DECISIONPOINT SYSTEMS, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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 plans to obtain any external financing required for our current activities and

proposed transactions and potential acquisition and expansion efforts;

? the impacts of the COVID-19 pandemic, or any other health epidemic, on

our business, and our customers, and the resulting disruptions

to supply chains, labor markets or the global economy as a whole;

? the concentration of our customers and suppliers and the potential effect of

the loss of a significant customer or supplier;

? the debts of the Company arising from our time line of credit

        to time or otherwise;
    ?   our ability to integrate the business operations of businesses that we
        acquire from time to time;
    ?   our prior history of operating losses;
    ?   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 revenues, capital

additional funding requirements and needs;

? general economic conditions, including the effects of inflation,

volatility, rising interest rates and effects of geopolitical events

        domestically and abroad;
    ?   our ability to develop and maintain our corporate infrastructure,
        including our internal controls;
    ?   our ability to develop innovative new products; 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.



In January 2022we finalized the acquisition of Advanced Mobile Group, LLC
(“AMG”), a private company headquartered in Doylestown, Pennsylvania. We acquired AMG to expand our mobility-focused enterprise solutions and service offerings and grow its mid-range capabilities.Atlantic Region. AMG is a regional leader providing services, hardware, software, integration solutions and wireless networking, with deep experience in the segments of warehousing and distribution, manufacturing, mobile, retail and healthcare workforce automation, with approximately 600 customers.



16




The future impact of the COVID-19 pandemic on our business and results of
operations is unknown and will depend on future developments, which fluctuate
and are highly uncertain and cannot be predicted with confidence, including the
duration and severity of the COVID-19 pandemic, the spread of the new variants
of the virus domestically or abroad, the effectiveness of vaccines and
vaccination rates, and additional preventative and protective actions that
governments, or we or our customers, may implement, which may result in an
extended period of continued business disruption and reduced operations. Certain
of our customers, particularly those in the retail sector, have at times been
significantly impacted by COVID-19 and the pandemic has contributed to
disruptions in supply chains and labor shortages across industries, and we have
experienced supplier shipment delays due to a supply chain and logistic
challenges resulting in delays in product revenue recognition. Our results of
operations during the first half of 2022 are not necessarily indicative of
results to be expected in the remainder of 2022 in light of the uncertainties
surrounding the impact of the COVID-19 pandemic and continuing issues with
logistics and supply chain disruptions through the date of this report.



In addition, general economic uncertainty and volatility arising from
geopolitical events and concerns, inflation, rises in energy prices, changes in
interest rates 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 operating results


Net Sales


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

Revenue is recognized when a customer obtains control of goods or services promised under a contract and is measured as the amount of consideration we expect to receive in exchange for the transfer of goods or the provision of services. We do not have significant extended payment terms, as payment is due at the time of sale or shortly thereafter. Sales, value added and other taxes levied in conjunction with revenue-generating activities are excluded from revenue.

Cost of sales, selling and marketing expenses and general and administrative expenses

Here is an illustration of the major costs categorized into 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 costs include:


    ?   Corporate payroll and benefits;
    ?   Depreciation and amortization;
    ?   Rent;
    ?   Utilities; and

