As filed with the Securities and Exchange Commission on August 16, 2006
Registration No. 333-135248
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NO. 1
to
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
DataLogic International, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 8082 88-0477056
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number
Keith Moore
DataLogic International, Inc. DataLogic International, Inc.
18301 Von Karman, Suite 250 18301 Von Karman, Suite 250
Irvine, CA 92612 Irvine, Ca 92612
(949) 260-0120 (949) 260-0120
(Address, and telephone number (Name, address and telephone number
of principal executive offices) of agent for service)
Copies to:
Rick Weed
Weed & Co. LLP
4695 MacArthur Court, Suite 1430
Newport Beach, CA 92660
(949) 475-9086
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
_________________________
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED AUGUST 16, 2006
DataLogic International, Inc.
19,042,284 Shares of Common Stock
This Prospectus relates to the resale by the selling stockholders of up to
19,042,284 shares of our common stock, including up to 7,913,750 shares of
common stock issuable upon the exercise of common stock purchase warrants and
options. The selling stockholders may sell common stock from time to time in
the principal market on which the stock is traded at the prevailing market
price or in negotiated transactions. The selling stockholders may be deemed
underwriters of the shares of common stock, which they are offering. We will
not receive any proceeds from the sale of the common stock. However, we will
receive the sale price of any common stock we sell to the selling stockholders
upon exercise of the warrants. We will pay the expenses of registering these
shares.
The Common Stock is quoted on the OTC Bulletin Board under the trading symbol
"DLGI". The last reported sale price of our Common Stock on the OTC Bulletin
Board as of August 15, 2006 was $0.10 per share.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
YOU SHOULD PURCHASE THESE SECURITIES ONLY IF YOU CAN AFFORD TO
LOSE YOUR ENTIRE INVESTMENT. WE URGE YOU TO READ THE "RISK FACTORS"
SECTION BEGINNING ON PAGE 5 ALONG WITH THE REST OF THIS PROSPECTUS
BEFORE YOU MAKE YOUR INVESTMENT DECISION.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this Prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the Registration Statement that was filed
by DataLogic International, Inc. with the Securities and Exchange Commission.
The selling stockholders may not sell these securities until the Registration
Statement becomes effective. This Prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
The date of this Prospectus is August 16, 2006
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TABLE OF CONTENTS
Page
About This Prospectus ..................................................2
Prospectus Summary......................................................3
Risk Factors ...........................................................5
Forward Looking Statements ............................................13
Use of Proceeds .......................................................13
Selling Stockholders ..................................................14
Plan of Distribution ..................................................16
Market for Common equity and Related Stockholders Matters .............18
Management's Discussion and Analysis ..................................19
Description of Business ...............................................30
Description of Property ...............................................35
Legal Proceedings .....................................................35
Management ............................................................36
Executive Compensation ................................................37
Certain Relationships and Related Transactions ........................39
Security Ownership of Certain Beneficial Owners and Management ........40
Description of Securities .............................................41
Disclosure of Commission Position of Indemnification for
Securities Act Liabilities...........................................42
Legal Matters .........................................................43
Experts................................................................43
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.............................................43
Where you Can Find Other Information...................................43
Financial Statements.............................................. F-1,46
ABOUT THIS PROSPECTUS
---------------------
You should only rely on the information contained in this Prospectus. We have
not authorized anyone to provide you with information different from that
contained in this Prospectus. The information contained in this Prospectus is
accurate only as of the date of this Prospectus, regardless of the time of
delivery of this Prospectus or of any sale of Common Stock.
All references to "we," "our," "us," or the "Company" refer to DataLogic
International, Inc., a Delaware corporation, and its wholly owned
subsidiaries, unless specifically stated otherwise.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed information
appearing elsewhere in this Prospectus. The securities offered hereby are
speculative and involve a high degree of risk. See "Risk Factors."
The Company
We are a communications and information technology ("IT") solutions company.
We leverage our technology expertise, customer relationships and supplier
channels to develop solutions addressing markets with attractive growth
characteristics, such as network design and project management, Global
Positioning System ("GPS")-based mobile asset tracking and strategic IT
outsourcing.
We operate and manage two strategic business segments. Our segments and their
principal activities are:
Communications. Our communications segment addresses markets for advanced
communications solutions. Our solutions include network design and project
management, mobile asset tracking and secured mobile communications.
Consulting. Our consulting segment provides IT outsourcing and consulting
services to a broad range of U.S. and international governmental agencies and
commercial enterprises. Our consulting segment services include project
management and systems analysis, design, implementation, testing and
maintenance. We also provide short and long-term staffing solutions.
Company History
We were originally incorporated as Galveston Oil & Gas, Inc. on October 3,
1996. Our initial business was in the development of oil and gas properties.
After the consummation of a series of corporate acquisitions, the nature of
our business changed from development of oil and gas properties to the
business of facilitating the consumption of information, products and services
via the Internet. We changed our name to TopClick International, Inc. on
February 5, 1999 and then, to DataLogic International, Inc. on July 23, 2001.
Since that time we have undergone a number of changes in our business strategy
and organization:
. On July 20, 2001, we completed the acquisition of DataLogic Consulting,
Inc. ("DCI"), a Texas corporation, formed on August 20, 1993, in a
business combination with DCI being the surviving entity for accounting
purposes.
. On June 2, 2003, we acquired 51% of IPN Communications, Inc. ("IPN").
On November 5 2004, we acquired the remaining 49% of IPN.
. On January 13, 2004, we acquired certain GPS-based technology assets
and entered the GPS mobile asset tracking business.
. On March 1, 2005, we acquired the assets of I.S. Solutions, LLC
("ISS"), a provider of technology solutions for public safety and
homeland security agencies.
. On September 15, 2005, we acquired the assets of CBSi Holdings, Inc.
("CBSi") to enhance our GPS-based mobile asset tracking solution and
further increase our distribution and client relationships.
. On November 21, 2005, we acquired BluBat, Inc. ("BluBat"), a provider
of network design, systems and software engineering services to further
expand our communications solutions capabilities.
. On June 30, 2006, we sold certain assets related to the our small
fleet/sub-prime lending market operations including the BounceGPS
trademark.
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Our primary Internet address is www.dlgi.com. We make our periodic reports
(Forms 10-QSB and Forms 10-KSB) and current reports (Forms 8-K) available free
of charge through our website as soon as reasonably practicable after they are
filed electronically with the Securities and Exchange Commission ("SEC"). We
may from time to time provide important disclosures to investors by posting
them in the investor relations section of our website, as allowed by SEC
rules.
Recent Developments - Private Placement in May 2006
In May 2006, we closed a private placement of unregistered Common Stock and
warrants for total gross proceeds of $1.625 million.
In the private placement, we offered and sold the shares of common stock
and common stock purchase warrants together as a unit, at a purchase price of
$0.20 per unit. For each share of common stock in the unit, each purchaser
will also receive warrants to purchase the number of Class A warrants equal to
forty percent of the number of common shares purchased and Class B warrants
equal to twenty-five percent of the number of common shares purchased. Class
A warrants have an exercise price of $0.35 per share and Class B warrants have
an exercise price of $0.45 per share. Both classes of warrants are
exercisable beginning November 23, 2006 and have a 5-1/2 year term, expiring
November 23, 2011. The gross proceeds of $1,625,000 raised in the private
placement resulted in the sale and issuance to the investors a total of
8,125,000 shares of common stock, Class A warrants to purchase 3,250,000
shares of common stock and Class B warrants to purchase an additional
2,031,250 shares of common stock. The private placement shares and warrants
were offered and sold solely to accredited investors in reliance on the
exemption from registration provided by Rule 506 of Regulation D under the
Securities Act.
Midtown Partners & Co., LLC, an NASD member firm, acted as the sole placement
agent in the private placement. In connection with the private placement, we
paid to Midtown Partners consideration consisting of (a) a cash sales
commission (including a non-accountable expense allowance) of $130,000
(representing 8% of the gross proceeds raised in the private placement), (b)
warrants to purchase 650,000 shares of Common Stock (representing 8% of the
aggregate number of shares of Common Stock sold in the private placement),
with each warrant having an exercise price of $0.20 per share, (c) warrants to
purchase 260,000 shares of Common Stock (representing 8% of the aggregate
number of shares of Common Stock underlying the Class A common stock purchase
warrants sold in the private placement), with each warrant having an exercise
price of $0.35 per share, and (d) warrants to purchase 162,500 shares of
Common Stock (representing 8% of the aggregate number of shares of Common
Stock underlying the Class B common stock purchase warrants sold in the
private placement), with each warrant having an exercise price of $0.45 per
share. Each of the warrants issued to Midtown Partners is exercisable
beginning November 23, 2006 and expiring on November 23, 2011. We also agreed
to pay legal fees in the amount of $10,000 to legal counsel for the investors
in the private placement.
Under the terms of the private placement, we agreed to prepare and file a
resale registration statement with the SEC for the shares sold in the private
financing and the shares underlying the warrants. We are obligated to maintain
the effectiveness of the registration statement for up to two years.
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The Offering
Common Stock offered by
Selling Stockholders............. Up to 19,042,284 shares of Common Stock
including:
i) up to 11,128,534 outstanding shares of
Common Stock;
ii) up to 3,250,000 shares issuable upon
the exercise of Class A Warrants at an
exercise price of $0.35 per share;
iii) up to 2,031,250 shares issuable upon
the exercise of Class B Warrants at an
exercise price of $0.45 per share;
iv) up to 1,560,000 shares issuable upon
the exercise of an option at an exercise
price of $0.001 per share; and
v) up to 1,072,500 shares issuable upon the
exercise of warrants at an exercise prices
of $0.20 per share (650,000 shares), $0.35
per share (260,000 shares) and $0.45 per
share (162,500 shares).
Common Stock Outstanding
Before the Offering.............. 45,777,961 shares (1)
Common Stock Outstanding
After the Offering (assuming
full exercise of options and
warrants held by the selling
stockholders).................... up to 61,816,711 shares
Use of Proceeds.................. This Prospectus relates to shares of our
Common Stock that may be offered and sold
from time to time by the selling
stockholders. We will not receive any
proceeds from the resale of our Common
Stock. We will, however, receive proceeds
from the exercise of the warrants and
options, which we will use for general
corporate purposes.
Market for our Common Stock...... Our Common Stock is quoted on the OTC
Bulletin Board under the trading symbol
"DLGI". The market for our Common Stock
is highly volatile as discussed in more
detail, below, under the heading "Risk
Factors". We can provide no assurance that
there will be a market in the future for our
Common Stock.
(1) As of July 31, 2006. Does not include 9,807,473 shares of our
Common Stock that are reserved for issuance pursuant to outstanding warrants
and stock options, and shares available for future issuance under our 2005
Non-Qualified Stock and Stock Option Plan.
RISK FACTORS
Investing in our securities involves a high degree of risk. You should
carefully consider the below risk factors and warnings before making an
investment decision. If any of the risks described below actually occur, our
business, financial condition or future operating results could be materially
harmed. In that case, the price of our Common Stock could decline, and you
could lose all or part of your investment. You should also refer to the other
information set forth or incorporated by reference in this Prospectus.
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WE HAVE A HISTORY OF LOSSES AND MAY NOT ACHIEVE PROFITABILITY IN THE FUTURE
As of June 30, 2006, we had an accumulated deficit of $6,829,484 and net
losses of $3,001,616 for the six months ended June 30, 2006. To achieve
profitability we will need to generate significant revenues to offset our cost
of revenues and our sales and marketing, research and development and general
and administrative expenses. We may not achieve or sustain our revenue or
profit goals and may incur losses in the future. Changes such as increases in
our pricing for solutions or the pricing of competing solutions may harm our
ability to increase sales of our solutions to new and existing customers. If
we are not able to expand our customer base and increase our revenue from new
and existing customers, we may continue to be unprofitable.
WE DO NOT HAVE SUFFICIENT CASH ON HAND AND CASH FLOW FROM OPERATIONS TO
SERVICE OUR INDEBTEDNESS AND OTHER LIQUIDITY REQUIREMENTS, AND WILL REQUIRE
ADDITIONAL NEAR-TERM FINANCING
On January 20, 2006, we issued a secured term note to Laurus Master Fund, Ltd.
in the principal amount of $3,250,000 (the "Secured Note"). We have used the
proceeds from the issuance of the Secured Note to repay the principal of a
convertible note issued in July 2004 and to fund our ongoing operations. We
are obligated to repay the principal amount of the Secured Note in monthly
installments of $154,762 (together with any accrued and unpaid interest on the
principal amount repaid) commencing May 1, 2006 through maturity at December
31, 2007.
We project that our cash on hand and cash flow generated from operations will
not be sufficient to pay monthly principal installments due under the Secured
Note and to fund operational liquidity requirements. As a result, our ability
to repay the Secured Note as well as to continue our operations and growth
strategy depend on our ability to access the capital markets in the near term.
There can be no assurance that capital from outside sources will be available
on a timely basis, or if such financing is available, that it will be on terms
that management deems sufficiently favorable. If we are unable to obtain
additional financing in a timely basis and upon terms that management deems
sufficiently favorable, or at all, we could be forced to restructure or to
default on our obligations under the Secured Note or to curtail or abandon our
business plan, any of which may devalue or make worthless an investment in the
Company.
WE HAVE PLEDGED ALL OF OUR ASSETS TO SECURE THE SECURED NOTE
The Secured Note is secured by a lien on substantially all of our assets,
including our equipment, inventory, contract rights, receivables, general
intangibles, and intellectual property. A default by us under the Secured Note
would enable the holder of the Secured Note to take control of substantially
all of our assets. If this happens, the holder of the Secured Note could
force us to substantially curtail or cease our operations and you could lose
your entire investment in the Company.
In addition, the existence of the security interest of the Secured Note will
make it more difficult for us to obtain additional financing required to repay
monies borrowed by us, continue our business operations and pursue our growth
strategy.
THE SECURED NOTE BECOMES IMMEDIATELY DUE AND PAYABLE UPON DEFAULT AND WE MAY
BE REQUIRED TO PAY AN AMOUNT IN EXCESS OF THE OUTSTANDING AMOUNT DUE UNDER THE
SECURED NOTE, AND WE MAY BE FORCED TO SELL ALL OF OUR ASSETS
The Secured Note becomes immediately due and payable upon an event of default
including:
. failure to pay interest and principal payments when due;
. a breach by us of any material covenant or term or condition of the
note or any agreement made in connection therewith;
. a breach by us of any material representation or warranty made in the
note or in any agreement made in connection therewith;
. an assignment for the benefit of our creditors or a receiver or trustee
is appointed for us;
. any form of bankruptcy or insolvency proceeding is instituted by or
against us;
. any money judgment entered or filed against us for more than $50,000;
and
. trading of our common stock is suspended for 5 consecutive days or 5
days during any 10 consecutive days from a principal market.
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If we default on the Secured Note and the holder demands all payments due and
payable, we will be required to pay 130% of the outstanding principal amount
of each note and any interest accrued thereon. Since we do not have
sufficient cash to repay such an amount, such a default on the Secured Note
could materially adversely affect our business, operating results or financial
condition to such extent that we are forced to restructure, file for
bankruptcy, sell assets or cease operations, any of which could result in the
loss of your entire investment in the Company.
WE INTEND TO ISSUE ADDITIONAL SECURITIES, INCLUDING COMMON STOCK
We intend to raise additional funds through the issuance of equity,
equity-related or convertible debt securities. The issuance of additional
common stock dilutes existing stockholdings. Further procurement of
additional financing through the issuance of equity, equity-related or
convertible debt securities or preferred stock may further dilute existing
stock. Further, the perceived risk of dilution may cause our stockholders to
sell their shares, which would contribute to downward movement in the price of
the shares.
OUR AUDITORS HAVE EXPRESSED AN OPINION THAT THERE IS SUBSTANTIAL DOUBT ABOUT
OUR ABILITY TO CONTINUE AS A GOING CONCERN
Our auditors have expressed an opinion that there is substantial doubt about
our ability to continue as a going concern primarily because we have yet to
generate sufficient working capital to support our operations and our ability
to make debt service requirements. Our most recent financial statements have
been prepared assuming that we will continue as a going concern. The financial
statements do not include any adjustments that might result from our inability
to continue as a going concern. If we are unable to continue as a going
concern, you may lose your entire investment in the Company.
WE DEPEND ON A FEW CUSTOMERS
We depend on a few major customers for the majority of our revenues. This
creates a significant financial risk to the Company because if a major
customer were to terminate or materially reduce, for any reason, its business
relationship with us, we would suffer an immediate and substantial decline in
revenue.
Some of our government agency customers are subject to unique political and
budgetary constraints. These constraints imposed upon our customers make it
difficult to predict the timing and amount of revenue to expect from these
customers in future periods. In addition, our government agency customers
have special contracting requirements that affect our ability to obtain new
government customers.
WE MAY NOT SUCCESSFULLY EXECUTE OR INTEGRATE OUR ACQUISITIONS
We plan to engage in future acquisitions, which may be expensive and
time-consuming and from which we may not realize anticipated benefits. We may
acquire additional businesses, technologies, products and services if we
determine that these additional businesses, technologies, products and
services are likely to serve our strategic goals. We currently have no
commitments or agreements with respect to any acquisitions. The specific
risks we may encounter in these types of transactions include the following:
. Continued development and enhancement of select products, services and
solutions for target markets;
. Continued investments in our infrastructure, including but not limited
to, product development, sales, implementation, and support;
. Continued efforts to make infrastructure investments within an overall
context of maintaining reasonable expense discipline; and
. Addition of new customers through maintaining and expanding sales,
marketing and service and product development activities.
-7-
A failure to successfully integrate acquired businesses or technology for any
of these reasons could have a material adverse effect on our results of
operations.
WE OPERATE IN HIGHLY COMPETITIVE MARKETS, AND IF WE FAIL TO COMPETE
EFFECTIVELY, OUR ABILITY TO ACQUIRE NEW CUSTOMERS WOULD DECREASE AND OUR
BUSINESS WOULD SUFFER
We face significant competition. The markets for our products and services are
intensely competitive and we face significant competition from a number of
different sources. Several of our competitors have significantly greater name
recognition as well as substantially greater financial, technical, service
offering, product development and marketing resources than we do. Competitive
pressures and other factors may result in price or market share erosion that
could have a material adverse effect on our business, results of operations
and financial condition.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGES, WHICH COULD
MAKE OUR PRODUCTS AND SERVICES OBSOLETE
There can be no assurance that we will be successful in our product
development efforts, that the market will continue to accept our existing
products, or that new products or product enhancements will be developed and
implemented in a timely manner, or achieve market acceptance. If new products
or product enhancements do not achieve market acceptance, our business,
results of operations and financial condition could be materially adversely
affected.
If we fail to develop and introduce in a timely manner new products and
services compatible with emerging technologies, we may not be able to compete
effectively and our ability to generate revenue will suffer.
The industry in which we operate is subject to significant technological
change. The market generally is characterized by rapid technological change,
changing customer needs, frequent new product introductions, and evolving
industry standards. The introduction of products incorporating new
technologies and the emergence of new industry standards could render our
existing products and services obsolete and unmarketable. There can be no
assurance that we will be successful in developing and marketing new products
and services that respond to technological changes or evolving industry
standards.
WE MAY BE SUBJECT TO LITIGATION THAT COULD RESULT IN SIGNIFICANT COSTS TO US
We face the risks and uncertainties that are associated with any potential
litigation against us. We face the risks associated with litigation
concerning the operation of our business. The uncertainty associated with
substantial unresolved litigation may have an adverse impact on our business.
In particular, such litigation could impair our relationships with existing
customers and our ability to obtain new customers. Defending such litigation
may result in a diversion of management's time and attention away from
business operations, which could have a material adverse effect on our
business, results of operations and financial condition. Such litigation may
also have the effect of discouraging potential acquirers from bidding for us
or reducing the consideration such acquirers would otherwise be willing to pay
in connection with an acquisition. There can be no assurance that such
litigation will not result in liability in excess of our insurance coverage,
that our insurance will cover such claims or that appropriate insurance will
continue to be available to us in the future at commercially reasonable rates.
OUR SUCCESS AND ABILITY TO COMPETE DEPENDS UPON OUR ABILITY TO SECURE AND
PROTECT OUR INTELLECTUAL PROPERTY
Our success depends on our ability to protect our proprietary rights to the
technologies used to implement and operate our solutions. In the event that a
third party breaches the confidentiality provisions or other obligations in
one or more of our agreements or misappropriates or infringes our intellectual
property rights or the intellectual property rights licensed to us by third
parties, our business could be seriously harmed. To protect our proprietary
rights, we rely on a combination of trade secrets, confidentiality and other
contractual provisions and agreements, and intellectual property laws, which
afford us only limited protection. We currently do not hold any patents on
our technologies, which may limit our ability to protect our technologies.
Third parties may independently discover or invent competing technologies or
reverse engineer our trade secrets, software or other technology. Therefore,
the measures we take to protect our proprietary rights may not be adequate.
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CLAIMS THAT WE INFRINGE THIRD-PARTY PROPRIETARY RIGHTS COULD RESULT IN
SIGNIFICANT EXPENSES OR RESTRICTIONS ON OUR ABILITY TO PROVIDE SOLUTIONS
We do not believe that our operations or products infringe on the intellectual
property rights of others. However, third parties may claim that our current
or future solutions infringe their proprietary rights or assert other claims
against us. As the number of entrants into our market increases, the
possibility of an intellectual property or other claim against us grows. Any
intellectual property or other claim, with or without merit, would be
time-consuming and expensive to litigate or settle and could divert management
attention from focusing on our core business. As a result of such a dispute,
we may have to pay damages, incur substantial legal fees, develop costly
non-infringing technology, if possible, or enter into license agreements,
which may not be available on terms acceptable to us, if at all. Any of these
results would increase our expenses and could decrease the functionality of
our solutions, which would make our solutions less attractive to our current
or potential customers. We have agreed in some of our agreements, and may
agree in the future, to indemnify other parties for any expenses or
liabilities resulting from claimed infringements of the proprietary rights of
third parties.
WE FACE POTENTIAL LIABILITY FOR SECURITY BREACHES RELATING TO OUR TECHNOLOGY
We face the possibility of damages resulting from internal and external
security breaches, and viruses. The systems with which we may interface, such
as the Internet and related systems, may be vulnerable to security breaches,
viruses, programming errors, or similar disruptive problems. The effect of
these security breaches and related issues could reduce demand for our
services. Accordingly, we believe that it is critical that these facilities
and related infrastructures not only be secure, but also be viewed by our
customers as free from potential breach. Maintaining such standards,
protecting against breaches and curing security flaws may require us to expend
significant capital.
WE MAY NOT EFFECTIVELY MANAGE THE GROWTH NECESSARY TO EXECUTE OUR BUSINESS
PLAN, WHICH COULD ADVERSELY AFFECT OUR RESULTS
We have in the past experienced periods of growth that have placed, and may
continue to place, a significant strain on our resources. In the event we are
unable to identify, hire, train and retain qualified individuals within a
reasonable timeframe, such failure could have a material adverse effect on us.
In addition, our ability to manage future increases, if any, in the scope of
our operations or personnel will depend on significant expansion of our
marketing and sales, management, and administrative and financial
capabilities. The failure of our management to effectively manage expansion in
our business could have a material adverse effect on our business, results of
operations and financial condition.
OUR BUSINESS PLAN REQUIRES CONTINUED INVESTMENT IN SOPHISTICATED
TELECOMMUNICATIONS AND COMPUTER SYSTEMS AND COMPUTER SOFTWARE, WHICH COULD
INCREASE OUR COSTS AND ADVERSELY AFFECT OUR BUSINESS
We anticipate making significant investments in the acquisition, development
and maintenance of telecommunications and computer systems and software
technologies and we believe that such expenditures will be necessary on
an on-going basis. Computer and telecommunication technologies are evolving
rapidly and are characterized by short product lifecycles, which requires us
to anticipate technological developments. We can give no assurance that we
will be successful in anticipating, managing or adopting such technological
changes on a timely basis or that we will have the resources available to
invest in new technologies. Our business is dependent on our computer and
telecommunications equipment and software systems, the temporary or permanent
loss of which, through physical damage or operating malfunction, could have a
material adverse effect on our business. Operating malfunctions in the
software systems of financial institutions, market makers and other parties
might have an adverse effect on our operations. We depend on service provided
by various local and long distance telephone companies. A significant increase
in the cost of telephone services that is not recoverable through an increase
in the price of our services, or any significant interruption in telephone
services, could have a material adverse effect on our business. Additionally,
as we continue to introduce new services that use new technologies, we may be
required to license technology from third parties. There can be no assurance
that these licenses will be available on commercially reasonable terms, if at
all. Our inability to obtain any of these licenses could result in delays or
reductions in the introduction of new services or could adversely affect our
existing business.
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IF WE WERE TO LOSE THE SERVICES OF KEY PERSONNEL, WE MAY NOT BE ABLE TO
EXECUTE OUR BUSINESS STRATEGY
Our operations are dependent upon our key personnel. If such personnel were to
leave unexpectedly, we may not be able to execute our business plan. Our
future performance depends in significant part upon the continued service of
our key technical and senior management personnel, many of whom have been with
us for a significant period of time. These personnel have acquired specialized
knowledge and skills with respect to our business. We do not maintain key man
life insurance on any of our employees. Because we have a relatively small
number of employees when compared to other leading companies in the same
industry, our dependence on maintaining our relationship with key employees is
particularly significant. We are also dependent on our ability to attract and
retain high-quality personnel.
CHANGES IN ACCOUNTING POLICIES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
RESULTS
We are subject to changes in and interpretations of financial accounting
matters that govern the measurement of our performance. Based on our reading
and interpretations of relevant guidance, principles or concepts issued by,
among other authorities, the American Institute of Certified Public
Accountants ("AICPA"), the Financial Accounting Standards Board ("FASB") , and
the United States SEC, management believes that our current sales and business
arrangements have been properly reported. However, there continue to be issued
interpretations and guidance for applying the relevant standards to a wide
range of sales contract terms and business arrangements that are prevalent in
our industries. Future interpretations or changes by the regulators of
existing accounting standards or changes in our business practices could
result in future changes in our revenue recognition and/or other accounting
policies and practices that could have a material adverse effect on our
business, financial condition, cash flows, revenue and results of operations.
Our earnings were adversely affected when we changed our accounting policy
with respect to employee stock options in the first quarter of 2006. Stock
options have from time to time been an important component of the compensation
packages for our senior-level employees.
OUR REVENUE MODEL IN THE MOBILE ASSET TRACKING MARKET IS UNPROVEN AND COULD
FAIL
Our revenue model for the mobile asset tracking market is new and evolving,
and we cannot be certain that it will be successful. We have limited
experience with our mobile asset tracking solutions and our success is largely
dependent upon our ability to successfully integrate and manage our
acquisitions. Accordingly, we cannot assure you that our business model will
be successful or that we can sustain revenue growth or achieve or sustain
profitability.
OUR MOBILE ASSETING TRACKING BUSINESS DEPENDS ON GPS TECHNOLOGY AND WIRELESS
NETWORKS CONTROLLED BY OTHERS
Our mobile asset tracking solutions rely on signals from GPS satellites built
and maintained by the U.S. Department of Defense. GPS satellites and their
ground support systems are subject to electronic and mechanical failures and
sabotage. If one or more satellites malfunction, there could be a substantial
delay before they are repaired or replaced, if at all, and our products and
services may cease to function and customer satisfaction would suffer.
In addition, the U.S. government could decide not to continue to operate and
maintain GPS satellites over a long period of time or to charge for the use of
the GPS. Furthermore, because of ever-increasing commercial applications of
the GPS and international political unrest, U.S. government agencies may
become increasingly involved in the administration or the regulation of the
use of GPS signals in the future. If factors such as the foregoing affect the
GPS, for example by affecting the availability, quality, accuracy or pricing
of GPS technology, our business may suffer.
-10-
Currently, our solutions function on General Packet Radio Services networks
and Code Division Multiple Access 1xRTT networks controlled by wireless
communications providers. Our existing agreements with wireless
communications providers may in some cases be terminated immediately upon the
occurrence of certain conditions or with prior written notice. If one or more
of our wireless communications providers decides to terminate or not to renew
its contract with us, we may incur additional costs relating to obtaining
alternate coverage from another wireless communications provider outside of
its primary coverage area, or we may be unable to replace the coverage at all,
causing a complete loss of services to our customers in that coverage area.
THE REPORTING OF INACCURATE LOCATION INFORMATION COULD CAUSE THE LOSS OF
CUSTOMERS AND EXPOSE US TO LEGAL LIABILITY
The accurate reporting of location information is critical to our customers'
businesses. If we fail to accurately report location information, we could
lose customers, our reputation and ability to attract new customers could be
harmed, and we could be exposed to legal liability. We may not have insurance
adequate to cover losses we may incur as a result of these inaccuracies.
DEFECTS OR ERRORS IN OUR SOLUTIONS COULD RESULT IN THE CANCELLATION OF OR
DELAYS IN THE IMPLEMENTATION OF OUR SOLUTIONS, WHICH COULD DAMAGE OUR
REPUTATION AND HARM OUR FINANCIAL CONDITION
We must develop our mobile asset tracking solutions quickly to keep pace with
a rapidly changing market. Solutions that address this market are likely to
contain undetected errors or defects, especially when first introduced or when
new versions are introduced. We may be forced to delay commercial release of
new solutions or updated versions of existing solutions until such errors or
defects are corrected, and in some cases, we may need to implement
enhancements to correct errors that were not detected until after deployment
of our solutions. Even after testing and release, our solutions may not be
free from errors or defects, which could result in the cancellation or
disruption of our services or dissatisfaction of customers. Such customer
dissatisfaction could damage our reputation and result in lost revenues,
diverted development resources, and increased service and warranty costs.
OUR SUCCESS DEPENDS ON OUR ABILITY TO MAINTAIN AND EXPAND OUR SALES CHANNELS
To increase our market awareness, customer base and revenues, we need to
expand our direct and indirect sales operations. There is strong competition
for qualified sales personnel, and we may not be able to attract or retain
sufficient new sales personnel to expand our operations. New sales personnel
require training and it takes time for them to achieve full productivity, if
at all. In addition, we believe that our success is dependent on the
expansion of our indirect distribution channels, including our relationships
with independent sales agents. These sales channel alliances require training
in selling our solutions and it will take time for these alliances to achieve
productivity, if at all. We may not be able to establish relationships with
additional distributors on a timely basis, or at all. Our independent sales
agents, many of which are not engaged with us on an exclusive basis, may not
devote adequate resources to promoting and selling our solutions.
OUR QUARTERLY OPERATING RESULTS FLUCTUATE, AND OUR STOCK PRICE MAY DECLINE IF
WE DO NOT MEET THE EXPECTATIONS OF ANALYSTS AND INVESTORS
Our quarterly operating results have historically fluctuated and may do so in
the future. Our revenue has fluctuated in the past, and may fluctuate in the
future from quarter to quarter and period to period, as a result of a number
of factors including, without limitation:
. the size and timing of orders from clients;
. the length of sales cycles;
. changes in pricing policies or price reductions by us or our
competitors;
. the timing of new product announcements and product introductions by us
or our competitors;
. changes in revenue recognition or other accounting guidelines employed
by us and/or established by the FASB or other rule-making bodies;
-11-
. the availability and cost of system components;
. the financial stability of clients;
. market acceptance of new products, applications and product
enhancements;
. our success in expanding our sales and marketing programs;
. execution of or changes to Company strategy;
. personnel changes; and
. general market/economic factors.
Due to all of the foregoing factors, it is possible that our operating results
may be below the expectations of public market analysts and investors. In such
event, the price of our common stock would likely be materially adversely
affected.
WE HAVE A SMALL FINANCE AND ACCOUNTING STAFF AND A FAILURE TO MAINTAIN AN
EFFECTIVE SYSTEM OF INTERNAL CONTROLS COULD EXPOSE US TO POTENTIAL LIABILITIES
We have a very small finance and accounting staff and, due to our limited
resources, it is not always possible to have optimum segregation of accounting
and finance duties. However, if we are unsuccessful in attracting the capital
and human resources necessary to implement and maintain an effective system of
internal controls, and if as a result we were to fail to disclose timely
material items as required under the Securities Exchange Act, it could give
rise to potential regulatory and/or shareholder actions, which could have a
material adverse effect on our business and financial condition, and on the
market value of our shares. We believe that our current system of internal
controls is generally adequate.
OUR STOCK PRICE IS VOLATILE
The price of our shares and the trading volume of our shares have been
volatile historically and may continue to be volatile. Volatility may be
caused by a number of factors including but not limited to:
. Actual or anticipated quarterly variations in operating results;
. Rumors about our performance or merger and acquisition activity;
. Changes in expectations of future financial performance or changes in
estimates of securities analysts;
. Governmental regulatory action;
. Client relationship developments;
. Purchases or sales of Company stock;
. Changes occurring in the markets in general; and
. Other factors, many of which are beyond our control.
