Form 10-Q
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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þ |
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Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934 |
or
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o |
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Transition Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934 |
For Quarter Ended September 30, 2010
Commission File Number 0-13898
Veramark Technologies, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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16-1192368 |
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(State or other jurisdiction of Incorporation
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(IRS Employer Identification Number) |
or Organization) |
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1565 Jefferson Road, Suite 120, Rochester, NY 14623
(Address of principal executive offices)(Zip Code)
(585) 381-6000
(Registrants telephone number, including area code)
3750 Monroe Ave, Pittsford, NY 14534 Former Address
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). YES
þ NO o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller Reporting Company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). YES o NO þ
The number of shares of Common Stock, $.10 par value, outstanding on September 30, 2010 was
9,993,576.
PART I FINANCIAL INFORMATION
VERAMARK TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
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(Unaudited) |
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September 30, |
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December 31, |
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2010 |
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2009 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
352,126 |
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$ |
488,381 |
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Short-Term Investments |
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267,167 |
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457,520 |
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Accounts receivable, trade (net of allowance for
doubtful accounts of $47,500 and $24,000, respectively) |
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2,523,967 |
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1,314,986 |
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Inventories, net |
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17,254 |
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13,510 |
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Prepaid expenses |
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372,170 |
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389,267 |
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Other current assets |
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182,889 |
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509,590 |
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Total Current Assets |
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3,715,573 |
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3,173,254 |
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PROPERTY AND EQUIPMENT |
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Cost |
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3,574,717 |
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3,520,903 |
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Less accumulated depreciation |
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(3,245,372 |
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(3,207,550 |
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Property and Equipment (Net) |
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329,345 |
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313,353 |
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OTHER ASSETS: |
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Software development costs (net of accumulated amortization of $2,006,810 and $2,497,948, respectively) |
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2,884,307 |
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2,906,505 |
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Pension assets |
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3,094,555 |
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2,995,657 |
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Intagible assets, net |
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885,000 |
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Goodwill |
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336,219 |
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Deposits and other assets |
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1,204,934 |
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995,766 |
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Total Other Assets |
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8,405,015 |
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6,897,928 |
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TOTAL ASSETS |
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$ |
12,449,933 |
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$ |
10,384,535 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
502,567 |
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$ |
325,204 |
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Accrued compensation |
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715,105 |
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457,332 |
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Deferred revenue |
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4,093,764 |
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3,790,856 |
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Bank debt current portion |
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300,000 |
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Pension obligation current portion |
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502,059 |
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502,059 |
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Contingent liabilities current portion |
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561,150 |
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Other accrued liabilities |
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344,810 |
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632,061 |
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Total Current Liabilities |
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7,019,455 |
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5,707,512 |
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Long-term portion of contingent liabilities net of
current portion |
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375,300 |
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Pension obligation |
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4,593,226 |
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4,674,071 |
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Total Liabilities |
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11,987,981 |
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10,381,583 |
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STOCKHOLDERS EQUITY: |
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Common Stock, par value $.10; shares authorized,
40,000,000; shares issued and outstanding,
10,073,801 and 10,028,952 |
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1,007,380 |
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1,002,895 |
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Additional paid-in capital |
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22,567,711 |
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22,398,110 |
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Accumulated deficit |
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(22,776,664 |
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(23,179,337 |
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Treasury stock (80,225 shares, at cost) |
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(385,757 |
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(385,757 |
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Accumulated other comprehensive income |
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49,282 |
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167,041 |
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Total Stockholders Equity |
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461,952 |
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2,952 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
12,449,933 |
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$ |
10,384,535 |
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The accompanying notes are an integral part of these financial statements.
3
VERAMARK TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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NET REVENUES |
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Product revenue |
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$ |
586,848 |
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$ |
382,445 |
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$ |
1,781,557 |
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$ |
1,232,973 |
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Service revenue |
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3,041,479 |
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2,128,070 |
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7,795,690 |
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6,279,611 |
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Total Net Revenue |
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3,628,327 |
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2,510,515 |
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9,577,247 |
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7,512,584 |
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COSTS AND OPERATING EXPENSES: |
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Cost of sales |
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1,005,638 |
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720,212 |
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2,633,784 |
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2,042,082 |
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Engineering and software development |
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385,292 |
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220,571 |
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1,080,083 |
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793,735 |
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Selling, general and administrative |
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2,053,339 |
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1,936,556 |
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5,507,926 |
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5,759,288 |
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Total Costs and Operating Expenses |
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3,444,269 |
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2,877,339 |
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9,221,793 |
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8,595,105 |
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INCOME (LOSS) FROM OPERATIONS |
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184,058 |
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(366,824 |
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355,454 |
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(1,082,521 |
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NET INTEREST INCOME |
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29,760 |
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16,499 |
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47,219 |
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10,145 |
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INCOME (LOSS) BEFORE INCOME TAXES |
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213,818 |
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(350,325 |
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402,673 |
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(1,072,376 |
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INCOME TAXES |
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NET INCOME (LOSS) |
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$ |
213,818 |
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$ |
(350,325 |
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$ |
402,673 |
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$ |
(1,072,376 |
) |
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NET INCOME (LOSS) PER SHARE |
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Basic |
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$ |
0.02 |
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$ |
(0.04 |
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$ |
0.04 |
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$ |
(0.11 |
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Diluted |
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$ |
0.02 |
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$ |
(0.04 |
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$ |
0.04 |
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$ |
(0.11 |
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The accompanying notes are an integral part of these financial statements.
