þ | Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
o | Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For Quarter Ended September 30, 2011 |
Delaware | 16-1192368 | |
(State or other jurisdiction of Incorporation or Organization) |
(IRS Employer Identification Number) |
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller Reporting Company þ |
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13 - 22 | ||||||||
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24 | ||||||||
24 - 26 | ||||||||
27 | ||||||||
27 - 28 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
2
(Unaudited) | ||||||||
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 594,343 | $ | 1,236,375 | ||||
Investments |
161,621 | 265,962 | ||||||
Accounts
receivable, trade (net of allowance for doubtful accounts of $26,000 and $33,000) |
1,736,394 | 1,911,693 | ||||||
Prepaid expenses |
464,524 | 294,090 | ||||||
Other current assets |
909,048 | 290,762 | ||||||
Total Current Assets |
3,865,930 | 3,998,882 | ||||||
PROPERTY AND EQUIPMENT |
||||||||
Cost |
2,598,143 | 2,512,162 | ||||||
Less accumulated depreciation |
(2,027,165 | ) | (1,909,965 | ) | ||||
Property and Equipment (net) |
570,978 | 602,197 | ||||||
OTHER ASSETS: |
||||||||
Software development costs (net of accumulated
amortization of $3,016,803 and $2,245,268) |
2,819,342 | 2,961,617 | ||||||
Pension assets |
3,199,422 | 3,107,952 | ||||||
Intangibles, net |
623,250 | 804,000 | ||||||
Goodwill |
336,219 | 336,219 | ||||||
Deposits and other assets |
1,104,374 | 1,062,152 | ||||||
Total Other Assets |
8,082,607 | 8,271,940 | ||||||
TOTAL ASSETS |
$ | 12,519,515 | $ | 12,873,019 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ | 277,334 | $ | 360,382 | ||||
Accrued compensation |
736,609 | 667,062 | ||||||
Deferred revenue |
4,516,813 | 4,250,933 | ||||||
Current portion of pension obligation |
522,739 | 502,059 | ||||||
Contingent liability |
210,000 | 899,400 | ||||||
Short term bank debt |
66,667 | 246,667 | ||||||
Short term note payable |
250,000 | 0 | ||||||
Other accrued liabilities |
956,746 | 415,459 | ||||||
Total Current Liabilities |
7,536,908 | 7,341,962 | ||||||
Long-Term debt |
176,889 | 174,555 | ||||||
Long-Term portion of pension obligation |
4,697,533 | 4,914,757 | ||||||
Total Liabilities |
12,411,330 | 12,431,274 | ||||||
STOCKHOLDERS EQUITY: |
||||||||
Common Stock, par value $.10; shares authorized,
40,000,000; 10,560,158 shares and 10,190,595
shares issued |
1,056,015 | 1,019,059 | ||||||
Additional paid-in capital |
22,834,645 | 22,661,405 | ||||||
Accumulated deficit |
(23,100,789 | ) | (22,568,440 | ) | ||||
Treasury stock (80,225 shares, at cost) |
(385,757 | ) | (385,757 | ) | ||||
Accumulated other comprehensive income |
(295,929 | ) | (284,522 | ) | ||||
Total Stockholders Equity |
108,185 | 441,745 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 12,519,515 | $ | 12,873,019 | ||||
3
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
NET REVENUES |
||||||||||||||||
Product revenues |
$ | 400,612 | $ | 586,848 | $ | 1,242,181 | $ | 1,781,557 | ||||||||
Service revenues |
3,028,727 | 3,041,479 | 8,820,124 | 7,795,690 | ||||||||||||
Total Net Revenues |
3,429,339 | 3,628,327 | 10,062,305 | 9,577,247 | ||||||||||||
COSTS AND OPERATING EXPENSES: |
||||||||||||||||
Cost of revenues |
1,164,118 | 1,005,638 | 3,341,506 | 2,633,784 | ||||||||||||
Engineering and software development |
227,350 | 385,292 | 828,097 | 1,080,083 | ||||||||||||
Selling, general and administrative |
1,961,512 | 2,053,339 | 5,604,014 | 5,507,926 | ||||||||||||
