UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
ý
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For
the Quarterly Period Ended September 30, 2008
o
|
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)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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
ý No
o
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 o Accelerated
filer o Non-accelerated
filer o Smaller
Reporting
Company ý
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
o
No ý
The
number of shares of Common Stock outstanding as of November 7, 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 SEPTEMBER 30, 2008
INDEX
PART
I – FINANCIAL INFORMATION
|
Page
|
Item
1
|
Financial
Statements
|
4
|
Item
2
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
19
|
Item
3
|
Quantitative
and Qualitative Disclosures about Market Risk
|
27
|
Item
4
|
Controls
and Procedures
|
27
|
PART
II – OTHER INFORMATION
|
|
Item
1
|
Legal
Proceedings
|
28
|
Item
1A
|
Risk
Factors
|
28
|
Item
2
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
28
|
Item
3
|
Defaults
Upon Senior Securities
|
28
|
Item
4
|
Submission
of Matters to a Vote of Security Holders
|
28
|
Item
5
|
Other
Information
|
28
|
Item
6
|
Exhibits
|
29
|
|
Signatures
|
30
|
PART
I. FINANCIAL INFORMATION
Item
1 - Financial Statements
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands)
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
ASSETS
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
761
|
|
$
|
1,770
|
|
Trade
receivables
|
|
|
1,141
|
|
|
2,464
|
|
Inventories,
net
|
|
|
1,023
|
|
|
1,400
|
|
Prepaid
expenses and other current assets
|
|
|
105
|
|
|
32
|
|
Total
current assets
|
|
|
3,030
|
|
|
5,666
|
|
|
|
|
|
|
|
|
|
Fixed
assets, net
|
|
|
97
|
|
|
127
|
|
Total
assets
|
|
$
|
3,127
|
|
$
|
5,793
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
-
|
|
$
|
989
|
|
Trade
payables to related parties
|
|
|
560
|
|
|
578
|
|
Trade
payables and other current liabilities
|
|
|
278
|
|
|
658
|
|
Deferred
revenue and customer deposits
|
|
|
234
|
|
|
-
|
|
Fair
value of warrant liability
|
|
|
432
|
|
|
399
|
|
Accrued
dividends on Series A 5% cumulative convertible preferred
stock
|
|
|
-
|
|
|
178
|
|
Total
current liabilities
|
|
|
1,504
|
|
|
2,802
|
|
|
|
|
|
|
|
|
|
Long-term
bank line of credit
|
|
|
-
|
|
|
2,021
|
|
Liability
under derivative contracts
|
|
|
536
|
|
|
255
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
2,040
|
|
|
5,078
|
|
|
|
|
|
|
|
|
|
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 September 30, 2008 and December 31, 2007, respectively;
liquidation value of $0 and $1,150 at September 30, 2008 and
December 31, 2007, respectively
|
|
|
-
|
|
|
1,074
|
|
Series
B convertible preferred stock, 1.5 shares issued and outstanding
at September 30, 2008 and December 31, 2007; liquidation value
of $150 at September 30, 2008 and December 31, 2007
|
|
|
107
|
|
|
70
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity (deficit):
|
|
|
|
|
|
|
|
Common
stock $.001par value, 50,000 authorized, 18,444 shares
issued and
outstanding at September 30, 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
|
|
|
32,211
|
|
|
30,174
|
|
Accumulated
deficit
|
|
|
(31,249
|
)
|
|
(30,618
|
)
|
Total
stockholders’ equity (deficit)
|
|
|
980
|
|
|
(429
|
)
|
Total
liabilities and stockholders’ equity (deficit)
|
|
$
|
3,127
|
|
$
|
5,793
|
|
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in
thousands, except per share amounts)
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
3,019
|
|
$
|
3,296
|
|
$
|
8,560
|
|
$
|
11,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,986
|
|
|
1,975
|
|
|
5,811
|
|
|
6,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
1,033
|
|
|
1,321
|
|
|
2,749
|
|
|
4,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
836
|
|
|
920
|
|
|
2,308
|
|
|
3,210
|
|
Research
and development
|
|
|
166
|
|
|
526
|
|
|
539
|
|
|
2,052
|
|
Total
operating expenses
|
|
|
1,002
|
|
|
1,446
|
|
|
2,847
|
|
|
5,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
31
|
|
|
(125
|
)
|
|
(98
|
)
|
|
(752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of derivative instruments and warrant
liability
|
|
|
(425
|
)
|
|
(464
|
)
|
|
(314
|
)
|
|
(501
|
)
|
Gain
on sale of assets
|
|
|
-
|
|
|
-
|
|
|
550
|
|
|
-
|
|
Interest
expense and other
|
|
|
(157
|
)
|
|
13
|
|
|
(409
|
)
|
|
33
|
|
Total
non-operating income (expense), net
|
|
|
(582
|
)
|
|
(451
|
)
|
|
(173
|
)
|
|
(468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss before income taxes
|
|
|
(551
|
)
|
|
(576
|
)
|
|
(271
|
)
|
|
(1,220
|
)
|
Income
tax expense
|
|
|
-
|
|
|
2
|
|
|
2
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(551
|
)
|
|
(578
|
)
|
|
(273
|
)
|
|
(1,224
|
)
|
Dividend
on Series A and accretion of Series A and Series B
preferred stock redemption value
|
|
|
(13
|
)
|
|
(237
|
)
|
|
(127
|
)
|
|
(721
|
)
|
Deemed
dividend on Series A preferred stock maturity and Conversion
|
|
|
-
|
|
|
-
|
|
|
(231
|
)
|
|
-
|
|
Net
loss available to common stockholders
|
|
$
|
(564
|
)
|
$
|
(815
|
)
|
$
|
(631
|
)
|
$
|
(1,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share - basic and diluted