4
VERAMARK TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months Ended September 30, |
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2010 |
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2009 |
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OPERATING ACTIVITIES: |
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Net Income (Loss) |
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$ |
402,673 |
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$ |
(1,072,376 |
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Adjustments to reconcile net income or loss to net cash flows
provided by operating activities |
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Depreciation and amortization |
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1,118,126 |
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1,096,417 |
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Bad debt expense |
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23,500 |
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(9,000 |
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Share based compensation expense |
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103,804 |
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69,250 |
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Pension assets |
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(98,898 |
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(24,715 |
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Loss on disposal of fixed assets |
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2,347 |
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1,096 |
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Unrealized gain (losses) on investments |
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(29,559 |
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(6,376 |
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Unrealized (gain) losses on pension liabilities |
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(88,200 |
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263,317 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(1,232,481 |
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(91,537 |
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Inventories |
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(3,744 |
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9,824 |
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Prepaid expenses and other current assets |
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343,798 |
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(193,810 |
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Deposits and other assets |
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(209,168 |
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(90,005 |
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Accounts payable |
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177,363 |
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197,174 |
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Accrued compensation and related taxes |
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257,773 |
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87,536 |
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Deferred revenue |
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302,908 |
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(131,460 |
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Other accrued liabilities |
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(287,251 |
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(8,278 |
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Pension obligation |
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(80,845 |
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(183,861 |
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Change in net liabilites acquisition |
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(47,730 |
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Net cash provided (used) by operating activities |
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654,416 |
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(86,804 |
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INVESTING ACTIVITIES: |
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Acquisitions cash paid |
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(300,000 |
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(Purchase) sale of investments |
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190,353 |
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537,177 |
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Capitalized software development costs |
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(839,372 |
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(1,040,423 |
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Additions to property and equipment |
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(154,934 |
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(136,669 |
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Net cash flows used by investing activities |
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(1,103,953 |
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(639,915 |
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FINANCING ACTIVITIES |
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Bank borrowing |
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300,000 |
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Transfer of surender values |
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310,000 |
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Proceeds employee stock purchase plan |
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13,282 |
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14,281 |
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Net cash provided by financing activities |
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313,282 |
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324,281 |
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NET DECREASE IN CASH AND CASH EQUIVALENTS |
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(136,255 |
) |
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(402,438 |
) |
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
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488,381 |
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1,014,669 |
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CASH AND CASH EQUIVALENTS, END OF PERIOD |
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$ |
352,126 |
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$ |
612,231 |
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2010 |
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2009 |
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SUPPLEMENTAL CASH FLOW INFORMATION |
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Cash Transactions: |
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Income taxes paid, net |
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2,873 |
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|
4,350 |
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Interest paid |
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5,691 |
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|
1,462 |
|
5
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited financial statements include all adjustments of a normal and
recurring nature which, in the opinion of Companys management, are necessary to present fairly the
Companys financial position as of September 30, 2010, the results of its operations for the three
and nine months ended September 30, 2010 and 2009, and cash flows for the nine months ended
September 30, 2010 and 2009.
Certain information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been omitted pursuant to
the rules and regulations of the Securities and Exchange Commission. These condensed financial
statements should be read in conjunction with the financial statements and related notes contained
in the Companys Annual Report on Form 10-K to the Securities and Exchange Commission for the year
ended December 31, 2009.
The results of operations and cash flows for the three and nine months ended September 30,
2010 are not necessarily indicative of the results to be expected for the full years operation.
6
(2) |
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PROPERTY AND EQUIPMENT |
The major classifications of property and equipment at September 30, 2010, and December 31,
2009 were:
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September 30, |
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December 31, |
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2010 |
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2009 |
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Machinery and equipment |
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$ |
117,541 |
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$ |
117,541 |
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Computer hardware and software |
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1,210,371 |
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1,164,431 |
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Furniture and fixtures |
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861,008 |
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853,134 |
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Leasehold improvements |
|
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1,385,797 |
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|
1,385,797 |
|
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$ |
3,574,717 |
|
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$ |
3,520,903 |
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|
For the nine months ended September 30, 2010 and 2009, the Company recorded depreciation
expense of $148,556 and $233,139, respectively.
(3) |
|
STOCK-BASED COMPENSATION |
The Companys share-based compensation consists of restricted stock and stock options, vesting
over periods ranging from zero to four years. For the nine months ended September 30, 2010,
the Company awarded 98,000 stock options and 54,000 restricted shares. The Company cancelled
259,650 stock options, and 135,194 shares of restricted stock previously granted during the
same period. During the same nine months of 2009, the Company awarded 107,000 restricted
shares and 40,000 stock options and cancelled 133,040 stock options.
A summary of the status of the Companys stock option plan as of September 30, 2010 is
presented below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Grant-Date |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Fair Value |
|
|
Term (Yrs) |
|
|
Value |
|
Outstanding as of December 31, 2009 |
|
|
1,740,793 |
|
|
$ |
0.94 |
|
|
$ |
0.84 |
|
|
|
4.2 |
|
|
$ |
201,626 |
|
Granted |
|
|
98,000 |
|
|
$ |
0.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(259,650 |
) |
|
|
2.63 |
|
|
|
|
|
|
|
|
|
|
|
(118,432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of September 30, 2010 |
|
|
1,579,143 |
|
|
$ |
0.63 |
|
|
$ |
0.58 |
|
|
|
4.3 |
|
|
$ |
83,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September
30, 2010 |
|
|
1,456,143 |
|
|
$ |
0.64 |
|
|
$ |
0.59 |
|
|
|
3.9 |
|
|
$ |
83,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010, there was $43,302 of total unrecognized compensation cost related to
non-vested stock options granted under the Plan and $76,282 of unrecognized compensation cost
related to non-vested restricted stock grants. The compensation cost for stock options will be
recognized over a weighted-average period of 1.1 years. The compensation costs of restricted
stock will be recognized over a weighted-average period of 0.9 years.
7
(4) |
|
TOTAL COMPREHENSIVE INCOME (LOSS) |
Total comprehensive income (loss) for the first three and nine months ended September 30 of
2010 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
213,818 |
|
|
$ |
(350,325 |
) |
|
$ |
402,673 |
|
|
$ |
(1,072,376 |
) |
Unrealized change pension |
|
|
(29,400 |
) |
|
|
80,000 |
|
|
|
(88,200 |
) |
|
|
263,317 |
|
Unrealized change on investments |
|
|
(25,212 |
) |
|
|
(6,605 |
) |
|
|
(29,559 |
) |
|
|
(6,376 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
159,206 |
|
|
$ |
(276,930 |
) |
|
$ |
284,914 |
|
|
$ |
(815,435 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) |
|
NET INCOME (LOSS) PER SHARE (EPS) |
ASC 260-10 (SFAS 128) Earnings Per Share as amended in September 2009, requires the Company
to calculate net income (loss) per share based on basic and diluted net income (loss) per
share, as defined. Basic EPS excludes dilution and is computed by dividing net income (loss)
by the weighted average number of shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. The dilutive effect of outstanding
options issued by the Company is reflected in diluted EPS using the treasury stock method.
Under the treasury stock method, options will only have a dilutive effect when the average
market price of common stock during the period exceeds the exercise price of the options.
