The selling security holders may offer and sell any
of the shares from time to time in a number of different ways and at varying prices, and may engage a broker, dealer or underwriter to
sell the shares. Information regarding the selling security holders and the times and manner in which they may offer and sell the shares
under this prospectus is provided under “Selling Security Holders” and “Plan of Distribution” in the prospectus
dated February 1, 2021. See “Plan of Distribution” beginning on page 28 of the prospectus for more information about how the
selling security holders may sell or otherwise dispose of the shares of common stock being registered pursuant to the prospectus.
We are filing this prospectus supplement to supplement
and amend the information previously included in the prospectus with the information contained in our Special Financial Report for the
year ended December 31, 2020 on Form SP 15D2 (the “Form SP 15D2”) filed with the Securities and Exchange Commission on April
6, 2021. Accordingly, we have attached our Form SP 15D2 to this prospectus supplement. You should read this prospectus supplement together
with the prospectus and any prior prospectus supplements thereto, each to be delivered with this prospectus supplement.
Our common stock is quoted on the OTCQX Best Market
under the symbol “DPSI”. On April 29, 2021 the last reported sale of our common stock on the OTCQX Best Market was $2.75 per
share.
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition
of “large accelerated filer,” “accelerated filer,” “small reporting company,” and "emerging
growth company" in Rule 12b-2 of the Exchange Act.
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. ☐
As of June 30, 2020, the aggregate market value of the registrant’s
Common Stock held by non-affiliates of the registrant was $11,100,912.
The number of shares outstanding of the registrant’s
Common Stock, $0.001 par value, was 13,576,223 as of March 31, 2021.
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 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 professional 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
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 June 2018, we acquired 100% of the outstanding stock of
Royce Digital Systems, Inc. (“RDS”), located in Irvine, California for consideration of $5.6 million. RDS provides innovative
enterprise print and mobile technologies, deployment services and on-site maintenance.
In December 2020, we acquired 100% of all of the issued and outstanding
membership interests of ExtenData Solutions, LLC (“ExtenData”) for $5.2 million, including contingent consideration. As a
result of the acquisition, ExtenData became a wholly owned subsidiary of the Company. ExtenData is focused on enterprise mobility solutions
and that provides software product development, mobile computing, identification and tracking solutions, and wireless tracking solutions.
See Note 3 for additional information.
Note 2: Basis of Presentation and Summary of Significant
Accounting Policies
Basis of Presentation
The consolidated financial statements of DecisionPoint Systems, Inc.
and its subsidiaries have been prepared on an accrual basis of accounting in accordance with United States Generally Accepted Accounting
Principles (“U.S. GAAP”). The accompanying 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”), Royce Digital Systems, Inc. (“RDS”) and ExtenData. ExtenData was acquired on December 4, 2020 and as such,
has been consolidated into our financial position and results of operations beginning December 5, 2020. All our identifiable assets are
in the United States and all intercompany transactions have been eliminated in consolidation.
COVID-19
COVID-19 and the response to the virus have negatively impacted
overall economic conditions. The potential future impacts of COVID-19, while uncertain, could materially adversely impact the
Company's results of operations. The financial related impact and duration cannot be reasonably estimated at this time.
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.
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.
Accounts Receivable
Accounts receivable are stated at net realizable value, and
as such, earnings are charged with a provision for doubtful accounts based on our best estimate of the amount of probable credit
losses in our existing accounts receivable. We determine an allowance based on historical write-off experience and specific account
information available. Accounts receivable are reflected in the accompanying consolidated balance sheets net of a valuation allowance
of $92,000 and $37,000 as of December 31, 2020 and 2019 respectively. When internal collection efforts on accounts have been exhausted,
the accounts are written off by reducing the allowance for doubtful accounts and the related customer receivable.
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 a reduction of inventory to net realizable value and a charge to cost of sales. Inventories are reflected in the accompanying
consolidated balance sheets net of a valuation allowance of $41,000 and $33,000 as of December 31, 2020 and 2019, respectively.
Deferred Costs
Deferred costs consist primarily of customer-related third-party
extended hardware and software maintenance services which we have paid for in advance. The costs are ratably amortized over the
life of the contract, generally one to five years.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, generally from three to five years. Leasehold improvements are recorded
at cost and amortized over the shorter of the lease term or the life of the improvements. Cost incurred for repairs and maintenance are
expensed as incurred. Upon retirement or sale, the cost and related accumulated depreciation and amortization of disposed assets are removed
from the accounts and any resulting gain or loss is included in other income or expense.
Operating Leases
We recognize a right-of-use asset and lease liability for all
of our long-term leases at the commencement date. Lease liabilities are measured based on the present value of the minimum lease
payments discounted at our incremental borrowing rate as of the date of commencement, which is determined based on information
available at lease commencement and is equal to the rate of interest that we would have to pay to borrow on a collateralized basis
over a similar term in an amount equal to the lease payments in a similar economic environment. Right-of-use assets are measured
based on the lease liability adjusted for any initial direct costs, prepaid rent, or lease incentives. Operating lease costs are
included within general and administrative expenses on the consolidated statements of income and comprehensive income.
Capitalized Software Development Costs
The capitalization of software development costs for external
use begins when technological feasibility has been established and ends when the software is available for sale. Software development
costs are amortized on a straight-line line basis over the remaining economic life, generally three years. Amortization of the
capitalized software is classified within cost of sales for services in the consolidated statements of income and comprehensive
income.
Intangible Assets and Long-lived Assets
We evaluate our intangible and long-lived assets for impairment when
events or circumstances arise that indicate intangible and long-lived assets may be impaired. Indicators of impairment include, but are
not limited to, a significant deterioration in overall economic conditions, a decline in the market capitalization, the loss of significant
business, or other significant adverse changes in industry or market conditions. We completed the qualitative assessment for impairment
and determined that there was no impairment during the years ended December 31, 2020 and 2019. There can be no assurance, however, that
market conditions will not change or demand for our products will continue, which could result in an impairment of intangible and long-lived
assets in the future.
