimated fair value of Macro’s assets acquired and liabilities assumed as of the Effective Date resulting from the finalization of the Company’s detailed valuation analysis.

 

As of September 30, 2023, the allocation of the total consideration to the estimated fair value of acquired net assets as of the acquisition date for Macro was as follows (in thousands):

 

Cash  $923 
Accounts receivable, net   10,124 
Inventory, net   2,630 
Prepaids and other current assets   111 
Operating lease assets   1,390 
Property and equipment, net   1,058 
Customer lists and relationships   4,080 
Trade name   1,380 
Other assets   44 
Accounts payable   (2,809)
Accrued expenses and other current liabilities   (695)
Deferred tax liability   

(3,257

)
Operating lease liability   (1,503)
Deferred revenue   (1,144)
Total fair value excluding goodwill   15,589 
Goodwill   14,056 
Total consideration  $26,388 

  

The estimated useful lives of intangible assets recorded related to the Macro acquisition are as follows:

 

  

Expected

Life

Customer lists and relationships  7 years
Trade name  3 years

 

Pro Forma Information

 

The following unaudited pro forma condensed consolidated statement of operations for the three and nine months ended September 30, 2023 as if the Macro acquisition had been completed on January 1, 2023, and after giving effect to certain pro forma adjustments. The pro forma condensed consolidated statement of operations is presented for informational purposes only and is not indicative of the results of operations that would have necessarily been achieved if the acquisition had actually been consummated on January 1, 2023.

 

   Nine Months
Ended
September 30,
 
   2023 
Net sales  $96,032 
Net income  $3,836 
Net income per share - basic  $0.51 
Net income per share - diluted  $0.50 

 

During the three and nine months ended September 30, 2023, we incurred transaction costs of $26,000 and $436,000, respectively.

 

9

 

 

DecisionPoint Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Advanced Mobile Group, LLC

 

On January 31, 2022, we entered into a Membership Unit Purchase Agreement and concurrently therewith closed upon the acquisition of all of the issued and outstanding membership interests of Advanced Mobile Group, LLC (“AMG”) for $5.1 million. The consideration we paid was comprised of cash of $4.6 million, of which $4.4 million was paid during the year ended December 31, 2022, and an estimated earn-out obligation valued at $0.5 million, subject to the financial performance of AMG during each of the two years following the closing of the acquisition. As a result of the acquisition, AMG became a wholly owned subsidiary of the Company.

 

As of September 30, 2023, the allocation of the total consideration to the estimated fair value of acquired net assets as of the acquisition date for AMG was as follows (in thousands):

 

Cash  $170 
Accounts receivable   1,402 
Inventory   129 
Prepaids and other current assets   123 
Customer lists and relationships   1,930 
Trade name   360 
Backlog   280 
Developed technology   70 
Accounts payable   (558)
Accrued expenses   (152)
Deferred tax liabilities   (897)
Deferred revenue   (148)
Total fair value excluding goodwill   2,709 
Goodwill   2,371 
Total consideration  $5,080 

 

The estimated useful lives of intangible assets recorded related to the AMG acquisition are as follows:

 

  

Expected

Life

Customer lists and relationships  7 years
Trade name  3 years
Backlog  11 months
Developed technology  3 years

 

Other acquisition

 

In March 2022, we acquired the customer lists and relationships of Boston Technologies, a provider of mobile order management and route accounting software for direct store delivery (DSD) operations, for cash of $0.3 million.

 

10

 

 

DecisionPoint Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 4: Intangible Assets

 

Definite lived intangible assets are as follows (in thousands):

 

   September 30, 2023   December 31, 2022 
   Gross   Accumulated   Net   Gross   Accumulated   Net 
   Amount   Amortization   Amount   Amount   Amortization   Amount 
Customer lists and relationships  $12,020   $(4,992)  $7,028   $7,940   $(3,850)  $4,090 
Trade names   2,740    (1,396)   1,344    1,360    (973)   387 
Developed technology   140    (108)   32    140    (86)   54 
Backlog   340    (340)   
-
    340    (340)   
-
 
   $15,240   $(6,836)  $8,404   $9,780   $(5,249)  $4,531 

 

Amortization expense recognized during the three and nine months ended September 30, 2023 was $0.6 million and $1.6 million, respectively. Amortization expense recognized during the three and nine months ended September 30, 2022 was $0.5 million and $1.4 million, respectively. Amortization expense is primarily calculated on a straight-line basis.

  

Note 5: Net Income Per Share

 

Basic net income per common share is computed by dividing the net income available to common stockholders by the weighted-average number of common shares outstanding. Diluted net income per share is calculated similarly to basic per share amounts, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. For periods in which there is a net loss, potentially dilutive securities are excluded from the computation of fully diluted net loss per share as their effect is anti-dilutive.