? Other administrative costs such as maintenance of company 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           Six Months Ended
                                                  June 30,                    June 30,
                                             2022          2021          2022          2021
Statements of Operations Data:                                (unaudited)
Net sales                                 $   27,506     $  15,169     $  47,227     $  31,241
Cost of sales                                 21,179        11,673        36,225        23,907
Gross profit                                   6,327         3,496        11,002         7,334
Sales and marketing expenses                   2,384         1,910         4,560         3,799
General and administrative expenses            1,960         1,474        
4,220         3,094
Total operating expenses                       4,344         3,384         8,780         6,893
Operating income                               1,983           112         2,222           441
Interest expense                                  (9 )         (21 )         (35 )         (50 )
Gain on extinguishment of debt                     -             -         
   -         1,211
Other expense                                    (21 )           -           (16 )           -
Income before income taxes                     1,953            91         2,171         1,602
Income tax (expense) benefit                  (1,232 )          79          (598 )         (99 )
Net income attributable to common
shareholders                              $      721     $     170     $   1,573     $   1,503
Percentage of Net Sales:
Net sales                                      100.0 %       100.0 %       100.0 %       100.0 %
Cost of sales                                   77.0 %        77.0 %        76.7 %        76.5 %
Gross profit                                    23.0 %        23.0 %        23.3 %        23.5 %
Sales and marketing expenses                     8.7 %        12.6 %         9.7 %        12.2 %
General and administrative expenses              7.1 %         9.7 %       
 8.9 %         9.9 %
Total operating expenses                        15.8 %        22.3 %        18.6 %        22.1 %
Operating income                                 7.2 %         0.7 %         4.7 %         1.4 %
Interest expense                                 0.0 %         0.1 %        -0.1 %         0.2 %
Gain on extinguishment of debt                     - %           - %       
   - %         3.9 %
Other expense                                   -0.1 %           - %         0.0 %         0.0 %
Income before income taxes                       7.1 %         0.6 %         4.6 %         5.1 %
Income tax (expense) benefit                    -4.5 %         0.5 %        -1.3 %         0.3 %
Net income attributable to common
shareholders                                     2.6 %         1.1 %         3.3 %         4.8 %





18



Operating results for the second quarter of 2022 compared to the second quarter of 2021 (unaudited)


Net sales



                          Three Months Ended
                               June 30,              Dollar      Percent
                           2022          2021        Change       Change
                               (dollars in thousands)
Hardware and software   $   20,601     $ 10,257     $ 10,344        100.9 %
Consumables                  2,091        1,317          774         58.8 %
Services                     4,814        3,595        1,219         33.9 %
                        $   27,506     $ 15,169     $ 12,337         81.3 %




Net sales increased by 81.3%, or $12.3 million, during the three months ended
June 30, 2022 as compared to the same period of the prior year. The increase in
net sales was primarily driven by two significant, unplanned equipment orders by
two of our large enterprise customers and a $1.9 million increase in overall net
sales associated with sales by AMG which we acquired on January 31, 2022 (and,
thus, there were no corresponding sales by AMG included in our results of
operations for the comparable period in 2021).



Cost of sales



                          Three Months Ended
                               June 30,             Dollar       Percent
                           2022          2021       Change       Change
                              (dollars in thousands)
Hardware and software   $   16,371     $  8,290     $ 8,081          97.5 %
Consumables                  1,498          918         580          63.2 %
Services                     3,310        2,465         845          34.3 %
                        $   21,179     $ 11,673     $ 9,506          81.4 %




Cost of sales increased by 81.4%, or $9.5 million during the three months ended
June 30, 2022 as compared to the same prior year period primarily due to higher
hardware sales volume and a $1.3 million increase in overall cost of sales
associated with cost of sales of AMG that we acquired on January 31, 2022 (and,
thus, there were no corresponding costs of sales of AMG included in our results
of operations for the comparable period in 2021).



Gross profit



                                    Three Months Ended
                                         June 30,
                                    2022             2021
                                  (dollars in thousands)
Gross profit:
Hardware and software           $       4,230       $ 1,967
Consumables                               593           399
Services                                1,504         1,130
Total gross profit              $       6,327       $ 3,496

Gross profit percentage:
Hardware and software                    20.5 %        19.2 %
Consumables                              28.4 %        30.3 %
Services                                 31.2 %        31.4 %
Total gross profit percentage            23.0 %        23.0 %





19




Gross profit increased $2.8 million for the three months ended June 30, 2022 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 remained
flat with the prior year period.