Litigation expenses & settlement costs |
0 | 0 | 862,995 | 0 | ||||||||||||
Total Costs and Operating Expenses |
3,352,980 | 3,444,269 | 10,636,612 | 9,221,793 | ||||||||||||
INCOME (LOSS) FROM OPERATIONS |
76,359 | 184,058 | (574,307 | ) | 355,454 | |||||||||||
NET INTEREST INCOME |
9,182 | 29,760 | 41,958 | 47,219 | ||||||||||||
INCOME (LOSS) BEFORE TAXES |
85,541 | 213,818 | (532,349 | ) | 402,673 | |||||||||||
INCOME TAXES |
0 | 0 | 0 | 0 | ||||||||||||
NET INCOME (LOSS) |
$ | 85,541 | $ | 213,818 | $ | (532,349 | ) | $ | 402,673 | |||||||
NET INCOME (LOSS) PER SHARE |
||||||||||||||||
Basic |
$ | 0.01 | $ | 0.02 | $ | (0.05 | ) | $ | 0.04 | |||||||
Diluted |
$ | 0.01 | $ | 0.02 | $ | (0.05 | ) | $ | 0.04 | |||||||
4
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | (532,349 | ) | $ | 402,673 | |||
Adjustments
to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
1,122,836 | 1,118,126 | ||||||
Increase (decrease) in bad debt reserve |
(7,000 | ) | 23,500 | |||||
Change in acquisition liabilities |
(239,400 | ) | (47,730 | ) | ||||
Compensation expense equity grants |
36,523 | 103,804 | ||||||
Loss on disposal of fixed assets |
39 | 2,347 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
182,299 | (1,232,481 | ) | |||||
Prepaid expenses and other current assets |
(788,720 | ) | 340,054 | |||||
Pension assets |
(91,470 | ) | (98,898 | ) | ||||
Deposits and other assets |
(42,222 | ) | (209,168 | ) | ||||
Accounts payable |
(83,048 | ) | 177,363 | |||||
Accrued compensation and related taxes |
69,547 | 257,773 | ||||||
Deferred revenue |
265,880 | 302,908 | ||||||
Other accrued liabilities |
541,287 | (287,251 | ) | |||||
Note payable |
250,000 | 0 | ||||||
Prepaid rent liability |
52,334 | 0 | ||||||
Pension obligation |
(196,544 | ) | (169,045 | ) | ||||
Net cash provided by operating activities |
539,992 | 683,975 | ||||||
INVESTING ACTIVITIES: |
||||||||
Acquisition cash paid |
(450,000 | ) | (300,000 | ) | ||||
Sale of investments |
92,934 | 160,794 | ||||||
Additions to property and equipment |
(120,306 | ) | (154,934 | ) | ||||
Capitalized software development costs |
(648,325 | ) | (839,372 | ) | ||||
Net cash flows used by investing activities |
(1,125,697 | ) | (1,133,512 | ) | ||||
FINANCING ACTIVITY: |
||||||||
Borrowing (repayment) line of credit |
(180,000 | ) | 300,000 | |||||
Bank borrowing repayment of term loan |
(50,000 | ) | 0 | |||||
Exercise of stock options |
161,259 | 0 | ||||||
Employee stock purchase plan |
12,414 | 13,282 | ||||||
Net cash provided (used) by financing activities |
(56,327 | ) | 313,282 | |||||
Net change in cash and cash equivalents |
(642,032 | ) | (136,255 | ) | ||||
Cash and cash equivalents, beginning of year |
1,236,375 | 488,381 | ||||||
Cash and cash equivalents, end of quarter |
$ | 594,343 | $ | 352,126 | ||||
2011 | 2010 | |||||||
SUPPLEMENTAL CASH FLOW INFORMATION |
||||||||
Cash Transactions: |
||||||||
Net Income taxes paid (refunded) |
$ | (8,306 | ) | $ | 2,873 | |||
Net Interest paid |
$ | 9,446 | $ | 5,691 |
5
(1) | GENERAL |
(2) | PROPERTY AND EQUIPMENT |
The major classifications of property and equipment at September 30, 2011, and December 31,
2010 were: |
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Machinery and equipment |
$ | 116,385 | $ | 117,541 | ||||
Computer hardware and software |
1,298,051 | 1,216,120 | ||||||
Furniture and fixtures |
1,183,707 | 1,178,501 | ||||||
$ | 2,598,143 | $ | 2,512,162 | |||||
For the nine months ended September 30, 2011 and 2010, the Company recorded depreciation
expense of $151,486 and $148,556, respectively. |