ABILITY OF PRINCIPAL STOCKHOLDERS TO EXERCISE CONTROL
Two of our directors and principal stockholders beneficially owned
approximately 30% of the outstanding shares of our common stock at June 30,
2006, which makes it possible for them to have significant influence over the
outcome of all matters submitted to our shareholders for approval.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC WHICH LIMIT
THE TRADING MARKET IN OUR COMMON STOCK, MAKE TRANSACTIONS IN OUR COMMON STOCK
CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR COMMON STOCK
Our Common Stock is considered a "penny stock" as defined in Rule 3a51-1
promulgated by the SEC under the Securities Exchange Act of 1934. In general,
a security which is not quoted on NASDAQ or has a market price of less than $5
per share where the issuer does not have in excess of $2,000,000 in net
tangible assets (none of which conditions the Company meets) is considered a
penny stock. The SEC's Rule 15g-9 regarding penny stocks impose additional
sales practice requirements on broker-dealers who sell such securities to
persons other than established customers and accredited investors (generally
-12-
persons with net worth in excess of $1,000,000 or an annual income exceeding
$200,000 or $300,000 jointly with their spouse). For transactions covered by
the rules, the broker-dealer must make a special suitability determination for
the purchaser and receive the purchaser's written agreement to the transaction
prior to the sale. Thus, the rules affect the ability of broker-dealers to
sell our Common Stock should they wish to do so, because of the adverse effect
that the rules have upon liquidity of penny stocks. Unless the transaction
is exempt under the rules, under the Securities Enforcement Remedies and
Penny Stock Reform Act of 1990, broker-dealers effecting customer transactions
in penny stocks are required to provide their customers with (i) a risk
disclosure document; (ii) disclosure of current bid and ask quotations if any;
(iii) disclosure of the compensation of the broker-dealer and its sales
personnel in the transaction; and (iv) monthly account statements showing
the market value of each penny stock held in the customer's account. As a
result of the "penny stock" rules, the market liquidity for our Common Stock
may be adversely affected by limiting the ability of broker-dealers to sell
our Common Stock and the ability of purchasers to resell our Common Stock.
Additionally, the value of our securities may be adversely affected by the
"penny stock" rules, because of the additional disclosures required by
broker-dealers, which take additional time and effort from broker-dealers,
decreasing the likelihood that broker-dealers will sell our Common Stock.
This may in turn have an adverse effect on the liquidity of our securities
which in turn could adversely affect the price of our securities.
In addition, various state securities laws impose restrictions on transferring
"penny stocks" and as a result, investors in our Common Stock may have their
ability to sell their shares impaired.
FORWARD-LOOKING STATEMENTS
--------------------------
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act, and Section 21E of the Securities Exchange
Act of 1934 (the "Exchange Act"). We have based these forward-looking
statements on our current expectations and projections about future events.
These forward-looking statements are subject to known and unknown risks,
uncertainties and assumptions about us that may affect our actual results,
levels of activity, performance, or achievements expressed or implied by such
forward-looking statements. These factors are discussed in the section
entitled "Risk Factors". In some cases you can identify forward-looking
statements by terminology such as "may", "should", "could", "would", "expect",
"plan", "anticipate", "believe", "estimate", "continue", or the negative of
such terms or other similar expressions. All forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the cautionary statements included in this Prospectus. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this Prospectus might not occur.
USE OF PROCEEDS
----------------
This Prospectus relates to 11,128,534 outstanding shares of our Common Stock.
We will not receive any proceeds from the resale of such Common Stock by the
selling stockholders.
This Prospectus also relates up to 7,913,750 shares of Common Stock that we
may issue upon exercise of outstanding warrants and options. The Common Stock
underlying the warrants may be offered and sold from time to time by the
selling stockholders. The Company will not receive any proceeds from the
resale of our Common Stock underlying the warrants and options; however, the
Company will receive proceeds upon the exercise of the warrants and options.
However, 5,281,250 of the warrants are exercisable on a cashless basis if the
shares of Common Stock underlying the warrants are not then registered for
resale pursuant to an effective registration statement on or before May 23,
2007, and 1,072,500 of the warrants are exercisable on a cashless basis during
the entire term of the warrant. To the extent that the warrants are exercised
on a cashless basis, then we will not receive any proceeds from the exercise
of those warrants.
The Company will use the proceeds from the exercise of warrants and options,
if any, for general corporate purposes.
-13-
SELLING STOCKHOLDERS
-------------------
As of July 31, 2006, the Company had 54,234,293 shares of Common
Stock outstanding. This Prospectus relates to the resale of 19,042,284 shares
of Common Stock by the selling stockholders. The selling stockholders may be
deemed "underwriters" within the meaning of Section 2(a)(11) of the Securities
Act of 1933 (the "Securities Act" or the "1933 Act"). None of the selling
stockholders have held any position, office, or had any other material
relationship with the Company, its predecessors or affiliates within the past
three years, except that Walt Camping, the majority shareholder of CBSi
Holdings, Inc., and was Executive Vice President and Director of the
Company from September 15, 2005 to July 6, 2006. Upon the effectiveness
of the registration statement of which this Prospectus is a part, all
19,042,284 shares of Common Stock will be freely tradable without restriction
or further registration under the Securities Act. Sales of a substantial
number of shares of the Company's Common Stock in the public market following
this offering could adversely affect the market price of the Common Stock.
We have agreed to provide the selling stockholders with certain registration
rights. Under the terms of our May 2006 private placement, we agreed to
prepare and file a resale registration statement with the SEC for the shares
sold in the private financing and the shares underlying the warrants. We are
obligated to maintain the effectiveness of the registration statement for up
to two years. Pursuant to these arrangements, we will pay all expenses in
connection with the registration and sale of the shares, except any selling
commissions or discounts allocable to sales of the shares, fees and
disbursements of counsel and other representatives of the selling
stockholders, and any stock transfer taxes payable by reason of any such sale.
The table below sets forth information with respect to the resale of shares of
Common Stock by the selling stockholders. We will not receive any proceeds
from the resale of Common Stock by the selling stockholders
Common Stock Shares of
Beneficially Common Stock Beneficial Percentage
Owned Included Ownership Owned
Before the in this After the After the
Name (1) Offering(2) Prospectus Offering(3) Offering
----------------------------------- ------------- ------------- ---------- --------
CBSi Holdings. Inc.(4) 3,003,534(4) 3,003,534 0 -
Laurus Master Fund, Ltd.(5) 1,560,000 1,560,000(5) 0 -
Paragon Capital LP(6) 1,750,000 2,887,500(6) 0 -
Lagunitas Partners LP(7) 1,500,000 2,475,000(7) 0 -
Crescent International Ltd (8) 1,500,000 2,475,000(8) 0 -
Chestnut Ridge Partners, L.P.(9) 1,000,000 1,650,000(9) 0 -
Gruber & McBaine International(10) 500,000 825,000(10) 0 -
Jon D and Linda W Gruber Trust(11) 250,000 412,500(11) 0 -
J Patterson McBaine(12) 250,000 412,500(12) 0 -
Double U Master Fund LP(13) 500,000 825,000(13) 0 -
Nite Capital LP(14) 375,000 618,750(14) 0 -
Hudson Bay Fund LP(15) 250,000 412,500(15) 0 -
Mahler & Emerson(16) 250,000 412,500(16) 0 -
Richard Kreger - 536,250(17) 0 -
RHK Midtown Partners LLC(18) - 225,225(18) 0 -
Midtown Partners & Co., LLC(19) - 160,875(19) 0 -
Ariel Imas - 85,800(17) 0 -
Bruce Jordan - 41,925(17) 0 -
Michael Oleyar - 10,725(17) 0 -
-14-
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rule, beneficial ownership includes any shares as
to which the selling security holder has sole or shared voting power or
investment power and also any shares, which the selling stockholder has the
right to acquire within 60 days. Shares of Common Stock subject to an option
or warrant currently convertible or exercisable, or convertible or exercisable
within 60 days are deemed outstanding for computing the percentage of the
selling stockholder holding such option or warrant, but are not deemed
outstanding for computing the percentage of any other person.
(1) The selling stockholders do not hold any position or office, and have not
had any material relationship with the Company or any of its affiliates
within the past three (3) years, except that Walt Camping, the majority
shareholder of CBSi Holdings, Inc., was an Executive Vice President
and Director of the Company from September 15, 2005 to July 6, 2006.
(2) The warrants held by the selling stockholders and included hereunder are
not exercisable within 60 days following the date of this Prospectus, and
accordingly are not included in the column "Common Stock Beneficially
Owned Before the Offering."
(3) Assumes that all Common Stock registered will be sold.
(4) Includes 3,003,534 shares issued to the shareholders of CBSi Holdings,
Inc. in connection with the Company's acquisition of the assets of CBSi.
Mr. Camping, the majority shareholder of CBSi, beneficially owns these
shares.
(5) Includes 40,000 outstanding shares of Common Stock and 1,560,000 shares
issuable upon exercise of an option. Laurus Master Fund, Ltd. is a
private investment fund. To our knowledge, Laurus Master Fund, Ltd. has
sole voting and investment power with respect to all of the shares of
common stock beneficially owned by it, except that Laurus Capital
Management, LLC, a Delaware limited liability company, may be deemed a
control person of the shares held by Laurus. David Grin and Eugene Grin
are the principals of Laurus Capital Management, LLC. The address for
Messrs. David Grin and Eugene Grin is 825 Third Avenue, 14th Floor, New
York, New York 10022.
(6) Includes 1,137,500 shares subject to warrants to purchase shares of Common
Stock, exercisable beginning November 22, 2006. Mr. Alan P. Donenfeld may
be deemed to have voting and dispositive power over the shares of Common
Stock owned by Paragon Capital L.P.; Mr. Donenfeld disclaims beneficial
ownership interest of such shares of Common Stock except to the extent of
his pecuniary interest therein.
(7) Includes 975,000 shares subject to warrants to purchase shares of Common
Stock, exercisable beginning November 22, 2006.
(8) Includes 975,000 shares subject to warrants to purchase shares of Common
Stock, exercisable beginning November 22, 2006. Maxi Brezzi and Bachir
Taleb-Ibrahimi, in their capacity as managers of Cantara (Switzerland) SA,
the investment advisor to Crescent International Ltd, have voting control
and investment discretion over the shares owned by Crescent International
Ltd. Messrs. Brezzi and Taleb-Ibrahimi disclaim beneficial ownership of
such shares.
(9) Includes 650,000 shares subject to warrants to purchase shares of Common
Stock, exercisable beginning November 22, 2006. Mr. Kenneth Pasternak may
be deemed to have voting and dispositive power over the shares of Common
Stock owned by Chestnut Ridge Partners, L.P.; Mr. Pasternak disclaims
beneficial ownership interest of such shares except to the extent of his
pecuniary interest therein.
(10) Includes 325,000 shares subject to warrants to purchase shares of Common
Stock, exercisable beginning November 22, 2006.
(11) Includes 162,500 shares subject to warrants to purchase shares of Common
Stock, exercisable beginning November 22, 2006.
-15-
(12) Includes 162,500 shares subject to warrants to purchase shares of Common
Stock, exercisable beginning November 22, 2006.
(13) Includes 325,000 shares subject to warrants to purchase shares of Common
Stock, exercisable beginning November 22, 2006. Mr. Issac Winehouse
may be deemed to have voting and dispositive power over the shares of
Common Stock owned by Double U Master Fund L.P.; Mr. Winehouse disclaims
beneficial ownership interest of such shares of Common Stock except to
the extent of his pecuniary interest therein.
(14) Includes 243,750 shares subject to warrants to purchase shares of Common
Stock, exercisable beginning November 22, 2006. Mr. Keith Goodman,
manager of the general partner of Nite Capital L.P. may be deemed to have
voting and dispositive power over the shares of Common Stock owned by
Nite Capital L.P; Mr. Goodman disclaims beneficial ownership interest of
such shares of Common Stock except to the extent of his pecuniary
interest therein.
(15) Includes 162,500 shares subject to warrants to purchase shares of Common
Stock, exercisable beginning November 22, 2006. Yoav Roth and John
Doscas may be deemed to have voting and dispositive power over the shares
of Common Stock owned by Hudson Bay Fund L.P.; Both Yoav Roth and John
Doscas disclaim beneficial ownership interest of such shares of Common
Stock.
(16) Includes 162,500 shares subject to warrants to purchase shares of Common
Stock, exercisable beginning November 22, 2006.
(17) Consists solely of shares subject to warrants to purchase shares of
Common Stock, exercisable beginning November 22, 2006.
(18) Consists solely of shares subject to warrants to purchase shares of
Common Stock, exercisable beginning November 22, 2006.
(19) Consists solely of shares subject to warrants to purchase shares of
Common Stock, exercisable beginning November 22, 2006.
PLAN OF DISTRIBUTION
---------------------
The Selling Stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
. ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
. block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
. purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
. an exchange distribution in accordance with the rules of the
applicable exchange;
. privately negotiated transactions;
. settlement of short sales entered into after the date of this
prospectus;
. broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
. a combination of any such methods of sale;
. through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise; or
. any other method permitted pursuant to applicable law.
-16-
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the Selling Stockholders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser)
in amounts to be negotiated, but, except as set forth in a supplement to this
Prospectus, in the case of an agency transaction not in excess of a customary
brokerage commission in compliance with NADSR Rule 2440; and in the case of a
principal transaction a markup or markdown in compliance with NASDR IM-2440.
In connection with the sale of the Common Stock or interests therein, the
Selling Stockholders may enter into hedging transactions with broker-dealers
or other financial institutions, which may in turn engage in short sales of
the Common Stock in the course of hedging the positions they assume. The
Selling Stockholders may also, on or after the date of this Prospectus, sell
shares of the Common Stock short and deliver these securities to close out
their short positions, or loan or pledge the Common Stock to broker-dealers
that in turn may sell these securities. The Selling Stockholders may also
enter into option or other transactions with broker-dealers or other financial
institutions or the creation of one or more derivative securities which
require the delivery to such broker-dealer or other financial institution of
shares offered by this prospectus, which shares such broker-dealer or other
financial institution may resell pursuant to this prospectus (as supplemented
or amended to reflect such transaction).
The Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Each Selling Stockholder
has informed the Company that it does not have any written or oral agreement
or understanding, directly or indirectly, with any person to distribute the
Common Stock. In no event shall any broker-dealer receive fees, commissions
and markups which, in the aggregate, would exceed eight percent (8%).
The Company is required to pay certain fees and expenses incurred by the
Company incident to the registration of the shares. The Company has agreed to
indemnify the Selling Stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act. In addition, any securities covered by
this prospectus which qualify for sale pursuant to Rule 144 under the
Securities Act may be sold under Rule 144 rather than under this prospectus.
Each Selling Stockholder has advised us that they have not entered into any
written or oral agreements, understandings or arrangements with any
underwriter or broker-dealer regarding the sale of the resale shares. There
is no underwriter or coordinating broker acting in connection with the
proposed sale of the resale shares by the Selling Stockholders.
We agreed to keep this prospectus effective until the earlier of (i) the date
on which the shares may be resold by the Selling Stockholders without
registration and without regard to any volume limitations by reason of Rule
144(e) under the Securities Act or any other rule of similar effect or (ii)
all of the shares have been sold pursuant to the prospectus or Rule 144 under
the Securities Act or any other rule of similar effect. The resale shares
will be sold only through registered or licensed brokers or dealers if
required under applicable state securities laws. In addition, in certain
states, the resale shares may not be sold unless they have been registered or
qualified for sale in the applicable state or an exemption from the
registration or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to the Common Stock for a period of
two business days prior to the commencement of the distribution. In addition,
the Selling Stockholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including Regulation M,
which may limit the timing of purchases and sales of shares of the Common
Stock by the Selling Stockholders or any other person. We will make copies of
this prospectus available to the Selling Stockholders and have informed them
of the need to deliver a copy of this prospectus to each purchaser at or prior
to the time of the sale.
-17-
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
Common Stock
Our common stock currently trades on the OTC Bulletin Board under the trading
symbol "DLGI". The stock is also trading on the Berlin and Frankfurt
exchanges under the trading symbol "TOP.FSE" and German securities code (WKN)
of 779612.
The following table sets forth the high and low bid prices for the Company's
common stock for the periods indicated as reported by the OTC Bulletin Board.
The quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions.
Bid Prices
Quarter Ended High Low
----------------- ------ ------
June 30, 2006 $0.34_ $0.13_
March 31, 2006 $0.41 $0.23
December 31, 2005 $0.30 $0.21
September 30, 2005 $0.35 $0.24
June 30, 2005 $0.32 $0.20
March 31, 2005 $0.60 $0.35
December 31, 2004 $0.75 $0.40
September 30, 2004 $0.63 $0.30
June 30, 2004 $0.91 $0.54
March 31, 2004 $0.26 $1.39
Holders
There were 3,433 holders of record of our Common Stock as of July 31, 2006.
Dividends
We have never paid a cash dividend on our Common Stock and do not anticipate
the payment of a cash dividend in the foreseeable future. We intend to
reinvest in our business operations any funds that could be used to pay a cash
dividend.
Securities Offered for Issuance Under Equity Incentive Plans
The following table gives information as of December 31, 2005, regarding our
Common Stock that may be issued upon the exercise of options, warrants and
other rights under our equity compensation plans. See also "Note 16 to
Consolidated Financial Statements" for the year ended December 31, 2005
included in this Prospectus.
Number of
securities
remaining
available for
future issuance
under equity
Number of securities Weighted-average compensation
to be issued upon exercise price of plans (excluding
exercise of out- outstanding securities
standing options, options, warrants reflected
Plan category warrants and rights(a) and rights in column (a))
------------------ ---------------------- ------------------- ---------------
Equity compensation
plans approved by
security holders 927,500 (1) $0.30 0
Equity compensation
plans not approved
by security holders 8,960,000 (2) $0.33 1,419,744
Total 9,887,500 $0.31 1,419,744
------------------- --------------------- ------------------- ---------------
(1) Consists solely of our 2003 Stock Compensation Plan and 2004
Non-Qualified Stock and Stock Option Plan.
(2) Consists solely of our 2005 Non-Qualified Stock and Stock Option
Plan.
-18-
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------
This report contains forward looking statements within the meaning of Section
27a of the Securities Act and Section 21e of the Exchange Act. These forward
looking statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from historical results or
anticipated results, including those set forth, above, in the section entitled
"Risk Factors" and elsewhere in this Prospectus. The following discussion
and analysis should be read in conjunction with the Company's financial
statements and notes thereto included in the section entitled "Financial
Statements" in this Prospectus.
Overview
We are a communications and IT solutions company. We leverage our technology
expertise, customer relationships and supplier channels to develop solutions
addressing markets with attractive growth characteristics, such as network
design and project management, GPS-based mobile asset tracking and strategic
IT outsourcing.
We operate and manage two strategic business segments. Our segments and their
principal activities are:
Communications
--------------
Our communications segment addresses markets for advanced communications
solutions. Our solutions include network design and project management,
mobile asset tracking and secured mobile communications.
Consulting
----------
Our consulting segment provides IT outsourcing and consulting services to a
broad range of U.S. and international governmental agencies and commercial
enterprises. Our consulting segment services include project management and
systems analysis, design, implementation, testing and maintenance. We also
provide short and long-term staffing solutions.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 2005
Net Revenue
Consulting Segment
The net revenues for the three months ended June 30, 2006 increased $77,000 or
2.3% to $3,390,000 as compared to net revenues of $3,313,000 for the three
months ended June 30, 2005. The increase in revenues was due to an increase
in staff placed in the second quarter of 2006 vs. 2005.
Communications Segment
The net revenues for the three months ended June 30, 2006 increased $512,000
to $1,683,000 as compared to net revenues of $1,171,000 for the three months
ended June 30, 2005. The increase in revenues was primarily due to one large
order received in the second quarter of 2006 vs. 2005.
Gross Profit
Consulting Segment
The gross profit for the three months ended June 30, 2006 decreased $17,000 or
4.9% to $327,000 as compared to the gross profit of $344,000 for the three
months ended June 30, 2005. The decrease was due to an increase in workers
compensation and unemployment taxes.
-19-
Communications Segment
The gross profit for the three months ended June 30, 2006 increased $43,000 or
23.6% to $225,000 as compared to the gross profit of $182,000 for the three
months ended June 30, 2005. The increase in gross profit was due to increased
revenue in video communications product and service sales.
Operating Expenses
Consulting Segment
The operating expenses for the three months ended June 30, 2006 were $568,000
as compared to the operating expenses of $470,000 for the three months ended
June 30, 2005. The increase was due to an increase in compensation costs
associated with the expensing of stock options (per SFAS 123(R)), an increase
in employee benefits, workers compensation, unemployment insurance, and
professional fees.
Communications Segment
The operating expenses for the three months ended June 30, 2006 were $452,000
as compared to the operating expenses of $227,000 for the three months ended
June 30, 2005. The year-over-year increase was due to increases
in operating expenses as a result of our acquisitions and increases in sales
and marketing costs for other communications products and services.
Non-Operating Expenses
Consulting Segment
Interest expense for the three months ended June 30, 2006 was $36,000 as
compared to $204,000 for the three months ended June 30, 2005. The decrease
in interest expense was primarily due to a decrease in interest expense
associated with the amortization of the debt discount on the convertible term
note issued by the Company to Laurus which was paid in January 2006. The
change in the fair value of derivative and warrant liabilities was $417,000 in
2006 as compared to $452,000 for the three months ended June 30, 2005. The
decrease was primarily due to decreases in the Company's stock prices in 2006
versus decreases in the Company's stock price in the comparable period of
2005. Gain from the sale of property and equipment increased $15,000 as
compared to $ 0 for the three months ended June 30, 2005 due to a sale of
property in 2006 that did not occur in 2005.
Communications Segment
Interest expense for the three months ended June 30, 2006 was $53,000 as
compared to $4,000 for the three months ended June 30, 2005. The increase in
interest expense was related to the interest on equipment finance contracts
and other notes.
Net Loss
Consulting Segment
As a result of the above, the net loss for the three months ended June 30,
2006 was $109,000 as compared to the net loss of $100,000 for the three months
ended June 30, 2005.
Communications Segment
As a result of the above, the net loss for the three months ended June 30,
2006 was $16,000 as compared to the net loss of $22,000 for the three months
ended June 30, 2005.
The basic and diluted loss per share was $0.00 during the three months ended
June 30, 2006 as compared to the basic and diluted loss per share of $0.00 in
2005.
-20-
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 2005
Consulting Segment
The net revenues for the six months ended June 30, 2006 decreased $80,000 or
1.2% to $6,518,000 as compared to net revenues of $6,598,000 for the six
months ended June 30, 2005. The decrease in revenues was due to a decrease in
staff placed in the first quarter of 2006 vs. 2005.
Communications Segment
The net revenues for the six months ended June, 2006 increased $1,525,000 to
$2,779,000 as compared to net revenues of $1,254,000 for the six months ended
June 30, 2005. The increase in revenues was due to increases in video
communications product and service sales.
Gross Profit
Consulting Segment
The gross profit for the six months ended June 30, 2006 decreased $166,000 or
22.2% to $581,000 as compared to the gross profit of $747,000 for the six
months ended June 30, 2005. The decrease was due to an increase in workers
compensation and unemployment tax rates.
Communications Segment
The gross profit for the six months ended June 30, 2006 increased $196,000 or
91.6% to $410,000 as compared to the gross profit of $214,000 for the six
months ended June 30, 2005. The increase in gross profit was due to increased
revenue in video communications product and service sales.
Operating Expenses
Consulting Segment
The operating expenses for the six months ended June 30, 2006 were $1,429,000
as compared to the operating expenses of $1,030,000 for the six months ended
June 30, 2005. The increase was due to an increase in compensation costs
associated with the expensing of stock options (per SFAS 123(R)), an increase
in employee benefits, workers compensation, unemployment insurance,
professional fees, bad debt and other one-time costs associated with the
restatement of the Company's financial statements.
Communications Segment
The operating expenses for the six months ended June 30, 2006 were $1,271,000
as compared to the operating expenses of $341,000 for the six months ended
June 30, 2005. The year-over-year increase was due to increases in operating
expenses as a result of our acquisition of CBSi, and increases in sales and
marketing costs for the BounceGPS and other communications products and
services.
Non-Operating Expenses
Consulting Segment
Interest expense for the six months ended June 30, 2006 was $118,000 as
compared to $437,000 for the six months ended June 30, 2005. The decrease in
interest expense was primarily due to a decrease in interest expense
associated with the amortization of the debt discount on the convertible term
note issued by the Company to Laurus which was paid in January 2006. Loss
from debt extinguishment was a one-time charge of $1,338,000 in 2006 as a
result of the repayment of the Laurus convertible term note. The change in
the fair value of derivative and warrant liabilities was $198,000 in 2006 as
compared to $1,132,000 for the six months ended June 30, 2005. The decrease
was primarily due to decreases in the Company's stock prices in 2006 versus
decreases in the Company's stock price in the comparable period of 2005. Gain
from the sale of property and equipment increased $25,000 as compared to $ 0
for the six months ended June 30, 2005 due to a sale of property in 2006 that
did not occur in 2005.
-21-
Communications Segment
Interest expense for the six months ended June 30, 2006 was $58,000 as
compared to $6,000 for the three months ended June 30, 2005. The increase in
interest expense was related to the interest on equipment finance contracts
and other notes.
Net Loss
Consulting Segment
As a result of the above, the net loss for the six months ended June 30, 2006
was $2,285,000 as compared to the net profit of $185,000 for the six months
ended June 30, 2005.
Communications Segment
As a result of the above, the net loss for the six months ended June 30, 2006
was $716,000 as compared to the net loss of $102,000 for the six months ended
June 30, 2005.
The basic and diluted loss per share was $0.06 during the six months ended
June 30, 2006 was compared to the basic and diluted earnings per share of
$0.01 and $0.00, respectively, in 2005.
RESULTS OF OPERATION FOR THE YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR
ENDED DECEMBER 31, 2004
Net Revenue
Consulting Segment
------------------
The net revenues for the year ended December 31, 2005 increased $1,776,000 or
14.6% to $13,929,000 as compared to net revenues of $12,153,000 for the prior
year. The year-over-year increase in revenues was due to increases in
consulting contracts received in 2005.
Communications Segment
----------------------
The net revenues for the year ended December 31, 2005 increased $1,492,000 or
71.0% to $3,594,000 as compared to net revenues of $2,102,000 in the prior
year. The year-over-year increase in revenues was due to increases in our
mobile asset tracking and video communications product and service sales.
Gross Profit
Consulting Segment
------------------
The gross profit for the year ended December 31, 2005 decreased $420,000 or
21.7% to $1,518,000 as compared to the gross profit of $1,938,000 in the prior
year. The decrease was due to the change in the composition of cost of goods
sold as a result of differing types of contracts between 2005 and 2004 and due
to the changing composition of costs of goods sold and operating expenses as a
result of acquisitions in 2005. As a result of increased cost of goods sold
in 2005, gross profit decreased accordingly. Operating expenses decreased
accordingly (see below).
-22-
Communications Segment
----------------------
The gross profit for the year ended December 31, 2005 decreased $89,000 or
12.3% to $635,000 as compared to the gross profit of $724,000 in the prior
year. The year-over-year decrease in gross profit was due to decreases in
VoIP license revenue.
Operating Expenses
Consulting Segment
------------------
The operating expenses for the year ended December 31, 2005 were $1,337,000 as
compared to the operating expenses of $2,650,000 in the prior year. The
decrease was mainly due to the large bad debt write-offs in 2004 and
secondarily due to the changing composition of costs of goods sold and
operating expenses as a result of acquisitions in 2005. Cost of goods sold
increased accordingly, as explained above.
Communications Segment
----------------------
The operating expenses for the year ended December 31, 2005 were $1,427,000 as
compared to the operating expenses of $1,003,000 in the prior year. The
year-over-year increase was due to increases in operating expenses as a result
of our acquisition of CBSi, and increases in operations for our mobile asset
tracking and other communications products and services.
Non-Operating Expenses
Consulting Segment
------------------
Interest expense for the year ended December 31, 2005 was $883,000 as compared
to $533,000 in the prior year. The increase in interest expense was primarily
due to the interest expense associated with the amortization of the debt
discount on the convertible term note issued by the Company to Laurus for
twelve months in 2005 versus only six months in 2004. Other than temporary
write-down of marketable securities available for sale was $196,300 for the
year ended December 31, 2005 as compared to $ 0 in the prior year. The
increase in other than temporary write-down of marketable securities for sale
was attributable to the Company's determination in 2005 that the decline in
the market value of securities available for sale is "other-than-temporary."
Accordingly, the cost bases of the securities were adjusted to their market
value as of December 31, 2005. The change in the fair value of derivative
and warrant liabilities was $1,301,000 in 2005 as compared to $111,000 in
2004. The increase was due to the decrease in the price of our Common Stock
during 2005 that causes exercise of the warrants to be less attractive and to
a decrease in 2005 in the computed volatility of the market value of the
Company's common stock.
Communications Segment
----------------------
Interest expense for the year ended December 31, 2005 was $17,000 as compared
to $6,000 in the prior year. The increase in interest expense was related to
the interest on the notes assumed with the CBSi asset purchase.
-23-
Net Loss
Consulting Segment
------------------
As a result of the above, the net profit for the year ended December 31, 2005
was $389,000 as compared to the net loss of $1,196,000 in the prior year. The
increase in profit was primarily due to the larger decrease in the fair value
of derivative and warrant liabilities in 2005 and a decrease in bad debt as
compared to the year ended December 31, 2004.
Communications Segment
----------------------
As a result of the above, the net loss for the year ended December 31, 2005
was $809,000 as compared to the net loss of $286,000 in the prior year. The
increase in net loss was the result of our acquisition of CBSi and increases
in operations for our mobile asset tracking and other communications product
and service activities.
The basic and diluted loss per share was $0.01 during the year ended December
31, 2005 as compared to the basic and diluted loss per share of $0.04 in 2004.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2006, we had $545,409 in cash and $2,537,638 in accounts
receivable. Our current liabilities consisted of $4,160,563 in accounts
payable, deferred revenue, accrued expenses, and current portion of notes
payable.
For the year ended December 31, 2005, we had a net decrease in cash of
$187,067, resulting from $131,202 of cash used in our operating activities,
$199,319 of cash used in our investing activities, and $143,455 of cash
provided by our financing activities.
For the six months ended June 30, 2006, we had a net increase in cash of
$88,629, resulting from $1,705,546 of cash used in our operating activities,
$64,749 of cash used in our investing activities, and $1,858,924 of cash
provided by our financing activities.
Cash Flows from Operating Activities
Net cash used in our operating activities of $131,203 for the year ended
December 31, 2005 was primarily attributable to a net loss of $420,271, less
the change in the fair value of derivatives and warrant liabilities in the
amount of $1,300,861, and offset by the amortization of discount on
convertible debt of $570,863 and the issuance of shares for services rendered
and interest expense totaling $589,094. We used less cash in operations in
2005 versus 2004 due primarily to a decrease in our net loss in 2005 over
2004.
Net cash used in our operating activities of $1,705,546 for the six months
ended June, 2006 was primarily attributable to a net loss of $3,001,616,
offset by the loss on extinguishment of debt in the amount of $1,337,859, and
the issuance of or commitment to issue shares and options for services
rendered of $406,691. We used more cash in operations for the six months ended
June 30, 2006 versus the six months ended June 30, 2005 due primarily to an
increase in our net loss in six months ended June 30, 2006 over the same
period in 2005. The increase in our net loss was primarily attributable to an
increase in compensation costs associated with the expensing of stock options
(per SFAS 123(R)), an increase in employee benefits, workers compensation,
unemployment insurance, professional fees, bad debt and other one-time costs
associated with the restatement of the Company's financial statements.
-24-
Cash Flows from Investing Activities
Net cash used in our investing activities of $199,319 for the year ended
December 31, 2005 was primarily attributable to cash used in our acquisition
of property and equipment and costs incurred for software development of
$444,833 offset by net cash received in acquisitions of $266,371. We used more
cash in investing activities in 2005 versus 2004 due to investments in our
business.
Net cash used in our investing activities of $64,749 for the six months
ended June 30, 2006 was primarily attributable to advances on notes receivable
of $50,000 offset by proceeds from the sale of property and equipment of
$24,663. We used less cash from investing activities for the six months ended
June 30, 2006 versus the six months ended June 30, 2005 due primarily to more
property and other acquisitions in 2005 than 2006.
Cash Flows from Financing Activities
Net cash provided by our financing activities of $143,455 for the year ended
December 31, 2005 was comprised of a decrease in restricted cash of $1,258,689
offset by payment of convertible debt of $487,932 and payments on notes
payable of $630,302.
Net cash provided by our financing activities of $1,858,924 for the six
months ended June 30, 2006 was comprised of an increase in notes payable
proceeds of $3,300,000, proceeds from common stock sales of $1,423,820, offset
by the payment of our convertible debt and notes and related fees in the
amount of $2,864,896.
The Company's consolidated financial statements are prepared using the accrual
method of accounting in accordance with accounting principles generally
accepted in the United States of America ("GAAP"), and have been prepared on a
going concern basis, which contemplates the realization of assets and the
settlement of liabilities in the normal course of business. The Company has
an accumulated deficit of $6,829,484 at June 30, 2006 and a history
of operating losses over the last several years. Management has taken various
steps to revise its operating and financial requirements, which it believes
will be sufficient to provide the Company with the ability to continue its
operations for the next twelve months. Management has also devoted
considerable effort during the three months ended June 30, 2006
towards management of liabilities and improvement of the Company's operations.
In view of the matters described above, recoverability of a major portion of
the recorded asset amounts shown in the accompanying consolidated balance
sheets is dependent upon continued operations of the Company, which in turn is
dependent upon the Company's ability to raise additional capital, obtain
financing and to succeed in its future operations. The financial statements
do not include any adjustments relating to the recoverability and
classification of recorded asset amounts and classification of liabilities
that might be necessary should the Company be unable to continue as a going
concern. As a result, our independent registered public accounting firms have
included "going concern" modifications in their reports on the consolidated
financial statements for the years ended December 31, 2005 and 2004.
On January 20, 2006, we issued a secured term note to Laurus Master Fund, Ltd.
in the principal amount of $3,250,000. We used the proceeds from the issuance
of the Secured Note to repay the principal of the convertible debt we issued
in June 2004 and to fund our ongoing operations.
