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EX-31.2 - DOCUMENT CAPTURE TECHNOLOGIES, INC. | v184596_ex31-2.htm |
EX-32.2 - DOCUMENT CAPTURE TECHNOLOGIES, INC. | v184596_ex32-2.htm |
EX-10.4 - DOCUMENT CAPTURE TECHNOLOGIES, INC. | v184596_ex10-4.htm |
EX-10.1 - DOCUMENT CAPTURE TECHNOLOGIES, INC. | v184596_ex10-1.htm |
EX-31.1 - DOCUMENT CAPTURE TECHNOLOGIES, INC. | v184596_ex31-1.htm |
EX-32.1 - DOCUMENT CAPTURE TECHNOLOGIES, INC. | v184596_ex32-1.htm |
EX-10.3 - DOCUMENT CAPTURE TECHNOLOGIES, INC. | v184596_ex10-3.htm |
EX-10.5 - DOCUMENT CAPTURE TECHNOLOGIES, INC. | v184596_ex10-5.htm |
EX-10.2 - DOCUMENT CAPTURE TECHNOLOGIES, INC. | v184596_ex10-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For
the Quarterly Period Ended March 31, 2010
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For
the transition period
from to
Commission
File Number: 000-25839
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
80-0133251
|
|
(State
or other jurisdiction of
|
(I.R.S.Employer
|
|
incorporation
or organization)
|
Identification
Number)
|
1798
Technology Drive
Suite
178
San
Jose, California 95110
(Address
of principal executive offices, Zip code)
408-213-3707
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes x No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer ¨ Smaller
Reporting Company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨
No x
The
number of shares of Common Stock outstanding as of May 12, 2010 was
19,406,270.
SPECIAL
NOTE ON FORWARD LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in Item 2 of Part I of this
report include forward-looking statements. These statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by forward-looking statements.
In some
cases, you can identify forward-looking statements by terminology such as "may,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "proposed," "intended," or "continue" or the negative
of these terms or other comparable terminology. You should read statements that
contain these words carefully, because they discuss our expectations about our
future operating results or our future financial condition or state other
"forward-looking" information. There may be events in the future that we are not
able to accurately predict or control. Before you invest in our securities, you
should be aware that the occurrence of any of the events described in this
Quarterly Report could substantially harm our business, results of operations
and financial condition, and that upon the occurrence of any of these events,
the trading price of our securities could decline and you could lose all or part
of your investment. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
growth rates, levels of activity, performance or achievements. We are under no
duty to update any of the forward-looking statements after the date of this
Quarterly Report to conform these statements to actual results.
- 2
-
DOCUMENT
CAPTURE TECHNOLOGIES, INC
FORM 10-Q
FOR
THE QUARTER ENDED MARCH 31, 2010
INDEX
Page
|
||
PART I – FINANCIAL
INFORMATION
|
4
|
|
Item
1
|
Financial
Statements
|
4
|
Item
2
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
16
|
Item
4T
|
Controls
and Procedures
|
22
|
PART II – OTHER INFORMATION
|
23
|
|
Item
1
|
Legal
Proceedings
|
23
|
Item
1A
|
Risk
Factors
|
23
|
Item
2
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
23
|
Item
3
|
Defaults
Upon Senior Securities
|
23
|
Item
5
|
Other
Information
|
23
|
Item
6
|
Exhibits
|
24
|
Signatures
|
25
|
- 3
-
PART
I. FINANCIAL INFORMATION
Item
1 - Financial Statements
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands)
March 31,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
|
(unaudited)
|
*
|
||||||
ASSETS | ||||||||
Cash
and cash equivalents
|
$ | 165 | $ | 328 | ||||
Trade
receivables
|
2,027 | 1,497 | ||||||
Inventories,
net
|
1,530 | 1,674 | ||||||
Prepaid
expenses and other current assets
|
118 | 132 | ||||||
Total
current assets
|
3,840 | 3,631 | ||||||
Restricted
cash
|
5 | 5 | ||||||
Fixed
assets, net
|
159 | 176 | ||||||
Total
assets
|
$ | 4,004 | $ | 3,812 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Line
of credit
|
$ | 236 | $ | 202 | ||||
Trade
payables to related parties
|
348 | 341 | ||||||
Trade
payables and other accrued expenses
|
405 | 440 | ||||||
Accrued
compensation and benefits
|
65 | 124 | ||||||
Deferred
revenue and customer deposits
|
90 | 111 | ||||||
Total
current liabilities
|
1,144 | 1,218 | ||||||
Commitments
and contingencies (Note 10)
|
||||||||
Stockholders’
equity:
|
||||||||
Preferred
stock $.001 par value, 2,000 authorized, 0 issued and Outstanding March
31, 2010 and December 31, 2009
|
||||||||
Common
stock $.001par value, 50,000 authorized, 19,406 shares issued and
outstanding at March 31, 2010 and December 31, 2009
|
19 | 19 | ||||||
Additional
paid-in capital
|
35,907 | 35,697 | ||||||
Accumulated
deficit
|
(33,066 | ) | (33,122 | ) | ||||
Total
stockholders’ equity
|
2,860 | 2,594 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 4,004 | $ | 3,812 |
*Amounts
derived from the audited financial statements for the year ended December 31,
2009.