Intangible assets with finite useful lives are amortized over
their respective estimated useful lives using an accelerated method to their estimated residual values, if any. Our intangible
assets consist of customer lists, customer relationships and trade names. Refer to Notes 3 and 4 for further information on our
intangible assets.
Goodwill
Goodwill represents the excess of the purchase price paid over the
fair value of the net assets acquired. Goodwill is not amortized but tested for impairment at least annually or whenever events or changes
in circumstance indicate that carrying values may not be recoverable. We assess the impairment of goodwill annually at each year-end and
when indicators of impairment are present.
We completed our annual assessment for goodwill impairment and determined
that goodwill was not impaired as of December 31, 2020 and 2019. For the year ended December 31, 2020, we recognized additional goodwill
of $1.1 million related to a business acquisition as further described in Note 3.
Factors that we consider important that could trigger an impairment
assessment include, but not limited to, the following:
|
●
|
significant under-performance relative to historical
and projected operating results;
|
|
●
|
significant changes in the manner of use of
the acquired assets or business strategy; and
|
|
●
|
significant negative industry or general economic
trends.
|
When performing the impairment review, we determine the carrying amount
of a reporting unit by assigning assets and liabilities, including the existing goodwill, to each reporting unit. To evaluate whether
goodwill is impaired, we compare the estimated fair value of each reporting unit to which the goodwill is assigned to the reporting unit’s
carrying amount. If the carrying amount of a reporting unit exceeds its fair value, the amount of the impairment loss will be recognized
as the difference of the estimated fair value and the carrying value of the reporting unit.
Determining the fair value of a reporting unit is judgmental in nature
and involves the use of significant estimates and assumptions. These estimates and assumptions include determining enterprise fair value
and the allocation of enterprise fair value to the Company’s operating segments, revenue and expense growth rates, capital expenditures
and the depreciation and amortization related to capital expenditures, changes in working capital, discount rates, risk-adjusted discount
rates, future economic and market conditions and the determination of appropriate comparable companies. Due to the inherent uncertainty
involved in making these estimates, actual future results related to assumed variables could differ from these estimates.
Fair Value Measurement
Fair value is the price that would be received from selling an asset
or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants as of the measurement date. Applicable accounting guidance provides a hierarchy for inputs used
in measuring fair value that prioritize the use of observable inputs over the use of unobservable inputs when such observable inputs are
available. The three levels of inputs that may be used to measure fair value are as follows:
|
●
|
Level 1 - Quoted prices in active markets for
identical assets or liabilities.
|
|
●
|
Level 2 - Observable inputs other than Level
1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent
transactions (less active markets), or model-driven valuations in which all significant inputs are observable or can be derived
principally from, or corroborated with, observable market data.
|
|
●
|
Level 3 - Fair value is derived from valuation
techniques in which one or more significant inputs are unobservable, including assumptions and judgments made by us.
|
The carrying amounts of cash, accounts receivable, accounts payable
and accrued expenses, and line of credit approximate fair value due to the short-term nature of these financial instruments. The carrying
amount of our debt approximates its fair value as the credit markets have not materially changed since the original borrowing dates.
Business Combinations
We utilize the acquisition method of accounting for business combinations
which allocates the purchase price of an acquisition to the various tangible and intangible assets acquired and liabilities assumed based
on their estimated fair values. We primarily establish fair value using the income approach based upon a discounted cash flow model. The
income approach requires the use of many assumptions and estimates including future revenues and expenses, as well as discount factors
and income tax rates. Other estimates include:
|
●
|
Estimated step-ups or write-downs for fixed
assets and inventory;
|
|
●
|
Estimated fair values of intangible assets;
and
|
|
●
|
Estimated liabilities assumed from the target
|
While we use our best estimates and assumptions as part of
the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business acquisition
date, these estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchase price
allocation period, which is generally no more than one year from the business acquisition date, we may record adjustments to the
assets acquired and liabilities assumed, with the corresponding offset to goodwill.
Revenue Recognition
We determine revenue recognition through the following steps:
(1) identification of the contract with a customer; (2) identification of the performance obligations in the contract; (3) determination
of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition
of revenue when, or as, a performance obligation is satisfied.
We combine contracts with the same customer into a single contract
for accounting purposes when the contracts are entered into at or near the same time and the contracts are negotiated as a single
commercial package, consideration in one contract depends on the other contract, or the services are considered a single performance
obligation. If an arrangement involves multiple performance obligations, the items are analyzed to determine the separate units
of accounting, whether the items have value on a standalone basis and whether there is objective and reliable evidence of their
standalone selling price. The total contract transaction price is allocated to the identified performance obligations based upon
the relative standalone selling prices of the performance obligations. The standalone selling price is based on an observable
price for services sold to other comparable customers, when available, or an estimated selling price using a cost plus margin
approach. We estimate the amount of total contract consideration we expect to receive for variable arrangements by determining
the most likely amount we expect to earn from the arrangement based on the expected quantities of services we expect to provide,
and the contractual pricing based on those quantities. We only include some or a portion of variable consideration in the transaction
price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur or when the
uncertainty associated with the variable consideration is subsequently resolved. We consider the sensitivity of the estimate,
our relationship and experience with our client and variable services being performed, the range of possible revenue amounts and
the magnitude of the variable consideration to the overall arrangement.
As discussed in more detail below, 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. Observable prices are used to determine the standalone selling price
of separate performance obligations, or a cost plus margin approach is used when observable prices are not available. Sales, value-added
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 December 31, 2020, the total aggregate transaction price
allocated to the unsatisfied performance obligations was approximately $7.8 million, of which approximately $4.6 million is expected
to be recognized over the next 12 months.
Hardware, consumables, and software products - We recognize
product revenue at the point in time when a client takes control of the hardware, consumables and/or software, which typically occurs
when title and risk of loss have passed to the client. Our selling terms and conditions reflect that F.O.B ‘dock’ contractual
terms establish that control is transferred from us at the point in time when the product is shipped to the customer.