 

Below is a reconciliation of the fully dilutive securities effect for the three and nine months ended September 30, 2023 and 2022 (in thousands, except per share data):

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2023   2022   2023   2022 
Net income attributable to common stockholders  $1,053   $1111   $2,755   $2,684 
                     
Weighted average basic common shares outstanding   7,640    7,290    7,514    7,210 
Dilutive effect of stock options, warrants and restricted stock   172    303    145    300 
Weighted average shares for diluted earnings per share   7,812    7,593    7,659    7,510 
                     
Basic income per share  $0.14   $0.15   $0.37   $0.37 
Diluted income per share  $0.13   $0.15   $0.36   $0.36 

 

11

 

 

DecisionPoint Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 6: Line of Credit

 

Our Loan and Security Agreement (the “Loan Agreement”) with MUFG Union Bank, National Association (the “Bank”), as amended, provides for a revolving line of credit of up to $10.0 million with our obligations being secured by a security interest in substantially all of our assets. Loans extended to us under the Loan Agreement are currently scheduled to mature on July 31, 2026. Effective March 27, 2023, we entered into an amendment letter

 

(“Amendment”) with the Bank that served to amend certain terms of the Loan Agreement and increased the revolving line of credit available to us from $9.0 million to $10.0 million. The Amendment also served to modify certain covenants in the original agreement. On March 31, 2023, we drew down $7.0 million of this facility and amounts borrowed under this credit facility are evidenced, and governed, by the terms of a commercial promissory note in favor of the Bank. During the second and third quarters of 2023 we paid down $4.0 million and $1.2 million, respectively, on the line of credit and as of September 30, 2023, there is $1.8 million outstanding on the line of credit.

 

Interest and Fees

 

Loans under the Loan Agreement with an outstanding balance of at least $150,000 bear interest, at our option, at a base interest rate equal to the Term secured overnight financing rate as administered by the Federal Reserve Bank of New York (“SOFR”) plus 2.50% or a base rate equal to an index offered by the Bank for the interest period selected and is payable at the on the last day of each month, commencing April 30, 2023. The interest rate on the loans adjusts at the end of each SOFR rate period (1, 3, or 6 month term) selected by us. All other loan amounts bear interest at a rate equal to an index rate determined by the Bank, which shall vary when the index rate changes. As of September 30, 2023, the effective interest rate was 7.7%. We have the right to prepay variable interest rate loans, in whole or in part at any time, without penalty or premium. Amounts outstanding with a base interest rate may be prepaid in whole or in part provided we have given the Bank written notice of at least five days prior to prepayment and pay a prepayment fee. At any time prior to the maturity date, we may borrow, repay and reborrow amounts under the Loan Agreement, subject to the prepayment terms, and, as long as the total outstanding does not exceed $10.0 million.

 

Covenants

 

Under the Loan Agreement , as amended by the Amendment, we are subject to a variety of customary affirmative and negative covenants, including that we (i) maintain a ratio of total debt to EBITDA of not greater than 3.0:1.0 measured at the end of each quarter, (ii) maintain a fixed charge coverage ratio of not less than 1.35:1.00 to be measured as of the end of each fiscal quarter, and (iii) submit a pro-forma statement in advance showing compliance and overall satisfactory metrics post acquisition should the Company use any loan under the Loan Agreement for any acquisition with a purchase price in excess of $1,500,000. The Loan Agreement also prohibits us from, or otherwise imposes restrictions on us with respect to, among other things, liquidating, dissolving, entering into any consolidation, merger, division, partnership, or other combination, selling or leasing a majority of our assets or business or purchase or lease all or the greater part of the assets or business of another entity or person.

 

As of September 30, 2023 we were in compliance with all of our covenants, were eligible to borrow up to $8.2 million, and had $1.8 million in outstanding borrowings under the Loan Agreement.

 

Note 7: Term Debt

 

MUFG Promissory Note

 

We entered into a $5.0 million unsecured promissory note agreement, effective March 27, 2023, with the Bank. Principal and interest payments on this note are due in quarterly installments of $250,000 on the last day of each quarter commencing June 30, 2023, with an interest rate based on Term SOFR plus 2.5% (secured overnight financing rate) as administered by the Federal Reserve Bank of New York, which was 7.9% at September 30, 2023.This note matures March 31, 2028.

 

12

 

 

DecisionPoint Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

EIDL Promissory Note

 

On August 27, 2020, we received $0.2 million in connection with a promissory note from the SBA under the Economic Injury Disaster Loan (“EIDL”) program pursuant to the CARES Act. Under the terms of the EIDL promissory note, interest accrues on the outstanding principal at an interest rate of 3.75% per annum and with a term of 30 years with equal monthly payments of principal and interest of $731 beginning on August 27, 2021. As of September 30, 2023 and December 31, 2022, outstanding debt under the promissory note was $0.1 million.

 

At September 30, 2023, our total debt consisted of the following:

 

Line of credit  $1,803 
MUFG promissory note   4,750 
EIDL promissory note   143 
Total debt   6,696 
Less: current portion of long-term debt   (1,003)
Long-term debt  $5,693 

 

Note 8: Stockholders’ Equity

 

We are authorized to issue two classes of stock designated as common stock and preferred stock. As of September 30, 2023, we are authorized to issue 60,000,000 total shares of stock. Of this amount, 50,000,000 shares are designated as common stock, having a par value of $0.001 and 10,000,000 shares are designated as preferred stock, having a par value of $0.001.