Sales and marketing expenses



                                 Three Months Ended
                                      June 30,              Dollar       Percent
                                  2022          2021        Change       Change
                                             (dollars in thousands)
Sales and marketing expenses   $    2,384      $ 1,910     $    474          24.8 %
As a percentage of sales              8.7 %       12.6 %                     (3.9 )%




Sales and marketing expenses increased $0.5 million, or 24.8%, for the three
months ended June 30, 2022 as compared to the prior year period primarily due to
increased commissions on higher sales volume during the second quarter of 2022,
combined with increased expenses for AMG operations that was acquired on January
31, 2022 (and, thus, there were not corresponding sales and marketing expenses
of AMG included in our results of operations for the comparable period in 2021).
As a percentage of sales, sales and marketing expenses decreased 390 basis
points primarily due to higher sales volume for the three months ended June
30,
2022.


General and administrative expenses


                                        Three Months Ended
                                             June 30,              Dollar       Percent
                                         2022          2021        Change       Change
                                                    (dollars in thousands)
General and administrative expenses   $    1,960      $ 1,474     $    486 
        33.0 %
As a percentage of sales                     7.1 %        9.7 %                     (2.6 )%




General and administrative expenses increased $0.5 million, or 33.0%, for the
three months ended June 30, 2022 as compared to the same period of the prior
year. The increase in these expenses was due to higher professional and
accounting fees, increased rent costs and a $0.3 million increase in expenses
primarily associated with the acquisition of AMG on January 31, 2022 (and, thus,
there were no corresponding general and administrative expenses by AMG included
in our results of operations for the comparable period in 2021). As a percentage
of sales, general and administrative costs decreased 260 basis points primarily
due the higher sales volume in the second quarter of 2022.



Interest charges. The decrease in interest expense to $9,000 for the second quarter of 2022 from $21,000 compared to the same period last year was due to lower debt levels compared to the same period last year.



Income tax (expense) benefit. Income tax expense was approximately $1.2 million
for the three months ended June 30, 2022 compared to an income tax benefit of
$79,000 for the three months ended June 30, 2021. The income tax expense was
primarily due to higher income before income taxes.



Net revenue. The net income was $0.7 million compared to $0.2 million at the same time last year.



20



Results of operations for the six months ended June 30, 2022 Compared to the half-year ended June 30, 2021 (Unaudited)


Net sales



                          Six Months Ended
                              June 30,             Dollar       Percent
                          2022         2021        Change       Change
                              (dollars in thousands)

Hardware and software $34,901 $20,721 $14,180 68.4% Consumables

                3,371        2,776          595          21.4 %
Professional services      8,955        7,744        1,211          15.6 %
                        $ 47,227     $ 31,241     $ 15,986          51.2 %



Net sales increased by 51.2%, or $16.0 million, during the six months ended June
30, 2022 as compared to the same period of the prior year. The increase in net
sales was primarily driven by two significant, unplanned equipment orders by two
of our large enterprise customers and a $4.1 million increase in overall net
sales associated with sales by AMG which we acquired on January 31, 2022 (and,
thus, there were no corresponding sales by AMG included in our results of
operations for the comparable period in 2021).



Cost of sales



                          Six Months Ended
                              June 30,             Dollar       Percent
                          2022         2021        Change       Change
                              (dollars in thousands)
Hardware and software   $ 27,907     $ 16,715     $ 11,192          67.0 %
Consumables                2,383        1,942          441          22.7 %
Professional services      5,935        5,250          685          13.1 %
                        $ 36,225     $ 23,907     $ 12,318          51.5 %




Cost of sales increased by 51.5%, or $12.3 million during the six months ended
June 30, 2022 as compared to the same prior year period primarily due to higher
hardware sales volume and a $2.7 million increase in overall cost of sales
associated with cost of sales of AMG that we acquired on January 31, 2022 (and,
thus, there were no corresponding costs of sales of AMG included in our results
of operations for the comparable period in 2021).



Gross profit



                                     Six Months Ended
                                         June 30,
                                    2022             2021
                                  (dollars in thousands)
Gross profit:
Hardware and software           $       6,994       $ 4,006
Consumables                               988           834
Professional services                   3,020         2,494
Total gross profit              $      11,002       $ 7,334

Gross profit percentage:
Hardware and software                    20.0 %        19.3 %
Consumables                              29.3 %        30.0 %
Professional services                    33.7 %        32.2 %
Total gross profit percentage            23.3 %        23.5 %





21



Gross profit increased $3.7 million for the six months ended June 30, 2022 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 decreased
20 basis points due to a shift in mix to hardware sales with lower profit
margins.



