Form 10-Q
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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| þ |
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Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
or
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| o |
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Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For Quarter Ended March 31, 2010
Commission File Number 0-13898
Veramark Technologies, Inc.
(Exact name of registrant as specified in its charter)
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| Delaware
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16-1192368 |
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| (State or other jurisdiction of Incorporation
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(IRS Employer Identification Number) |
| or Organization) |
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3750 Monroe Avenue, Pittsford, NY 14534
(Address of principal executive offices)(Zip Code)
(585) 381-6000
(Registrant’s 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.
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| Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller Reporting Company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
YES o NO þ
The number of shares of Common Stock, $.10 par value, outstanding on March 31, 2010 was
9,828,727.
PART I — FINANCIAL INFORMATION
VERAMARK TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
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(Unaudited) |
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March 31, |
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December 31, |
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2010 |
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|
2009 |
|
ASSETS |
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CURRENT ASSETS: |
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|
|
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|
|
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|
|
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Cash and cash equivalents |
|
$ |
601,402 |
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$ |
488,381 |
|
Investments |
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420,963 |
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|
457,520 |
|
Accounts receivable, trade (net of allowance for
doubtful accounts of $25,000 and $24,000, respectively) |
|
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1,378,552 |
|
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|
1,314,986 |
|
Inventories, net |
|
|
10,275 |
|
|
|
13,510 |
|
Prepaid expenses |
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|
444,851 |
|
|
|
389,267 |
|
Other current assets |
|
|
384,930 |
|
|
|
509,590 |
|
|
|
|
|
|
|
|
Total Current Assets |
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3,240,973 |
|
|
|
3,173,254 |
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PROPERTY AND EQUIPMENT |
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Cost |
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3,638,361 |
|
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|
3,520,903 |
|
Less accumulated depreciation |
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|
(3,249,883 |
) |
|
|
(3,207,550 |
) |
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Property and Equipment (Net) |
|
|
388,478 |
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|
313,353 |
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OTHER ASSETS: |
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Software development costs (net of accumulated
amortization of $2,817,887 and $2,497,948, respectively) |
|
|
2,889,377 |
|
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|
2,906,505 |
|
Pension assets |
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|
3,015,777 |
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|
2,995,657 |
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Deposits and other assets |
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1,037,988 |
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|
995,766 |
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Total Other Assets |
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6,943,142 |
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6,897,928 |
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TOTAL ASSETS |
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$ |
10,572,593 |
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$ |
10,384,535 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
354,008 |
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$ |
325,204 |
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Accrued compensation and related taxes |
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506,702 |
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|
457,332 |
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Deferred revenue |
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4,008,442 |
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3,790,856 |
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Current portion of pension obligation |
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|
502,059 |
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|
502,059 |
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Other accrued liabilities |
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504,156 |
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|
632,061 |
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Total Current Liabilities |
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5,875,367 |
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5,707,512 |
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Pension obligation |
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4,640,455 |
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|
4,674,071 |
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Total Liabilities |
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10,515,822 |
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10,381,583 |
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STOCKHOLDERS’ EQUITY: |
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Common Stock, par value $.10; shares authorized,
40,000,000; shares issued and outstanding,
9,908,952 and 10,028,952 |
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990,895 |
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1,002,895 |
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Additional paid-in capital |
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22,440,365 |
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22,398,110 |
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Accumulated deficit |
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(23,112,826 |
) |
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(23,179,337 |
) |
Treasury stock (80,225 shares, at cost) |
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(385,757 |
) |
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(385,757 |
) |
Accumulated other comprehensive income |
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124,094 |
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|
167,041 |
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Total Stockholders’ Equity |
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56,771 |
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2,952 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
$ |
10,572,593 |
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$ |
10,384,535 |
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|
The accompanying notes are an integral part of these financial statements.