(3) | STOCK-BASED COMPENSATION |
The Companys share-based compensation consists of restricted stock and stock options, vesting
over periods ranging from one to four years. For the nine months ended September 30, 2011,
the Company awarded 301,875 stock options vesting over four years, cancelled 107,896 stock
options, cancelled 53,333 restricted shares granted in previous periods, and exercised 398,554
options. During the first nine months
of 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. |
6
A summary of the status of the Companys stock option plan as of September 30, 2011, is
presented below: |
Weighted | Weighted | Average | ||||||||||||||||||
Average | Average | Remaining | ||||||||||||||||||
Exercise | Grant-Date | Contractual | Intrinsic | |||||||||||||||||
Shares | Price | Fair Value | Term (Yrs) | Value | ||||||||||||||||
Outstanding as of December 31, 2010 |
1,557,768 | $ | 0.62 | $ | 0.58 | 4.1 | $ | 79,154 | ||||||||||||
Granted |
301,875 | 0.69 | 0.67 | 0 | ||||||||||||||||
Exercised |
(398,554 | ) | 0.43 | (31,914 | ) | |||||||||||||||
Canceled |
(107,896 | ) | 0.51 | (8,160 | ) | |||||||||||||||
Outstanding as of September 30, 2011 |
1,353,193 | $ | 0.70 | $ | 0.70 | 6.1 | $ | 39,080 | ||||||||||||
Options exercisable at September
30, 2011 |
993,693 | $ | 0.72 | $ | 0.72 | 4.9 | $ | 39,080 | ||||||||||||
(4) | COMPREHENSIVE INCOME |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income (loss) |
$ | 85,541 | $ | 213,818 | $ | (532,349 | ) | $ | 402,673 | |||||||
Unrealized change pension |
0 | (29,400 | ) | 0 | (88,200 | ) | ||||||||||
Unrealized change -
investments |
(1,342 | ) | (25,212 | ) | (11,407 | ) | (29,559 | ) | ||||||||
Total comprehensive income |
$ | 84,199 | $ | 159,206 | $ | (543,756 | ) | $ | 284,914 | |||||||
(5) | NET INCOME (LOSS) PER SHARE (EPS) |
ASC 260-10 Earnings Per Share 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 are 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. |
7
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Basic |
||||||||||||||||
Net Income (loss) |
$ | 85,541 | $ | 213,818 | $ | (532,349 | ) | $ | 402,673 | |||||||
Weighted average common shares outstanding |
10,426,311 | 9,945,611 | 10,234,239 | 9,909,703 | ||||||||||||
Net Income (loss) per common share |
$ | 0.01 | $ | 0.02 | $ | (0.05 | ) | $ | 0.04 | |||||||
Diluted |
||||||||||||||||
Net Income (loss) |
$ | 85,541 | $ | 213,818 | $ | (532,349 | ) | $ | 402,673 | |||||||
Weighted average common shares outstanding |
10,426,311 | 9,945,611 | 10,234,239 | 9,909,703 | ||||||||||||
Additional dilutive effect of stock options and warrants after application of treasury stock method |
57,080 | 180,947 | 0 | 102,757 | ||||||||||||
Weighted average dilutive shares outstanding |
10,483,391 | 10,126,558 | 10,234,239 | 10,012,460 | ||||||||||||
Net Income (loss) per common share assuming full
dilution |
$ | 0.01 | $ | 0.02 | $ | (0.05 | ) | $ | 0.04 | |||||||
(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, 2011 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. |
(7) | BENEFIT PLANS |
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 the first
quarter of 2011 and for the year 2011 to date the Company contributed $26,589 to employees
401(k) accounts. During the first quarter of 2010, and for the first three quarters of 2010,
the Companys contribution to employee 401(k) accounts totaled $24,644. |
8
The Company also sponsors an unfunded Supplemental Executive Retirement Program (SERP),
which is a non-qualified plan that provides certain key employees defined pension benefits.