Revenues from software license sales are recognized as a single performance
obligation on a gross basis as we are acting as a principal in these transactions at the point the software license is delivered to the
customer. Generally, software licenses are sold with accompanying third-party delivered software assurance, which allows customers to
upgrade, at no additional cost, to the latest technology if new capabilities are introduced during the period that the software assurance
is in effect. In most instances, we determined that the accompanying third-party delivered software assurance is critical or essential
to the core functionality of the software license because we do not sell the software license and standard warranty on a standalone basis
(which indicates that the customer cannot benefit from the software license and standard warranty on its own), the software license and
the standard warranty are not separately identifiable, the software license assurance warranty are inputs of a combined item in the contract,
the assurance warranty and software license are highly interdependent and interrelated because the core functionality of the license is
dependent on the assurance warranty, and our promise to provide the assurance warranty that is necessary for the software license to continue
to provide significant benefit to the customer. As a result, the software license and the accompanying third-party delivered software
assurance are recognized as a single performance obligation. For certain of our agreements, the accompanying third-party delivered software
assurance is recognized on a net basis when we are acting as an agent in these transactions. We consider several factors to determine
whether we are acting as a principal or an agent, including whether we are the primary obligor to the customer, have established our own
pricing and have inventory and credit risks.
Our internally developed software solution generates SaaS revenues
from implementation, training and subscription fees. The initial term of the SaaS agreements is generally one year. The subscription
fees are recognized over the subscription period. The implementation fees are necessary and integral for the customer to utilize
the software. As such, the implementation fees are deferred and amortized over the subscription period.
We also offer third-party SaaS subscriptions to our customers.
The third-party subscriptions are recognized on a net basis as we are acting as an agent in these transactions, whereas our
internally developed software solution offering is recognized on a gross basis.
We leverage drop-ship shipments with many of our partners and
suppliers to deliver hardware and consumable products to our clients without having to physically hold the inventory at our warehouses,
thereby increasing efficiency and reducing costs. We recognize revenue for drop-ship arrangements on a gross basis as the principal
in the transaction when the product is received by the client because we control the product prior to transfer to the client.
We also assume primary responsibility for the fulfillment in the arrangement, we assume inventory risk if the product is returned
by the client, we set the price of the product charged to the client, we assume credit risk for nonpayment by our customer, and
we work closely with clients to determine their hardware specifications.
Professional services - We provide professional services
which include consulting, staging, deployment, installation, repair and customer specified software customization. The arrangement
is based on either a time and material basis or a fixed fee. For our time and materials service contracts, we recognize revenues
as those services are provided and consumed, as this is the best output measure of how the services are transferred to the customer.
Fixed fee contracts are recognized in the period in which the services are performed or delivered using a proportional service
model. Except for installation services that are recognized over the subscription period as previously described, all other professional
services are recognized on a gross basis in the period in which the services are performed or delivered.
Maintenance services - We sell certain Original Equipment
Manufacturer (“OEM”) hardware and software maintenance support arrangements to our clients. We also offer an internal
maintenance agreement related to hardware. These contracts are support service agreements for the hardware and/or software products
that were acquired from us and others. Although these are third-party support agreements for maintenance on the specific hardware
and/or software products, our internal help desk and systems engineers assist customers by providing technical assistance on the
source of or how to fix the problem. In addition, we also provide a turn back feature, deploying replacements as needed while
we manage the return and reverse logistics of the product back to the OEM. Revenue related to service contracts is recognized
ratably over the term of the agreement, generally over one to three years.
We act as the principal in the transaction as the primary obligor
for fulfillment in the arrangement, we set the price of the service charged to the customer, and we assume credit risk for the
amounts invoiced. In addition, we manage back-end warranties, service contracts and repairs for multiple products and suppliers.
We leverage our knowledge base of mobility best practices by consolidating multiple supplier’s maintenance
requirements under a single point in contact through us. Our internal support team assists our customers first by performing an
initial technical triage to determine the source of the problem including, but not limited to, physical damage and software issues
and whether they can be handled remotely by the client or returned for repair. Further, we receive the returned products, confirm
that the equipment is operational or not, either repair or refurbish the equipment internally or return it to the manufacturer
directly to repair. We then obtain the product turn back from the manufacturer and either send it back out to a specific customer
location or place in a customer’s spare pool. As a result, we recognize the revenue on a gross basis.
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 December 31, 2020 and 2019, we deferred $136,417 and $109,309, respectively, of related contract acquisition costs. We recorded $27,108
and $35,752 in amortized deferred contract acquisition costs in 2020 and 2019, respectively.
The following table summarizes net sales by revenue source
(in thousands):
|
|
Year
Ended
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Hardware and software
|
|
$
|
47,416
|
|
|
$
|
27,184
|
|
Consumables
|
|
|
3,257
|
|
|
|
4,806
|
|
Professional services
|
|
|
12,687
|
|
|
|
11,899
|
|
|
|
$
|
63,360
|
|
|
$
|
43,889
|
|
Concentration of Risk
Financial instruments that potentially subject us to a concentration
of credit risk consist primarily of cash and accounts receivable. All our cash balances are insured by the Federal Deposit Insurance
Corporation (“FDIC”) up to $250,000 per depositor at each financial institution. As of December 31, 2020, we had $2,014,000
on deposit in excess of the insurance limits. We have not experienced any such losses in these accounts.
In 2020, Kaiser Permanente and Nordstrom accounted for approximately
20%, or $12.9 million, and 31%, or $19.6 million, of our net sales, respectively. No other single customer in 2020 accounted for
more than 10% of net sales.
Accounts receivable from these customers at December 31, 2020
accounted for 48% of total accounts receivable.
For the year ended December 31, 2020, we had purchases from
two suppliers that collectively represented 65% of total purchases and 82% of accounts payable at December 31, 2020. Loss of a
significant vendor could have a material adverse effect on our operations.