3
VERAMARK TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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March 31, |
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2010 |
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2009 |
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NET REVENUES |
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Product sales |
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$ |
532,406 |
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$ |
468,269 |
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Service sales |
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2,249,323 |
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2,054,410 |
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Total Net Sales |
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2,781,729 |
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2,522,679 |
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COSTS AND OPERATING EXPENSES: |
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Cost of sales |
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736,058 |
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|
644,219 |
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Engineering and software development |
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320,039 |
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|
294,516 |
|
Selling, general and administrative |
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1,676,344 |
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1,773,627 |
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Total Costs and Operating Expenses |
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|
2,732,441 |
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2,712,362 |
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INCOME (LOSS) FROM OPERATIONS |
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49,288 |
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|
(189,683 |
) |
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NET INTEREST INCOME |
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17,223 |
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|
9,564 |
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INCOME (LOSS) BEFORE INCOME TAXES |
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66,511 |
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(180,119 |
) |
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INCOME TAXES |
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|
— |
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|
— |
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NET INCOME (LOSS) |
|
$ |
66,511 |
|
|
$ |
(180,119 |
) |
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|
|
|
|
|
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|
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|
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NET INCOME (LOSS) PER SHARE |
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|
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|
|
|
|
Basic |
|
$ |
0.01 |
|
|
$ |
(0.02 |
) |
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|
|
|
|
|
|
Diluted |
|
$ |
0.01 |
|
|
$ |
(0.02 |
) |
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|
|
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|
The accompanying notes are an integral part of these financial statements.
4
VERAMARK TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended March 31, |
|
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|
2010 |
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|
2009 |
|
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
66,511 |
|
|
$ |
(180,119 |
) |
Adjustments to reconcile net income or loss to net cash flows
provided by operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
371,611 |
|
|
|
406,213 |
|
Bad debt expense |
|
|
3,859 |
|
|
|
(14,000 |
) |
Share based compensation expense |
|
|
30,255 |
|
|
|
27,067 |
|
Pension assets |
|
|
(20,120 |
) |
|
|
(7,500 |
) |
Loss on disposal of fixed assets |
|
|
140 |
|
|
|
0 |
|
Unrealized gain (losses) on investments |
|
|
(13,547 |
) |
|
|
(5,351 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(67,425 |
) |
|
|
(49,166 |
) |
Inventories |
|
|
3,235 |
|
|
|
6,770 |
|
Prepaid expenses and other current assets |
|
|
69,076 |
|
|
|
(215,982 |
) |
Deposits and other assets |
|
|
(42,222 |
) |
|
|
0 |
|
Accounts payable |
|
|
28,804 |
|
|
|
107,380 |
|
Accrued compensation and related taxes |
|
|
49,370 |
|
|
|
50,656 |
|
Deferred revenue |
|
|
217,586 |
|
|
|
(36,515 |
) |
Other accrued liabilities |
|
|
(127,905 |
) |
|
|
(26,017 |
) |
Pension obligation |
|
|
(63,016 |
) |
|
|
(18,515 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
506,212 |
|
|
|
44,921 |
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Sale of investments |
|
|
36,557 |
|
|
|
10,473 |
|
Capitalized software development costs |
|
|
(302,811 |
) |
|
|
(297,983 |
) |
Additions to property and equipment |
|
|
(126,937 |
) |
|
|
(124,300 |
) |
|
|
|
|
|
|
|
Net cash flows used by investing activities |
|
|
(393,191 |
) |
|
|
(411,810 |
) |
|
|
|
|
|
|
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FINANCING ACTIVITY: |
|
|
|
|
|
|
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Exercise of stock options |
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
113,021 |
|
|
|
(366,889 |
) |
|
|
|
|
|
|
|
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|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
488,381 |
|
|
|
1,014,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
601,402 |
|
|
$ |
647,780 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
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| |
|
2010 |
|
|
2009 |
|
SUPPLEMENTAL CASH FLOW INFORMATION |
|
|
|
|
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Cash Transactions: |
|
|
|
|
|
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Income taxes paid, net |
|
$ |
250 |
|
|
$ |
2,750 |
|
Interest paid |
|
$ |
488 |
|
|
$ |
226 |
|
The accompanying notes are an integral part of these financial statements.
5
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited financial statements include all adjustments of a normal and
recurring nature which, in the opinion of Company’s management, are necessary to present fairly the
Company’s financial position as of March 31, 2010, the results of its operations for the three
months ended March 31, 2010 and 2009, and cash flows for the three months ended March 31, 2010 and
2009.
Certain information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been omitted pursuant to
the rules and regulations of the Securities and Exchange Commission. These condensed financial
statements should be read in conjunction with the financial statements and related notes contained
in the Company’s Annual Report on Form 10-K to the Securities and Exchange Commission for the year
ended December 31, 2009.
