Notes to the Condensed Consolidated Financial
Statements
(Unaudited)
Note 1: Description of Business
DecisionPoint Systems, Inc., which we sometimes refer to as the “Company”,
“we” or “us”, is an enterprise mobility systems integrator that, through its subsidiaries, sells, installs, deploys
and repairs mobile computing and wireless systems that are used both within a company’s facilities and in the field. These systems
generally include mobile computers, mobile application software, and related data capture equipment including bar code scanners and radio
frequency identification (“RFID”) readers. We also provide services, consulting, staging, kitting, deployment, maintenance,
proprietary and third-party software and software customization as an integral part of our customized solutions for our customers. The
suite of products utilizes the latest technologies with the intent to make complex mobile technologies easy to use, understand and keep
running within all vertical markets such as merchandising, sales and delivery, field service, logistics and transportation and warehouse
management.
In June 2018, we acquired 100% of the outstanding stock of Royce Digital
Systems, Inc. (“RDS”). RDS provides innovative enterprise print and mobile technologies, deployment services and on-site maintenance.
In December 2020, we acquired 100% of the issued and outstanding membership
interests of ExtenData Solutions, LLC (“ExtenData”). ExtenData is focused on enterprise mobility solutions and provides software
product development, mobile computing, identification and wireless tracking solutions.
In January 2022, we acquired 100% of the issued and outstanding membership
interests of Advanced Mobile Group, LLC (“AMG”). AMG provides services, hardware, software, integration, and wireless networking
solutions, with deep experience in warehousing and distribution, manufacturing, mobile workforce automation, retailing, and healthcare
segments.
Note 2: Basis of Presentation and Summary of Significant Accounting
Policies
Basis of Presentation
We have prepared the accompanying unaudited condensed consolidated
financial statements of DecisionPoint Systems, Inc. and its subsidiaries on the accrual basis of accounting in accordance with United
States Generally Accepted Accounting Principles (“U.S. GAAP”). The accompanying condensed consolidated financial statements
include the accounts of DecisionPoint Systems, Inc. and its wholly owned subsidiaries, DecisionPoint Systems International (“DPSI”),
DecisionPoint Systems Group, Inc. (“DPS Group”), RDS, ExtenData and AMG. AMG was acquired on January 31, 2022, and as such,
has been consolidated into our financial position and results of operations beginning February 1, 2022. All intercompany accounts and
transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with U.S. GAAP have been omitted from these interim financial statements
as permitted by SEC rules and regulations. Accordingly, these unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the
year ended December 31, 2021.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the financial condition, results
of operations and cash flows for the interim periods presented. The results of operations for the three and nine months ended September
30, 2022 are not necessarily indicative of results to be expected for the full fiscal year.
Reverse Stock Split
In December 2021, we effectuated a reverse stock split of our outstanding
shares of common stock at a ratio of 1-for-2. See Note 8, Stockholders’ Equity, for additional information. As a result,
the number of shares and income per share disclosed throughout these consolidated financial statements have been retrospectively adjusted
to reflect the reverse stock split. All share and per share information presented in this report has been retroactively adjusted to reflect
the reverse stock split.
COVID-19
COVID-19 and the response to the pandemic have, at times, negatively
impacted overall economic conditions (including contributing to supply chain disruptions, labor shortages and an inflationary economic
environment). The potential future impacts of COVID-19, while uncertain, could materially adversely impact the Company’s results
of operations.
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.
Inventory
Inventory consists solely of finished goods and is stated at the lower
of cost or net realizable value. Cost is determined under the first-in, first-out (FIFO) method. We periodically review our inventory
and make provisions as necessary for estimated obsolete and slow-moving goods. The creation of such provisions results in reduction of
inventory to net realizable value and a charge to cost of sales. Inventories are reflected in the accompanying condensed consolidated
balance sheets net of a valuation allowance of $76,000 and $59,000 as of September 30, 2022 and December 31, 2021, respectively.
Income Taxes
Our quarterly provision for income taxes uses an annual effective tax
rate based on the expected annual income and statutory tax rates. Our effective tax rate, including discrete items as more fully described
below, was 27.3% for the nine months ended September 30, 2022 and 14.1% for the nine months ended September 30, 2021.
