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DPSI > SEC Filings for DPSI > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for DECISIONPOINT SYSTEMS, INC.

Form 10-K for DECISIONPOINT SYSTEMS, INC.


31-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides information and analysis of our results of operations for the fiscal years ended December 31, 2013 and 2012 and our liquidity and capital resources and should be read in conjunction with our audited consolidated financial statements and the notes to those statements included in this Annual Report on Form 10-K. Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of American ("GAAP"). In the following discussion and analysis of results of operations and financial condition, certain financial measures may be considered "non-GAAP financial measures" under Securities and Exchange Commission rules. These rules require supplemental explanation and reconciliation, which is provided in this Annual Report on Form 10-K.

DecisionPoint's management uses the non-GAAP measure, Adjusted Working Capital, in their evaluation of business cash flow and financial position performance. We believe this non-GAAP measure provides investors with a better understanding of operating financial position of our company.

Non-GAAP disclosures have limitations as analytical tools, should not be viewed as a substitute for cash flow or operating earnings determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. This supplemental presentation should not be construed as an inference that our future results will be unaffected by similar adjustments to operating earnings determined in accordance with GAAP.

Overview

DecisionPoint enables our clients to "move decisions closer to the customer" by "empowering the mobile worker". We define the mobile worker as those individuals that are on the front line in direct contact with customers. These workers include field repair technicians, sales associates, couriers, public safety employees and millions of other workers that deliver goods and or services throughout the country. Whether they are blue or white collar, mobile workers have many characteristics in common. Mobile workers need information, access to corporate resources, decision support tools and the ability to capture and report information back to the organization.

DecisionPoint empowers these mobile workers through the implementation of various mobile technologies including specialized mobile business applications, wireless networks, mobile computers (for example, rugged, tablets, and smartphones) and a comprehensive suite of consulting, integration, deployment and support services.

Mobile computing capabilities and usage continue to grow. With choice comes complexity so helping our customers navigate the myriad of options is what we do best. The right choice may be an off-the-shelf application or a custom business application to fit a very specific business process. DecisionPoint has the specialized resources and support structure to address the needs of mobile applications in the retail, transportation, field workforce sales/service and the warehousing market segments. We continue to invest in building out our capabilities to support these markets and business needs. For example, in July 2012, we invested in the expansion of our custom software development capabilities through the acquisition of Illume Mobile in Tulsa, OK, which specializes in the custom development of specialized mobile business applications for Apple, Android and Windows Mobile devices. Additionally, through the acquisition of Illume Mobile we acquired a cloud-based, horizontal software application "ContentSentral" which manages and distributes multiple types of corporate content (for example, PDF, video, images, and spreadsheets) on mobile tablets used by field workers. We also dramatically increased our software products expertise with the acquisition in June 2012 of APEX in Canada. The APEXWare™ software suite significantly expanded our field sales/service software offerings. APEXWare™ is a purpose-built mobile application suite ideally suited to the automation of field sales/service and warehouse workers. Additionally, we continue to expand our deployment and MobileCare support offerings. In 2012 we moved our headquarters location to a larger facility in Irvine, CA in order to accommodate the expansion of our express depot and technical support organizations. We also continue to invest in our "MobileCare EMM" enterprise mobility management offering. In 2008, we recognized the need for customers to outsource their mobile device management ("MDM") needs, thus we invested in building out a MDM practice that offers these services under a comprehensive managed service model. We have extended this offering from our historically ruggedized mobile computer customer base to address the growth of consumer devices in the enterprise and support the Bring Your Own Device (BYOD) and Bring Your Own Application (BYOA) movement.

Recognizing that we cannot build every business application, we have developed an 'ecosystem' of partners which support our custom and off-the-shelf solutions. These partners include suppliers of mobile devices (Apple, Intermec, Motorola, among others), wireless carriers (AT&T, Sprint, T-Mobile, Verizon), mobile peripheral manufactures (Zebra Technologies Corporation, Datamax - O'Neil), in addition to a host of specialized independent software vendors such as AirWatch, VeriFone GlobalBay, XRS and Wavelink.