The Secured Note, which is not convertible, bears interest at the coupon rate
of the prime rate plus 2.00% (or 10.25% as of June 30, 2006) and is subject to
a floor interest rate of 8.00%. The Secured Note is collateralized by a
security interest in substantially all of our assets and the assets of our
subsidiaries. Our obligations under the Secured Note are guaranteed by each
of our subsidiaries.
-25-
We are obligated to repay the principal amount of the Secured Note in monthly
installments of $154,762 (together with any accrued and unpaid interest on the
principal amount repaid) commencing May 1, 2006 through maturity at December
31, 2007. If we default on the Secured Note, the amount of the principal
balance would increase to 130% of the then-outstanding principal and be
subject to acceleration.
On March 31, 2006, we obtained an amendment to the Secured Note deferring the
date for payment of the initial monthly principal installment from April 1 to
May 1, 2006 in exchange for issuing 40,000 shares of our common stock to the
holder of the Secured Note. There can be no assurance that we will be able to
obtain subsequent deferrals of our repayment obligations under the Secured
Note on terms that management deems satisfactory or at all.
On May 23 2006, we closed a private placement of unregistered common stock and
warrants for total gross proceeds of $1.625 million. The shares and stock
purchase warrants were sold together, based on a price of $0.20 per share. The
common stock purchase warrants are of two classes, Class A and Class B, and
have an exercise price of $0.35 per share and $0.45 per share, respectively.
Both classes of warrants are exercisable beginning November 23, 2006 and have
a 5-1/2 year term, expiring November 23, 2011. The private placement resulted
in the sale and issuance to the investors a total of 8,125,000 shares of
common stock, Class A warrants to purchase 3,250,000 shares of common stock
and Class B warrants to purchase an additional 2,031,250 shares of common
stock.
On July 6, 2006, we completed the sale of (a) approximately 700 units of
our Panther Trak asset tracking device and related inventory and (b) certain
other assets related to our small fleet/sub-prime lending market operations
(including our BounceGPS trademark and existing customer relationships). We
also licensed to the purchaser, on a non-exclusive basis, certain of our asset
tracking device and asset management solution technologies. In the
transaction, we received $450,000 in cash and a $250,000 promissory note from
the purchaser. The promissory note has a term of two years (with quarterly
amortization of principal) and bears interest at 9% per annum. The purchaser
also assumed certain liabilities related to our small fleet/sub-prime lending
market operations. We will receive a royalty stream from the purchaser's
sales of asset management solutions based substantially on our licensed
technology.
We project that our cash on hand and cash flow generated from operations will
not be sufficient to pay monthly principal installments due under the Secured
Note and to fund operational liquidity requirements. As a result, our ability
to repay the Secured Note as well as to continue our operations and growth
strategy depend on our ability to access the capital markets in the near-term.
There can be no assurance that capital from outside sources will be available
on a timely basis, or if such financing is available, that it will be on terms
that management deems sufficiently favorable. If we are unable to obtain
additional financing in a timely basis and upon terms that management deems
sufficiently favorable, or at all, we could be forced to curtail or abandon
our business plan, making any investment in the Company worthless.
Over the longer term, we must successfully execute our plans to increase
revenue and income streams that will generate significant positive cash flow
if we are to sustain adequate liquidity without impairing growth or requiring
the infusion of additional funds from external sources. Additionally, a major
expansion, such as would occur with the acquisition of a major new subsidiary,
might also require external financing that could include additional debt or
capital. There can be no assurance that additional financing, if required,
will be available on acceptable terms, if at all.
-26-
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP"). As
such, we are required to make certain estimates, judgments and assumptions
that we believe are reasonable based upon the information available. These
estimates and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods presented. The significant
accounting policies which we believe are the most critical to aid in fully
understanding and evaluating our reported financial results include the
following:
Accounts Receivable
-------------------
Accounts receivable consists of amounts billed to customers upon performance
of service or delivery of goods and expenses incurred by the Company but not
yet billed to customers for consulting services. The Company performs ongoing
credit evaluations of customers and adjusts credit limits based upon payment
history and the customer current creditworthiness, as determined by its review
of their current credit information. The Company continuously monitors
collections and payments from its customers and maintains a provision for
estimated credit losses based upon its historical experience and any
customer-specific collection issues that it has identified.
Inventories
-----------
Inventories consist of finished goods and are valued at the lower of cost
(determined on a weighted average basis) or market. Management compares the
cost of inventories with their market value and an allowance is recorded to
write down the inventories to their market value, if lower.
Other Assets
------------
Other assets consist of software development costs, website development costs,
software licenses and client lists and are recorded at cost.
Software development costs incurred in the development of certain products
upon reaching technological feasibility are being capitalized in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to be Sold, Licensed, or Otherwise
Marketed." All other software research, development and maintenance costs are
expensed in the period incurred. The Company evaluates the carrying value of
such costs, on a periodic basis, by comparing such amounts to their net
realizable value. Amounts in excess of net realizable value are charged to
operations.
Amortization of such costs are provided over the greater of the amount
computed using the straight-line method over the estimated economic life of
each product commencing upon the initial sale of the related product or the
ratio of current gross revenues to the total of current and anticipated future
gross revenues for the related product.
Website development costs, software licenses and client lists are recorded at
cost and amortized using the straight-line method over their estimated useful
lives of 2-5 years.
Long-Lived Assets
-----------------
The Company accounts for its long-lived assets in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the historical cost carrying
value of an asset may no longer be appropriate. The Company assesses
recoverability of the carrying value of an asset by estimating the future net
cash flows expected to result from the asset, including eventual disposition.
If the future net cash flows are less than the carrying value of the asset, an
impairment loss is recorded equal to the difference between the asset's
carrying value and fair value or disposable value.
-27-
Goodwill
--------
Goodwill represents the excess of acquisition cost over the net assets
acquired in a business combination. Management reviews, on an annual basis,
the carrying value of goodwill in order to determine whether impairment has
occurred. Impairment is based on several factors including the Company's
projection of future undiscounted operating cash flows. If an impairment of
the carrying value were to be indicated by this review, the Company would
adjust the carrying value of goodwill to its estimated fair value.
Beneficial Conversion Feature
-----------------------------
From time to time, the Company has debt with conversion options that provide
for a rate of conversion that is below market value. This feature is normally
characterized as a beneficial conversion feature ("BCF"), which is recorded by
the Company pursuant to Emerging Issues Task Forces ("EITF") Issue No. 98-5
("EITF 98-05"), "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios," and EITF
Issue No. 00-27, "Application of EITF Issue No. 98-5 to Certain Convertible
Instruments."
If a BCF exists, the Company records it as a debt discount and amortizes it to
interest expense over the life of the debt on a straight-line basis, which
approximates the effective interest method.
Derivative Financial Instruments
--------------------------------
The Company's derivative financial instruments consist of embedded derivatives
related to the Laurus notes entered into in June 2004 and January 2006, since
the notes were not conventional convertible debt and the warrants require
registration. The embedded derivatives included the conversion feature,
monthly payment options, variable interest features, liquidated damages
clauses in the registration rights agreement and certain default provisions.
The accounting treatment of derivative financial instruments requires that we
record the derivatives and related warrants at their fair values as of the
inception date of the agreement and at fair value as of each subsequent
balance sheet date.
Any change in fair value of these instruments will be recorded as
non-operating, non-cash income or expense at each reporting date. If the fair
value of the derivatives is higher at the subsequent balance sheet date, we
will record a non-operating, non-cash charge. If the fair value of the
derivatives is lower at the subsequent balance sheet date, we will record
non-operating, non-cash income. The derivative and warrant liabilities are
recorded as long-term liabilities in the consolidated balance sheet.
Revenue Recognition
--------------------
Revenue is recognized when earned. The Company recognizes revenue on its
software products in accordance with all applicable accounting regulations,
including the AICPA's Statement of Position ("SOP") 97-2, "Software Revenue
Recognition", and SOP 98-9, "Modification of SOP 97-2, With Respect to Certain
Transactions."
For sales of communication products, our revenue recognition policies are in
compliance with Staff Accounting Bulletin ("SAB") 104. Sales revenue is
recognized at the date of shipment to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no
other significant obligations by us exist and collectibility is reasonably
assured. Payments received before all of the relevant criteria for revenue
recognition are satisfied are recorded as deferred revenue in the accompanying
consolidated balance sheets.
-28-
Revenues and costs of revenues from consulting contracts are recognized during
the period in which the service is performed.
The Company has contracts with various governments and governmental agencies.
Government contracts are subject to audit by the applicable governmental
agency. Such audits could lead to inquiries from the government regarding the
allowability of costs under applicable government regulations and potential
adjustments of contract revenues. To date, the Company has not been involved
in any such audits.
Income Taxes
------------
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are recognized for future tax benefits or consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
provided for significant deferred tax assets when it is more likely than not
that such assets will not be realized through future operations. We currently
have recorded a valuation allowance against all of our deferred tax assets.
We have considered future taxable income and ongoing tax planning strategies
in assessing the amount of the valuation allowance. If actual results differ
favorably from these estimates, we may be able to realize some or all of the
deferred tax assets, which could favorably impact our operating results.
Issuance of Shares for Non-Cash Consideration
---------------------------------------------
The Company accounts for the issuance of equity instruments to acquire goods
and/or services based on the fair value of the goods and services or the fair
value of the equity instrument at the time of issuance, whichever is more
reliably determinable. The majority of equity instruments have been valued at
the market value of the shares on the date issued.
The Company's accounting policy for equity instruments issued to consultants
and vendors in exchange for goods and services follows the provisions of EITF
96-18, "Accounting for Equity Instruments That are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services"
and EITF 00-18, "Accounting Recognition for Certain Transactions Involving
Equity Instruments Granted to Other Than Employees." The measurement date for
the fair value of the equity instruments issued is determined at the earlier
of (i) the date at which a commitment for performance by the consultant or
vendor is reached or (ii) the date at which the consultant or vendor's
performance is complete. In the case of equity instruments issued to
consultants, the fair value of the equity instrument is recognized over the
term of the consulting agreement. In accordance to EITF 00-18, an asset
acquired in exchange for the issuance of fully vested, nonforfeitable equity
instruments should not be presented or classified as an offset to equity on
the grantor's balance sheet once the equity instrument is granted for
accounting purposes.
Stock-Based Compensation
------------------------
Prior to January 1, 2006, the Company accounted for options and warrants
issued pursuant to its stock option plans under the recognition and
measurement provisions of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations, as
permitted by SFAS No. 123, Accounting for Stock Based Compensation. Effective
January 1, 2006, on the first day of the Company's fiscal year 2006, the
Company adopted the fair value recognition provisions of SFAS No. 123(R),
-29-
Share Based Payments, using the modified-prospective transition method. Under
this transition method, compensation cost recognized in the period of initial
adoption includes: (a) compensation cost for all share-based payments granted
and not yet vested prior to January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS No. 123,
and (b) compensation cost for all share-based payments granted subsequent to
December 31, 2005 based on the grant-date fair value estimated in accordance
with the provisions of SFAS No. 123(R). Results for prior periods have not
been restated. Since stock-based compensation expense recognized in the
statements of operations is based on awards ultimately expected to vest, the
compensation expense has been reduced for estimated forfeitures. SFAS No.
123(R) requires forfeitures to be estimated at the time of grant and revised,
if necessary, in subsequent periods if actual forfeitures differ from those
estimates.
The Company calculates stock-based compensation by estimating the fair value
of each option using the Black-Scholes option pricing model. The Company's
determination of fair value of share-based payment awards are made as of their
respective dates of grant using that option pricing model and is affected by
the Company's stock price as well as assumptions regarding a number of
subjective variables. These variables include, but are not limited to the
Company's expected stock price volatility over the term of the awards and
actual and projected employee stock option exercise behavior. The
Black-Scholes option pricing model was developed for use in estimating the
value of traded options that have no vesting or hedging restrictions and are
fully transferable. Because the Company's employee stock options have certain
characteristics that are significantly different from traded options, the
existing valuation models may not provide an accurate measure of the fair
value of the Company's employee stock options. Although the fair value of
employee stock options is determined in accordance with SFAS No. 123(R) using
an option-pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction. The calculated
compensation cost is recognized on a straight-line basis over the vesting
period of the option.
Prior to January 1, 2006, the Company accounted for employee stock-based
compensation under the "Intrinsic Value" method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," as opposed to the fair value method prescribed by SFAS No. 123,
"Share-Based Payment." Pursuant to the provisions of APB Opinion No. 25, the
Company generally did not record an expense for the value of stock-based
awards granted to employees. The Company had adopted the disclosure only
provisions of SFAS No. 123. Had the Company adopted SFAS No. 123(R) in prior
periods, the impact of that standard would have approximated the impact of
SFAS No. 123 as described in the disclosure of pro forma net loss and loss per
share in Note 2 to the Company's consolidated financial statements.
DESCRIPTION OF BUSINESS
-------------------------
The Company
We are a communications and information technology ("IT") solutions company.
We leverage our technology expertise, customer relationships and supplier
channels to develop solutions addressing markets with attractive growth
characteristics, such as network design and project management, GPS-based
mobile asset tracking and strategic IT outsourcing.
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We operate and manage two strategic business segments. Our segments and their
principal activities are:
Communications. Our communications segment addresses markets for advanced
communications solutions. Our solutions include network design and project
management, mobile asset tracking and secured mobile communications.
Consulting. Our consulting segment provides IT outsourcing and consulting
services to a broad range of U.S. and international governmental agencies and
commercial enterprises. Our consulting segment services include project
management and systems analysis, design, implementation, testing and
maintenance. We also provide short and long-term staffing solutions.
Company Strategy
Our objective is to grow the core businesses in each of our segments through a
combination of organic and acquired growth. The key elements to our strategy
are:
. Further penetrate vertical markets in which we have or are developing
reference customers. We have developed relationships with customers
in selected vertical markets, such as public safety and fleet
services. We are leveraging our relationships with these customers
and our knowledge of their needs to attract other potential customers
in these markets. In other vertical markets, we intend to replicate
the model of deploying our solutions with a leading reference customer
and leveraging this relationship and our market expertise to attract
other customers in those markets.
. Exploit cross-selling opportunities to our existing customers. We
plan to focus our sales efforts toward our existing customers to
expand the scope of the solutions we provide to them.
. Enhance our product development, sales and customer support
infrastructure. We intend to continue making investments in our
corporate infrastructure, including product development, sales,
implementation, and customer support.
. Create new value-added products and services for our customers. We
will continue to add new features and functionality to our solutions
and develop new product and service platforms that take advantage of
improvements that are being made in wireless communications, IT and
other technologies.
. Acquire complementary businesses and technologies. We intend to build
our revenue base and solutions by selectively acquiring complementary
businesses and technologies. We target companies with the following
characteristics: (1) an established market presence in their
respective fields, (2) a loyal customer base that can be used to
cross-sell other products and services, and (3) products and services
that provide recurring, predictable service and maintenance revenue
streams.
While these are the key elements of our current strategy, there can be no
guarantees that our strategy will not change, or that we will succeed in
achieving these goals individually or collectively.
Company History
We were originally incorporated as Galveston Oil & Gas, Inc. on October 3,
1996. Our initial business was in the development of oil and gas properties.
After the consummation of a series of corporate acquisitions, the nature of
our business changed from development of oil and gas properties to the
business of facilitating the consumption of information, products and services
via the Internet. We changed our name to TopClick International, Inc. on
February 5, 1999 and then, to DataLogic International, Inc. on July 23, 2001.
Since that time we have undergone a number of changes in our business strategy
and organization:
-31-
. On July 20, 2001, we completed the acquisition of DataLogic
Consulting, Inc., a Texas corporation, formed on August 20, 1993, in a
business combination with DCI being the surviving entity for
accounting purposes.
. On June 2, 2003, we acquired 51% of IPN Communications, Inc. On
November 5 2004, we acquired the remaining 49% of IPN.
. On January 13, 2004, we acquired certain GPS-based technology assets
and entered the GPS mobile asset tracking business.
. On March 1, 2005, we acquired the assets of I.S. Solutions, LLC, a
provider of technology solutions for public safety and homeland
security agencies.
. On September 15, 2005, we acquired the assets of CBSi Holdings, Inc.
to enhance our GPS-based mobile asset tracking solution and further
increase our distribution and client relationships.
. On November 21, 2005, we acquired BluBat, Inc., a provider of network
design, systems and software engineering services to further expand
our communications solutions capabilities.
. On June 30, 2006, we sold certain assets related to the our small
fleet/sub-prime lending market operations including the BounceGPS
trademark.
Operations
Communications Segment
----------------------
Our communications segment addresses markets for advanced communications
solutions, including network design and project management, mobile asset
tracking and secured mobile communications. Our September 2005 acquisition of
the assets of CBSi and November 2005 acquisition of Blubat expanded the range
of solutions offered by, and the customer base of, our communications segment.
Network Design. We provide a full range of network design, engineering,
project management and maintenance and support services for advanced
communications networks. Our applications include municipal and public safety
wireless networks, distance learning projects, and security and surveillance
over IP-based networks. Our customers include government and public safety
agencies as well as large commercial enterprises.
Mobile Asset Tracking. Our current mobile asset tracking products and
services consist of our Panther Trak asset tracking device and our vehicle and
asset management solutions, which we launched in 2005.
Our Panther Trak asset tracking device utilizes digital cellular networks and
the GPS to enable a broad range of customer-defined options in keeping track
of valuable vehicular assets. The device sends and receives a variety of
information from time to time and on demand. Such data includes location,
velocity, and time. These data are transmitted to our data center using
wireless networks and the Internet. If a wireless connection to a device is
not available, then the device will store the captured data and seek to
transmit the data when a wireless connection is available.
Our vehicle and asset management solutions combine Panther Trak, wireless
communications, GPS technology, hosted software applications and Internet
technologies to deliver an end-to-end customer solution for mobile asset
tracking. Our solutions allow control of the Panther Trak device from a
user's PC including customized functions, such as notification when the
vehicle or asset is moved, disabling the vehicle, notification of cargo door
openings, in-vehicle temperature readings, and even remotely unlocking the
vehicle doors. In an emergency situation, a covert microphone can also be
activated to listen to what is happening in the vehicle. Our vehicle and
asset management solutions include Automated Vehicle Location ("AVL") software
that interacts with mapping technology, as well as administration modules for
management of mobile assets all within a simple user interface design.
Secured Mobile Communications. We offer an encryption and two-factor
authentication product, EncrypTAC. EncrypTAC allows law enforcement agents
using mobile communications to efficiently access FBI databases without
compromising security. EncrypTAC is approved by New Mexico-based police
departments and we are expanding our sales and marketing efforts for
EncrypTAC.
-32-
Consulting Services
-------------------
Our consulting segment provides IT consulting services to a broad range of
U.S. and international governmental agencies and commercial enterprises. Our
consulting segment is led by our wholly owned subsidiary, DCI. DCI provides
complete IT consulting services that include project management and systems
analysis, design, implementation, testing and maintenance. DCI also provides
short and long-term staffing solutions.
Our March 2005 acquisition of the assets of ISS by our wholly owned
subsidiary, DataLogic New Mexico, Inc. ("DNM") expanded our technology
solutions for and customer base in the public safety and homeland security
agency market.
We plan to capitalize on the growth trends in IT outsourcing by large
corporations and public entities that look to economize their operations, move
fixed costs to variable costs, and focus on core competencies. IT outsourcing
is now a prevalent practice due to the proliferation and increased
sophistication of technology in the workplace.
We have historically provided a majority of our consulting services at client
facilities. Such consulting services have been provided under both
professional staff supplementation and project engagements. Staff
supplementation engagements are distinguishable from project engagements,
commonly referred to as outsourcing services, in that with staff engagements
the client generally maintains responsibility for the overall task, whereas
with outsourcing services, we typically assume major responsibility for the
management of the project and/or the design and implementation of specific
deliverables based upon client defined requirements. Our objective in
providing professional staffing engagements include developing a clear
understanding of the client's needs and positioning ourselves to provide
quality consulting and outsourcing services if the need arises.
Staff Augmentation/Consulting Services. We seek to provide quality consulting
services to our existing and prospective Fortune 1000 clients and governmental
agencies. We expect to create value by deploying qualified professionals to
work with clients in the Telecommunications, Energy, Financial, Governmental,
Healthcare, Manufacturing, Retail and Transportation industries. We believe
future prospects of contract renewals from existing clients are good since
DataLogic has received favorable reviews and has been extended for multiple
terms on most of the projects; however, there can be no assurance that we will
be able to renew most of these contracts, if at all.
Customers
Our customer base is predominantly located in North America. It includes small
to large commercial businesses as well as all levels of governmental agencies.
The vertical markets we currently serve include Communications, Energy,
Financial, Government, Education, Public Safety, Homeland Security,
Healthcare, Manufacturing, Retail and Transportation.
Sales and Marketing
We use a direct sales force, online marketing, reseller and distributor
programs to market our products and services. The direct sales force consists
of in-house business development personnel and account managers who market the
products and services to senior business executives, information officers,
information systems managers and others who make purchasing decisions.
Our direct sales force typically responds to proposals and makes presentations
to potential clients. Our sales employees identify prospective clients
through a variety of means, including sourcing of proposals, referrals from
existing clients, industry consultants, and trade shows and seminars. Our
sales cycle can vary significantly and typically ranges from three to twelve
months from initial contact to contract execution.
-33-
We engage in advertising and other traditional marketing techniques such as
client referrals, trade shows, and personal sales calls to targeted clients.
Relationships with our larger clients and key governmental personnel are
maintained and fostered by at least one of our executive officers. We derive a
large part of our business from repeat sales to our clients and look to
continually expand product and service offerings with existing clients.
Government Regulation
Our principal products and services do not require any special government
approval that is unique to us. We are subject to the same array of federal,
state and local laws and regulations that affect other business in the
information technology and service industry.
We have not incurred any separately identifiable costs to comply with
environmental laws.
Research & Development
During each of the last two fiscal years, the Company spent a limited amount
on research and development activities.
Intellectual Property
We rely on a combination of trade secret, trademark and copyright laws,
nondisclosure agreements and other contractual restrictions to protect our
proprietary technology.
As part of our confidentiality procedures, we generally enter into
nondisclosure agreements with our employees, consultants, distributors and
corporate alliances and limit access to and distribution of our software,
documentation and other proprietary information. In the event that a third
party breaches the confidentiality provisions or other obligations in one or
more of our agreements or misappropriates or infringes our intellectual
property or the intellectual property licensed to us by third parties, our
business could be seriously harmed. Third parties may independently discover
or invent competing technologies or reverse engineer our trade secrets,
software or other technology. Furthermore, laws in some foreign countries may
not protect our proprietary rights to the same extent as the laws of the
United States. Therefore, the measures we take to protect our proprietary
rights may not be adequate.
Third parties may claim that our current or future products or services
infringe their proprietary rights or assert other claims against us. As the
number of entrants into our markets increases, the possibility of an
intellectual property or other claim against us grows. Any intellectual
property or other claim, with or without merit, would be time-consuming and
expensive to litigate or settle and could divert management attention from
focusing on our core business. As a result of such a dispute, we may have to
pay damages, incur substantial legal fees, develop costly non-infringing
technology, if possible, or enter into license agreements, which may not be
available on terms acceptable to us, if at all. Any of these results would
increase our expenses and could decrease the functionality of our solutions,
which would make our solutions less attractive to our current or potential
customers. We have agreed in some of our agreements, and may agree in the
future, to indemnify other parties for any expenses or liabilities resulting
from claimed infringements of the proprietary rights of third parties.
While we have applied for registration of trademarks, service marks and
registered domain names in an effort to protect them, we cannot be sure of the
nature or extent of the protection afforded, since trademark registration does
not assure any enforceable rights under many circumstances and there exists
significant uncertainty surrounding legal protections of domain names.
We have registered our key Internet URLs, www.dlgi.com,
www.datalogicconsulting.com, www.blubat.com, www.ipncom.com, and
www.iphonecenter.net, and review these registrations on a regular basis to
ensure that they remain current and in good standing.
-34-
Competition
The markets for our products and services are intensely competitive. The
mobile asset management and IT consulting industries are highly fragmented and
include numerous competitors, none of which we believe dominates these
markets. The markets we service are subject to rapid changes in technology,
and we expect that competition in these market segments will increase as new
competitors enter the market. We believe our principal competitive advantages
are the features and capabilities of our products and services, and our high
level of customer support.
Many of our existing and potential competitors have substantially greater
financial, technical, marketing and distribution resources than we do.
Additionally, many of these companies have greater name recognition and more
established relationships with our target customers. Furthermore, these
competitors may be able to adopt more aggressive pricing policies and offer
customers more attractive terms than we can.
Employees
As of December 31, 2005, we had 410 employees. There were 260 part-time and
150 full-time employees including 8 employees consisting of executive,
supervisory, administrative, sales and clerical personnel. We consider our
relations with our employees to be good. We have no collective bargaining
agreements with any of our employees. We have employment agreements with
senior management and with each of our billable employees.
DESCRIPTION OF PROPERTY
------------------------
Our corporate offices are located at 18301 Von Karman Ave, Suite 250, Irvine,
California 92612. The space consists of approximately 2,900 square feet of
office space and is leased by the Company until August 31, 2006.
In addition, our subsidiary operations currently occupy leased office space in
locations around the country. A description of the occupancy terms for each of
our significant locations follows.
.. Our Phoenix operations (acquired from CBSi) occupied approximately
8,100 square feet of leased office space in Phoenix, Arizona. The term
of the lease expires on August 31, 2008. On July 6, 2006 the lease was
assumed by Huron Holdings, Inc. pursuant to the agreement with the
Company.
. Our network design operations (acquired from Blubat) occupy
approximately 3,500 square feet of leased office space in Solana
Beach, California. The term of the lease expires on December 31, 2006.
. Our public safety and secured mobile communications operations
(acquired from ISS) occupy approximately 2,310 square feet of leased
office space in Albuquerque, New Mexico. The term of the lease
expires on December 31, 2008.
We also lease sales office spaces in Los Angeles, California, Houston, Texas,
New York, New York, Providence, Rhode Island, Herndon, Virginia and Miami,
Florida. We also have personnel who provide services to the company from
their home offices. We do not subsidize home office expenses. We believe
that our current facilities are adequate for our current level of operations
and that suitable additional or alternative space will be available as needed.
LEGAL PROCEEDINGS
------------------
As of July 31, 2006, the Company was not a party to any material legal
proceedings.
-35-
MANAGEMENT
----------
The following table sets forth as of August 15, 2006, the names and
ages of our current directors and executive officers, and the principal
offices and positions with our company held by each person.
Name Age Position Since
----------------- ----- ---------------------------- --------------
Keith Moore 44 Chairman, Chief Executive January 2005
Officer and Chief Operating
Officer
Khanh D. Nguyen 41 President, Chief Financial September 2002
Officer and Director
Derek K. Nguyen 42 Chief Information Officer July 2001
and Director
Keith Moore has been the Company's Chairman of the Board of Directors, Chief
Executive Officer, and Chief Operating Officer since January 2005. Mr. Moore
was Chairman of the Board of iTechexpress, Inc. from 1999 to 2005. From 1991
till 1996, Mr. Moore served as president, Chief Operating Officer, Chief
Financial Officer, director and consultant of Activision, Inc. (NASDAQ:
ATVI). Mr. Moore is a founder of International Consumer Technologies and was
vice president, Chief Financial Officer and director since its inception in
July 1986 until its amalgamation into Activision in December 1994. Mr. Moore
earned his BS in Accounting and his Masters in Finance from Eastern Michigan
University in 1982 and 1984, respectively. Mr. Moore is also a director of
iTechexpress, Inc., Drug Consultants, Inc., Service Advantage International,
Inc. and Monarch Staffing, Inc.
Derek K. Nguyen is the Company's Chief Information Officer and a member of the
Board of Directors and served as the Company's Chief Executive Officer and
Chairman of the Board of Directors from July 20, 2001 until January 19, 2005.
Mr. Nguyen serves as the Chief Executive Officer and Chairman of DataLogic
Consulting, Inc. Under Mr. Nguyen's leadership, DataLogic Consulting, Inc.
received several awards, including Houston's 100 Fastest Growing Companies
during 1997-1998; Inc. Magazine's Fastest Growing 500 Winners in 1999; 50
Largest Minority Owned Firms in Houston in 1999-2000; and Top 100 Diversity
Owned Businesses in Texas in 2000. Mr. Nguyen has over 15 years of industry
experience and has served as a technical consultant for AT&T, FedEx,
International Paper, Exxon, Mobil, and Prudential Healthcare where he
developed various business applications. Mr. Nguyen holds a Bachelor of
Business Administration degree in Information Systems from the University of
North Texas. Mr. Nguyen is the brother of Khanh D. Nguyen, the Company's
president, Chief Financial Officer and a member of the Board of Directors.
Khanh D. Nguyen is the Company's President, Chief Financial Officer, secretary
and treasurer and a member of the Board of Directors. Mr. Nguyen was appointed
President, Chief Operating Officer and secretary on September 23, 2002 and
held the Chief Operating Officer position until January 19, 2005. Mr. Nguyen
served as the Company's Chief Financial Officer from September 23, 2002. Mr.
Nguyen has served as DataLogic Consulting, Inc's vice president, Chief
Technology Officer and board member since September 1993. From September 1999
until December 2001, Mr. Nguyen served as the president and Chief Executive
Officer of KDN Securities. Mr. Nguyen has over 15 years of practical systems
development and management experience. He has broad technical and business
knowledge in the areas of Aerospace, Defense, Financial, Retail, Hospitality,
and Transportation. He has also served as a technical consultant for Flagstar,
CSX, Levi's, Charles Schwab and others where he architected and developed
real-time and object-oriented intra/internet based systems. Mr. Nguyen holds a
Bachelor of Science degree in Electrical Engineering from Texas A&M
University. Mr. Nguyen is the brother of Derek K. Nguyen, the Company's Chief
Information Officer and a member of the Board of Directors.
-36-
EXECUTIVE COMPENSATION
----------------------
Compensation of Executive Officers
The following table shows for each of the years ended December 31,2005, 2004
and 2003, respectively, certain compensation awarded or paid to, or earned by,
the following persons (collectively, the "Named Executive Officers"):
. Keith Moore, our Chairman, Chief Executive Officer and Chief Operating
Officer;
. Khanh D. Nguyen., our President, Chief Financial Officer;
. Derek Nguyen, our Chief Information Officer; and
. Walt Camping, our former Executive Vice President
Other than the Named Executive Officers, no executive officer who was serving
in such capacity at the end of 2005 earned more than $100,000 in salary and
bonus for 2005.
SUMMARY COMPENSATION TABLE
Long-term
Compensation
--------------------------
Annual Compensation Awards Payouts
Name and --------------------------------------------------------
Principal Salary Bonus Other Annual Stock Options LTIP
Position Year ($) ($) Compensation Awards SARs(#) Payouts
------------------- ----- --------- ------ ------------ ------- --------- -------
Keith Moore
Chairman,
Chief Executive
Officer, and
Chief Operating
Officer (1)(2) 2005 $127,436 None $ - - 3,400,000 None
Khanh D. Nguyen
President, Chief 2005 $145,475 None $ - - 900,000 None
Financial Officer 2004 $102,500 None $ - - 565,000 None
and Director (1) 2003 $ 65,000 None $ - 323,864 550,000 None
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Derek Nguyen
Chief Information 2005 $147,244 None $ - - 900,000 None
Officer and 2004 $102,500 None $ - - 565,000 None
Director (1)(3) 2003 $ 65,000 None $ - 323,864 550,000 None
Walt Camping
Executive Vice
President and
Director (1)(4) 2005 $ 35,000 None $ - - 1,025,000 None
(1) During the year ended December 31, 2005, the Company issued 276,438 shares
with a value of $76,667 to each of the Chief Executive Officer, Chief
Financial Officer and Chief Information Officer and the Company issued
69,121 shares with a value of $17,500 to the Executive Vice President,
which is included in the salary column. During the year ended December 31,
2004, the Company issued 136,413 shares with a value of $37,500 to each of
the Chief Financial Officer and Chief Information Officer, which is
included in the salary column.
(2) Keith Moore was named our Chief Executive Officer effective January 18,
2005.
(3) Derek Nguyen was our Chief Executive Officer for all of 2003 and 2004
through January 18, 2005.
(4) Walt Camping was named our Executive Vice President effective September
15, 2005. Mr. Camping's employment with the Company terminated on July
6, 2006. Mr. Camping has 512,500 vested options with an exercise period
until December 31, 2006.
We entered into written employment agreements with Keith Moore, Khanh Nguyen
and Derek Nguyen on August 18, 2005 (effective as of January 19, 2005). The
employment agreements are for a two-year term expiring January 19, 2007.
Under the terms of the agreements, those officers will earn an annual salary
of $140,000 in 2005 and $160,000 in 2006, payable in a combination of cash and
Common Stock over the term of the agreements. Further, they shall receive
stock option grants of no less than 100,000 shares per quarter vesting over
two years with an exercise price equal to the average closing price for the
our Common Stock for the five trading days immediately preceding and following
the grant date. If we terminate the agreements other than for cause, the
officer would be entitled to receive unpaid salary for the remaining term of
the agreement, plus a severance payment equal to one year's base salary and
benefits. The officer would also be entitled vesting of all unvested stock
options held by the officer.
