Unassociated Document
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, 2008
¨
|
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
|
|
59-3134518
|
(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)
408-436-9888
ext. 207
(Registrant’s
telephone number, including area code)
Check
whether the issuer (1) 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 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, 2008 was 18,443,770.
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.
DOCUMENT
CAPTURE TECHNOLOGIES, INC
FORM 10-Q
FOR
THE QUARTER ENDED MARCH 31, 2008
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
|
18
|
Item
3
|
Quantitative
and Quantitative Disclosures about Market Risk
|
25
|
Item
4T
|
Controls
and Procedures
|
25
|
PART
II – OTHER INFORMATION
|
26
|
Item
1
|
Legal
Proceedings
|
26
|
Item
1A
|
Risk
Factors
|
26
|
Item
2
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
26
|
Item
3
|
Defaults
Upon Senior Securities
|
26
|
Item
4
|
Submission
of Matters to a Vote of Security Holders
|
26
|
Item
5
|
Other
Information
|
26
|
Item
6
|
Exhibits
|
26
|
|
Signatures
|
27
|
PART
I. FINANCIAL INFORMATION
Item
1 - Financial Statements
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands)
|
|
March 31,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,299
|
|
$
|
1,770
|
|
Trade
receivables
|
|
|
1,618
|
|
|
2,464
|
|
Inventories,
net
|
|
|
1,194
|
|
|
1,400
|
|
Prepaid
expenses and other current assets
|
|
|
29
|
|
|
32
|
|
Total
current assets
|
|
|
4,140
|
|
|
5,666
|
|
Fixed
assets, net
|
|
|
111
|
|
|
127
|
|
Total
assets
|
|
$
|
4,251
|
|
$
|
5,793
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Notes
payable and related warrant liability
|
|
$
|
1,123
|
|
$
|
1,239
|
|
Trade
payables to related parties
|
|
|
715
|
|
|
578
|
|
Trade
payables and other current liabilities
|
|
|
531
|
|
|
658
|
|
Accrued
dividends on Series A 5% cumulative convertible preferred
stock
|
|
|
-
|
|
|
178
|
|
Total
current liabilities
|
|
|
2,369
|
|
|
2,653
|
|
|
|
|
|
|
|
|
|
Long-term
bank line of credit
|
|
|
700
|
|
|
2,021
|
|
Liability
under derivative contracts
|
|
|
569
|
|
|
255
|
|
Total
liabilities
|
|
|
3,638
|
|
|
4,929
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
preferred stock, $.001 par value, 2,000 authorized:
|
|
|
|
|
|
|
|
Series
A 5% cumulative convertible preferred stock, 0 and 11.5
shares
issued
and outstanding at March 31, 2008 and December 31, 2007,
respectively;
liquidation value of $0 and $1,150 at March 31, 2008
and
December 31, 2007, respectively
|
|
|
-
|
|
|
1,074
|
|
Series
B convertible preferred stock, 1.5 shares issued and
outstanding
at March 31, 2008 and December 31, 2007; liquidation
value
of $150 at March 31, 2008 and December 31, 2007
|
|
|
82
|
|
|
70
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity (deficit):
|
|
|
|
|
|
|
|
Common
stock $.001par value, 50,000 authorized, 18,444 shares issued
and
outstanding at March 31, 2008 and 15,904 shares issued
and
15,404 outstanding at December 31, 2007 (500 shares held in
escrow)
|
|
|
18
|
|
|
15
|
|
Additional
paid-in capital
|
|
|
31,944
|
|
|
30,323
|
|
Accumulated
deficit
|
|
|
(31,431
|
)
|
|
(30,618
|
)
|
Total
stockholders’ equity (deficit)
|
|
|
531
|
|
|
(280
|
)
|
Total
liabilities and stockholders’ equity (deficit)
|
|
$
|
4,251
|
|
$
|
5,793
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in
thousands, except per share amounts)
|
|
Three Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
2,538
|
|
$
|
4,127
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,805
|
|
|
2,484
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
733
|
|
|
1,643
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Selling
and marketing
|
|
|
251
|
|
|
400
|
|
General
and administrative
|
|
|
710
|
|
|
915
|
|
Research
and development
|
|
|
203
|
|
|
777
|
|
Total
operating expenses
|
|
|
1,164
|
|
|
2,092
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(431
|
)
|
|
(449
|
)
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
Change
in fair value of derivative instruments
|
|
|
(314
|
)
|
|
(368
|
)
|
Gain
on sale of assets
|
|
|
400
|
|
|
-
|
|
Other
|
|
|
(133
|
)
|
|
9
|
|
Total
other income (expense)
|
|
|
(47
|
)
|
|
(359
|
)
|
|
|
|
|
|
|
|
|
Net
loss before income taxes
|
|
|
(478
|
)
|
|
(808
|
)
|
Provision
for income taxes
|
|
|
2
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(480
|
)
|
|
(808
|
)
|
Dividend
on Series A and accretion of Series A and Series B preferred stock
redemption value
|
|
|
(102
|
)
|
|
(241
|
)
|
Deemed
dividend on Series A preferred stock maturity and
conversion
|
|
|
(231
|
)
|
|
-
|
|
Net
loss available to common stockholders
|
|
$
|
(813
|
)
|
$
|
(1,049
|
)
|
|
|
|
|
|
|
|
|
Net
loss per common share – basic and diluted
|
|
$
|
(0.05
|
)
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
Basic
and diluted
|
|
|
16,442
|
|
|
23,850
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in
thousands)
|
|
Three Months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
Net
loss available to common stockholders
|
|
$
|
(813
|
)
|
$
|
(1,049
|
)
|
Adjustments
to reconcile net loss to net cash provided (used) by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
|
16
|
|
|
9
|
|
Stock-based
compensation cost – options
|
|
|
110
|
|
|
814
|
|
Fair
value of common stock warrants issued for services
rendered
|
|
|
34
|
|
|
4
|
|
Interest
expense attributable to amortization of debt issuance
costs
|
|
|
84
|
|
|
-
|
|
Change
in fair value of derivative instruments
|
|
|
314
|
|
|
368
|
|
Accretion
of Series A and Series B preferred stock redemption value
|
|
|
88
|
|
|
220
|
|
Deemed
dividend on Series A preferred stock
|
|
|
231
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
846
|
|
|
(689
|
)
|
Inventories
|
|
|
206
|
|
|
332
|
|
Prepaid
expenses and other current assets
|
|
|
3
|
|
|
(78
|
)
|
Accrued
dividends on Series A 5% cumulative convertible stock
|
|
|
13
|
|
|
21
|
|
Trade
payables to related parties
|
|
|
137
|
|
|
(780
|
)
|
Trade
payables and other current liabilities
|
|
|
(127
|
)
|
|
(109
|
)
|
Cash
provided (used) by operating activities
|
|
|
1,142
|
|
|
(937
|
)
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
-
|
|
|
(32
|
)
|
Cash
used by investing activities
|
|
|
-
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
Net
(payments)
advances on bank line of credit
|
|
|
(1,321
|
)
|
|
500
|
|
Payments
on notes payable
|
|
|
(300
|
)
|
|
-
|
|
Proceeds
from exercise of employee stock options
|
|
|
8
|
|
|
-
|
|
Cash
(used) provided by financing activities
|
|
|
(1,613
|
)
|
|
500
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(471
|
)
|
|
(469
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,770
|
|
|
1,333
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
1,299
|
|
$
|
864
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Restricted
common stock acquired from related party
|
|
$
|
-
|
|
$
|
2
|
|
Conversion
of convertible preferred stock to common stock
|
|
$
|
1,339
|
|
$
|
-
|
|
Increase
in the warrant liability of common stock warrants in connection with
debt
financing
|
|
$
|
100
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
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") develops, designs and delivers
various imaging technology solutions to all types and sizes of enterprises
including governmental agencies, large corporations, small corporations, small
office-home offices (“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. DCT’s patented and proprietary page-imaging devices
facilitate the way information is stored, shared and managed for 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, DCT established many technical milestones and was granted
numerous patents for its linear imaging technology. DCT’s patented CIS and
mobile imaging scanner technology provides high quality images at extremely
low
power consumption levels allowing delivery of compact scanners in a form ideally
suited for laptop or desktop computer users who need a small, lightweight device
to scan or fax documents.