Periodic pension expense for the three and nine months ended September 30, 2011 and 2010
consists of the following: |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest Cost |
60,000 | 161,899 | 180,000 | 295,699 | ||||||||||||
Unrealized
Actuarial Gain |
0 | (29,400 | ) | 0 | (88,200 | ) | ||||||||||
Pension Expense |
$ | 60,000 | $ | 132,499 | $ | 180,000 | $ | 207,499 | ||||||||
The Company paid pension obligations of $376,544 for both the nine months ended
September 30, 2011 and the nine months ended September 30, 2010. |
The discount rate used in determining the actuarial present value of the projected benefit
obligation was 5.0% for the nine months ended September 30, 2011 and 5.5% for the nine months
ended September 30, 2010. |
The Company maintains life insurance covering certain current and former 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 $3,199,000 at September 30, 2011. The
accumulated cash surrender values of these policies at December 31, 2010 was approximately
$3,108,000. |
The projected pension benefits paid or expected to be paid under this plan are as follows,
assuming retirement at age 65 and a life expectancy of 80 83 years for all participants: |
Period Ending December 31, Unless Stated Otherwise, | ||||||||
Q4 2011 |
125,514 | |||||||
2012 |
538,159 | |||||||
2013 |
558,660 | |||||||
2014 |
460,526 | |||||||
2015 |
418,926 | |||||||
2016 - 2020 |
2,401,241 |
9
(8) | ACQUISITION |
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 were 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. Through September 30, 2011 we have paid the
Principals of Source Loop $450,000 and issued 100,000 shares of common stock against
performance targets for 2010 and 2011 contained in the asset purchase agreement. |
As of September 30, 2011, based on managements projections of actual performance against
targets contained in the asset purchase agreement for 2011, the estimated remaining
contingent liability is $210,000 in cash and common stock. Under the purchase method of
accounting, the remaining contingent stock consideration (300,000 shares) is 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 decreases in the Companys stock price will be
recorded as income. |
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, 2010. |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Unaudited (In 000s) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Revenue |
$ | 3,429 | $ | 3,628 | $ | 10,062 | $ | 10,145 | ||||||||
Income (Loss) |
$ | 86 | $ | 214 | $ | (532 | ) | $ | 367 | |||||||
Earnings Per Share |
$ | 0.01 | $ | 0.02 | $ | (0.05 | ) | $ | 0.04 | |||||||
(9) | INTANGIBLE ASSETS AND GOODWILL |
Under the purchase 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. The table below summarizes the fair values assigned to
the identifiable intangible assets by asset class at the time of acquisition, and the
subsequent amortization through September 30, 2011 of those intangible assets. |
10
Weighted | FMV at | Current | Accumulated | Net Value by | ||||||||||||||||
Avg Life | Acquisition | Year | Amortization | Asset Class | ||||||||||||||||
Intangible Asset Class | Years | Date | Amortization | at 9/30/11 | at 9/30/11 | |||||||||||||||
Customer Contracts |
3 | $ | 526 | $ | 84 | $ | 162 | $ | 364 | |||||||||||
Customer Relationships |
3 | 260 | 54 | 104 | 156 | |||||||||||||||
Key Employee Agreements |
1 | 177 | 36 | 86 | 91 | |||||||||||||||
Other |
1 | 30 | 7 | 18 | 12 | |||||||||||||||
Sub-Total Intangibles |
||||||||||||||||||||
Subject to Amoritization |
3 | 993 | $ | 181 | $ | 370 | $ | 623 | ||||||||||||
Goodwill |
336 | |||||||||||||||||||
Total Intangible Assets Acquired |
$ | 1,329 | ||||||||||||||||||
Intangible Asset Class | Q4 2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||
Customer Contracts |
$ | 28 | $ | 88 | $ | 67 | $ | 60 | $ | 51 | |||||||||||
Customer Relationships |
19 | 42 | 31 | 25 | 19 | ||||||||||||||||
Key Employee Agreements |
10 | 42 | 39 | 0 | 0 | ||||||||||||||||
Other |
3 | 5 | 3 | 1 | 0 | ||||||||||||||||
Sub-Total Intangibles |