Sales and marketing expenses


                                 Six Months Ended
                                     June 30,             Dollar       Percent
                                 2022         2021        Change       Change
                                            (dollars in thousands)

Sales and marketing expenses $4,560 $3,799 $761 20.0% As a percentage of sales

             9.7 %      12.2 %                     (2.5 )%



Sales and marketing expenses increased $0.8 million, or 20.0%, for the six
months ended June 30, 2022 as compared to the prior year period primarily due to
increased commissions on higher sales volume during the second quarter of 2022,
combined with increased expenses for AMG operations that was acquired on January
31, 2022 (and, thus, there were no corresponding sales and marketing expenses of
AMG included in our results of operations for the comparable period in 2021). As
a percentage of sales, sales and marketing expenses decreased 250 basis points
primarily due to the higher sales volume for the six months ended June 30, 2022.



General and administrative expenses


                                        Six Months Ended
                                            June 30,            Dollar       Percent
                                        2022         2021       Change       Change
                                                  (dollars in thousands)
General and administrative expenses   $   4,220     $ 3,094     $ 1,126    
     36.4 %
As a percentage of sales                    8.9 %       9.9 %                    (1.0 )%




General and administrative expenses increased $1.1 million, or 36.4%, for the
six months ended June 30, 2022 as compared to the same period of the prior year.
The increase in these expenses was due to increased stock compensation expense,
professional and accounting fees, and business insurance, and a $0.4 million
increase in expenses associated with the acquisition of AMG on January 31, 2022
(and, thus, there were no corresponding general and administrative expenses by
AMG included in our results of operations for the comparable period in 2021). As
a percentage of sales, general and administrative costs increased 100 basis
points primarily due to higher sales volume for the six months ended June 30,
2022.


Interest charges. The decrease in interest expense to $35,000 of $50,000 last year was attributable to a decrease in the average debt balance compared to the same period last year.



Gain on extinguishment of debt. We recorded a gain on extinguishment of debt of
$1.2 million in the first half of 2021 in connection with the SBA's forgiveness
of the PPP Loans.



Income tax (expense) benefit. Income tax expense was approximately $0.6 million
and $0.1 million for the six months ended June 30, 2022 and June 30, 2021,
respectively. The higher income tax rate this period is associated with higher
income before income taxes and in the prior year period, the PPP loan
forgiveness was not subject to federal income tax.



Net revenue. The net income was $1.6 million compared to $1.5 million at the same time last year.



22



Cash and capital resources

As of June 30, 2022, our principal sources of liquidity were cash totaling $8.5
million and $9.0 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, 2021. Based on our recent trends and our current projections, we expect to
generate cash from operations for the year ending December 31, 2022. 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.



Our ability to continue to meet our cash requirements will depend on, among
other things, the effect of COVID-19 on U.S. and global economic activity,
continuing disruptions in supply chains and labor shortages across industry
sectors contributed to by the COVID-19 pandemic, the effects of inflation, 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 unpredictability of the COVID-19 global pandemic and
its effect on our company, customers and suppliers. Consequently, the duration
of the pandemic 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)



                            June 30,      December 31,       Increase/
                              2022            2021           (Decrease)
                                           (in thousands)
Current assets              $  30,367     $      19,334     $     11,303
Current liabilities            32,587            18,352           14,235
Working capital (deficit)   $  (2,220 )   $         982     $     (3,202 )




The working capital deficit as of June 30, 2022 was primarily due to the cash
paid for the acquisition of AMG. Deferred revenue increased at June 30, 2022 as
compared to December 31, 2021 was due to an $8.7 million large enterprise retail
customer order placed in January 2022, all of which was paid in cash as of June
30, 2022. The estimated cost to deliver this order is approximately $7.4
million.