In 2019, Kaiser Permanente and Pitney Bowes accounted for approximately
24%, or $10.8 million, and 11%, or $4.7 million, of our net sales, respectively. No other single customer in 2019 accounted for
more than 10% of net sales.
Accounts receivable from these customers at December 31, 2019
accounted for 58% of total accounts receivable.
For the year ended December 31, 2019, we had purchases from
two suppliers that collectively represented 73% of total purchases and 85% of accounts payable at December 31, 2019.
Share-Based Compensation
We account for share-based compensation in accordance with the provisions
of ASC Topic 718 “Compensation – Stock Compensation”. Under ASC 718, share-based compensation cost is measured at the
grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service
period (generally the vesting period of the equity grant).
Stock-based compensation expense recognized during the period is based
on the value of the portion of stock-based payment awards that is ultimately expected to vest during the period. Given that stock-based
compensation expense recognized in the accompanying consolidated statements of income and comprehensive income is based on awards ultimately
expected to vest, it has been reduced for estimated forfeitures. We account for forfeitures as they occur, rather than estimate expected
forfeitures.
Compensation cost for stock awards, which include restricted
stock units (“RSUs”), is measured at the fair value on the grant date and recognized as expense, net of estimated
forfeitures, over the related service period. The fair value of stock awards is based on the estimated fair value of our common
stock on the grant date.
The estimated fair value of common stock option awards is calculated
using the Black-Scholes option pricing model. The Black-Scholes model requires subjective assumptions regarding future stock price
volatility and expected time to exercise, along with assumptions about the risk-free interest rate and expected dividends, all
of which affect the estimated fair values of our common stock option awards. Given a lack of historical stock option exercises,
the expected term of options granted is calculated as the average of the weighted vesting period and the contractual expiration
date of the option. This calculation is based on a method permitted by the Securities and Exchange Commission in instances where
the vesting and exercise terms of options granted meet certain conditions and where limited historical exercise data is available.
The expected volatility is based on the historical volatility of the common stock of comparable public companies that operate
in similar industries as us.
The risk-free rate selected to value any particular grant is
based on the U.S. Treasury rate that corresponds to the expected term of the grant effective as of the date of the grant. The
expected dividend assumption is based on our history and management’s expectation regarding dividend payouts.
Compensation expense for common stock option awards with graded
vesting schedules is recognized on a straight-line basis over the requisite service period for the last separately vesting portion
of the award, provided that the accumulated cost recognized as of any date at least equals the value of the vested portion of
the award.
If there are any modifications or cancellations of the underlying
vested or unvested stock-based awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based
compensation expense, or record additional expense for vested stock-based awards. Future stock-based compensation expense and
unearned stock- based compensation may increase to the extent that we grant additional common stock options or other stock-based
awards.
Income Taxes
We utilize the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the consolidated
financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences
are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Under ASC Topic 740, the impact of an uncertain income tax
position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit
by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood
of being sustained. Additionally, ASC Topic 740 provides requirements for derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. Our policy is to recognize interest and/or penalties related to income
tax matters in income tax expense.
At December 31, 2020 and 2019, we had no unrecognized tax benefits
that, if recognized, would affect our effective income tax rate over the next 12 months. As of December 31, 2020 and 2019, we had no accrued
interest or penalties.
Accounting Standards Adopted
We adopted ASU 2018-13, Fair Value Measurement (Topic 820),
– Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which makes a number
of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated
with Level 1, Level 2 and Level 3 fair value measurements. The adoption of this guidance did not have an impact on our consolidated
financial statements.
We adopted ASU No. 2018-15, Intangibles–Goodwill
and Other–Internal-Use Software that requires implementation costs incurred by customers in cloud computing
arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer
in a software licensing arrangement under the internal-use software guidance in ASC Topic 350, Intangibles–Goodwill
and Other. This ASU requires a customer to disclose the nature of its hosting arrangements that are service contracts
and provide disclosures as if the deferred implementation costs were a separate, major depreciable asset class. The adoption
of this guidance did not have a material impact on our consolidated financial statements.
Accounting Standards Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments
– Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU will require 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. The guidance was initially effective for us in the first quarter of 2020.
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, defers 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. Early adoption is permitted. Although management continues to analyze the provisions of this ASU, currently,
we believe the adoption of this ASU will not significantly impact the Company’s consolidated results of operations and financial
position.
In December 2019, the FASB issued ASU 2019-12, “Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” to simplify various aspects related to accounting for
income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing
guidance to improve consistent application. ASU 2019-12 is effective for us beginning in the first quarter of 2022. We do not
expect this guidance to have a material impact on our consolidated financial statements.
In October 2020, the FASB issued ASU 2020-10, “Codification
Improvements”. This ASU amends a variety of Topics, including presentation and disclosures of financial statements, interim
reporting, accounting changes and error corrections. This ASU will be effective for us in the first quarter of 2021, with early adoption
permitted. We do not expect this guidance to have a material impact on our consolidated financial statements.
There are no other accounting standards that have been issued
but not yet adopted that we believe could have a material impact on our consolidated financial statements.
Note 3: Acquisitions
ExtenData Solutions, LLC
On December 4, 2020, the Company entered into a Membership Unit Purchase
Agreement (the “Purchase Agreement”) and concurrently therewith closed upon the acquisition of all of the issued and outstanding
membership interests of ExtenData for $5,169,787. The consideration we paid is comprised of cash of $4,419,787, of which $4,250,000 was
paid as of December 31, 2020, and an estimated earn-out obligation valued at $750,000, subject to the financial performance of ExtenData
during each of the two years following the closing of the acquisition. The earn-out obligation is recorded in other liabilities in the
consolidated balance sheet as of December 31, 2020. As a result of the acquisition, ExtenData became a wholly owned subsidiary of the
Company. ExtenData is focused on enterprise mobility solutions and provides software product development, mobile computing, identification
and tracking solutions, and wireless tracking solutions.