DCT’s
business model was developed around intellectual property (“IP”) driven products
sold primarily to original equipment manufacturers (“OEM”), private label brands
and value added resellers (“VAR”) and can be found in a variety of applications,
including but not limited, to the following:
|
· |
Document
and information management;
|
|
· |
Identification
card scanners;
|
|
· |
Passport
security scanners;
|
|
· |
Bank
note and check verification;
|
|
· |
Optical
mark readers used in lottery
terminals.
|
In
addition, during the past several years, DCT has engaged in the research and
development of certain technologies related to the field of high definition
(“HD”) display. During that time, DCT expanded its HD display initiative through
acquisition, exclusive licensing and the addition of key personnel and expended
significant resources to develop its HD display technology. However, in November
2007, DCT terminated its HD display research and development efforts. All
HD-related expenses, including employees and contractors were terminated by
December 31, 2007. See Note 3.
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 10 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, 2008 are
not
necessarily indicative of the operating results that may be expected for the
entire year ending December 31, 2008. The interim financial statements should
be
read in conjunction with the financial statements in the Company’s Annual Report
on Form 10-KSB for the year ended December 31, 2007, filed with the Securities
and Exchange Commission (“SEC”) on March 5, 2008.
DOCUMENT
CAPTURE TECHNOLOGIES, INC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)
The
consolidated financial statements include the accounts of DCT and its
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
Certain
accounts have been reclassified to conform to the current period presentation.
Such reclassifications did not affect total net sales, operating loss or net
loss available to common stockholders.
Liquidity
and Going Concern
The
accompanying financial statements have been prepared assuming that DCT will
continue as a going concern. As of March 31, 2008, DCT has a substantial
accumulated deficit totaling $31,431,000 resulting from recurring losses in
recent years. These factors raise substantial doubt about DCT’s ability to
continue as a going concern.
Management
believes the Company has adequate resources to continue as a going concern
such
as current sources of liquidity including cash, current accounts receivables
and
a $285,000 line of credit available for use under its current line of credit
facility. Management also believes that it has the ability to borrow additional
funds from third parties such as financial institutions or will be successful
in
a debt or equity financing that will be sufficient to fund its operations for
the next twelve months. Therefore, for at least the next twelve months, DCT
can
continue to operate as a going concern.
The
consolidated financial statements do not include any adjustments relating to
the
recoverability and classification of recorded asset amounts or the amount and
classification of liabilities or any other adjustment that might be necessary
should DCT be unable to continue as a going concern.
Note
2 – Recent Accounting Pronouncements
Pronouncements
Adopted During the Current Reporting Period
In
September 2006, the FASB issued SFAS 157, Fair
Value Measurements
(“SFAS
157”), which provides guidance about how to measure assets and liabilities that
use fair value. SFAS 157 will apply whenever another US Generally Accepted
Accounting Principle (“GAAP”) standard requires (or permits) assets or
liabilities to be measured at fair value but does not expand the use of fair
value to any new circumstances. This standard also will require additional
disclosures in both annual and quarterly reports. SFAS 157 was effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and was adopted by DCT on January 1, 2008. The adoption of SFAS 157 had no
impact on DCT’s consolidated financial position, cash flows or results of
operations.
In
February 2007, the FASB issued SFAS 159, The
Fair Value Option for Financial Assets and Financial Liabilities-Including
an
amendment of FASB Statement No. 115
(“SFAS
159”). SFAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value that are not currently required to be
measured at fair value, with unrealized gains and losses related to these
financial instruments reported in earnings at each subsequent reporting date.
SFAS 159 was effective for financial statements issued for fiscal years
beginning after November 15, 2007, and was adopted by DCT on January 1, 2008.
The adoption of SFAS 159 had no impact on DCT’s consolidated
financial position, cash flows or results of operations.
In
June
2007, the FASB ratified the Emerging Issues Task Force (“EITF”) Issue No. 07-3,
“Accounting
for Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities”
(“EITF
07-3”). EITF 07-3 requires non-refundable advance payments for goods and
services to be used in future research and development activities to be recorded
as an asset and the payments to be expensed when the research and development
activities are performed. EITF 07-3
is effective, on a prospective basis, for fiscal years beginning after
December 15, 2007 and was adopted by DCT on January
1, 2008. The adoption of SFAS 159 had no impact on DCT’s consolidated financial
position, cash flows or results of operations.
DOCUMENT
CAPTURE TECHNOLOGIES, INC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)
Pronouncements
to be Adopted in Future Reporting Periods
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations”
(“SFAS
141R”). SFAS 141R will significantly change the accounting for business
combinations in a number of areas including the treatment of contingent
consideration, contingencies, acquisition costs, in-process research and
development and restructuring costs. In addition, under SFAS 141R, changes
in
deferred tax asset valuation allowances and acquired income tax uncertainties
in
a business combination after the measurement period will impact income taxes.
SFAS 141R is effective for fiscal years beginning after December 15, 2008 and,
as such, DCT will adopt this standard on January 1, 2009. DCT
is
currently evaluating the potential impact this standard may have on its
consolidated financial position, cash flows and results of operations.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures
about Derivative Instruments and Hedging Activities-an amendment of FASB
Statement No. 133”
(“SFAS
161”). SFAS 161 requires enhanced disclosure related to derivatives and hedging
activities and thereby seeks to improve the transparency of financial reporting.
Under SFAS 161, entities are required to provide enhanced disclosures relating
to: (a) how and why an entity uses derivative instruments; (b) how derivative
instruments and related hedge items are accounted for under SFAS No. 133,
“Accounting
for Derivative Instruments and Hedging Activities”
(“SFAS
133”), and its related interpretations; and (c) how derivative instruments and
related hedged items affect an entity’s financial position, financial
performance, and cash flows. FAS No. 161 must be applied prospectively to all
derivative instruments and non-derivative instruments that are designated and
qualify as hedging instruments and related hedged items accounted for under
SFAS
133 for all financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, and,
as
such, DCT will adopt this standard on January 1, 2009. DCT
is
currently evaluating the potential impact this standard may have on its
consolidated financial position, cash flows and results of operations.