The results of operations and cash flows for the three months ended March 31, 2010 are not
necessarily indicative of the results to be expected for the full year’s operation.
| (2) |
|
PROPERTY AND EQUIPMENT |
The major classifications of property and equipment at March 31, 2010, and December 31, 2009
were:
| |
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|
|
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Machinery and equipment |
|
$ |
117,541 |
|
|
$ |
117,541 |
|
Computer hardware and software |
|
|
1,281,889 |
|
|
|
1,164,431 |
|
Furniture and fixtures |
|
|
853,134 |
|
|
|
853,134 |
|
Leasehold improvements |
|
|
1,385,797 |
|
|
|
1,385,797 |
|
|
|
|
|
|
|
|
|
|
$ |
3,638,361 |
|
|
$ |
3,520,903 |
|
|
|
|
|
|
|
|
For the quarter ended March 31, 2010 and March 31, 2009, the Company recorded depreciation
expense of $51,672 and $89,111, respectively.
| (3) |
|
STOCK-BASED COMPENSATION |
The Company’s share-based compensation consists of restricted stock and stock options,
generally vesting over periods ranging from one to four years. For the quarter ended March
31, 2010, the company awarded 3,000 stock options vesting over four years. During the first
quarter of 2009 the Company awarded 50,000 restricted shares and 16,500 stock options vesting
over four years.
6
A summary of the status of the Company’s stock option plan as of March 31, 2010 is presented
below:
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| |
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Average |
|
|
Average |
|
|
Remaining |
|
|
|
|
| |
|
|
|
|
|
Exercise |
|
|
Grant-Date |
|
|
Contractual |
|
|
Intrinsic |
|
| |
|
Shares |
|
|
Price |
|
|
Fair Value |
|
|
Term (Yrs) |
|
|
Value |
|
Outstanding as of December 31, 2009 |
|
|
1,740,793 |
|
|
$ |
0.94 |
|
|
$ |
0.84 |
|
|
|
4.2 |
|
|
$ |
201,626 |
|
Granted |
|
|
3,000 |
|
|
$ |
0.42 |
|
|
|
|
|
|
|
|
|
|
|
— |
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
Canceled |
|
|
(19,275 |
) |
|
|
8.19 |
|
|
|
|
|
|
|
|
|
|
|
(27,682 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
Outstanding as of March 31, 2010 |
|
|
1,724,518 |
|
|
$ |
0.85 |
|
|
$ |
0.78 |
|
|
|
4.0 |
|
|
$ |
173,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
Options exercisable at March 31, 2010 |
|
|
1,612,643 |
|
|
$ |
0.87 |
|
|
$ |
0.80 |
|
|
|
3.7 |
|
|
$ |
173,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010, there was $35,214 of total unrecognized compensation cost related to
non-vested stock options granted under the Plan and $104,749 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) |
|
TOTAL COMPREHENSIVE INCOME (LOSS) |
Total comprehensive income (loss) for the first quarter of 2010 and 2009 was as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
66,511 |
|
|
$ |
(180,119 |
) |
Unrealized change — pension |
|
|
(29,400 |
) |
|
|
103,317 |
|
Unrealized change on investments |
|
|
(13,547 |
) |
|
|
(5,351 |
) |
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
23,564 |
|
|
$ |
(82,153 |
) |
|
|
|
|
|
|
|
| (5) |
|
NET INCOME (LOSS) PER SHARE (EPS) |
ASC 260-10 (SFAS 128) “Earnings Per Share” as amended in September 2009, requires the Company
to calculate net income (loss) per share based on basic and diluted net income (loss) per
share, as defined. Basic EPS excludes dilution and is computed by dividing net income (loss)
by the weighted average number of shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. The dilutive effect of outstanding
options issued by the Company 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
Calculations of Earnings (Loss) Per Share
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
March 31, |
|
| |
|
2010 |
|
|
2009 |
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
|
$ |
66,511 |
|
|
$ |
(180,119 |
) |
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
9,828,727 |
|
|
|
9,784,729 |
|
|
|
|
|
|
|
|
Net Income (loss) per common share |
|
$ |
0.01 |
|
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
|
$ |
66,511 |
|
|
$ |
(180,119 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
9,828,727 |
|
|
|
9,784,729 |
|
|
|
|
|
|
|
|
|
|
Additional dilutive effect of stock options and
warrants after application of treasury stock method |
|
|
18,850 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive shares outstanding |
|
|
9,847,577 |
|
|
|
9,784,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) per common share assuming full dilution |
|
$ |
0.01 |
|
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
There were no dilutive effects of stock options in the first quarter of 2009, as the effect would
have been anti-dilutive due to the net loss incurred.