The acquisition was accounted for using the acquisition method
pursuant to ASC Topic 805, Business Combinations. Accordingly, goodwill has been measured as the excess of the total consideration
over the amounts assigned to the identifiable assets acquired and liabilities assumed. The operating results for ExtenData have
been consolidated into our results of operations beginning December 5, 2020.
The allocation of the total consideration to the estimated fair value
of acquired net assets as of the acquisition date for ExtenData is as follows (in thousands):
Cash
|
|
$
|
841
|
|
Accounts receivable
|
|
|
1,900
|
|
Inventory
|
|
|
4
|
|
Prepaids and other current assets
|
|
|
40
|
|
Fixed assets
|
|
|
519
|
|
Customer lists and relationships
|
|
|
2,420
|
|
Trade name
|
|
|
510
|
|
Developed technology
|
|
|
70
|
|
Backlog
|
|
|
60
|
|
Accounts payable
|
|
|
(1,678
|
)
|
Accrued expenses
|
|
|
(244
|
)
|
Deferred revenue
|
|
|
(410
|
)
|
Total fair value excluding goodwill
|
|
|
4,032
|
|
Goodwill
|
|
|
1,138
|
|
Total consideration
|
|
$
|
5,170
|
|
The estimated useful lives of intangible assets recorded related
to the ExtenData acquisition are as follows (in thousands):
|
|
Expected Life
|
Customer lists and relationships
|
|
12 years
|
Trade name
|
|
3 years
|
Developed technology
|
|
3 years
|
Backlog
|
|
3 months
|
Royce Digital Systems
In connection with the acquisition of Royce Digital Systems, Inc. (“RDS”)
in June 2018, we estimated an earnout obligation of $500,000 for the second 12-month period post acquisition. Since the closing of the
acquisition, certain disputes have arisen regarding third-party claims seeking damages potentially to be incurred by us. On September
16, 2020, in settlement of the dispute, the Company and the seller agreed to the original earnout obligation of $500,000 and that only
$298,000 of the earnout shall be paid by the Company in settlement of the disputes. As a result, we recorded $202,000 in Other Income
in the Consolidated Statements of Income and Comprehensive Income during the year ended December 31, 2020.
Note 4: Intangible Assets
Definitive lived intangible assets are as follows (in thousands):
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Gross Amount
|
|
|
Accumulated Amortization
|
|
|
Net Amount
|
|
|
Gross Amount
|
|
|
Accumulated Amortization
|
|
|
Net Amount
|
|
Customer lists and relationships
|
|
$
|
5,690
|
|
|
$
|
(1,663
|
)
|
|
$
|
4,027
|
|
|
$
|
3,270
|
|
|
$
|
(1,104
|
)
|
|
$
|
2,166
|
|
Trade names
|
|
|
1,000
|
|
|
|
(434
|
)
|
|
|
566
|
|
|
|
490
|
|
|
|
(262
|
)
|
|
|
228
|
|
Developed technology
|
|
|
70
|
|
|
|
(3
|
)
|
|
|
67
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Backlog
|
|
|
60
|
|
|
|
(57
|
)
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
6,820
|
|
|
$
|
(2,157
|
)
|
|
$
|
4,663
|
|
|
$
|
3,760
|
|
|
$
|
(1,366
|
)
|
|
$
|
2,394
|
|
The range of useful lives and the weighted-average remaining
useful life of amortizable intangible assets at December 31, 2020 is as follows:
|
|
Expected
Life
|
|
Weighted
Average Remaining Useful Life
|
Customer lists and relationships
|
|
7-12
years
|
|
9.8 years
|
Trade name
|
|
3 years
|
|
2.6 years
|
Developed technology
|
|
3 years
|
|
2.9 years
|
Backlog
|
|
3 months
|
|
0.2 years
|
The amortization expense of the definite lived intangible assets
for the years remaining is as follows:
|
|
Estimated
Amortization
|
|
|
|
(in thousands)
|
|
Year ending December 31,
|
|
|
|
2021
|
|
$
|
1,098
|
|
2022
|
|
|
1,089
|
|
2023
|
|
|
895
|
|
2024
|
|
|
531
|
|
2025
|
|
|
360
|
|
Thereafter
|
|
|
690
|
|
Total
|
|
$
|
4,663
|
|
Amortization expense recognized during the years ended December
31, 2020 and 2019 was $0.8 million and $0.7 million, respectively. Amortization expense is calculated on an accelerated 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 presented 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 years ended December 31, 2020 and 2019 (in thousands, except
per share data):
|
|
2020
|
|
|
2019
|
|
Net income attributable to common stockholders
|
|
$
|
2,861
|
|
|
$
|
891
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
13,576
|
|
|
|
13,415
|
|
Dilutive effect of stock options and restricted stock
|
|
|
2,046
|
|
|
|
1,926
|
|
Weighted average shares for diluted earnings per share
|
|
|
15,622
|
|
|
|
15,341
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
0.21
|
|
|
$
|
0.07
|
|
Diluted income per share
|
|
$
|
0.18
|
|
|
$
|
0.06
|
|
Note 6: Property and Equipment
Property and equipment consist of the following at December
31 (in thousands):
|
|
2020
|
|
|
2019
|
|
Computer equipment
|
|
$
|
484
|
|
|
$
|
366
|
|
Software
|
|
|
481
|
|
|
|
-
|
|
Furniture and fixtures
|
|
|
112
|
|
|
|
131
|
|
Leasehold improvements
|
|
|
105
|
|
|
|
98
|
|
Equipment
|
|
|
23
|
|
|
|
-
|
|
Property and equipment, gross
|
|
|
1,207
|
|
|
|
595
|
|
Accumulated depreciation
|
|
|
(456
|
)
|
|
|
(356
|
)
|
Property and equipment, net
|
|
$
|
751
|
|
|
$
|
239
|
|
Depreciation and amortization expense related to property and
equipment for each of the years ended December 31, 2020 and 2019 was $0.1 million.