8
Calculations of Earnings (Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
213,818 |
|
|
$ |
(350,325 |
) |
|
$ |
402,673 |
|
|
$ |
(1,072,376 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
9,945,611 |
|
|
|
9,913,731 |
|
|
|
9,909,703 |
|
|
|
9,855,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) per common share |
|
$ |
0.02 |
|
|
$ |
(0.04 |
) |
|
$ |
0.04 |
|
|
$ |
(0.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
213,818 |
|
|
$ |
(350,325 |
) |
|
$ |
402,673 |
|
|
$ |
(1,072,376 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
9,945,611 |
|
|
|
9,913,731 |
|
|
|
9,909,703 |
|
|
|
9,855,829 |
|
Additional dilutive effect of stock options and
warrants after application of treasury stock method |
|
|
180,947 |
|
|
|
|
|
|
|
102,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive shares outstanding |
|
|
10,126,558 |
|
|
|
9,913,731 |
|
|
|
10,012,460 |
|
|
|
9,855,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) per common share assuming full dilution |
|
$ |
0.02 |
|
|
$ |
(0.04 |
) |
|
$ |
0.04 |
|
|
$ |
(0.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no dilutive effects of stock options for the three and nine months ended September 30,
2009, as the effect would have been anti-dilutive due to the net loss incurred.
(6) |
|
INDEMNIFICATION OF CUSTOMERS |
Our agreements with customers generally require us to indemnify the customer against claims
that our software infringes third party patent, copyright, trademark or other proprietary
rights. Such indemnification obligations are generally limited in a variety of
industry-standard respects, including our right to replace an infringing product. As of
September 30, 2010 we had not experienced any material losses related to these
indemnification obligations and no material claims with respect thereto were outstanding. We
do not expect significant claims related to these indemnification obligations, and
consequently, we have not established any related reserves.
The Company sponsors an employee incentive savings plan under Section 401(k) for all eligible
employees. The Companys contributions to the plan are discretionary. During 2010 the
Company has contributed $24,644 to employees 401k accounts. During 2009 the Companys
contribution to employee 401k accounts totaled $23,868.
9
The Company also sponsors an unfunded Supplemental Executive Retirement Program (SERP),
which is a non-qualified plan that provides certain employees defined pension benefits.
Periodic pension expense for the three and nine months ended September 30, 2010 and 2009
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Cost |
|
$ |
161,899 |
|
|
$ |
130,000 |
|
|
$ |
295,699 |
|
|
$ |
176,683 |
|
Unrealized Change-Pension |
|
|
(29,400 |
) |
|
|
80,000 |
|
|
|
(88,200 |
) |
|
|
263,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Expense |
|
$ |
132,499 |
|
|
$ |
210,000 |
|
|
$ |
207,499 |
|
|
$ |
440,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company paid pension obligations of $376,544 for the nine months ended September 30, 2010
and $360,544 for the nine months ended September 30, 2009.
The Company maintains life insurance covering certain key employees under its Supplemental
Executive Retirement Program with the Company named as beneficiary. The Company intends to
use the death benefits of these policies, as well as loans against the accumulating cash
surrender value of the policies, to fund future pension obligations. The total death benefit
associated with these policies is $10.2 million, with an associated accumulated cash
surrender value of approximately $3,095,000 at September 30, 2010. The accumulated cash
surrender values of these policies at December 31, 2009 was approximately $2,996,000.
The projected pension benefits paid or expected to be paid under this plan are as follows,
assuming retirement at 65 and a life expectancy of 80 years for all participants:
Period Ending December 31, Unless Stated Otherwise,
|
|
|
|
|
Q4 2010 |
|
$ |
125,515 |
|
2011 |
|
|
502,059 |
|
2012 |
|
|
502,059 |
|
2013 |
|
|
487,166 |
|
2014 |
|
|
487,166 |
|
2015 2019 |
|
|
2,329,859 |
|
10
The Company has a contractual obligation to maintain certain health benefits for two of its
former executive officers. These benefits are accounted for as Post Retirement Healthcare
Benefits, (PRHB). Periodic PRHB expensed and paid for the three and nine months ended
September 30, 2010 and 2009 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Service Cost |
|
$ |
2,125 |
|
|
$ |
2,005 |
|
|
$ |
6,375 |
|
|
$ |
6,015 |
|
Interest Cost |
|
|
1,288 |
|
|
|
1,408 |
|
|
|
3,862 |
|
|
|
4,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRHB Expense |
|
$ |
3,413 |
|
|
$ |
3,413 |
|
|
$ |
10,237 |
|
|
$ |
10,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The projected PRHB paid or expected to be paid are as follows:
Period Ending December 31, Unless Stated Otherwise,
|
|
|
|
|
Q4 2010 |
|
$ |
3,412 |
|
2011 |
|
|
13,649 |
|
2012 |
|
|
13,649 |
|
2013 |
|
|
13,649 |
|
2014 |
|
|
10,149 |
|
2015 2019 |
|
|
33,245 |
|
On June 18, 2010 we acquired the enterprise telecom expense management (TEM) consulting
business of privately held Source Loop, LLC, based in Alpharetta, Georgia. The aggregate
purchase price paid for those assets was up to $1.5 million, plus the issuance of up to
500,000 shares of Veramarks common stock. At closing, $300,000 in cash was paid and 100,000
shares of Veramark common stock issued to the principals of Source Loop. In addition, Source
Loop retained $300,000 in accounts receivable and cash on hand prior to the acquisition date,
leaving contingent consideration of $900,000 and 400,000 shares of Veramark common stock that
could be earned, subject to attaining certain revenue and employee retention parameters
through December 31, 2011.
At the time of the acquisition, we have recorded total contingent liabilities of $1,080,000,
consisting of a short-term portion of $803,000, and a long-term portion of $277,000,
reflecting managements estimate of the expected future consideration to be paid. During the
third quarter, the Company reduced expected consideration to be paid by approximately
$144,000.
Under the purchase method of accounting, the contingent stock consideration (400,000 shares)
was treated as a financial derivative, and recorded as a liability, as it does not have a
fixed settlement provision. This liability will vary in a mark-to-market fashion with the
value of the Companys stock, until the settlement amount is known. Increases in the
Companys stock price will result in an accounting expense, and any decrease in the Companys
stock price will be recorded as income. Both the initial stock transferred (100,000 shares)
and the contingent shares (400,000) were initially valued as $0.57 per share, representing
the weighted average share price of the Companys stock for the five trading days preceding
and five trading days subsequent to the closing date of the transaction. For the period
ended September 30, 2010 there was no change in the restricted stock liability arising from
fluctuations in the Company weighted average share price.