We recognize excess tax benefits (windfalls) and excess tax deficiencies
(shortfalls) as discrete items in income taxes in the period that stock options are exercised. For the nine months ended September 30,
2022, we recorded an income tax benefit and deferred tax asset of $0.1 million related to excess tax benefits for stock option exercises
which represents the difference in deferred tax assets recorded at fair value during the vesting period and the actual deferred tax assets
realized based on the intrinsic value on the date of exercise. For the nine months ended September 30, 2022, we recorded an income tax
expense of $0.2 million related to non-deductible officer’s compensation under IRC 162(m). For the nine months ended September 30,
2021, we had recorded an income tax benefit of $0.3 million related to the non-taxable PPP loan forgiveness, which is not taxable at the
federal level, but may be at the state level.
Operating Leases
For non-cancelable operating lease agreements, operating lease assets
and operating lease liabilities are established for leases with an expected term greater than one year and we recognize lease expense
on a straight-line basis.
We previously had an operating lease for office and warehouse space
in Irvine, California with fixed minimum monthly payments of $13,945, an original lease expiration of June 2023 and an incremental borrowing
rate of 4.75%. In February 2022, we reached an agreement with the lessor which allowed for an early termination of the operating
lease on February 28, 2022. The monthly payments remained unchanged through February 2022, and we did not incur an early termination
liability in result of the lease modification. On the date of termination, we reversed the related net book value of the operating lease
asset of $0.2 million and the lease liability of $0.2 million.
In connection with the closure of the office and warehouse space in
Irvine, California, we entered into a new lease agreement commencing in February 2022 to relocate that office and warehouse space to Laguna
Hills, California. Pursuant to the lease agreement, the base rent of $39,778 per month begins on June 1, 2022 and will
increase 3% annually. The lease expires on April 30, 2029. In February 2022, we established an operating lease liability of
$3.1 million and operating lease assets of $3.0 million. In connection with the new lease agreement, we entered into a sublease agreement
for a portion of the Laguna Hills office and warehouse location, and we will receive $24,254 per month commencing in February 2022
with a sublease expiration of October 31, 2023.
During the nine months ended September 30, 2022, we also entered into
several other non-cancelable operating lease agreements with terms greater than one year and established an operating lease liability
of $0.1 million and operating lease assets of $0.1 million.
At September 30, 2022 the total operating lease liability was $3.1
million and the total operating lease asset was $2.8 million.
Revenue Recognition
We recognize revenue when a customer obtains control of promised goods
or services under the terms of a contract and is measured as the amount of consideration we expect to receive in exchange for transferring
goods or providing services. We do not have any material extended payment terms, as payment is due at or shortly after the time of the
sale. Sales, 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 September 30, 2022, the total aggregate transaction price allocated
to the unsatisfied performance obligations was approximately $9.5 million, of which approximately $6.7 million is expected to be recognized
over the next 12 months.
As of December 31, 2021, the total aggregate transaction price allocated
to the unsatisfied performance obligations was approximately $7.1 million.
We defer costs to acquire contracts, including commissions, incentives
and payroll taxes if they are incremental and recoverable costs of obtaining a customer contract with a term exceeding one year. Deferred
contract costs are amortized to sales and marketing expense over the contract term, generally over one to three years. We have elected
to recognize the incremental costs of obtaining a contract with a term of less than one year as a selling expense when incurred. We include
deferred contract acquisition costs in “Prepaid expenses and other current assets” in the consolidated balance sheets. As
of September 30, 2022 and December 31, 2021, we deferred $0.1 million and $0.1 million, respectively, of related contract acquisition
costs
The following table summarizes net sales by revenue source (in thousands):
| |
Three Months Ended
September 30, | | |
Nine Months Ended
September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Hardware and software | |
$ | 19,205 | | |
$ | 12,743 | | |
$ | 54,105 | | |
$ | 33,464 | |
Consumables | |
| 1,783 | | |
| 1,606 | | |
| 5,154 | | |
| 4,382 | |
Professional services | |
| 4,725 | | |
| 3,870 | | |
| 13,681 | | |
| 11,614 | |
| |
$ | 25,713 | | |
$ | 18,219 | | |
$ | 72,940 | | |
$ | 49,460 | |
Accounting Standards Not Yet Adopted
In September 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. 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.
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
Advanced Mobile Group, LLC
On January 31, 2022, we entered into a Membership Unit Purchase Agreement
and concurrently therewith closed upon the acquisition of all of the issued and outstanding membership interests of AMG for $5.1 million.