|
|
$
|
(0.03
|
)
|
$
|
(0.04
|
)
|
$
|
(0.04
|
)
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding – basic and
diluted
|
|
|
18,444
|
|
|
21,717
|
|
|
17,784
|
|
|
22,445
|
|
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in
thousands)
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
Net
loss available to common stockholders
|
|
$
|
(631
|
)
|
$
|
(1,945
|
)
|
Adjustments
to reconcile net loss available to common stockholders to net
cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
|
37
|
|
|
32
|
|
Stock-based
compensation cost – options
|
|
|
391
|
|
|
1,272
|
|
Fair
value of warrants issued for services rendered
|
|
|
69
|
|
|
14
|
|
Interest
expense attributable to amortization of debt issuance
costs
|
|
|
311
|
|
|
2
|
|
Change
in fair value of derivative instruments
|
|
|
281
|
|
|
501
|
|
Change
in fair value of warrant liability
|
|
|
33
|
|
|
-
|
|
Accretion
of Series A and Series B preferred stock redemption value
|
|
|
113
|
|
|
657
|
|
Deemed
dividend on Series A preferred stock
|
|
|
231
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
1,323
|
|
|
(118
|
)
|
Inventories
|
|
|
377
|
|
|
286
|
|
Prepaid
expenses and other current assets
|
|
|
(73
|
)
|
|
(13
|
)
|
Accrued
dividends on Series A 5% cumulative convertible stock
|
|
|
13
|
|
|
64
|
|
Trade
payables to related parties
|
|
|
(18
|
)
|
|
(350
|
)
|
Deferred
revenue and customer deposits
|
|
|
234
|
|
|
-
|
|
Trade
payables and other current liabilities
|
|
|
(380
|
)
|
|
(18
|
)
|
Cash
provided by operating activities
|
|
|
2,311
|
|
|
384
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(7
|
)
|
|
(67
|
)
|
Cash
used by investing activities
|
|
|
(7
|
)
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
Net (payments)
advances on bank line of credit
|
|
|
(2,021
|
)
|
|
487
|
|
Payments
on notes payable
|
|
|
(1,300
|
)
|
|
-
|
|
Proceeds
from exercise of employee stock options
|
|
|
8
|
|
|
-
|
|
Cash
(used) provided by financing activities
|
|
|
(3,313
|
)
|
|
487
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(1,009
|
)
|
|
804
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,770
|
|
|
1,333
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
761
|
|
$
|
2,137
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Restricted
common stock acquired from related party
|
|
$
|
-
|
|
$
|
2
|
|
Conversion
of convertible preferred stock to common stock
|
|
$
|
1,339
|
|
$
|
525
|
|
Issuance
of preferred stock warrants in connection with debt
financing
|
|
$
|
-
|
|
$
|
399
|
|
Purchase
of restricted common stock for retirement
|
|
$
|
-
|
|
$
|
2,000
|
|
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
offices-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;
· Business
card readers;
· Barcode
scanning; and
· 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 September 30, 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 assets, total
liabilities and stockholders’ equity, total net sales, operating loss or net
loss available to common stockholders. Specifically, at December 31, 2007,
$149,000, which related to the fair value classification of warrants, was
reclassed from additional paid-in capital to current liabilities. See “Note 10 -
Commitments and Contingencies: Notes Payable and Related Warrant Liability” for
further discussion of the accounting for warrants. This reclass did not affect
the Company’s financial position or liquidity at December 31, 2007.
Note
2 – New Accounting Pronouncements and Accounting Treatment of New Financial
Transactions
New
Accounting Pronouncements Adopted During the Current Reporting
Period
DCT
did
not adopt any new accounting pronouncements during the three months ended
September 30, 2008.
New
Accounting Pronouncements to be Adopted in Future Reporting
Periods
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“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.
SFAS
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.
In
May
2008, the FASB issued SFAS No. 162, "The
Hierarchy of Generally Accepted Accounting Principles"
("SFAS 162"). SFAS 162 identifies the sources of accounting principles
and the framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles (the
GAAP hierarchy). SFAS 162 will become effective 60 days following the
SEC's approval of the Public Company Accounting Oversight Board amendments
to
AU Section 411, "The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles." We do not expect the adoption of
SFAS 162 to have a material effect on our consolidated financial
position, cash flows and results of operations.
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)
In
May
2008, the FASB issued a FASB Staff Position (“FSP”) Accounting Principles Board
("APB") 14-1 "Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)"
("FSP
APB 14-1"). FSP APB 14-1 requires the issuer of certain convertible
debt instruments that may be settled in cash (or other assets) on conversion
to
separately account for the liability (debt) and equity (conversion option)
components of the instrument in a manner that reflects the issuer's
non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal
years beginning after December 15, 2008 on a retroactive basis.