We entered into an employment agreement with Walt Camping on September 15,
2005. The employment agreement was for a term of three years. Mr. Camping
was entitled to an annual base salary of $120,000. Mr. Camping was eligible
to participate in a bonus pool (with other employees of the Company) equal to
2.1% of our collected revenue from our GPS-based solutions. The employment
agreement with Mr. Camping was terminated on July 6, 2006. In consideration of
the termination of the employment agreement and mutual release of any claims,
we transferred to Mr. Camping $110,000 of the principal amount of a note
payable to us from MBSi Capital Corp., Inc. ("MBSi"), of which Mr. Camping is
a majority owner. We also agreed to accept a $50,000 payment from MBSi in
satisfaction of MBSi's remaining obligations to us. Concurrently with the
termination of his employment agreement, Mr. Camping resigned as a member of
our Board of Directors. Mr. Camping's resignation was not because of a
disagreement with us on any matter relating to our operations, policies, or
practices.
Option Grants in 2005
The following table provides details regarding stock options granted in 2005
to the Named Executive Officers:
% of Total
Number of Securities Options Granted Exercise
Underlying Options To Employees Price
Name Granted In 2005 Per Share Expiration Date
------------- ---------------------- ----------------- ---------- --------------
Keith Moore 2,500,000 27.9% $0.36 March 31, 2010
Keith Moore 100,000 1.1% $0.33 March 31, 2008
Keith Moore 500,000 5.6% $0.23 June 30, 2008
Keith Moore 200,000 2.2% $0.25 Sept. 30, 2008
Keith Moore 100,000 1.1% $0.23 Dec. 30, 2008
Keith Nguyen 100,000 1.1% $0.33 March 31, 2008
Keith Nguyen 500,000 5.6% $0.23 June 30, 2008
Keith Nguyen 200,000 2.2% $0.25 Sept. 30, 2008
Keith Nguyen 100,000 1.1% $0.23 Dec. 30, 2008
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Derek Nguyen 100,000 1.1% $0.33 March 31, 2008
Derek Nguyen 500,000 5.6% $0.23 June 30, 2008
Derek Nguyen 200,000 2.2% $0.25 Sept. 30, 2008
Derek Nguyen 100,000 1.1% $0.23 Dec. 30, 2008
Walt Camping 1,025,000 (1) 5.7% $0.28 Dec. 31, 2006
(1) Walt Camping was named our Executive Vice President effective September 15, 2005.
Mr. Camping's employment with the Company terminated on July 6, 2006. Mr. Camping
has 512,500 vested options with an exercise period until December 31, 2006.
Aggregated Option Exercises in 2005 and Year-End Option Values
The following table shows information regarding the number and value of unexercised in-the-money
stock options held by the Named Executive Officers as of December 31, 2005.
Number of Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money
Acquired on Value Options at Year-End: Options at Year-End:
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
------------- ----------- ------------ ------------ ------------- ----------- -------------
Keith Moore 0 $ 0 1,580,000 1,820,000 $ 0 $ 0
Keith Nguyen 130,000 $ 19,500 1,567,625 747,375 $ 0 $ 19,313
Derek Nguyen 130,000 $ 19,500 1,567,625 747,375 $ 0 $ 19,313
Walt Camping 0 $ 0 1,025,000 (1) 0 $ 0 $ 0
(1) Walt Camping was named our Executive Vice President effective September 15, 2005.
Mr. Camping's employment with the Company terminated on July 6, 2006. Mr. Camping
has 512,500 vested options with an exercise period until December 31, 2006.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
------------------------------------------------
The Company had a note payable to a director of the Company. The note was
unsecured and had an annual percentage rate ("APR") of 12% and was due on
September 30, 2003. The note had an outstanding balance of $4,712 as of
December 31, 2005 and $77,813 as of December 31, 2004. The note was repaid
during the first quarter of 2006.
The Company had a note payable to the Chief Information Officer of the
Company. The note was unsecured and had an APR of 10% and was due on January
21, 2004. The note had an outstanding balance of $4,712 as of December 31,
2005 and $77,813 as of December 31, 2004. The note was repaid during the
first quarter of 2006.
Interest expense on these notes for the years ended December 31, 2005 and 2004
amounted to $5,915 and $9,975, respectively.
As part of the purchase of certain assets of CBSi Holdings, Inc., we assumed
an agreement with MBSi Capital Corp., ("MBSi") a company majority owned by a
director and executive officer of the Company. Under the terms of the
agreement, MBSi will provide customer and technical support for BounceGPS
clients of the Company on a per unit basis. To date no payments were made
under this agreement.
Our notes receivable include a $100,000 note receivable purchased by the
Company in the CBSi acquisition and an additional advances of $30,000 during
the year ended December 31, 2005, and $50,000 during the three months ended
March 31, 2006. On July 6, 2006, the Company and Walt Camping terminated
the employment agreement between them. Mr. Camping had served as an Executive
Vice President of the Company since September 2005 with responsibility for
sales of asset management solutions to the small fleet and sub-prime lending
markets. In consideration of the termination of the employment agreement
and mutual release of any claims, the Company transferred to Mr. Camping
$110,000 of the principal amount of a note receivable to the Company from
MBSi. The Company also agreed to accept a $50,000 payment from MBSi in
satisfaction of MBSi's remaining obligations to the Company. We
recorded interest income of $2,668 related to the note during the year ended
December 31, 2005.
-39-
On March 21, 2006, we entered into two agreements with Monarch Bay Management
Company, L.L.C. ("MBMC"): (a) an agreement for corporate development strategy
and execution services and (b) an agreement for chief financial officer
services. Keith Moore, our Chief Executive Officer, is a member of MBMC.
Corporate Development Services Agreement. Under the corporate development
services agreement with MBMC, we will pay to MBMC a monthly fee of $7,000 (or
$14,000 in the case of the initial payment). The monthly fee is payable
$3,000 in cash and $4,000 in shares of our common stock ($6,000 in cash and
$8,000 in shares of our common stock in the case of the initial payment). The
number of shares of our common stock to be issued will calculated based on the
average closing price of our common stock for the last ten days of each month
in which the monthly fee is earned. We will also reimburse MBMC for certain
expenses in connection with providing services to us. In addition, we will
grant to MBMC on a quarterly basis commencing April 1, 2006, an option to
purchase 75,000 shares (or 50,000 shares in the case of the initial grant) of
our common stock at an exercise price equal to 120% of the average closing
price of our common stock for the last ten days of the quarter for which the
option is granted; provided that if certain milestones specified in the
agreement are achieved the exercise price of the options will be reduced to
100% of the average closing price of our common stock for the last ten days of
the quarter for which the option is granted. The options will be exercisable
for a period of five years following the date of grant. The initial term of
the agreement expires on December 31, 2006 and continues thereafter on a
month-to-month basis unless terminated by either party.
Chief Financial Officer Services Agreement. Under the chief financial officer
services agreement with MBMC, we will pay to MBMC a monthly fee of $6,250 in
cash. We will also reimburse MBMC for certain expenses in connection with
providing services to us. The initial term of the agreement expires on March
31, 2007 and renews thereafter on an annual basis unless terminated by either
party.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
---------------------------------------------------------------
The following table sets forth information as of August 15, 2006, with
respect to the beneficial ownership of the common stock by (i) each director
and officer of the Company, (ii) all directors and officers as a group and
(iii) each person known by the Company to own beneficially 5% or more of the
common stock:
Name and Address of Shares of Common Stock Beneficially Owned (1)
Beneficial Owners Number Percent
-------------------- -------------------------- -------------------
Derek K. Nguyen 9,645,694 (2) 17.9%
18301 Von Karman Ave.
Suite 250
Irvine, CA 92612
Khanh D. Nguyen 8,348,637 (2) 15.5%
18301 Von Karman Ave.
Suite 250
Irvine, CA 92612
Walt Camping 3,606,894 (3) 6.7%
5608 North 27th Ave.
Phoenix, AZ 85017
Keith Moore 3,052,507 (4) 5.7%
18301 Von Karman Ave.
Suite 250
Irvine, CA 92612
All officers and
directors as a group
(3 people) 21,046,838 (2,4) 39.1%
-40-
(1) The number of shares of Common Stock owned are those "beneficially
owned" as determined under the rules of the SEC, including any shares of
Common Stock as to which a person has sole or shared voting or investment
power and any shares of Common Stock which the person has the right to
acquire within 60 days through the exercise of any option, warrant or
right. Shares of Common Stock subject to an option or warrant currently
exercisable, or exercisable within 60 days are deemed outstanding for
computing the percentage of the person holding such option or warrant, but
are not deemed outstanding for computing the percentage of any other
person. As of July 31, 2006 there were 54,234,293 shares of
Common Stock outstanding.
(2) Includes 1,520,875 shares issuable upon currently exercisable
stock options.
(3) Includes 3,003,534 shares issued to the shareholders of CBSi in connection
with the Company's acquisition of the assets of CBSi. Mr. Camping, the
majority shareholder of CBSi, beneficially owns these shares. Includes
512,500 shares issuable upon currently exercisable stock options.
(4) Includes 2,705,000 shares issuable upon currently exercisable
stock options.
DESCRIPTION OF SECURITIES
--------------------------
Common Stock
Our Certificate of Incorporation authorizes the issuance of 100,000,000 shares
of Common Stock, $.001 par value per share. Holders of shares of Common Stock
are entitled to one vote for each share on all matters to be voted on by the
stockholders. Holders of Common Stock do not have cumulative voting rights.
Holders of shares of Common Stock are entitled to share ratably in dividends,
if any, as may be declared, from time to time by the Board of Directors in its
discretion, from funds legally available therefor. In the event of a
liquidation, dissolution, or winding up of the Company, the holders of shares
of Common Stock are entitled to share pro rata all assets remaining after
payment in full of all liabilities. Holders of Common Stock have no preemptive
or other subscription rights, and there are no conversion rights or redemption
or sinking fund provisions with respect to such shares.
Preferred Stock
Our Certificate of Incorporation currently does not authorize the issuance of
shares of preferred stock.
Options and Warrants
As of July 31, 2006, there were options to purchase 9,807,473 shares
of our Common Stock outstanding and warrants to purchase 9,215,000 shares of
our Common Stock outstanding. Included in our outstanding options and
warrants are the following:
Laurus Option. In connection with our January 2006 secure term note private
placement, we issued to Laurus Master Fund, Ltd. an option to purchase
1,560,000 shares of our common stock for $.001 per share. The option can be
exercised from time to time without expiration. The shares of Common Stock
issuable upon exercise of the option are among the shares being offered by the
selling stockholders pursuant to this Prospectus.
Class A Warrants. In connection with our May 2006 private placement, we
issued to the investors Class A common stock purchase warrants to purchase
3,250,000 shares of our Common Stock. The Class A warrants have an exercise
price of $0.35 per share, are exercisable beginning November 23, 2006 and have
a 5-1/2 year term, expiring November 23, 2011. The Class A warrants are
exercisable on a cashless basis if the shares of Common Stock underlying the
warrants are not then registered for resale pursuant to an effective
registration statement on or before May 23, 2007. The shares of Common Stock
issuable upon exercise of the Class A warrants are among the shares being
offered by the selling stockholders pursuant to this Prospectus.
-41-
Class B Warrants. In connection with our May 2006 private placement, we
issued to the investors Class B common stock purchase warrants to purchase
2,031,250 shares of our Common Stock. The Class B warrants have an exercise
price of $0.45 per share, are exercisable beginning November 23, 2006 and have
a 5-1/2 year term, expiring November 23, 2011. The Class B warrants are
exercisable on a cashless basis if the shares of Common Stock underlying the
warrants are not then registered for resale pursuant to an effective
registration statement on or before May 23, 2007. The shares of Common Stock
issuable upon exercise of the Class B warrants are among the shares being
offered by the selling stockholders pursuant to this Prospectus.
Placement Agent Warrants. In connection with our May 2006 private placement,
we issued to the placement agent common stock purchase warrants to purchase
1,072,500 shares of our Common Stock. Of these, warrants to purchase 650,000
shares of Common Stock have an exercise price of $0.20 per share, warrants to
purchase 260,000 shares of Common Stock have an exercise price of $0.35 per
share, and warrants to purchase 162,500 shares of Common Stock have an
exercise price of $0.45 per share. Each of the warrants is exercisable
beginning November 23, 2006 and expiring on November 23, 2011 and may be
exercised on a cashless basis throughout their term. The shares of Common
Stock issuable upon exercise of the placement agent warrants are among the
shares being offered by the selling stockholders pursuant to this Prospectus.
Transfer Agent
The transfer agent for our Common Stock is Signature Stock Transfer, Inc.,
2301 Ohio Drive, Suite 100, Plano, TX 75093.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR
--------------------------------------------------------
SECURITIES ACT LIABILITIES
---------------------------
Section 145 of the General Corporation Law of the State of Delaware permits a
corporation to indemnify its officers and directors to the extent provided in
that statute. Our certificate of incorporation and bylaws contain provisions
intended to indemnify officers and directors against liability to the fullest
extent permitted by Delaware law.
Under Delaware law, directors and officers may be indemnified against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
in connection with any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation) if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. In
stockholders' derivative actions, indemnification extends only to expenses
(including attorneys' fees) incurred in connection with defense or settlement
of such an action, except that no indemnification shall be made in the event
such person shall have been adjudged to be liable to the corporation, unless
and only to the extent that a proper court shall have determined that such
person is fairly and reasonably entitled to indemnity for such expenses.
Delaware law also permits a corporation to maintain insurance on behalf of its
officers and directors against liabilities incurred while acting in such
capacities.
Our certificate of incorporation and bylaws contain provisions intended to
provide indemnification to our officers and directors. Our certificate
provides that we shall, to the fullest extent permitted by the provisions of
Section 145 of the Delaware General Corporation Law, indemnify any and all
persons whom we have power to indemnify from and against any and all expenses,
liabilities, or other matters referred to in or covered by said section. Our
bylaws contain a similar provision requiring indemnity of our officers and
directors to the fullest extent authorized by Delaware law.
-42-
Our directors and officers are covered by insurance (with certain exceptions
and limitations) which indemnifies them against losses and liabilities arising
from certain alleged "wrongful acts," including alleged errors or
misstatements or misleading statements, or certain other alleged wrongful acts
or omissions constituting neglect or breach of duty, including liability under
the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant
to the foregoing, or otherwise, we have been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
LEGAL MATTERS
---------------
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby are being passed upon for us by Weed & Co. LLP, Irvine,
California. Weed & Co. LLP has not represented the selling stockholders in
connection with such registration.
EXPERTS
--------
The audited financial statements as of December 31, 2005 included in this
Prospectus have been included in reliance on the report of Corbin & Company,
LLP ("Corbin"), our current independent registered public accounting firm, as
indicated in their report thereon appearing elsewhere herein, and are included
in reliance upon the authority of such firm as experts in accounting and
auditing. The audited financial statements as of December 31, 2004 included
in this Prospectus have been included in reliance on the report of Kabani &
Co., Inc. ("Kabani"), our prior independent registered public accounting firm,
as indicated in their report thereon appearing elsewhere herein, and are
included in reliance upon the authority of such firm as experts in accounting
and auditing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
-------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
On June 8, 2005, we dismissed Kabani & Company, Inc., as our independent
auditor. Kabani reported on our financial statements for the fiscal year ended
December 31, 2004. We are not aware of any past disagreements between us and
Kabani on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure. There were no
"reportable events" (as such term is defined in Item 304 of Regulation S-K)
that occurred within our fiscal years ended December 31, 2004 and 2003, nor
any subsequent interim period preceding the replacement of Kabani. The
decision to change accountants was recommended and approved by our Board of
Directors.
Effective June 3, 2005, we appointed Corbin & Company, LLP, which appointment
was approved by our Board of Directors, to act as our independent auditors.
During our two most recent fiscal years and any subsequent interim period
prior to the engagement of Corbin, neither we nor anyone on our behalf
consulted with Corbin regarding either (1) the application of accounting
principles to a specified transaction, either contemplated or proposed, or the
type of audit opinion that might be rendered on our financial statements, or
(2) any matter that was either the subject of a "disagreement" or a
"reportable event" (each as defined in Item 304 of Regulation S-K).
WHERE YOU CAN FIND MORE INFORMATION
----------------------------------
We file annual and current reports, proxy statements and other information
with the Securities and Exchange Commission. Copies of our reports, proxy
statements and other information may be inspected and copied at the public
reference facility maintained by the SEC at 100 F Street N.E., Washington,
D.C. 20549, or at the SEC's regional offices at Seven World Trade Center, Room
4300, New York, New York 10281, and at 75 W. Jackson Blvd., Suite 900,
Chicago, Illinois 60604. Copies of these materials also can be obtained by
mail at prescribed rates from the Public Reference Section of the SEC, 100 F
Street N.E., Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330.
The SEC also maintains a web site at http://www.sec.gov that contains reports,
proxy statements and other information regarding us.
-43-
In addition, we maintain a web site that contains information regarding our
company, including copies of reports, proxy statements and other information
we file with the SEC. The address of our web site is www.dlgi.com. Our web
site, and the information contained on that site, or connected to that site,
are not incorporated into and do not constitute a part of this Prospectus.
We have filed a registration statement on Form SB-2 with the SEC for the
Common Stock offered by the selling stockholders under this Prospectus. This
Prospectus does not include all of the information contained in the
registration statement. You should refer to the registration statement and its
exhibits for additional information that is not contained in this prospectus.
Whenever we make reference in this Prospectus to any of our contracts,
agreements or other documents, you should refer to the exhibits attached to,
or incorporated by reference into, the registration statement for copies of
the actual contract, agreement or other document.
You should rely only on the information contained in this Prospectus. We have
not authorized any other person to provide you with different information.
This Prospectus may only be used where it is legal to sell these securities.
The information in this Prospectus is accurate as of the date on the front
cover. You should not assume that the information contained in this Prospectus
is accurate as of any other date.
-44-
INDEX TO FINANCIAL STATEMENTS
------------------------------
Report of Corbin & Company, LLP, Independent
Registered Public Accounting Firm.......................................F-1
Report of Kabani & Co., Inc., Independent
Registered Public Accounting Firm.......................................F-2
Consolidated Balance Sheets as of December 31, 2005 and 2004 (audited)....F-3
Consolidated Statements of Operations and Comprehensive Loss
For the Years Ended December 31, 2005 and 2004 (audited)...............F-4
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended December 31, 2005 and 2004 (audited).............F-5-6
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2005 and 2004(audited)..............F-7-9
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2005 and 2004 (audited)...........F-10-40
Unaudited Consolidated Balance Sheets as of June 30, 2006 and
2005 (restated)........................................................F-41
Unaudited Consolidated Statements of Operations and Comprehensive
Loss-Three and Six Months Ended June 30, 2006 and 2005 (restated).....F-42
Unaudited Consolidated Statements of Cash Flows -
Three and Six Months Ended June 30, 2006 and 2005 (restated).......F-43-44
Notes to Unaudited Consolidated Financial Statements
Three and Six Months Ended June 30, 2006 and 2005 (restated).......F-45-80
The following financial statements required by Item 310 of Regulation S-B are
stated in U.S. dollars and are prepared in accordance with U.S. Generally
Accepted Accounting Principles.
-45-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
---------------------------------------------------------
To the Stockholders and Board of Directors
Datalogic International, Inc.
We have audited the accompanying consolidated balance sheet of Datalogic
International, Inc. and subsidiaries (the "Company") as of December 31, 2005
and the related consolidated statements of operations and comprehensive loss,
stockholders' equity and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Datalogic International, Inc. and subsidiaries as of December 31, 2005, and
the results of their operations and their cash flows for the year then ended
in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company has incurred recurring losses and has
yet to be successful in establishing profitable operations. These factors,
among others, raise substantial doubt about its ability to continue as a going
concern. Management plans regarding those matters are also described in Note
1. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ Corbin & Company, LLP
CORBIN & COMPANY, LLP
Irvine, California
March 31, 2006
F-1
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
---------------------------------------------------------
To the Stockholders and Board of Directors
Datalogic International, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheet of DataLogic
International, Inc., a Delaware Corporation and subsidiaries (collectively,
"the Company") as of December 31, 2004 and the related consolidated statements
of operations and comprehensive loss, stockholders' deficit and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audit of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Datalogic International, Inc. and subsidiaries as of December 31, 2004, and
the results of their operations and cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States
of America.
The Company's consolidated financial statements are prepared using the
generally accepted accounting principles applicable to a going concern, which
contemplates the realization of assets and liquidation of liabilities in the
normal course of business. The Company incurred net losses of $1,482,456 and
$911,582 during the years ended December 31, 2004 and 2003, respectively.
There was an accumulated deficit of $3,407,597 as of December 31, 2004, and
total liabilities exceeded total assets by $1,050,402 as of December 31, 2004.
These factors as discussed in Note 1 to the consolidated financial statements,
raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1 referred to above. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
As discussed in note 1, the consolidated financial statements for the year
ended December 31, 2004 have been restated.
/s/ Kabani & Company, Inc.
KABANI & COMPANY, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Huntington Beach, California
April 13, 2005, except for note 1, which is March 30, 2006
F-2
47
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
2005 2004
-------------- --------------
(Restated)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 456,780 $ 643,847
Accounts receivable, net of allowance
for doubtful accounts of $131,585 and
$1,395,797, respectively 1,886,505 1,630,570
Marketable securities available for sale 7,200 16,000
Inventories 1,068,575 53,526
Prepaid expenses and other current assets 111,090 104,750
------------- -------------
Total current assets 3,530,150 2,448,693
RESTRICTED CASH - 1,258,689
NOTE RECEIVABLE 130,000 -
PROPERTY AND EQUIPMENT, net 194,710 67,230
OTHER ASSETS:
Software development costs and licenses, net 532,008 18,243
Loan origination costs, net 155,498 259,166
Client lists 734,307 -
Goodwill 288,000 -
Deposits 26,435 9,111
------------- -------------
$ 5,591,108 $ 4,061,132
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,575,411 $ 874,352
Accrued payroll and related taxes 614,277 573,001
Current portion of deferred revenue 462,371 -
Notes payable - officers 9,424 174,624
Current portion of notes payable 274,233 433,200
Current portion of convertible debt, net of
debt discount of $29,461 and $0, respectively 1,258,418 636,360
------------- -------------
Total current liabilities 4,194,134 2,691,537
------------- -------------
LONG-TERM LIABILITIES:
Notes payable, net of current portion 19,717 -
Long-term portion of convertible debt, net of
discount of $816,667 and $1,416,991, respectively - 787,558
Derivative and warrant liabilities 331,578 1,632,439
Deferred tax liability 288,000 -
Deferred revenue, net of current portion 31,047 -
------------- -------------
Total long-term liabilities 670,342 2,419,997
------------- -------------
Total liabilities 4,864,476 5,111,534
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value; 100,000,000
shares authorized; 45,083,357 and 39,113,979
shares issued and outstanding at December 31,
2005 and 2004, respectively 45,083 39,114
Additional paid-in-capital 4,376,131 2,510,480
Shares to be issued, 398,947 and 50,401 shares
at December 31, 2005 and 2004, respectively 139,660 42,457
Unamortized consulting fees (6,374) (47,356)
Comprehensive income - (187,500)
Accumulated deficit (3,827,868) (3,407,597)
------------- -------------
Total stockholders' equity (deficit) 726,632 (1,050,402)
------------- -------------
$ 5,591,108 $ 4,061,132
============= =============
See reports of independent registered public accounting firms and
notes to the consolidated financial statements.
F-3
48
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
-------------- --------------
(Restated)
Net revenue $ 17,522,795 $ 14,255,054
Cost of revenue 15,369,447 11,593,063
-------------- --------------
Gross profit 2,153,348 2,661,991
Operating expense:
Bad debt expense 19,439 1,395,797
Consulting expense 254,710 1,018,491
Depreciation and amortization 246,051 102,167
General and administrative expenses 2,243,872 1,136,975
-------------- --------------
Total operating expense 2,764,072 3,653,430
-------------- --------------
Loss from operations (610,724) (991,439)
Non-operating income (expense):
Interest expense, net (899,985) (538,827)
Change in fair value of derivative and
warrant liabilities 1,300,861 110,636
"Other-than-temporary" write-down of marketable
securities available for sale (196,300) -
Factoring expense - (99,926)
Loss on sale of assets (10,923) -
-------------- --------------
Total non-operating income (expense) 193,653 (528,117)
-------------- --------------
Loss before provision for income tax
and minority interest allocation (417,071) (1,519,556)
Provision for income tax (3,200) (1,600)
Minority interest allocation - 38,700
-------------- --------------
Net loss (420,271) (1,482,456)
Other comprehensive loss:
Temporary decrease in fair value of marketable
securities available for sale (8,800) (45,000)
Reclassification of decrease in fair value of
marketable securities available for sale to
"other-than-temporary" decline in fair value 196,300 -
-------------- --------------
Comprehensive loss $ (232,771) $ (1,527,456)
============== ==============
Loss per share basic and diluted $ (0.01) $ (0.04)
============== ==============
Basic and diluted
weighted average shares outstanding* 41,382,140 37,289,741
============== ==============
* Weighted average number of shares used to compute basic and diluted loss
per share is the same since the effect of dilutive securities is
anti-dilutive for the years ended December 31, 2005 and 2004.
See reports of independent registered public accounting firms
and notes to the consolidated financial statements.
F-4
49
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Common Stock Accumulated
--------------------- Additional Unamortized Shares Other Total
Number of Paid-in Treasury Consulting To be Comprehensive Accumulated Equity
Shares Amount capital Stock Fees Issued Loss Deficit (Deficit)
----------- --------- ------------ ---------- ---------- --------- ------------- ------------ -------------
Balance,
January 1,
2004 36,459,996 36,460 1,590,385 (10,000) - - (142,500) (1,925,141) (450,796)
Issuance of
shares for
consulting
services 914,599 915 466,868 - - - - - 467,783
Issuance of
shares for
compensation 89,355 89 49,296 - - - - - 49,385
Issuance of
shares for
legal services 150,000 150 62,700 - (47,356) - - - 15,494
Issuance of
shares for
management
services 370,370 370 99,630 - - - - - 100,000
Issuance of
shares for
director
compensation 25,000 25 10,225 - - - - - 10,250
Non-employee
warrants
reclassified
to derivative
and warrant
liabilities
(restated) - - (30,487) - - - - - (30,487)
Sale of
treasury
stock - - 140,904 10,000 - - - - 150,904
Comprehensive
loss on
marketable
securities - - - - - - (45,000) - (45,000)
Stock issued
for loan
payment 117,159 117 77,571 - - - - - 77,688
Shares to
be issued - - - - - 42,457 - - 42,457
Stock options
exercised 987,500 988 43,387 - - - - - 44,375
Net loss
(restated) - - - - - - - (1,482,456) (1,482,456)
----------- --------- ------------ ---------- ---------- --------- ------------- ------------ -------------
F-5
50
Balance at
December 31,
2004 (restated) 39,113,979 39,114 2,510,479 - (47,356) 42,457 (187,500) (3,407,597) (1,050,403)
Issuance of
shares as
compensation 1,330,005 1,330 517,243 - 40,982 - - - 559,555
Decline in
value of
marketable
securities
available for
sale - - - - - - (8,800) - (8,800)
"Other-than-
temporary"
write down of
marketable
securities
available
for sale - - - - - - 196,300 - 196,300
Shares issued
for convertible
debt and
interest payment 300,113 300 125,748 - - - - - 126,048
Shares
issued for
acquisitions 4,159,260 4,159 1,195,841 - - - - - 1,200,000
Stock options
exercised for
payment of
notes payable
officers 160,000 160 23,840 - - - - - 24,000
Shares committed
to be issued for
payment of
accounts payable - - - - - 2,000 - - 2,000
Shares committed
to be issued for
payment of
compensation - - - - - 73,003 - - 73,003
Shares committed
to be issued for
stock options
exercised for
payment of notes
payable - officers - - - - - 22,200 - - 22,200
Stock options
exercised for cash 20,000 20 2,980 - - - - - 3,000
Net loss - - - - - - - (420,271) (420,271)
----------- --------- ------------ ---------- ---------- --------- ------------- ------------ -------------
Balance at
December 31,
2005 45,083,357 $ 45,083 $ 4,376,131 $ - $ (6,374) $ 139,660 $ - $(3,827,868) $ 726,632
=========== ========= ============ ========== ========== ========= ============= ============ =============
See reports of independent registered public accounting firms
and notes to the consolidated financial statements.
F-6
51
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
-------------- --------------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (420,271) $ (1,482,456)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 246,051 102,167
Amortization of discount and loan
Origination costs on convertible debt 570,863 295,597
Change in fair value of derivative and
warrant liabilities (1,300,861) (110,636)
Bad debt expense 19,439 1,395,797
Issuance of or commitment to issue shares
for compensation and services 569,107 732,725
Issuance of shares for interest 19,987 11,688
"other-than temporary" write-down of
marketable securities available for sale 196,300 -
Loss on sale of assets 10,923 -
Minority interest - (38,700)
(Increase) decrease in operating assets, net
of acquisitions:
Accounts receivable 131,477 (1,492,823)
Inventories (139,394) 12,699
Prepaid expenses and other current assets 56,214 (151,132)
Deposits (17,324) (2,499)
Increase (decrease) in operating liabilities,
net of acquisitions:
Accounts payable and accrued expenses (174,879) 632,353
Deferred revenue 101,165 (125,000)
-------------- --------------
Total adjustments 289,068 1,262,236
-------------- --------------
Net cash used in operating activities (131,203) (220,220)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received in acquisitions, net of cash paid 266,371 -
Proceeds from sale of treasury shares - 150,904
Advances on notes receivable (30,000) -
Proceeds from sale of assets 9,143 -
Acquisition of property and equipment and
costs incurred for software development (444,833) (21,497)
-------------- --------------
Net cash provided by (used in)
investing activities (199,319) 129,407
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible debt - 3,000,000
(Increase) decrease in restricted cash 1,258,689 (1,258,689)
Payment of debt issuance costs - (311,000)
Payments to factor - (854,301)
Proceeds from loans - 458,824
Payment of convertible debt (487,932) (93,091)
Payment of notes payable (630,302) (213,825)
Payment on line of credit - (429,406)
Proceeds from line of credit - 182,631
Proceeds from stock options 3,000 -
-------------- --------------
Net cash provided by financing activities 143,455 481,143
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (187,067) 390,330
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 643,847 253,517
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 456,780 $ 643,847
============== ==============
F-7
52
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the year $ 219,838 $ 194,462
Income taxes paid during the year $ 3,200 $ 1,600
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
2005
The Company issued 1,330,005 shares of common stock for management and consulting
services amounting to $496,105 during the year ended December 31, 2005. The Company
also committed to issue 290,251 shares for services amounting to $73,003. The Company
amortized prepaid legal fees paid in stock in 2004 of $40,982 during the year ended
December 31, 2005.
During the year ended December 31, 2005, the Company issued 252,525 and 47,588 shares
of common stock in payment of principal and interest of $106,061 and $19,987,
respectively, on the notes payable.
On March 1, 2005, the Company issued 117,664 shares amounting to $50,000 for the
acquisition of ISS (see Note 19).
On March 31, 2005, the Company issued 20,000 shares of its common stock for the
exercise of stock options with an exercise price of $0.15 per share for cash proceeds
of $3,000.
On September 15, 2005, the Company acquired the assets of CBSi in exchange for
3,003,534 shares of common stock valued at $850,000 (see Note 19).
On October 1, 2005, the Company converted 160,000 stock options with a strike price of
$0.15 per share for a total exercise value of $24,000 as a payment against notes
payable - officers.
On November 21, 2005, the Company acquired BluBat, Inc. ("BluBat") in exchange for
1,038,062 shares of common stock valued at $300,000 (see Note 19).
On December 31, 2005, the Company committed to convert 20,000 stock options with a
strike price of $0.15 per share for a total exercise value of $3,000 against notes
payable - officers.
On December 31, 2005, the Company committed to convert 80,000 stock options with a
strike price of $0.24 per share for a total exercise value of $19,200 against notes
payable - officers.
On December 31, 2005, the Company committed to issue 8,696 shares for accounts payable
amounting to $2,000.
F-8
53
2004
During the year ended December 31, 2004, the Company issued 914,599 shares for
consulting services rendered by consultants amounting to $467,783 of which $378,696
has been expensed for the year ended December 31, 2004.
The Company issued 89,355 shares for compensation amounting to $49,385.
The Company issued 150,000 shares for legal services amounting to $62,850 of which
$15,493 has been expensed for the year ended December 31, 2004.
The Company issued 370,370 shares of common stock for management fees amounting to
$100,000 of which $100,000 has been expensed for the year ended December 31, 2004.
The Company issued 25,000 shares for director's compensation amounting to $10,250.
The Company reclassified additional paid-in-capital of $30,487 to derivative and
warrant liabilities.
The Company received $150,904 from the sale of treasury stock.
The Company issued 117,159 shares as payment of principal and interest valued at
$66,000 and $11,688, respectively.
The Company issued 987,500 shares towards the exercise of stock options by officers of
the Company amounting to $44,375. The amount has been offset against the notes payable
to the officers.
The Company has entered into a consulting agreement under which it will issue 187,500
shares as consideration for the services to be provided under the agreement. The
Company has issued 137,099 shares as of December 31, 2004 (included in the 914,599
shares issued for consulting during the year). The Company recorded $42,457 for the
balance of shares to be issued on the accompanying financial statements.
The Company recorded derivative and warrant liabilities of $1,712,588 in 2004 upon
consummation of the Laurus debt financing.
See reports of independent registered public accounting firms
and notes to the consolidated financial statements.
F-9
54
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
Description of Business
-----------------------
DataLogic International, Inc. ("DataLogic" or the "Company") provides
communication solutions including Global Positioning System("GPS") -based
mobile asset tracking, network security and secure mobile communications. The
Company provides these solutions and Information Technology ("IT") outsourcing
and consulting services to a wide range of U.S. and international governmental
agencies and commercial enterprises. The Company leverages its technology
expertise, customer relationships and supplier channels to develop solutions
addressing the rapidly growing GPS and communications markets.