 

Warrants

 

The following table summarizes information about our outstanding common stock warrants as of September 30, 2023:

 

   Date     Strike   Total
Warrants
Outstanding
and
Exercisable
   Total
Exercise
Price
   Weighted
Average
Exercise
 
   Issued  Expiration  Price   (in thousands)   (in thousands)   Price 
Warrants - Common Stock  Oct-18  Oct-23   1.40    18         26      
               18   $26   $1.40 

 

In June 2023, the common stock warrants issued by the Company in June 2018 were fully exercised by all of the holders resulting in the issuance of 191,826 shares of common stock. In June 2023, one holder exercised a common stock warrant, issued by the Company in June 2018, on a cashless basis for a total of 12,676 shares of common stock, which was settled in two issuances: 9,247 shares of common stock were issued in June 2023 and an additional 3,429 shares of common stock were issued during the third quarter of 2023.

 

13

 

 

DecisionPoint Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 9: Share-Based Compensation

 

Under our amended 2014 Plan, 1,600,000 shares of our common stock are reserved for issuance, of which 587,709 shares of common stock remain available for issuance.

 

Under the 2014 Plan, common stock incentives may be granted to our officers, employees, directors, consultants, and advisors (and prospective directors, officers, managers, employees, consultants and advisors) and our affiliates can acquire and maintain an equity interest in us, or be paid incentive compensation, which may (but need not) be measured by reference to the value of our common stock.

 

The 2014 Plan permits us to provide equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock and other stock bonus awards and performance compensation awards.

 

The 2014 Plan is administered by the Board of Directors, or a committee appointed by the Board of Directors, which determines recipients and the number of shares subject to the awards, the exercise price and the vesting schedule. The term of stock options granted under the 2014 Plan cannot exceed ten years. Options cannot have an exercise price less than 100% of the fair market value of our common stock on the grant date, and generally vest over a period of three years. If the individual possesses more than 10% of the combined voting power of all classes of our stock, the exercise price shall not be less than 110% of the fair market of a share of common stock on the date of grant.

 

The following table summarizes stock option activity under the 2014 Plan for the nine months ended September 30, 2023:

 

       Grant Date   Weighted     
       Weighted   Average     
       Average   Remaining   Aggregate 
   Stock   Exercise   Contractual   Intrinsic 
   Options   Price   Life   Value 
           (in years)   ($ in thousands) 
Outstanding at December 31, 2022   458,957   $4.08           
Granted   60,521    7.26           
Forfeited or expired   
-
    0           
Exercised   (64,165)   2.44           
Outstanding at September 30, 2023   455,313   $4.73    2.4   $1,276 
Exercisable at September 30, 2023   365,598   $4.91    2.4   $1,276 

 

Share-based compensation cost for the nine months ending September 30, 2023 was measured using the Black-Scholes option-pricing model with the following assumptions:

  

Weighted average grant-date fair value per option granted  $6.52 to 7.76 
Expected option term in years   2.5 
Expected volatility factor   74.0%
Risk-free interest rate   3.82 to 4.18%
Expected annual dividend yield   0.0%

 

We estimate expected volatility using historical volatility of common stock of our peer group over a period equal to the expected life of the options. The expected term of the awards represents the period of time that the awards are expected to be outstanding. We considered expectations for the future to estimate employee exercise and post-vest termination behavior. We do not intend to pay common stock dividends in the foreseeable future, and therefore have assumed a dividend yield of zero. The risk-free interest rate is the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term of the awards.

 

As of September 30, 2023, there was $0.2 million of total unrecognized share-based compensation related to unvested stock options. These costs have a weighted average remaining recognition period of 1.2 years.

 

14

 

 

DecisionPoint Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 10: Contingencies

 

Litigation

 

From time to time, we are subject to litigation incidental to the conduct of our business. When applicable, we record accruals for contingencies when it is probable that a liability will be incurred, and the amount of loss can be reasonably estimated. While the outcome of lawsuits and other proceedings against us cannot be predicted with certainty, in our opinion, individually or in the aggregate, no such lawsuits are expected to have a material effect on our condensed consolidated financial position or results of operations.

 

Concentrations

 

No customer accounted for 10% or more of consolidated revenue during the three months ended September 30, 2023. One customer accounted for 18% of consolidated revenue during the nine months ended September 30, 2023. One customer accounted for 30% of consolidated revenue during the three months ended September 30, 2022, and 18% of consolidated revenue during the nine months ended September 30, 2022. Trade accounts receivable from two customers represented 11% and 12% of net consolidated receivables at September 30, 2023 and trade accounts receivable from two customers represented approximately 14% and 13% of net consolidated receivables at September 30, 2022.