Other
recent accounting pronouncements issued by the FASB (including its EITF), the
American Institute of Certified Public Accountants (“AICPA”), and the SEC did
not or are not believed by management to have a material impact on the Company's
present or future financial statements.
Note
3 – Sale of HD Display-Related Assets
In
December 2007, DCT entered an asset purchase agreement with Sky Glory Enterprise
Investment Co., Ltd (“Sky Glory”), whereby Sky Glory agreed to purchase certain
HD display-related assets, subject to certain terms and conditions, for a total
of $600,000 cash. On March 31, 2008, DCT received an initial $400,000 cash
payment. A second cash payment of $150,000 was received on May 2, 2008. To
date,
the
final
$50,000 payment has not been received.
There
were no costs associated with the sale of HD-related assets. As such, the entire
cash proceeds of $400,000 were recorded as a gain on sale of assets during
the
three months ended March 31, 2008. The second cash payment of $150,000 will
be
reflected in DCT’s financial statements as a gain on sale of assets during the
three months ended June 30, 2008. The final $50,000 payment will be reflected
in
DCT’s financial statements as a gain on sale of assets if and when the cash is
received.
Darwin
Hu, the current Chairman of DCT’s board of directors, was instrumental in
negotiating and closing the sale of the HD-display related assets. Until March
1, 2008, Mr. Hu was DCT’s President and Chief Executive Office, at which time he
resigned from DCT to become an executive at a subsidiary of Sky Glory.
DOCUMENT
CAPTURE TECHNOLOGIES, INC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)
Note
4 – Related-Party Transactions
Related-Party
Purchases
The
Company purchases the majority of its finished scanner imaging products from
Syscan Lab Limited (“SLL”), a wholly-owned subsidiary of Syscan Technology
Holdings Limited ("STH"), the parent company of DCT’s former majority
stockholder. DCT’s Chairman, Darwin Hu, was formerly the CEO of STH. He resigned
from STH effective December 2004.
Purchases
from SLL totaled $1,380,000 and $2,178,000 for the three months ended March
31,
2008 and 2007, respectively. All purchases from SLL were carried out in the
normal course of business. As a result of these purchases, the Company was
liable to SLL for $715,000 and $578,000 at March 31, 2008 and December 31,
2007,
respectively.
Note
5 – 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 $100,000.
As
of March 31, 2008, DCT had consolidated balances of approximately $1,097,000,
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,
|
|
|
|
2008
|
|
2007
|
|
Customer
A
|
|
|
28
|
%
|
|
32
|
%
|
Customer
B
|
|
|
25
|
|
|
15
|
|
Customer
C
|
|
|
21
|
|
|
21
|
|
Customer
D
|
|
|
10
|
|
|
*
|
|
*
Customer accounted for less than 10% for the period indicated.
Trade
receivables from these customers totaled $1,231,000 at March 31, 2008. As of
March 31, 2008, all the Company's trade receivables were unsecured.
Note
6 – Concentration of Supplier Risk
DCT
purchases substantially all finished scanner imaging products from one vendor
that is also a wholly-owned subsidiary of the parent company of its former
majority stockholder. See Note 4. If this vendor became unable or unwilling
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.
DOCUMENT
CAPTURE TECHNOLOGIES, INC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)
Note
7 – Employee Equity Incentive Plans
Stock-Based
Compensation
DCT
has
several stock-based employee compensation plans, which are more fully described
in the 2007 Annual Report on Form 10-KSB.
Effective
January 1, 2006 DCT adopted the fair value recognition provisions of SFAS 123R,
Share-Based
Payments
(“SFAS
123R”), using the modified prospective application method. Under this transition
method, compensation cost recognized for the three months ended March 31, 2008
and 2007, includes the applicable amounts of: (a) compensation expense of all
stock-based payments granted prior to, but not yet vested as of January 1,
2006
(based on the grant-date fair value estimated in accordance with the original
provisions of SFAS 123 and the Accounting Principles Board (“APB”) 25,
Accounting
for Stock Issued to Employees
(“APB
25”)), and (b) compensation expense for all stock-based payments granted
subsequent to January 1, 2006 (based on the grant-date fair value estimated
in
accordance with the new provisions of SFAS 123R).
The
following table sets forth the total stock-based compensation expense included
in the Condensed Consolidated Statements of Operations (in
thousands):
|
|
Three months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
Selling
and marketing
|
|
$
|
15
|
|
$
|
73
|
|
General
and administrative
|
|
|
71
|
|
|
508
|
|
Research
and development
|
|
|
24
|
|
|
233
|
|
At
March
31, 2008, the Company had approximately $395,000 of total unrecognized
compensation cost related to stock options. This cost is expected to be
recognized over a weighted-average period of approximately 16
months.
Stock
Options
The
following table summarizes stock option activity and related information for
the
three months ended March 31, 2008:
|
|
Options
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
6,847,550
|
|
$
|
0.18
|
|
Granted
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
(1,446,000
|
)
|
|
(0.01
|
)
|
Cancelled
|
|
|
(434,385
|
)
|
|
(0.87
|
)
|
Outstanding
at March 31, 2008
|
|
|
4,967,165
|
|
$
|
0.39
|
|
The
following table summarizes all options outstanding and exercisable by price
range as of March 31, 2008:
|
|
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
|
|
|
4.07
|
|
$
|
0.01
|
|
|
2,241,165
|
|
$
|
0.01
|
|
$0.60
- $0.70
|
|
|
2,726,000
|
|
|
8.86
|
|
$
|
0.70
|
|
|
1,717,333
|
|
$
|
0.70
|
|
DOCUMENT
CAPTURE TECHNOLOGIES, INC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)
Note
8 – Basic and Diluted Net Loss Per Common Share
Basic
net
loss per common share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the period. Diluted net
loss
per common share is computed by dividing net loss by the weighted average number
of shares of common stock and common stock equivalents outstanding during the
period. Common stock equivalents were not considered in calculating DCT’s
diluted net loss per common share for the three months ended March 31, 2008
and
2007 as their effect would be anti-dilutive. As a result, for all periods
presented, DCT’s basic and diluted net loss per common share is the same.
Note
9 – Equity
Common
Stock Activity
During
January 2008, DCT cancelled 750,000 shares of its common stock (of which 500,000
shares were never released from escrow) as a result of terminating its HD
display related research and development efforts. The shares were originally
issued in anticipation of reaching research and development milestones and
conditions. However, the milestones and performance criteria were not met before
the project was terminated.
During
the first quarter of 2008, DCT issued 1,446,000 shares of common stock upon
the
exercise of stock options by DCT’s principal officers, employees and
consultants. Of the options exercised, 646,000 shares were completed through
a
cashless exercise.
