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 theSecurities and Exchange Commission . Some additional factors that could cause actual results to differ include:
? our plans to obtain any requisite outside funding for our current and
proposed operations and potential acquisition and expansion efforts;
? the impacts from the COVID-19 pandemic, or any other health epidemic, on
our business, our clientele, supply chains, the labor markets, or the
global economy as a whole;
? the concentration of our customers and the potential effect of the loss of
a significant customer;
? debt obligations of the Company arising from our line of credit 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 revenue, capital
requirements and needs for additional financing;
? general economic conditions, including effects of inflation, market
volatility, interest rate increases, 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 inUnited States Dollars ("$") and are prepared in accordance withU.S. GAAP. In this Quarterly Report, unless otherwise specified, all dollar amounts are expressed inUnited States dollars and all references to "common shares" refer to the common shares in our capital stock. Overview
DecisionPoint is a provider and integrator of mobility and wireless systems for business organizations. The Company designs, deploys and supports 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). The Company also integrates data capture equipment including bar code scanners and radio frequency identification (RFID) readers. InJanuary 2022 , we completed the acquisition ofAdvanced Mobile Group, LLC ("AMG"), a privately held company headquartered inDoylestown, Pennsylvania .DecisionPoint acquired AMG to expandDecisionPoint's mobility-first enterprise solutions and service offerings and grow its capabilities in the mid-Atlantic region. AMG is a regional leader providing services, hardware, software, integration, and wireless networking solutions, with deep experience in warehousing and distribution, manufacturing, mobile workforce automation, retailing, and healthcare segments, and 600 customers. 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, 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 been significantly impacted by COVID-19 and the pandemic has contributed to disruptions in supply chains and labor shortages across industries, and therefore We have experienced supplier shipment delays due to a supply chain and logistic challenges resulting in delays in product revenue recognition of approximately$10 million during the first quarter of 2022. Our results of operations during the first quarter 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 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. 14
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.
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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
March 31,
2022 2021
Statements of Income Data:
Net sales $ 19,721 $ 16,072
Cost of sales 15,047 12,234
Gross profit 4,674 3,838
Sales and marketing expenses 2,175 1,889
General and administrative expenses 2,261 1,620
Total operating expenses
4,436 3,509 Operating income 238 329 Interest expense (25 ) (29 ) Gain on extinguishment of debt - 1,211 Other, net 4 Income before income taxes 217 1,511 Income tax benefit (expense) 637 (178 ) Net income$ 854 $ 1,333 Percentage ofNet Sales : Net sales 100.0 % 100.0 % Cost of sales 76.3 % 76.1 % Gross profit 23.7 % 23.9 % Sales and marketing expenses 11.0 % 11.8 %
General and administrative expenses 11.5 % 10.1 %
Total operating expenses
22.5 % 21.8 % Operating income 1.2 % 2.0 % Interest expense -0.1 % -0.2 % Gain on extinguishment of debt 0.0 % 7.5 % Other, net 0.0 % 0.0 % Income before income taxes 1.1 % 9.4 % Income tax benefit (expense) 3.2 % -1.1 % Net income 4.3 % 8.3 %
Results of Operations for the First Quarter of 2022 compared to the First
Quarter of 2021 (Unaudited)
Net sales
Three Months Ended
March 31, Dollar Percent
2022 2021 Change Change
(dollars in thousands)
Hardware and software $ 14,300 $ 10,466 $ 3,834 36.6 %
Consumables 1,280 1,459 (179 ) (12.3 )%
Services 4,141 4,147 (6 ) (0.1 )%
$ 19,721 $ 16,072 $ 3,649 22.7 %
Net sales increased by 22.7%, or $3.6 million , during the three months ended
March 31, 2022 as compared to the same period of the prior year. The increase in
net sales was driven by higher hardware sales to three of our large enterprise
customers and a $2.2 million increase in overall net sales associated with sales
by AMG which we acquired on January 31, 2022 (and, thus, there were not
corresponding sales by AMG included in our results of operations for the
comparable period in 2021).
16
Cost of sales
Three Months Ended
March 31, Dollar Percent
2022 2021 Change Change
(dollars in thousands)
Hardware and software $ 11,537 $ 8,427 $ 3,110 36.9 %
Consumables 885 1,024 (139 ) (13.6 )%
Services 2,625 2,783 (158 ) (5.7 )%
$ 15,047 $ 12,234 $ 2,813 23.0 %
Cost of sales increased by 23.0%, or $2.8 million during the three months ended
March 31, 2022 as compared to the same prior year period primarily due to higher
hardware sales volume and a $1.4 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 not corresponding costs of sales of AMG included in our results
of operations for the comparable period in 2021).
Gross profit
Three Months Ended
March 31,
2022 2021
(dollars in thousands)
Gross profit:
Hardware and software $ 2,763 $ 2,038
Consumables 395 435
Services 1,516 1,365
Total gross profit $ 4,674 $ 3,838
Gross profit percentage:
Hardware and software 19.3 % 19.5 %
Consumables 30.9 % 29.8 %
Services 36.6 % 32.9 %
Total gross profit percentage 23.7 % 23.9 %
Gross profit increased $0.8 million for the three months ended March 31, 2022 as
compared to the prior year period, primarily as a result of overall higher sales
volume and the other impacts noted above. Overall gross profit margin decreased
20 basis points due to a shift in mix to hardware sales with lower profit
margins.