 

Two vendors accounted for 29% and 19% of all consolidated purchases during the three months ended September 30, 2023. Three vendors accounted for 21%, 20%, and 14% of all consolidated purchases during the nine months ended September 30, 2023. For the prior year period, two vendors accounted for 12% and 11% of all consolidated purchases for the three months ended September 30, 2022, and three vendors accounted for 37%, 22% and 17% of all consolidated purchases during the nine months ended September 30, 2022. No other vendor accounted for more than 10% of purchases during the three and nine months ended September 30, 2023 and 2022.

 

As of September 30, 2023, two vendors accounted for 31% and 25% of total accounts payable. As of September 30, 2022, three vendors accounted for 31%, 27% and 22% of the total accounts payable. No other vendor accounted for more than 10% of accounts payable as of September 30, 2023 and 2022.

 

A significant decrease or interruption in business from our significant customers or vendors could have a material adverse effect on our business, financial condition and results of operations. Financial instruments that potentially expose us to a concentration of credit risk principally consist of accounts receivable. We sell product to a large number of customers in many different geographic regions. To minimize credit risk, we perform ongoing credit evaluations of our customers’ financial condition.

 

15

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains statements that discuss future events or expectations, projections of results of operations or financial condition, trends in our business, business prospects and strategies and other “forward-looking” information. In some cases, you can identify “forward-looking statements” by words like “may,” “will,” “should,” “expects,” These statements may relate to, among other things, our expectations regarding for our financial results, revenue, operating expenses and other financial measures in future periods, and the adequacy of our sources of liquidity to satisfy our working capital needs, capital expenditures, and other liquidity requirements. Our actual results may differ materially from those anticipated in these forward-looking statements. Among the factors that could cause actual results to differ materially are the factors discussed under “Risk Factors” in documents and reports we have filed with the Securities and Exchange Commission. Some additional factors that could cause actual results to differ include:

 

  our estimates regarding expenses, future revenue, capital requirements and liquidity;
     
  our plans to obtain any requisite outside funding for our current and proposed operations and potential acquisition and expansion efforts;
     
  the success of the Company’s plan for growth, both internally and through pursuit of suitable acquisition candidates;
     
  the concentration of our customers and vendors and the potential effect of the loss of a significant customer or vendor;
     
  debt obligations of the Company arising from our line of credit and term loan from time to time or otherwise;
     
  our ability to integrate the business operations of businesses that we acquire from time to time;
     
  the possibility that we may be adversely affected by other economic, business or competitive factors including market volatility, inflation, increases in interest rates, supply chain interruptions, and may not be able to manage other risks and uncertainties;
     
  our ability to compete with companies producing similar products and services;
     
  the scope of protection we are able to establish and maintain for intellectual property rights covering our products and technology;
     
  the accuracy of our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
     
  our ability to develop and maintain our corporate infrastructure, including our internal controls;
     
  general economic conditions, including effects of inflation, market volatility, interest rate increases, general recession concerns in the U.S. and abroad, and effects of geopolitical events domestically and abroad;
     
  our ability to develop innovative new products and services; and
     
  our financial performance.

 

Our financial statements are stated in United States Dollars (“$”) and are prepared in accordance with U.S. GAAP. In this Quarterly Report, unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to “common shares” refer to the common shares in our capital stock.

 

Overview

 

We are a provider and integrator of mobility and wireless systems for business organizations. We design, deploy and support mobile computing systems that enable customers to access employers’ data networks at various locations (i.e., the retail selling floor, nurse workstations, warehouse and distribution centers or on the road deliveries via enterprise-grade handheld computers, printers, tablets, and smart phones). We also integrate data capture equipment including bar code scanners and radio frequency identification (RFID) readers.

  

We may from time to time make strategic acquisitions. For example, in April 2023, we completed the acquisition of Macro Integration Services, Inc. (“Macro”), a privately held company headquartered in Greensboro, North Carolina. We acquired Macro to increase profits margins through adding more services, expanding our regional presence, and adding new capabilities and deepening existing ones. This acquisition also strengthens our position in the traditional retail market while adding to adjacent retail verticals in foods service and grocery.

 

16

 

 

General economic uncertainty and volatility arising from geopolitical events and concerns, inflation, rises in energy prices, increased interest rates, recession concerns, and general declines in capital spending in the information technology sector (and the economy in general) make it difficult to predict changes in the purchasing requirements of our customers and the markets we serve and whether our results of operations will be materially impacted. 

 

Components of Results of Operations

 

Net Sales

 

Net sales reflect revenue from the sale of hardware, software, consumables and professional services (including hardware and software maintenance) to our clients, net of sales taxes.

 

Revenue is recognized when a customer obtains control of promised goods or services under the terms of a contract and is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. We do not have any material extended payment terms, as payment is due at or shortly after the time of the sale. Sales, value-added and other taxes collected concurrently with revenue producing activities are excluded from revenue.

 

Cost of Sales, Sales and Marketing Expenses, and General and Administrative Expenses

 

The following illustrates the primary costs classified in each major expense category:

 

Cost of sales, include:

 

  Cost of goods sold for hardware, software and consumables;
     
  Cost of professional services, including maintenance;
     
  Markdowns of inventory; and
     
  Freight expenses.