On June 2, 2003, we acquired 51% of IPN Communications, Inc. ("IPN"). On
November 5, 2004, we acquired the remaining 49% of IPN.
On January 13, 2004, the Company acquired the Machine-to-Machine ("M2M") GPS
based technology and entered into the GPS mobile asset tracking business. The
Company derives its GPS-based revenues from the sale of mobile tracking units,
software and hardware licenses and residual income from subscriber fees.
On September 15, 2005, the Company acquired the assets of CBSi, Inc. ("CBSi")
to complete its GPS based mobile asset tracking solution and further increase
its distribution and client relationships (see Note 19).
On November 21, 2005, the Company acquired BluBat, Inc. ("BluBat") a provider
of network design, security, management and software engineering services to
further increase its communications capabilities (see Note 19).
The Company's wholly owned subsidiaries include DataLogic Consulting, Inc.
("DCI"), IPN Communications, Inc. ("IPN") and DataLogic New Mexico, Inc.
("DNM").
DCI provides complete IT consulting services that include, but are not limited
to, project management and systems analysis, design, implementation, testing
and maintenance. DCI also provides short and long-term staffing solutions to
IT clients, healthcare providers and other businesses.
IPN provides VoIP telephony products and services worldwide. IPN derives its
VoIP revenues from phone sets, communication servers, software and hardware
licenses and residual global long distance airtime sales.
DNM was formed in the first quarter of 2005 as a result of the acquisition of
the assets of ISS (see Note 19). DNM is an IT solutions provider for public
safety and homeland security agencies.
Restatement of Financial Statements
-----------------------------------
After reviewing the provisions of the Laurus notes, management determined that
the notes included certain features that are considered embedded derivative
financial instruments, such as the conversion feature, a variable interest
rate feature, events of default and a liquidated damages clause, which
required recording at their fair value. This adjustment has been reflected in
the period ended December 31, 2004. The Company also made certain
reclassifications.
F-10
55
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS, continued
The effect of the adjustments and reclassifications on the financial
statements as of and for the year ended December 31, 2004 is as follows:
The effect of the adjustments on the consolidated balance sheet is as follows:
Prepaid expenses and other current assets increased by $89,087.
Long-term portion of convertible debt, net of discount decreased by
$661,465.
Derivative and warrant liabilities increased by $1,632,439.
Additional paid in capital decreased by $892,355.
Unamortized consulting fees decreased by $89,087.
Accumulated deficit increased by $78,619
Consolidated Statement of Operations for the year ended December 31, 2004:
Depreciation and amortization decreased by $106,342.
General and administrative expenses increased by $51,834.
Interest expense increased by $243,763.
Change in fair value of derivative and warrant liabilities increased by
$110,636.
Net loss increased by $78,619.
Consolidated Statement of Stockholders Equity for the year ended December 31,
2004:
The warrants and beneficial conversion feature and additional
paid-in-capital were reduced by $861,868.
Non-employee warrants reclassified to derivative and warrant liabilities
increased and additional paid-in-capital decreased by $30,487.
Unamortized consulting fees decreased by $89,087 due to reclassification
to prepaid asset.
Consolidated Statement of Cash Flows for the year ended December 31, 2004:
Depreciation and amortization decreased by $106,342.
Amortization of discount on convertible debt increased by $295,597.
Change in fair value of derivative and warrant liabilities decreased by
$110,636.
F-11
56
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS, continued
Issuance of or commitment to issue shares for compensation and services
increased by $42,457 due to shares to be issued for service previously
recorded as changes in account payable.
Payments of loan decreased by $44,375 due to shares issued for payment of
loan previously recorded as changes in account payable.
Accounts payable decreased by $86,832 due to reclassification to issuance
of or commitment to issue shares for compensation services and payments
of loan described above.
Going Concern
-------------
The Company's consolidated financial statements are prepared using the accrual
method of accounting in accordance with accounting principles generally
accepted in the United States of America ("GAAP") , and have been prepared on
a going concern basis, which contemplates the realization of assets and the
settlement of liabilities in the normal course of business. The Company has
an accumulated deficit of $3,827,868 at December 31, 2005 and a history of
operating losses over the last several years. Management has taken various
steps to revise its operating and financial requirements, which it believes
will be sufficient to provide the Company with the ability to continue its
operations for the next twelve months. Management has also devoted
considerable effort during the year ended December 31, 2005 towards management
of liabilities and improvement of the Company's operations.
In view of the matters described above, recoverability of a major portion of
the recorded asset amounts shown in the accompanying consolidated balance
sheet is dependent upon continued operations of the Company, which in turn is
dependent upon the Company's ability to raise additional capital, obtain
financing and to succeed in its future operations. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts and classification of liabilities
that might be necessary should the Company be unable to continue as a going
concern.
F-12
57
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The accompanying financial statements include the accounts and transactions of
DataLogic International, Inc. and its subsidiaries. Intercompany transactions
and balances have been eliminated in consolidation. The minority owners
interest has been reflected as minority interest in the accompanying
consolidated financial statements for the year ended December 31, 2004.
Use of Estimates
----------------
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates include the
collectibility of accounts receivable, the realizability of inventories, the
recoverability of long-lived assets and the valuation allowance of the
deferred tax asset. Actual results could differ from those estimates.
Accounts Receivable
-------------------
Accounts receivable consists of amounts billed to customers upon performance
of service or delivery of goods and expenses incurred by the Company but not
yet billed to customers for consulting services ($212,417 as of December 31,
2005). The Company performs ongoing credit evaluations of customers and
adjusts credit limits based upon payment history and the customers current
creditworthiness, as determined by its review of their current credit
information. The Company continuously monitors collections and payments from
its customers and maintains a provision for estimated credit losses based upon
its historical experience and any customer-specific collection issues that it
has identified.
Marketable Securities Available for Sale
----------------------------------------
The Company's securities are marketable equity securities that are classified
as available for sale and, as such, are initially recorded at cost and
adjusted to their fair value at each balance sheet date. Securities
classified as available for sale may be sold in response to changes in
interest rates, liquidity needs and for other purposes and accordingly, are
classified as current assets in the accompanying consolidated balance sheet.
Unrealized holding gains and losses on available for sale securities are
excluded from earnings and reported as other comprehensive income or loss, net
of tax, as a separate component of stockholders equity.
F-13
58
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
In accordance with the guidance of Emerging Issues Task Force ("EITF") Issue
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments," the Company assesses any decline in value of
available-for-sale securities and non-marketable securities below cost as to
whether such decline is "other than temporary". If a decline is determined to
be "other than temporary" the decline is recorded as a reduction of the cost
basis of the security and is included in the statement of operations as an
impairment write down of the investment (see Note 3).
Inventories
-----------
Inventories consist of finished goods and are valued at the lower of cost
(determined on a weighted average basis) or market. Management compares the
cost of inventories with their market value and an allowance is recorded to
write down the inventories to their market value, if lower. Finished goods
inventories are comprised of phone, GPS and video communications products.
Property and Equipment
----------------------
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets. The
useful lives for the related assets range from five to seven years.
Maintenance and repairs are charged to expense as incurred. Renewals and
improvements of a major nature are capitalized. At the time of retirement or
other disposition of property and equipment, the cost and accumulated
depreciation are removed from the accounts and any resulting gains or losses
are reflected in the consolidated statement of operations.
Other Assets
------------
Other assets consist of software development costs, website development costs,
software licenses, loan origination costs, client lists and goodwill, and are
recorded at cost.
Software development costs incurred in the development of certain products are
capitalized upon reaching technological feasibility in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for
the Costs of Computer Software to be Sold, Licensed, or Otherwise Marketed."
All other software research, development and maintenance costs are expensed in
the period incurred. The Company evaluates the carrying value of such costs,
on a periodic basis, by comparing such amounts to their net realizable value.
Amounts in excess of net realizable value are charged to operations.
Amortization of such costs are provided over the greater of the amount
computed using the straight-line method over the estimated life of each
product commencing upon the initial sale of the product or the ratio of
current revenues to the total of current and anticipated future revenues for
the related product.
F-14
59
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Website development costs and software licenses are recorded at cost and
amortized using the straight-line method over their estimated useful lives of
3-5 years.
Loan origination costs are capitalized and amortized using the straight-line
method (which approximates the effective interest method) over the term of the
related debt instrument.
Client lists are recorded at their allocated fair values in purchase
accounting (see Note 19) and are being amortized over their estimated useful
lives of three years.
Goodwill
--------
Goodwill represents the excess of acquisition cost over the net assets
acquired in a business combination and is not amortized in accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets." The provisions of SFAS
No. 142 require that the Company allocate its goodwill to its various
reporting units, determine the carrying value of those businesses, and
estimate the fair value of the reporting units so that a two-step goodwill
impairment test can be performed. In the first step of the goodwill
impairment test, the fair value of each reporting unit is compared to its
carrying value. Management reviews, on an annual basis, the carrying value of
goodwill in order to determine whether impairment has occurred. Impairment is
based on several factors including the Company projection of future
discounted operating cash flows. If an impairment of the carrying value were
to be indicated by this review, the Company would perform the second step of
the goodwill impairment test in order to determine the amount of goodwill
impairment, if any.
Long-Lived Assets
-----------------
The Company accounts for its long-lived assets in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the historical cost carrying
value of an asset may no longer be appropriate. The Company assesses
recoverability of the carrying value of an asset by estimating the future net
cash flows expected to result from the asset, including eventual disposition.
If the future net cash flows are less than the carrying value of the asset, an
impairment loss is recorded equal to the difference between the asset's
carrying value and fair value or disposable value. As of December 31, 2005,
the Company does not believe there has been any impairment of its long-lived
assets. There can be no assurances, however, that demand for the Company's
products and services will continue, which could result in an impairment of
long-lived assets in the future.
F-15
60
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Convertible Debt
----------------
The Company records its convertible debt net of the debt discount. From time
to time, the Company has debt with conversion options that provide for a rate
of conversion that is below market value. This feature is normally
characterized as a beneficial conversion feature ("BCF"), which is recorded by
the Company pursuant to EITF Issue No. 98-5 ("EITF 98-05"), "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios," and EITF Issue No. 00-27, "Application of EITF
Issue No. 98-5 to Certain Convertible Instruments."
If a BCF exists, the Company records it as a debt discount. Debt discounts
are amortized to interest expense over the life of the debt on a straight-line
basis, which approximates the effective interest method.
Derivative Financial Instruments
--------------------------------
The Company's derivative financial instruments consist of embedded derivatives
related to the Laurus notes entered into on June 25, 2004, since the notes are
not conventional convertible debt (see Note 13). The embedded derivatives
include the conversion feature, monthly payment options, variable interest
features, liquidated damages clauses in the registration rights agreement and
certain default provisions. The accounting treatment of derivative financial
instruments requires that the Company records the derivatives and related
warrants at their fair values as of the inception date of the agreement and at
fair value as of each subsequent balance sheet date.
In addition, under the provisions of EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock," as a result of entering into the convertible debt, the
Company is required to classify all other non-employee stock options as
warrants and derivative liabilities and mark them to market at each reporting
date (see Note 13).
Conversion-related derivatives were valued using the Binomial Option Pricing
Model. The interest rate adjustment provision was valued using discounted
cash flows and probability analysis. Options and warrants were valued using
the Black-Sholes model. The following assumptions were used in valuing the
derivative and warrant liabilities as of December 31:
2005 2004
--------------- ---------------
Risk-free interest rate 4.35 - 4.36% 3.58 - 3.86%
Volatility 199 - 284% 291 - 306%
Expected dividend yield 0% 0%
The valuation of the conversion derivatives also considered probability
analysis related to trading volume restrictions.
Any change in fair value of these instruments will be recorded as
non-operating, non-cash income or expense at each reporting date. If the fair
value of the derivatives is higher at the subsequent balance sheet date, we
will record a non-operating, non-cash charge. If the fair value of the
derivatives is lower at the subsequent balance sheet date, we will record
non-operating, non-cash income. The derivative and warrant liabilities are
recorded as liabilities in the consolidated balance sheet.
F-16
61
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments consist of cash and cash equivalents,
marketable securities available for sale, accounts receivable, note
receivable, accounts payable and accrued expenses, notes payable and
convertible debt. Pursuant to SFAS No. 107, "Disclosures About the Fair Value
of Financial Instruments," the Company is required to estimate the fair value
of all financial instruments at the balance sheet date. The Company cannot
determine the estimated fair value of the convertible debt since instruments
similar to the convertible debt could not be found. Other than this item, the
Company considers the carrying values of its financial instruments in the
financial statements to approximate their fair values.
Revenue Recognition
-------------------
Revenue is recognized when earned. The Company recognizes revenue on its
software products in accordance with all applicable accounting regulations,
including the American Institute of Certified Public Accountants' ("AICPA")
Statement of Position ("SOP") 97-2, "Software Revenue Recognition", and SOP
98-9, "Modification of SOP 97-2, With Respect to Certain Transactions."
Expenses are recognized in the period in which the corresponding liability is
incurred.
For sales of communication products, our revenue recognition policies are in
compliance with Staff Accounting Bulletin ("SAB") 104. Revenue is recognized
at the date of shipment to customers when a formal arrangement exists, the
price is fixed or determinable, the delivery is completed, no other
significant obligations by us exist and collectibility is reasonably assured.
Payments received before all of the relevant criteria for revenue recognition
are satisfied are recorded as deferred revenue in the accompanying
consolidated balance sheet.
Revenues and costs of revenues from consulting contracts are recognized during
the period in which the service is performed.
The Company has contracts with various governments and governmental agencies.
Government contracts are subject to audit by the applicable governmental
agency. Such audits could lead to inquiries from the government regarding the
allowability of costs under applicable government regulations and potential
adjustments of contract revenues. To date, the Company has not been involved
in any such audits.
Income Taxes
------------
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are recognized for future tax benefits or consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to
F-17
62
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
be recovered or settled. A valuation allowance is provided for significant
deferred tax assets when it is more likely than not that such assets will not
be realized through future operations.
Earnings per Share
------------------
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share"
("EPS"). SFAS No. 128 provides for the calculation of basic and diluted
earnings per share. Basic EPS includes no dilution and is computed by
dividing income or loss available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution of securities that could share in the earnings
or losses of the entity. Such amounts include shares potentially issuable
pursuant to shares to be issued, convertible debentures and outstanding
options and warrants. Had such shares been included in diluted EPS, they
would have resulted in weighted-average common shares of 46,302,567 and
43,070,204 for the years ended December 31, 2005 and 2004, respectively.
Issuance of Shares for Non-Cash Consideration
---------------------------------------------
The Company accounts for the issuance of equity instruments to acquire goods
and/or services based on the fair value of the goods and services or the fair
value of the equity instrument at the time of issuance, whichever is more
reliably determinable. The majority of equity instruments have been valued at
the market value of the shares on the date issued.
The Company's accounting policy for equity instruments issued to consultants
and vendors in exchange for goods and services follows the provisions of EITF
Issue No. 96-18, "Accounting for Equity Instruments That are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services" and EITF Issue No. 00-18, "Accounting Recognition for Certain
Transactions Involving Equity Instruments Granted to Other Than Employees."
The measurement date for the fair value of the equity instruments issued is
determined at the earlier of (i) the date at which a commitment for
performance by the consultant or vendor is reached or (ii) the date at which
the consultant or vendor's performance is complete. In the case of equity
instruments issued to consultants, the fair value of the equity instrument is
recognized over the term of the consulting agreement. In accordance with EITF
Issue No. 00-18, an asset acquired in exchange for the issuance of fully
vested, nonforfeitable equity instruments should not be presented or
classified as an offset to equity on the grantor's balance sheet once the
equity instrument is granted for accounting purposes.
F-18
63
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Stock-Based Compensation
------------------------
The Company accounts for employee stock-based compensation under the Intrinsic
Value method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," as opposed to the fair value
method prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation."
Pursuant to the provisions of APB Opinion No. 25, the Company generally does
not record an expense for the value of stock-based awards granted to
employees. The Company has adopted the disclosure only provisions of SFAS No.
123 (see Note 16).
Had the Company determined employee stock-based compensation cost based on a
fair value model at the grant date for its employee stock options under SFAS
123, the Company's net loss and loss per share would have been adjusted to the
pro forma amounts for the years ended December 31, 2005 and 2004 as follows
(amounts in thousands, except per share amounts):
For the years
ended December 31,
2005 2004
------------- -----------
Net loss - as reported $ (420) $ (1,482)
Stock-based employee compensation
expense included in reported net
loss, net of tax - -
Total stock-based employee
compensation expense determined
under fair-value-based method for
all rewards, net of tax (1,123) (559)
----------- -----------
Pro forma net loss $ (1,543) $ (2,041)
=========== ===========
Loss per share:
Basic and diluted, as reported $ (0.01) $ (0.04)
Basic and diluted, pro forma $ (0.04) $ (0.05)
Concentrations of Credit Risk
-----------------------------
The Company maintains its cash balances at financial institutions that are
insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000.
As of December 31, 2005 and at various times throughout the year ended
December 31, 2005, the Company's cash balances exceeded the amount insured by
the FDIC. Management believes the risk of loss of cash balances in excess of
the insured limit to be low.
Two major customers accounted for 70% and 72% of the net revenue for the years
ended December 31, 2005 and 2004, respectively. Accounts receivable from
these major customers amounted to $748,921 and $1,288,959 as of December 31,
2005 and December 31, 2004, respectively.
F-19
64
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
A significant portion of the Company's business is located in Rhode Island,
California and New Mexico and is subject to economic conditions and
regulations in those areas.
The Company extends credit to its customers based upon its assessment of their
credit worthiness and generally does not require collateral.
The Company utilizes a limited number of suppliers for the GPS device
components. The Company has alternate sources to supply its products should
the need arise.
Reclassifications
-----------------
Certain amounts in the December 31, 2004 consolidated financial statements
have been reclassified to conform to the December 31, 2005 presentation. Such
reclassifications had no effect on the net loss as previously reported, except
as disclosed in Note 1 to the consolidated financial statements.
Recent Accounting Pronouncements
--------------------------------
In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No.
154, "Accounting Changes and Error Corrections - A Replacement of APB Opinion
No. 20 and FASB Statement 3." This statement replaces Accounting Principles
Board ("APB") Opinion No. 20, "Accounting Changes," and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Reporting." APB Opinion No. 20
required that most voluntary changes in an accounting principle be recognized
by including in net income of the period of the change the cumulative effect
of changing to the new accounting principle. SFAS No. 154 generally requires
retrospective application to prior period financial statements of changes in
accounting principle. SFAS No. 154 is effective in the first reporting period
beginning after December 15, 2005. The Company does not believe the adoption
of this statement will result in a significant impact to the Company
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123(R)"), which is a revision of SFAS No. 123. SFAS 123(R)
supersedes APB Opinion No. 25 and amends SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS No. 123 (R) is similar to the approach
described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. The provisions of this statement are
effective for the Company as of January 1, 2006. The Company will adopt SFAS
123(R) in the first fiscal quarter of 2006.
F-20
65
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
SFAS No. 123(R) requires companies to recognize in the income statement the
grant-date fair value of stock options and other equity-based compensation
issued to employees. SFAS No. 123(R) also establishes accounting requirements
for measuring, recognizing and reporting share-based compensation, including
income tax considerations. Upon adoption of SFAS No. 123(R), the Company will
use the modified prospective application. Under this method, the cost of new
awards and awards modified, repurchased or cancelled after the required
effective date and the portion of awards for which the requisite service has
not been rendered (unvested awards) that are outstanding as of the required
effective date will be recognized as the requisite service is rendered on or
after the required effective date. The compensation cost for that portion of
awards shall be based on the grant-date fair value of those awards as
calculated for either recognition or pro forma disclosures under SFAS No. 123.
As permitted by SFAS No. 123, the Company currently accounts for share-based
payments to employees using APB Opinion No. 25 intrinsic value method and, as
such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS No. 123(R) fair value method will have a
negative impact on the Company's results of operations, although it will have
no impact on its overall financial position. The impact of adopting SFAS No.
123(R) cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. However, had the Company adopted
SFAS No. 123(R) in prior periods, the impact of that standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of pro
forma net loss and loss per share in Note 2 above to the Company's
consolidated financial statements. SFAS No. 123(R) also requires the benefits
of tax deductions in excess of recognized compensation cost to be reported as
a financing cash flow, rather than as an operating cash flow as required under
current accounting literature. The requirement will reduce net operating cash
flows and increase net financing cash flows in periods of adoption.
F-21
66
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-Monetary
Assets," an amendment of APB Opinion No. 29, "Accounting for Non-Monetary
Assets." The amendments made by SFAS No. 153 are based on the principle that
exchanges of non-monetary assets should be measured based on the fair value of
the assets exchanged. Further, the amendments eliminate the narrow exception
for non-monetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of non-monetary assets that do not have
"commercial substance." The provisions in SFAS No. 153 are effective for
non-monetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. Early application is permitted and companies must apply the
standard prospectively. The Company does not believe the adoption of this
statement will result in a significant impact to the Company's consolidated
financial statements.
In November 2004, The FASB issued SFAS No. 151, "Inventory Costs," an
amendment of ARB No. 43, Chapter 4 to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs and spoilage. SFAS
No. 151 requires that these costs be expensed as incurred and not included in
overhead. SFAS No. 151 also requires that allocation of fixed production
overhead to conversion costs be based on normal capacity of the production
facilities. This standard is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The Company does not believe the
adoption of this statement will result in a significant impact to the
Company's consolidated financial statements.
NOTE 3 - MARKETABLE SECURITIES AVAILABLE FOR SALE
The following is a summary of marketable securities available for sale as of
December 31, 2005 and 2004:
Adjusted
Cost Fair Unrealized
Basis Value Loss
-------- ------- ---------
December 31, 2005 $ 7,200 $ 7,200 $ 0
December 31, 2004 $203,500 $16,000 $187,500
Unrealized holding losses for the years ended December 31, 2005 and 2004 were
$8,800 and $45,000, respectively. Realized losses on the
"other-than-temporary" write-down of marketable securities available for sale
were $196,300 and zero for the years ended December 31, 2005 and 2004,
respectively.
NOTE 4 - RESTRICTED CASH
During the year ended December 31, 2005 the Company renegotiated the terms of
its convertible term note with Laurus Master Fund, Ltd. ("Purchaser") (see
Note 13). As a result, all of the $1,258,689 of the principal amount of the
convertible term note that was previously held in a restricted account was
released to the Company. The restricted cash account earned interest at the
rate of 3.25% per annum. Interest income was $38,847 and $17,197 for the
years ended December 31, 2005 and 2004, respectively.
F-22
67
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, December 31,
2005 2004
------------ ------------
Office equipment and furniture $ 196,313 $ 30,512
Computer equipment and software 124,536 86,567
----------- -----------
320,849 117,079
Less accumulated depreciation (126,139) (49,849)
----------- -----------
$ 194,710 $ 67,230
=========== ===========
Depreciation expense was $77,130 and $21,915 for the years ended December 31,
2005 and 2004, respectively.
NOTE 6 - SOFTWARE DEVELOPMENT COSTS AND LICENSES
Software development costs and licenses consist of the following:
December 31, December 31,
2005 2004
------------ ------------
Software development costs and licenses $ 633,131 $ 39,000
Website development costs 4,900 4,900
------------ ------------
$ 638,031 $ 43,900
Less accumulated amortization (106,023) (25,657)
------------ ------------
$ 532,008 $ 18,243
============ ============
Amortization expense was $65,253 and $28,418 for the years ended December 31,
2005 and 2004, respectively.
Future aggregate amortization of the software development costs and licenses
is as follows for the years ending December 31:
2006 $ 200,821
2007 324,708
2008 6,479
------------
Total $ 532,008
============
F-23
68
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LOAN ORIGINATION COSTS
Loan origination costs were as follows:
December 31, December 31,
2005 2004
------------ ------------
Loan origination costs $ 311,000 $ 311,000
Less accumulated amortization (155,502) (51,834)
------------ ------------
$ 155,498 $ 259,166
============ ============
Amortization of the loan origination costs was $103,668 and $51,834 for the
years ended December 31, 2005 and 2004, respectively, and is included in the
general and administrative expense in the accompanying consolidated statements
of operations. The net unamortized balance of loan origination costs will be
written off in the first quarter of 2006 in connection with the debt
modification (see Note 20).
NOTE 8 - CLIENT LISTS
Future aggregate amortization of the client lists is as follows for the years
ending December 31:
2006 $ 244,769
2007 244,769
2008 244,769
------------
Total $ 734,307
============
No amortization was recorded on the client lists as they were acquired in
connection with BluBat near the end of 2005.
NOTE 9 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
December 31, December 31,
2005 2004
------------- ------------
Accounts payable $ 1,110,646 $ 314,738
Accrued sales taxes 173,134 222,206
Accrued interest expense 77,649 114,164
Accrued expenses - other 213,982 223,244
------------- ------------
$ 1,575,411 $ 874,352
============= ============
F-24
69
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - DUE TO FACTOR
The Company had a factoring and security agreement to sell certain accounts
receivable at a discount of 1.75% of the face value. The Company discontinued
the services of the factor as of June 30, 2004 and all the outstanding
balances due to the factor have been paid in full. The outstanding balances
were secured by all of the Company's accounts receivable, inventories and
computer hardware. In connection with the factoring agreement, the Company
incurred fees of $99,926 during the year ended December 31, 2004.
NOTE 11 - NOTES PAYABLE - OFFICERS
Notes payable to officers are unsecured, past due, payable on demand and bear
interest at an annual rate of 6 percent on the unpaid principal balance. The
Company repaid $122,200 ($46,200 through the conversion of stock options) of
the notes payable to officers during the year ended December 31, 2005. The
balance on the notes payable to the officers amounted to $9,424 and $174,624
as of December 31, 2005 and 2004, respectively. Interest expense on these
notes for the years ended December 31, 2005 and 2004 amounted to $5,915 and
$9,975, respectively.
NOTE 12 - NOTES PAYABLE
Notes payable consisted of the following as of December 31, 2005:
Current Long-term
--------- ----------
Unsecured notes, interest rate 6%, interest
payable at the end of the term or on demand,
past due and immediately payable 150,000 -
Unsecured note, interest rate 6%, principal and
interest payable at the end of the term,
due and repaid on February 21, 2006 50,800 -
Note secured by computer equipment, interest
rate 10% payable on demand, past due and
immediately payable 7,406 -
Note secured by computer equipment, interest
rate 10% payable in monthly installments of
principal and interest of $1,953, due July 2007 19,263 8,026
Note secured by computer equipment, interest
rate 10% payable in monthly installments of
principal and interest of $4,273, due May 2007 46,764 11,691
---------- ----------
$ 274,233 $ 19,717
========== ==========
F-25
70
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - NOTES PAYABLE, continued
Notes payable consisted of the following as of December 31, 2004:
Current Long-term
--------- ----------
Unsecured notes, interest rate 10%, interest
payable at the end of the term or on demand,
past due and immediately payable 50,000 -
Unsecured notes, interest rate 6%, interest
payable at the end of the term or on demand,
past due and immediately payable 200,000 -
Unsecured notes, interest rate 6%, interest
payable at the end of the term or on demand,
past due and immediately payable 150,000 -
Unsecured notes, interest rate 12%, interest
payable at the end of the term or on demand,
past due and immediately payable 33,200 -
---------- ----------
$ 433,200 $ -
========== ==========
Interest expense on these notes for the years ended December 31, 2005 and 2004
was $16,008 and $16,091, respectively.
F-26
71
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - CONVERTIBLE DEBT
On June 25, 2004, the Company entered into a Securities Purchase Agreement
with Laurus Master Fund, Ltd. ("Purchaser" or "Laurus") in connection with the
private placement of a convertible term note issued by the Company in the
principal amount of $3,000,000, due June 25, 2007. The note (as amended) is
convertible into shares of the Company's common stock at conversion prices of
$0.32 for the first $950,000 of aggregate principal converted and $0.60
thereafter and bears interest at the prime rate plus 2%, totaling 9.25% at
December 31, 2005. Additionally, the note provisions include cashless
warrants that provide for the purchase of up to 705,000 shares of common stock
at exercise prices ranging from $0.73 to $0.79, until June 25, 2011. The note
is secured by all the Company's assets.
On January 28, 2005, the Purchaser made available $300,000 of the principal
amount held in the restricted account and the note was amended. In addition,
on August 17, 2005, the Purchaser made available $950,000 of the principal
amount held in the restricted account and the note was further amended.
Pursuant to EITF Issue No. 96-19, "Debtor's Accounting for a Modification or
Exchange of Debt Instruments," neither of the modifications were considered
substantial and thus the Company did not record any gain or loss related to
the amendments.
The notes include certain features that are considered embedded derivative
financial instruments, such as the conversion feature, a variable interest
rate feature, events of default and a liquidated damages clause, which have
been recorded at their fair value. These features are described below, as
follows:
. The notes conversion feature;
. Interest on the notes is subject to downward adjustment based on our
common stock price;
. The registration rights agreement includes a penalty provision based
on any failure to meet and/or maintain registration requirements for
shares issuable under the conversion of the notes or exercise of the
warrants; and
. The notes contain certain events of default, wherein we may be
required to pay a default interest rate above the normal rate.
Because the Laurus notes are not conventional convertible debt, the Company is
also required to record the related warrants at their fair values. The total
of the Laurus-related derivative and warrant liabilities at June 25, 2004
totaled $1,712,588, consisting of the fair value of the conversion feature and
other derivatives of of $1,282,564 and the fair value of the warrants of
$430,024 less the fair value of the interest rate adjustment provision of
$172,292. These amounts were recorded to debt discount and are being
amortized to interest expense over the term of the notes.
The Company also reclassified $30,487 related to outstanding non-employee
options and warrants from additional paid-in-capital, which will be marked to
market at each reporting date (see Note 16).
F-27
72
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - CONVERTIBLE DEBT, continued
During the year ended December 31, 2005 and 2004, the value of the warrant and
derivative liabilities decreased by $1,300,861 and $110,636, respectively,
which is reflected as a component of other income in the accompanying
consolidated statements of operations.
The debt discount is being first offset to the extent of the long-term portion
of the convertible debt and then from the current portion of the convertible
debt on the consolidated balance sheet and will be amortized over the life of
the debt. The Company has recorded amortization expense of $570,863 and
$295,597 for the years ended December 31, 2005 and 2004, respectively.
In February 2005, 300,113 shares were issued as payment of principal and
interest of $106,061 and $19,987, respectively.
The balance of the convertible debt (net of the unamortized debt discount of
$846,128) as of December 31, 2005 was $1,258,418 for the current portion and
$0 for the long-term portion. The balance of the convertible debt (net of the
unamortized debt discount of $1,416,991) as of December 31, 2004 was $636,360
for the current portion and $787,558 for the long-term portion. The
classification was based on the terms of the modified debt agreement in 2006.
In addition, the balance of the unamortized debt discount will be written off
in 2006 in connection with the modification of the convertible note (see Note
20).
F-28
73
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - INCOME TAXES
The provision for income taxes consists of the following for the years ended
December 31:
2005 2004
-------------- -------------
Current:
Federal $ - $ -
State 3,200 1,600
-------------- -------------
3,200 1,600
-------------- -------------
Deferred:
Federal (377,000) (422,000)
State (107,000) (124,000)
-------------- -------------
(484,000) (546,000)
Less change in valuation allowance 484,000 546,000
-------------- -------------
- -
-------------- -------------
$ 3,200 $ 1,600
============== =============
The deferred tax liability is as follows as of December 31,
2005 2004
-------------- -------------
Tax benefit of net operating
loss carryforwards $ 1,800,000 $ 1,200,000
Client list (288,000) -
Valuation allowance (1,800,000) (1,200,000)
-------------- -------------
$ (288,000) $ -
============== =============
Deferred income taxes are provided for the tax effects of temporary
differences in the reporting of income and deductions for financial statement
and income tax reporting purposes and arise principally from net operating
loss carryforwards, differing costs bases for amortization of intangible
assets for book and tax purposes and accelerated depreciation methods used for
income tax reporting.
The Company's effective tax rate differs from the federal and state statutory
rates due to the valuation allowance recorded for the deferred tax asset due
to unused net operating loss carryforwards. An allowance has been provided
for by the Company which reduced the tax benefits accrued by the Company for
its net operating losses to zero, as it cannot be determined when, or if, the
tax benefits derived from these operating losses will materialize.
As of December 31, 2005, the Company has available net operating loss
carryforwards of approximately $4,500,000 for federal and state purposes,
which expire in various years through 2025 and 2015 for federal and California
purposes, respectively. The Company's use of its net operating losses may be
restricted in future years due to the limitations pursuant to IRC Section 382
on changes in ownership.