|||||||||||||||||||||
Subject to Amoritization |
$ | 60 | $ | 177 | $ | 140 | $ | 86 | $ | 70 | |||||||||||
(10) | COMMITMENTS AND CONTINGENCIES |
| Asentinel waived all claims for damages for prior infringement and agreed not to make
claims for future infringement of its patents. |
| The Company agreed to pay Asentinel $500,000. Of that amount $250,000 was paid upon
execution of the agreement, and $250,000 is payable without interest, on June 16, 2012, and
is represented by the Companys promissory note |
||
| The lawsuit was dismissed against the Company. |
11
(11) | REVOLVING DEMAND NOTE AGREEMENT |
On October 31, 2008, Veramark Technologies, Inc. entered into a Revolving Demand Note
Agreement (the Agreement), effective as of October 31, 2008, with Manufacturers and Traders
Trust Company (the Bank) to provide working capital in the ordinary course of business.
This Agreement was amended in October 2010 increasing the amount available under the
agreement from $400,000 to $750,000. At September 30, 2011, the Company did not have any
outstanding balance under this Agreement. |
| The maximum outstanding principal balance under the Agreement is Seven Hundred
Fifty Thousand Dollars ($750,000). |
| Veramark may borrow under the Agreement, from time to time, an amount less than
or equal to, but not greater than the available balance. |
| The outstanding principal balance will bear interest at a per annum rate equal to
LIBOR rate plus 3.5% with a minimum rate of 4.0%. |
| The Bank may demand payment of the outstanding principal balance at any time. |
(12) | TERM NOTE AGREEMENT |
On October 29, 2010, the Company entered into an agreement with Manufacturers and Traders
Trust Company to provide a three year term loan in the amount of $200,000, the proceeds of
which were used to purchase furnishings and fixtures for the Companys new headquarters
facility. The loan bears an interest rate of LIBOR plus 4.0%, with a minimum interest rate of
4.5%. At September 30, 2011, the remaining balance of the term loan was $138,889. |
12
Item 2 | Managements Discussion and Analysis of Financial Condition and Results of Operations |
13
Q-1 | Q-2 | Q-3 | Nine Months Ended | |||||||||||||
Unaudited (In 000s) | 2011 | 2011 | 2011 | September 2011 | ||||||||||||
GAAP Net Income (Loss) |
$ | 53 | $ | (671 | ) | $ | 86 | $ | (532 | ) | ||||||
Legal Expenses |
139 | 224 | 0 | 363 | ||||||||||||
Settlement Amount |
0 | 500 | 0 | 500 | ||||||||||||
Adjusted Net Income
(Non-GAAP) |
$ | 192 | $ | 53 | $ | 86 | $ | 331 | ||||||||
Fully Diluted EPS (Non-GAAP) |
$ | 0.02 | $ | 0.00 | $ | 0.01 | $ | 0.03 | ||||||||
Q-1 | Q-2 | Q-3 | Nine Months Ended | |||||||||||||
2010 | 2010 | 2010 | September 2010 | |||||||||||||
GAAP Net Income |
$ | 67 | $ | 122 | $ | 214 | $ | 403 | ||||||||
Fully Diluted EPS |
$ | 0.01 | $ | 0.01 | $ | 0.02 | $ | 0.04 | ||||||||
14
Three Months Ended | Nine Months Ended | ||||||||||||||||||
September 30, | September 30, | ||||||||||||||||||
2011 | 2010 | 2011 | 2010 | ||||||||||||||||
Gross expenditures for engineering & software development |
$ | 496,000 | $ | 652,000 | $ | 1,476,000 | $ | 1,919,000 | |||||||||||
Less: Software development costs capitalized |
(269,000 | ) | (267,000 | ) | (648,000 | ) | (839,000 | ) | |||||||||||
Net expense for engineering and software
development |
$ | 227,000 | $ | 385,000 | $ | 828,000 | $ | 1,080,000 | |||||||||||
15
16
17
| 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. |
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. This update does not have a material effect on the Companys financial
statements. |
| 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. This update does not have a material effect on the
Companys financial statements. |
18
| 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. This update does not have a material
effect on the Companys financial statements. |
| 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. This update does not have a material effect on the Companys financial statements. |