We are focused on several commercial enterprise markets. These include retail, field sales/service, warehousing and distribution and transportation. With the continued growth of the mobile internet, we expect to see our current markets growth in addition to the emergence of new markets. In order to identify these new markets we recently created a new internal organization whose sole purpose is to identify and nurture new market opportunities. We expect our customers to continue to embrace and deploy new technology to better enhance their own customers' experiences and improve their own operations while lowering their operating costs. Our expertise and understanding of our customers' operations and business operations in general, coupled with our expertise and understanding of mobile technology equipment and software offerings enables us to identify new trends and opportunities and provide these new solutions to our existing and potential customers.


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At DecisionPoint, we deliver to our customers the ability to make better, faster and more accurate business decisions by implementing industry-specific, enterprise wireless and mobile computing systems for their front-line mobile workers, inside and outside of the traditional workplace. It is these systems that provide the information to improve the hundreds of individual business decisions made each day. Historically, critical information has remained locked away in the organization's enterprise computing systems, accessible only when employees were at their desks. Our solutions unlock this information and deliver it to employees when needed regardless of their location. As a result, our customers are able to move their business decision points closer to their customers which we believe in turn improves customer service levels, reduces cost and accelerates business growth.

We have several offices throughout North America which allows us to serve our multi-location clients and their mobile workforces. We provide depot services through our West and East coast facilities. Additionally, we are always keenly aware of potential acquisition candidates that can provide complementary products and service offerings to our customer base.

Business Combinations

Illume Mobile Acquisition

On July 31, 2012 ("Illume Closing Date"), we consummated an asset purchase agreement ("Asset Purchase Agreement") with MacroSolve, Inc. Pursuant to the Asset Purchase Agreement, we purchased the business (including substantially all the related assets) of the seller's Illume Mobile division ("Illume Mobile"), based in Tulsa, Oklahoma.

Founded in 1996, Illume Mobile is a mobile business solutions provider that services mobile products and platforms. Illume Mobile's initial core business is the development and integration of business applications for mobile environments. Today, Illume Mobile serves the mobile application development needs of a wide range of customers, from Fortune 500s to small and medium-sized businesses. It delivers advanced, mobile apps for many device platforms including iPad, iPhone and Android with functionality including 3D animation, mobile video, augmented reality, GPS, and more. Illume Mobile seeks to leverage its combination of creativity, technical savvy, years of mobile experience, and market insight to enable customers to envision their mobile applications and bring them to reality, providing the most value in the shortest amount of time. For more information regarding this acquisition, (see "Note 5 - Business Combinations" in the accompanying Notes to the Consolidated Financial Statements for additional details).

Apex Systems Integrators Acquisition

On June 4, 2012 ("Closing Date"), pursuant to a Stock Purchase Agreement ("Purchase Agreement"), we acquired all of the issued and outstanding shares of Apex Systems Integrators Inc. ("Apex"), a corporation organized under the laws of the Province of Ontario, Canada. Apex is a provider of wireless mobile work force software solutions. Its suite of products utilizes the latest technologies to empower the mobile worker in many areas including merchandising, sales and delivery; field service; logistics and transportation; and, warehouse management. Its clients are North American companies that are household names whose products and services are used daily to feed, transport, entertain and care for people throughout the world. For more information regarding this acquisition, (see "Note 5 - Business Combinations" in the accompanying Notes to the Consolidated Financial Statements for additional details).

The operating results of Illume Mobile have been included in our results of operations beginning August 1, 2012 and operating results of Apex have been included in our results of operations beginning June 5, 2012.


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Pro Forma Disclosure of Financial Information (unaudited)

The following table summarizes our unaudited consolidated results of operations
for the year ended December 31, 2012, as if the Apex and Illume acquisitions had
occurred on January 1, 2012 (in thousands):

                                                       December 31,
                                                   2012             2012
                                                as reported       pro forma

Net sales                                      $      71,501     $    73,703
Net loss attributable to common shareholders          (4,820 )        (6,887 )

Net loss per share - basic and diluted                 (0.61 )         (0.87 )

Included in the pro forma combined results of operations are the following adjustments for Apex: (i) amortization of intangible assets for the years ended December 31, 2012 of $572,000, (ii) a net increase in interest expense for the year ended December 31, 2012 of $291,000.