| (6) |
|
INDEMNIFICATION OF CUSTOMERS |
Our agreements with customers generally require us to indemnify the customer against claims
that our software infringes third party patent, copyright, trademark or other proprietary
rights. Such indemnification obligations are generally limited in a variety of
industry-standard respects, including our right to replace an infringing product. As of
March 31, 2010 we had not experienced any material losses related to these indemnification
obligations and no material claims with respect thereto were outstanding. We do not expect
significant claims related to these indemnification obligations, and consequently, we have
not established any related reserves.
The Company sponsors an employee incentive savings plan under Section 401(k) for all eligible
employees. The Company’s contributions to the plan are discretionary. During the first
quarter of 2010 the Company contributed $24,644 to employee’s 401k accounts. During the
first quarter of 2009 the Company’s contribution to employee 401k accounts totaled $23,868.
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 months ended March 31, 2010 and 2009 consists of the
following:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Interest Cost |
|
$ |
91,899 |
|
|
$ |
(8,317 |
) |
Unrealized Actuarial Gain |
|
|
(29,400 |
) |
|
|
103,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Expense |
|
$ |
62,499 |
|
|
$ |
95,000 |
|
|
|
|
|
|
|
|
The Company paid pension obligations of $125,515 for the three months ended March 31, 2010
and $113,515 for the three months ended March 31, 2009.
The discount rate used in determining the actuarial present value of the projected benefit
obligation was 5.5% for the three months ended March 31, 2010 and 2009.
The Company maintains life insurance covering certain key employees under its Supplemental
Executive Retirement Program with the Company named as beneficiary. The Company intends to
use the death benefits of these policies, as well as loans against the accumulating cash
surrender value of the policies, to fund future pension obligations. The total death benefit
associated with these policies is $10.2 million, with an associated accumulated cash
surrender value of approximately $3,016,000 at March 31, 2010. The accumulated cash surrender
values of these policies at December 31, 2009 was approximately $2,996,000.
The projected pension benefits paid or expected to be paid under this plan are as follows,
assuming retirement at 65 and a life expectancy of 80 years for all participants:
Period Ending December 31, Unless Stated Otherwise,
| |
|
|
|
|
Q2 – Q4 2010 |
|
|
376,544 |
|
2011 |
|
|
471,925 |
|
2012 |
|
|
477,005 |
|
2013 |
|
|
487,166 |
|
2014 |
|
|
487,166 |
|
2015 – 2019 |
|
|
2,329,859 |
|
9
| |
|
|
The Company has a contractual obligation to maintain certain health benefits for two of its
former executive officers. These benefits are accounted for as Post Retirement Healthcare
Benefits, (“PRHB”). Periodic PRHB expensed and paid for the three months ended March 31,
2010 and 2009 consists of the following: |
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Current Service Cost |
|
$ |
2,125 |
|
|
$ |
2,005 |
|
Interest Cost |
|
|
1,287 |
|
|
|
1,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRHB Expense |
|
$ |
3,412 |
|
|
$ |
3,412 |
|
|
|
|
|
|
|
|
| |
|
|
The projected PRHB paid or expected to be paid are as follows: |
Period Ending December 31, Unless Stated Otherwise,
| |
|
|
|
|
Q2 – Q4 2010 |
|
|
10,237 |
|
2011 |
|
|
13,649 |
|
2012 |
|
|
13,649 |
|
2013 |
|
|
13,649 |
|
2014 |
|
|
10,149 |
|
2015 – 2019 |
|
|
33,245 |
|
10
|
|
|
| Item 2 |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Results of Operations
Management’s 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 Company’s strategy for growth,
product development, regulatory approvals, market position and expenditures. Forward-looking
statements are based on management’s 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 for the first quarter ended March 31, 2010, of $2,782,000, increased 10% from revenues of
$2,523,000 reported for the first quarter of 2009. The net income earned for the first quarter of
2010 of $67,000, representing $0.01 per diluted share, compared with a net loss of $180,000, or
$0.02 per share, incurred for the first quarter of 2009.
The higher revenues realized in the first quarter, as compared to prior year results, reflect
higher revenues derived from multi-year contracts providing Telecom Expense Management (TEM) and
Business Process Outsourcing (BPO) services to a growing client base.