During
the first quarter of 2008, DCT issued 1,844,016 shares of common stock resulting
from the maturity of $1,150,000 (11,500 shares) of Series A 5% cumulative
convertible preferred stock (“Series A Stock”) and the related accrued dividend
shares.
Preferred
Stock Activity
Series
A 5% Cumulative Convertible Preferred Stock Maturity
On
March
15, 2008 (the "Series A Stock Redemption Date"), all of DCT’s outstanding Series
A Stock was redeemed for a per share redemption price equal to the stated value
on the Series A Stock Redemption Date (the "Series A Stock Redemption Price").
The Series A Stock Redemption Price included principal and accrued dividends.
The Series A Stock Redemption Price was payable either in cash or in shares
of
common stock at DCT’s sole discretion. DCT elected to pay all of the Series A
Stock Redemption Price in shares of common stock. According to the terms of
the
Series A Stock agreement, the shares of common stock that were delivered to
holders of the Series A Stock were valued at 85% of the fifteen-day volume
weighted average price of the common stock on the Series A Redemption Date.
Series
A Stock Dividends
Through
maturity, DCT’s Series A Stock accrued cumulative dividends at a rate of 5% per
year, payable semiannually on July 1 and January 1. Dividends were payable
in
cash, by accretion of the stated value or in shares of common stock. Subject
to
certain terms and conditions, the decision whether to accrete dividends to
the
stated value of the Series A Stock or to pay for dividends in cash or in shares
of common stock was at DCT’s discretion and DCT opted to pay all dividends in
shares of common stock. During the three months ended March 31, 2008 and 2007,
Series A Stock dividends were approximately $14,000 and $21,000, respectively.
DOCUMENT
CAPTURE TECHNOLOGIES, INC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)
Series
A Stock Deemed Dividends
In
accordance with EITF Issue 98-5, Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios (“EITF
98-5”), and EITF Issue No. 00-27, Application
of Issue 98-5 to Certain Convertible Instruments (“EITF
00-27”), DCT’s Series A Stock had an embedded contingent beneficial conversion
feature because the conversion price was less than the fair value of DCT’s
common stock on the maturity and conversion of the Series A Stock into common
stock. Additionally, the embedded beneficial conversion feature was considered
contingent because it was based on two variables: (i) how much of the Series
A
Stock Redemption Price was paid in DCT’s common stock, and (ii) the fifteen-day
volume weighted average price of the common stock on the Series A Redemption
Date.
Under
EITF 98-5, a contingent beneficial conversion feature should be recognized
in
earnings when all contingencies are resolved. DCT recorded a deemed dividend
on
its Series A Stock during the three months ended March 31, 2008 totaling
$231,000. This non-cash dividend is to reflect the implied economic value to
the
preferred stockholder of converting Series A shares into common stock at a
15%
discount of the common stock price at the time of conversion. The fair value
was
calculated using the difference between the agreed-upon conversion price of
the
Series A Preferred Stock into shares of common stock and the fair market value
of DCT's common stock on the conversion date. This amount was charged to
accumulated deficit with the offsetting credit to additional paid-in-capital.
DCT
treated the deemed dividend on Series A Stock as a reconciling item to adjust
its reported net loss, together with Series A Stock dividends recorded during
the applicable period, to the loss available to common stockholders line item
on
the consolidated statements of operations.
Preferred
Stock Accounting Treatment
Preferred
Stock Classification.
Pursuant
to the Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task
Force (“EITF”) EITF 00-19, Accounting
for Derivative Financial Instruments
(“EITF
00-19”), and EITF Topic D-98, Classification
and Measurement of Redeemable Securities
(“Topic
D-98”), DCT’s Series A Stock (until its maturity on March 15, 2008) and Series B
convertible redeemable preferred stock (“Series B Stock”) was classified as
temporary equity, as the stock is conditionally redeemable on the redemption
date.
The
difference between the initial recorded value of the Series A Stock redemption
value was accreted, on a straight-line basis, from the issuance date through
the
maturity date of March 15, 2008. The difference between the initial recorded
value of the Series B Stock and the minimum redemption value is being accreted,
on a straight-line basis, from the issuance date through the earliest redemption
of August 7, 2009. The increases in the carrying amount of the Series A Stock
and Series B Stock for the three months ended March 31, 2008 and 2007 totaled
approximately $88,000 and $220,000, respectively. The accretion of DCT’s Series
A Stock and Series B Stock redemption value is disclosed as a reconciling item
and adjusts DCT’s reported net loss, together with the Series A Stock dividends,
to net loss available to common stockholders.
Likely
Embedded Derivative.
Under
the provisions of SFAS 133, Accounting
for Derivative Instruments and Hedging Activities
(“SFAS
133”) and EITF 00-19, the redemption feature and registrations rights feature of
DCT’s (i) Series A Stock (until the March 15, 2008 maturity date), (ii) Series
A
Stock warrants, (iii) Series B Stock, and (iv) Series B Stock warrants (referred
to collectively as “DCT’s Derivative Instruments”) are all likely derivative
instruments that require bifurcation from the host contract. Accordingly, the
fair value of DCT’s outstanding Derivative Instruments have been recorded in
DCT’s Balance Sheet as a liability as of March 31, 2008. The total increase in
the fair value of DCT’s Derivative Instruments totaled approximately $314,000
and $368,000 for the three months ended March 31, 2008 and 2007, respectively,
with the offsetting adjustment disclosed as non-operating expense on DCT’s
Statements of Operations.
DOCUMENT
CAPTURE TECHNOLOGIES, INC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)
DCT
computes fair value of these derivatives using the Black-Scholes valuation
model. The Black-Scholes model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. DCT's
derivative instruments have characteristics significantly different from traded
options, and the input assumptions used in the model can materially affect
the
fair value estimate.
The
assumptions used in the Black-Scholes valuation model to estimate fair value
of
each derivative instrument and the resulting weighted average estimated value
of
the Series A Stock derivative liability and the Series B Stock derivative
liability as of March 31, 2008 and 2007 are as follows:
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
Weighted
average estimated values per share
|
|
$
|
0.29
|
|
$
|
0.27
|
|
Expected
remaining life in years
|
|
|
2
|
|
|
3
|
|
Expected
volatility
|
|
|
108
|
%
|
|
51
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
Risk
free interest rate
|
|
|
4
|
%
|
|
5.3
|
%
|
Note
10 – Commitments and Contingencies
Operating
Leases
The
Company is committed under various non-cancelable operating leases which extend
through February 2011. Future minimum rental commitments as of March 31, 2008
are as follows (in
thousands):
Year Ending
March 31,
|
|
Future
Minimum
Lease
Payments
|
|
2009
|
|
$
|
189
|
|
2010
|
|
|
151
|
|
2011
|
|
|
39
|
|
Total
|
|
$
|
379
|
|
Bank
Line of Credit
DCT
has a
$3,000,000 line of credit (“LOC”) at a commercial bank. Borrowings under the LOC
are limited to 80% of eligible accounts receivable and 40% of eligible
inventory, as defined in the LOC agreement. The LOC bears an annual interest
rate of prime (6.0% at March 31, 2008) plus 1.25% for advances drawn against
accounts receivables and prime plus 2.25% for advances drawn against inventory.