- 4
-
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in
thousands, except per share amounts)
Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Net
sales
|
$ | 3,428 | $ | 2,015 | ||||
Cost
of sales
|
2,103 | 1,237 | ||||||
Gross
profit
|
1,325 | 778 | ||||||
Operating
expenses:
|
||||||||
Selling,
general and administrative
|
966 | 1,189 | ||||||
Research
and development
|
265 | 231 | ||||||
Total
operating expenses
|
1,231 | 1,420 | ||||||
Operating
income (loss)
|
94 | (642 | ) | |||||
Non-operating
income (expense)
|
(36 | ) | - | |||||
Net
income (loss) before income taxes
|
58 | (642 | ) | |||||
Provision
for income taxes
|
2 | - | ||||||
Net
income (loss)
|
56 | (642 | ) | |||||
Accretion
of preferred stock redemption value
|
- | (12 | ) | |||||
Net
income (loss) available to common stockholders
|
$ | 56 | $ | (654 | ) | |||
Earnings
per common share – basic and diluted
|
$ | 0.00 | $ | (0.04 | ) | |||
Weighted
average common shares outstanding:
|
||||||||
Basic
|
19,406 | 18,463 | ||||||
Diluted
|
21,606 | 18,463 |
- 5
-
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in
thousands)
Three Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
Operating
activities:
|
||||||||
Net
income (loss)
|
$ | 56 | $ | (642 | ) | |||
Adjustments
to reconcile net income (loss) to net cash used by operating
activities:
|
||||||||
Depreciation
expense
|
62 | 10 | ||||||
Stock-based
compensation cost – options
|
170 | 180 | ||||||
Fair
value of common stock and warrants issued for services
rendered
|
40 | 111 | ||||||
Interest
expense attributable to amortization of debt issuance
costs
|
15 | - | ||||||
Other
|
- | (1 | ) | |||||
Changes
in operating assets and liabilities:
|
||||||||
Trade
receivables
|
(530 | ) | 117 | |||||
Inventories
|
144 | 7 | ||||||
Prepaid
expenses and other current assets
|
11 | (38 | ) | |||||
Trade
payables to related parties
|
7 | (152 | ) | |||||
Trade
payables and other current liabilities
|
(94 | ) | (8 | ) | ||||
Income
taxes payable
|
- | (75 | ) | |||||
Deferred
revenue and customer deposits
|
(21 | ) | (49 | ) | ||||
Cash
used by operating activities
|
(140 | ) | (540 | ) | ||||
Investing
activities:
|
||||||||
Capital
expenditures
|
(45 | ) | (7 | ) | ||||
Cash
used by investing activities
|
(45 | ) | (7 | ) | ||||
Financing
activities:
|
||||||||
Net
advances on bank line of credit
|
28 | 349 | ||||||
Deferred
financing costs
|
(6 | ) | - | |||||
Cash
provided by financing activities
|
22 | 349 | ||||||
Net
decrease in cash and cash equivalents
|
(163 | ) | (198 | ) | ||||
Cash
and cash equivalents at beginning of period
|
328 | 405 | ||||||
Cash
and cash equivalents at end of period
|
$ | 165 | $ | 207 | ||||
Supplemental
disclosures of cash flow information:
|
||||||||
Cash
paid during the period for:
|
||||||||
Interest
|
$ | 11 | $ | 4 | ||||
Income
taxes
|
$ | 2 | $ | 75 |
- 6
-
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
Note
1 – Background and Basis of Presentation
Organization
Document
Capture Technologies, Inc. ("DCT" or "Company"), a Delaware corporation,
develops, designs and delivers various document capture technology
solutions to all types and sizes of enterprises including governmental agencies,
large corporations, small corporations, small office-home office (“SOHO”),
professional practices as well as consumers (referred to herein collectively as
“Enterprises”) . DCT is a market-leader in providing USB-powered scanning
solutions to a wide variety of industries and market applications. The Company’s
patented and proprietary page-image capture devices facilitate the way
information is stored, shared and managed in both business and personal
use.
Syscan,
Inc., DCT’s wholly-owned subsidiary, was incorporated in California in 1995 to
develop and manufacture a new generation of contact image sensors (“CIS”) that
are complementary metal-oxide-silicon (“CMOS”) imaging sensor devices. During
the late 1990s, the Company achieved many technical milestones and were granted
numerous patents for it’s linear imaging technology. The Company’s patented CIS
and mobile imaging scanner technology provides high quality images at extremely
low power consumption levels, allowing DCT to deliver compact scanners in a form
that is simple to use with a computer and or integrate into new or existing
systems where there is need for a small footprint, lightweight device to scan
documents.
DCT’s
business model was developed and continues to evolve around intellectual
property (“IP”) driven products sold primarily to original equipment
manufacturers (“OEM”), private label brands and value added resellers (“VAR”).
Our image scanning products can be found in a variety of applications, including
but not limited to, the following:
|
·
|
Bank
note and check verification (remote capture deposit or
“RDC”);
|
|
·
|
Document
and information management;
|
|
·
|
Identification
card scanners;
|
|
·
|
Passport
security scanners;
|
|
·
|
Business
card readers;
|
|
·
|
Barcode
scanning; and
|
|
·
|
Optical
mark readers used in lottery
terminals.
|
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements of DCT have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the instructions to Form
10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include
all information and disclosures necessary for a presentation of the Company’s
financial position, results of operations, and cash flows in conformity with
accounting principles generally accepted in the United States
(“GAAP”).
In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for all periods presented have been made. Preparing
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses. Actual
results may differ from these estimates. The results of operations for the
period ended March 31, 2010 are not necessarily indicative of the operating
results that may be expected for the entire year ending December 31, 2010. The
interim financial statements should be read in conjunction with the financial
statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2009, filed with the Securities and Exchange Commission (“SEC”) on
March 31, 2010.
- 7
-
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
The
consolidated financial statements include the accounts of DCT and its one
subsidiary - Syscan. All significant intercompany transactions and
balances have been eliminated. DCT’s functional currency is the
United States (U.S.) dollar. As such, DCT does not have any
translation adjustments. Monetary accounts denominated in non-U.S.
currencies, such as cash or payables to vendors, have been re-measured to the
U.S. dollar. Gains and losses resulting from foreign currency
transactions are included in the results of operations. To date, DCT
has not entered into hedging activities to offset the impact of foreign currency
fluctuations.
Certain
accounts have been reclassified to conform to the current period
presentation. Such reclassifications did not affect DCT’s total net
sales, operating loss, net loss available to common stockholders, financial
position or liquidity.
The
Company has evaluated subsequent events up through the date of the filing of
this report with the SEC.
Note
2 – Recent Accounting Pronouncements
In
October 2009, the FASB issued new standards for revenue recognition with
multiple deliverables. These new standards impact the determination of when the
individual deliverables included in a multiple-element arrangement may be
treated as separate units of accounting. Additionally, these new standards
modify the manner in which the transaction consideration is allocated across the
separately identified deliverables by no longer permitting the residual method
of allocating arrangement consideration. These new standards are effective
for fiscal years beginning on or after June 15, 2010; however, early adoption is
permitted. DCT does not expect these new standards to significantly impact
its consolidated financial statements.
In
October 2009, the FASB issued new standards for the accounting for certain
revenue arrangements that include software elements. These new standards amend
the scope of pre-existing software revenue guidance by removing from the
guidance non-software components of tangible products and certain software
components of tangible products. These new standards are required to be adopted
in the first quarter of 2011; however, early adoption is permitted. DCT does not
expect these new standards to significantly impact its consolidated financial
statements.