Orders received during the first quarter of 2010 totaled $3.0 million, down from $3.4 million for
the first quarter of 2009, a quarter which included a single BPO order valued at $1.1 million.
Orders for premise based licensed products and services increased 23% in the first quarter of 2010,
from the same quarter of 2009.
Embedded backlog, which represents the value of orders received for products and services to be
provided in future periods, increased to approximately $7.9 million at March 31, 2010, up from
approximately $7.5 million at December 31, 2009.
Revenues
Revenues recognized for TEM and BPO services for the first quarter of 2010 increased 63% from
revenues generated for the first quarter of 2009, accounting for 28% of first quarter 2010
revenues. For the first quarter of 2009, TEM and BPO revenues accounted for 19% of total revenues.
Revenues from the sale of licenses and services for premise based products decreased 5% from the
prior year. Maintenance revenues on the installed based of premised based products however,
increased 4% for the first quarter of 2010 as compared with the same quarter of 2009.
Gross Margin
Gross margin (defined as revenues minus cost of sales) totaled $2,046,000 for the quarter ended
March 31, 2010, an increase of 9% from gross margin of $1,878,000 for the quarter ended March 31,
2009. The increased gross margin results from a combination of the higher revenues achieved in
2010 versus 2009, in addition to the positive effects of spreading fixed costs over a growing
number of contracts.
11
Operating Expenses
Engineering and software development cost, net of the effects of capitalization, increased 8% from
$295,000 for the quarter ended March 31, 2009 to $320,000 for the quarter ended March 31, 2010.
Software development costs of $303,000 were capitalized during the first quarter of 2010, which
compares with the capitalization $298,000 of software development costs in the first quarter of
2009.
Expenses for selling, general, and administrative (SG&A) expenses were reduced to $1,676,000 for
the quarter ended March 31, 2010, or 6%, from SG&A expenses of $1,774,000 for the same quarter of
2009.
Liquidity and Capital Resources
Cash and short term investments at March 31, 2010, totaled $1,022,000, an increase of 8%, or
$76,000 from the cash and short term investment balance of $946,000 at December 31, 2009. The
Company continues to be debt free and maintains an unutilized $400,000 line of credit arrangement
with a local banking institution.
Accounts receivable increased 5% from the December 31, 2009 balance of $1,315,000 to $1,379,000, at
December 31, 2010. The reserve for bad debts increased slightly, from $24,000 at December 31, 2009
to $25,000 at March 31, 2010. There was no material write-off of customer balances in the first
quarter of 2010.
Prepaid expenses of $445,000 at March 31, 2010, increased $56,000 from the December 31, 2009
balance of $389,000. Prepaid expenses include commissions paid to the Company’s sales force for
orders received, often in advance of the associated revenue being recognized, and prepayments for
business insurances and other expenditures whose economic benefit will be realized in future
periods.
The net value of property and equipment at March 31, 2009 is $389,000, which compares with a total
of $314,000 at December 31, 2009. Capital expenditures for the first quarter of 2010 totaled
$127,000, which compares with capital expenditures of $124,000 for the same three months of 2009.
Depreciation expense for the first quarter of 2010 was $52,000, down from the depreciation expense
of $89,000 for the first quarter of 2009.
Software development costs capitalized and included in the balance sheet at March 31, 2010 of
$2,889,000, decreased $17,000 from the December 31, 2009 balance of $2,906,000. Software
development costs of $303,000 were capitalized in the first quarter of 2010, as compared with
$298,000 of costs capitalized in the first quarter 2009. Amortization of software development costs
capitalized in previous periods, which are charged to cost of sales, were $320,000 and $317,000
respectively, for the three months ended March 31, 2010 and 2009.
Pension assets, which consist of the cash surrender values of company-owned life insurance
contracts, increased from $2,996,000 at December 31, 2009 to $3,016,000 at March 31, 2010. These
cash surrender values, combined with the death benefits associated with the policies, which are not
included in the Company’s balance sheet, are intended to fully fund future pension obligations of
the Company.