Interest payments are due monthly and all unpaid interest and principal is
due
in full on September 13, 2009. Upon certain events of default, the default
variable interest rate increases to prime plus 5%. DCT had an available
borrowing capacity of $285,000 on its LOC at March 31, 2008.
As
of
March 31, 2008, DCT was in compliance with all LOC debt covenants.
Long-Term
Loan
On
September 27, 2007 the Company entered into a $1,500,000 term loan agreement
("Loan Agreement") with Montage Capital, LLC ("Lender") in an arm’s length
transaction. DCT granted the Lender a continuing security interest, and pledged
to the Lender, all of its assets to secure payment and performance of its
obligations under the Loan Agreement. The Loan Agreement and the security
interest are subordinate to DCT’s LOC.
DOCUMENT
CAPTURE TECHNOLOGIES, INC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)
DCT
is
currently making monthly principal payments of $100,000 and interest payments
at
an annual interest rate of 15%. All outstanding principal and accrued interest
is due at the time the loan matures on November 30, 2008. However, if DCT sells
any assets outside the ordinary course of business and receives cash proceeds
from such sale, the Lender must be paid 20% of such proceeds as pre-payment
of
the outstanding principal. Additionally, under certain circumstances defined
in
the Loan Agreement, the Lender has the right to declare all of the amounts
due
under the Loan Agreement immediately due and payable. No such circumstances
have
occurred to date.
In
connection with the Loan Agreement, DCT issued warrants (“Loan Warrants”) to
purchase up to 650,000 shares of DCT’s common stock at an initial exercise price
of $0.60 per share. The
Loan
Warrants vested immediately and expire September 2012. From the initial funding
of the Loan Agreement through March 31, 2008, the warrant holders had the right
to require DCT to purchase the warrant for a maximum of $250,000. On March
31,
2008, the warrant repurchase price increased to a maximum of $350,000. The
warrant repurchase feature expires September 2012.
Under
the
Black-Scholes pricing model, the fair value of the Loan Warrants on the issuance
date was $399,000 using the following assumptions: contractual term of five
years, 5.3% risk-free interest rate, expected volatility of 90% and expected
dividend yield of 0%. Because the warrants were immediately redeemable for
$250,000 cash at the warrant holder’s request, DCT accounted for the original
$250,000 warrant redemption value as a current liability and the $149,000 excess
fair value over the warrant redemption value as additional paid-in capital.
On
March 31, 2008, DCT accounted for the warrant repurchase price increased maximum
by increasing the related current liability from $250,000 to $350,000 with
the
offset recorded to additional paid in capital.
DCT
is
accreting the entire $399,000 debt discount to interest expense over the life
of
the Loan Agreement. In connection with the Loan Warrants, DCT recorded non-cash
interest expense for the three months ended March 31, 2008 of $84,000.
Future
annual repayment obligations as of March 31, 2008 were as follows (in
thousands):
Principal
payments due less than 12 months
|
|
$
|
1,000
|
|
Loan
Warrants redemption value
|
|
|
350
|
|
Total
obligations
|
|
|
1,350
|
|
Less
unamortized debt discount
|
|
|
(227
|
)
|
Total
notes payable and related warrant liability
|
|
$
|
1,123
|
|
The
Loan
Warrants provide for weighted average anti-dilution price adjustments if the
Company issues common stock (or securities convertible into common stock) for
consideration less than the then-effective exercise price; provided that if
the
Company sells or issues its equity securities within one year after the issue
date in an offering in which the Company receives gross proceeds of at least
$1,000,000 (“Equity Event”), then, at the option of the Lender, the shares into
which the Loan Warrants are convertible will be of the type and series of stock
issued in the Equity Event. The exercise price shall be equal to the price
per
share paid in the Equity Event, and the Lender shall have the rights given
to
the purchasers in the Equity Event.
Employment
Agreements
The
Company maintains employment agreements with its executive officers, which
extend through 2008. The agreements provide for a base salary, annual bonus
to
be determined by the Board of Directors, termination payments, stock options,
non-competition provisions, and other terms and conditions of employment. In
addition, the Company maintains employment agreements with other key employees
with similar terms and conditions. As of March 31, 2008, termination payments
totaling $389,000 are in effect.
DOCUMENT
CAPTURE TECHNOLOGIES, INC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)
Consulting
Agreement
DCT
entered into an Investor Relations Consulting Agreement dated January 25, 2008,
for a term of one year beginning January 1, 2008, payable at a monthly rate
of
$5,000. Additionally, DCT agreed to pay the consultant 110,000 warrants with
an
exercise price of $0.65 per share, with the following vesting schedule: (i)
50%
upon signing the agreement, (ii) 25% on June 30, 2008, and (iii) 25% on
September 30, 2008. The warrants expire three years after their respective
vesting dates (January 1, 2011, June 30, 2011, and September 30, 2011). Each
warrant includes a cashless exercise provision. The warrants will not be
registered under federal or state securities laws. The fair value of these
warrants, as determined by the Black-Scholes valuation model, totaled
approximately $68,000 and is amortized ratably over the vesting period. As
such,
$34,000 was charged to general and administrative expense and credited to
additional paid-in capital during the three months ended March 31,
2008.
Registration
Rights Agreements
In
connection with the issuance of multiple equity instruments, DCT executed
registration rights agreements with the purchasers thereof under which DCT
agreed to register the common shares underlying the equity instrument.
All
registration rights agreements provide for liquidated damages in the event
the
registration statement is not maintained continuously effective. During the
three months ended March 31, 2008, DCT maintained continuously effective
registration statements for all equity instruments that require effective
registration statements.
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
10 – Segment and Geographic Information
Segment
Information
DCT
currently operates in one segment, the design, development and delivery of
various imaging technology solutions, most notably scanners, as defined by
SFAS
131, Disclosures
about Segments of an Enterprise and Related Information (“SFAS
131”).
Geographic
Information
During
the three months ended March 31, 2008 and 2007, DCT recorded net sales
throughout the U.S. 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,
|
|
|
|
2008
|
|
2007
|
|
U.S.
|
|
$
|
2,351
|
|
$
|
4,001
|
|
Europe
and other
|
|
|
187
|
|
|
126
|
|
|
|
$
|
2,538
|
|
$
|
4,127
|
|
DOCUMENT
CAPTURE TECHNOLOGIES, INC
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)
Presented
below is information regarding identifiable assets, classified by operations
located in the U.S., Europe and Asia
(in
thousands):
|
|
March 31, 2008
|
|
December 31, 2007
|
|
U.S.
|
|
$
|
4,110
|
|
$
|
5,574
|
|
Asia
|
|
|
100
|
|
|
110
|
|
Europe
|
|
|
41
|
|
|
109
|
|
|
|
$
|
4,251
|
|
$
|
5,793
|
|
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.