The consideration we paid is comprised of cash of $4.6 million, of which $4.4 million was paid as of September 30, 2022, and an estimated
earn-out obligation valued at $0.5 million, subject to the financial performance of AMG during each of the two years following the closing
of the acquisition. As a result of the acquisition, AMG became a wholly owned subsidiary of the Company.
Through the end of the third quarter of 2022, we continued to refine
our analysis of the estimated fair value of the acquisition purchase price (including earn-outs) and the estimated fair value of the assets
acquired and liabilities assumed in the acquisition, and we expect to continue to refine this analysis into the fourth quarter of 2022.
Relative to the provisional amounts recorded as of March 31, 2022, changes to the fair value of assets and liabilities assumed at the
date of AMG acquisition were a result of updating the purchase price allocation and were comprised of (i) $0.9 million decrease in customer
lists and relationships, (ii) a $0.2 million decrease in the trade name, (iii) a $0.1 million increase in backlog, (iv) a $0.1 million
increase in developed technology, (v) a $0.1 million decrease in deferred revenue and (vi) a $0.9 million increase in goodwill. We have
not yet completed our final analysis of the estimated fair value of the acquisition purchase price (including earn-outs) and the estimated
fair value of the assets acquired and liabilities assumed in the acquisition. We expect that significant goodwill and definite-lived intangible
assets will be recognized upon completion of the required purchase price allocation analysis. In accordance with ASC 805 Business
Combinations, the provisional amounts recorded below may be adjusted in future periods as management completes its acquisition analysis.
As of September 30, 2022, the allocation of the total consideration
to the estimated fair value of acquired net assets as of the acquisition date for AMG is as follows (in thousands):
Cash | |
$ | 170 | |
Accounts receivable | |
| 1,402 | |
Inventory | |
| 129 | |
Prepaids and other current assets | |
| 123 | |
Customer lists and relationships | |
| 1,580 | |
Trade name | |
| 330 | |
Backlog | |
| 260 | |
Developed technology | |
| 60 | |
Accounts payable | |
| (558 | ) |
Accrued expenses | |
| (152 | ) |
Deferred revenue | |
| (148 | ) |
Total fair value excluding goodwill | |
| 3,196 | |
Goodwill | |
| 1,884 | |
Total consideration | |
$ | 5,080 | |
The estimated useful lives of intangible assets recorded related to
the AMG acquisition are as follows (in thousands):
| |
Expected Life |
Customer lists and relationships | |
7 years |
Trade name | |
3 years |
Backlog | |
11 months |
Developed technology | |
3 years |
Other acquisition
In March 2022, we acquired the customer lists and relationships of
Boston Technologies, a provider of mobile order management and route accounting software for direct store delivery (DSD) operations,
for cash of $0.3 million.
Note 4: Intangible Assets
Definite lived intangible assets are as follows (in thousands):
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
Gross
Amount | | |
Accumulated
Amortization | | |
Net
Amount | | |
Gross
Amount | | |
Accumulated
Amortization | | |
Net
Amount | |
Customer lists and relationships | |
$ | 7,590 | | |
$ | (3,442 | ) | |
$ | 4,148 | | |
$ | 5,690 | | |
$ | (2,453 | ) | |
$ | 3,237 | |
Trade names | |
| 1,330 | | |
| (895 | ) | |
| 435 | | |
| 1,000 | | |
| (699 | ) | |
| 301 | |
Developed technology | |
| 130 | | |
| (73 | ) | |
| 57 | | |
| 70 | | |
| (44 | ) | |
| 26 | |
Backlog | |
| 320 | | |
| (249 | ) | |
| 71 | | |
| 60 | | |
| (60 | ) | |
| - | |
| |
$ | 9,370 | | |
$ | (4,659 | ) | |
$ | 4,711 | | |
$ | 6,820 | | |
$ | (3,256 | ) | |
$ | 3,564 | |
Amortization expense recognized during the three and nine months ended
September 30, 2022 was $0.5 million and $1.4 million, respectively. Amortization expense recognized during the three and nine months ended
September 30, 2021 was $0.2 million and $0.8 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
in which there is a net loss, potentially dilutive securities are excluded from the computation of fully diluted net loss per share as
their effect is anti-dilutive.