Current liabilities of $5,875,000 at March 31, 2010 increased $167,000, or 3% from $5,708,000 at
December 31, 2009. The increase in current liabilities results from a $217,000 increase in deferred
revenues, which in addition to requiring little or no future cash outlay, represent a significant
portion of the Company’s embedded revenues. Deferred revenues consist primarily of the value of
maintenance contracts billed to customers, for whom the Company has yet to provide the underlying
service, and as a result, has not yet recognized the associated revenue. It is expected that the
majority of the current deferred revenues will be recognized as revenue over the next four
quarters. Liabilities for both accounts payable and accrued compensation rose slightly, $29,000 and
$50,000, respectively, from December 31, 2009 balances, but were offset by a decrease in other
accrued liabilities of $128,000.
12
Stockholders equity of $57,000 at March 31, 2010, increased $54,000 from the December 31, 2009
balance of $3,000, reflecting in part the first quarter net income.
In management’s view, current cash flow projections and operating expense levels, in combination
with current cash balances and access to additional capital, provide sufficient resources to fund
operations for the next twelve months and beyond.
Accounting Pronouncements
| |
• |
|
In October 2009, the FASB issued Accounting Standards Update No. 2009-13,
Multiple-Deliverable Revenue Arrangements, which amends existing revenue recognition
accounting pronouncements that are currently within the scope of FASB Codification Subtopic
605-25 (previously included within EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables, or EITF 00-21). The consensus to EITF Issue No. 08-01, Revenue Arrangements
with Multiple Deliverables, or EITF 08-01, provides accounting principles and application
guidance on whether multiple deliverables exist, how the arrangement should be separated,
and the consideration allocated. This guidance eliminates the requirement to establish the
fair value of undelivered products and services and instead provides for separate revenue
recognition based upon management’s estimate of the selling price for an undelivered item
when there is no other means to determine the fair value of that undelivered item. EITF
00-21 previously required that the fair value of the undelivered item be the price of the
item either sold in a separate transaction between unrelated third parties or the price
charged for each item when the item is sold separately by the vendor. This was difficult to
determine when the product was not individually sold because of its unique features. Under
EITF 00-21, if the fair value of all of the elements in the arrangement was not
determinable, then revenue was deferred until all of the items were delivered or fair value
was determined. This new approach is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010.
The Company will have to evaluate the impact of this standard on future revenue
arrangements that we may enter into. |
| |
• |
|
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). |
13
| |
|
|
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. The Company does not expect this to have a material effect on the
Company’s 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 entity’s equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an entity
would not classify such an award as a liability if it otherwise qualifies as an equity.
This update is effective for fiscal years, and interim periods within those fiscal years
beginning on or after December 15, 2010. The Company does not expect this to have a
material effect on the Company’s 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 involving 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 Company’s revenue consists of revenues from the licensing of software to resellers and end user
customers; fees for services rendered to include installation, training, implementation, and
customer maintenance contracts; and the outsourcing or hosting of services.
14
The Company recognizes software license revenue under ASC 985-605, formerly Statement of Position
No 97-2 “Software Revenue Recognition” as amended by Statement of Position No. 98-9, “Software
Revenue Recognition With Respect to Certain Transactions”, and under ASC 605-25, formerly Emerging
Issues Task Force 00-21, “Revenue Arrangements with Multiple Deliverables”, and related
interpretations.
Sales of licensed software sold directly to an end user customer are recognized as revenue upon
delivery and installation of the software at the customer site. Sales of licensed software to a
reseller are recognized as revenue when delivery is made to the reseller. Regardless of the form
of sale no revenue is recognized without persuasive evidence of an arrangement existing. Persuasive
evidence is determined to be a signed purchase order received from the customer or an equivalent
form for those customers lacking a formalized purchase order system. In the case of VeraSMART
sales, a software license agreement signed by both parties is often required in addition to a
purchase order or equivalent. Additionally, revenue is only recognized when a selling price is
fixed or determinable and collectability of the receivable is deemed to be probable.
Service revenues such as training, installation and implementation are recognized when the service
is complete and acknowledged by the customer, regardless as to whether the sale is on a direct
basis or through a reseller arrangement.
Fees charged to customers for post-contract Customer Support are recognized ratably over the term
of the contract. Costs related to maintenance obligations are expensed as incurred.
Sales which constitute a multiple-element arrangement are accounted for by determining if the
elements can be accounted for as separate accounting units, and if so, by applying values to those
units for which there is vendor specific objective evidence of their fair value. The Company uses
the residual method to apply any remaining balance to the remaining elements of the arrangement.