11
The financial impact of the acquisition has been an increase in third quarter 2010 revenues
of $507,000, and increase in net income of $63,000. For the nine months ended September 30,
2010 the acquisition of Source Loop has increased revenues by $616,000 and reduced net income
by $4,000. The unaudited financial information in the table below summarizes the combined
results of operations on a pro-forma basis, as if we had acquired Source Loop on January 1,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Unaudited (In 000s) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenue |
|
$ |
3,628 |
|
|
$ |
2,902 |
|
|
$ |
10,145 |
|
|
$ |
8,800 |
|
Income (Loss) |
|
$ |
214 |
|
|
$ |
(486 |
) |
|
$ |
367 |
|
|
$ |
(1,357 |
) |
Earnings Per Share |
|
$ |
0.02 |
|
|
$ |
(0.05 |
) |
|
$ |
0.04 |
|
|
$ |
(0.14 |
) |
12
(9) |
|
OTHER INTANGIBLE ASSETS AND GOODWILL |
Under the acquisition method of accounting, we allocated the fair value of the total
consideration expected to be transferred, to the tangible and identifiable intangible assets
acquired from Source Loop based on their estimated fair values on the date of acquisition.
The fair values assigned to the identifiable intangible assets were based on estimates and
assumptions determined by management. See the table below.
Amortization of Intangible Assets Acquired in Source Loop Acquisition
(In 000s except for years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
FMV at |
|
|
Accumulated |
|
|
Net Value by |
|
|
|
Avg Life |
|
|
Acquisition |
|
|
Amortization |
|
|
Asset Class |
|
Intangible Asset Class |
|
Years |
|
|
Date |
|
|
at 09/30/10 |
|
|
at 09/30/10 |
|
Customer Contracts |
|
|
3.1 |
|
|
|
526 |
|
|
|
44 |
|
|
|
482 |
|
Customer Relationships |
|
|
2.6 |
|
|
|
260 |
|
|
|
28 |
|
|
|
232 |
|
Key Employee Agreements |
|
|
1.4 |
|
|
|
177 |
|
|
|
28 |
|
|
|
149 |
|
Other |
|
|
0.7 |
|
|
|
30 |
|
|
|
8 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-Total Intangibles
Subject to Amortization |
|
|
2.6 |
|
|
|
993 |
|
|
|
108 |
|
|
|
885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Assets Acquired |
|
|
|
|
|
|
1,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Future Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Asset Class |
|
Q4 2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2015 |
|
Customer Contracts |
|
|
34 |
|
|
|
112 |
|
|
|
88 |
|
|
|
67 |
|
|
|
60 |
|
|
|
51 |
|
Customer Relationships |
|
|
22 |
|
|
|
73 |
|
|
|
42 |
|
|
|
31 |
|
|
|
25 |
|
|
|
19 |
|
Key Employee Agreements |
|
|
22 |
|
|
|
46 |
|
|
|
42 |
|
|
|
39 |
|
|
|
|
|
|
|
|
|
Other |
|
|
5 |
|
|
|
10 |
|
|
|
5 |
|
|
|
3 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-Total Intangibles
Subject to Amortization |
|
|
83 |
|
|
|
241 |
|
|
|
177 |
|
|
|
140 |
|
|
|
86 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All customer contracts are subject to renewal or extension by December 31, 2011. Management expects
the renewal or extension of all of the customer contracts included in the table above.
Goodwill represents the excess of the purchase price paid over the fair value of assets
acquired. Goodwill is not amortized and is subject to an impairment test that will be
conducted on an annual basis, or more frequently if a change in circumstances or the
occurrence of events indicates that potential impairment exists. Through September 30, 2010,
there has been no impairment of Goodwill associated with the Source Loop acquisition.
13
(10) |
|
FACILITIES RELOCATION |
On May 10, 2010 the Company entered into an agreement with Eagles Landing 1 LLC, for the
lease of approximately 22,878 square feet of office space at the Eagles Landing Business Park
located at 1565 Jefferson Road, Building 1, Suite 120 in the town of Henrietta, New York. The
initial term of the lease is November 1, 2010 through March 31, 2018. The lease includes two
options to extend the initial term for an additional five years each. The Companys lease
agreement for its current facility expires October 31, 2010. The company expects the move to
the new location to reduce facility costs by approximately $250,000 per year.
The Company maintains a line of credit arrangement with a local commercial bank. Subsequent
to the end of the third quarter, the bank extended the Companys line of credit from $400,000
to $750,000. As of the date of this filing, there were no additional borrowings against the
line of credit.
The same bank has also provided a term loan to the Company, in the amount of $200,000, the
proceeds of which are being used for furniture and fixtures in the new facility. The loan
has a term of 36 months.
14
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Managements Discussion and Analysis contains statements that are forward-looking. Such statements
are identified by the use of words like plans, expects, intends, believes, will,
anticipates, estimates, and other words of similar meaning in conjunction with, among other
things, discussions of future operations, financial performance, and the Companys strategy for
growth, product development, regulatory approvals, market position and expenditures.
Forward-looking statements are based on managements expectations as of the date of this report.
The Company cannot guarantee that any forward-looking statement will be accurate, although the
Company believes that it has been reasonable in its expectations and assumptions. Forward-looking
statements are subject to the risks identified in Issues and Risks and elsewhere in this report.
Readers are cautioned not to place undue reliance on forward-looking statements and are advised to
review the risks identified in Issues and Risks and elsewhere in this report. The Company has no
obligation to update forward-looking statements.
Overview
Revenues of $3,628,000 for our third quarter ended September 30, 2010 increased $1,117,000 or 44%
from revenues of $2,511,000 for the third quarter of 2009. Revenues for the nine months ended
September 30, 2010 of $9,577,000 increased $2,064,000 or 27%, from revenues of $7,513,000 the nine
months ended September 30, 2009.
The net income of $214,000 for the three months ended September 30, 2010, representing $0.02 per
diluted share, compares with the net loss of $350,000, or a loss of $0.04 per share, for the same
quarter a year ago. For the nine months ended September 30, 2010 net income of $403,000, or $0.04
per diluted share, compares with a net loss of $1,072,000, a loss of $0.11 per share, for the first
nine months of 2009.
The third quarter of 2010 is the first reporting period to include a full quarter of operating
results for Source Loop. Veramark acquired substantially all of the assets of Source Loop, a
leading provider of professional and managed services for enterprise-class telecom expense
management (TEM) in June. The financial impact of the Source Loop acquisition on third quarter 2010
results was an increase of $507,000 in revenue and a net addition of $63,000 to reported net
income.
Orders received for the third quarter of 2010 totaled $4.3 million. Year to date orders through
September 30, 2010 of $9.7 million increased 13% from the prior year. Embedded revenues, which
represents the value of orders received for products and services, the revenue from which will be
recognized in future periods increased 8% to $9.1 million at September 30, 2010, up from $8.4
million at the end of the previous quarter. Embedded revenues totaled $7.5 million at December 31,
2009.