 

Sales and marketing expenses, include:

 

  Sales salaries, benefits and commissions;
     
  Consulting;
     
  Marketing tools;
     
  Travel; and
     
  Marketing promotions and trade shows.

 

General and administrative expenses, include:

 

  Corporate payroll and benefits;
     
  Depreciation and amortization;
     
  Rent;
     
  Utilities; and
     
  Other administrative costs such as maintenance of corporate offices, supplies, legal, consulting, audit and tax preparation and other professional fees.

 

17

 

 

Results of Operations

 

The following table summarizes key components of our results of operations for the periods indicated, both in dollars and as a percentage of our net sales (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2023   2022   2023   2022 
  (unaudited) 
Statements of Operations Data:    
Net sales  $27,140   $25,713   $85,091   $72,940 
Cost of sales   19,657    19,959    63,809    56,184 
Gross profit   7,483    5,754    21,282    16,756 
Sales and marketing expenses   2,129    2,291    6,988    6,850 
General and administrative expenses   3,838    1,936    10,242    6,155 
Total operating expenses   5,967    4,227    17,230    13,005 
Operating income   1,516    1,527    4,052    3,751 
Interest expense   (162)   (7)   (385)   (42)
Other income (expense)   15    -    23    (17)
Income before income taxes   1,369    1,520    3,690    3,692 
Income tax expense   (316)   (409)   (935)   (1,008)
Net income attributable to common shareholders  $1,053   $1,111   $2,755   $2,684 
Percentage of Net Sales:                    
Net sales   100.0%   100.0%   100.0%   100.0%
Cost of sales   72.4%   77.6%   75.0%   77.0%
Gross profit   27.6%   22.4%   25.0%   23.0%
Sales and marketing expenses   7.8%   8.9%   8.2%   9.4%
General and administrative expenses   14.1%   7.5%   12.0%   8.4%
Total operating expenses   22.0%   16.4%   20.2%   17.8%
Operating income   5.6%   5.9%   4.8%   5.1%
Interest expense   (0.6)%   (0.0)%   (0.5)%   (0.1)%
Other income (expense)   0.1%   0.0%   0.0%   (0.0)%
Income before income taxes   5.0%   5.9%   4.3%   5.1%
Income tax expense   (1.2)%   (1.6)%   (1.1)%   (1.4)%
Net income attributable to common shareholders   3.9%   4.3%   3.2%   3.7%

 

Results of Operations for the Third Quarter of 2023 Compared to the Third Quarter of 2022 (Unaudited)

 

Net sales

 

   Three Months Ended
September 30,
   Dollar   Percent 
   2023   2022   Change   Change 
   (dollars in thousands) 
Hardware and software  $13,994   $19,205   $(5,211)   (27.1)%
Consumables   1,442    1,783    (341)   (19.1)%
Services   11,704    4,725    6,979    147.7%
   $27,140   $25,713   $1,427    5.5%

 

Net sales increased by 5.5%, or $1.4 million, during the three months ended September 30, 2023 as compared to the same period of the prior year. Hardware and software net sales decreased $5.2 million during the three months ended September 30, 2023, primarily due a $6.6 million decrease in hardware sales to one of our largest customers, offset by a $1.7 million increase in hardware sales by Macro. Macro was acquired on April 1, 2023 (and, thus, there were no corresponding sales by Macro included in our results of operations for the comparable period in 2022). Consumables decreased $0.3 million during the three months ended September 30, 2023 primarily due to decreased third quarter sales to one of our existing customers. Included in the prior year consumables sales was a one-time transaction of $0.3 million that was not repeated during the current quarter ending September 30, 2023. Services increased $7.0 million during the three months ended September 30, 2023 primarily due to the acquisition of Macro on April 1, 2023 (and, thus, there were no corresponding sales by Macro included in our results of operations for the comparable period in 2022), which added $6.0 million in services revenue. Quarterly services revenues were also positively impacted by a $0.3 million increase from our largest customer.

 

18

 

 

Cost of sales

 

   Three Months Ended
September 30,
   Dollar   Percent 
   2023   2022   Change   Change 
   (dollars in thousands) 
Hardware and software  $11,304   $15,673   $(4,369)   (27.9)%
Consumables   1,036    1,250    (214)   (17.1)%
Services   7,317    3,036    4,281    141.0%
   $19,657   $19,959   $(302)   (1.5)%

 

Cost of sales decreased by 1.5%, or $0.3 million during the three months ended September 30, 2023 as compared to the same prior year period primarily due to decreases in the cost of sales of both hardware and software and consumables which were consistent with the corresponding decreases in sales of these product lines. These decreases were offset by increased cost of sales of services which increased due to the acquisition of Macro on April 1, 2023, which added $3.6 million in costs (and, thus, there were no corresponding sales by Macro included in our results of operations for the comparable period in 2022).