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 Emerging
Issues Task Force (“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.
Accounting
Treatment of New Financial Transaction Entered During the Current Reporting
Period
During
the nine months ended September 30, 2008, DCT entered a new type of financial
transaction whereby it sold, and the customer immediately paid for, “end of
life” parts. The associated revenue is recognized when the finished scanner is
shipped to the customer. During the nine months ended September 30, 2008, DCT
recognized revenue of $17,000 and deferred revenue of $213,000 associated with
this financial transaction. DCT anticipates shipping all completed scanners
within 12 months. As such, the $213,000 deferred revenue is classified as a
current liability.
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. On
June
26, 2008, DCT entered an agreement with Darwin Hu to assign and transfer its
rights to the final $50,000 owed by Sky Glory to Mr. Hu in lieu of any
additional severance compensation (approximately $72,000) owed to Mr. Hu as
of
June 26, 2008.
Darwin
Hu
is a current member of DCT’s board of directors and was the Chairman of DCT’s
board of directors until his resignation effective July 15, 2008. Mr. Hu 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
Officer, at which time he resigned from DCT to become an executive at a
subsidiary of Sky Glory.
There
were no costs associated with the sale of HD related assets. As such, the entire
cash proceeds of $550,000 were recorded as a gain on sale of assets during
the
nine months ended September 30, 2008.
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.
Purchases
from SLL totaled $1,903,000 and $5,111,000 for the three and nine months ended
September 30, 2008, respectively, and $1,780,000 and $6,101,000 for the three
and nine months ended September 30, 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 $560,000 at September 30,
2008.
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)
Related-Party
Net Sales
During
the three months ended September 30, 2008, DCT recorded net sales totaling
$57,000 for finished scanners sold to Shenzen Syscan Technology, Co. Ltd.,
a
wholly-owned subsidiary of STH. The related cost of goods sold was $41,000.
This
transaction contained similar terms and conditions as for other transactions
of
this nature entered into by DCT.
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
until October 2, 2008. Effective October 3, 2008 the FDIC insures accounts
at
each institution up to $250,000. As of October 3, 2008, DCT had consolidated
balances of approximately $511,000, 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
September 30,
|
|
Nine months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Customer A
|
|
|
28
|
%
|
|
26
|
%
|
|
30
|
%
|
|
28
|
%
|
Customer
B
|
|
|
20
|
|
|
19
|
|
|
18
|
|
|
15
|
|
Customer
C
|
|
|
19
|
|
|
*
|
|
|
14
|
|
|
14
|
|
Customer
D
|
|
|
11
|
|
|
23
|
|
|
*
|
|
|
13
|
|
Customer
E
|
|
|
*
|
|
|
11
|
|
|
*
|
|
|
*
|
|
*
Customer accounted for less than 10% for the period indicated.
Trade
receivables from all significant customers at September 30, 2008 totaled
$1,029,000. As of September 30, 2008, all the Company's trade receivables were
unsecured.
Note
6 – Concentration of Supplier Risk
Manufacturing
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)
Components
Additionally,
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.
Note
7 – Employee Equity Incentive Plans
Stock-Based
Compensation
DCT
has
two 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
No.123R, “Share-Based
Payments”
(“SFAS
123R”), using the modified prospective application method. Under this transition
method, compensation cost recognized for the three and nine months ended
September 30, 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”) No. 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 statements of operations (in
thousands):
|
|
Three months Ended
September 30,
|
|
Nine months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Selling, general
and administrative
|
|
$
|
147
|
|
$
|
86
|
|
$
|
312
|
|
$
|
816
|
|
Research
and development
|
|
|
30
|
|
|
106
|
|
|
79
|
|
|
456
|
|
Total
|
|
$
|
177
|
|
$
|
192
|
|
$
|
391
|
|
$
|
1,272
|
|
The
weighted average assumptions used to value options granted during the three
months ended September 30, 2008 are as follows:
Weighted
average estimated values per share
|
|
$
|
0.24
|
|
Expected
option life in years
|
|
|
2.0
|
|
Weighted
average expected volatility
|
|
|
175
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
Weighted
average risk free interest rate
|
|
|
2.9
|
%
|
At
September 30, 2008, the Company had approximately $1,295,000 of total
unrecognized compensation cost related to stock options. This cost is expected
to be recognized over a weighted average period of approximately 2.9
years.
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)
Stock
Options
The
following table summarizes stock option activity and related information for
the
nine months ended September 30, 2008:
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
Outstanding at December 31,
2007
|
|
|
6,847,550
|
|
$
|
0.18
|
|
Granted
|
|
|
5,105,000
|
|
|
0.30
|
|
Exercised
|
|
|
(1,446,000
|
)
|
|
(0.01
|
)
|
Cancelled
|
|
|
(1,069,385
|
)
|
|
(0.77
|
)
|
Outstanding
at September 30, 2008
|
|
|
9,437,165
|
|
$
|
0.32
|
|
The
following table summarizes all options outstanding and exercisable by price
range as of September 30, 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
|
|
|
3.57
|
|
$
|
0.01
|
|
|
2,241,165
|
|
$
|
0.01
|
|
$0.30
|
|
|
5,105,000
|
|
|
9.79
|
|
$
|
0.30
|
|
|
-
|
|
|
-
|
|
$0.60
- $0.70
|
|
|
2,091,000
|
|
|
8.32
|
|
$
|
0.69
|
|
|
1,304,000
|
|
$
|
0.70
|
|
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 and nine months ended September
30, 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.