Note 7: Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the
following at December 31 (in thousands):
|
|
2020
|
|
|
2019
|
|
Salaries and benefits
|
|
$
|
1,687
|
|
|
$
|
1,002
|
|
Accrued earn out obligation related to acquisition
|
|
|
-
|
|
|
|
500
|
|
Sales tax payable
|
|
|
519
|
|
|
|
269
|
|
Professional fees
|
|
|
294
|
|
|
|
149
|
|
Vendor purchases
|
|
|
72
|
|
|
|
140
|
|
Customer deposits
|
|
|
54
|
|
|
|
137
|
|
Other
|
|
|
181
|
|
|
|
25
|
|
Total accrued expenses and other current liabilities
|
|
$
|
2,807
|
|
|
$
|
2,222
|
|
Note 8: Line of Credit
In August and September 2020, we amended and restated the credit agreement
with Pacific Western Business Finance (“PWBF”), formerly known as CapitalSource Business Financial Group, to increase the
line of credit from $7.25 million to $10 million, extend the maturity date to September 2023 and remove the “Fixed Charge Ratio”
financial covenant.
The line of credit bears interest at the prime rate plus 1.25% (4.50%
and 6.00% at December 31, 2020 and December 31, 2019, respectively) and is secured by substantially all of our U.S. assets.
As of December 31, 2020, additional availability under the line of
credit was $8.8 million, which is determined from a borrowing base calculation on our existing accounts receivable balance. As of December
31, 2020, we had $1.2 million outstanding under the line of credit, and as of December 31, 2019, we had $3.2 million outstanding under
the line of credit.
Prior to the amendment in August 2020, we were required to maintain
a financial covenant in accordance with the credit agreement. The financial covenant required a Fixed Charge Ratio of not less than 1.2
to 1.0 as of each month-end, determined on a trailing 12-month basis, with “Fixed Charge Ratio” defined as (a) EBITDA (net
income before interest expense, taxes, depreciation and amortization) less cash paid for income taxes, owner distributions, earnout payments
and all unfinanced capital expenditures, divided by (b) the aggregate of principal and interest payments, and all other fees, costs and
expenses paid or payable to PWBF related to the promissory note. We were in compliance with the financial covenant through the amendment
date.
For the years ended December 31, 2020 and 2019, our interest expense
on the revolving credit facility, including fees paid to secure lines of credit, totaled approximately $40,000 and $215,000 respectively.
Note 9: Term Debt
The following table sets forth our outstanding term debt as
of December 31 (in thousands):
|
|
Maturity Date
|
|
2020
|
|
|
2019
|
|
Subordinated promissory notes
|
|
April 30, 2021
|
|
$
|
—
|
|
|
$
|
500
|
|
PWBF promissory note
|
|
August 25, 2020
|
|
|
—
|
|
|
|
144
|
|
PWBF PPP loan (1)
|
|
May 4, 2022
|
|
|
471
|
|
|
|
—
|
|
PWBF PPP loan (1)
|
|
April 20, 2022
|
|
|
740
|
|
|
|
—
|
|
EIDL promissory note
|
|
August 27, 2051
|
|
|
150
|
|
|
|
—
|
|
Unamortized discount
|
|
|
|
|
—
|
|
|
|
(110
|
)
|
Less: Current portion of debt
|
|
|
|
|
—
|
|
|
|
(144
|
)
|
Total long-term debt
|
|
|
|
$
|
1,361
|
|
|
$
|
390
|
|
|
(1)
|
These loans were forgiven in the first quarter of 2021 as further discussed below.
|
Subordinated Promissory Notes
In October 2018, we completed a private placement of subordinated promissory
notes in the aggregate principal amount of $1,500,000. These promissory notes carried an interest rate of 12% per annum, are not collateralized,
and require quarterly interest payments with a maturity date of April 30, 2021. In connection with these notes, we issued warrants to
the placement agent to purchase 52,500 shares of our common stock at an exercise price of $0.70 per share. The fair value of the warrants
was $18,000 (See Note 11). In addition, we issued 525,000 shares of our common stock to note holders. The estimated fair value of these
shares was $262,500 and such amount has been presented as a debt discount and is being amortized to interest expense through the maturity
date of the promissory notes.
In November 2020, the subordinated promissory notes were paid in full.
For the years ended December 31, 2020 and December 31, 2019, our interest expense on these notes, including amortization of deferred financing
costs, was approximately $279,000 and $240,000, respectively.
PWBF Promissory Notes
In June 2018, we entered into a promissory note with PWBF with a principal
amount of $750,000. This promissory note carried an annual interest rate of prime rate plus 1.25% (4.50% at July 31, 2020 and 6.00% at
December 31, 2019, respectively) with a maturity date of August 25, 2020. Principal payments were due and payable in 26 consecutive payments
each in the amount of $20,834 beginning June 25, 2018. In July 2020, the promissory note was paid in full.
PWBF PPP Loans
On April 20, 2020 and May 4, 2020, we received $740,000 and $471,000,
respectively, in proceeds from loans from PWBF, which were granted pursuant to the Paycheck Protection Program of the Coronavirus Aid
Relief and Economic Security Act (collectively, the “PPP Loans”). Under the terms of the PPP Loans, interest accrues on the
outstanding principal at the rate of 1.0% per annum with a deferral of payments for nine months and with a term of two years. Principal
payments are due and payable in 18 consecutive payments beginning on November 1, 2020 in the amount of $41,437 for the PPP Loan received
on April 20, 2020 and $26,374 beginning on December 1, 2020 for the PPP Loan received on May 4, 2020. The PPP Loans may be prepaid in
part or in full, at any time, without penalty. The CARES Act provides for forgiveness of up to the full amount borrowed, subject to certain
conditions, and based on the use of proceeds for qualifying expenses including payroll, benefits, rent and utilities. We used the entire
PPP loan proceeds for qualifying expenses. In December 2020, we applied for loan forgiveness, including principal and accrued interest
as permitted by the CARES Act. Principal and interest payments due under the PPP Loans are deferred until the review and approval of any
forgiveness is made by the Small Business Administration (“SBA”). We account for the PPP Loans under the ASC 740 debt model.