| In December 2010, the FASB issued Accounting Standards Update No. 2010-28, topic 350,
When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or
Negative Carrying Amounts. For those reporting units with zero or negative carrying value,
step 2 of the impairment test is required to be performed, even if step 1 indicates it is
not necessary. This update does not have a material effect on the Companys financial
statements. |
| In December 2010, the FASB issued Accounting Standards Update No. 2010-29, topic 805,
Disclosure of Supplementary Pro Forma Information for Business Combinations, to clarify
diversity in practice of applying this topic. Paragraph 805-10-50-2(h) requires a public
entity to disclose pro forma information for business combinations that occurred in the
current reporting period. The disclosures include pro forma revenue and earnings of the
combined entity for the current reporting period as though the acquisition date for all
business combinations that occurred during the year had been as of the beginning of the
annual reporting period. If comparative financial statements are presented, the pro forma
revenue and earnings of the combined entity for the comparable prior reporting period
should be reported as though the acquisition date for all business combinations that
occurred during the current year had been as of the beginning of the comparable prior
annual reporting period. The Company properly reports such supplementary information in
its filings. |
| In May 2011, the FASB issued Accounting Standards Update No. 2011-04, topic 820, Fair
Value
Measurement, to improve the comparability of fair value measurements presented and disclosed
in financial statements prepared in accordance with United States GAAP and International
Financial Reporting Standards. Some of the amendments clarify the Boards intent about the
application of existing fair value measurement requirements. Other amendments change a
particular principle or requirement for measuring fair value or for disclosing information
about fair value measurements. Specifically, the guidance requires additional
disclosures for fair value measurements that are based on significant unobservable inputs.
The updated guidance is to be applied prospectively and is effective for the Companys
interim and annual periods beginning January 1, 2012. The adoption of this guidance is not
expected to have a material impact on the Companys consolidated financial statements. |
19
| In June 2011, the FASB issued Accounting Standards Update No. 2011-05, topic 220,
Comprehensive Income. The objective of this Update is to improve the comparability,
consistency, and transparency of financial reporting and to increase the prominence of
items reported in other comprehensive income. To increase the prominence of items reported
in other comprehensive income and to facilitate convergence of U.S. generally accepted
accounting principles (GAAP) and International Financial Reporting Standards (IFRS), the
FASB decided to eliminate the option to present components of other comprehensive income as
part of the statement of changes in stockholders equity, among other amendments in this
Update. |
The amendments require that all non-owner changes in stockholders equity be presented either
in a single continuous statement of comprehensive income or in two separate but consecutive
statements. In the two-statement approach, the first statement should present total net
income and its components followed consecutively by a second statement that should present
total other comprehensive income, the components of other comprehensive income, and the total
of comprehensive income. The amendments in this Update should be applied retrospectively,
and are effective for the Companys interim and annual periods beginning after December 15,
2011. The Company does not expect this update to have a material effect on the Companys
financial statements. |
| In September 2011, the FASB issued Accounting Standards Update No. 2011-08, topic 350,
Intangibles Goodwill and Other, to simplify how entities test goodwill for impairment.