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)
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. From January 1, 2008 through the Series A Stock
Redemption Date, DCT recorded Series A Stock dividends of $14,000. During the
three and nine months ended September 30, 2007, Series A Stock dividends were
approximately $20,000 and $64,000, respectively.
Series
A Stock Deemed Dividends
In
accordance with EITF Issue No. 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 first quarter of 2008 totaling $231,000. This
non-cash dividend was recorded 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 net loss available to common stockholders line
item on the consolidated statements of operations.
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)
Preferred
Stock Accounting Treatment
Preferred
Stock Classification.
Pursuant
to EITF Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company’s Own Stock (“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
Stock were 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 amounts of the Series A Stock
and Series B Stock for the three and nine months ended September 30, 2008 were
$13,000 and $113,000, respectively. The increases in the carrying amounts of
the
Series A Stock and Series B Stock for the three and nine months ended September
30, 2007 were $217,000 and $657,000, 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 No. 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 September 30, 2008. Increases in the
estimated fair value of DCT’s Derivative Instruments are recorded as
non-operating expense on DCT’s Statements of Operations. Decreases in the
estimated fair value of DCT’s Derivative Instruments are recorded as
non-operating revenue on DCT’s Statements of Operations.
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.
Significant
terms and estimated fair values of DCT’s Derivative Instruments are stated below
(in
thousands, except per share price):
|
|
|
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
Host Contract
|
|
Expiration/
Maturity Date
|
|
Price
$
|
|
Shares
|
|
Fair
Value
|
|
Shares
|
|
Fair
Value
|
|
Warrants issued with Series A Stock
|
|
|
March 15, 2010
|
|
|
1.00
|
|
|
186.5
|
|
$
|
75
|
|
|
186.5
|
|
$
|
160
|
|
Warrants issued with
Series A Stock
|
|
|
March
15, 2010
|
|
|
2.00
|
|
|
932.5
|
|
|
296
|
|
|
932.5
|
|
|
32
|
|
Warrants
issued with Series B Stock
|
|
|
August
7, 2009
|
|
|
1.50
|
|
|
675.0
|
|
|
127
|
|
|
675.0
|
|
|
41
|
|
Series
A Stock
|
|
|
March
15, 2008
|
|
|
1.00
|
|
|
-
|
|
|
-
|
|
|
1,150.0
|
|
|
-
|
|
Series
B Stock
|
|
|
August
7, 2009
|
|
|
1.00
|
|
|
150.0
|
|
|
38
|
|
|
150.0
|
|
|
22
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
$
|
536
|
|
|
|
|
$
|
255
|
|
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)
The
fair
value of DCT’s Derivative Instruments was determined under the following
assumptions:
|
|
September
30, 2008
|
|
December
31, 2007
|
|
Remaining contractual term, Series A Stock
Warrants (years)
|
|
|
1.5
|
|
|
2.2
|
|
Remaining
contractual term, Series B Stock Warrants (years)
|
|
|
0.9
|
|
|
1.6
|
|
Remaining
contractual term, Series A Stock (years)
|
|
|
-
|
|
|
0.2
|
|
Remaining
contractual term, Series B Stock (years)
|
|
|
0.9
|
|
|
1.6
|
|
Average
expected volatility
|
|
|
149.0
|
%
|
|
49.0
|
%
|
Expected
dividend yield
|
|
|
-
|
|
|
-
|
|
Risk
free interest rate
|
|
|
1.8
|
%
|
|
4.0
|
%
|
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 September 30, 2008
are listed below (in
thousands):
Year Ending
September 30,
|
|
Future
Minimum
Lease
Payments
|
|
2009
|
|
$
|
242
|
|
2010
|
|
|
161
|
|
2011
|
|
|
1
|
|
Total
|
|
$
|
404
|
|
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 trade receivables and 40% of eligible
inventories, as defined in the LOC agreement. The LOC bears an annual interest
rate of prime (5.0% at September 30, 2008) plus 1.25% for advances drawn against
trade receivables and prime plus 2.25% for advances drawn against inventories.
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 $1,141,000 on its LOC at September 30, 2008.
As
of
September 30, 2008, DCT was in compliance with all LOC debt
covenants.
Notes
Payable and Related Warrant Liability
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. The loan called for monthly principal and interest payments, at
an
annual interest rate of 15%, and originally matured on November 30, 2008. DCT
paid the loan in full in September 2008. There was no prepayment penalty
associated with the early pay-off.
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 Loan Warrant repurchase price
increased to a maximum of $350,000. The Loan Warrant repurchase feature expires
September 2012.
