Attached files
file | filename |
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EX-31.2 - EXHIBIT 31.2 - VERAMARK TECHNOLOGIES INC | c24222exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - VERAMARK TECHNOLOGIES INC | c24222exv32w1.htm |
EX-32.2 - EXHIBIT 32.2 - VERAMARK TECHNOLOGIES INC | c24222exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - VERAMARK TECHNOLOGIES INC | c24222exv31w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - VERAMARK TECHNOLOGIES INC | Financial_Report.xls |
Table of Contents
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
þ | Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
or
o | Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For Quarter Ended September 30, 2011 |
Commission File Number 0-13898
Veramark Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 16-1192368 | |
(State or other jurisdiction of Incorporation or Organization) |
(IRS Employer Identification Number) |
1565 Jefferson Road, Suite 120 Rochester, NY 14623
(Address of principal executive offices)(Zip Code)
(Address of principal executive offices)(Zip Code)
(585) 381-6000
(Registrants telephone number, including area code)
N/A
(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.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | 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, 2011 was
10,479,933.
INDEX
Page | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 - 12 | ||||||||
13 - 22 | ||||||||
22 | ||||||||
23 | ||||||||
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
Table of Contents
PART
I FINANCIAL INFORMATION
VERAMARK TECHNOLOGIES, INC.
VERAMARK TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(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 | ||||
The accompanying notes are an integral part of these financial statements.
3
Table of Contents
VERAMARK TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
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 | |||||||
The accompanying notes are an integral part of these financial statements.
4
Table of Contents
VERAMARK TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
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 |
The accompanying notes are an integral part of these financial statements.
5
Table of Contents
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) | GENERAL |
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, 2011, the results of its operations for the three
and nine months ended September 30, 2011 and 2010, and cash flows for the nine months ended
September 30, 2011 and 2010.
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, 2010.
The results of operations and cash flows for the three and nine months ended September 30,
2011 are not necessarily indicative of the results to be expected for the full years operation.
Certain prior period amounts have been reclassified to conform to the current period presentation.
(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
Table of Contents
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 | ||||||||||||
As of September 30, 2011, there was $140,948 of total unrecognized compensation cost related
to non-vested stock options granted under the Plan, and $26,422 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 1.2 years. The compensation costs of restricted stock
will be recognized over a weighted-average period of 0.8 years.
(4) | COMPREHENSIVE INCOME |
Total comprehensive income for the three and nine months ended September 30 of 2011 and
2010 was as follows:
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
Table of Contents
Calculations of Earnings (Loss) Per Share
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 | |||||||
There were no dilutive effects of stock options for the nine months ended September 30, 2011
as the effect would have been anti-dilutive due to the net loss incurred for that period.
(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
Table of Contents
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
Table of Contents
(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
Table of Contents
Amortization of Intangible Assets Acquired in Source Loop Acquisition
(In 000s except weighted ave life in years)
(In 000s except weighted ave life in years)
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 | ||||||||||||||||||
Expected Future Amoritzation
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 | |||||||||||
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 conducted in December of
each year, or more frequently if a change in circumstances or the occurrence of events indicates
that potential impairment exists. Through September 30, 2011, there has been no impairment of
goodwill associated with the Source Loop acquisition.
(10) | COMMITMENTS AND CONTINGENCIES |
On June 16, 2011 the Company entered into a Nonexclusive Patent License and settlement agreement
relating to an action brought by Asentinel LLC, against Veramark, AnchorPoint a division of MTS,
and CASS Information Systems, alleging infringement of two patents held by Asentinel concerning
systems and methods for identifying and processing billing exceptions in telecommunications
invoices.
Material terms of the agreement included:
| 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. |
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(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 material terms of the Agreement include:
| 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. |
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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, 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 $3,429,000 for the quarter ended September 30, 2011 decreased 5% from revenues of
$3,628,000 for the same quarter of 2010. For the nine months ended September 30, 2011 revenues of
$10,062,000 increased 5% from revenues of $9,577,000 for the first nine months of 2010.