Line of Credit


On July 30, 2021, we entered into a Loan and Security Agreement (the "Loan
Agreement") with MUFG Union Bank, National Association. The Loan Agreement
provides for a revolving line of credit of up to $9.0 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, 2024.


From June 30, 2022we could borrow up to $9.0 millionand had no outstanding borrowings under the line of credit.


EIDL Promissory Note



On August 27, 2020, we received $150,000 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
that began on August 27, 2021.




23




Cash Flow Analysis



                                               Six Months Ended
                                                   June 30,
                                              2022          2021
                                                (in thousands)

Net cash flow generated by operating activities $12,872 $2,491
Net cash used in investing activities (5,620 ) (325 ) Net cash used in financing activities (1,380 ) (1,204 ) Net increase in cash

                        $  5,872      $    962




Operating Activities



Net cash provided by operating activities increased to $12.9 million for the six
months ended June 30, 2022 from $2.5 million for the six months ended June 30,
2021. The increase was primarily due to an increase in deferred revenue during
the six months ended June 30, 2022.



Investing Activities



Net cash used in investing activities was $5.6 million for the six months ended
June 30, 2022 which is comprised of cash payments in connection with the
acquisition of AMG, the acquisition of the customer list and relationships of
Boston Technologies, and capital expenditures of property and equipment. Net
cash used in investing activities was $0.3 million for the six months ended June
30, 2021 which is comprised of cash payments delivered in the first half of 2021
in connection with the acquisition of ExtenData and purchases of capital
expenditures of property and equipment.



Financing Activities



Net cash used in financing activities was $1.4 million for the six months ended
June 30, 2022 due to the payment of employee taxes on the cashless exercise of
employee stock options. Net cash used in financing activities was $1.2
million for the six months ended June 30, 2021, which was primarily comprised of
payments on the line of credit.



Stock Issuances


For the six months ended June 30, 2022, certain employees exercised vested stock
options previously granted under the 2014 Plan through a cashless exercise. The
options exercised were net settled in satisfaction of the exercise price and
employee share-based tax withholding. These shares were issued pursuant to an
S-8 Registration Statement dated July 7, 2021 with respect to shares issuable
pursuant to the 2014 Plan. The exercised options, utilizing a cashless exercise,
are summarized in the following table:



                Weighted                                                                              Employee
                 Average        Shares Net         Shares                  

Weighted Exercise of Stock-Based Options Settled for Holdback Net shares Medium

            Tax

Exercise price exercised for taxes issued

Withholding tax on share price

   550,834     $      3.48           194,681         142,479          213,674     $        9.85     $  1,403,191



Significant 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.




24



The acquisition of Advanced Mobile Group, LLC

We completed the acquisition of Advanced Mobile Group, LLC ("AMG") for $5.1
million on January 31, 2022. We accounted for this transaction under the
acquisition method of accounting for business combinations. Accordingly, the
purchase price was allocated, on a preliminary basis, to the assets acquired and
liabilities assumed based on their respective estimated fair values, including
identified intangible assets of $2.2 million and resulting goodwill of $1.9
million. Our preliminary fair value estimates of intangible assets were
determined using valuation techniques based on estimates and assumptions used
for similar intangible assets we acquired in connection with the acquisition of
ExtenData in December 2020. As disclosed in Note 3 to the accompanying condensed
consolidated financial statements, during the quarter ended June 30, 2022,
management continued to refine its estimates of the fair value of assets
acquired and liabilities assumed. Included in the purchase price of AMG, is
contingent consideration of $0.5 million, subject to EBITDA results of AMG
during each of the two years following the closing of the acquisition. We
estimated the fair value of the contingent consideration based on the financial
forecasts of AMG. The estimated fair values associated with the acquisition of
AMG are subject to change during the measurement period which is not expected to
exceed one year after the date of acquisition. Any adjustments to our
preliminary purchase price allocation identified during the measurement period
will be recognized in the period in which the adjustments are determined and
recorded against goodwill.



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, 2021. Other than the acquisition of
AMG, 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, 2021.

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