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)
The
Company accounted for the issuance of the Loan Warrants under the provisions
of
FASB Staff Position (“FSP”) No. 150-5, Issuer’s
Accounting Under Statement No. 150 for Freestanding Warrants and Other
Similar Instruments on Shares That Are Redeemable”
(“FSP
150-5”),
an
interpretation of SFAS No. 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities
and
Equity
(“SFAS
150”). Pursuant to FSP 150-5, freestanding warrants for shares that are either
puttable or warrants for shares that are redeemable are classified as
liabilities on the consolidated balance sheet at fair value with the offset
recorded to debt discount. The Company amortized the debt discount to interest
expense from the loan origination date through the early pay-off date. At each
reporting period, the Company will remeasure the fair value of the Loan Warrant
liability with any gains or losses recorded as a component of non-operating
income (expense), net.
The
total
initial fair value of the Loan Warrants was approximately $399,000 as
calculated using the Black-Scholes pricing model with the following assumptions:
contractual term of five years, 5.3% risk-free interest rate, expected
volatility of 90% and expected dividend yield of 0%. In
connection with the Loan Warrants, DCT recorded non-cash interest expense for
the three and nine months ended September 30, 2008 of $144,000 and $311,000,
respectively. The debt discount was fully amortized as of September 30, 2008.
As
of
September 30, 2008, the fair value of the warrants was approximately $432,000
as
calculated using the Black-Scholes pricing model with the following assumptions:
contractual term of four years, 3.1% risk-free interest rate, expected
volatility of 258% and expected dividend yield of 0%. The Company recorded
a
non-cash loss of approximately $33,000 during the three and nine months ended
September 30, 2008 to account for the increase in the fair value of all
outstanding Loan Warrants as of September 30, 2008.
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 September 30, 2008, termination
payments totaling $1,026,000 are in effect.
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 the 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, $17,000 and $68,000
was charged to general and administrative expense and credited to additional
paid-in capital during the three and nine months ended September 30, 2008,
respectively.
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)
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
nine
months ended September 30, 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
11 – 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
No. 131, “Disclosures
about Segments of an Enterprise and Related Information” (“SFAS
131”).
Geographic
Information
During
the three and nine months ended September 30, 2008 and 2007, 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
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
U.S.
|
|
$
|
2,775
|
|
$
|
3,103
|
|
$
|
7,845
|
|
$
|
10,642
|
|
Asia
|
|
|
57
|
|
|
7
|
|
|
101
|
|
|
7
|
|
Europe
and other
|
|
|
187
|
|
|
186
|
|
|
614
|
|
|
470
|
|
|
|
$
|
3,019
|
|
$
|
3,296
|
|
$
|
8,560
|
|
$
|
11,119
|
|
Presented
below is information regarding identifiable assets, classified by operations
located in the U.S., Asia, and Europe (in
thousands):
|
|
September
30, 2008
|
|
December
31, 2007
|
|
U.S.
|
|
$
|
3,013
|
|
$
|
5,574
|
|
Asia
|
|
|
81
|
|
|
110
|
|
Europe
|
|
|
33
|
|
|
109
|
|
|
|
$
|
3,127
|
|
$
|
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.
DOCUMENT
CAPTURE TECHNOLOGIES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS –
(Unaudited)
Note
12 – Subsequent Event
At
DCT’s
Annual Stockholders’ Meeting held on October 3, 2008, stockholders voted for the
increase in the number of shares of common stock authorized for issuance under
DCT’s 2006 Stock Option Plan from 1,500,000 to 2,500,000.
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 and nine months ended September 30, 2008 compared to the three
and
nine months ended September 30, 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 nine months ended September 30, 2008 as compared
to the nine months ended September 30,
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.
Although
our 2008 sales have been affected by the general economic slowdown of the U.S.
economy, we have reduced our expenses by concentrating on our core business
and
focusing our resources toward revenue-generating activities. The successful
reduction of our operating expenses has somewhat mitigated the negative impact
of reduced sales to our financial condition. The most significant reduction
to
our operating expenses was a result of terminating our high definition (“HD”)
display research and development efforts during November 2007. All HD
display-related expenses, including employees and contractors were terminated
by
December 31, 2007. As such, our operating expenses for the three and nine months
ended September 30, 2008 are not directly comparable to our operating expenses
for the three and nine months ended September 30, 2007. We never generated
any
sales from our HD display research and development efforts.
While
substantially all our revenues and operating expenses have historically been
denominated in the U.S. dollar and unaffected by the fluctuating value of the
U.S. dollar, all our products are purchased in the Chinese Yuan. This has
significantly increased the cost of our products, which has not been passed
through to our customers.
We
have
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 recapitalization. As of the date of this filing, we continue to evaluate
different strategic opportunities.