Note
3 – Related-Party Transactions
Related-Party
Purchases
Historically,
the Company has purchased the majority of its finished scanner imaging products
from Shenzhen Syscan Technology (“SST”), a wholly-owned subsidiary of Syscan
Technology Holdings Limited (“STH”). SST currently holds
approximately 16% of DCT’s outstanding common stock.
Purchases
from SST totaled $1,854,000 and $1,173,000 for the three months ended March 31,
2010 and 2009, respectively. All purchases from SST were carried out
in the normal course of business. As a result of these purchases, DCT was liable
to SST for $348,000 and $341,000 at March 31, 2010 and December 31, 2009,
respectively.
Related-Party
Net Sales
During
the three months ended March 31, 2010, DCT recorded net sales and cost of sales
totaling $46,000 and $39,000, respectively, for finished scanners sold to
SST. DCT had no sales or cost of sales to SST during the three months
ended March 31, 2009. All sales to SST contained similar terms and
conditions as for other transactions of this nature entered into by
DCT.
Legal
Services Agreement
On
September 15, 2009, DCT entered into a legal services agreement (“Agreement”)
with Jody R. Samuels, a director of the Company. Pursuant to the
Agreement, Mr. Samuels will provide certain legal services to us which will
consist of assisting the Company in (i) the preparation of its periodic and
other filings with the Securities and Exchange Commission (“SEC”), including
proxy statements, special and annual meetings of shareholders, (ii) the
negotiation of financing and corporate development transactions, (iii)
preparation and review of documentation related to financing arrangements and
corporate development transactions, (iv) preparing registration statements, and
responding to any SEC inquiries/comment letters, (v) documenting corporate
governance policies and procedures, and (vi) any other legal matters reasonably
within the legal expertise of Mr. Samuels.
- 8
-
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
Pursuant
to the Agreement, Mr. Samuels is paid $4,000 per month for a total of $12,000
for the three months ended March 31, 2010. The Agreement may be cancelled
by either party with 30 days prior written notice.
Note
4 – Concentration of Credit Risk and Major Customers
Financial
instruments that subject DCT to credit risk are cash balances maintained in
excess of federal depository insurance limits and trade
receivables.
Cash
and Cash Equivalents
DCT
maintains cash balances at several banks. Accounts at each institution are
insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. As
of March 31, 2010, DCT had consolidated balances of approximately $62,000, which
were not guaranteed by the FDIC. DCT has not experienced any losses in such
accounts and believes the exposure is minimal.
Major
Customers and Trade Receivables
A
relatively small number of customers account for a significant percentage of
DCT’s sales. Customers that exceeded 10% of total revenues and
accounts receivable were as follows:
Three Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
Customer
A
|
26 | % | * | % | ||||
Customer
B
|
20 | 33 | ||||||
Customer
C
|
16 | 21 | ||||||
Customer
D
|
* | 10 | ||||||
Customer
E
|
* | 10 |
*
Customer accounted for less than 10% for the period indicated.
Trade
receivables from these customers totaled $1,059,000 at March 31,
2010. As of March 31, 2010, all the Company's trade receivables were
unsecured.
Note
5 – Concentration of Supplier Risk
Manufacturing. Historically,
DCT has purchased substantially all its finished scanner imaging products from
one vendor that is also a wholly-owned subsidiary of the parent company of DCT’s
former majority stockholder. See Note 3. If this vendor
became unable to provide materials in a timely manner and DCT was unable to find
alternative vendors, DCT’s business, operating results and financial condition
would be materially adversely affected.
Components. DCT
purchases some controller chips that are sole-sourced, as they are specialized
devices. To date, DCT has been able to obtain adequate component
supplies from existing sources. If in the future DCT became unable to
obtain sufficient quantities of required materials, components or subassemblies,
or if such items do not meet quality standards, delays or reductions in product
shipments could occur, which could harm DCT’s business, operating results and
financial condition. Management is currently investigating ways to
mitigate this existing risk.
- 9
-
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
Note
6 – Employee Equity Incentive Plans
General
DCT’s
share-based awards are long-term retention plans that are intended to attract,
retain and provide incentives for talented employees. DCT believes
its share-based awards are critical to its operation and productivity. The
employee share-based award plans allow DCT to grant, on a discretionary basis,
incentive stock options and non-qualified stock options.
Stock
Options
DCT
issues options under three different stock option plans (all approved by
shareholders) as well as through employment agreements with key employees,
executives and consultants (approved by the board of directors on a case-by-case
basis). Options generally vest over three years from the date of
grant and expire seven years from the date of grant
The
following table sets forth, by the respective option plan, certain aspects of
DCT’s stock options as of March 31, 2010:
Option Approval Method
|
Options Outstanding and Options Available
|
|||||||||||||||||||||||
Description
|
Board of
Directors
|
Board of
Directors
and
Shareholders
|
Total
|
Outstanding
|
Available
For
Future
Grant
|
Total
|
||||||||||||||||||
2002
Amended and Restated Stock Option Plan
|
- | 3,200,000 | 3,200,000 | 3,200,000 | - | 3,200,000 | ||||||||||||||||||
2006
Stock Option Plan
|
- | 2,500,000 | 2,500,000 | 2,500,000 | - | 2,500,000 | ||||||||||||||||||
2009
Stock Option Plan
|
- | 1,500,000 | 1,500,000 | 1,039,333 | 460,667 | 1,500,000 | ||||||||||||||||||
Key
Personnel Option Grants
|
6,375,000 | - | 6,375,000 | 4,616,165 | - | 4,616,165 | ||||||||||||||||||
6,375,000 | 7,200,000 | 13,575,000 | 11,355,498 | 460,667 | 11,816,165 |
Stock-Based
Compensation
The
following table sets forth the total stock-based compensation expense included
in DCT’s Statements of Operations (in thousands):
Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Selling,
general and administrative
|
$ | 138 | $ | 147 | ||||
Research
and development
|
32 | 33 | ||||||
$ | 170 | $ | 180 |
At March
31, 2010, DCT had approximately $1,436,000 of total unrecognized compensation
cost related to unvested stock options. This cost is expected to be recognized
over a weighted-average period of approximately 2.8 years.