In late September the Company assumed possession of its new headquarters facility located at 1565
Jefferson Road, in Rochester NY. The new facility is approximately 23,000 square feet and offers a
design more conducive to a software and services company such as Veramark. It is estimated that the
annual savings in total facility costs will approximate $250,000.
15
Revenues
Revenues from the sale of licenses for TEM and call accounting products and services increased 65%
and 37%, respectively for the three and nine months ended September 30, 2010 from the same periods
of 2009. Revenues generated from managed service contracts providing TEM and Business Process
Outsourcing (BPO) services increased 94% for the three months ended September 30, 2010 and 69% for
the nine months ended September 30, 2010 as compared with the same three and nine month periods of
2009. Third quarter 2010 results include the $507,000 of revenue contribution from clients acquired
from Source Loop.
Revenues earned from maintenance contracts on our installed base of software products increased 9%
for the three months ended September 30, 2010 and 4% for the nine months ended September 30, 2010
as compared with the same three and nine month periods of 2009.
Gross Margin
Gross margins (revenues less cost of sales) of $2,623,000 and $6,943,000 for the three and nine
months ended September 30, 2010 increased 47% and 27% respectively from gross margins of $1,790,000
and $5,471,000 for the three and nine months ended September 30, 2009 due to the increase in 2010
revenues. As a percentage of revenues, the gross margin of 72% for the nine months ended September
30, 2010 compares with a gross margin of 73% for the first nine months of 2009.
Operating Expenses
Expenses for engineering and software development, net of software capitalization, of $385,000 for
the three months ended September 30, 2010 and $1,080,000 for the nine months ended September 30,
2010 increased from $221,000 and $794,000 for the same three and nine month period of 2009 due to a
sizable reduction in software development costs capitalized. The chart below summarizes, for both
the three and nine months ended September 30, 2010 and 2009, gross engineering and software
developments costs incurred, development costs capitalized, and the resulting net engineering and
software development costs included in the Companys statement of operations.
|
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|
|
|
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|
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Three Months Ended |
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|
Six Months Ended |
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|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenditures for engineering & software
development |
|
$ |
652,000 |
|
|
$ |
624,000 |
|
|
$ |
1,919,000 |
|
|
$ |
1,834,000 |
|
Less: Software development costs capitalized |
|
|
(267,000 |
) |
|
|
(403,000 |
) |
|
|
(839,000 |
) |
|
|
(1,040,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net expense for engineering and software |
|
$ |
385,000 |
|
|
$ |
221,000 |
|
|
$ |
1,080,000 |
|
|
$ |
794,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General, and Administrative expenses (SG&A) of $2,053,000 for the three months ended
September 30, 2010, increased $116,000, or 6% from the prior year primarily due to $84,000 of
additional expenses associated with the acquisition of Source Loop. For the nine months ended
September 30, 2010, SG&A expense of $5,508,000 decreased $251,000, or 4% from the prior year,
despite an additional $101,000 of expense attributable to the acquisition.
16
Liquidity and Capital Resources
The Companys net cash position (cash on hand plus short term investments) decreased from $781,000
at June 30, 2010 to $619,000 at September 30, 2010 primarily the result of expenditures incurred in
connection with the relocation of our facility, including $125,000 of deposits placed for
furniture, fixtures and other leasehold improvements. Cash and short term investments totaled
$946,000 at December 31, 2009. The Company maintains a line of credit arrangement with a local
commercial bank, against which the Company borrowed $300,000 in the second quarter in conjunction
with the acquisition of Source Loop. There were no additional borrowings against the line of credit
in the third quarter. Subsequent to the end of the third quarter, the bank extended the Companys
line of credit from $400,000 to $750,000.
Accounts receivable of $2,524,000 at September 30, 2010 increased 92% from the December 31, 2009
balance of $1,315,000. The increase reflects a combination of the addition of former Source Loop
clients and higher sales volumes. We incurred a net charge to bad debt expense of $85,000 in the
third quarter resulting from the bankruptcy of a reseller partner. The September 30, 2010 bad debt
reserve of $48,000 has increased from a reserve of $24,000 at December 31, 2009 to reflect the
higher accounts receivable balance.
Prepaid expenses of $372,000 at September 30, 2010 decreased 4% from the December 31, 2009 balance
of $389,000. Prepaid expenses consist of commissions due to our sales force for orders received,
which will be charged to expense at the time the associated revenue is recognized, as well as
unutilized portions of annual business insurances, and various deposits and subscription services.
Capital expenditures for the nine months ended September 30, 2010 of $155,000 are 13% higher than
the $137,000 of capital expenditures for the first nine months of 2009. Capital expenditures for
the fourth quarter of 2010 will exceed those incurred in any of the previous three quarters due to
the relocation of our facility. Depreciation expense of $149,000 for the first nine months of 2010
decreased $84,000 from depreciation expense of $233,000 for the same nine months of 2009.
Software development costs capitalized and included on our balance sheet at September 31, 2010
total $2,884,000, a reduction of 1% from capitalized development costs of $2,907,000 at December
31, 2009. For the nine months ended September 30, 2010 we capitalized $839,000 of software
development costs, $201,000 less than the developments costs capitalized for the first nine months
of 2009. Amortization of software development costs capitalized in previous periods, which are
charged to cost of revenues, totaled $862,000 for the first nine months of 2010, nearly identical
to the amortization expense of $863,000 for the same period of 2009.
Intangible assets of $885,000 at September 30, 2010 reflect the remaining fair value of the assets
acquired from Source Loop based on their estimated fair values as determined at the time of
acquisition. The change of $81,000 from the June 30, 2010 balance of $993,000 reflects the third
quarter amortization of those fair values based on their expected weighted average useful lives.
17
Total current liabilities of $7,019,000 at September 31, 2010 increased $1,311,000 from the
December 31, 2009 total of $5,708,000. The increase includes $300,000 borrowed against our line of
credit arrangement and $561,000 of contingent liabilities associated with the acquisition of Source
Loop, representing the expected future consideration to be paid in cash and stock during the next
twelve months. Deferred revenues, which include the value of maintenance, training, installation
and other contracted services, for which customers have been billed, but for which the associated
service has not yet been performed, increased from $3,791,000 at
December 31, 2009 to $4,094,000 at September 30, 2010. The majority of the contracted services are
expected to be performed over the next twelve months and will be recognized as revenue as
performed. Deferred revenues form a component of the embedded revenues referred to in the Overview
section.