Critical
Accounting Policies
Our
MD&A is based upon our unaudited 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 our derivative financial instruments,
revenue recognition, trade receivables and the related allowance, inventories
and the related allowance, 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 and nine months ended September 30, 2008 compared to the three and nine
months ended September 30, 2007 (in
thousands):
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
3,019
|
|
$
|
3,296
|
|
$
|
(277
|
)
|
|
(8
|
)%
|
$
|
8,560
|
|
$
|
11,119
|
|
$
|
(2,559
|
)
|
|
(23
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,986
|
|
|
1,975
|
|
|
11
|
|
|
1
|
|
|
5,811
|
|
|
6,609
|
|
|
(798
|
)
|
|
(12
|
)
|
As
a percentage of sales
|
|
|
66
|
%
|
|
60
|
%
|
|
|
|
|
|
|
|
68
|
%
|
|
59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
|
836
|
|
|
920
|
|
|
(84
|
)
|
|
(9
|
)
|
|
2,308
|
|
|
3,210
|
|
|
(902
|
)
|
|
(28
|
)
|
Research
and development expense
|
|
|
166
|
|
|
526
|
|
|
(360
|
)
|
|
(68
|
)
|
|
539
|
|
|
2,052
|
|
|
(1,513
|
)
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-operating income (expense), net
|
|
|
(582
|
)
|
|
(451
|
)
|
|
NM
|
|
|
NM
|
|
|
(173
|
)
|
|
(468
|
)
|
|
NM
|
|
|
NM
|
|
Dividend
and deemed dividend on 5%
convertible preferred stock and accretion
of preferred stock redemption
value
|
|
|
(13
|
)
|
|
(237
|
)
|
|
NM
|
|
|
NM
|
|
|
(358
|
)
|
|
(721
|
)
|
|
NM
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM
= Not Meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
The
decrease in net sales during both the three and nine months ended September
30,
2008 as compared to the same periods in 2007 is attributable to the overall
slowdown of the general economic and market conditions in the U.S. economy
and
the related slowdown of information technology (“IT”) spending. Additionally,
the decrease in net sales during the nine months ended September 30, 2008
compared to the nine months ended September 30, 2007 was a result of the
decreased demand within the banking and financial sectors of our market. These
sectors have been more focused on regulatory actions and financial hardships
than on investing in transaction system infrastructure, of which we are a key
supplier. Sales to these particular sectors decreased $828,000 during the nine
months ended September 30, 2008 as compared to the nine months ended September
30, 2007. We had no sales to customers in the banking and financial sectors
during either the three months ended September 30, 2008 or 2007.
Our
international sales have continued to grow as a result of (i) the European
markets for our products continue to show strong growth, and (ii) we nearly
doubled our distribution network within this market during 2008. During the
three and nine months ended September 30, 2008, our European sales were $171,000
and $614,000, or 6% and 7%, respectively, of our total net sales. During the
three and nine months ended September 30, 2007, our European sales were $186,000
and $470,000, or 6% and 4%, respectively, of our sales. We expect our European
sales to continue to increase as we continue to improve our ability to deliver
all channel products from our Netherlands-based warehouse and improve our
time-to-market.
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. 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.
Although
we continually concentrate on expanding our significant customer base, our
revenue remains dependent on a small number of significant customers. During
the
three months ended September 30, 2008, 67% of sales were generated from three
customers as compared to 68% of sales generated from three customers during
the
same period in 2007. During the nine months ended September 30, 2008, 62% of
our
sales were generated from three customers as compared to 57% of sales generated
from three customers during the same period in 2007. 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.
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 both the three and nine
months ended September 30, 2008 as compared to the same periods in 2007 as
a
direct result of the devaluation of the U.S. dollar against the Chinese Yuan.
This increase was somewhat offset by the following factors during the second
and
third quarters of 2008:
|
·
|
The
negotiated price reduction of our finished
product;
|
|
·
|
Our
phase out of certain third-party software as we move toward less
costly
third-party software; and
|
|
·
|
Our
continuing efforts toward reducing the cost of our
products.
|
We
expect
our cost of sales as a percentage of net sales to fluctuate somewhat during
the
remainder of 2008 as (i) we experience changes in our product mix, (ii) the
value of the U.S. dollar remains volatile and (iii) we implement further product
cost reduction strategies.
Selling,
General and Administrative Expenses
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, logistics and certain sales
representative fees are also included.
The
decrease in selling, general and administrative expense during both the three
and nine months ended September 30, 2008 as compared to the same periods in
2007
was primarily attributable to the termination of our HD display-related
activities, which added approximately $83,000 and $290,000 of product promotion
and marketing expense during the three and nine months ended September 30,
2007,
respectively. Subsequent to January 1, 2008, we have not incurred any HD
display-related expenses.
Additionally,
the decrease during the nine months ended September 30, 2008 as compared to
the
nine months ended September 30, 2007 was attributable to lower stock-based
compensation costs (a non-cash charge) as a result of granting stock options
to
key employees and accounting for such options under Statement of Financial
Accounting Standards (“SFAS”) No.123R, “Share-Based
Payments” (“SFAS
123R”). See “Note 7: Employee Equity Incentive Plans” in Part I, Item 1 of this
Form 10-Q. Stock-based compensation cost was $312,000 and $816,000 for the
nine
months ended September 30, 2008 and 2007, respectively.
During
the three months ended September 30, 2008, we issued new stock options to
directors and key employees. This caused an increase in our stock-based
compensation costs to $147,000 from $86,000 during the three months ended
September 30, 2008 and 2007, respectively.