Below is a reconciliation of the fully dilutive securities effect for
the three and nine months ended September 30, 2022 and 2021 (in thousands, except per share data):
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Net income attributable to common stockholders | |
$ | 1,111 | | |
$ | 612 | | |
$ | 2,684 | | |
$ | 2,115 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average basic common shares outstanding | |
| 7,290 | | |
| 6,958 | | |
| 7,210 | | |
| 6,928 | |
Dilutive effect of stock options, warrants and restricted stock | |
| 303 | | |
| 272 | | |
| 300 | | |
| 346 | |
Weighted average shares for diluted earnings per share | |
| 7,593 | | |
| 7,230 | | |
| 7,510 | | |
| 7,274 | |
| |
| | | |
| | | |
| | | |
| | |
Basic income per share | |
$ | 0.15 | | |
$ | 0.09 | | |
$ | 0.37 | | |
$ | 0.31 | |
Diluted income per share | |
$ | 0.15 | | |
$ | 0.08 | | |
$ | 0.36 | | |
$ | 0.29 | |
Note 6: Line of Credit
Our Loan and Security Agreement (the “Loan Agreement”)
with MUFG Union Bank, National Association (the “Bank”) 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.
Interest and Fees
Loans under the Loan Agreement with an outstanding balance of at least
$150,000 bear interest, at our option, at a base interest rate equal to the London Interbank Offered Rate (“LIBOR”) plus 2.50%
or a base rate equal to an index offered by the Bank for the interest period selected and is payable at the on the last day of each month.
If the LIBOR rate is selected, the interest rate on the loans adjusts at the end of each LIBOR rate period (1, 2, 3, 6, or 12 month term)
selected by us. All other loan amounts bear interest at a rate equal to an index rate determined by the Bank, which shall vary when the
index rate changes. As of September 30, 2022, the effective interest rate was the Prime Rate of 6.25%. We have the right to prepay variable
interest rate loans, in whole or in part at any time, without penalty or premium. Amounts outstanding with a base interest rate may be
prepaid in whole or in part provided we have given the Bank written notice of at least five days prior to prepayment and pay a prepayment
fee. At any time prior to the maturity date, we may borrow, repay and reborrow amounts under the Loan Agreement, subject to the prepayment
terms, and, as long as the total outstanding does not exceed $9.0 million. The Loan Agreement requires a commitment fee of 0.25% per year,
payable quarterly and in arrears, on any unused portion of the line of credit.
Covenants
Under the Loan Agreement, we are subject to a variety of customary
affirmative and negative covenants, including that we (i) achieve a net profit of not less than $1.0 million at the end of each fiscal
year, (ii) maintain a ratio of total debt to EBITDA of not greater than 3.0:1.0 measured at the end of each quarter, and (iii) not realize
a net loss for more than two consecutive quarters. The Loan Agreement also prohibits us from, or otherwise imposes restrictions on us
with respect to, among other things, liquidating, dissolving, entering into any consolidation, merger, division, partnership, or other
combination, selling or leasing a majority of our assets or business or purchase or lease all or the greater part of the assets or business
of another entity or person.
As of September 30, 2022, we were in compliance with all of our covenants,
were eligible to borrow up to $9.0 million, and had no outstanding borrowings under the line of credit.
Note 7: Term Debt
EIDL Promissory Note
On August 27, 2020, we received $0.2 million in connection with a promissory
note from the SBA under the Economic Injury Disaster Loan (“EIDL”) program pursuant to the CARES Act. Under the terms of the
EIDL promissory note, interest accrues on the outstanding principal at an interest rate of 3.75% per annum and with a term of 30 years
with equal monthly payments of principal and interest of $731 beginning on August 27, 2021. As of September 30, 2022 and December 31,
2021, outstanding debt under the promissory note was $0.1 million.
Note 8: Stockholders’ Equity
We are authorized to issue two classes of stock designated as common
stock and preferred stock. As of September 30, 2022, we are authorized to issue 60,000,000 total shares of stock. Of this amount, 50,000,000
shares are designated as common stock, each having a par value of $0.001 and 10,000,000 shares are designated as preferred stock, each
having a par value of $0.001.