Net income of $86,000, or $0.01 per share for the quarter ended September 30, 2011 compares with a
net income of $214,000, or $0.02 per share, for the same quarter of 2010. For the nine months ended
September 30, 2011 we have incurred a net loss of $532,000, which includes $863,000 legal and
settlement costs expensed in the first and second quarters of 2011 in connection with a patent
infringement complaint filed by Asentinel LLC, against Veramark and two other defendants in October
2010. Absent those one- time costs, net income for the nine months ended September 30, 2011 would
have been $331,000, or $0.03 per share. For the nine months ended September 30, 2010 we reported
net income of $403,000, or $0.04 per share.
Orders booked for the quarter ended September 30, 2011 of $4.9M increased 14% from orders of $4.3
million for the same quarter of 2010, and orders booked of $12.9 million for the nine months ended
September 30, 2011 increased 33% from $9.7 million for the first nine months of 2010. Recurring
revenues, representing our backlog of orders and services to be provided, and recognized as revenue
in future periods, increased 26% from the December 31, 2010 total of $9.6 million, to $12.1 million
at September 30, 2011. Of that amount, approximately $7.8 million will be recognized over the next
12 months.
Non-GAAP Financial Measures
Removing the one-time settlement and litigation costs referenced above, net income for the nine
months ended September 30, 2011 would have been $331,000, or $0.03 per share, versus $403,000, or
$0.04 per share for the first nine months of 2010, as depicted in the table below.
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Reconcilation of GAAP Net Income to Non-GAAP Net Income
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 | ||||||||
Revenues
Our revenues are earned by providing Telecom Expense Management (TEM) products and services, which
include call accounting, either through the direct sale of licensed software, or under multi-year
managed service contracts offered by means of Software as a Service (SaaS). Throughout 2011 we have
observed an increasing market preference for the SaaS option. For the three and nine months ended
September 30, 2011, revenues from TEM Managed Service contracts increased 16% and 23%,
respectively, from the three and nine months ended September 30, 2010. Revenues generated from the
direct sale of TEM products and services, including maintenance revenues from our installed base,
decreased 11% and 7% for the quarter and nine months ended September 30, 2011, respectively, as
compared with the same periods of 2010.
Gross Margin
Gross margin (revenues less cost of revenues) of $2,265,000, or 66% of revenues, for the
quarter ended September 30, 2011 decreased $357,000, or 14% from gross margin of $2,622,000, or 72%
of revenues, for the same quarter of 2010. For the nine months ended September 30, 2011 gross
margin of $6,721,000, representing 67% of revenue decreased 3% from $6,943,000, or 72% of revenues,
for the first nine months of 2010. The lower margins reflect the higher percentage of managed
service revenues in the overall product mix, as discussed above. Multi-year managed service
contracts typically yield lower margins as a percentage of monthly revenues than those earned from
the one-time sale of a software license, however, generally return greater revenue and margin
dollars over the life of the contact.
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Engineering and Software Development Costs
Engineering and software development expenses, net of the capitalization of software development
costs, totaled $227,000 for the quarter ended September 30, 2011 and $828,000 for the nine months
ended September 30, 2011. For the same three and nine month periods of 2010, net expenses for
engineering and software development totaled $385,000 and $1,080,000, respectively. The reduction
in year to date expenses is attributable to lower facility costs ($83,000) arising from the move to
our new facility in late 2010 and lower compensation costs ($267,000). The chart below summarizes
gross engineering and software development expenses, costs capitalized, and the resulting impact on
the Companys Statement of Operations for the three and nine months ended September 30, 2011 and
2010.