The
decrease in our selling, general and administrative expenses discussed above
was
somewhat offset by our increased personnel costs to support our public company
status, including the costs of implementing and complying 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 and nine months ended September 30, 2008 as
compared to the three and nine months ended September 30, 2007 was a result
of
terminating our HD display-related product development during November 2007.
During the three and nine months ended September 30, 2007, salaries, expensed
equipment and contractors related to our HD display product was approximately
$300,000 and $1,274,000, respectively. Subsequent to January 1, 2008, we have
not incurred any HD display-related expenses.
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 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 $30,000 and $79,000 for
the
three and nine months ended September 30, 2008, respectively. Stock-based
compensation cost was $106,000 and $456,000 for the three and nine months ended
September 30, 2007, respectively.
Total
Non-Operating Income (Expense)
The
most
significant component of our non-operating income (expense) was a $550,000
gain
on sale of assets during the nine months ended September 30, 2008. In December
2007, DCT entered into 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. There were
no costs associated with the sale of HD related assets. As such, the entire
cash
proceeds of $550,000 were recorded as a gain on sale of assets during the nine
months ended September 30, 2008. See “Note 3: Sale of HD Display-Related
Assets”in Part I, Item 1 of this Form 10-Q.
Another
significant component of our non-operating income (expense) was the change
in
the fair value of our liability for derivative contracts, as calculated by
the
Black-Scholes valuation model, associated with our Series A Stock and related
warrants and Series B Stock and related warrants. During the three and nine
months ended September 30, 2008, the fair value of our liability for derivative
contracts increased $425,000 and $314,000 respectively. During the three and
nine months ended September 30, 2007, the fair value of our liability for
derivative contracts increased $464,000 and increased $501,000, respectively.
Pursuant SFAS 133, “Accounting
for Derivative Instruments and Hedging Activities”
(“SFAS
133”) and the Emerging Issues Task Force (“EITF”) No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company’s Own Stock (“EITF
00-19”), the increase in the fair value of our liability for derivative
contracts is included as non-operating expense in our consolidated statements
of
operations.
Non-operating
income (expense) was also impacted by our increased debt, which resulted in
an
increase in interest expense to $159,000 and $427,000 during the three and
nine
months ended September 30, 2008, respectively, from $37,000 and $97,000 during
the three and nine months ended September 30, 2007, respectively. Of the
interest expense recorded during the three and nine months ended September
30,
2008, $144,000 and $311,000, respectively, was non-cash interest expense
attributable to amortization of debt discount resulting from debt issuance
costs. Non-cash interest expense during both the three and nine months ended
September 30, 2007 was $2,000.
Dividend
and Deemed Dividend on Series A Stock and Accretion of Preferred Stock
Redemption Value
During
the three and nine months ended September 30, 2008, the total accretion on
our
preferred stock was $13,000 and $113,000, respectively. During the three and
nine months ended September 30, 2007, the total accretion on our preferred
stock
was $217,000 and $657,000, respectively. The decrease during both periods 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.
We
had no
dividends during the three months ended September 30, 2008, as a result of
the
maturity of our Series A Stock, as compared to $20,000 during the three months
ended September 30, 2007. During the nine months ended September 30, 2008 and
2007, Series A Stock dividends accrued were approximately $14,000 and $64,000,
respectively. We do not pay dividends on our Series B Stock.
DCT
recorded a deemed dividend on its Series A Stock during the first quarter of
2008 totaling $231,000. This non-cash dividend was recorded 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
September 30, 2008, our principal sources of liquidity included cash and cash
equivalents of $761,000 and an available borrowing capacity of $1,141,000 on
our
bank line of credit. Except for the additional principal payments and early
pay-off of our notes payable, we had no other significant cash outlays during
the current reporting period.
A
summary
of our cash flow activities is show below (in
thousands):
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
Net cash provided by operating
activities
|
|
$
|
2,311
|
|
$
|
384
|
|
Net
cash used by investing activities
|
|
|
(7
|
)
|
|
(67
|
)
|
Net
cash (used) provided by financing activities
|
|
|
(3,313
|
)
|
|
487
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
(1,009
|
)
|
$
|
804
|
|
Operating
activities:
During
the nine months ended September 30, 2008, our operating activities provided
$2,311,000 of cash. This amount was comprised of our $631,000 net loss available
to common shareholders, $1,466,000 of net non-cash expenses, and $1,476,000
net
cash provided by changes in operating assets and liabilities. Our net loss
available to common shareholders for the nine months ended September 30, 2008
included a $550,000 gain on the sale of our HD display-related assets, which
positively impacted our cash position. Additionally, during the second quarter
of 2008, we sold, and our customer immediately paid for, “end of life” parts,
which totaled $230,000. Although we don’t recognize revenue associated with the
sale until the finished scanner is shipped to the customer, the entire
transaction had a positive impact on our cash flow from operations.
During
the nine months ended September 30, 2007, our operating activities provided
$384,000 of cash. This amount was comprised of our $1,945,000 net loss available
to common shareholders, $2,478,000 of net non-cash expenses and $149,000 net
cash used by changes in operating assets and liabilities.
Non-cash
items included in net loss available to common shareholders are depreciation
expense, stock-based compensation cost of options, fair value of warrants issued
for services rendered, change in fair value of derivative instruments, change
in
fair value of warrant liability, amortization of debt discount, and 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 nine months ended September 30, 2008 compared to the
nine
months ended September 30, 2007.