  

Gross profit

 

   Three Months Ended
September 30,
 
   2023   2022 
   (dollars in thousands) 
Gross profit:        
Hardware and software  $2,690   $3,532 
Consumables   406    533 
Services   4,387    1,689 
Total gross profit  $7,483   $5,754 
           
Gross profit percentage:          
Hardware and software   19.2%   18.4%
Consumables   28.1%   29.9%
Services   37.5%   35.7%
Total gross profit percentage   27.6%   22.4%

 

Gross profit increased $1.7 million for the three months ended September 30, 2023 as compared to the prior year period, primarily as a result of the increase in sales of services combined with increased costs and the other impacts noted above. Overall gross profit margin increased 5.2% due to a shift in mix to services with higher profit margins.

 

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Sales and marketing expenses

 

   Three Months Ended
September 30,
   Dollar   Percent 
   2023   2022   Change   Change 
   (dollars in thousands) 
Sales and marketing expenses  $2,129   $2,291   $(162)   (7.1)%
As a percentage of sales   7.8%   8.9%        -1.1%

 

Sales and marketing expenses decreased $0.2 million, or 7.1%, for the three months ended September 30, 2023 as compared to the prior year period primarily due to a $150,000 decrease in commission expense for the third quarter of 2023 due to a corresponding decrease in hardware sales. As a percentage of sales, sales and marketing expenses decreased 110 basis points primarily due to higher sales volume for the three months ended September 30, 2023.

 

General and administrative expenses

 

   Three Months Ended
September 30,
   Dollar   Percent 
   2023   2022   Change   Change 
   (dollars in thousands) 
General and administrative  $3,838   $1,936   $1,902    98.2%
As a percentage of sales   14.1%   7.5%        6.6%

 

General and administrative expenses increased $1.9 million, or 98.2%, for the three months ended September 30, 2023 as compared to the same period of the prior year. The increase in these expenses was primarily due to the $1.8 million increase due to the acquisition of Macro on April 1, 2023 (and thus, there were no corresponding expenses by Macro for the comparable period in 2022). As a percentage of sales, general and administrative costs increased 660 basis points. This increase is attributable to the fact that Macro’s general and administrative expenses trend higher as a percentage of their sales. The Company will continue to monitor these expenses as it looks for efficiencies in operations.

 

Interest expense. The increase in interest expense to $162,000 for the third quarter of 2023 from $7,000 from the same period last year was due to the increased debt levels incurred for the Macro acquisition, as compared to the same period last year.

 

Income tax expense. Income tax expense was approximately $0.3 million for the three months ended September 30, 2023 compared to $0.4 million income tax expense for the three months ended September 30, 2022. The decrease is primarily due to the decrease in income before income taxes, period over period.

 

Net income. Net income of $1.1 million remained flat in comparison to the same period last year.

 

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Results of Operations for the Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022 (Unaudited)

 

Net sales

 

   Nine Months Ended
September 30,
   Dollar   Percent 
   2023   2022   Change   Change 
   (dollars in thousands)     
Hardware and software  $52,808   $54,105   $(1,297)   (2.4)%
Consumables   4,540    5,154    (614)   (11.9)%
Services   27,743    13,681    14,062    102.8%
   $85,091   $72,940   $12,151    16.7%

 

Net sales increased by 16.7%, or $12.2 million, during the nine months ended September 30, 2023 as compared to the same period of the prior year. The increase in net sales was primarily driven by the $14.1 million increase in services which was primarily due to the $12.3 million increase in services associated with sales by Macro which we acquired on April 1, 2023 (and, thus, there were no corresponding sales by Macro included in our results of operations for the comparable period in 2022). Hardware sales decreased $1.3 million primarily due a $4.4 million decrease in hardware sales to one of our largest customers offset by a $3.3 million increase in hardware sales associated by Macro. Consumables decreased $0.6 million during the nine months ended September 30, 2023 primarily due to decreased sales to one of our existing customers. Included in the prior year consumables sales was a one-time transaction of $0.6 million that was not repeated during the nine months ending September 30, 2023.

 

Cost of sales

 

   Nine Months Ended
September 30,
   Dollar   Percent 
   2023   2022   Change   Change 
   (dollars in thousands)     
Hardware and software  $42,913   $43,580   $(667)   (1.5)%
Consumables   3,292    3,633    (341)   (9.4)%
Services   17,604    8,971    8,633    96.2%
   $63,809   $56,184   $7,625    13.6%

  

Cost of sales increased by 13.6%, or $7.6 million during the nine months ended September 30, 2023 as compared to the same prior year period primarily due to higher services sales volume and a $3.8 million increase in overall cost of sales associated with cost of sales of Macro that we acquired on April 1, 2023 (and, thus, there were no corresponding costs of sales of Macro included in our results of operations for the comparable period in 2022).

 

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Gross profit

 

   Nine Months Ended
September 30,
 
   2023   2022 
   (dollars in thousands) 
Gross profit:        
Hardware and software  $9,895   $10,525 
Consumables   1,248    1,521 
Services   10,139    4,710 
Total gross profit  $21,282   $16,756 
           
Gross profit percentage:          
Hardware and software   18.7%   19.5%
Consumables   27.5%   29.5%
Services   36.5%   34.4%
Total gross profit percentage   25.0%   23.0%

 

Gross profit increased $4.5 million for the nine months ended September 30, 2023 as compared to the prior year period, primarily as a result of overall higher sales volume and the other impacts noted above. Overall gross profit margin increased 200 basis points due to a shift in mix to services with higher profit margins. The shift in the mix was caused by the acquisition of Macro which is primarily a services based company.