Stock
Option Activity and Outstanding
DCT had
the following stock option activity during the three months ended March 31,
2010:
- 10
-
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
Options
|
Weighted-
Average
Exercise
Price
|
|||||||
Outstanding
at December 31, 2009
|
11,355,498 | $ | 0.32 | |||||
Granted
|
- | - | ||||||
Cancelled
|
- | - | ||||||
Exercised
|
- | - | ||||||
Outstanding
at March 31, 2010
|
11,355,498 | $ | 0.32 | |||||
Vested
or expected to vest at March 31, 2010
|
11,355,498 | $ | 0.32 |
The
following table summarizes all options outstanding and exercisable by price
range as of March 31, 2010:
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||
Range of
Exercise Prices
|
Number
Outstanding
|
Weighted-
Average
Remaining
Contractual
Life (Years)
|
Weighted-
Average
Exercise
Price
|
Number
Exercisable
|
Weighted-
Average
Exercise
Price
|
|||||||||||||||
$0.01
|
2,241,165 | 2.1 | $ | 0.01 | 2,241,165 | $ | 0.01 | |||||||||||||
$0.30-$0.35
|
7,028,333 | 8.8 | $ | 0.31 | 1,384,583 | $ | 0.30 | |||||||||||||
$0.51
|
150,000 | 8.8 | $ | 0.51 | 50,000 | $ | 0.51 | |||||||||||||
$0.60
- $0.70
|
1,936,000 | 6.8 | $ | 0.69 | 1,936,000 | $ | 0.69 | |||||||||||||
11,355,498 | 5,611,748 |
The
“intrinsic value” of options is the excess of the value of DCT stock over the
exercise price of such options. The total intrinsic value of options
outstanding (of which all are expected to vest) was approximately $650,000 and
$788,000 at March 31, 2010 and December 31, 2009, respectively. The total
intrinsic value for exercisable options was $650,000 and $722,000 at March 31,
2010 and December 31, 2009, respectively. No options were exercised during the
three months ended March 31, 2010.
Note
7 – Earnings per Common Share - Basic and Diluted
Basic
earnings per common share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the
period. Diluted earnings per common share is computed by dividing net
income (loss) by the weighted average number of shares of common stock and
common stock equivalents outstanding during the period.
Common
stock equivalents of 2,200,000 were taken into consideration in calculating
diluted earnings per common share for the three months ended March 31, 2010, but
the impact did not change earnings per common share. Common stock
equivalents of 3,885,000 were not considered in calculating DCT’s diluted
earnings per common share for the three months ended March 31, 2009 as their
effect would be anti-dilutive. As a result, for all periods
presented, DCT’s basic and diluted earnings per share are the same.
Note
8 – Equity
Common
Stock
DCT had
no common stock activity during the three months ended March 31,
2010.
- 11
-
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
DCT’s
Board of Directors approved the issuance of 25,000 restricted common shares to a
consultant for investor relations services rendered during the three months
ended March 31, 2009. The common shares have piggyback registration
rights to the next registration statement filed by DCT. DCT amortized
the estimated fair value of the common shares ratably over the service period,
which was completed prior to March 31, 2009. Accordingly, $11,000 was charged to
selling, general and administrative expense and credited to additional paid-in
capital during the three months ended March 31, 2009.
Preferred
Stock
During
the three months ended March 31, 2009, DCT reported $12,000 of accretion of
preferred stock redemption value associated with its series B convertible
redeemable preferred stock (“Series B Stock”), which matured August 7,
2009. DCT had no other preferred stock activity during any period
presented.
Common
Stock Warrants
DCT had
the following common stock warrant activity during the three months ended March
31, 2010:
Warrants
|
||||
Outstanding
at December 31, 2009
|
2,002,027 | |||
Expired
|
(1,209,000 | ) | ||
Issued
|
167,000 | |||
Outstanding
at March 31, 2010
|
960,027 |
In
certain instances, DCT issues warrants for consulting services. DCT
amortizes the fair value of such warrants over the service period. In
connection with such common stock warrants issued and outstanding, DCT charged
selling, general and administrative expense with the offset credit to additional
paid in capital for $40,000 and $100,000 during the three months ended March 31,
2010 and 2009, respectively. DCT estimated the fair value of the warrants issued
under the Black-Scholes valuation model using the following
assumptions:
Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Weighted
average expected life in years
|
3.0 | 3.0 | ||||||
Weighted
average expected volatility
|
297 | % | 266 | % | ||||
Expected
dividend yield
|
0 | % | 0 | % | ||||
Weighted
average risk free interest rate
|
1.6 | % | 1.8 | % |
Note
9 – Bank Line of Credit
As of
March 31, 2010, DCT had a $2,000,000 line of credit (“LOC”) at a commercial
bank. Borrowings under the LOC are limited to (i) 80% of eligible
accounts receivable less the aggregate face amount of all outstanding letters of
credit, cash management services, and foreign exchange contracts, and (ii) 40%
of eligible inventory (all as defined in the LOC agreement). The
interest rate is prime (3.25% at March 31, 2010) plus 2.75% for advances drawn
against receivables, with a minimum interest rate of 6%; and prime plus 3.75%
for advances drawn against inventory, with a minimum interest rate of
7%. Interest payments are due monthly and all unpaid interest and
principal is due in full on September 2, 2010.
Upon
certain events of default (as defined in the LOC agreement), the default
variable interest rate increases five percentage points above the interest rate
applicable immediately prior to the default. Additionally, the lender
has the right to declare all of the amounts due under the LOC immediately due
and payable upon an event of default.
As of
March 31, 2010, DCT was in compliance with all LOC debt covenants and had unused
borrowing capacity of $1,575,000.
- 12
-
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
During
September 2009, in connection with the LOC origination, DCT paid the lender a
loan origination fee and legal fees which totaled approximately $20,000, and
issued a warrant to purchase 68,027 shares of the Company’s Common Stock at
$0.588 per share. During March 2010, in connection with
increasing the LOC borrowing base, DCT paid the lender a loan modification fee
of $6,000. The loan origination, modification, and legal fees
are recorded as deferred financing costs included in other current assets and
are being amortized over the life of the loan to interest
expense. The $35,000 fair value of the warrants was determined using
the Black-Scholes valuation model with the following assumptions: remaining
contractual term of 7 years, 2.9% risk-free interest rate, expected volatility
of 406% and expected dividend yield of 0%. The fair value of the
warrants was initially recorded as debt discount, with an offset to additional
paid in capital, and is being amortized over the life of the loan to interest
expense.