Included in the pro forma combined results of operations are the following adjustments for Illume Mobile: (i) amortization of intangible assets for the year ended December 31, of $125,000. Net loss per share assumes the 325,000 shares issued in connection with the Apex acquisition and the 617,284 shares issued in connection with the Illume Mobile acquisition are outstanding for each period presented (see "Note 5 - Business Combinations" in the accompanying Notes to the Consolidated Financial Statements for additional details).

The historical financial information of Apex has been extracted for the periods required from the historical financial statements of Apex Systems Integrators, Inc. which were prepared in accordance with U.S. generally accepted accounting principles. The historical financial information of Illume Mobile has been derived from using internally generated management reports for the periods required.

The unaudited pro forma financial information is not intended to represent or be indicative of the Company's consolidated results of operations that would have been reported had the Apex and Illume Mobile acquisitions been completed as of the beginning of the period presented, nor should it be taken as indicative of the Company's future consolidated results of operations.

Results of Operations

For comparison purposes, all dollar amounts have been rounded to nearest million while all percentages are actual.

                                                  Year ended December 31,
                                                  2013              2012            Increase/(Decrease)

Total revenue                                  $      60.7       $      71.5     $    (10.8 )         -15.1 %
Gross profit                                   $      12.7       $      15.0     $     (2.3 )         -15.4 %
Total operating expenses                       $      17.5       $      18.2     $     (0.6 )          -3.5 %
Loss from operations                           $      (4.8 )     $      (3.1 )   $      1.7            54.1 %
Loss before provision for income taxes         $      (5.4 )     $      (4.0 )   $      1.4            35.7 %
Net loss attributable to common shareholders   $      (7.8 )     $      (4.8 )   $      3.0            61.9 %

Total Revenue

Revenues for the years ended December 31, 2013 and 2012 is summarized below:

                                                            Increase
                           Year ended December 31,         (Decrease)
                           2013              2012

Hardware                $      38.0       $      48.5            -21.8 %
Professional services          16.7              16.4              1.7 %
Software                        4.4               4.5             -1.8 %
Other                           1.6               2.1            -21.6 %
                        $      60.7       $      71.5            -15.1 %


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Revenues were $60.7 million for the year ended December 31, 2013, compared to $71.5 million for the same period ended December 31, 2012, a decrease of $10.8 million or 15.1%. Revenues for Apex and Illume Mobile for the years ended 2013 and December 31, 2012 were $2.5 million, $1.0 million, and $1.1 million, $0.4 million, respectively. Excluding the impact of Apex and Illume Mobile acquisitions in 2012, revenues decreased by $12.8 million, or 18.2% over the prior year with the largest decrease occurring in hardware sales where sales decreased by 21.8%.

The improved economic conditions in the U.S. which had begun in the first half of 2010, and continued improvement throughout 2011 and 2012 have had a positive effect on our sales. The economic environment in 2012 stabilized whereupon we benefitted from renewed interest and more importantly, fundamental need to implement new cost saving technology. As a result, the 20.4% increase in hardware revenues for the year ended December 31, 2012 compared to the same period in 2011 was due to the increase in system upgrades of mobile computing at the retail level for some of our largest customers. With respect to the substantial decrease of hardware sales of 21.8% in 2013 as compared to 2012, major retail chains are coming off 2012 where the improved economic environment in some areas had driven refresh cycles by customers. Additionally, some customers have delayed purchases that we would have expected to be made in 2013 as they are evaluating various options for competing operating platforms. The increase in professional services for the year ended December 31, 2013 compared to the same period in 2012 of 1.7% relates to custom mobile application development, including deployment and staging services to support our customer's technology upgrades. Our software revenues for the year ended December 31, 2013 compared to the same period in 2012 was relatively stable. The decrease in other revenues relates to a reallocation of corporate resources away from the lower volume for consumables and towards the professional services business.