 

Sales and marketing expenses

 

   Nine Months Ended
September 30,
   Dollar   Percent 
   2023   2022   Change   Change 
   (dollars in thousands) 
Sales and marketing expenses  $6,988   $6,850   $138    2.0%
As a percentage of sales   8.2%   9.7%        -1.5%

 

Sales and marketing expenses increased $0.1 million, or 2.0%, for the nine months ended September 30, 2023 as compared to the prior year period primarily due to increased expenses of $139,000 for Macro operations that was acquired on April 1, 2023 (and, thus, there were no corresponding sales and marketing expenses of Macro included in our results of operations for the comparable period in 2022). As a percentage of sales, sales and marketing expenses decreased 150 basis points primarily due to the higher sales volume for the nine months ended September 30, 2023.

  

General and administrative expenses

 

   Nine Months Ended
September 30,
   Dollar   Percent 
   2023   2022   Change   Change 
   (dollars in thousands) 
General and administrative  $10,242   $6,155   $4,087    66.4%
As a percentage of sales   12.0%   8.4%        3.6%

 

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General and administrative expenses increased $4.1 million, or 66.4%, for the nine months ended September 30, 2023 as compared to the same period of the prior year. The increase in these expenses was due to $0.2 million increased warehouse costs associated with increased headcount and rent increases, a $0.1 million increase in professional and legal fees, and a $3.3 million increase in expenses associated with the acquisition of Macro on April 1, 2023 (and, thus, there were no corresponding general and administrative expenses by Macro included in our results of operations for the comparable period in 2022). As a percentage of sales, general and administrative costs increased 360 basis points. This increase is attributable to the fact that Macro’s general and administrative expenses trend higher as a percentage of their sales. The Company will continue to monitor these expenses as it looks for efficiencies in operations.

 

Interest expense. The increase in interest expense to $385,000 for the nine months ended September 30, 2023 from $42,000 for the nine months ended September 30, 2022 was due to the new debt incurred in connection with the April 1, 2023 acquisition of Macro.

 

Income tax (expense) benefit. Income tax expense was approximately $0.9 million for the nine months ended September 30, 2023 compared to $1.0 million in the nine-month period ended September 30, 2022. The higher income tax rate this period is associated with higher income before income taxes and in the prior year period.

 

Net income. Net income was $2.7 million in each of the nine-month periods ended September 20, 2023 and 2022.

 

Liquidity and Capital Resources

 

As of September 30, 2023, our principal sources of liquidity were cash totaling $3.6 million and $8.2 million of availability under our line of credit. In recent years, we have financed our operations primarily through cash generated from operating activities, borrowings from term loans and our line of credit. In certain prior years, we generated operating losses and negative cash flows from operating activities as reflected in our accumulated deficit. We have generated operating income for each of the years ended December 31, 2018 through December 31, 2022. Based on our recent trends and our current projections, we expect to generate cash from operations for the year ending December 31, 2023. Given our projections, combined with our existing cash and credit facilities, we believe the Company has sufficient liquidity for at least the next 12 months and beyond.

 

Our ability to continue to meet our cash requirements will depend on, among other things, global economic activity, continuing on-going disruptions in supply chains and labor shortages across industry sectors, the effects of inflation, the effects of interest rate increases, recession concerns, and our ability to achieve anticipated levels of revenues and cash flow from operations, our ability to manage costs and working capital successfully and the continued availability of financing, if needed. We cannot provide any assurance that our assumptions used to estimate our liquidity requirements will remain accurate due to, among other things, the macro-economic environment. Consequently, the volatile economic environment and our estimates on the severity of the impact on our future earnings and cash flows could change and have a material impact on our results of operations and financial condition. In the event of a sustained market deterioration, and declines in net sales, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions. We cannot provide any assurance that we will be able to obtain any additional sources of financing or liquidity on acceptable terms, or at all.

 

Working Capital (Deficit)

 

   September 30,
2023
   December 31,
2022
   Increase/
(Decrease)
 
   (in thousands) 
Current assets  $29,288   $32,272   $(2,984)
Current liabilities   32,953    31,665    1,288 
Working capital (deficit)  $(3,665)  $607   $(4,272)

  

The working capital deficit as of September 30, 2023 was primarily due to the $4.0 million decrease in cash which was due to the acquisition of Macro which closed on April 1, 2023.