More specifically, this methodology applies when there is embedded maintenance (post-contract
customer support) involved in the sale of a software license, or when the sale of a software
license is made in conjunction with installation services. In the latter case, the recognition of
the software license is deferred until installation is completed.
The Company’s revenues generated through hosting solutions are recognized using the proportional
performance method. Revenues are recognized in the month services are rendered and earned under
service agreements with clients where service fees are fixed or determinable. Contracts can be
terminated with 90 days written notice. All services provided by the Company through the date of
cancellation are due and payable under the contract terms.
The Company believes its revenue recognition policies are appropriate, in all circumstances, and
that its policies are reflective of complexities arising from customer arrangements involving such
features as maintenance, warranty agreements, license agreements, and other normal course of
business arrangements.
Capitalization of Software Development
The Company capitalizes software development costs when technological feasibility has been
established for the software in accordance with ASC 985-20, formerly SFAS No. 86, “Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” Such capitalized costs
are amortized on a product-by-product basis over their economic life or the ratio of current
revenues to current and anticipated revenues from such software, whichever provides the greater
amortization. The Company periodically reviews the carrying value of capitalized software
development costs and impairments are recognized in the results of operations when the expected
future undiscounted operating cash flow derived from the capitalized software is less than its
carrying value. Should the Company inaccurately determine when a product reaches technological
feasibility or the economic life of a product, results could differ materially from those reported.
The Company uses what it believes are reasonable assumptions and where applicable, established
valuation techniques in making its estimates.
15
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 Company’s management. These assumptions include years of service, life
expectancies, and projected future salary increases for each participant. In addition, management
must make assumptions with regard to the proper long-term interest and liability discount rates to
be applied to these future obligations.
Should the Company need to alter any of these assumptions, there is the potential for significant
adjustments to future projected pension liabilities.
Risk Factors
The following factors, among others discussed herein and in the Company’s filings under the Act,
could cause actual results and future events to differ materially from those set forth or
contemplated in this report: economic, competitive, governmental and technological factors,
increased operating costs, failure to obtain necessary financing, risks related to natural
disasters and financial market fluctuations. Such factors also include:
Intellectual Property Rights
The Company regards its products as proprietary and attempts to protect them with a combination of
copyright, trademark and trade secret protections, employee and third-party non-disclosure
agreements and other methods of protection. Despite those precautions, it may be possible for
unauthorized third parties to copy certain portions of the Company’s products, reverse engineer or
obtain and use information that the Company regards as proprietary. The laws of some foreign
countries do not protect Veramark’s proprietary rights to the same extent as the laws of the United
States. Any misappropriation of the Company’s intellectual property could
have a material adverse effect on its business and results of operations. Furthermore, although
the Company take steps to prevent unlawful infringement of other’s intellectual property, there
can be no assurance that third parties will not assert infringement claims against the Company in
the future with respect to current or future products. Any such assertion could require the
Company to enter into royalty arrangements or result in costly litigation.
Existing Customer Base
We derive an increasingly significant portion of our revenues from multi- year managed service
contracts. As a result, if the Company lose a major customer, or if a managed service contract is
delayed, reduced, or cancelled, the Company’s 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.
16
Product Development
The Company has made significant investments in research, development and marketing for new
products, services and technologies, including the VeraSMART software offering and its hosted or
managed solutions. Significant revenue from new product and service investments may not be
achieved for a number of years, if at all. Moreover, if such products or services are
profitable, operating margins may not be as high as the margins historically experienced by the
Company. The development of software products is a complex and time-consuming process. New
products and enhancements to existing products can require long development and testing periods.
Significant delays in new product releases or significant problems in creating new products,
particularly any delays in future releases of the VeraSMART suite of products or services, could
adversely affect the Company’s 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, the Company’s revenue will be adversely affected. Additionally, the
Company’s revenues would be unfavorably impacted if customers reduce their purchases of new
software products or upgrades to existing products.
New Products and Services
The Company is in the process of transforming it’s business model from a company providing largely
premise based software products and services to one offering hosted solutions providing a wide
variety of TEM processes, such as wireless management, invoice processing, and reporting — as
managed services under multi year arrangements. The effect of this transformation will be a
reduction in the amount of revenues recognized initially on any given contract than would be
realized from a one- time sale of software, but higher embedded future revenues over the life of
the contract. Since major components of the Company’s cost structure including personnel and
facility costs are relatively fixed based on anticipated revenues, period to period comparisons of
the Company’s operating results should not be relied upon as an indicator of future performance.