Cost of Sales

Cost of sales for the years ended December 31, 2013 and 2012 is summarized
below:

                                                            Increase
                           Year ended December 31,         (Decrease)
                           2013              2012

Hardware                $      31.0       $      40.2            -22.8 %
Professional services          11.3              11.3              0.4 %
Software                        4.5               3.7             20.5 %
Other                           1.2               1.3            -11.2 %
                        $      48.0       $      56.5            -15.0 %

The types of expenses included in the cost of sales line are hardware costs, third party licenses, costs associated with third party professional services, salaries and benefits for project managers and software engineers, freight, consumables and accessories.

Cost of sales were $48.0 million for the year ended December 31, 2013, compared to $56.5 million for the same period ended December 31, 2012, a decrease of $8.5 million or 15.0%. The decrease in cost of sales for hardware of 22.8% for the year ended December 31, 2013 compared to the same period in 2012 was slightly higher than the hardware revenue decrease due the change in product mix of hardware items. The cost of sales for professional services from the year ended December 31, 2013 was comparable to the year ended December 31, 2012 and increased by only 0.4%. The increase in cost of sales for professional services of 0.4% was 1.3% lower than the revenue decline of 1.7% and was due to increased professional service personnel costs associated with the carry-over of revenue growth from the prior year. The increase in cost of sales for software of 20.5% for the year ended December 31, 2013 compared to the same period in 2012 was related to amortization of intangible assets associated with the Apex and Illume Mobile acquisitions. The decrease in other cost of sales of 11.2% for the year ended December 31, 2013 relates to the decrease in the other revenues.


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Gross Profit

Gross profit for the years ended December 31, 2013 and 2012 is summarized below:

                           Year ended December 31,             Increase
                           2013              2012             (Decrease)

Hardware                $       7.0       $       8.3     $ (1.3 )      -15.7 %
Professional services           5.4               5.1        0.3          5.9 %
Software                       (0.1 )             0.8       (0.9 )     -112.5 %
Other                           0.4               0.8       (0.4 )      -50.2 %
                        $      12.7       $      15.0     $ (2.3 )      -15.3 %

Our gross profit was $12.7 million for the year ended December 31, 2013, compared to $15.0 million for the same period ended December 31, 2012, a decrease of $2.3 million or 15.3%. Our gross margin percentage of 21.0% in 2013 is comparable to the same period of 2012. The decrease in gross profit of $2.3 million was driven by the decrease in overall revenue of $10.8 million. In addition, the decrease in gross profit was partly due to the increase of $300,000 in amortization of intangible assets associated with Apex and Illume Mobile acquisitions as 2013 reflected a full year of amortization for such intangibles. Additionally, we have continued to implement increased cost control for the products and services which we resell, our professional service costs were positively impacted by our better utilization associated with greater recognized revenue from these services in the current twelve months and therefore, we realized higher margins on those services. The gross profit for professional services increased by $0.3 million, or 5.9% over the prior comparable period. The gross profit margin for software decreased by $0.9 million, to ($0.1) million for the year ended December 31, 2013. The gross profit for hardware decreased by $1.3 million, or 15.7% over the prior year comparable period and was driven by a mix change.

Selling, General and Administrative Expenses

                                                  Year ended December 31,
                                                  2013              2012             Increase/(Decrease)

Selling, general and administrative expenses   $      18.3       $      18.2     $       0.1             0.8 %
Adjustment to earn-out obligations             $      (0.8 )     $        -             (0.8 )

Total operating expenses                       $      17.5       $      18.2           (0.70 )          -3.7 %
As a percentage of sales                              28.9 %            25.4 %