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 | |||||||||||
Selling, General, and Administrative Costs
SG&A expenses of $1,962,000 for the quarter ended September 30, 2011 decreased 4% from the same
quarter of 2010. For the nine months ended September 30, 2011 SG&A expenses of $5,604,000 increased
2% from $5,508,000 for the first nine months of 2010. The increase in year to date 2011 expenses
from the prior year is due to an expansion of the Companys direct sales force which added
approximately $175,000 to expenses, mostly in the form of compensation. This was partially offset
by lower marketing and facility expenses.
Litigation Expense and Settlement Costs
On June 16, 2011 the Company settled a patent litigation complaint brought by Asentinel LLC, which
also named CASS Information Systems and AnchorPoint, a division of MTS as defendants, alleging the
infringement of two telecom expense management (TEM) patents held by Asentinel. Under the terms of
the settlement, the Company agreed to pay Asentinel $500,000 in return for a waiver of all known
claims for past infringement of the Asentinel patents, an agreement not to make claims for future
infringement of those patents and dismissal of the lawsuit. Of the settlement amount, $250,000 was
paid on the date of settlement, with the remaining $250,000 represented by a note payable with a
maturity date of June 16, 2012. The entire settlement amount of $500,000 and legal fees of $224,000
pertaining to this action were charged to the Statement of Operations for the quarter ended June
30, 2011. Additionally the Company expensed $139,000 of legal fees associated with this action in
the first quarter of 2011.
Liquidity and Capital Resources
Cash and short- term investments totaled $756,000 at September 30, 2011, which compared with a cash
and short-term investment position of $1,502,000 at December 31, 2010. For the third quarter of
2011 we generated a positive cash flow of $127,000. Major cash outlays in 2011 have included the
patent litigation claim against
the Company referred to above, $450,000 attributable to the 2010 acquisition of Source Loop and the
repayment of $180,000 borrowed against the Companys line of credit agreement at December 31, 2010.
As of September 30, 2011 we have no outstanding balance against our line of credit agreement,
which provides for up to $750,000 of working capital.
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Accounts receivable at September 30, 2011 totaled $1,736,000, net of a reserve for bad debts of
$26,000. At December 31, 2010 accounts receivable totaled $1,912,000, net of a $33,000 reserve for
bad debts. There have been no significant write-offs of customer balances during the first nine
months of 2011.
Prepaid expenses of $465,000 at September 30, 2011 increased 58% from the December 31, 2010 total
of $294,000. Prepaid expenses consist of payments made prior to the end of the current period for
economic benefits to be realized in future periods, including items such as maintenance contracts,
business insurances and prepaid commissions. The increase for the nine months ended September 30,
2011 includes increases in the prepaid portions of business insurance ($77,000) and prepaid
commissions ($55,000).
Other current assets at September 30, 2011 of $909,000 include $885,000 of funds held by the
Company on the behalf of clients utilizing our bill-pay service as a component of their managed TEM
agreements. That portion of the asset is offset by a compensating balance in other accrued
liabilities.
Capital equipment purchases for the first nine months of 2011 totaled $120,000, which compares to
capital purchases of $155,000 for the first nine months of 2010. We do not expect capital outlays
in the fourth quarter of 2011 to vary appreciably from that experienced during the first three
quarters of the year.
Software development costs capitalized and included on our balance sheet at September 30, 2011 of
$2,819,000 have decreased 5% from the December 31, 2010 balance of $2,962,000. For the nine months
ended September 30, 2011 we have capitalized $648,000 of development costs while amortizing
$791,000 of development costs previously capitalized. For the first nine months of 2010 we had
capitalized $839,000 of development costs and amortized $862,000. The amortization of capitalized
software costs is charged directly to cost of revenues in the Companys Statements of Operations.
The intangible asset of $623,000 at September 30, 2011 represents the unamortized portion of the
fair market value of assets acquired from Source Loop in June 2010. Those assets continue to
perform as expected at the time of acquisition and are currently being amortized at approximately
$60,000 per quarter.