Long-term liabilities consisting of the companys pension obligations extending beyond twelve
months and the long-term portion of expected consideration remaining on the acquisition of Source
Loop total $4,969,000 at September 30, 2010. At December 31, 2010 long term liabilities totaled
$4,674,000 consisting solely of the pension obligation.
Stockholders equity at September 31, 2010 totals $462,000, an increase of $459,000 from the
December 31, 2009 balance of $3,000, and includes the year to date net income of $403,000 and
$57,000 of common stock issued in June as partial consideration to the principals of Source Loop.
Management continually reviews its cash and investment positions, operating expense levels, and
access to additional sources of capital. It is managements opinion that more than sufficient
resources exist to fully fund operations and strategic objectives for the next twelve months and
beyond.
18
Accounting Pronouncements
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|
|
In October 2009, the FASB issued Accounting Standards Update No. 2009-13,
Multiple-Deliverable Revenue Arrangements, which amends existing revenue recognition
accounting pronouncements that are currently within the scope of FASB Codification Subtopic
605-25 (previously included within EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables, or EITF 00-21). The consensus to EITF Issue No. 08-01, Revenue Arrangements
with Multiple Deliverables, or EITF 08-01, provides accounting principles and application
guidance on whether multiple deliverables exist, how the arrangement should be separated,
and the consideration allocated. This guidance eliminates the requirement to establish the
fair value of undelivered products and services and instead provides for separate revenue
recognition based upon managements estimate of the selling price for an undelivered item
when there is no other means to determine the fair value of that undelivered item. EITF
00-21 previously required that the fair value of the undelivered item be the price of the
item either sold in a separate transaction between unrelated third parties or the price
charged for each item when the item is sold separately by the vendor. This was difficult to
determine when the product was not individually sold because of its unique features. Under
EITF 00-21, if the fair value of all of the elements in the arrangement was not
determinable, then revenue was deferred until all of the items were delivered or fair value
was determined. This new approach is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010.
The Company will have to evaluate the impact of this standard on future revenue
arrangements that we may enter into. |
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|
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, topic 820,
Fair Value Measurements and Disclosures, which amends existing fair value disclosure
pronouncements. This update provides amendments to Subtopic 820-10 that require new
disclosures as follows: |
|
1. |
|
Transfers in and out of Levels 1 and 2. A reporting entity should disclose
separately the amounts of significant transfers in and out of Level 1 and Level 2
fair value measurements and describe the reasons for the transfers. |
|
2. |
|
Activity in Level 3 fair value measurements. In the reconciliation for
fair value measurements using significant unobservable inputs (Level 3), a reporting
entity should present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net number). |
This update also provides amendments to Subtopic 820-10 that clarify existing disclosures as
follows:
|
1. |
|
Level of disaggregation. A reporting entity should provide fair value
measurement disclosures for each class of assets and liabilities. A class is often a
subset of assets or liabilities within a line item in the statement of financial
position. A reporting entity needs to use judgment in determining the appropriate
classes of assets and liabilities. |
|
2. |
|
Disclosures about inputs and valuation techniques. A reporting entity
should provide disclosures about the valuation techniques and inputs used to measure
fair value for both recurring and nonrecurring fair value measurements. Those
disclosures are required for fair value measurements that fall in either Level 2 or
Level 3. |
19
This update also includes conforming amendments to the guidance on employers disclosures
about postretirement benefit plan assets (Subtopic 715-20). The conforming amendments to
Subtopic 715-20 change the terminology from major categories of assets to classes of assets
and provide a cross reference to the guidance of Subtopic 820-10 on how to determine
appropriate classes to present fair value disclosures.
This update is effective for interim and annual reporting periods beginning after December
15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in
the roll forward of activity in Level 3 fair value measurements. Those disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years.
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|
In April 2010, the FASB issued Accounting Standards Update No. 2010-13, topic 718,
Compensation Stock Compensation, which adds clarification that an employee share-based
award with an exercise price denominated in the currency of a market in which a substantial
portion of the entitys equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an entity
would not classify such an award as a liability if it otherwise qualifies as an equity.
This update is effective for fiscal years, and interim periods within those fiscal years
beginning on or after December 15, 2010. The Company does not expect this to have a
material effect on the Companys financial statements. |
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|
In April 2010, the FASB issued Accounting Standards Update No. 2010-17, topic 605,
Revenue Recognition Milestone Method, which provides guidance on the criteria that should
be met for determining whether the milestone method of revenue recognition is appropriate.
A vendor can recognize consideration that is contingent upon achievement of a milestone in
its entirety as revenue in the period in which the milestone is achieved only if the
milestone meets all criteria to be considered substantive. This update is effective on a
prospective basis for milestones achieved in fiscal years, and interim periods within those
years, beginning on or after June 15, 2010. The Company is currently evaluating the impact
this update may have on the Companys financial statements. |
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|
|
In July 2010, the FASB issued Accounting Standards Update No. 2010-20, topic 310,
Receivables, which requires disclosures about the credit quality of financing receivables
and the allowance for credit losses. The disclosures as of the end of a reporting period
are effective for interim and annual reporting periods ending on or after December 15,
2010. The Company does not expect this to have a material effect on the Companys
financial statements. |
Critical Accounting Policies
The preparation of financial statements requires management to make estimates and assumptions that
affect amounts reported therein. The most significant of these involves difficult or complex
judgments as described below. In each situation, management is required to make estimates about
the effects of matters or future events that are inherently uncertain.
Revenue Recognition
The Companys revenue consists of revenues from the licensing of software to resellers and end user
customers; fees for services rendered to include installation, training, implementation, and
customer maintenance contracts; and the outsourcing or hosting of services.
20
The Company recognizes software license revenue under ASC 985-605, formerly Statement of Position
No 97-2 Software Revenue Recognition as amended by Statement of Position No. 98-9, Software
Revenue Recognition With Respect to Certain Transactions, and under ASC 605-25, formerly Emerging
Issues Task Force 00-21, Revenue Arrangements with Multiple Deliverables, and related
interpretations.
Sales of licensed software sold directly to an end user customer are recognized as revenue upon
delivery and installation of the software at the customer site. Sales of licensed software to a
reseller are recognized as revenue when delivery is made to the reseller. Regardless of the form
of sale no revenue is recognized without persuasive evidence of an arrangement existing. Persuasive
evidence is determined to be a signed purchase order received from the customer or an equivalent
form for those customers lacking a formalized purchase order system. In the case of VeraSMART
sales, a software license agreement signed by both parties is often required in addition to a
purchase order or equivalent. Additionally, revenue is only recognized when a selling price is
fixed or determinable and collectability of the receivable is deemed to be probable.