DCT’s LOC
balance at March 31, 2010 was comprised of the following (in thousands):
Total
principal due
|
$ | 250 | ||
Less
unamortized debt discount
|
(14 | ) | ||
$ | 236 |
Interest
Expense Related to Amortization of Warrant Fair Values and Loan Origination
Fee
The
Company recorded non-cash interest expense of $15,000 during the three months
ended March 31, 2010 in connection with the LOC warrants and amortization of the
LOC origination, modification and legal fees.
Note
10 – Commitments and Contingencies
Operating
Leases
The
Company is committed under various non-cancelable operating leases which extend
through June 2011. Future minimum rental commitments as of March 31, 2010 are as
follows (in
thousands):
Year Ending
March 31,
|
Future
Minimum
Lease
Payments
|
|||
2011
|
$ | 55 | ||
2012
|
1 | |||
$ | 56 |
The above
table reflects the current leases for DCT’s corporate headquarters and its
inventory management and distribution, which both expire June 30,
2010. DCT expects to enter into new leases effective July 1, 2010
with similar terms, conditions and costs as existing leases.
Employment
Agreements
DCT
maintains employment agreements with its executive officers which extend through
2010. The agreements provide for a base salary and annual bonus to be determined
by the Board of Directors. The agreements also provide for
termination payments, stock options, non-competition provisions, and other terms
and conditions of employment. In addition, DCT maintains employment agreements
with other key employees with similar terms and conditions. As of
March 31, 2010 termination payments totaling $1,055,000 remain in
effect.
- 13
-
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
Research
and Development Agreement
During
the second quarter of 2009, the Company entered into an agreement (“Development
Agreement”) with a customer to develop a scanner to meet the customer’s specific
product requirements. The customer has the right to terminate the contract at
any time without cause upon giving DCT two weeks’ notice. If terminated, the
customer shall pay DCT for all work-in-progress or work completed up to the date
of termination. Each party shall retain its rights in any intellectual property
rights owned or licensed to it prior to commencement of development. All
intellectual property developed by DCT will be owned exclusively by the customer
and DCT will not distribute the developed product to any other customer (unless
DCT receives prior written approval from the customer). During the
first 12 months following the initial product shipment, the customer is
committed to buying a certain minimum number of scanners developed under this
agreement.
At March,
31, 2010, DCT had $36,000 of deferred revenue associated with the Development
Agreement, which will be recognized upon shipment of the developed
product.
Litigation,
Claims and Assessments
The
Company experiences routine litigation in the normal course of its business and
does not believe that any pending litigation will have a material adverse effect
on DCT’s financial condition, results of operations or cash flows.
Note
11 – Segment and Geographic Information
Segment
Information
DCT
operates in one segment: the design, development and delivery of various imaging
technology solutions, most notably scanners.
Geographic
Information
During
the three months ended March 31, 2010 and 2009, DCT recorded net sales
throughout the U.S., Asia and Europe as determined by the final destination of
the product. The following table summarizes total net sales
attributable to significant countries (in thousands):
Three Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
U.S.
|
$ | 3,105 | $ | 1,711 | ||||
Europe
|
277 | 304 | ||||||
Asia
|
46 | - | ||||||
$ | 3,428 | $ | 2,015 |
Presented
below is information regarding identifiable assets, classified by operations
located in the U.S., Europe and Asia (in thousands):
March 31,
2010
|
December 31,
2009
|
|||||||
U.S.
|
$ | 3,795 | $ | 3,574 | ||||
Asia
|
85 | 110 | ||||||
Europe
|
124 | 128 | ||||||
$ | 4,004 | $ | 3,812 |
Assets
located in Asia relate to tooling equipment required to manufacture DCT’s
product. Assets located in Europe relate to DCT’s field service,
sales, distribution and inventory management in the
Netherlands.
- 14
-
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)
Note
12 – Subsequent Events
Stock
Option Grants to Officers and Directors
On April
29, 2010 the Company’s board of directors granted an aggregate of 1,000,000
options to certain officers and directors of the company pursuant to the 2010
Stock Option Plan. The options are exercisable for a period of ten
years from the date of grant at an exercise price of $0.29 per share and vest as
follows: one-third on April 29, 2011, one-third on April 29, 2012 and one-third
on April 29, 2013.
Related
Party Transactions
Stock Option Grants and
Amended Consulting Agreement. On April 29, 2010, the
Company’s board of directors approved an amendment to the business advisory and
consulting agreement between the Company and each of Richard “Bo” Dietl and
Daniel DelGiorno (the “Consultants”) dated July 28, 2008, whereby in addition to
the services already being provided pursuant to the agreement, the Consultants
will provide investor relations services in exchange for options to purchase up
to 1,500,000 shares of the Company’s common stock at a price of $0.30 per
share. The options vest over a two year period with 50% of such
options vesting at the end of the first and second years of the agreement;
however, in the event of a change of control in the Company’s securities or
assets pursuant to introductions specifically made by Consultants to the
Company, all of the options shall immediately vest 100% in conjunction with such
event. A change of control shall be defined as a change of ownership
of 50% or more of the Company’s securities, or voting control thereof, or a
transfer of more than 50% of the Company’s tangible and/or intangible
assets.
Agreement to License Office
Space. On April 26,
2010, DCT entered into a two-year license agreement (“License”) with Richard
“Bo” Dietl and Associates (“BDA”) to license office space from BDA in New York
City. The purpose of the License is for DCT to have a physical
presence in New York City. In connection with the License, the
Company paid BDA an upfront license fee of $50,000 as payment in
full. The License can be cancelled by either party with 90 days
written notice.
Agreement for
Finder’s Fee. On April 30, 2010, DCT entered into a
non-exclusive six-month agreement with BDA, whereby BDA will provide
introductions to third parties who might be interested in investing or otherwise
providing sources of financing to DCT. If DCT actually closes on any
financing as a result of introductions by BDA, BDA will receive 10% of the
proceeds.
- 15
-
Item
2 - Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion should be read in conjunction with Document Capture
Technologies, Inc.’s (“DCT” or “Company”) unaudited condensed consolidated
financial statements and notes included herein. The results described
below are not necessarily indicative of the results to be expected in any future
period. Certain statements in this discussion and analysis, including
statements regarding our strategy, financial performance and revenue sources,
are forward-looking statements based on current expectations and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in the forward-looking statements. Readers are
referred to DCT’s Annual Report on Form 10-K for the year ended December 31,
2009 as filed with the Securities and Exchange Commission on March 31,
2010. We undertake no duty to update any forward-looking statement to
conform the statement to actual results or changes in our
expectations.