Accounts payable of $277,000 has been reduced by $83,000 from the December 31, 2010 balance of
$360,000, and $316,000 from the June 30, 2011 balance of $593,000. The decrease in the third
quarter of 2011 reflects the payment of legal fees incurred in connection with the patent
litigation discussed above.
Deferred revenues of $4,517,000 have increased $266,000 for the first nine months of 2011 from the
December 31, 2010 balance of $4,251,000. Deferred revenues are a component of total embedded
revenues referred to in the overview section of the report, and represent the unrecognized portion
of customer orders for services such as maintenance, training, consulting and installation that
will be performed in future periods and recognized as revenues at that time.
The contingent liability of $210,000 at September 30, 2011 reflects managements current estimate
of the remaining consideration to be paid in cash and common stock to the principals of Source
Loop, LLC, acquired by Veramark in June 2010. The actual amount ultimately paid is dependent upon
the achievement of specific
revenue goals for 2011 contained in the asset purchase agreement governing the transaction. During
July of 2011, $150,000 was paid based upon specific employee retention goals specified in that
agreement.
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Short term debt of $317,000 at September 30, 2011 includes the current portion ($67,000) due on a
three year term loan, the proceeds of which were used to purchase furnishings and fixtures for the
Companys new headquarters facility and the $250,000 note due Asentinel in June 2012 in connection
with the patent litigation settlement.
Long- term debt of $177,000 includes the non-current portion of the term loan referenced above
($72,000) and a long-term rent liability ($105,000) associated with the lease of our current
facility, which provided a five month rent-free period at the inception of the lease. Accounting
rules require that our balance sheet include a liability over the term of the lease (7 years) equal
to the difference between the amount of rent expense recorded and the amount of rent paid through
the reporting period.
Stockholders equity of $108,000 at September 30, 2011 decreased from stockholders equity of
$442,000 at December 31, 2010 as a result of the loss incurred for the first nine months of 2011.
During 2011 employees of the Company have exercised 398,554 stock options and purchased 24,342
shares of common stock through the Companys Employee Stock Purchase Plan.
It is managements opinion that given the current cash and investment position, a fully available
credit line, as well as access to other sources of capital, that more than sufficient financial
resources exist to fully fund operations and strategic initiatives for the next twelve months and
beyond.
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Accounting Pronouncements
| 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. |
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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. 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. |
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| 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. |
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 including installation, training, implementation, and
customer maintenance contracts; and the outsourcing or hosting of services, commonly referred to as
Software as a Service (SaaS).
The Company recognizes software license revenue under ASC 985-605, formerly Statement of Position
No 97-2 Software Revenue Recognition, 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,
as amended.
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Licensed software may be sold as a stand-alone element, with other software elements, or in
conjunction with supplemental services. When an order consists of more than one element, it is
considered to be a multiple element arrangement (MEA). When sold as a stand-alone element, the
revenue is recognized upon shipment. When sold as part of a MEA, revenue from the licensed
software is recognized when each element is activated at the customer site, via the entry of a
software key-code. This typically occurs at the same time that installation occurs. Service
revenues such as training, installation and implementation, are recognized when the service is
complete, and acknowledged by the customer.
For either a single element transaction or a MEA, Veramark allocates consideration to all
deliverables based on their relative stand-alone selling prices. Amendments to ASC 605-25, which
became effective January 1, 2011, establish a hierarchy to determine the stand-alone selling price
as follows:
| Vendor Specific Objective Evidence of the fair value (VSOE), |
| Third Party Evidence (TPE) |
| Best Estimate of the Selling Price (ESP) |
Sales which constitute a MEA 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, per the hierarchy
above. If VSOE is not available, management estimates the fair selling price using historical
pricing for similar items, in conjunction with current pricing and discount policies.
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. Additionally, revenue is only recognized when a selling price is fixed or determinable,
and collectability of the receivable is deemed to be probable.