The following is a reconciliation of the provision for income taxes at the
expected rates to the income taxes reflected in the statements of operations:
2005 2004
---------- ----------
Tax benefit at federal statutory rate (34) % (34) %
State tax benefit net of federal tax effect (6) (6)
Change in valuation allowance 40 40
---------- ----------
- % - %
========== ==========
F-29
74
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Operating Leases
----------------
The Company leases office space under operating lease agreements expiring at
various dates through December 31, 2008. Rent expense related to these leases
was $125,013 and $97,318 for the years ended December 31, 2005 and 2004,
respectively. Minimum future rental payments under the leases are as follows
for the years ending December 31:
2006 $ 189,976
2007 86,364
2008 66,520
---------
$ 342,860
=========
As part of the purchase of certain assets of CBSi (see Note 19) the Company
assumed an agreement for wireless air-time services that requires minimum
future payments as follows for the years ending December 31:
2006 $ 400,000
2007 400,000
---------
$ 800,000
=========
Indemnities and Guarantees
--------------------------
During the normal course of business, the Company has made certain indemnities
and guarantees under which it may be required to make payments in relation to
certain transactions. These indemnities include certain agreements with the
Company's officers under which the Company may be required to indemnify such
persons for liabilities arising out of their employment relationship, lease
agreements where the Company may be required to indemnify landlords, contracts
where the Company may be required to indemnify the other party from
liabilities resulting from claimed infringements of the proprietary rights of
third parties, asset and stock purchase agreements where the Company may be
required to indemnify the sellers for breach of representations or warranties
and the Laurus agreement where the Company may be required to indemnify
Laurus. The duration of these indemnities and guarantees varies, and in
certain cases, is indefinite.
The majority of these indemnities and guarantees do not provide for any
limitation of the maximum potential future payments the Company would be
obligated to make. Historically, the Company has not been obligated to make
significant payments for these obligations and no liability has been recorded
for these indemnities and guarantees in the accompanying consolidated balance
sheet.
F-30
75
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - STOCKHOLDERS' EQUITY
Common Stock
------------
During the years ended December 31, 2005 and 2004, the Company issued shares
of its common stock as follows:
2005
----
The Company issued 1,330,005 shares of common stock for management and
consulting services amounting to $496,104 during the year ended December 31,
2005. The Company also committed to issue 290,251 shares for services
amounting to $73,003. The Company amortized prepaid legal fees paid in stock
in 2004 of $40,982 during the year ended December 31, 2005.
During the year ended December 31, 2005, the Company issued 252,525 and 47,588
shares of common stock in payment of principal and interest of $106,061 and
$19,987, respectively, on the notes payable.
On March 1, 2005, the Company issued 117,564 shares valued at $50,000 for the
acquisition of ISS (see Note 19).
On March 31, 2005, the Company issued 20,000 shares for the exercise of stock
options with an exercise price of $0.15 per share for cash proceeds of $3,000.
On September 15, 2005, the Company acquired the assets of CBSi in exchange for
3,003,534 shares of common stock valued at $850,000 (see Note 19).
On October 1, 2005, the Company issued 160,000 shares for the exercise of
stock options with an exercise price of $0.15 per share for a total value of
$24,000 as a payment against notes payable - officers.
On November 21, 2005, the Company acquired BluBat in exchange for 1,038,062
shares of common stock valued at $300,000 (see Note 19).
On December 31, 2005, the Company committed to issue 20,000 shares for the
exercise of stock options with an exercise price of $0.15 per share for a
total value of $3,000 against notes payable - officers.
On December 31, 2005, the Company committed to issue 80,000 shares for the
exercise of stock options with an exercise price of $0.24 per share for a
total value of $19,200 against notes payable - officers.
On December 31, 2005, the Company committed to issue 8,696 shares for accounts
payable amounting to $2,000.
F-31
76
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - STOCKHOLDERS' EQUITY, continued
2004
----
During the year ended December 31, 2004, the Company issued 914,599 shares for
consulting services rendered by consultants amounting to $467,783, of which
$378,696 has been expensed for the year ended December 31, 2004.
The Company issued 89,355 shares for compensation amounting to $49,385.
The Company issued 150,000 shares for legal services amounting to $62,850 of
which $15,493 has been expensed for the year ended December 31, 2004.
The Company issued 370,370 shares of common stock for management fees
amounting to $100,000 of which $100,000 has been expensed for the year ended
December 31, 2004.
The Company issued 25,000 shares for director's compensation amounting to
$10,250.
The Company reclassified $30,487 of non-employee stock options from additional
paid-in-capital to derivative and warrant liabilities.
The Company received $150,904 from the sale of treasury stock.
The Company issued 117,159 shares as payment of principal and interest valued
at $66,000 and $11,688, respectively.
The Company issued 987,500 shares towards the exercise of stock options by
officers of the Company amounting to $44,375. The amount has been offset
against the notes payable to the officers.
The Company has entered into a consulting agreement under which it will issue
187,500 shares as consideration for the services to be provided under the
agreement. The Company has issued 137,099 shares as of December 31, 2004
(included in the 914,599 shares issued for consulting during the year). The
Company recorded $42,457 for the balance of shares to be issued on the
accompanying financial statements.
Stock Options
-------------
The Company has three stock option plans: The 2003 Stock Compensation Plan
(the "2003 Plan"), the 2004 Non-Qualified Stock and Stock Option Plan (the
"2004 Plan") and the 2005 Non-Qualified Stock and Stock Option Plan (the "2005
Plan").
The 2003 Plan was adopted on April 1, 2003 and reserved ten million shares of
the Company's common stock for grant under the plan to directors, key
employees and independent contractors who provide services to the Company.
The 2003 Plan is administered by the Board of Directors. All options must be
exercised within ten years of the date granted and may not be less than 100%
of the fair market value of the Company's common shares on the date of grant.
Under the 2004 and 2005 Plans, two and twenty million shares, respectively, of
the Company's common stock are reserved for grant to officers, directors,
employees,
F-32
77
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - STOCKHOLDERS' EQUITY, continued
consultants and others. Both the 2004 and 2005 Plans are administered by the
Compensation Committee of the Board of Directors. All options must be granted
within ten years of the adoption of the plan. Additionally, any options
granted to a shareholder who owns at least a ten percent interest in the
Company have a maximum term of ten years. All expenses of administering the
2003, 2004 and 2005 Plans are borne by the Company.
Following is a summary of the stock option activity:
Weighted-
Average
Exercise
Shares Price
----------- -----------
Outstanding at January 1, 2004 1,750,000 $0.20
Granted 2,905,000 $0.42
Forfeited -
Exercised (987,500) $0.24
-----------
Outstanding at December 31, 2004 3,667,500 $0.20
Granted 8,960,000 $0.33
Forfeited (2,460,000) $0.24
Exercised (280,000) $0.18
-----------
Outstanding at December 31, 2005 9,887,500 $0.31
===========
Exercisable at December 31, 2005 5,942,750 $0.32
===========
Weighted average fair value of options
granted in 2005 $0.33
Following is a summary of the status of options outstanding at December 31,
2005:
Outstanding Options Exercisable Options
------------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Exercise Price Amount Life(in years) Price Amount Price
-------------- ------- --------------- -------- --------- --------
$ 0.06-$0.24 552,500 3.91 $ 0.13 390,000 $ 0.13
$ 0.23-$0.76 9,335,000 4.00 $ 0.33 5,552,750 $ 0.33
Following is a summary of the status of options outstanding at December 31,
2004:
Outstanding Options Exercisable Options
------------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Exercise Price Number Life Price Number Price
-------------- --------- ----------- ----------- ------------ -----------
$ 0.06-$0.24 762,500 4.91 $ 0.13 1,387,500 $ 0.13
$ 0.40-$0.76 2,905,000 5.00 $ 0.56 938,750 $ 0.56
No compensation cost was recognized for the years ended December 31, 2005 and
2004 as all options granted during the periods were to employees and were
above fair market value of the stock on the date of grant.
F-33
78
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - STOCKHOLDERS' EQUITY, continued
The assumptions used in calculating the fair value of options granted using
the Black-Scholes option-pricing model are as follows:
2005 2004
---- -----
Risk-free interest rate 4.47% 4.00%
Expected life of the options 5.00 years 5.00 years
Expected volatility 291% 275%
Expected dividend yield 0 0
NOTE 17 - SEGMENT REPORTING
The Company has two reportable segments consisting of consulting services and
communications. The Company evaluates performance based on sales, gross
profit margins and operating profit before income taxes. The following is
information for the Company's reportable segments as of and for the years
ended December 31, 2005 and 2004 (in thousands):
2005:
Consulting Communications
Segment Segment Unallocated Total
------------- ------------ ----------- ------------
Net revenue $ 13,929 $ 3,594 $ - $ 17,523
Gross profit 1,518 635 - 2,153
Depreciation (29) (114) - (143)
Amortization (43) (60) - (103)
Interest expense (883) (17) - (900)
Income (loss) before
provision for income
tax and minority
interest allocation 392 (809) - (417)
Identifiable assets 2,722 2,869 - 5,591
Capital expenditures 60 385 - 445
F-34
79
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - SEGMENT REPORTING, continued
2004:
Consulting Communications
Segment Segment Unallocated Total
------------- ------------ ------------ -----------
Revenue $ 12,153 $ 2,102 $ - $ 14,255
Gross margin 1,938 724 - 2,662
Depreciation (7) (15) - (22)
Amortization (9) (71) - (80)
Interest expense (533) (6) - (539)
Loss before provision
for income tax and
minority interest
allocation (1,235) (285) - (1,520)
Identifiable assets 3,697 364 - 4,061
Capital expenditures - 21 - 21
NOTE 18 - RELATED PARTY TRANSACTIONS
In 2004, the Company issued 370,370 shares of common stock for management fees
amounting $100,000. These shares have been issued to the management of IPN as
part of the management agreement between the Company and IPN for services that
were provided in 2004. Zero and $100,000 has been expensed for the years
ended December 31, 2005 and 2004, respectively. The Company also entered into
a service agreement with IPN principals (current Company employees) in which
the Company granted 1,500,000 options to IPN management to be vested over a
period of two years. On October 1, 2005, the management agreement was
terminated and 825,000 options were cancelled. Additionally, on October 1,
2005, the Company entered into a commission only sales consulting agreement
with one of the IPN principals.
In November 2004, the Company issued 491,804 shares of its common stock to
acquire the remaining 49% of IPN. In December 2004, the Company and the three
former shareholders of IPN who received the Company shares reached an
agreement to rescind the issuance of the 491,804 shares. As part of the
agreement, the Company paid $10 as full consideration for the remaining 49% of
IPN. The 491,804 shares have not been included in the issued and outstanding
shares of the Company. In April 2005 these shares were cancelled.
The Company entered into written employment agreements with its two principal
shareholders as officers of the Company on August 18, 2005 to be effective as
of January 19, 2005. Under the terms of the agreements, the principals will
earn an annual salary of $140,000 in 2005 and $160,000 in 2006, payable in a
combination of cash and common stock over the term of the agreements.
Further,
F-35
80
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - RELATED PARTY TRANSACTIONS, continued
they shall receive stock option grants of no less than 100,000 shares per
quarter vesting over two years with an exercise price equal to the average
closing price for the Company's common stock for the five trading days
immediately preceding and following the grant date. The Company granted
1,800,000 options to these employees during the year ended December 31, 2005.
As part of the purchase of certain assets of CBSi (see Note 19) the Company
assumed an agreement with MBSi Capital Corp., ("CBSi") an entity majority
owned by a director and shareholder of the Company. Under the terms of the
agreement, MBSi will provide customer and technical support for GPS clients of
the Company on a per unit basis. During the year ended December 31, 2005, no
payments were made under this agreement.
Notes receivable represents a $100,000 note receivable purchased by the
Company in the CBSi acquisition (see Note 19) and an additional advance of
$30,000 during the year ended December 31, 2005. The note is due from MBSi
and is unsecured, bears interest at 7% payable annually on September 15 of
each year and the principal is due September 15, 2010. The Company recorded
interest income of $2,668 related to the notes during the year ended December
31, 2005.
NOTE 19 - ACQUISITIONS
ISS
---
On March 1, 2005, the Company completed the purchase of certain assets of ISS.
The Company agreed to pay $50,000 in cash and $50,000 in restricted common
stock of the Company for all of ISS's contracts with existing customers,
customer lists and certain equipment used in ISS's information technology
business. Moreover, under the agreement, the Company may pay an earn out up
to $400,000, payable in the Company's restricted common stock if certain
levels of revenues and net income before taxes are achieved during any
consecutive twelve months following the closing. The earn out expires three
years following the closing. The acquired assets are held in DNM. DNM is an
IT consultancy and solutions provider for government, public safety and
homeland security agencies.
The purchase price was determined in arms-length negotiations between the
parties. A summary of the assets acquired and consideration is as follows:
Allocated Amount
----------------
Equipment $ 100,000
-----------
$ 100,000
===========
Consideration paid Amount
------------------ ------------
Restricted common stock (117,664 shares) $ 50,000
Cash 50,000
-----------
$ 100,000
===========
F-36
81
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - ACQUISITIONS, continued
CBSi
-----
On September 15, 2005, the Company completed the purchase of the assets of
CBSi. The Company agreed to pay $850,000 in restricted common stock of the
Company for all of CBSi's net assets, contracts with existing customers,
customer lists, software, intangibles and equipment used in CBSi's asset and
vehicle tracking business. Moreover, under the agreement, the Company may pay
an earn out of up to 20 million shares payable in restricted common stock of
the Company. Under the earn out plan, the CBSi shareholders may earn shares
of restricted common stock of the Company based upon certain gross profit
dollars achieved during the three (3) years following the closing of the asset
acquisition.
The purchase price was determined in arms-length negotiations between the
parties. A summary of the net assets acquired and consideration is as
follows:
Allocated Amount
----------------
Cash $ 200,426
Notes and accounts receivable 310,684
Inventories 875,655
Other assets 21,573
Equipment 154,729
Software development costs 154,132
Client lists 13,528
Due to DataLogic (668,225)
Notes payable (176,149)
Accounts payable (16,228)
Deferred revenue (20,125)
------------
Total $ 850,000
============
Consideration paid Amount
------------------ ------------
Restricted common stock (3,003,534 shares)$ 850,000
============
Blubat
------
On November 21, 2005, the Company completed the purchase of BluBat, Inc. The
Company agreed to pay $400,000 in a combination of cash, notes payable and
restricted common stock of the Company to the former shareholders of BluBat,
Inc. in exchange for all of the outstanding and issued stock of BluBat, Inc.
Moreover, under the agreement, the Company may pay an earn out of up to
$450,000, payable in the Company's restricted common stock if certain levels
of revenues and net income before taxes are achieved during any consecutive
twelve months following the closing. The earn out expires two years following
the closing.
F-37
82
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - ACQUISITIONS, continued
The purchase price was determined in arms-length negotiations between the
parties. A summary of the net assets acquired and consideration is as
follows:
Allocated Amount
----------------
Cash $ 115,945
Accounts receivable 196,166
Client lists 720,779
Goodwill 288,000
Accounts payable (260,762)
Deferred revenue (372,128)
Deferred tax liability (288,000)
------------
$ 400,000
============
Consideration paid Amount
------------------ ------------
Cash $ 50,000
Notes payable 50,000
Restricted common stock (1,038,062 shares) 300,000
------------
$ 400,000
============
As part of the purchase the Company recorded deferred income taxes related to
the book basis of acquired amortizable intangibles in the amount of $288,000.
The following unaudited pro forma combined results of operations indicate the
historical results that would have been shown had ISS and BluBat operating
results been included with the Company for the years ended December 31, 2005
and 2004, respectively, and the results for the period of January 31, 2005
(date of CBSi inception) through December 31, 2005 for CBSi. The pro forma
information is provided for informational purposes only. It is based on
historical information and does not necessarily reflect the actual results
that would have occurred and is not necessarily indicative of future results
of operations of the combined companies.
For the For the
year ended year ended
December 31, 2005 December 31, 2004
------------------ ------------------
Total revenues $ 19,642,597 $ 18,286,336
================== =================
Net loss $ (787,001) $ (1,482,329)
================== =================
Pro forma net loss per share -
basic and diluted $ (0.02) $ (0.04)
================== =================
F-38
83
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - SUBSEQUENT EVENTS
On January 20, 2006, the Company entered into a Securities Purchase Agreement
(the "Agreement") with Laurus Master Fund, Ltd. ("Laurus"). Pursuant to the
Agreement, the Company issued to Laurus a Secured Term Note (the "New Note")
in the principal amount of $3,250,000 and redeemed the $3,000,000 original
principal amount under the Secured Convertible Term Note due June 25, 2007
(the "Old Note") held by Laurus (see Note 12). The New Note, which is not
convertible, bears interest at the coupon rate of the prime rate plus 2.00%
(or 10.25% as of June 30, 2006) and is subject to a floor interest rate of
8.00%. The New Note matures on December 31, 2007. The initial monthly
principal payment of $154,761.90 is due on April 1, 2006. In connection with
the sale of the New Note to Laurus, the Company issued to Laurus an option to
purchase 1,560,000 shares of the Company's common stock for $.001 per share in
a private placement exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
The redemption price of the Old Note was $2,153,091, comprising 105% of
outstanding principal and accrued interest. The Company paid Laurus fees of
$48,750 in connection with the New Note.
The net proceeds from the New Note will be used for the repayment in full of
the Old Note and general corporate purposes. The Company has the option of
prepaying the New Note, upon seven days' written notice, by paying an amount
equal to 103% of the principal amount outstanding, plus accrued but unpaid
interest and any and all other sums due, accrued or payable to the holder of
the New Note.
The New Note is collateralized by a security interest in substantially all of
the Company's assets and the assets of the Company's subsidiaries pursuant to
a Master Security Agreement by and among Laurus, the Company and its
subsidiaries entered into concurrently with the Agreement (the "New Master
Security Agreement") and other related security agreements. The Company's
obligations under the New Note are guaranteed by each of its subsidiaries.
The Company is obligated to file a registration statement for the shares of
common stock issuable upon exercise of the option sold to Laurus pursuant to a
Registration Rights Agreement by and between Laurus and the Company entered
into concurrently with the Agreement (the "New Registration Rights
Agreement"). The registration statement is required to be filed within 90
days of the consummation of the transaction described above and is required to
be declared effective within 150 days of the consummation of the transaction
described above.
If the Company were to default on the New Note, the amount of the principal
balance would increase to 130% of the then-outstanding principal and be
subject to acceleration.
F-39
84
DATALOGIC INTERNATIONAL INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - SUBSEQUENT EVENTS, continued
Since the modification of the New Note results in terms that, pursuant to EITF
Issue No. 96-19, "Debtor's Accounting for a Modification or Exchange of Debt
Instruments" are substantially different from the terms of the Old Note, the
modification will be recorded in 2006 as an extinguishment of debt. A
non-cash charge of approximately $900,000 will be included in the consolidated
statement of operations during the first quarter of 2006, representing the
amount of fees paid to Laurus to cancel the Old Note and issue the New Note,
the amount of unamortized debt discount and the amount of unamortized debt
issuance costs. The value of the new warrants will be recorded as a debt
discount on the New Note and amortized over the New Note life.
On March 31, 2006, Laurus and the Company entered into an amendment to the New
Note that defers the date of initial monthly principal payment thereunder from
April 1, 2006 to May 1, 2006. The amount of the April installment will be
added to the principal of the New Note to be repaid by the Company at
maturity. The company issued 40,000 shares of common stock to Laurus as
consideration for the amendment.
In January 2006, the Company issued 398,947 shares that were committed to be
issued at December 31, 2005 (see Note 16). In February 2006, the Company
issued 163,326 shares for services performed in 2006 valued at $37,565.
On March 21, 2006, the Company entered into two agreements with Monarch Bay
Management Company, L.L.C. ("MBMC"): (a) an agreement for corporate
development strategy and execution services and (b) an agreement for chief
financial officer services. Keith Moore, our Chief Executive Officer, is a
member of MBMC.
Corporate Development Services Agreement. Under the corporate development
services agreement with MBMC, the Company will pay to MBMC a monthly fee of
$7,000 (or $14,000 in the case of the initial payment). The monthly fee is
payable $3,000 in cash and $4,000 in shares of common stock ($6,000 in cash
and $8,000 in shares of common stock in the case of the initial payment). The
number of shares of common stock to be issued will calculated based on the
average closing price of the Company's common stock for the last ten days of
each month in which the monthly fee is earned. The Company will also
reimburse MBMC for certain expenses in connection with providing services. In
addition, the Company will grant to MBMC on a quarterly basis commencing April
1, 2006, an option to purchase 75,000 shares (or 50,000 shares in the case of
the initial grant) of common stock at an exercise price equal to 120% of the
average closing price of our common stock for the last ten days of the quarter
for which the option is granted; provided that if certain milestones specified
in the agreement are achieved the exercise price of the options will be
reduced to 100% of the average closing price of its common stock for the last
ten days of the quarter for which the option is granted. The options will be
exercisable for a period of five years following the date of grant. The
initial term of the agreement expires on December 31, 2006 and continues
thereafter on a month-to-month basis unless terminated by either party.
Chief Financial Officer Services Agreement. Under the chief financial officer
services agreement with MBMC, the Company will pay to MBMC a monthly fee of
$6,250 in cash. The Company will also reimburse MBMC for certain expenses in
connection with providing services to us. The initial term of the agreement
expires on March 31, 2007 and renews thereafter on an annual basis unless
terminated by either party.
F-40
85
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30
2006 2005
(Restated)
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 545,409 $ 424,625
Accounts receivable, net of allowance
for doubtful accounts of $7,117 and
$115,312, respectively 2,537,638 1,645,958
Marketable securities available for sale 3,522 7,500
Inventories 249,600 455,964
Prepaid expenses and other current assets 284,966 307,381
------------- ------------
Total current assets 3,621,135 2,841,428
RESTRICTED CASH - 972,095
NOTES RECEIVABLE 430,000 -
PROPERTY AND EQUIPMENT, net 117,336 154,331
OTHER ASSETS:
Software development costs and licenses, net 377,083 10,927
Loan origination costs, net - 207,332
Client lists, net 600,650 -
Goodwill 288,000 -
Deposits 17,662 9,111
------------- ------------
$ 5,451,866 $ 4,195,224
============= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,193,406 $ 1,263,710
Accrued payroll and related taxes 727,126 606,769
Current portion of deferred revenue 366,843 602,801
Notes payable - officers - 55,624
Current portion of notes payable 1,873,188 255,000
Current portion of convertible debt - 769,692
------------- ------------
Total current liabilities 4,160,563 3,553,596
------------- ------------
LONG-TERM LIABILITIES:
Notes payable, net of current portion 1,083,332 -
Convertible debt, net of current portion and
discount of $1,066,848 as of June 30, 2005 - 587,745
Derivative and warrant liabilities 339,750 499,489
Deferred tax liability 288,000 -
Deferred revenue, net of current portion 22,972 -
------------- ------------
Total long-term liabilities 1,734,054 1,087,234
------------- ------------
Total liabilities 5,894,617 4,640,830
------------- ------------
STOCKHOLDERS' DEFICIT:
Common stock, $0.001 par value; 100,000,000
shares authorized; 53,902,959 and 39,434,092
shares issued and outstanding at June 30,
2006 and 2005, respectively 53,904 39,434
Additional paid-in capital 6,272,081 2,641,156
Shares to be issued, 361,334 and 307,219 shares
at June 30, 2006 and 2005, respectively 70,800 225,290
Unamortized consulting fees (6,374) (23,804)
Accumulated other comprehensive loss (3,678) -
Accumulated deficit (6,829,484) (3,327,682)
------------- ------------
Total stockholders' deficit (442,751) (445,606)
------------- ------------
$ 5,451,866 $ 4,195,224
============= ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-41
86
Net revenue $ 5,072,279 $ 4,484,178 $ 9,296,581 $ 7,852,446
Cost of revenue 4,520,061 3,958,087 8,305,374 6,891,587
------------- ------------- ------------- -------------
Gross profit 552,218 526,091 991,207 960,859
Operating expenses 1,020,334 696,917 2,700,475 1,371,478
------------- ------------- ------------- -------------
Total operating expenses 1,020,334 696,917 2,700,475 1,371,478
------------- ------------- ------------- -------------
Loss from operations (468,116) (170,826) (1,709,268) (410,619)
------------- ------------- ------------- -------------
Non-operating income (expense):
Interest expense, net (89,136) (207,852) (176,606) (443,216)
Loss from debt extinguishment - - (1,337,859) -
Change in fair value of derivative
and warrant liabilities 416,955 451,974 198,087 1,132,950
Other-than-temporary write-down of
marketable securities available for sale - (196,000) - (196,000)
Gain from sale of property and equipment 14,868 - 24,829 -
------------- ------------- ------------- -------------
Total non-operating income (expense) 342,687 48,122 (1,291,548) 493,734
------------- ------------- ------------- -------------
Income (loss) before provision for income tax (125,429) (122,704) (3,000,816) 83,115
Provision for income tax - - 800 3,200
------------- ------------- ------------- -------------
Net income (loss) (125,429) (122,704) (3,001,616) 79,915
Other comprehensive (loss):
Temporary (decrease) in fair value of
marketable securities available for sale (8,938) - (3,678) -
------------- ------------- ------------- -------------
Net comprehensive (loss) $ (134,367) $ (122,704) $ (3,005,295) $ 79,915
============= ============= ============= =============
Income (loss) per share - basic $ (0.00) $ (0.00) $ (0.06) $ 0.00
============= ============= ============= =============
Basic weighted average shares outstanding* 49,196,515 39,434,092 47,400,526 39,382,631
============= ============= ============= =============
Income (loss) per share - diluted $ (0.00) $ (0.00) $ (0.06) $ 0.00
============= ============= ============= =============
Diluted weighted average shares outstanding* 49,196,515 39,434,092 47,400,526 39,842,412
============= ============= ============= =============
* Weighted average number of shares used to compute basic and diluted loss
per share is the same since the effect of dilutive securities is
anti-dilutive for the quarters ended June 30, 2006 and 2005 and the
six months ended June 30, 2006.
The accompanying notes are an integral part of these
consolidated financial statements.
F-42
87
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30
2006 2005
------------ -------------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(3,001,616) $ 79,915
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss on extinguishment of debt 1,337,859 -
Depreciation and amortization 289,470 61,497
Amortization of discount and loan origination costs on convertible debt 39,801 334,919
Change in fair value of derivative and warrant liabilities (198,087) (1,132,950)
Issuance of or commitment to issue shares and options for compensation 397,491 170,379
Shares issued for interest 9,200 19,987
Other than temporary write-down of marketable securities available for sale - 196,000
Gain on sale of property and equipment (24,829) -
(Increase) decrease in operating assets, net of acquisitions
and dispositions:
Accounts receivable (651,133) (15,388)
Inventories 542,744 (402,438)
Prepaid expenses and other current assets (173,876) (179,079)
Deposits 8,773 -
Increase (decrease) in operating liabilities, net of acquisitions
and dispositions:
Accounts payable and accrued expenses (271,653) 423,126
Deferred revenue (9,690) 602,801
------------ -------------
Total adjustments 1,296,070 78,854
------------ -------------
Net cash provided by (used in) operating activities (1,705,546) 158,769
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances on notes receivable (50,000) -
Proceeds from sale of property and equipment 24,663 -
Acquisition of property and equipment and costs incurred for
software development (39,412) (91,282)
------------ -------------
Net cash used in investing activities (64,749) (91,282)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 3,300,000 -
Proceeds from issuance of common stock 1,423,820 -
Decrease in restricted cash - 286,594
Payment of convertible debt (2,108,546) (241,557)
Fees paid in connection with extinguishment of debt (163,278) -
Payment of notes payable (593,072) (334,746)
Proceeds from stock options - 3,000
------------ -------------
Net cash provided by (used in) financing activities 1,858,924 (286,709)
------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 88,629 (219,222)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 456,780 643,847
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 545,409 $ 424,625
============ =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-43
88
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005
2006 2005
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 110,173 $ 42,251
Income taxes paid during the period $ 800 $ 1,600
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
2006
On June 30, 2006, the Company committed to issue 40,000 shares for the
exercise of stock options with an exercise price of $0.15 per share and 20,000
shares for the exercise of stock options with an exercise price of $0.24 per
share for a total value of $10,800 against notes payable - officers.
The Company purchased equipment valued at $11,100 in exchange for a note
payable.
On June 30, 2006, the Company sold inventory for a note receivable of
$250,000.
2005
During the six months ended June 30, 2005, the Company issued 252,525 and
47,588 shares of common stock in payment of principal and interest of $106,061
and $19,987, respectively, on the convertible debt. The Company issued 20,000
shares for the exercise of stock options with an exercise price of $0.15 per
share.
The accompanying notes are an integral part of these consolidated financial
statements.
F-44
89
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 1 - DESCRIPTION OF BUSINESS
Description of Business
-----------------------
DataLogic International, Inc. ("DataLogic" or the "Company") provides
communication solutions including network design and project management,
mobile asset tracking and secured mobile communications. The Company provides
these solutions and Information Technology ("IT") outsourcing and consulting
services to a wide range of U.S. and international governmental agencies and
commercial enterprises. The Company leverages its technology expertise,
customer relationships and supplier channels to develop solutions addressing
the rapidly growing GPS and communications markets.
On June 2, 2003, we acquired 51% of IPN Communications, Inc. ("IPN"). On
November 5, 2004, we acquired the remaining 49% of IPN.
On January 13, 2004, the Company acquired the Machine-to-Machine ("M2M")
GPS-based technology and entered into the GPS mobile asset tracking business.
The Company derives its GPS-based revenues from the sale of mobile tracking
units, software and hardware licenses.
On September 15, 2005, the Company acquired the assets of CBSi, Inc. ("CBSi")
and their GPS-based mobile asset tracking solution (see Note 18).
On November 21, 2005, the Company acquired BluBat, Inc., ("BluBat") a provider
of network design, security, management and software engineering services to
further increase its communications capabilities.
On June 30, 2006, the Company entered into an Asset Purchase Agreement with
Huron Holdings, Inc. ("Huron") whereby the Company sold certain inventory and
assets related to the Company's small fleet/sub-prime lending market
operations including its BounceGPS trademark and existing customer
relationships.
The Company's wholly owned subsidiaries include DataLogic Consulting, Inc.
("DCI"), IPN Communications, Inc. ("IPN") and DataLogic New Mexico, Inc.
("DNM").
DCI provides complete IT consulting services that include, but are not limited
to, project management and systems analysis, design, implementation, testing
and maintenance. DCI also provides short and long-term staffing solutions to
IT clients, healthcare providers and other businesses.
IPN provides VoIP telephony products and services. IPN derives its VoIP
revenues from phone sets and residual airtime sales.
DNM was formed in the first quarter of 2005 as a result of the acquisition of
the assets of IS Solutions, LLC ("ISS"). DNM is an IT solutions provider for
public safety and homeland security agencies.
F-45
90
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 1 - DESCRIPTION OF BUSINESS, continued
Basis of Presentation
---------------------
The accompanying consolidated interim financial statements have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission ("SEC") for the presentation of interim financial information.
These interim consolidated financial statements are unaudited and, in the
opinion of management, include all adjustments (consisting of normal recurring
adjustments and accruals) necessary to present fairly the consolidated balance
sheet, consolidated operating results and consolidated cash flows for the
periods presented in accordance with accounting principles generally accepted
in the United States of America ("GAAP"). Operating results for the three and
six months ended June 30, 2006 are not necessarily indicative of the results
that may be achieved for the year ending December 31, 2006 or for any other
interim period during such year. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with GAAP
have been omitted in accordance with the rules and regulations of the SEC.
These interim consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto contained
in the Company's Form 10-KSB for the year ended December 31, 2005.
Restatement of Financial Statements
-----------------------------------
After reviewing the provisions of the Laurus notes, management determined that
the notes included certain features that are considered embedded derivative
financial instruments, such as the conversion feature, a variable interest
rate feature, events of default and a liquidated damages clause, which
required recording at their fair value. This adjustment has been reflected in
the period ended June 30, 2005. The Company also made certain
reclassifications.
The effect of the adjustments and reclassifications on the financial
statements as of and for the three and six months ended June 30, 2005 is as
follows:
F-46
91
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 1 - DESCRIPTION OF BUSINESS, continued
The effect of the adjustments on the consolidated balance sheet is as follows:
Long-term portion of convertible debt, net of discount, decreased by
$479,103.
Derivative and warrant liabilities increased by $499,489.
Additional paid-in capital decreased by $892,356.
Accumulated deficit decreased by $871,970.
Consolidated Statement of Operations for the three and six months ended June
30, 2005:
Operating expenses increased by $772 and $0, respectively.
Interest expense increased by $93,910 and $182,361, respectively.
Change in fair value of derivative and warrant liabilities increased by
$416,955 and $198,087, respectively.
Net loss decreased by $355,339 and $950,589, respectively, resulting in
net income of $79,915 for the six months ended June 30, 2005.
Consolidated Statement of Cash Flows for the six months ended June 30, 2005:
Net loss decreased by $950,589, resulting in net income of $79,915.
Depreciation and amortization decreased by $26,538.
Amortization of discount on convertible debt and debt issuance costs
increased by $334,919.
Change in fair value of derivative and warrant liabilities decreased by
$1,132,950.
Issuance of or commitment to issue shares and options for compensation
Increased by $51,289.
Accounts payable and accrued expenses decreased by $132,832.
Acquisition of property and equipment increased by $31,065.
Payments on notes payable and convertible debt decreased by $101,444.
Going Concern
-------------
The Company's consolidated financial statements are prepared using the accrual
method of accounting in accordance with accounting principles generally
accepted in the United States of America ("GAAP"), and have been prepared on a
going concern basis, which contemplates the realization of assets and the
settlement of liabilities in the normal course of business. The Company has
an accumulated deficit of $6,829,484 at June 30, 2006 and a history of
operating losses over the last several years. Management has taken various
steps to revise its operating and financial requirements, which
F-47
92
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 1 - DESCRIPTION OF BUSINESS, continued
it believes will be sufficient to provide the Company with the ability to
continue its operations for the next twelve months. Management has also
devoted considerable effort during the six months ended June 30, 2006 towards
management of liabilities and improvement of the Company's operations.