Sales and marketing expenses
Three Months Ended
March 31, Dollar Percent
2022 2021 Change Change
(dollars in thousands)
Sales and marketing expenses$ 2,175 $ 1,889 $ 286
15.1 % As a percentage of sales 11.0 % 11.8 % - (0.7 )% Sales and marketing expenses increased$0.3 million , or 15.1%, for the three months endedMarch 31, 2022 as compared to the prior year period due to increased expenses for AMG operations that was acquired onJanuary 31, 2022 (and, thus, there were not corresponding sales and marketing expenses of AMG included in our results of operations for the comparable period in 2021). As a percentage of sales, sales and marketing expenses decreased 70 basis points primarily due to incremental one-time costs associated with the sales integration efforts with ExtenData incurred for the three months endedMarch 31, 2021 . 17
General and administrative expenses
Three Months Ended
March 31, Dollar Percent
2022 2021 Change Change
(dollars in thousands)
General and administrative expenses$ 2,261 $ 1,620 $ 641
39.6 % As a percentage of sales 11.5 % 10.1 % - 1.4 % General and administrative expenses increased$0.6 million , or 39.6%, for the three months endedMarch 31, 2022 as compared to the same period of the prior year. The increase in costs was due to higher director, executive and employee compensation, an increase in legal and compliance costs, and a$0.1 million increase in expenses associated with the acquisition of AMG onJanuary 31 (and, thus, there were not 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 140 basis points primarily due to higher fixed director and executive compensation not correlated with the higher sales volume.
Interest expense. The decrease in interest expense to
quarter of 2022 from
decrease in debt levels as compared to the same period last year.
Income tax benefit (expense). Income tax benefit was approximately$637,000 for the three months endedMarch 31, 2022 and income tax expense was$178,000 for the three months endedMarch 31, 2021 . The income tax benefit was due to lower income before income taxes and the recognition of excess tax benefits associated with stock option exercise activity in the first quarter of 2022.
Net income. Net income was
period last year.
Liquidity and Capital Resources
As ofMarch 31, 2022 , our principal sources of liquidity were cash totaling$9.3 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 endedDecember 31, 2018 throughDecember 31, 2021 . Based on our recent trends and our current projections, we expect to generate cash from operations for the year endingDecember 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 onU.S. and global economic activity, continuing disruptions in supply chains and labor shortages across industry sectors caused by the COVID-19 pandemic, 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 the Company and its 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. 18 Working Capital (Deficit) March 31, December 31, Increase/ 2022 2021 (Decrease) (in thousands) Current assets$ 28,684 $ 19,334 $ 9,350 Current liabilities 33,148 18,352 14,796
Working capital (deficit) (4,464 ) 982 (5,546
) The working capital deficit as ofMarch 31, 2022 was due to cash paid for the acquisition of AMG. Deferred revenue increased atMarch 31, 2022 as compared toDecember 31, 2021 due to a$14.0 million large enterprise retail customer order placed inJanuary 2022 , all of which was paid in cash as ofMarch 31, 2022 .
Line of Credit
OnJuly 30, 2021 , we entered into a Loan and Security Agreement (the "Loan Agreement") withMUFG 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 onJuly 31, 2024 .
As of
outstanding borrowings under the line of credit.
EIDL Promissory Note OnAugust 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$731 beginning onAugust 27, 2021 . Cash Flow Analysis Three Months EndedMarch 31, 2022 2021 (in thousands)
Net cash provided by operating activities
Net cash used in investing activities
(4,907 ) (243 ) Net cash used in financing activities - (1,204 ) Net increase (decrease) in cash$ 6,762 $ (189 ) Operating Activities Net cash provided by operating activities increased to$11.7 million for the three months endedMarch 31, 2022 from$1.3 million for the three months endedMarch 31, 2021 . The increase was primarily due to an increase in deferred revenue. 19 Investing Activities
Net cash used in investing activities was$4.9 million for the three months endedMarch 31, 2022 which is comprised of cash payments in the first quarter of 2022 in connection with the acquisition of AMG and Boston Technologies and purchases of capital expenditures of property and equipment. Net cash used in investing activities was$0.2 million for the three months endedMarch 31, 2021 which is comprised of cash payments delivered in the first quarter 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
ended
credit.
Stock Issuances
For the three months ended
stock options through a cashless exercise. The options exercised were net
settled in satisfaction of the exercise price and employee share-based tax
withholding. The exercised options, utilizing a cashless exercise, are
summarized in the following table:
Weighted Employee
Average Shares Net Shares Weighted Share-Based
Options Exercise Settled for Withheld Net Shares Average Tax
exercised Price Exercise for Taxes Issued Share Price Withholding
550,834 $ 3.48 194,681 142,479 213,674 $ 9.85 $ 1,403,191
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted inthe 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.
Acquisition of
We completed the acquisition ofAdvanced Mobile Group, LLC ("AMG") for$5.0 million onJanuary 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$3.1 million and resulting goodwill of$1.0 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 inDecember 2020 . 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 endedDecember 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 endedDecember 31, 2021 . 20
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