Fees charged to customers for post-contract Technical Support are recognized ratably over the term
of the contract. Costs related to maintenance obligations are expensed as incurred.
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.
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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, Costs of to be Sold, Leased, or
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.
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, and life
expectancies. 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.
Item 3 | Quantitative and Qualitative Disclosures About Market Risk |
On October 29, 2010 the Company entered into an agreement with Manufacturers and Traders Trust
Company to provide a three year term note 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.
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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 Financial 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, that occurred 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 control 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.
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PART II OTHER INFORMATION
Item 1 | Legal Proceedings |
On June 16, 2011 the Company entered into a Nonexclusive Patent License and settlement agreement
relating to an action brought by Asentinel LLC, against Veramark, AnchorPoint a division of MTS,
and CASS Information Systems, alleging infringement of two patents held by Asentinel concerning
systems and methods for identifying and processing billing exceptions in telecommunications
invoices.
Material terms of the agreement included:
| 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 |
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
Veramark 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 Veramarks products, reverse engineer or
obtain and use information that Veramark 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 Veramarks intellectual property could have a material adverse
effect on its business and results of operations. Furthermore, although Veramark takes steps to
prevent unlawful infringement of others intellectual property, there can be no assurance that
third parties will not assert infringement claims against Veramark in the future with respect to
current or future products. Any such assertion could require Veramark to enter into royalty
arrangements or result in costly litigation.
Existing Customer Base
We derive a significant portion of our revenues from multi-year Managed Service contracts. As a
result, if we lose a major customer, or if a Managed Service contract is delayed, reduced, or
cancelled, our 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.
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Product Development
Veramark 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 Veramark. 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 Veramark revenues.
Declines in Demand for Software
If overall market demands 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, Veramarks revenue could be adversely affected. Additionally,
Veramarks revenues could be unfavorably impacted if customers reduce their purchases of new
software products or upgrades to existing products.
Competition
Veramark 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 Veramark. 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
Veramarks 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 Veramark to their specific
specifications, while others resell Veramarks products. Any loss of the continued availability of
those relationships could have a material adverse effect on Veramarks business and results of
operations.
Security and Privacy Breaches in our Systems May Damage Client Relations and Inhibit our Growth
The uninterrupted operation of our hosted solutions and the confidentiality of third party
information that resides on our systems is critical to our business. We have what we believe to be
sufficient security in place to prevent major interruptions in service and to prevent unauthorized
access. Any failure in our security and privacy measures could have a material adverse impact on
our financial position and results of operations.
Loss of Key Employees
Veramarks delivery of quality products and services requires the experience and knowledge of our
staff. The loss of key employees could hinder our ability to deliver services, possibly resulting
in loss of customers or loss of revenue. Any loss of key employees could have a material adverse
effect on Veramarks business and results of operations.
Changing Market
Veramark serves the highly dynamic telecommunications market, which is characterized by continuous
technological enhancements and choices that effect the costs incurred versus benefit received by
our customers. Veramark staff must remain current otherwise the quality and value of our services
could be diminished and competition could offer better value. The failure to remain current could
have a material adverse effect on Veramarks business and results of operations.
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Access to Capital
Veramark may not have the access to capital that will be necessary to maintain competitive
products, to hire the experienced staff, to fund growth or to fund acquisitions. This could cause
Veramark to fall behind market growth rates and have an adverse effect on Veramarks business.
Public Company
Veramark is one of only a few TEM companies that has a publicly traded stock. In addition,
Veramarks revenue is small relative to most public companies and the cost of compliance is
relatively high when compared with revenue and earnings. This reduces the capital available to run
operations and to invest in innovation which could have an adverse effect on business.
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.
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Item 5: | Other Information |
None
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) |
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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. |
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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 10, 2011
/s/ Anthony C. Mazzullo
|
||
President and CEO |
Date: November 10, 2011
/s/ Ronald C. Lundy
|
||
Vice President of Finance and CFO |
29