In view of the matters described above, recoverability of a major portion of
the recorded asset amounts shown in the accompanying consolidated balance
sheet is dependent upon continued operations of the Company, which in turn is
dependent upon the Company's ability to raise additional capital, obtain
financing and to succeed in its future operations. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts and classification of liabilities
that might be necessary should the Company be unable to continue as a going
concern.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts and
transactions of DataLogic International, Inc. and its subsidiaries. All
intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
----------------
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates include the
collectibility of accounts receivable, the realizability of inventories, the
recoverability of long-lived assets and the valuation allowance of the
deferred tax asset. Actual results could differ from those estimates.
Cash Equivalents
----------------
For purposes of the statements of cash flows, the Company considers highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
F-48
93
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Accounts Receivable
-------------------
Accounts receivable consists of amounts billed to customers upon performance
of service or delivery of goods and expenses incurred by the Company but not
yet billed to customers for consulting services ($256,204 as of June 30, 2006
and $194,358 as of June 30, 2005). The Company performs ongoing credit
evaluations of customers and adjusts credit limits based upon payment history
and the customers' current creditworthiness, as determined by its review of
their current credit information. The Company continuously monitors
collections and payments from its customers and maintains a provision for
estimated credit losses based upon its historical experience and any
customer-specific collection issues that it has identified.
Marketable Securities Available for Sale
----------------------------------------
The Company's securities are marketable equity securities that are classified
as available for sale and, as such, are initially recorded at cost and
adjusted to their fair value at each balance sheet date. Securities
classified as available for sale may be sold in response to changes in
interest rates, liquidity needs and for other purposes and accordingly, are
classified as current assets in the accompanying consolidated balance sheet.
Unrealized holding gains and losses on available for sale securities are
excluded from earnings and reported as other comprehensive income or loss, net
of tax, as a separate component of stockholders' equity.
In accordance with the guidance of Emerging Issues Task Force ("EITF") Issue
No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments," the Company assesses any decline in value of
available-for-sale securities below cost as to whether such decline is "other
than temporary". If a decline is determined to be "other than temporary" the
decline is recorded as a reduction of the cost basis of the security and is
included in the statement of operations as an impairment write down of the
investment (see Note 3).
Inventories
-----------
Inventories consist of finished goods and are valued at the lower of cost
(determined on a weighted average basis) or market. Management compares the
cost of inventories with their market value and an allowance is recorded to
write down the cost of inventories to their market value, if lower. Finished
F-49
94
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
goods inventories are comprised of phone, GPS and video communications
products.
Property and Equipment
----------------------
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets. The
useful lives for the related assets range from five to seven years.
Maintenance and repairs are charged to expense as incurred. Renewals and
improvements of a major nature are capitalized. At the time of retirement or
other disposition of property and equipment, the cost and accumulated
depreciation are removed from the accounts and any resulting gains or losses
are reflected in the consolidated statement of operations.
Other Assets
------------
Other assets consist of software development costs, website development costs,
software licenses, loan origination costs, client lists and goodwill, and are
recorded at cost.
Software development costs incurred in the development of certain products are
capitalized upon reaching technological feasibility in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for
the Costs of Computer Software to be Sold, Licensed, or Otherwise Marketed."
All other software research, development and maintenance costs are expensed in
the period incurred. The Company evaluates the carrying value of such costs,
on a periodic basis, by comparing such amounts to their net realizable value.
Amounts in excess of net realizable value are charged to operations.
Amortization of such costs are provided over the greater of the amount
computed using the straight-line method over the estimated life of each
product commencing upon the initial sale of the product or the ratio of
current revenues to the total of current and anticipated future revenues for
the related product.
Website development costs and software licenses are recorded at cost and
amortized using the straight-line method over their estimated useful lives of
2-5 years.
F-50
95
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Loan origination costs are capitalized and amortized using the straight-line
method (which approximates the effective interest method) over the term of the
related debt instrument.
Client lists are recorded at their allocated fair values in purchase
accounting (see Note 18) and are being amortized over their estimated useful
lives of three years.
Goodwill
--------
Goodwill represents the excess of acquisition cost over the net assets
acquired in a business combination and is not amortized in accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets." The provisions of SFAS
No. 142 require that the Company allocate its goodwill to its various
reporting units, determine the carrying value of those businesses, and
estimate the fair value of the reporting units so that a two-step goodwill
impairment test can be performed. In the first step of the goodwill
impairment test, the fair value of each reporting unit is compared to its
carrying value. Management reviews, on an annual basis, the carrying value of
goodwill in order to determine whether impairment has occurred. Impairment is
based on several factors including the Company's projection of future
discounted operating cash flows. If an impairment of the carrying value were
to be indicated by this review, the Company would perform the second step of
the goodwill impairment test in order to determine the amount of goodwill
impairment, if any.
Long-Lived Assets
-----------------
The Company accounts for its long-lived assets in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the historical cost carrying
value of an asset may no longer be appropriate. The Company assesses
recoverability of the carrying value of an asset by estimating the future net
cash flows expected to result from the asset, including eventual disposition.
If the future net cash flows are less than the carrying value of the asset, an
impairment loss is recorded equal to the difference between the asset's
carrying value and fair value or disposable value. As of June 30, 2006, the
F-51
96
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Company does not believe there has been any impairment of its long-lived
assets. There can be no assurances, however, that demand for the Company's
products and services will continue, which could result in an impairment of
long-lived assets in the future.
Convertible Debt
----------------
The Company records its convertible debt net of the debt discount. From time
to time, the Company has debt with conversion options that provide for a rate
of conversion that is below market value. This feature is normally
characterized as a beneficial conversion feature ("BCF"), which is recorded by
the Company pursuant to EITF Issue No. 98-5 ("EITF 98-05"), "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios," and EITF Issue No. 00-27, "Application of EITF
Issue No. 98-5 to Certain Convertible Instruments."
If a BCF exists, the Company records it as a debt discount. Debt discounts
are amortized to interest expense over the life of the debt on a straight-line
basis, which approximates the effective interest method.
Derivative Financial Instruments
--------------------------------
The Company's derivative financial instruments consist of embedded derivatives
related to the Laurus notes entered into on June 25, 2004, since the notes are
either not conventional convertible debt or the warrants require registration
(see Note 13). The embedded derivatives include the conversion feature,
monthly payment options, variable interest features, liquidated damages
clauses in the registration rights agreement and certain default provisions.
The accounting treatment of derivative financial instruments requires that the
Company record the derivatives and related warrants at their fair values as of
the inception date of the agreement and at fair value as of each subsequent
balance sheet date.
In addition, under the provisions of EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock," as a result of entering into the convertible debt, the
Company is required to classify all other non-employee stock options and
warrants as derivative liabilities and mark them to market at each reporting
date (see Note 13).
F-52
97
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Conversion-related derivatives were valued using the Binomial Option Pricing
Model, which also considered probability analysis related to trading volume
restrictions. The interest rate adjustment provision was valued using
discounted cash flows and probability analysis. Options and warrants were
valued using the Black-Sholes model, with the following assumptions:
2006 2005
---------------------- ---------------------
Risk-free interest rate 4.53 - 5.15% 4.01 - 4.22%
Volatility 291 - 303% 282 - 287%
Expected dividend yield 0% 0%
Any change in fair value of these instruments will be recorded as
non-operating, non-cash income or expense at each reporting date. If the fair
value of the derivatives is higher at the subsequent balance sheet date, the
Company will record a non-operating, non-cash charge. If the fair value of the
derivatives is lower at the subsequent balance sheet date, the Company will
record non-operating, non-cash income. The derivative and warrant liabilities
are recorded as long-term liabilities in the consolidated balance sheets.
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments consist of cash and cash equivalents,
marketable securities available for sale, accounts receivable, note
receivable, accounts payable and accrued expenses, notes payable and
convertible debt. Pursuant to SFAS No. 107, "Disclosures About the Fair Value
of Financial Instruments," the Company is required to estimate the fair value
of all financial instruments at the balance sheet date. The Company considers
the carrying values of its financial instruments in the financial statements
to approximate their fair values.
Revenue Recognition
-------------------
Revenue is recognized when earned. The Company recognizes revenue on its
software products in accordance with all applicable accounting regulations,
including the American Institute of Certified Public Accountants' ("AICPA")
Statement of Position ("SOP") 97-2, "Software Revenue Recognition", and SOP
98-9, "Modification of SOP 97-2, With Respect to Certain Transactions."
Expenses are recognized in the period in which the corresponding liability is
incurred.
For sales of communication products, the Company's revenue recognition
policies are in compliance with Staff Accounting Bulletin ("SAB") 104.
Revenue is recognized at the date of shipment to customers when a formal
arrangement exists, the price is fixed or determinable, the delivery is
completed, no other significant obligations of the Company exist and
collectibility is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as
deferred revenue in the accompanying consolidated balance sheets. Revenues
and costs of revenues from consulting contracts are recognized during the
period in which the service is performed.
F-53
98
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
The Company has contracts with various governments and governmental agencies.
Government contracts are subject to audit by the applicable governmental
agency. Such audits could lead to inquiries from the government regarding the
allowability of costs under applicable government regulations and potential
adjustments of contract revenues. To date, the Company has not been involved
in any such audits.
Income Taxes
------------
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are recognized for future tax benefits or consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
provided for significant deferred tax assets when it is more likely than not
that such assets will not be realized through future operations.
Earnings per Share
------------------
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share"
("EPS"). SFAS No. 128 provides for the calculation of basic and diluted
earnings per share. Basic EPS includes no dilution and is computed by
dividing income or loss available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution of securities that could share in the earnings
or losses of the entity. Such amounts include shares potentially issuable
pursuant to shares to be issued, convertible debentures and outstanding
options and warrants. Had such shares been included in diluted EPS, they
would have resulted in weighted-average common shares of 49,196,515 and
39,434,092 for the three months ended June 30, 2006 and 2005, respectively and
47,400,526 and 39,842,412 for the six months ended June 30, 2006 and 2005,
respectively.
Issuance of Shares for Non-Cash Consideration
---------------------------------------------
The Company accounts for the issuance of equity instruments to acquire goods
F-54
99
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
and/or services based on the fair value of the goods and services or the fair
value of the equity instrument at the time of issuance, whichever is more
reliably determinable. The majority of equity instruments have been valued at
the market value of the shares on the date issued.
The Company's accounting policy for equity instruments issued to consultants
and vendors in exchange for goods and services follows the provisions of EITF
Issue No. 96-18, "Accounting for Equity Instruments That are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services" and EITF Issue No. 00-18, "Accounting Recognition for Certain
Transactions Involving Equity Instruments Granted to Other Than Employees."
The measurement date for the fair value of the equity instruments issued is
determined at the earlier of (i) the date at which a commitment for
performance by the consultant or vendor is reached or (ii) the date at which
the consultant or vendor's performance is complete. In the case of equity
instruments issued to consultants, the fair value of the equity instrument is
recognized over the term of the consulting agreement. In accordance with EITF
Issue No. 00-18, an asset acquired in exchange for the issuance of fully
vested, nonforfeitable equity instruments should not be presented or
classified as an offset to equity on the grantor's balance sheet once the
equity instrument is granted for accounting purposes.
On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
Share-Based Payment ("SFAS 123(R)") which establishes standards for the
accounting for transactions in which an entity exchanges its equity
instruments for goods or services, primarily focusing on accounting for
transactions where an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments,
including stock options, based on the grant-date fair value of the award and
to recognize it as compensation expense over the period the employee is
required to provide service in exchange for the award, usually the vesting
period. SFAS 123(R) supersedes Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" for periods beginning in
fiscal 2006. In March 2005, the Securities and Exchange Commission issued SAB
No. 107 relating to SFAS 123(R). The Company has applied the provisions of SAB
107 in its adoption of SFAS 123(R).
The Company adopted SFAS 123(R) using the modified prospective transition
method, which requires the application of the accounting standard as of
January 1, 2006, the first day of the Company's fiscal year 2006. The
Company's consolidated financial statements as of and for the three and six
months ended June 30, 2006 reflect the impact of SFAS 123(R). In accordance
F-55
100
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
with the modified prospective transition method, the Company's consolidated
financial statements for prior periods have not been restated to reflect, and
do not include, the impact of SFAS 123(R).
SFAS 123(R) requires companies to estimate the fair value of share-based
payment awards on the date of grant using an option-pricing model. The value
of the portion of the award that is ultimately expected to vest is recognized
as expense over the requisite service periods in the Company's consolidated
statement of operations. Prior to the adoption of SFAS 123(R), the Company
accounted for stock-based awards to employees and directors using the
intrinsic value method in accordance with APB Opinion No. 25 as allowed under
SFAS No. 123, "Accounting for Stock-Based Compensation." Under the intrinsic
value method, no stock-based compensation expense had been recognized in the
Company's consolidated statements of operations, other than as related to
option grants to employees and consultants below the fair market value of the
underlying stock at the date of grant.
Stock-based compensation expense recognized during the period is based on the
value of the portion of share-based payment awards that is ultimately expected
to vest during the period. Stock-based compensation expense recognized in the
Company's consolidated statement of operations for the three and six months
ended June 30, 2006 included compensation expense for share-based payment
awards granted prior to, but not yet vested as of December 31, 2005 based on
the grant date fair value estimated in accordance with the pro forma
provisions of SFAS No. 123 and compensation expense for the share-based
payment awards granted subsequent to December 31, 2005 based on the grant date
fair value estimated in accordance with the provisions of SFAS 123(R). As
stock-based compensation expense recognized in the consolidated statement of
operations for the three and six months ended June 30, 2006 is based on awards
ultimately expected to vest, it has been reduced for estimated forfeitures.
SFAS 123(R) requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. The estimated average forfeiture rates for the three and six
months ended June 30, 2006, of approximately 5% was based on historical
forfeiture experience. The estimated pricing term of option grants for the
first six months of 2006 was 5.0 years. In the Company's pro forma
information required under SFAS 123(R) for the periods prior to fiscal 2006,
the Company accounted for forfeitures as they occurred.
SFAS 123(R) requires the cash flows resulting from the tax benefits resulting
from tax deductions in excess of the compensation cost recognized for those
options to be classified as financing cash flows. Due to the Company's loss
position, there were no such tax benefits during the three or six months
F-56
101
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
ended June 30, 2006. Prior to the adoption of SFAS 123(R), those benefits
would have been reported as operating cash flows had the Company received any
tax benefits related to stock option exercises.
The fair value of stock-based awards to employees and directors is calculated
using the Black-Scholes option pricing model, even though this model was
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which differ significantly from the
Company's stock options. The Black-Scholes model also requires subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The expected term of
options granted is derived from historical data on employee exercises and
post-vesting employment termination behavior. The risk-free rate selected to
value any particular grant is based on the U.S Treasury rate that corresponds
to the pricing term of the grant effective as of the date of the grant. The
expected volatility is based on the historical volatility of the Company's
stock price. These factors could change in the future, affecting the
determination of stock-based compensation expense in future periods.
Valuation and Expense Information under SFAS 123(R)
---------------------------------------------------
The weighted-average fair value of stock-based compensation is based on the
single option valuation approach. Forfeitures are estimated and it is assumed
no dividends will be declared. The estimated fair value of stock-based
compensation awards to employees is amortized using the straight-line method
over the vesting period of the options.
The fair value calculations are based on the following assumptions:
2006 2005
---- ----
Risk-free interest rate 4.86% - 5.15% 4.00% - 4.50%
Expected life of the options 5.00 yrs 5.00 yrs
Expected volatility 297% - 303% 276% - 282%
Expected dividend yield 0 0
F-57
102
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
The following table summarizes stock-based compensation expense related to
stock options and employee stock purchase plan purchases under SFAS 123(R) for
the three and six months ended June 30, 2006 which was allocated as follows:
Three Months Ended June 30, Six Months Ended June 30,
2006 2006
---------------------------- ----------------------------
APB Opinion APB Opinion
SFAS No. 123(R) No. 25 SFAS No. 123(R) No. 25
--------------- ------------- --------------- -------------
Net loss $ (125,429) $ (59,209) $ (3,001,616) $ (2,694,634)
=============== ============= =============== =============
Loss per share,
basic and diluted $ (0.00) $ (0.00) $ (0.06) $ (0.06)
=============== ============= =============== =============
A summary of option activity under the Company's stock equity plans during the
six months ended June 30, 2006 is as follows:
Weighted
Average
Weighted Remaining Aggregate
Number of Average Contractual Intrinsic
Shares (in Exercise Term (in Value (in
Thousands) Price Years) Thousands)
---------- --------- ----------- ----------
Outstanding at January 1,2006 9,184 $0.33
Granted 1,575 $0.16
Forfeited (892) $0.28
Exercised (60) $0.18
Outstanding at June, 2006 9,807 $0.32 4.70 $ 2,636
---------- --------- -----------
Vested and expected to vest at
June 30, 2006 3,485 $0.32 3.33 $ 1,868
========== ========= ============ ========
Exercisable at June 30, 2006 113 $0.05 1.50 $ 841
========== ========= ============ ========
F-58
103
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
The following table summarizes significant ranges of outstanding and
exercisable options as of June 30, 2006:
Outstanding Options Exercisable Options
------------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Exercise Price Number Life Price Number Price
-------------- --------- ----------- ----------- ------------ -----------
$ 0.06-$0.24 552,500 4.41 $ 0.13 390,000 $ 0.13
$ 0.23-$0.76 9,254,973 4.75 $ 0.32 7,079,223 $ 0.32
-----------------------------------------------------------------------------
The per share weighted average fair value of options granted during the three
months ended June 30, 2006 and June 30, 2005 was $0.15 and $0.21,
respectively.
The total intrinsic value of options exercised during the three months ended
June 30, 2006 and June 30, 2005 was approximately $6,600 and $3,000,
respectively. As of June 30, 2006, total unrecognized forfeiture adjusted
compensation costs related to nonvested stock options was $788,579, which is
expected to be recognized as an expense over a weighted average period of
approximately 2.0 years.
Prior to fiscal 2006, the weighted-average fair value of stock-based
compensation to employees was based on the single option valuation approach.
Forfeitures were recognized as they occurred and it was assumed no dividends
would be declared.
The estimated fair value of stock-based compensation awards to employees was
amortized using the straight-line method over the vesting period of the
options.
Pro forma results are as follows:
For the three months For the six months
ended June 30, 2005 ended June 30, 2005
(restated) (restated)
-------------------- --------------------
Net income (loss) - as reported $ (123) $ 80
Stock-Based employee compensation
expense included in reported net
income (loss), net of tax - -
F-59
104
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Total stock-based employee
compensation expense determined
under fair-value-based method for
all rewards, net of tax (41) (309)
-------------- --------------
Pro forma net loss $ (164) $ (229)
============== ==============
Income (loss) per share:
Basic and diluted, as reported $ (0.003) $ 0.002
Basic and diluted, pro forma $ (0.004) $ (0.006)
Concentrations of Credit Risk
-----------------------------
The Company maintains its cash balances at financial institutions that are
insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000.
As of June 30, 2006 and at various times throughout the three and six months
ended June 30, 2006, the Company's cash balances exceeded the amount insured
by the FDIC. Management believes the risk of loss of cash balances in excess
of the insured limit to be low.
Three major customers accounted for 66% and 82% of the net revenue for the six
months ended June 30, 2006 and 2005, respectively. Accounts receivable from
these major customers amounted to $1,879,662 and $1,058,000 as of June 30,
2006 and 2005, respectively.
A significant portion of the Company's business is located in Rhode Island,
California and New Mexico and is subject to economic conditions and
regulations in those areas.
The Company extends credit to its customers based upon its assessment of their
credit worthiness and generally does not require collateral.
The Company utilizes a limited number of suppliers for the GPS device
components. The Company has alternate sources to supply its products should
the need arise.
F-60
105
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 3 - MARKETABLE SECURITIES AVAILABLE FOR SALE
The following is a summary of marketable securities available for sale as of
June 30, 2006 and 2005:
Adjusted
Cost Fair Unrealized
Basis Value Gain (Loss)
---------- --------- -----------
June 30, 2006 $ 7,200 $ 3,522 $ (3,678)
June 30, 2005 $ 7,500 $ 7,500 $ -
The decrease in the value of marketable securities available for sale for the
three and six months ended June 30, 2006 was $8,938 and $3,678, respectively.
Unrealized holding gains and losses for the three and six months ended June
30, 2005 were zero. Realized losses on the Other-than-temporary write-down of
marketable securities available for sale were $196,000 for the three and six
months ended June 30, 2005.
NOTE 4 - RESTRICTED CASH
In connection with the Company's private placement of a convertible term note
with Laurus Master Fund, Ltd. ("Purchaser"), (see Note 13) as of June 30,
2005, $972,095 of the principal amount of the convertible term note was held
in a restricted account by the Company but under the sole dominion and control
of the Purchaser as security for the Company's and its subsidiaries'
obligations under the Securities Purchase Agreement and related agreements.
The restricted cash account earned interest at the rate of 3.25% per annum and
the Company earned $1,721 and $7,576 in interest income from the restricted
cash account for the three and six months ended June 30, 2005. All cash in
the restricted account was released to the Company during the third quarter of
2005.
F-61
106
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 5 - NOTES RECEIVABLE
On June 30, 2006, the Company entered into an agreement with Huron. Pursuant
to the agreement, the Company sold to Huron 700 units of its Panther Trak
asset tracking device, related inventory and certain other assets including
its BounceGPS trademark.
In the transaction, the Company received from Huron a $250,000 promissory
note. The promissory note has a term of two years (with quarterly
amortization and payments of principal of $31,250, plus accrued interest) and
bears interest at 9% per annum. There was no interest paid or accrued during
the three or six months ended June 30, 2006.
As part of the purchase of certain assets of CBSi (see Note 18) the Company
assumed an agreement with MBSi Capital Corp., ("MBSi") an entity majority
owned by a director and shareholder of the Company. Under the terms of the
agreement, MBSi will provide customer and technical support for GPS clients of
the Company on a per unit basis. This agreement was terminated on March 31,
2006. During the six months ended June 30, 2006, no payments were made under
this agreement.
Note receivable represents a $100,000 note receivable purchased by the Company
in the CBSi acquisition (see Note 18) and an additional advance of $30,000
during the year ended December 31, 2005 and $50,000 during the six months
ended June 30, 2006. The note is due from MBSi and is unsecured, bears
interest at 7% payable annually on September 15 of each year and the principal
is due September 15, 2010. The Company recorded interest income of $3,107 and
$6,214 related to the note during the three and six months ended June 30,
2006.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 30, June 30,
2006 2005
------------ ------------
Office equipment and furniture $ 150,798 $ 104,730
Computer equipment and software 111,537 122,566
------------ ------------
262,335 227,296
Less accumulated depreciation (144,999) (72,965)
------------ ------------
$ 117,336 $ 154,331
============ ============
Depreciation expense was $24,648 and $14,761 for the three months ended June
30, 2006 and 2005, respectively. Depreciation expense was $37,796 and $23,116
for the six months ended June 30, 2006 and 2005, respectively.
NOTE 7 - SOFTWARE DEVELOPMENT COSTS AND LICENSES
Software development costs and licenses consist of the following:
June 30, June 30,
2006 2005
------------ ------------
Software development costs and licenses $ 604,000 $ 39,000
Website development costs 4,900 4,900
------------ ------------
F-62
107
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 7 - SOFTWARE DEVELOPMENT COSTS AND LICENSES, continued
608,900 43,900
Less accumulated amortization (231,817) (32,973)
------------ ------------
$ 377,083 $ 10,927
============ ============
Amortization expense was $62,709 and $3,657 for the three months ended June
30, 2006 and 2005, respectively. Amortization expense was $131,545 and $7,316
for the six months ended June 30, 2006 and 2005, respectively.
Future aggregate amortization of the software development costs and licenses
is as follows for the years ending December 31:
2006 (6 months) $ 187,500
2007 189,583
------------
Total $ 377,083
NOTE 8 - LOAN ORIGINATION COSTS
Loan origination costs were as follows:
June 30, June 30,
2006 2005
------------ ------------
Loan origination costs $ - $ 311,000
Less accumulated amortization - (103,668)
------------ ------------
$ - $ 207,332
============ ============
Amortization of the loan origination costs was $0 and $25,917 for the three
months ended June 30, 2006 and 2005, respectively. Amortization of the loan
origination costs was $8,521 and $51,834 for the six months ended June 30,
2006 and 2005, respectively. Amortization of the loan origination costs is
included in interest expense in the accompanying consolidated statements of
operations. The net unamortized balance of loan origination costs was written
off in the first quarter of 2006 in connection with the debt modification (see
Note 13) and is reflected as a component of the loss on extinguishment of debt
in the accompanying consolidated statement of operations for the six months
ended June 30, 2006.
F-63
108
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 9 - CLIENT LISTS
Client lists resulted from the acquisition of Blubat (see Note 18) and consist
of the following:
June 30, June 30,
2006 2005
------------ ------------
Client lists $ 720,779 $ -
Less accumulated amortization (120,129) -
------------ ------------
$ 600,650 $ -
============ ============
Amortization of client lists was $60,066 and $120,130, for the three and six
months ended June 30, 2006, respectively. The client list that resulted from
the acquisition of CBSi, with a net book value of $13,528 were written off
during the three months ended June 30, 2006 and the resulting loss of $13,528
is included as a component of gain from sale of property and equipment in the
consolidated statements of operations for the three and six months ended June
30, 2006.
Future aggregate amortization of the client lists is as follows for the years
ending December 31:
2006 (6 months) $ 111,112
2007 244,769
2008 244,769
------------
Total $ 600,650
============
NOTE 10 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30, June 30,
2006 2005
------------- ------------
Accounts payable $ 934,978 $ 818,202
Accrued sales taxes 218,584 169,680
Accrued interest expense - 134,368
Accrued expenses - other 39,844 141,460
------------- ------------
$ 1,193,406 $ 1,263,710
============= ============
F-64
109
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 11 - NOTES PAYABLE - OFFICERS
Notes payable to officers are unsecured, payable on demand and bear interest
at an annual rate of 6 percent on the unpaid principal balance. The Company
repaid $50,000 of the notes payable to officers during the three months ended
June 30, 2006. The balance on the notes payable to the officers amounted to $
0 and $55,624 as of June 30, 2006 and 2005, respectively. Interest expense on
these notes for the three months ended June 30, 2006 and 2005 amounted to $888
and $834, respectively. Interest expense on these notes for the six months
ended June 30, 2006 and 2005 amounted to $1,388 and $2,357, respectively.
NOTE 12 - NOTES PAYABLE
Notes payable consisted of the following as of June 30, 2006:
Current Long-term
----------- -----------
Note secured by all assets, interest rate of
prime plus 2% (totaling 10.25% as of June 30,
2006) payable in monthly principal installments
of $154,762, plus interest, due December 2007
(see Note 13) $ 1,857,144 $ 1,083,332
Other 10,038 -
----------- -----------
$ 1,873,188 $ 1,083,332
=========== ===========
Notes payable consisted of the following as of June 30, 2005:
Current Long-term
----------- -----------
Unsecured notes, interest rate 10%, interest payable
at maturity, past due and immediately payable 25,000 -
Unsecured notes, interest rate 6%, interest payable
at maturity, past due and immediately payable 80,000 -
Unsecured notes, interest rate 6%, interest payable
at maturity, past due and immediately payable 150,000 -
----------- -----------
$ 255,000 $ -
=========== ===========
Interest expense on these notes for the three months ended June, 2006 and 2005
was $74,148 and $ 3,825, respectively. Interest expense on these notes for the
six months ended June 30, 2006 and 2005 was $121,317 and $ 8,316,
respectively.
F-65
110
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 13 - CONVERTIBLE DEBT
On January 20, 2006, the Company entered into a Securities Purchase Agreement
(the "Agreement") with Laurus Master Fund, Ltd. ("Laurus"). Pursuant to the
Agreement, the Company issued to Laurus a Secured Term Note (the "New Note")
in the principal amount of $3,250,000 and redeemed the $3,000,000 original
principal amount under the Secured Convertible Term Note which had an original
maturity date of June 25, 2007 (the "Old Note") held by Laurus. The New Note,
which is not convertible, bears interest at the coupon rate of prime plus
2.00% (or 10.25% as of June 30, 2006) and is subject to a floor interest rate
of 8.00%. The New Note matures on December 31, 2007. The initial monthly
principal payment of $154,762 was due on April 1, 2006. On March 31, 2006,
the New Note was amended to defer the date of initial monthly principal
payment thereunder from April 1, 2006 to May 1, 2006. The amount of the April
installment will be added to the principal of the New Note to be repaid by the
Company at maturity. On April 29, 2006, the Company issued 40,000 shares of
common stock to Laurus as consideration for the amendment, valued at $9,200.
In connection with the sale of the New Note to Laurus, the Company issued to
Laurus an option to purchase 1,560,000 shares of the Company's common stock
for $0.001 per share in a private placement exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933. The value of these options was
$390,000 on January 20, 2006 and was recorded as a component of the loss on
extinguishment of debt in the accompanying consolidated statement of
operations for the six months ended June 30, 2006. The options are marked to
market at each reporting date as a result of the warrants registration rights.
The redemption price of the Old Note was $2,153,091, comprising 105% of
outstanding principal and accrued interest, plus fees paid to Laurus of
F-66
111
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 13 - CONVERTIBLE DEBT, continued
$48,750 in connection with the New Note and $12,000 of expenses paid to third
parties related to the redemption.
The net proceeds from the New Note were used for the repayment in full of the
Old Note and general corporate purposes. The Company has the option of
prepaying the New Note, upon seven days' written notice, by paying an amount
equal to 103% of the principal amount outstanding, plus accrued but unpaid
interest and any and all other sums due, accrued or payable to the holder of
the New Note.
The New Note is collateralized by a security interest in substantially all of
the Company's assets and the assets of the Company's subsidiaries pursuant to
a Master Security Agreement by and among Laurus, the Company and its
subsidiaries entered into concurrently with the Agreement (the "New Master
Security Agreement") and other related security agreements. The Company's
obligations under the New Note are guaranteed by each of its subsidiaries.
The Company was obligated to file a registration statement for the shares of
common stock issuable upon exercise of the warrants granted to Laurus under
both the Old Note and the New Note, pursuant to a Registration Rights
Agreement by and between Laurus and the Company entered into concurrently with
the Agreement (the "New Registration Rights Agreement"). The registration
statement was filed by the required date and is required to be declared
effective by August 15, 2006 (August 30, 2006 with the 15-day grace period).
If the Company were to default on the New Note, the amount of the principal
balance would increase to 130% of the then-outstanding principal and be
subject to acceleration.
Since the modification of the New Note results in terms that, pursuant to EITF
Issue No. 96-19, "Debtor's Accounting for a Modification or Exchange of Debt
Instruments" are substantially different from the terms of the Old Note, the
modification was recorded as an extinguishment of debt. A charge of
$1,337,859 was recorded in the consolidated statement of operations during the
six months ended June 30, 2006, representing the amount of fees paid to Laurus
($151,278) and third parties ($12,000) to cancel the Old Note and issue the
New Note, the amount of unamortized debt discount ($818,848), the amount of
unamortized debt issuance costs ($146,977) and the amount associated with the
options issued to Laurus in connection with the sale of the New Note
($390,000), less the fair value of the derivative and warrant liabilities
associated with the conversion feature of the Old Note ($181,244).
F-67
112
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 13 - CONVERTIBLE DEBT, continued
The Old Note was entered into on June 25, 2004 with Laurus in connection with
a private placement of a convertible term note issued by the Company in the
principal amount of $3,000,000, due June 25, 2007. The Old Note (as amended)
was convertible into shares of the Company's common stock at conversion prices
of $0.32 for the first $950,000 of aggregate principal converted and $0.60
thereafter and bore interest at the prime rate plus 2%. Additionally, the Old
Note provisions included cashless warrants that provide for the purchase of up
to 705,000 shares of common stock at exercise prices ranging from $0.73 to
$0.79, until June 25, 2011. The Old Note was secured by all the Company's
assets.
On January 28, 2005, the Purchaser made available $300,000 of the principal
amount held in the restricted account and the Old Note was amended. In
addition, on August 17, 2005, the Purchaser made available $950,000 of the
principal amount held in the restricted account and the Old Note was further
amended. Pursuant to EITF Issue No. 96-19, neither of the modifications were
considered substantial and thus the Company did not record any gain or loss
related to the amendments.
The Old Notes included certain features that were considered embedded
derivative financial instruments, such as the conversion feature, a variable
interest rate feature, events of default and a liquidated damages clause,
which were recorded at their fair value. These features are described below,
as follows:
. The notes' conversion feature;
. Interest on the notes was subject to downward adjustment based on the
Company's common stock price;
. The registration rights agreement included a penalty provision based
on any failure to meet and/or maintain registration requirements for
shares issuable under the conversion of the notes or exercise of the
warrants; and
. The notes contained certain events of default, wherein the Company
may be required to pay a default interest rate above the normal rate.
Because the Old Notes were not conventional convertible debt, the Company was
also required to record the related warrants at their fair values. The total
of the Laurus-related derivative and warrant liabilities at June 25, 2004
totaled $1,712,588, which was recorded to debt discount, and was being
amortized to interest expense through the redemption date of the Old Note.
The debt discount was offset against the long-term portion of the Old Note on
the consolidated balance sheet. The balance of the unamortized debt discount
of $818,848 was written off in January 2006 in connection with the redemption
F-68
113
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 13 - CONVERTIBLE DEBT, continued
of the Old Note and is included in the loss on extinguishment of debt in the
consolidated statement of operations for the six months ended June 30, 2006.
The Company has recorded amortization expense of $ 0 and $142,324 for the
three months ended June 30, 2006 and 2005, respectively. The Company has
recorded amortization expense of $31,280 and $283,085 for the six months ended
June 30, 2006 and 2005, respectively.