 

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Line of Credit

 

Our Loan and Security Agreement (the “Loan Agreement”) with MUFG Union Bank, National Association (the “Bank”), as amended, provides for a revolving line of credit of up to $10.0 million with our obligations being secured by a security interest in substantially all of our assets. Loans extended to us under the Loan Agreement are scheduled to mature on July 31, 2026. Effective March 27, 2023, we entered into an amendment letter (“Amendment”) with the Bank that served to amend certain terms of the Loan Agreement and increased the revolving line of credit available to us from $9.0 million to $10.0 million. The Amendment also served to modify certain covenants in the original Loan Agreement. On September 30, 2023, we had $8.2 million of this facility available.

 

MUFG Promissory Note

 

We entered into a $5.0 million promissory note agreement, effective March 27, 2023, with the Bank. Principal and interest payments on this note are due in quarterly installments of $250,000 on the last day of each quarter commencing June 30, 2023, with an interest rate based on Term SOFR (secured overnight financing rate) as administered by the Federal Reserve Bank of New York. This note matures March 31, 2028.

 

Cash Flow Analysis

 

   Nine Months Ended
September 30,
 
   2023   2022 
   (in thousands) 
Net cash provided by operating activities  $2,342   $13,936 
Net cash used in investing activities   (13,022)   (5,824)
Net cash provided by (used in) financing activities   6,683    (1,252)
Net (decrease) increase in cash  $(3,997)  $6,860 

 

Operating Activities

 

Net cash provided by operating activities decreased to $2.3 million for the nine months ended September 30, 2023 from $13.9 million for the nine months ended September 30, 2022. The decrease was primarily due to cash payments of $10.3 million for inventory purchases and $0.9 million for 2022 bonuses that were paid out in 2023.

  

Investing Activities

 

Net cash used in investing activities was $13.0 million for the nine months ended September 30, 2023 which is comprised primarily of the $12.9 million purchase of Macro. Net cash used in investing activities was $5.8 million for the nine months ended September 30, 2022, which was comprised of $4.5 million in cash payments related to the acquisition of AMG in the first quarter of 2022 and $1.3 million in capital expenditures of property and equipment.

 

Financing Activities

 

Net cash provided by financing activities was $6.7 million for the nine months ended September 30, 2023 due to the $1.8 million net draw on the revolving line of credit and the proceeds from the $5.0 million term loan which were used to fund the acquisition of Macro Integration on April 1, 2023. Net cash used in financing activity was $1.3 million for the nine months ended September 30, 2022 primarily due to the cash paid for taxes on the cashless exercise of stock options.

 

24

 

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires the appropriate application of certain accounting policies, some of which require us to make estimates and assumptions about future events and their impact on amounts reported in our condensed consolidated financial statements. Since future events and their impact cannot be determined with absolute certainty, the actual results will inevitably differ from our estimates.

 

For a description of other critical accounting policies and estimates, refer to Part II, Item 7, Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes to our critical accounting estimates since our Annual Report on Form 10-K for the year ended December 31, 2022.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are a smaller reporting company, as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, for this reporting period and are not required to provide the information required under this item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of September 30, 2023, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective.

 

Changes in Internal Control Over Financial Reporting

 

There were no material changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

25

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The information contained in “Note 10: Contingencies” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q is incorporated by reference into this Item.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this Quarterly Report on Form 10-Q, please refer to the section titled Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022 for a detailed discussion of certain risks that affect us.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The following sets forth information regarding all unregistered securities sold within the three months ended September 30, 2023:

 

On June 6, 2023, one holder exercised, on a cashless basis, all of its outstanding common stock warrants, which were originally issued by the Company in June 2018. This cashless exercise for a total of 12,676 shares of common stock was settled in two separate issuances: 9,247 shares of common stock were issued in June 2023 and an additional 3,429 shares of common stock were issued in the third quarter of 2023. This cashless exercise was completed pursuant to the exemption from registration contained in Section 3(a)(9) of the Securities Act.

 

26

 

 

Item 6. Exhibits

 

EXHIBIT INDEX

 

Exhibit
Number
  Description
3.1   Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 filed on August 13, 2020)
     
3.2   Amendment to Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on December 17, 2021)  
     
3.3   Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.4 to the Registration Statement on Form S-1 filed on August 13, 2020)
     
10.1   Employment Agreement with Melinda Wohl, dated July 20, 2023 (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed on July 26, 2023).
     
31.1*   Certification by the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2*   Certification by the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1**   Section 1350 Certification of Principal Executive Officer
     
32.2**   Section 1350 Certification of Principal Financial Officer
     
101.INS   Inline XBRL Instance Document.
     
101.SCH   Inline XBRL Taxonomy Extension Schema Document.
     
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document.
     
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document.
     
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document.
     
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document.
     
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

* Filed herewith
** Furnished herewith

 

27

 

 

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 of the undersigned thereunto duly authorized. 

 

  DECISIONPOINT SYSTEMS, INC.
     
Date: November 14, 2023 By: /s/ Steve Smith
  Name:  Steve Smith
  Title: Chief Executive Officer
    (Principal Executive Officer)
     
Date: November 14, 2023 By: /s/ Melinda Wohl
  Name:  Melinda Wohl
  Title: Chief Financial Officer
    (Principal Financial Officer and
    Principal Accounting Officer)

 

 

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