In February and March 2021, we received SBA notices of forgiveness
of the PPP Loans in whole, including all accrued interest to date. As a result, we expect to record a gain on extinguishment of debt of
$1.2 million in the first quarter of 2021.
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 beginning on August 27, 2021.
The following table sets forth future principal payments for
outstanding debt, exclusive of the payments for the PPP Loans which were forgiven in February
and March 2021 (in thousands):
2021
|
|
$
|
—
|
|
2022
|
|
|
—
|
|
2023
|
|
|
2
|
|
2024
|
|
|
3
|
|
2025
|
|
|
3
|
|
Thereafter
|
|
|
142
|
|
Total minimum payments
|
|
|
150
|
|
Interest expense
Discounts and costs directly related to the issuance of debt
are presented against the related debt instrument and amortized over the life of the debt using the effective interest rate method
as interest expense.
For the years ended December 31, 2020 and 2019, interest expense on
term debt, including amortization of deferred financing costs, was approximately $319,000 and $649,000, respectively.
Note 10: Income Taxes
The provision for income taxes for the years ended December
31, 2020 and 2019 is as follows (in thousands):
|
|
2020
|
|
|
2019
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
(13
|
)
|
|
$
|
—
|
|
State
|
|
|
387
|
|
|
|
45
|
|
|
|
|
374
|
|
|
|
45
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,173
|
|
|
|
230
|
|
State
|
|
|
102
|
|
|
|
35
|
|
|
|
|
1,275
|
|
|
|
265
|
|
Valuation allowance
|
|
|
(588
|
)
|
|
|
—
|
|
Total income tax expense
|
|
$
|
1,061
|
|
|
$
|
310
|
|
Our deferred tax assets and liabilities are as follows (in
thousands):
|
|
2020
|
|
|
2019
|
|
Allowance for doubtful accounts
|
|
$
|
23
|
|
|
$
|
10
|
|
Inventory reserve and uniform capitalization
|
|
|
18
|
|
|
|
49
|
|
Accrued expenses and other liabilities
|
|
|
36
|
|
|
|
625
|
|
Deferred revenue
|
|
|
(140
|
)
|
|
|
(539
|
)
|
Other assets
|
|
|
198
|
|
|
|
117
|
|
Property and equipment
|
|
|
(128
|
)
|
|
|
(19
|
)
|
Intangibles
|
|
|
121
|
|
|
|
99
|
|
Goodwill
|
|
|
(50
|
)
|
|
|
(36
|
)
|
Net operating loss carryforwards
|
|
|
1,895
|
|
|
|
2,941
|
|
Total deferred tax assets
|
|
|
1,973
|
|
|
|
3,247
|
|
Valuation allowance
|
|
|
—
|
|
|
|
(588
|
)
|
Net deferred tax assets after valuation allowance
|
|
$
|
1,973
|
|
|
$
|
2,659
|
|
A reconciliation of the United States statutory income tax
rate to the effective income tax rate for the years ended December 31, 2020 and 2019 is as follows (in thousands):
|
|
2020
|
|
|
2019
|
|
Federal taxes at statutory rate
|
|
$
|
824
|
|
|
$
|
252
|
|
State and local income taxes
|
|
|
482
|
|
|
|
76
|
|
Permanent differences
|
|
|
343
|
|
|
|
—
|
|
Valuation allowance
|
|
|
(588
|
)
|
|
|
(33
|
)
|
Change in statutory rate
|
|
|
—
|
|
|
|
15
|
|
Provision for income taxes
|
|
$
|
1,061
|
|
|
$
|
310
|
|
Effective tax rate
|
|
|
27.1
|
%
|
|
|
25.9
|
%
|
Our deferred income tax assets and liabilities are recognized
for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax basis. These assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse.
We have net operating loss carryforwards available in certain jurisdictions
to reduce future taxable income. Future tax benefits for net operating loss carryforwards are recognized to the extent that realization
of these benefits is considered more likely than not. This determination is based on the expectation that related operations will be sufficiently
profitable or various tax business and other planning strategies will enable us to utilize the net operating loss carryforwards. Our evaluation
of the realizability of deferred tax assets considers both positive and negative evidence. The weight given to potential effects of positive
and negative evidence is based on the extent to which it can be objectively verified. As of December 31, 2019, we recorded a valuation
allowance related to the U.S. federal and state temporary items of approximately $0.6 million as it was determined it is more likely than
not that we will be able to fully use the assets to reduce future tax liabilities. As of December 31, 2020, we did not record a valuation
allowance related to the U.S. federal and state temporary items.
Utilization of the net operating loss carryforwards may be subject
to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code under section 382. The annual
limitation may result in the expiration of net operating loss carryforwards before utilization. As of December 31, 2020, we had federal
and state net operating loss carryforwards of approximately $7.4 million and $6.3 million, respectively. As of December 31, 2020 and 2019,
we had federal and state net operating loss carryforwards of approximately $12.2 million and $7.4 million, respectively. These loss carryforwards
will expire in varying amounts beginning 2025 through 2037.
We continue to remain subject to examination by U.S. federal
authority for the years 2017 through 2019 and for various state authorities for the years 2016 through 2019, with few exceptions.
On March 27, 2020, the CARES Act was enacted in response to the COVID-19
pandemic. The CARES Act permits net operating loss carryovers and carrybacks to offset 100% of taxable income for taxable years beginning
before 2021. In addition, the CARES Act allows net operating losses incurred in 2018, 2019, and 2020 to be carried back to each of the
five preceding taxable years to generate a refund of previously paid income taxes. The CARES Act has also made significant changes to
depreciation rules and interest deduction limitation rules, among other provision. We have evaluated the provisions of the CARES Act and
we do not expect that the net operating loss carryback provision or any other tax related provisions of the CARES Act would result in
a material benefit to us.