Selling, general and administrative expenses, excluding the adjustment to earn-out obligations, were $18.3 million for the year ended December 31, 2013, compared to $18.2 million for the same period in the prior year. This represents an increase of $0.1 million, or 0.8%. The change was due to the increase in sales salary related expenses of $1.5 million over the prior year comparable period, of which part relates to the expansion of the sales force in the U.S. tasked with bringing the APEXWare™ product to the U.S. market. Warehouse related expenses increased by $0.3 million over the prior year comparable period and was primarily associated with Apex and Illume Mobile acquisitions in 2013 reflected a full year of expenses. Offset to the increased selling, general and administrative expenses noted above were expense reduction measures to include, but not limited to, consolidation of information technology environments, consolidation of our east coast depot facility in to our larger California facility, reduction of outsourced consulting expertise where unnecessary and replacing certain service providers with lower cost providers. As a result of some of these measures, we recognized reductions in professional fees of $0.9 million and legal expenses of $0.4 million. We also recognized reductions in other miscellaneous expenses of $0.4 million, of which approximately $0.2 million related to personnel reductions. We consolidated administrative personnel and reduced staffing levels by 29% from April 2013 through February 2014, constituting annual future savings of $3 million. The result of these activities has reduced the expense structure of the consolidated business significantly. The Company is focused on improving processes and continuing cost reduction efforts.

The adjustment to earn-out obligations were $0.8 million for the year ended December 31, 2013. The fair value of the Apex earn-out was calculated to be approximately CDN$1,076,000 (US$1,033,000 at the closing date). At September 30, 2013, the calculated earn-out payment due under the Apex purchase agreement was CDN$341,000 ($US$331,000). The adjustment of CDN$735,000 (US$713,000) was recorded as a separate component of operating expenses in the consolidated statement of operations and comprehensive loss as of December 31, 2013. The fair value of the Illume Mobile earn-out payment was calculated to be approximately $107,000 at the closing date. At September 30, 2013, the calculated earn-out payment due under the Illume purchase agreement was zero. The adjustment of $107,000 was recorded as a separate component of operating expenses in the consolidated statement of operations and comprehensive loss as of December 31, 2013.


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                                               Year ended December 31,
                                              2013                2012             Increase/(Decrease)
Depreciation and amortization
In cost of sales                           $       0.8         $       0.5     $      0.3             59.9 %
In operating expenses                              1.2                 1.0            0.2             11.4 %
Total depreciation and amortization        $       2.0         $       1.6     $      0.4             27.3 %
As a percentage of sales                           3.3 %               2.2 %

Finance and administration expenses saw an increase in amortization of intangible assets as a result of the Apex and Illume acquisitions in 2012. Amortization expense of intangible assets for the years ended December 2013 and 2012, totaled $1.9 million and $1.5 million, respectively.

Interest Expense

Interest expense, which is related to our line of credit, subordinated debt and our obligations with related parties, was $959,000 for the year ended December 31, 2013, compared to $998,000 for the same period ended December 31, 2012. The $39,000, or 3.9% decrease in interest expense was the result of decreased general debt obligations outstanding in 2013 compared to the prior year. In the second half of 2013, interest expense decreased by $173,000, or 26.6% over the comparable period in the prior year.

Other (Income) Expense

Other (income) expense for the years ended December 31, 2013 and 2012, totaled $(38,000) and $(116,000), respectively. During 2013, we recognized a $296,000 favorable adjustment to the fair value of our warrant liabilities.

Liquidity and Capital Resources

Liquidity and Going Concern Matters

Our consolidated financial statements were prepared on a going concern basis in accordance with GAAP. The going concern basis of presentation assumes that we will continue in operation for the next twelve months and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern. Our history of losses, working capital deficit, capital deficit, minimal liquidity and other factors raises substantial doubt about our ability to continue as a going concern. In order for us to continue operations beyond the next twelve months and be able to discharge our liabilities and commitments in the normal course of business, we must establish profitable operations through increased sales, successfully implement cost cutting measures, avoid further unforeseen expenses, potentially raise additional equity or debt capital, and successfully refinance our current debt obligations when they come due in February of 2015. There can be no assurance that we will be able achieve sustainable profitable operations or obtain additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to us.

If the Company continues to incur operating losses and/or does not raise sufficient additional capital, material adverse events may occur including, but not limited to, 1) a reduction in the nature and scope of the Company's operations, 2) the Company's inability to fully implement its current business . . .

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