Management's
discussion and analysis of financial condition and results of operations
("MD&A") is provided as a supplement to the accompanying unaudited condensed
consolidated financial statements and notes to help provide an understanding of
our financial condition, changes in financial condition and results of
operations. The MD&A section is organized as follows:
·
|
Overview.
This section provides a general description of the Company's business, as
well as recent developments that we believe are important in understanding
the results of operations and to anticipate future trends in those
operations.
|
·
|
Critical
accounting policies. This section provides an analysis of the
significant estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities.
|
·
|
Results of
operations. This section provides an analysis of our results of
operations for the three months ended March 31, 2010 compared to the three
months ended March 31, 2009. A brief description of certain
aspects, transactions and events is provided, including related-party
transactions that impact the comparability of the results being
analyzed.
|
·
|
Liquidity
and capital resources. This section provides an analysis of our
financial condition and cash flows as of and for the three months ended
March 31, 2010 as compared to the three months ended March 31,
2009.
|
Overview
We are in
the business of designing, developing and delivering imaging technology
solutions. Our technology is protected under multiple patents. We
focus our research and development toward new deliverable and marketable
technologies related to document digitization and utilization. We sell our
products to customers throughout the world, including the United States, Canada,
Europe, South America, Australia and Asia.
Our
strategy includes a plan to expand our document/image-capture product line and
technology while leveraging our assets in other areas of the imaging industry.
We are actively shipping five groups of image-capture products. We
have expanded our document/image-capture product offerings, and will continue to
expand our product offerings in the future in response to the increased market
demand for faster, easier-to-use products and increased security to meet the
growing need for information protection, including identity and financial
transaction protection.
Critical
Accounting Policies
Our
MD&A is based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to revenue recognition, trade receivables and allowance for
doubtful accounts, inventories, and income taxes. We base our estimates on
historical experience and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
- 16
-
An
accounting policy is deemed to be critical if it requires an accounting estimate
to be made based on assumptions about matters that are highly uncertain at the
time the estimate is made, and if different estimates that reasonably could have
been used or changes in the accounting estimate that are reasonably likely to
occur could materially change the financial statements.
Our
disclosures of critical accounting policies in our Annual Report on Form 10-K
for the year ended December 31, 2009 have not materially changed since that
report was filed.
- 17
-
Results
of Operations
The
following table summarizes certain aspects of our results of operations for the
three months ended March 31, 2010 compared to the three months ended March 31,
2009 (in
thousands):
Three Months
Ended March 31,
|
||||||||||||||||
2010
|
2009
|
$ Change
|
% Change
|
|||||||||||||
Net
sales
|
$ | 3,428 | $ | 2,015 | $ | 1,413 | 70 | % | ||||||||
Cost
of sales
|
2,103 | 1,237 | 866 | 70 | ||||||||||||
As
a percentage of sales
|
61 | % | 61 | % | ||||||||||||
Selling,
general and administrative expense
|
966 | 1,189 | (223 | ) | (19 | ) | ||||||||||
Research
and development expense
|
265 | 231 | 34 | 15 | ||||||||||||
Non-operating
income (expense)
|
(36 | ) | - |
NM
|
NM
|
|||||||||||
NM
= Not Meaningful
|
Net
Sales
The
increase in net sales during the three months ended March 31, 2010 as compared
to the three months ended March 31, 2009 is primarily attributable to the
gradual strengthening of the general economic and market conditions in the U.S.
economy and the information technology (“IT”) capital spending. Sales
during the three months ended March 31, 2009 were atypical as a result of such
slowdown.
Our net
sales were also positively impacted during the three months ended March 31, 2010
by our increased sales efforts and market recognition of our newer and more
feature-rich products, and our ability to capitalize on several market
opportunities.
International
sales are strategically important to the growth of our business and represented
9% and 15% of our total sales during the three months ended March 31, 2010 and
2009, respectively. We continue to focus on expansion internationally
and are working toward broadening our product support and fulfillment
capabilities in Europe, Middle East, Africa and Western Asia.
Although
we continually concentrate on expanding our significant customer base, our
revenue remains dependent on a small number of significant
customers. Total sales to significant customers (customers who
represent more than 10% of our net sales) were 62% and 74% during the three
months ended March 31, 2010 and 2009, respectively. See
Note 4 included in Part I, “Item 1- Financial Statements.” The
identities of our largest customers and their respective contributions to our
net sales have varied in the past and will likely continue to vary from period
to period.
From time
to time, our key customers place large orders causing our quarterly sales to
fluctuate significantly. Additionally, the timing of when we
receive product to sell has a significant impact to our sales. We
expect both of these trends and resulting fluctuations to continue.
Cost
of Sales, Including Gross Profit
Cost of
sales includes all direct costs related to the purchase of scanners, imaging
modules and services related to the delivery of those items manufactured in
China, and to a lesser extent engineering services, software royalties, and
depreciation of tooling equipment. Cost of sales as a percentage of sales during
the three months ended March 31, 2010 as compared to the three months ended
March 31, 2009 was positively impacted by our continued efforts toward the
reduction of the cost of our products and value added third party software
bundles. Cost of sales as a percentage of sales during the three months ended
March 31, 2010 as compared to the three months ended March 31, 2009 was
negatively impacted by a higher proportion of overall net sales generated from
our less feature-rich products, which typically bear lower gross margins than
our scanners with more product features.
- 18
-
We expect
our cost of sales as a percentage of net sales to fluctuate somewhat during the
remainder of 2010 as we experience changes in our product mix and as we work
toward implementing further product cost reduction strategies.
Selling,
General and Administrative Expense
Selling,
general and administrative expenses consist primarily of personnel-related
expenses, including stock-based compensation costs, facilities-related expenses
and outside professional services such as legal and accounting. To a
lesser extent, market development and promotional funds for our retail
distribution channels, tradeshows, website support, warehousing and logistics
are also included.