Reverse Stock Split
On December 13, 2021, DecisionPoint filed a Certificate of Amendment
to the Amended and Restated Certificate of Incorporation (the “Certificate of Amendment”) with the Secretary of State of Delaware
to effect a 1-for-2 reverse stock split of the outstanding shares of the Company’s common stock that were outstanding at the time
the Certificate of Amendment was filed (the “Reverse Stock Split”).
As a result of the Reverse Stock Split, every two shares of issued
and outstanding common stock were automatically combined into one issued and outstanding share of common stock, without any change in
the par value per share. No fractional shares were issued as a result of the Reverse Stock Split. Any fractional shares that would otherwise
have resulted from the Reverse Stock Split were rounded up to the next whole number. The Reverse Stock Split reduced the number of shares
of common stock outstanding however, the number of authorized shares of common stock under the Certificate of Incorporation remained unchanged
at 50 million shares.
Proportionate adjustments were made to the per share exercise price
and the number of shares of common stock that may be purchased upon exercise of outstanding warrants and stock options granted by the
Company, and the number of shares of Common Stock reserved for future issuance under the Company’s 2014 Equity Incentive Plan, as
amended (the “2014 Plan”).
Warrants
The following table summarizes information about our outstanding common
stock warrants as of September 30, 2022:
| |
Date | |
| |
Strike
| | |
Total
Warrants
Outstanding
and | | |
Total
Exercise
Price
| | |
Weighted
Average
Exercise
| |
| |
Issued | |
Expiration | |
Price | | |
Exercisable | | |
(in thousands) | | |
Price | |
Warrants - Common Stock | |
Jun-18 | |
Jun-23 | |
$ | 1.00 | | |
| 207,665 | | |
$ | 208 | | |
| | |
Warrants - Common Stock | |
Oct-18 | |
Oct-23 | |
| 1.40 | | |
| 21,000 | | |
| 29 | | |
| | |
| |
| |
| |
| | | |
| 228,665 | | |
$ | 237 | | |
$ | 1.04 | |
In February 2021, the common stock warrants issued by the Company in
September 2016 were fully exercised by all of the holders on a cashless basis. As a result of the cashless exercise, 151,504 shares of
common stock were issued.
In September 2022, a portion of the common stock warrants issued by
the Company in 2018 were exercised by certain of the holders on a cashless basis. As a result of the cashless exercise, 97,408 shares
of common stock were issued.
Note 9: Share-Based Compensation
Under our amended 2014 Plan 1,100,000 shares of our common stock are
reserved for issuance under the 2014 Plan (as adjusted for the Reverse Stock Split).
Under the 2014 Plan, common stock incentives may be granted to our
officers, employees, directors, consultants, and advisors (and prospective directors, officers, managers, employees, consultants and advisors)
and our affiliates can acquire and maintain an equity interest in us, or be paid incentive compensation, which may (but need not) be measured
by reference to the value of our common stock.
The 2014 Plan permits us to provide equity-based compensation in the
form of stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock and other stock bonus awards
and performance compensation awards.
The 2014 Plan is administered by the Board of Directors, or a committee
appointed by the Board of Directors, which determines recipients and the number of shares subject to the awards, the exercise price and
the vesting schedule. The term of stock options granted under the 2014 Plan cannot exceed ten years. Options cannot have an exercise
price less than 100% of the fair market value of our common stock on the grant date, and generally vest over a period of three years.
If the individual possesses more than 10% of the combined voting power of all classes of our stock, the exercise price shall not be less
than 110% of the fair market of a share of common stock on the date of grant.