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-KSB for the year ended December 31, 2007 as filed
with the Securities and Exchange Commission on March 5, 2008. 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, 2008 compared to the three months ended
March
31, 2007. 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, 2008 as compared
to
the three months ended March 31,
2007.
|
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.
We
sell our products to customers throughout the world, including the United
States, Canada, Europe, South America, Australia and Asia.
We
are
actively shipping six 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 and easier-to-use products as well as increased security to meet the
growing need for information protection, including identity and financial
transaction protection.
While
substantially all our revenues and operating expenses have historically been
denominated in the U.S. dollar and unaffected by the decreased value of the
U.S.
dollar, all our product is purchased in the Chinese Yuan. This has significantly
increased the cost of our product, which has not been passed through to our
customers. We expect this trend to continue throughout the remainder of
2008.
We
have
been, and will continue to explore and evaluate a range of strategic
opportunities to enhance shareholder value, including, but not limited to,
combinations, partnerships, sales or mergers of our operations or assets with
another entity and/or a recapitalization. As of the date of this filing, we
continue to evaluate different strategic opportunities.
During
November 2007, we terminated our high definition (“HD”) display research and
development efforts. All HD display-related expenses, including employees and
contractors were terminated by December 31, 2007. As such our operating expenses
for the three months ended March 31, 2008 are not directly comparable to our
operating expenses for the three months ended March 31, 2007. We never generated
any sales from our HD-display research and development efforts.
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.
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-KSB
for the year ended December 31, 2007 have not materially changed since that
report was filed.
Results
of Operations
The
following table summarizes certain aspects of our results of operations for
the
three months ended March 31, 2008 compared to the three months ended March
31,
2007 (in
thousands):
|
|
Three Months
Ended March 31.
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
$
Change
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
2,538
|
|
$
|
4,127
|
|
$
|
(1,589
|
)
|
|
(39
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,805
|
|
|
2,484
|
|
|
(679
|
)
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of sales
|
|
|
71
|
%
|
|
60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing expense
|
|
|
251
|
|
|
400
|
|
|
(149
|
)
|
|
(37
|
)
|
General
and administrative expense
|
|
|
710
|
|
|
915
|
|
|
(205
|
)
|
|
(22
|
)
|
Research
and development expense
|
|
|
203
|
|
|
777
|
|
|
(574
|
)
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
(47
|
)
|
|
(359
|
)
|
|
NM
|
|
|
NM
|
|
Dividend
and deemed dividend on 5% convertible preferred stock and accretion
of
preferred stock redemption value
|
|
|
(333
|
)
|
|
(241
|
)
|
|
NM
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM
= Not Meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
The
decrease in net sales during the three months ended March 31, 2008 as compared
to the three months ended March 31, 2007 was attributable to the
following:
|
·
|
The
timing and rescheduling of significant customer orders, which resulted
in
unusually high number of scanners shipped during the three months
ended
March 31, 2007 and an unusually low number of scanners shipped during
the
three months ended March 31, 2008.
|
|
·
|
The
overall slowdown of the general economic and market conditions in
the U.S.
economy and the related slowdown of information technology (“IT”)
spending.
|
From
time
to time, our key customers place large orders causing our quarterly net revenue
to fluctuate significantly. We expect this trend and resulting fluctuations
to
continue. And although the number of scanners shipped during any quarter has
fluctuated significantly, our average selling price has remained fairly stable
and we expect this stability to continue for the foreseeable
future.
We
continue to concentrate on expanding our significant customer base and
decreasing our risk of dependency on a small number of significant customers.
However, revenue generated from our top four customers during the three months
ended March 31, 2008 was 84% as compared to 75% during the same period in fiscal
2007. The identities of our largest customer and their respective contributions
to our net sales have varied in the past and will likely continue to vary from
period to period.
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 and software royalties.
Cost
of sales as a percentage of net sales increased during the three months ended
March 31, 2008 as compared to the same period in 2007 as a direct result of
the
devaluation of the U.S. dollar against the Chinese Yuan. Although we will
continue to be exposed to the fluctuation of U.S. dollar against the Chinese
Yuan, we are working with our contract manufacturer to reduce our exposure
and
risk. At the same time, we have been and will continue to evaluate other cost
reducing strategies to offset our gross margin percentage decline experienced
during the three months ended March 31, 2008.
We
expect
our cost of sales as a percentage of net sales to fluctuate somewhat during
the
remainder of 2008 as we experience changes in our product mix, the value of
the
U.S. dollar remains volatile and we implement product cost reduction strategies.
Selling
and Marketing Expense
Selling
and marketing expenses consist primarily of salaries and related costs
of
employees, including stock-based compensation costs, engaged in
our
sales, marketing and customer account management functions and to a lesser
extent, market development and promotional funds for our retail distribution
channels, tradeshows, website support, warehousing, logistics and certain sales
representative fees. Selling and marketing expense fluctuates depending on
the
timing of advertising and promotions of our various new products, including
our
attendance at tradeshows, which are key to promoting our products.
The
decrease in selling and marketing expense during the three months ended March
31, 2008 as compared to the three months ended March 31, 2007 was primarily
attributable to the termination of our HD display-related activities, which
added approximately $107,000 of selling and marketing expense during the three
months ended March 31, 2007. We incurred no HD display-related selling and
marketing expenses during the three months ended March 31, 2008. To a lesser
extent, the decrease was attributable to lower stock-based
compensation costs (a non-cash charge) as a result of granting stock options
to
key employees as accounted for under SFAS 123R. See “Note 7: Employee Equity
Incentive Plans” in Part I, Item 1 of this Form 10-Q. Stock-based compensation
cost was $15,000 and $73,000 for the three months ended March 31, 2008 and
2007,
respectively.
General
and Administrative Expense
General
and administrative expense consists primarily of costs associated with our
executive, financial, human resources and information services functions,
including stock-based compensation costs, facilities-related expenses and
outside professional services such as legal and accounting. General and
administrative expenses decreased during the three months ended March 31, 2008
as
compared to the three months ended March 31, 2007 as a result of the
decrease in our stock-based compensation cost (a non-cash charge). We granted
stock options to key employees and directors during the first quarter of fiscal
2007 and accounted for such option grants under SFAS 123R. See “Note 7: Employee
Equity Incentive Plans” in Part I, Item 1 of this Form 10-Q. Stock-based
compensation cost was $71,000 and $508,000 during the three months ended March
31, 2008 and 2007, respectively. The decrease caused by the reduction of
stock-based compensation cost was somewhat offset by the following:
|
·
|
The
$90,000 non-recurring severance expense associated with changes to
our
executive management;
|
|
·
|
Increased
personnel costs to support our expanding business and related
infrastructure; and
|
|
·
|
Increased
expenses associated with maintaining our public company status, including
the costs of complying with the Sarbanes-Oxley Act.
|
We
anticipate that general and administrative expenses will continue to increase
as
our business continues to grow and the costs associated with being a public
company continue to increase as a result of our required reporting requirements
including, but not limited to, expenses incurred to comply with the
Sarbanes-Oxley Act of 2002.