Note 11: Stockholders’ Equity
We are authorized to issue two classes of stock designated
as common stock and preferred stock. As of December 31, 2020, we are authorized to issue 60,000,000 total shares of stock. Of
this amount, 50,000,000 shares are common stock, each having a par value of $0.001 and 10,000,000 shares are preferred stock,
each having a par value of $0.001.
Preferred Stock
At December 31, 2020 and 2019, there were no shares of preferred
stock outstanding.
Common Stock
At December 31, 2020 and 2019, there were 13,576,223 shares
of common stock outstanding.
In January 2019, we issued 1,250 shares of common stock for
proceeds of $1,175 in cash related to the exercise of stock options.
In March 2019, we granted a stock award of 700,000 shares of
our common stock to a certain officer. The incremental fair value of the unrestricted stock award was $249,000 and was recorded
as part of selling, general and administrative expense on the consolidated statement of income and comprehensive income. We determined
the fair value based upon the excess of the fair value of the stock award over the fair value of the cancelled award immediately
prior to the grant date of the new award. The unrestricted stock award vested on the grant date.
Warrants
The following table summarizes information about our outstanding
common stock warrants as of December 31, 2020:
|
|
Date
|
|
Strike
|
|
|
Total
Warrants
Outstanding
and
|
|
|
Total
Exercise
Price
|
|
|
Weighted
Average
Exercise
|
|
|
|
Issued
|
|
Expiration
|
|
Price
|
|
|
Exercisable
|
|
|
(in thousands)
|
|
|
Price
|
|
Common Stock Investor Warrants
|
|
Sep-16
|
|
Sep-21
|
|
$
|
1.03
|
|
|
|
461,447
|
|
|
$
|
475
|
|
|
|
|
|
Placement Agent Warrants - Common Stock
|
|
Jun-18
|
|
Jun-23
|
|
|
0.50
|
|
|
|
633,600
|
|
|
|
317
|
|
|
|
|
|
Placement Agent Warrants - Common Stock
|
|
Oct-18
|
|
Oct-23
|
|
|
0.70
|
|
|
|
52,500
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,147,547
|
|
|
$
|
829
|
|
|
$
|
0.72
|
|
There were no warrants issued, exercised, forfeited, or expired
in 2019 and 2020.
Note 12: Share-Based Compensation
Under our amended 2014 Equity Incentive Plan (the “2014 Plan”),
2,200,000 shares of our common stock are reserved for issuance under the plan.
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 the 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
shall not 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 five 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 for the
year ended December 31, 2020 and December 31, 2019:
|
|
Stock
Options
|
|
|
Grant Date
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
($ in thousands)
|
|
Outstanding at January 1, 2019
|
|
|
1,013,826
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
65,000
|
|
|
|
0.79
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,250
|
)
|
|
|
0.94
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(300,863
|
)
|
|
|
0.96
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
776,713
|
|
|
|
0.68
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
140,000
|
|
|
|
0.79
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(18,750
|
)
|
|
|
0.94
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
897,963
|
|
|
$
|
0.98
|
|
|
|
1.9
|
|
|
$
|
2,129
|
|
Exercisable at December 31, 2020
|
|
|
761,170
|
|
|
$
|
1.01
|
|
|
|
1.6
|
|
|
$
|
1,791
|
|
The total proceeds received from the exercise of stock options
in 2019 was $1,175. There were no stock options exercised in 2020.
Share-based compensation cost is measured at the grant date
based on the fair value of the award. The fair values of stock options granted were estimated using the Black-Scholes option-pricing
model with the following assumptions:
|
|
2020
|
|
|
2019
|
|
Weighted average grant-date fair value per option granted
|
|
$
|
0.79
|
|
|
$
|
0.79
|
|
Expected option term
|
|
|
3.3
years
|
|
|
|
3.3
years
|
|
Expected volatility factor
|
|
|
90.5
|
%
|
|
|
98.1
|
%
|
Risk-free interest rate
|
|
|
1.5
|
%
|
|
|
1.6
|
%
|
Expected annual dividend yield
|
|
|
—
|
|
|
|
—
|
%
|
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 December 31, 2020, there was $66,109 of total unrecognized
share-based compensation related to unvested stock options. These costs have a weighted average remaining recognition period of
1.7 years.
Note 13: Commitments and Contingencies
Operating Leases
As of December 31, 2020, we have two operating leases for office
and warehouse space and no financing leases.
We have an operating lease for office and warehouse space in Irvine,
California with monthly payments of $13,945, a lease expiration of June 2023 and an incremental borrowing rate of 4.75%. This lease represents
$0.4 million of the estimated future payments under operating leases shown in the table below.
We have an operating lease for office space in Centennial, Colorado
with monthly payments of $9,390, a lease expiration of October 2022 and an incremental borrowing rate of 4.75%. This lease represents
$0.2 million of the estimated future payments under operating leases shown in the table below.
The maturity of operating lease liabilities as of December
31, 2020 are as follows (in thousands):
2021
|
|
$
|
284
|
|
2022
|
|
|
267
|
|
2023
|
|
|
84
|
|
Total minimum lease payments
|
|
|
635
|
|
Less: Interest
|
|
|
(34
|
)
|
Present value of operating lease liabilities
|
|
$
|
601
|
|
During the year ended December 31, 2020, cash paid for amounts
included in the measurement of operating lease liabilities was $0.2 million.
Employee Benefit Plan
We have a 401(k)-retirement plan. Under the terms of the plan,
eligible employees may defer up to 25% of their pre-tax earnings, subject to the Internal Revenue Service annual contribution
limit. Additionally, the plan allows for discretionary matching contributions by us. In 2020 and 2019, the matching contributions
were 100% of the employee’s contribution up to a maximum of 4% of the employee’s eligible compensation. During the
years ended December 31, 2020 and 2019, we contributed $152,000 and $108,000, respectively, to the 401(k) plan.
Contingencies
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 consolidated financial position or results of operations.