We
expect
future cash provided (used) by operating activities to fluctuate 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:
Our
investing activities for both the nine months ended September 30, 2008 and
2007
were minimal and consisted of computer and general equipment purchases during
the normal course of business.
Financing
activities:
During
the nine months ended September 30, 2008, our financing activities consisted
of
(i) paying off our bank line of credit, (ii) normal recurring monthly principal
payments according to the terms of our notes payable agreement, which totaled
$900,000, and (3) additional principal payments and early pay off of our notes
payable, which totaled $400,000 During the nine months ended September 30,
2007,
our financing activities consisted of a $487,000 net draw against our bank
line
of credit to meet short-term obligations, including payments for product
purchases.
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 and nine months ended
September 30, 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 realigned
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 September 30, 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
|
|
|
|
|
|
|
|
|
|
|
|
Bank
line of credit (1)
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Warrant
repurchase liability(2)
|
|
|
350
|
|
|
350
|
|
|
-
|
|
|
-
|
|
Series
B Stock principal(3)
|
|
|
150
|
|
|
-
|
|
|
150
|
|
|
-
|
|
Operating
lease obligations
|
|
|
404
|
|
|
242
|
|
|
162
|
|
|
-
|
|
Consulting
agreement
|
|
|
15
|
|
|
15
|
|
|
-
|
|
|
-
|
|
Total
contractual cash obligations
|
|
$
|
919
|
|
$
|
607
|
|
$
|
312
|
|
$
|
-
|
|
(1)
DCT
has a
$3,000,000 line of credit (“LOC”) at a commercial bank. Borrowings under the LOC
are limited to 80% of eligible trade receivable and 40% of eligible inventories,
as defined in the LOC agreement. The LOC bears an annual interest rate of prime
(5.0% at September 30, 2008) plus 1.25% for advances drawn against trade
receivables and prime plus 2.25% for advances drawn against inventories.
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 $1,141,000 on its LOC at September 30, 2008.
As
of
September 30, 2008, DCT was in compliance with all LOC debt
covenants.
(2)
On
September 27, 2007, we entered into a $1,500,000 term loan agreement ("Loan
Agreement") with Montage Capital, LLC ("Lender"). The loan was fully paid off
at
September 30, 2008. 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.
(3)
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
September 30, 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 recent 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 September 30, 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 and nine months ended September 30, 2008 would have only
increased our interest expense approximately $9,000 and $43,000, respectively.
Both amounts are immaterial to our consolidated financial position, cash flows
and 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, our cost of sales would have increased more than $221,000
and $645,000 during the three and nine months ended September 30, 2008,
respectively, if the Chinese Yuan appreciated 10% against the U.S. dollar.
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. Despite these measures, 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 (the “Exchange Act”) 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 principal executive officer and principal financial officer,
as
appropriate to allow timely decisions regarding required disclosure.
Changes
in Internal Controls Over Financial Reporting
During
the quarterly period covered by this report, no changes in our internal controls
over financial reporting occurred 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 to 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
At
DCT’s
Annual Stockholders’ Meeting held on October 3, 2008, the stockholders holding
the requisite number of votes to approve each of the following actions: (1)
elected each of the director nominees, (2) approved the increase in the number
of shares of common stock authorized for issuance under DCT’s 2006 Stock Option
Plan from 1,500,000 to 2,500,000, and (3) ratified the appointment of our
independent registered public accounting firm.
|
|
|
Number of Shares
|
|
|
|
|
Voted For
|
|
Withheld
|
|
(1)
|
|
To elect a board of directors
to hold office until the next annual stockholders’ meeting or until their
respective successors have been elected or appointed:
|
|
|
|
|
|
|
|
|
|
Edward
Straw
|
|
|
11,757,523
|
|
|
100,000
|
|
|
|
David
Clark
|
|
|
11,757,523
|
|
|
100,000
|
|
|
|
William
Hawkins
|
|
|
11,757,523
|
|
|
100,000
|
|
|
|
Frank
Musso
|
|
|
11,757,523
|
|
|
100,000
|
|
|
|
Darwin
Hu
|
|
|
11,857,523
|
|
|
-
|
|
|
|
|
Number of Shares
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
To
approve the increase in the number of shares of common stock authorized
for issuance under DCT’s 2006 Stock Option Plan from 1,500,000 to
2,500,000.
|
|
|
8,236,200
|
|
|
224,005
|
|
|
-
|
|
(3)
|
|
To
ratify the appointment of independent registered public accounting
firm,
Clancy and Co., P.L.L.C.
|
|
|
11,817,523
|
|
|
40,000
|
|
|
-
|
|
Item
5 - Other Information
None.
Item
6 - Exhibits
Exhibit
Number
|
|
Description
of Exhibit
|
|
Method
of Filing
|
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:
November 14, 2008
|
|
/s/
David
P. Clark |
David
P. Clark, Chief Executive Officer
|
|
Date:
November 14, 2008
|
|
/s/
M.
Carolyn Ellis |
M.
Carolyn Ellis, Chief Financial
Officer
|