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
decrease during the three months ended March 31, 2008 as compared to the three
months ended March 31, 2007 was a result of terminating our HD display-related
product development during November 2007. During the three months ended March
31, 2007, salaries, expensed equipment and contractors related to our HD display
product was approximately $438,000. We incurred no HD display-related expenses
during the three months ended March 31, 2008. To a lesser extent, research
and
development expenses decreased as a result of reduced stock-based
compensation cost (a non-cash charge) attributable to granting stock options
to
key employees during the first quarter of fiscal 2007 and accounting for such
option grants under SFAS 123R. See “Note 7: Employee Equity Incentive Plans” in
Part I, Item 1 of this Form 10-Q. Stock-based compensation cost was $24,000
and
$233,000 for the three months ended March 31, 2008 and 2007, respectively.
Total
Other Income (Expense)
The
most
significant component of our other income (expense) during the three months
ended March 31, 2008 was a $400,000 gain on sale of assets. In
December 2007, DCT entered an asset purchase agreement with Sky Glory Enterprise
Investment Co., Ltd (“Sky Glory”), whereby Sky Glory agreed to purchase certain
HD display-related assets, subject to certain terms and conditions, for a total
of $600,000 cash. On March 31, 2008, DCT received an initial $400,000 cash
payment. A second cash payment of $150,000 was received on May 2, 2008. To
date,
the final $50,000 payment has not been received.
There
were no costs associated with the sale of HD-related assets. As such, the entire
cash proceeds of $400,000 were recorded as a gain on sale of assets during
the
three months ended March 31, 2008. The second cash payment of $150,000 will
be
reflected in DCT’s financial statements as a gain on sale of assets during the
three months ended June 30, 2008. The final $50,000 payment will be reflected
in
DCT’s financial statements as a gain on sale of assets if and when the cash is
received.
Darwin
Hu, the current Chairman of DCT’s board of directors, was instrumental in
negotiating and closing the sale of the HD-display related assets. Until March
1, 2008, Mr. Hu was DCT’s President and Chief Executive Office, at which time he
resigned from DCT to become an executive at a subsidiary of Sky Glory.
Other
income (expense) for the three months ended March 31, 2008 and 2007 also
included the $314,000 and $368,000 increase, respectively, in the fair value
of
the liability for derivative contracts (associated with our Series A Stock
and
related warrants and Series B Stock and related warrants). Pursuant to SFAS
133
and EITF 00-19, the increase in the fair value of the liability for derivative
contracts is included as other expense in our consolidated statements of
operations.
Other
income (expense) was also impacted by our increased debt, which resulted in
interest expense increasing to $147,000 during the three months ended March
31,
2008 from $16,000 during the three months ended March 31, 2007. Of the $147,000
interest expense recorded during the three months ended March 31, 2008, $84,000
was non-cash interest expense attributable to amortization of debt issuance
costs. We had no non-cash interest expense during the three months ended March
31, 2007.
Dividend
and Deemed Dividend on Series A Stock and Accretion of Preferred Stock
Redemption Value
During
the three months ended March 31, 2008 and 2007, the total accretion on our
preferred stock was $88,000 and $220,000, respectively. The decrease was
attributable to the conversion of both our Series A Stock and Series B Stock
and
the maturity of our Series A Stock on March 15, 2008.
During
the three months ended March 31, 2008 and 2007, Series A Stock dividends were
approximately $14,000 and $21,000, respectively. We
do not
pay dividends on our Series B Stock.
DCT
recorded a deemed dividend on its Series A Stock during the three months ended
March 31, 2008 totaling $231,000. This non-cash dividend is to reflect the
implied economic value to the preferred stockholder of converting Series A
shares into common stock at a 15% discount of the common stock price at the
time
of conversion. The fair value was calculated using the difference between the
agreed-upon conversion price of the Series A Preferred Stock into shares of
common stock and the fair market value of DCT's common stock on the conversion
date. See
“Note
9: Equity” in Part I, Item 1 of this Form 10-Q.
Liquidity
and Capital Resources
At
March
31, 2008, our principal sources of liquidity included cash and cash equivalents
of $1,299,000 and an available borrowing capacity of $285,000 on our bank line
of credit. We had no significant cash outlays, except as part of our normal
operations, during the three months ended March 31, 2008.
Operating
activities: During the three months ended March 31, 2008, our operating
activities provided $1,142,000 of cash. This was primarily a result of our
$813,000 net loss available to common shareholders, $877,000 of net non-cash
expenses and accretion of Series A and Series B preferred stock redemption
value, and $1,078,000 net cash provided by changes in operating assets and
liabilities. Our net loss available to common shareholders for the three months
ended March 31, 2008 included a $400,000 gain on the sale of our HD
display-related assets, which positively impacted our cash position. During
the
three months ended March 31, 2007, our operating activities used $937, 000
of
cash. This was primarily a result of our $1,049,000 net loss, $1,415,000 of
net
non-cash expenses and $1,303,000 net cash used by changes in operating assets
and liabilities. Non-cash items included in net loss available to common
shareholders for both the three months ended March 31, 2008 and 2007 include
depreciation expense, stock-based compensation cost of options, fair value
of
warrants issued for services rendered, change in fair value of derivative
instruments and the accretion of our Series A and Series B preferred stock
redemption value. Changes in our operating assets and liabilities are indicative
of the decrease in the sales of our product during the three months ended March
31, 2008 compared to the three months ended March 31, 2007.
We
expect
future cash provided (used) by operating activities to fluctuate, primarily
as a
result of fluctuations in our operating results, timing of product shipments,
trade receivables collections, inventory management and timing of vendor
payments.
Investing
activities: We had no investing activities during the three months ended March
31, 2008. Our investing activities for the three months ended March 31, 2007
were minimal and consisted of purchasing computer and general equipment during
the normal course of business.
Financing
activities: During the three months ended March 31, 2008, our financing
activities consisted of paying down our bank line of credit and our notes
payable according to the terms of the agreement. During the three months ended
March 31, 2007, our financing activities consisted of a $500,000 draw against
our bank line of credit to meet short-term obligations, including payment on
the
purchase of our product.
Cash
and Working Capital Requirements
As
previously discussed, we terminated our HD display research and development
efforts during November 2007. With the termination of the HD display portion
of
our business, our operating expenses during the three months ended March 31,
2008 were more aligned with our net sales. Additionally, our anticipated future
operating expenses will be more aligned with our projected net sales. If we
successfully manage our projected net sales and re-aligned 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.