Service revenues such as training, installation and implementation are recognized when the service
is complete and acknowledged by the customer, regardless as to whether the sale is on a direct
basis or through a reseller arrangement.
Fees charged to customers for post-contract Customer Support are recognized ratably over the term
of the contract. Costs related to maintenance obligations are expensed as incurred.
Sales which constitute a multiple-element arrangement are accounted for by determining if the
elements can be accounted for as separate accounting units, and if so, by applying values to those
units for which there is vendor specific objective evidence of their fair value. The Company uses
the residual method to apply any remaining balance to the remaining elements of the arrangement.
More specifically, this methodology applies when there is embedded maintenance (post-contract
customer support) involved in the sale of a software license, or when the sale of a software
license is made in conjunction with installation services. In the latter case, the recognition of
the software license is deferred until installation is completed.
The Companys revenues generated through hosting solutions are recognized using the proportional
performance method. Revenues are recognized in the month services are rendered and earned under
service agreements with clients where service fees are fixed or determinable. Contracts can be
terminated with 90 days written notice. All services provided by the Company through the date of
cancellation are due and payable under the contract terms.
The Company believes its revenue recognition policies are appropriate, in all circumstances, and
that its policies are reflective of complexities arising from customer arrangements involving such
features as maintenance, warranty agreements, license agreements, and other normal course of
business arrangements.
Capitalization of Software Development
The Company capitalizes software development costs when technological feasibility has been
established for the software in accordance with ASC 985-20, formerly SFAS No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Such capitalized costs
are amortized on a product-by-product basis over their economic life or the ratio of current
revenues to current and anticipated revenues from such software, whichever provides the greater
amortization. The Company periodically reviews the carrying value of capitalized software
development costs and impairments are recognized in the results of operations
when the expected future undiscounted operating cash flow derived from the capitalized software is
less than its carrying value. Should the Company inaccurately determine when a product reaches
technological feasibility or the economic life of a product, results could differ materially from
those reported. The Company uses what it believes are reasonable assumptions and where applicable,
established valuation techniques in making its estimates.
21
Allowance For Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the
potential inability of its customers to make required payments. Management specifically analyzes
accounts receivable, historical bad debts, credit concentrations and customer payment terms when
evaluating the adequacy of the allowance for doubtful accounts.
Pension Liability
The Company sponsors an unfunded Supplemental Executive Retirement Program (SERP), which is a
nonqualified plan that provides certain key employees a defined pension benefit. In order to
properly record the net present value of future pension obligations a number of assumptions are
required to be made by Companys management. These assumptions include years of service, life
expectancies, and projected future salary increases for each participant. In addition, management
must make assumptions with regard to the proper long-term interest and liability discount rates to
be applied to these future obligations.
Should the Company need to alter any of these assumptions, there is the potential for significant
adjustments to future projected pension liabilities.
22
Item 3 Quantitative and Qualitative Disclosures About Market Risk
The Company has no long-term bank debt obligations. The Company has no foreign currency
exchange risk and has no foreign currency exchange contracts.
Item 4 Controls and Procedures
Based upon an evaluation as of the end of the period covered by this report, the Companys
Chief Executive Officer and Chief Finance Officer concluded that the Companys disclosure controls
and procedures are effective to provide reasonable assurance that information required to be
disclosed by the Company in the reports that it files or submits under the Securities Exchange Act
of 1934 is (i) recorded, processed, summarized and reported, within the time periods specified in
the SECs rules and forms and (ii) accumulated and communicated to the Companys management,
including its principal executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required disclosure. There have been
no changes in the Companys internal controls over financial reporting, during the period covered
by this report, that have materially affected, or are reasonably likely to materially affect the
Companys internal controls over financial reporting.
The Companys disclosure controls and procedures and internal controls over financial
reporting provide reasonable, but not absolute, assurance that all deficiencies in design or
operation of those control systems, or all instances of errors or fraud, will be prevented or
detected. Those control systems are designed to provide reasonable assurance of achieving the goals
of those systems in light of the Companys resources and nature of the Companys business
operations. The Companys disclosure controls and procedures and internal controls over financial
reporting remain subject to risks of human error and the risk that controls can be circumvented for
wrongful purposes by one or more individuals in management or non-management positions.
23
PART II OTHER INFORMATION
Item 1 Legal Proceedings
On October 4, 2010, the Company was served with a summons and complaint in an action brought by
Asentinel LLC, against the Company, AnchorPoint, a division of MTS, and CASS Information Systems.
The complaint alleges infringement of two telecom expense management (TEM) patents held by
Asentinel. The Company is in the preliminary stages of investigating the claims made in the
complaint, and at this time, it is not possible to determine the ultimate resolution of, or
estimate the liability related to, this matter. No provision for losses has been provided in
connection with this litigation.
Item 1A Risk Factors
The following factors, among others discussed herein and in the Companys filings under the Act,
could cause actual results and future events to differ materially from those set forth or
contemplated in this report: economic, competitive, governmental and technological factors,
increased operating costs, failure to obtain necessary financing, risks related to natural
disasters and financial market fluctuations. Such factors also include:
Intellectual Property Rights
The Company regards its products as proprietary and attempts to protect them with a combination of
copyright, trademark and trade secret protections, employee and third-party non-disclosure
agreements and other methods of protection. Despite those precautions, it may be possible for
unauthorized third parties to copy certain portions of the Companys products, reverse engineer or
obtain and use information that the Company regards as proprietary. The laws of some foreign
countries do not protect Veramarks proprietary rights to the same extent as the laws of the United
States. Any misappropriation of the Companys intellectual property could have a material adverse
effect on its business and results of operations. Furthermore, although the Company takes steps
to prevent unlawful infringement of others intellectual property, there can be no assurance that
third parties will not assert infringement claims against the Company in the future with respect to
current or future products. Any such assertion could require the Company to enter into royalty
arrangements or result in costly litigation.
Existing Customer Base
We derive an increasingly significant portion of our revenues from multi-year managed service
contracts. As a result, if the Company loses a major customer, or if a managed service contract is
delayed, reduced, or cancelled, the Companys revenues could be adversely affected. In addition,
customers who have accounted for significant revenues in the past may not generate the same amount
of revenues in future periods.