The following table summarizes stock option activity under the 2014
Plan for the nine months ended September 30, 2022:
| |
Stock
Options | | |
Grant Date Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Life | | |
Aggregate Intrinsic Value | |
| |
| | |
| | |
(in years) | | |
($ in
thousands) | |
Outstanding at January 1, 2022 | |
| 1,002,750 | | |
$ | 3.00 | | |
| | | |
| | |
Granted | |
| 191,250 | | |
| 5.47 | | |
| | | |
| | |
Forfeited or expired | |
| (92,917 | ) | |
| 1.58 | | |
| | | |
| | |
Exercised | |
| (629,792 | ) | |
| 3.29 | | |
| | | |
| | |
Outstanding at September 30, 2022 | |
| 471,291 | | |
$ | 3.81 | | |
| 3.14 | | |
$ | 1,350 | |
Exercisable at September 30, 2022 | |
| 259,642 | | |
$ | 3.88 | | |
| 3.07 | | |
$ | 894 | |
During the nine months ended September 30, 2022, certain employees
exercised vested stock options 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:
Options
exercised | | |
Weighted
Average
Exercise
Price | | |
Shares Net
Settled for
Exercise | | |
Shares
Withheld
for Taxes (1) | | |
Net Shares
Issued | | |
Weighted
Average
Share Price | | |
Employee
Share-Based
Tax
Withholding (1) | |
| 550,834 | | |
$ | 3.48 | | |
| 194,681 | | |
| 142,479 | | |
| 213,674 | | |
$ | 9.85 | | |
$ | 1,403,191 | |
(1) | Shares withheld for employee
taxes of 142,479 represents the equivalent shares for employee tax withholding of $1.4 million. The employee tax withholding is based
on the statutory rates for each employee on the date of exercise. ASU 2016-09 clarifies that employee taxes paid in lieu of shares issued
for share-based compensation should be considered similar to a share repurchase. Accordingly, employee taxes paid by us are recorded
as a reduction to stockholders’ equity on the date of exercise and classified as a financing activity on the statement of cash
flows when taxes are paid to the taxing authorities. |
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 during the nine months ended September 30, 2022 were estimated using
the Black-Scholes option-pricing model with the following assumptions:
Weighted average grant-date fair value per option granted |
$ | 4.15 to 9.28 | |
Expected option term in years |
| 2.5 to 3.2 | |
Expected volatility factor |
| 65.0% to 83.0 | % |
Risk-free interest rate |
| 0.97% to 2.85 | % |
Expected annual dividend yield |
| 0.0 | % |
We estimate expected volatility using historical volatility of common
stock of our peer group over a period equal to the expected life of the options. The expected term of the awards represents the period
of time that the awards are expected to be outstanding. We considered expectations for the future to estimate employee exercise and post-vest
termination behavior. We do not intend to pay common stock dividends in the foreseeable future, and therefore have assumed a dividend
yield of zero. The risk-free interest rate is the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with
the expected term of the awards.
As of September 30, 2022, there was $0.1 million of total unrecognized
share-based compensation related to unvested stock options. These costs have a weighted average remaining recognition period of 1.1 years.
Note 10: Contingencies
Litigation
From time to time, we are subject to litigation incidental to the conduct
of our business. When applicable, we record accruals for contingencies when it is probable that a liability will be incurred, and the
amount of loss can be reasonably estimated. While the outcome of lawsuits and other proceedings against us cannot be predicted with certainty,
in our opinion, individually or in the aggregate, no such lawsuits are expected to have a material effect on our condensed consolidated
financial position or results of operations.
Concentrations
One customer accounted for 30% of consolidated revenue during the three
months ended September 30, 2022, and 18% of consolidated revenue during the nine months ended September 30, 2022. One customer accounted
for approximately 10% and 15% of consolidated net revenues during the three and nine months ended September 30, 2021, respectively. Trade
accounts receivable from two customers represented 14% and 13% of net consolidated receivables at September 30, 2022 and trade accounts
receivable from three customers represented approximately 19%, 12% and 11% of net consolidated receivables at September 30, 2021.
Two vendors accounted for 12% and 11% of all consolidated purchases
during the three months ended September 30, 2022, and three vendors accounted for 37%, 22%, and 17% of all consolidated purchased
during the nine months ended September 30, 2022. For the prior year periods, these same vendors accounted for 26% and 30% of all consolidated
purchases for the three months ended September 30, 2021, 24% and 14% for the nine months ended September 30, 2021. No other vendor accounted
for more than 10% of purchases during the three and nine months ended September 30, 2022 and 2021.
As of September 30, 2022, three vendors accounted for 31%,
27% and 22% of total accounts payable. As of September 30, 2021, the same two vendors accounted for 32% and 40% of
the total accounts payable. No other vendor accounted for more than 10% of accounts payable as of September 30, 2022 and
2021.
A significant decrease or interruption in business from our significant
customers or vendors could have a material adverse effect on our business, financial condition and results of operations. Financial instruments
that potentially expose us to a concentration of credit risk principally consist of accounts receivable. We sell product to a large number
of customers in many different geographic regions. To minimize credit risk, we perform ongoing credit evaluations of our customers’
financial condition.