The
decrease in selling and marketing expense during the three months ended March
31, 2010 as compared to the three months ended March 31, 2009 was primarily
attributable to the following:
·
|
Decreased
investor relations efforts associated with DCT’s initiatives toward
further reducing operating
expenses;
|
·
|
Decreased
accounting fees associated with retaining the same independent accounting
firm from year to year;
|
·
|
Decreased
legal fees; and
|
·
|
Decreased
amortization of the fair value (a non-cash charge) of equity instruments
issued for consulting services to $40,000 during the three months ended
March 31, 2010 from $111,000 during the three months ended March 31,
2009. See “Note 8 - Equity” in Part I, Item 1 of this Form
10-Q.
|
We
anticipate that selling, general and administrative expenses will continue to
fluctuate as our business continues to grow and the costs associated with being
a public company continue to increase. We continue to work to offset
these expenses by reducing overhead expenses and streamlining
operations
Research
and Development Expense
Research
and development expense consists primarily of salaries and related costs,
including stock-based compensation costs of employees engaged in product
research, design and development activities, compliance testing, documentation,
prototypes and expenses associated with transitioning the product to
production. The increased research and development expense was
primarily attributable to increased personnel expenses, as our headcount during
the three months ended March 31, 2010 was double the headcount during the three
months ended March 31, 2009.
We
anticipate that research and development expense will continue to increase over
the long term as a result of the growth of our existing products, new product
opportunities and expansion into new markets and technologies. We remain
committed to significant research and development efforts to extend our
technology leadership in the imaging technology markets.
Non-Operating
Income (Expense)
The most
significant components of our non-operating income (expense) during the three
months ended March 31, 2010 were (i) interest expense
totaling $25,000, of which $15,000 was non-cash and attributable to
amortization of debt issuance costs, and (ii) realized loss on foreign currency
resulting from the devaluation of the Euro against the US dollar.
- 19
-
Other
income (expense) during the three months ended March 31, 2009 was immaterial to
our results of operations.
Liquidity
and Capital Resources
At March
31, 2010, principal sources of liquidity included cash and cash equivalents of
$165,000 and an available borrowing capacity of $1,575,000 on our bank line of
credit. During March 2010, we negotiated an increase to our existing
line of credit borrowing, which gave us approximately $500,000 additional
borrowing capacity. We had no significant cash outlays, except as
part of our normal operations, during the three months ended March 31, 2010 or
March 31, 2010.
The
following table summarizes certain aspects of DCT’s liquidity (in thousands):
As of or for the Three
Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Cash
and cash equivalents
|
$ | 165 | $ | 207 | ||||
Working
capital
|
2,696 | 1,471 | ||||||
Cash
used by operating activities
|
(140 | ) | (540 | ) | ||||
Cash
used by investing activities
|
(45 | ) | (7 | ) | ||||
Cash
provided by financing activities
|
22 | 349 |
Operating
activities:
Cash used
by operations during the three months ended March 31, 2010 was primarily a
result of our $56,000 net income, $287,000 of net non-cash expenses and $483,000
net cash used by changes in operating assets and liabilities. Cash
used by operations during the three months ended March 31, 2009 was primarily a
result of our $642,000 net loss, $300,000 of net non-cash expenses, and $198,000
net cash provided by changes in operating assets and liabilities.
Non-cash
items included in net loss are depreciation expense, stock-based compensation
cost of options, fair value of warrants issued for services rendered, and
amortization of debt discount. The most significant change in
operating assets and liabilities during the three months ended March 31, 2010
was attributable to the increased accounts receivable as a results of increased
revenues during the period. The remaining changes in operating assets
and liabilities during both the three months ended March 31, 2010 and 2009 were
indicative of the normal operational fluctuations related to the timing of
product shipments, trade receivable collections, inventory management, and
timing of vendor payments.
We expect
future cash provided (used) by operating activities to fluctuate, primarily as a
result of fluctuations in operating results, timing of product shipments, trade
receivables collections, inventory management and timing of vendor
payments.
Investing
activities: Investing activities for both the three months
ended March 31, 2010 and 2009 included capital purchases to support normal
business operations.
Financing
activities: During the three months ended March 31, 2010,
financing activities consisted of (i) negotiating an increase to our existing
line of credit borrowing base, and (ii) $28,000 line of credit draw to meet
short-term obligations incurred during the normal course of
business. During the three months ended March 31, 2009, financing
activities consisted of a $349,000 draw against our bank line of credit to meet
short-term obligations incurred during the normal course of
business.
- 20
-
Cash
and Working Capital Requirements
DCT
actively controls operating expenses to align with current and projected net
sales. If we continue to successfully manage our projected net sales
and control our operating expenses, of which there can be no assurance,
management believes that current cash and other sources of liquidity are
sufficient to fund normal operations through the next 12 months.
DCT’s
current line of credit matures on September 2, 2010. Our current
lender has already communicated the desire to extend DCT’s current credit
facility through September 2011. Although management believes DCT
will be able to obtain an additional line of credit upon maturity of the
existing line of credit, there is no guarantee that DCT will be able to secure a
line of credit on terms that are acceptable to DCT.
Contractual
Obligations
The
following table summarizes our contractual obligations at March 31, 2010, and
the effect such obligations are expected to have on our liquidity and cash flows
in future periods (in
thousands):
Less Than
|
One – Three
|
Three – Five
|
||||||||||||||
Total
|
One Year
|
Years
|
Years
|
|||||||||||||
Line
of credit (1)
|
$ | 250 | $ | 250 | $ | - | $ | - | ||||||||
Operating
lease obligations
|
56 | 55 | 1 | - | ||||||||||||
Total
contractual cash obligations
|
$ | 306 | $ | 305 | $ | 1 | $ | - |
(1)
As of March 31, 2010, DCT had a $2,000,000 line of credit (“LOC”) at a
commercial bank. Borrowings under the LOC are limited to (i) 80% of
eligible accounts receivable less the aggregate face amount of all outstanding
letters of credit, cash management services, and foreign exchange contracts, and
(ii) 40% of eligible inventory (all as defined in the LOC
agreement). The interest rate is prime (3.25% at March 31, 2010) plus
2.75% for advances drawn against receivables, with a minimum interest rate of
6%; and prime plus 3.75% for advances drawn against inventory, with a minimum
interest rate of 7%. Interest payments are due monthly and all unpaid
interest and principal is due in full on September 2, 2010.
Upon
certain events of default (as defined in the LOC agreement), the default
variable interest rate increases five percentage points above the interest rate
applicable immediately prior to the default. Additionally, the lender
has the right to declare all of the amounts due under the LOC immediately due
and payable upon an event of default.