The amendments in the Update permit an entity to first assess qualitative factors to
determine whether it is more-likely-than-not that the fair value of a reporting unit is
less than its carrying amount as a basis for determining whether it is necessary to perform
the two-step goodwill impairment test described in Topic 350. The amendments in this Update
are effective for annual and interim goodwill impairment tests performed for fiscal years
beginning after December 15, 2011. The Company does not expect this update to have a
material effect on the Companys financial statements. |
20
| Vendor Specific Objective Evidence of the fair value (VSOE), |
| Third Party Evidence (TPE) |
| Best Estimate of the Selling Price (ESP) |
21
Item 3 | Quantitative and Qualitative Disclosures About Market Risk |
22
Item 4 | Controls and Procedures |
23
Item 1 | Legal Proceedings |
| Asentinel waived all claims for damages for prior infringement and agreed not to make
claims for future infringement of its patents. |
| The Company agreed to pay Asentinel $500,000. Of that amount $250,000 was paid upon
execution of the agreement and $250,000 is payable, without interest on June 16, 2012, and
is represented by the Companys promissory note |
| The lawsuit was dismissed against the Company. |
Item 1A | Risk Factors |
24
25
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Item 5: | Other Information |
Item 6: | Exhibits |
(a | ) | Financial Statements as set forth under Item 1 of this report on Form 10-Q |
||
(b | ) | Exhibits required to be filed by Item 601 of Regulation S-K |
||
3.1 | 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) |
|||
3.2 | Bylaws (incorporated by reference to Exhibit 3 to the Companys
Registration Statement on Form S-8 filed on October 5, 1992) |
|||
10.1 | 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 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) |
||
10.6 | * | 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) |
||
10.7 | * | 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) |
||
10.8 | * | 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) |
||
10.9 | * | 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) |
27
10.10 | Asset Purchase Agreement dated as of June 15, 2010 among the Company,
Source Loop, LLC, a Delaware limited liability company, and Joseph Foster,
Christopher Lee, Daren Moore, and Roberto Morson, who are all of the
members of Source Loop, LLC (incorporated by reference to exhibit 2.1 to
the Companys Current Report on Form 8-K filed August 31, 2010) |
|||
10.11 | * | Employment Agreement dated as of January 1, 2011 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 January 27, 2011) |
||
10.12 | * | 2011 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 March 8, 2011) |
||
10.13 | * | Amendment to Employee Agreement between Josh Bouk and the Company, dated
March 31, 2011 (incorporated by reference to Exhibit 10.12 to
the Companys Quarterly Report on Form 10-Q filed on August 12,
2011) |
||
10.14 | * | Amendment to Employee Agreement between Thomas McAlees and the Company,
dated March 31, 2011 (incorporated by reference to Exhibit 10.13 to
the Companys Quarterly Report on Form 10-Q filed on August 12,
2011) |
||
10.15 | Nonexclusive Patent License and Settlement Agreement between Asentinel LLC
and the Company, dated June 16, 2011 (incorporated by reference
to Exhibit 10.14 to
the Companys Quarterly Report on Form 10-Q filed on August 12,
2011) |
|||
10.16 | Promissory
Note between Asentinel LLC and the Company, dated June 16, 2011. (incorporated by reference to Exhibit 10.15 to
the Companys Quarterly Report on Form 10-Q filed on August 12,
2011) |
|||
14 | Code of Business Conduct and Ethics (incorporated by reference to Exhibit
E to the Companys Proxy Statement for its 2011 Annual Meeting of
Shareholders filed on April 14, 2011) |
|||
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. |
28
/s/ Anthony C. Mazzullo
|
||
President and CEO |
/s/ Ronald C. Lundy
|
||
Vice President of Finance and CFO |
29