Product Development
The Company has made significant investments in research, development and marketing for new
products, services and technologies, including the VeraSMART software offering and its hosted or
managed solutions. Significant revenue from new product and service investments may not be
achieved for a number of years, if at all. Moreover, if such products or services are
profitable, operating margins may not be as high as the margins historically experienced by the
Company. The development of software products is a complex and time-consuming process. New
products and enhancements to existing products can require long development and testing periods.
Significant delays in new product releases or significant problems in creating new products,
particularly any delays in future releases of the VeraSMART suite of products or services, could
adversely affect the Companys revenues.
24
Declines in Demand for Software
If overall market demand for software and computer devices generally, as well as call accounting
software or enterprise level products and services specifically, declines, or corporate spending
for such products declines, the Companys revenue will be adversely affected. Additionally, the
Companys revenues would be unfavorably impacted if customers reduce their purchases of new
software products or upgrades to existing products.
New Products and Services
The Company is in the process of transforming its business model from a company providing largely
premise-based software products and services to one offering hosted solutions, providing a wide
variety of TEM processes, such as wireless management, invoice processing, and reporting as managed
services under multi- year arrangements. The effect of this transformation will be a reduction in
the amount of revenues that can be initially recognized on any given contract (as compared to a
one-time sale of software), but higher embedded future revenues over the life of the contract.
Since major components of the Companys cost structure, including personnel and facility costs, are
relatively fixed based on anticipated revenues, period-to-period comparisons of the Companys
operating results should not be relied upon as an indicator of future performance.
Competition
The Company experiences intense competition across all markets for its products and services. Some
competing firms have greater name recognition and more financial, marketing and technological
resources than the Company. These competitive pressures may result in decreased sales volumes,
price reductions, and/or increased operating costs, such as for marketing and sales incentives,
resulting in lower revenues, gross margins and operating income.
Marketing and Sales
The Companys marketing and distribution strategy is founded on building mutually beneficial
relationships with companies that have established distribution networks. Some sell privately
labeled, customized products developed and manufactured by the Company to their specific
specifications, while others resell the Companys products. Any loss of the continued availability
of those relationships could have a material adverse effect on the Companys business and results
of operations.
Security and Privacy Breaches in the Company Systems May Damage Client Relations and Inhibit our
Growth
The uninterrupted operation of the Companys hosted solutions and the confidentiality of third
party information that resides on the Companys systems are critical to our business. The Company
has what it believes to be sufficient security in place to prevent major interruptions in service
and to prevent unauthorized access. Any failure in the Companys security and privacy measures
could have a material adverse impact on its financial position and results of operations.
Stock Price Volatility
The acquisition of Source Loop has resulted in a contingent liability, comprised in part by shares
of Company stock that may be issued in the future, as partial consideration of the acquisition.
The value of the stock liability
could vary based upon several factors, including changes in the Companys stock price through
December 31, 2011. Under ASC 805, the Company is required to record the change in the value of the
stock liability, if any, through the statement of operations.
25
Item 5 Other Information
None
Item 6 Exhibits
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(a) |
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Financial Statements as set forth under Item 1 of this report on Form 10-Q |
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(b) |
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Exhibits required to be filed by Item 601 of Regulation S-K |
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3.1 |
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Restated Certificate of Incorporation (incorporated by reference to
Exhibit 4.1 to the Companys Registration Statement on Form S-18
(File No. 2-96787) filed on March 22, 1985) |
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3.2 |
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Bylaws (incorporated by reference to Exhibit 3 to the Companys
Registration Statement on Form S-8 filed on October 5, 1992) |
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10.1 |
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Letter Agreement dated as of March 29, 2007 by and between the
Company and David G. Mazzella (incorporated by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K filed on April 3,
2007) |
|
|
|
|
|
|
10.2 |
* |
|
Amended and Restated Board of Directors Deferred Compensation Plan
(incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed on November 26, 2007) |
|
|
|
|
|
|
10.3 |
* |
|
Employment Agreement dated as of December 17, 2007 by and between
the Company and Anthony C. Mazzullo (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K filed on
December 19, 2007) |
|
|
|
|
|
|
10.4 |
* |
|
Restricted Stock Award Agreement dated as of January 1, 2008 by and
between the Company and Anthony C. Mazzullo (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed on March 25, 2008) |
|
|
|
|
|
|
10.5 |
* |
|
2008 Incentive Plan for Management and Key Employees (incorporated
by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed on April 2, 2008) |
|
|
|
|
|
|
10.6 |
* |
|
2008 Employee Stock Purchase Plan (incorporated by reference to
Exhibit F to the Companys Proxy Statement for its 2008 Annual
Meeting of Shareholders filed on April 29, 2008) |
|
|
|
|
|
|
10.7 |
* |
|
Description of non-employee director compensation (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed on August 18, 2008) |
|
|
|
|
|
|
10.8 |
* |
|
Amended Salary Continuation Agreement dated as of October 10, 2008
by and between the Company and Ronald C. Lundy (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed on October 17, 2008) |
|
|
|
|
|
|
10.9 |
* |
|
Form of 2008 Employee Stock Purchase Plan Enrollment Agreement
(incorporated by reference to Exhibit 4.2 to the Companys
Registration Statement on Form S-8 (File No. 333-155286) filed on
November 12, 2008) |
26
|
|
|
|
|
|
10.10 |
* |
|
2010 Bonus Compensation Plan dated as of March 1, 2010 by and
between the Company and Anthony C. Mazzullo (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed on March 5, 2010) |
|
|
|
|
|
|
10.11 |
* |
|
2010 Incentive Plan for Management and Key Employees (incorporated
by reference to Exhibit 10.2 to the Companys Current Report on
Form 8-K filed on March 5, 2010) |
|
|
|
|
|
|
14 |
|
|
Code of Business Conduct and Ethics (incorporated by reference to
Exhibit E to the Companys Proxy Statement for its 2008 Annual
Meeting of Shareholders filed on April 29, 2008) |
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
31.2 |
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
32.1 |
|
|
Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
32.2 |
|
|
Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
* |
|
Management contract or compensatory plan or arrangement |
|
(c) |
|
Schedules required to be filed by Regulation S-X |
None
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
VERAMARK TECHNOLOGIES, INC.
REGISTRANT
Date: November 12, 2010
|
|
|
/s/ Anthony C. Mazzullo
|
|
|
|
|
|
Anthony C. Mazzullo |
|
|
President and CEO |
|
|
|
|
|
Date: November 12, 2010 |
|
|
|
|
|
/s/ Ronald C. Lundy |
|
|
|
|
|
Ronald C. Lundy |
|
|
Vice President of Finance and CFO |
|
|
28