Contractual
Obligations
The
following table summarizes our contractual obligations at March 31, 2008, 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
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
bank line of credit (1)
|
|
$
|
700
|
|
$
|
-
|
|
$
|
700
|
|
$
|
-
|
|
Term
loan principal payments (2)
|
|
|
1,000
|
|
|
1,000
|
|
|
-
|
|
|
-
|
|
Term
loan warrant liabilities(3)
|
|
|
350
|
|
|
350
|
|
|
-
|
|
|
-
|
|
Series
B Stock principal(4)
|
|
|
150
|
|
|
-
|
|
|
150
|
|
|
-
|
|
Operating
lease obligations
|
|
|
379
|
|
|
189
|
|
|
190
|
|
|
-
|
|
Consulting
agreement
|
|
|
45
|
|
|
45
|
|
|
-
|
|
|
-
|
|
Total
contractual cash obligations
|
|
$
|
2,624
|
|
$
|
1,584
|
|
$
|
1,040
|
|
$
|
-
|
|
(1)
During
September 2007, we replaced our existing $2,500,000 line of credit at a
commercial bank with a similar line of credit (“LOC”) at a different commercial
bank. The new LOC maximum available credit is $3,000,000. Borrowings under
the
LOC are limited to 80% of eligible accounts receivable and 40% of eligible
inventory, as defined in the LOC agreement.
The
LOC
bears an annual interest rate of prime (6.0% at March 31, 2008) plus 1.25%
for
advances drawn against accounts receivables and prime plus 2.25% for advances
drawn against inventory. Interest payments are due monthly and all unpaid
interest and principal is due in full on September 13, 2009. Upon certain events
of default, the default variable interest rate increases to prime plus 5%.
As of
March 31, 2008, DCT was in compliance with all LOC debt covenants and had an
unused LOC borrowing capacity of $285,000.
(2)
On
September 27, 2007, we entered into a $1,500,000 term loan agreement ("Loan
Agreement") with Montage Capital, LLC ("Lender") and used the funds to
repurchase 8,000,000 shares of our restricted common stock. We granted the
Lender a continuing security interest, and pledged to the Lender, all of our
assets to secure payment and performance of its obligations under the Loan
Agreement. The Loan Agreement and the security interest are subordinate to
our
LOC.
The
Loan
Agreement bears an annual interest rate of 15% with interest-only payments
due
monthly starting from initial funding through October 31, 2007. Thereafter,
principal of $100,000 per month plus accrued interest is due at the end of
each
month through the loan’s maturity date of November 30, 2008. The remaining
principal balance and accrued interest is due on the maturity date.
(3)
In
connection with the Loan Agreement, we issued warrants (“Loan Warrants”) to
purchase up to 650,000 shares of our common stock at an initial exercise price
of $0.60 per share. The
Loan
Warrants vested immediately and expire September 2012. From the initial funding
of the Loan Agreement through March 31, 2008, the warrant holders had the right
to require DCT to purchase the warrant for a maximum of $250,000. On March
31,
2008, the warrant repurchase price increased to a maximum of $350,000. The
warrant repurchase feature expires September 2012.
(4)
On
August
7, 2009 (the "Series B Stock Redemption Date"), all of our outstanding Series
B
Stock shall be redeemed for a per share redemption price equal to the stated
value on the Series B Stock Redemption Date (the "Series B Stock Redemption
Price"). The Series B Stock Redemption Price is payable by us in cash or in
shares of common stock at our discretion and shall be paid within five trading
days after the Series B Stock Redemption Date. In the event we elect to pay
all
or some of the Series B Stock Redemption Price in shares of common stock, the
shares of common stock to be delivered to the purchasers shall be valued at
85%
of the fifteen-day volume weighted average price of the common stock on the
Series B Stock Redemption Date.
Off-Balance
Sheet Arrangements
At
March
31, 2008, 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
We
expect
the devaluation of the U.S. dollar against the Chinese Yuan to continue to
negatively impact our business for the foreseeable future. To the best of our
knowledge, except for the devaluation of the U.S. dollar against the Chinese
Yuan and 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, 2008, which are likely to have a material effect on our
future liquidity.
Item
3 – Quantitative and Qualitative Disclosure about Market
Risk
We
are
exposed to market risk related to fluctuations in interest rates and in foreign
currency exchange rates as follows:
Interest
Rate Exposure
DCT’s
exposure to market risk for changes in interest rates is limited to our LOC,
which varies with the prime lending rate. We only draw on our LOC when needed
for short-term working capital needs and we maintain a low or zero balance
when
possible. As such, the interest expense on our variable rate debt is a minimal
part of our operations. Although we cannot predict market fluctuations in
interest rates and their impact on our variable rate debt, management believes
the exposure is minimal. For example, a 10% increase in the prime lending rate
during the three months ended March 31, 2008 would have increased our interest
expense less than $20,000, an immaterial impact on our consolidated financial
position, cash flows or results of operations.
Foreign
Currency Exchange Rate Exposure
We
operate in the United States, manufacture
in
China,
and greater than 95% of our sales to date have been made in U.S. dollars.
However, we purchase our finished scanner imaging products from a manufacturer
located in China and the purchase price is denominated in the Chinese Yuan.
As a
result, currency fluctuations between the U.S. dollar and the Chinese Yuan
have
historically caused, and could continue to cause in the future, the purchase
price of our finished scanner product to increase significantly. Such
fluctuation has negatively impacted our historical results of operations, cash
flows and financial position and could continue to negatively impact us in
the
future. For example, a 10% appreciation in the Chinese Yuan against the U.S.
dollar would have increased our cost of sales over $200,000 during the three
months ended March 31, 2008.
We
expect
to purchase our finished scanner imaging products from China for the near future
and expect such purchases to be denominated in the Chinese Yuan. As a result,
we
anticipate that we may experience increased exposure to the risks of fluctuating
currencies and may choose to engage in currency hedging activities to reduce
these risks. However, we cannot be certain that any such hedging activities
will
be effective, or available to us at commercially reasonable rates.
Item
4 – Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Under
the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934 as of the end of the period covered by
this
report (the “Evaluation Date”). Based upon the evaluation, our principal
executive officer and principal financial officer concluded as of the Evaluation
Date that our disclosure controls and procedures were effective. Disclosure
controls are controls and procedures designed to reasonably ensure that
information required to be disclosed in our reports filed under the Exchange
Act, such as this report, is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms. Disclosure controls
include controls and procedures designed to reasonably ensure that such
information is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure.
Changes
in Internal Controls Over Financial Reporting
There
were no changes in our internal controls over financial reporting that occurred
during the quarterly period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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 the risk factors included in our Annual Report on Form
10-KSB for the year ended December 31, 2007 as filed with the Securities and
Exchange Commission on March 5, 2008.
Item
2 - Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item
3 - Defaults Upon Senior Securities
None.
Item
4 - Submission of Matters to a Vote of Security Holders
None.
Item
5 - Other Information
None.
Item
6 - Exhibits
Exhibit
Number
|
|
Description
of Exhibit
|
|
Method
of Filing
|
10.1
|
|
Lease
Agreement by and between DCT and Airport II Property Management,
LLC dated
March 7, 2008
|
|
Filed
herewith
|
10.2
|
|
Asset
purchase agreement by and between DCT and Sky Glory Enterprise Investment
Co., LTD. Dated December 20, 2007
|
|
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
|
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 15, 2008
|
|
/s/ David
P. Clark
|
|
|
David
P. Clark, Chief Executive Officer
|
|
|
|
Date:
May 15, 2008
|
|
/s/
M. Carolyn Ellis
|
|
|
M.
Carolyn Ellis
|
|
Chief
Financial Officer
|