As of
March 31, 2010, DCT was in compliance with all LOC debt covenants.
Off-Balance
Sheet Arrangements
At March
31, 2010, we did not have any relationship with unconsolidated entities or
financial partnerships, which other companies have established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. Therefore, we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships.
Trends
To the
best of our knowledge, except for the commitments described in “Note 10 -
Commitments and Contingencies” in Part I, Item 1 of this Form 10-Q, there are no
other known trends or demands, commitments, events or uncertainties that existed at March
31, 2010, which are likely to have a material effect on our future
liquidity.
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Item
4T – Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
We
conducted an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer (Principal Executive Officer)
and Chief Financial Officer (Principal Financial Officer), of the effectiveness
of the design and operation of our disclosure controls and procedures. The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange
Act”), means controls and other procedures of a company that are designed to
ensure that information required to be disclosed by the company in the reports
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures also include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company's
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate, to allow timely
decisions regarding required disclosure. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures were not effective as of March 31, 2010 for the reasons
discussed below related to material weaknesses in our internal control over
financial reporting.
Discussion
and Management’s Remediation Initiatives
At March
31, 2010, we did not have an independent financial expert on our Board of
Directors, which resulted in ineffective comprehensive entity-level internal
controls specific to the structure of our Board of Directors. We are
currently in the process of interviewing candidates that meet the definition of
independent and financial expert and can fill the vacant position on our Board
of Directors.
Conclusion
To
mitigate the above identified material weakness, DCT’s executive management, two
of whom are also members of DCT’s Board of Directors, performed detailed
analyses. These included, but were not limited to, a detailed balance
sheet and statement of operations analytical review that compared changes from
the prior period’s financial statements and analyzed all significant
differences. Additionally, DCT’s executive management compared the actual
results of operations to its internal budgeted forecast and investigated any
items where the actual results differed from expectations. In
addition to executive management’s detailed analyses, DCT’s independent board
members performed extensive analysis of our financial performance.
Such
detailed analyses were completed so management and our board of directors could
gain assurance that the financial statements and schedules included in this
Quarterly Report on Form 10-Q present fairly, in all material respects,
DCT’s financial position, results of operations and cash flows for all periods
presented.
Evaluation
of Changes in Internal Control over Financial Reporting
Under the
supervision and with the participation of our management, including our
Principal Executive Officer and Principal Financial Officer, we have determined
that, during the three months ended March 31, 2010, there were no changes in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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PART
II. OTHER INFORMATION
Item
1 - Legal Proceedings
We are
subject to various legal proceedings from time to time in the ordinary course of
business, none of which is required to be disclosed under this Item
1.
Item
1A – Risk Factors
There
have been no changes to the risk factors included in our Annual Report on Form
10-K for the year ended December 31, 2009 as filed with the Securities and
Exchange Commission on March 31, 2010.
Item
2 - Unregistered Sales of Equity Securities and Use of Proceeds
On April
29, 2010 the Company’s board of directors granted an aggregate of 1,000,000
options to certain officers and directors of the company pursuant to the 2010
Stock Option Plan. The options are exercisable for a period of ten
years from the date of grant at an exercise price of $0.29 per share and vest as
follows: one-third on April 29, 2011, one-third on April 29, 2012 and one-third
on April 29, 2013.
On April
29, 2010, the Company’s board of directors approved an amendment to the business
advisory and consulting agreement between the Company and each of Richard “Bo”
Dietl and Daniel DelGiorno (the “Consultants”) dated July 28, 2008, whereby in
addition to the services already being provided pursuant to the agreement, the
Consultants will provide investor relations services in exchange for options to
purchase up to 1,500,000 shares of the Company’s common stock at a price of
$0.30 per share. The options vest over a two year period with 50% of
such options vesting at the end of the first and second years of the agreement;
however, in the event of a change of control in the Company’s securities or
assets pursuant to introductions specifically made by Consultants to the
Company, all of the options shall immediately vest 100% in conjunction with such
event. A change of control shall be defined as a change of ownership
of 50% or more of the Company’s securities, or voting control thereof, or a
transfer of more than 50% of the Company’s tangible and/or intangible
assets.
Item
3 - Defaults Upon Senior Securities
None.
Item
5 - Other Information
On April
29, 2010, the Company’s board of directors adopted the Company’s 2010 Stock
Option Plan pursuant to which it authorized the issuance of up to 2,000,000
options pursuant to the plan. A copy of the 2010 Stock Option Plan is
attached hereto as Exhibit 10.1.
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Item
6 - Exhibits
Exhibit
Number
|
Description of Exhibit
|
Method of Filing
|
||
10.1
|
2010
Stock Option Plan
|
Filed
herewith
|
||
10.2
|
Business
Advisory and Consulting Agreement between the Company, Richard “Bo” Dietl
and Daniel DelGiorno dated July 28, 2008
|
Filed
herewith
|
||
10.3
|
Amendment
#1 to the Business Advisory and Consulting Agreement between
the Company, Richard “Bo” Dietl and Daniel DelGiorno dated August 3,
2009
|
Filed
herewith
|
||
10.4
|
Amendment
#2 to the Business Advisory and Consulting Agreement between
the Company, Richard “Bo” Dietl and Daniel DelGiorno dated April 29,
2010
|
Filed
herewith
|
||
10.5
|
License
agreement between the Company and Richard “Bo” Dietl and
Associates dated April 26, 2010
|
Filed
herewith
|
||
31.1
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act – David P.
Clark
|
Filed
herewith
|
||
31.2
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act – M. Carolyn
Ellis
|
Filed
herewith
|
||
32.1
|
Certifications
Pursuant to Section 906 of the Sarbanes-Oxley Act – David P.
Clark
|
Filed
herewith
|
||
32.2
|
Certifications
Pursuant to Section 906 of the Sarbanes-Oxley Act – M. Carolyn
Ellis
|
Filed
herewith
|
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, Document Capture
Technologies, Inc. has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Document
Capture Technologies, Inc.
|
||
Date: May
24, 2010
|
||
/s/
David P. Clark
|
||
David
P. Clark, Chief Executive Officer
|
||
Date:
May 24, 2010
|
||
/s/
M. Carolyn Ellis
|
||
M.
Carolyn Ellis
|
||
Chief
Financial Officer
|
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