During the three months ended June 30, 2006 and 2005, the value of the warrant
and derivative liabilities decreased by $416,955 and $451,974, respectively.
During the six months ended June 30, 2006 and 2005, the value of the warrant
and derivative liabilities decreased by $198,087 and $1,132,950, respectively.
The change in warrant and derivative liabilities is reflected as a component
of other income (expense) in the accompanying consolidated statements of
operations.
In February 2005, 300,113 shares were issued as payment of principal and
interest on the Old Note of $106,061 and $19,987, respectively.
The balance of the New Note as of June 30, 2006 was $1,857,144 and $1,083,332
for the current and long-term portions, respectively. The balance of the Old
Note (net of the unamortized debt discount of $1,066,848) as of June 30, 2005
was $769,692 for the current portion and $587,745 for the long-term portion.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Operating Leases
----------------
The Company leases office space under operating lease agreements expiring at
various dates through December 31, 2008. Rent expense related to these leases
was $61,393 and $39,459 for the three months ended June 30, 2006 and 2005,
respectively, and $114,728 and $62,301 for the six months ended June 30, 2006
and 2005, respectively. Minimum future rental payments under the leases are
as follows for the years ending December 31:
2006 (6 months) $ 49,276
2007 24,636
2008 25,368
----------
$ 99,280
==========
F-69
114
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 14 - COMMITMENTS AND CONTINGENCIES, continued
As part of the purchase of certain assets of CBSi (see Note 18) the Company
assumed an agreement for wireless air-time services that requires minimum
future payments as follows for the years ending December 31:
2006 $ 400,000
2007 400,000
----------
$ 800,000
==========
The Company has used air-time valued at $52,000 for the six months ended June
30, 2006, resulting in a minimum payment of $348,000 for the remainder of
2006.
Indemnities and Guarantees
--------------------------
During the normal course of business, the Company has made certain indemnities
and guarantees under which it may be required to make payments in relation to
certain transactions. These indemnities include certain agreements with the
Company's officers under which the Company may be required to indemnify such
persons for liabilities arising out of their employment relationship, lease
agreements where the Company may be required to indemnify landlords, contracts
where the Company may be required to indemnify the other party from
liabilities resulting from claimed infringements of the proprietary rights of
third parties, asset and stock purchase agreements where the Company may be
required to indemnify the sellers for breach of representations or warranties
and the Laurus agreement where the Company may be required to indemnify
Laurus. The duration of these indemnities and guarantees varies, and in
certain cases, is indefinite.
The majority of these indemnities and guarantees do not provide for any
limitation of the maximum potential future payments the Company would be
obligated to make. Historically, the Company has not been obligated to make
significant payments for these obligations and no liability has been recorded
for these indemnities in the accompanying consolidated balance sheets.
F-70
115
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 15 - STOCKHOLDERS' EQUITY
Common Stock
------------
During the six months ended June 30, 2006 and 2005, the Company issued shares
of its common stock as follows:
2006
----
On May 23, 2006, the Company closed on $1,625,000 in gross proceeds from a
private placement of shares of common stock and common stock purchase
warrants.
In the private placement, the Company offered and sold the shares of common
stock and common stock purchase warrants together as a unit, at a purchase
price of $0.20 per unit. For each share of common stock in the unit, each
purchaser will also receive warrants to purchase the number of Class A
warrants equal to forty percent of the number of common shares purchased and
Class B warrants equal to twenty-five percent of the number of common shares
purchased. Class A warrants have an exercise price of $0.35 per share and
Class B warrants have an exercise price of $0.45 per share. Both classes of
warrants are exercisable beginning November 23, 2006 and have a 5-1/2 year
term, expiring November 23, 2011. The gross proceeds of $1,625,000 raised in
the private placement resulted in the sale and issuance to the investors a
total of 8,125,000 shares of common stock, Class A warrants to purchase
3,250,000 shares of common stock and Class B warrants to purchase an
additional 2,031,250 shares of common stock. The private placement shares and
warrants were offered and sold solely to accredited investors in reliance on
the exemption from registration provided by Rule 506 of Regulation D under the
Securities Act.
In connection with the private placement, the Company paid to the placement
agent consideration consisting of (a) a cash sales commission (including a
non-accountable expense allowance) of $130,000 (representing 8% of the gross
proceeds raised in the private placement), (b) warrants to purchase 650,000
shares of common stock (representing 8% of the aggregate number of shares of
common stock sold in the private placement), with each warrant having an
exercise price of $0.20 per share, (c) warrants to purchase 260,000 shares of
common stock (representing 8% of the aggregate number of shares of common
stock underlying the Class A common stock purchase warrants sold in the
private placement), with each warrant having an exercise price of $0.35 per
share, and (d) warrants to purchase 162,500 shares of common stock
(representing 8% of the aggregate number of shares of common stock underlying
the Class B common stock purchase warrants sold in the private placement),
with each warrant having an exercise price of $0.45 per
F-71
116
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 15 - STOCKHOLDERS' EQUITY, continued
share. Each of the warrants issued to the placement agent is exercisable
beginning November 23, 2006 and expiring on November 23, 2011. The Company
also agreed to pay legal fees in the amount of $10,000 to legal counsel for
the investors in the private placement.
The Company agreed to prepare and file a resale registration statement with
the Securities and Exchange Commission (the "SEC") for the shares sold in the
private financing and the shares underlying the warrants. Specifically,
DataLogic (a) filed a registration statement with the SEC, and (b) is required
to use its best efforts to have the registration statement declared effective
not later than August 21, 2006 (or by September 20, 2006 if the registration
statement receives a full review by the SEC). If the registration statement is
not filed or declared effective within these time frames, the investors will
be entitled to monetary liquidated damages equal to 1.0% of the total amount
invested by such investor in the private placement, plus an additional 1.0%
liquidated damages for each 30-day period thereafter, up to a maximum
liquidated damages amount of not more than 9% of the amount invested by each
investor. DataLogic is obligated to maintain the effectiveness of the
registration statement for up to two years.
The Company granted the investors in the private placement "most favored
nations" rights. Specifically, during the 12-month period after the closing of
the private placement, if the Company or a subsidiary consummates another
financing of common stock, common stock equivalents or debt securities, the
investors will have the right to exchange any remaining shares that they
purchased in the private placement for the securities offered in the new
financing.
During the six months ended June 30, 2006, the Company issued 40,000 shares of
common stock in payment of interest of $9,200 (see Note 13). The Company
issued 213,200 shares of common stock for management and consulting services
amounting to $25,108 during the six months ended June 30, 2006.
During the six months ended June 30, 2006, the Company issued 80,000 shares of
its common stock that were committed to be issued as of December 31, 2005 for
the exercise of stock options with an exercise price of $0.24 per share for
cash proceeds of $19,200 in 2005 and the Company issued 20,000 shares of its
common stock that were committed to be issued as of December 31, 2005 for the
exercise of stock options with an exercise price of $0.15 per share for cash
proceeds of $3,000 in 2005.
F-72
117
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 15 - STOCKHOLDERS' EQUITY, continued
During the six months ended June 30, 2006, the Company issued 8,696 shares
that were committed to be issued as of December 31, 2005 for accounts payable
amounting to $2,000.
On June 30, 2006, the Company committed to issue 301,334, valued at $60,000,
shares for management and consulting services, 40,000 shares for the exercise
of stock options with an exercise price of $0.15 per share and 20,000 shares
for the exercise of stock options with an exercise price of $0.24 per share
for a total value of $10,800.
2005
----
During the six months ended June 30, 2005, the Company issued 300,113 shares
of its common stock as payment of principal and interest valued at $106,061
and $ 19,987, respectively. In addition, the Company issued 20,000 shares
from the exercise of stock options totaling $3,000.
The Company entered into a consulting agreement in 2004 under which it was
required to issue 180,000 shares as consideration for the consulting services
provided under the agreement. The Company had issued 131,424 shares as of June
30, 2004 and recorded the cost of the services provided based on the 20-day
average of the Company's stock price at the date of agreement amounting to
$160,200. The cost is being amortized over the one year term of the
agreement. The Company expensed $26,700 for the six months ended June 30,
2005.
As of June 30, 2005, the balance in shares to be issued consisted of $50,000
related to the purchase of certain assets of ISS (see Note 18), officer
compensation of $107,333 and consulting services of $67,957. All of these
shares to be issued, totaling 307,219 shares, were issued in July, 2005.
Stock Options
-------------
The Company has three stock option plans: The 2003 Stock Compensation Plan
(the "2003 Plan"), the 2004 Non-Qualified Stock and Stock Option Plan (the
"2004 Plan") and the 2005 Non-Qualified Stock and Stock Option Plan (the
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118
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 15 - STOCKHOLDERS' EQUITY, continued
"2005 Plan").
The 2003 Plan was adopted on April 1, 2003 and reserved ten million shares of
the Company's common stock for grant under the plan to directors, key
employees and independent contractors who provide services to the Company.
The 2003 Plan is administered by the Board of Directors. All options must be
exercised within ten years of the date granted and may not be less than 100%
of the fair market value of the Company's common shares on the date of grant.
Under the 2004 and 2005 Plans, two and twenty million shares, respectively, of
the Company's common stock are reserved for grant to officers, directors,
employees, consultants and others. Both the 2004 and 2005 Plans are
administered by the Compensation Committee of the Board of Directors. All
options must be granted within ten years of the adoption of the plan.
Additionally, any options granted to a shareholder who owns at least a ten
percent interest in the Company have a maximum term of ten years. All
expenses of administering the 2003, 2004 and 2005 Plans are borne by the
Company.
The assumptions used in calculating the fair value of options granted using
the Black-Scholes option-pricing model are as follows:
2006 2005
----- -----
Risk-free interest rate 5,15% 4.00%
Expected life of the options 5.00 yrs 5.00 yrs
Expected volatility 303% 282%
Expected dividend yield 0 0
NOTE 16 - SEGMENT REPORTING
The Company has two reportable segments consisting of consulting services and
communications. The Company evaluates performance based on sales, gross
profit margins and operating profit before income taxes. The following is
information for the Company's reportable segments as of and for the three and
six months ended June 30, 2006 and 2005 (in thousands):
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DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 16 - SEGMENT REPORTING, continued
Three months ended June 30, 2006: Consulting Communications
Segment Segment Unallocated Total
---------------------------------- ----------- -------------- ----------- ------------
Net Revenue $ 3,390 $ 1,683 - $ 5,073
Gross Profit 327 225 - 552
Depreciation (3) (22) - (25)
Amortization (55) (67) - (122)
Interest expense, net (36) (53) - (89)
Loss before provision for income tax 109 16 - 125
Identifiable assets 2,723 2,729 - 5,452
Capital expenditures - 31 - 31
Three months ended June 30, 2005: Consulting Communications
Segment Segment Unallocated Total
---------------------------------- ----------- -------------- ----------- ------------
Net Revenue $ 3,313 $ 1,171 - $ 4,484
Gross Profit 344 182 - 526
Depreciation (4) (11) - (15)
Amortization (31) (3) - (34)
Interest expense, net (204) (4) - (208)
Loss before provision for income tax 100 22 - 122
Identifiable assets 3,720 475 - 4,195
Capital expenditures 4 - - 4
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DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 16 - SEGMENT REPORTING, continued
Six months ended June 30, 2006: Consulting Communications
Segment Segment Unallocated Total
---------------------------------- ----------- -------------- ----------- ------------
Net Revenue $ 6,518 $ 2,779 - $ 9,297
Gross Profit 581 410 - 991
Depreciation (7) (31) - (38)
Amortization (106) (145) - (251)
Interest expense, net (118) (58) - (176)
Loss before provision for income tax 2,285 716 - 3,001
Identifiable assets 2,723 2,729 - 5,452
Capital expenditures - 39 - 39
Six months ended June 30, 2005: Consulting Communications
Segment Segment Unallocated Total
---------------------------------- ----------- -------------- ----------- ------------
Net Revenue $ 6,598 $ 1,254 - $ 7,852
Gross Profit 747 214 - 961
Depreciation (7) (16) - (23)
Amortization (31) (7) - (38)
Interest expense, net (437) (6) - (443)
Profit (loss) before provision
for income tax 185 (102) - 83
Identifiable assets 3,720 475 - 4,195
Capital expenditures 91 - - 91
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DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 17 - RELATED PARTY TRANSACTIONS
In 2004 the Company entered into a service agreement with IPN principals
(current Company employees) in which the Company granted 1,500,000 options to
IPN management to be vested over a period of two years. On October 1, 2005,
the management agreement was terminated and 825,000 options were cancelled.
Additionally, on October 1, 2005, the Company entered into a commission only
sales consulting agreement with one of the IPN principals.
In November 2004, the Company issued 491,804 shares of its common stock to
acquire the remaining 49% of IPN. In December 2004, the Company and the three
former shareholders of IPN who received the Company shares reached an
agreement to rescind the issuance of the 491,804 shares. As part of the
agreement, the Company paid $10 as full consideration for the remaining 49% of
IPN. The 491,804 shares have not been included in the issued and outstanding
shares of the Company. In April 2005 these shares were cancelled.
The Company entered into written employment agreements with its two principal
shareholders as officers of the Company on August 18, 2005 to be effective as
of January 19, 2005. Under the terms of the agreements, the principals will
earn an annual salary of $140,000 in 2005 and $160,000 in 2006, payable in a
combination of cash and common stock over the term of the agreements.
Further, they shall receive stock option grants of no less than 100,000 shares
per quarter vesting over two years with an exercise price equal to the average
closing price for the Company's common stock for the five trading days
immediately preceding and following the grant date. The Company granted
300,000 and 200,000 options to these employees during the three months ended
June 30, 2006 and 2005, respectively and 600,000 and 400,000 options during
the six months ended June 30, 2006 and 2005, respectively.
On March 21, 2006, the Company entered into two agreements with Monarch Bay
Management Company, L.L.C. ("MBMC"): (a) an agreement for corporate
development strategy and execution services and (b) an agreement for chief
financial officer services. Keith Moore, our Chief Executive Officer, is a
member of MBMC.
Corporate Development Services Agreement. Under the corporate development
services agreement with MBMC, the Company will pay to MBMC a monthly fee of
$7,000 (or $14,000 in the case of the initial payment). The monthly fee is
payable $3,000 in cash and $4,000 in shares of common stock ($6,000 in cash
and $8,000 in shares of common stock in the case of the initial payment). The
number of shares of common stock to be issued will calculated based on the
average closing price of the Company's common stock for the last ten days of
each month in which the monthly fee is earned. The Company will also
reimburse MBMC for certain expenses in connection with providing services. In
addition, the Company will grant to MBMC on a quarterly basis commencing April
1, 2006, an option to purchase 75,000 shares (or 50,000 shares in the case of
the initial grant) of common stock at an exercise price equal to 120% of the
average closing price of the Company's common stock for the last ten days of
the quarter for which the option is granted; provided that if certain
milestones specified in the agreement are achieved the exercise price of the
options will be reduced to 100% of the average closing price of the Company's
common stock for the last ten days of the quarter for which the option is
granted. The options will be exercisable for a period of five years following
the date of grant. The initial term of the agreement expires on December 31,
2006 and continues thereafter on a month-to-month basis unless terminated by
either party.
Chief Financial Officer Services Agreement. Under the chief financial officer
services agreement with MBMC, the Company will pay to MBMC a monthly fee of
$6,250 in cash. The Company will also reimburse MBMC for certain expenses in
connection with providing services to it. The initial term of the agreement
expires on March 31, 2007 and renews thereafter on an annual basis unless
terminated by either party. The agreement was terminated on April 27, 2006.
During the six months ended June 30, 2006, the Company incurred $30,083 in
connection with the above agreements.
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122
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 18 - ACQUISITIONS
ISS
---
On March 1, 2005, the Company completed the purchase of certain assets of ISS.
The Company agreed to pay $50,000 in cash and $50,000 in restricted common
stock of the Company for all of ISS's contracts with existing customers,
customer lists and certain equipment used in ISS's information technology
business. Moreover, under the agreement, the Company may pay an earn out up
to $400,000, payable in the Company's restricted common stock if certain
levels of revenues and net income before taxes are achieved during any
consecutive twelve months following the closing. The earn out expires three
years following the closing. No earn outs were payable during the three and
six months ended June 30, 2006 or 2005. The acquired assets are held in DNM.
DNM is an IT consultancy and solutions provider for government, public safety
and homeland security agencies.
The purchase price was determined in arms-length negotiations between the
parties. A summary of the assets acquired and consideration is as follows:
Allocated Amount
----------------
Equipment $ 100,000
-----------
$ 100,000
===========
Consideration paid Amount
------------------ ------------
Restricted common stock (117,664 shares) $ 50,000
Cash 50,000
-----------
$ 100,000
===========
CBSi
-----
On September 15, 2005, the Company completed the purchase of the assets of
CBSi. The Company agreed to pay $850,000 in restricted common stock of the
Company for all of CBSi's net assets, contracts with existing customers,
customer lists, software, intangibles and equipment used in CBSi's asset and
vehicle tracking business. Moreover, under the agreement, the Company may
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DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 18 - ACQUISITIONS, continued
pay an earn out of up to 20 million shares payable in restricted common stock
of the Company. Under the earn out plan, the CBSi shareholders may earn
shares of restricted common stock of the Company based upon certain gross
profit dollars achieved during the three (3) years following the closing of
the asset acquisition. No earn outs were payable during the three and six
months ended June 30, 2006.
The purchase price was determined in arms-length negotiations between the
parties. A summary of the net assets acquired and consideration is as
follows:
Allocated Amount
----------------
Cash $ 200,426
Notes and accounts receivable 310,684
Inventories 875,655
Other assets 21,573
Equipment 154,729
Software development costs 154,132
Client lists 13,528
Due to DataLogic (668,225)
Notes payable (176,149)
Accounts payable (16,228)
Deferred revenue (20,125)
------------
Total $ 850,000
============
Consideration paid Amount
------------------ ------------
Restricted common stock (3,003,534 shares)$ 850,000
============
Blubat
------
On November 21, 2005, the Company completed the purchase of BluBat, Inc. The
Company agreed to pay $400,000 in a combination of cash, notes payable and
restricted common stock of the Company to the former shareholders of BluBat,
Inc. in exchange for all of the outstanding and issued stock of BluBat, Inc.
Moreover, under the agreement, the Company may pay an earn out of up to
$450,000, payable in the Company's restricted common stock if certain levels
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124
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 18 - ACQUISITIONS, continued
of revenues and net income before taxes are achieved during any consecutive
twelve months following the closing. The earn out expires two years following
the closing. No earn outs were payable during the three and six months ended
June 30, 2006.
The purchase price was determined in arms-length negotiations between the
parties. A summary of the net assets acquired and consideration is as
follows:
Allocated Amount
----------------
Cash $ 115,945
Accounts receivable 196,166
Client lists 720,779
Goodwill 288,000
Accounts payable (260,762)
Deferred revenue (372,128)
Deferred tax liability (288,000)
------------
$ 400,000
============
Consideration paid Amount
------------------ ------------
Cash $ 50,000
Notes payable 50,000
Restricted common stock (1,038,062 shares) 300,000
------------
$ 400,000
============
As part of the purchase the Company recorded deferred income taxes related to
the book basis of acquired amortizable intangibles in the amount of $288,000.
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125
DATALOGIC INTERNATIONAL, INC. & SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
NOTE 19 - SUBSEQUENT EVENTS
On July 6, 2006, the Company and Walt Camping terminated the employment
agreement between them. Mr. Camping had served as an Executive Vice President
of the Company since September 2005 with responsibility for sales of asset
management solutions to the small fleet and sub-prime lending markets. In
consideration of the termination of the employment agreement and mutual
release of any claims, the Company transferred to Mr. Camping $110,000 of the
principal amount of a note receivable from MBSi Capital Corp., Inc. ("MBSi"),
of which Mr. Camping is a majority owner. The Company also agreed to accept a
$50,000 payment from MBSi in satisfaction of MBSi remaining obligations to
the Company.
Concurrently with the termination of his employment agreement, Mr. Camping
resigned as a director of the Company. Mr. Camping resignation was not
because of a disagreement with the Company, on any matter relating to its
operations, policies, or practices,
In July 2006, the Company issued 331,334 shares that were committed to be
issued at June 30, 2006 (see Note 15).
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126
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24: Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a corporation
to indemnify its directors, officers, employees or other agents in terms
sufficiently broad to permit indemnification (including reimbursement for
expenses incurred) under certain circumstances for liabilities arising under
the Securities Act of 1933,as amended (the "Securities Act"). Our Certificate
of Incorporation and Bylaws contain provisions intended to indemnify officers
and directors against liability to the fullest extent permitted by Delaware
law. The following discussion of our Certificate of Incorporation and Bylaws
is not intended to be exhaustive and is qualified in its entirety by reference
to the actual text of our Certificate of Incorporation and Bylaws.
Our certificate of incorporation, as amended, contains a provision permitted
by Delaware law which eliminates the personal liability of our directors for
monetary damages for breach or alleged breach of their fiduciary duty of care
which arises under state law. Although this does not change the directors'
duty of care, it limits legal remedies which are available for breach of that
duty to equitable remedies, such as an injunction or rescission. This
provision of our certificate of incorporation has no effect on directors'
liability for: (1) breach of the directors' duty of loyalty; (2) acts or
omissions not in good faith or involving intentional misconduct or known
violations of law; and (3) approval of any transactions from which the
directors derive an improper personal benefit.
Our bylaws contain a provision that provides for the indemnification of any
individual who was, is, or is threatened to be made a party, by reason of the
fact that the individual is a director or officer of ours or serves in a
similar role, to any pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative. Pursuant to this provision,
the individual is indemnified against all expenses, liability and loss
actually and reasonably incurred to the extent such individual is not
otherwise indemnified and to the extent such indemnification is permitted by
law.
We also maintain directors' and officers' reimbursement and liability
insurance pursuant to standard form policies, insuring our directors and
officers against certain liabilities for certain acts or omissions while
acting in their official capacity, including liability under the Securities
Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be allowed to our directors, officers and controlling persons under the
forgoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Item 25: Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in
connection with the distribution of the securities being registered. The
expenses shall be paid by the Registrant.
SEC Registration Fee........................$ 265
Legal Fees and Expenses.....................$ 5,000*
Accounting Fees and Expenses................$13,000*
Miscellaneous...............................$ 5,000*
TOTAL..................................$23,265*
* Estimated.
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127
Item 26: Recent Sales of Unregistered Securities
On June 25, 2004, we issued a Secured Convertible Term Note in the principal
amount of $3,000,000 to Laurus Master Fund, Ltd. in connection with the
Securities Purchase Agreement. The note is convertible into shares of common
stock at a fixed conversion price of $0.66 per share. We also issued Laurus a
warrant to purchase up to 705,000 shares at exercise prices ranging from $.73
to $.79 per share. The Note and the warrant were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act, on
the basis that the issuance did not involve a public offering.
On June 25, 2004, we issued a warrant to purchase up to 30,000 shares of
common stock at exercise prices ranging from $.73 to $.76 per share to
Biscayne Capital Markets, Inc. The warrant expires June 25, 2011. The warrant
was issued in reliance on the exemption from registration provided by Section
4(2) of the Securities Act, on the basis that the issuance did not involve a
public offering.
In November 2004, we issued 491,804 shares of its common stock to acquire the
remaining 49% of IPN Communications, Inc. The shares were issued in reliance
on the exemption from registration provided by Section 4(2) of the Securities
Act, on the basis that the issuance did not involve a public offering.
On March 1, 2005, we issued 117,564 shares for the acquisition of ISS valued
at $50,000. The shares were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act, on the basis that
the issuance did not involve a public offering.
On September 15, 2005, we acquired the assets of CBSi in exchange for
3,003,534 shares of common stock valued at $850,000. The shares were issued
in reliance on the exemption from registration provided by Section 4(2) of the
Securities Act, on the basis that the issuance did not involve a public
offering.
On November 21, 2005, we acquired BluBat in exchange for 1,038,062 shares of
common stock valued at $300,000. The shares were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act, on
the basis that the issuance did not involve a public offering.
During the year ended December 31, 2005, we issued 55,691 of unregistered
common stock shares, valued at $19,492 to each of the Chief Executive Officer,
Chief Financial Officer and Chief Information Officer for services performed.
The shares were issued in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act, on the basis that the issuance did not
involve a public offering.
On January 20, 2006, we issued (a) a Secured Term Note in the principal amount
of $3,250,000 to Laurus Master Fund, Ltd. and (b) an option to purchase
1,560,000 shares of the Company's common stock for $.001 per share. The note
and the option were issued in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act, on the basis that the issuance
did not involve a public offering.
On March 31, 2006, we issued 40,000 shares of common stock to Laurus Master
Fund, Ltd. in consideration of an amendment to the terms of our outstanding
secured term note. The shares were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act, on the basis that
the issuance did not involve a public offering.
II-2
128
On May 23, 2006, we closed a private placement of unregistered common
stock and warrants for total gross proceeds of $1.625 million. In the private
placement, we offered and sold the shares of common stock and common stock
purchase warrants together as a unit, at a purchase price of $0.20 per unit.
For each share of common stock in the unit, each purchaser will also receive
warrants to purchase the number of Class A warrants equal to forty percent of
the number of common shares purchased and Class B warrants equal to
twenty-five percent of the number of common shares purchased. Class A
warrants have an exercise price of $0.35 per share and Class B warrants have
an exercise price of $0.45 per share. Both classes of warrants are
exercisable beginning November 23, 2006 and have a 5-1/2 year term, expiring
November 23, 2011. The gross proceeds of $1,625,000 raised in the private
placement resulted in the sale and issuance to the investors a total of
8,125,000 shares of common stock, Class A warrants to purchase 3,250,000
shares of common stock and Class B warrants to purchase an additional
2,031,250 shares of common stock. The private placement shares and warrants
were offered and sold solely to accredited investors in reliance on the
exemption from registration provided by Rule 506 of Regulation D under the
Securities Act. Midtown Partners & Co., LLC, an NASD member firm, acted
as the sole placement agent in the private placement. In connection with the
private placement, we paid to Midtown Partners consideration consisting of (a)
a cash sales commission (including a non-accountable expense allowance) of
$130,000 (representing 8% of the gross proceeds raised in the private
placement), (b) warrants to purchase 650,000 shares of common stock
(representing 8% of the aggregate number of shares of common stock sold in the
private placement), with each warrant having an exercise price of $0.20 per
share, (c) warrants to purchase 260,000 shares of common stock (representing
8% of the aggregate number of shares of common stock underlying the Class A
common stock purchase warrants sold in the private placement), with each
warrant having an exercise price of $0.35 per share, and (d) warrants to
purchase 162,500 shares of common stock (representing 8% of the aggregate
number of shares of common stock underlying the Class B common stock purchase
warrants sold in the private placement), with each warrant having an exercise
price of $0.45 per share. Each of the warrants issued to Midtown Partners is
exercisable beginning November 23, 2006 and expiring on November 23, 2011. We
also agreed to pay legal fees in the amount of $10,000 to legal counsel for
the investors in the private placement.
Item 27: Exhibits
INDEX TO EXHIBITS
Exhibit No. Identification of Exhibit
3.1(1) Certificate of Incorporation
3.2(1) Certificate of Amendment to Certificate of Incorporation
3.3(2) Certificate of Amendment to Certificate of Incorporation
3.4(2) Certificate of Amendment to Cerificate of Incorporation
3.5(1) Amended and Restated Bylaws
4.1(3) DataLogic International, Inc. 2005 Non-Qualified Stock &
Stock Option Plan
4.2(4) Amendment No. 1 to 2005 Non-Qualified Stock & Stock Option Plan
4.3(5) DataLogic International, Inc. 2004 Non-Qualified Stock &
Stock Option Plan
4.4(6) DataLogic International, Inc. 2003 Stock Compensation Plan
5.1 Opinion and consent of Weed & Co. LLP re: the legality of
the shares being registered
10.1(7) Securities Purchase Agreement dated January 20, 2006, by and
between DataLogic International, Inc. and Laurus Master Fund, Ltd.
10.2(7) Secured Term Note dated January 20, 2006, by and between DataLogic
International, Inc. and Laurus Master Fund, Ltd.
10.3(5) Amendment No.1 to Secured Term Note dated March 31, 2006
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129
10.4(7) Registration Rights Agreement dated January 25, 2006, by and between
DataLogic International, Inc. and Laurus Master Fund, Ltd.
10.5(8) Amendment No.1 to Registration Rights Agreement with Laurus Master
Fund, Ltd.
10.6(6) Option issued by DataLogic International, Inc. to Laurus Master
Fund, Ltd. dated January 20, 2006
10.7(9) Common Stock Purchase Warrant issued by DataLogic International,
Inc. to Laurus Master Fund, Ltd. dated June 25, 2005
10.8(6) Master Security Agreement dated January 20, 2006, by DataLogic
International, Inc. and its subsidiaries.
10.9(6) Stock Pledge Agreement dated January 20, 2006, by and among Laurus
Master Fund, Ltd., DataLogic International, Inc. and its
subsidiaries.
10.10(7) Subsidiary Guaranty dated January 20, 2006 by the subsidiaries of
DataLogic International, Inc.
10.11(7) Subordination Agreement dated January 20, 2006 by and between Derek
K. Nguyen and Khanh D. Nguyen and Laurus Master Fund, Ltd.
10.12(10) Agreement for Non-Competition and Earn-Out Compensation dated
February 24, 2005
10.13(11) Asset Purchase Agreement with CBSi Holdings, Inc. dated September
15, 2005
10.14(11) Agreement for Non-Competition and Earn-Out Compensation dated
September 15, 2005
10.15(12) Agreement and Plan of Merger with Blubat, Inc. dated November 21,
2005
10.16(13) Employment Agreement with Derek Nguyen dated August 18, 2005
10.17(13) Employment Agreement with Keith Moore dated August 18, 2005
10.18(13) Employment Agreement with Khanh Nguyen dated August 18, 2005
10.19(14) Letter Agreement dated March 21, 2006 with Monarch Bay Management
Company L.L.C. for corporate development services
10.20(14) Letter Agreement dated March 21, 2006 with Monarch Bay Management
Company L.L.C. for chief financial officer services
10.21(8) Securities Purchase Warrant for May 2006 Private Placement
10.22(8) Registration Rights Agreement dated May 23, 2006
10.23(8) Form of Class A Common Stock Purchase Warrant
10.24(8) Form of Class B Common Stock Purchase Warrant
10.25(8) Form of Common Stock Purchase Warrant issued to Midtown Partners
10.26(15) Amendment No. 3 to Secured Term Note and Consent with Laurus Master
Fund, Ltd.
21.1* Subsidiaries of Registrant
23.1 Consent of Kabani & Company, Inc.
23.2 Consent of Corbin & Company, LLP
23.3 Consent of Weed & Co. LLP (included in Exhibit 5.1)
(1) Filed with Form 10-SB on April 23, 1999 (File No. 000-30382), and
incorporated herein by reference.
(2) Filed with Form SB-2 on July 26, 2004 , and incorporated herein by
reference.
(3) Filed with Form S-8 on June 24, 2005, and incorporated herein by
reference.
(4) Filed with Annual Report on Form 10K-SB filed on April 17, 2006, and
incorporated herein by reference
(5) Filed with Form S-8 on August 23, 2004, and incorporated herein by
reference.
(6) Filed with Form S-8 on April 9, 2003, and incorporated herein by
reference.
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130
(7) Filed with Form 8-K dated January 25, 2006, and incorporated herein by
reference.
(8) Filed with Form 8-K dated May 24, 2006, and incorporated herein by
reference
(9) Filed with Form 8-K dated June 24, 2005, and incorporated herein by
reference.
(10) Filed with Form 8-K dated March 4, 2005, and incorporated herein by
reference.
(11) Filed with Form 8-K dated September 9, 2005, and incorporated herein by
reference.
(12) Filed with Form 8-K dated November 23, 2005, and incorporated herein by
reference.
(13) Filed with Form 10Q-SB filed on November 3, 2005, and incorporated herein
by reference.
(14) Filed with Form 8-K dated March 21, 2006, and incorporated herein by
reference.
(15) Filed with Form 8-K dated July 11, 2006, and incorporated herein by
reference.
* Previously filed
Item 28: Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement to:
i. Include any prospectus required by Section 10(a)(3) of the
Securities Act;
ii. Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information
in the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement; and
iii. Include any additional or changed material on the plan of
distribution.
(2) For determining any liability under the Securities Act, to
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
(3) To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(4) For determining any liability under the Securities Act, to
treat the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4),
or 497(h) under the Securities Act as part of this registration statement as
of the time the Commission declared it effective.
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(5) For determining any liability under the Securities Act, to
treat each post-effective amendment that contains a form of prospectus as a
new registration statement relating to the securities offered in the
registration statement, and that offering of the securities at that time as
the initial bona fide offering of those securities.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
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SIGNATURES
In accordance with Requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Irvine, State of California on August 16, 2006.
DATALOGIC INTERNATIONAL, INC.
By: /s/ Keith Moore
Keith Moore
Chief Executive Officer
This registration statement has been signed by the following persons in
the capacities and on the dates indicated:
Signatures Title Date
---------- ----- ----
/s/ Keith Moore Chief Executive Officer, Chief August 16, 2006
___________________ Operating Officer and Chairman
Keith Moore
/s/ Khanh D. Nguyen President, Chief Financial Officer August 16, 2006
___________________ Treasurer, and Director
Khanh D. Nguyen (Principal Financial and
Accounting Officer)
/s/ Derek K. Nguyen Chief Information Officer & Director August 16, 2006
_____________________
Derek K. Nguyen
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