Competition
The Company experiences intense competition across all markets for its products and services. Some
competing firms have greater name recognition and more financial, marketing and technological
resources than the Company. These competitive pressures may result in decreased sales volumes,
price reductions, and/or increased operating costs, such as for marketing and sales incentives,
resulting in lower revenues, gross margins and operating income.
17
Marketing and Sales
The Company’s marketing and distribution strategy is founded on building mutually beneficial
relationships with companies that have established distribution networks. Some sell privately
labeled, customized products developed and manufactured by the Company to their specific
specifications, while others resell the Company’s products. Any loss of the continued availability
of those relationships could have a material adverse effect on the Company’s business and results
of operations.
Security and Privacy Breaches in the Company Systems May Damage Client Relations and Inhibit our
Growth
The uninterrupted operation of the Company’s hosted solutions and the confidentiality of third
party information that resides on the Company’s systems is critical to our business. The Company
has what it believes to be sufficient security in place to prevent major interruptions in service
and to prevent unauthorized access. Any failure in the Company’s security and privacy measures
could have a material adverse impact on it’s financial position and results of operations.
18
|
|
|
| Item 3 |
|
Quantitative and Qualitative Disclosures About Market Risk |
The Company has no long-term bank debt obligations. The Company has no foreign currency
exchange risk and has no foreign currency exchange contracts.
|
|
|
| Item 4 |
|
Controls and Procedures |
Based upon an evaluation as of the end of the period covered by this report, the Company’s
Chief Executive Officer and Treasurer (Chief Accounting Officer) concluded that the Company’s
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 SEC’s rules and forms and (ii) accumulated and communicated to the
Company’s 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 Company’s 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 Company’s internal controls over financial reporting.
The Company’s 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 Company’s resources and nature of the Company’s business
operations. The Company’s 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.
19
PART II — OTHER INFORMATION
|
|
|
| Item 5: |
|
Other Information |
None
| |
(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 Company’s 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 Company’s
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 Company’s 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 Company’s 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 Company’s 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 Company’s Current Report on Form
8-K filed on March 25, 2008) |
| |
|
|
|
|
| |
10.5 |
* |
|
2008 Incentive Plan for Management and Key Employees (incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on April 2, 2008) |
| |
|
|
|
|
| |
10.6 |
* |
|
2008 Employee Stock Purchase Plan (incorporated by reference to
Exhibit F to the Company’s Proxy Statement for its 2008 Annual
Meeting of Shareholders filed on April 29, 2008) |
| |
|
|
|
|
| |
10.7 |
* |
|
Description of non-employee director compensation (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form
8-K filed on August 18, 2008) |
| |
|
|
|
|
| |
10.8 |
* |
|
Amended Salary Continuation Agreement dated as of October 10, 2008
by and between the Company and Ronald C. Lundy (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form
8-K filed on October 17, 2008) |
20
| |
|
|
|
|
| |
10.9 |
* |
|
Form of 2008 Employee Stock Purchase Plan Enrollment Agreement
(incorporated by reference to Exhibit 4.2 to the Company’s
Registration Statement on Form S-8 (File No. 333-155286) filed on
November 12, 2008) |
| |
|
|
|
|
| |
10.10 |
* |
|
2010 Bonus Compensation Plan dated as of March 1, 2010 by and
between the Company and Anthony C. Mazzullo (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form
8-K filed on March 5, 2010) |
| |
|
|
|
|
| |
10.11 |
* |
|
2010 Incentive Plan for Management and Key Employees (incorporated
by reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed on March 5, 2010) |
| |
|
|
|
|
| |
14 |
|
|
Code of Business Conduct and Ethics (incorporated by reference to
Exhibit E to the Company’s Proxy Statement for its 2008 Annual
Meeting of Shareholders filed on April 29, 2008) |
| |
|
|
|
|
| |
31.1 |
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
| |
|
|
|
|
| |
31.2 |
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
| |
|
|
|
|
| |
32.1 |
|
|
Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
| |
|
|
|
|
| |
32.2 |
|
|
Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
| |
|
|
| * |
|
Management contract or compensatory plan or arrangement |
| |
(c) |
|
Schedules required to be filed by Regulation S-X |
none
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
21
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: May 13, 2010
| |
|
|
/s/ Anthony C. Mazzullo
Anthony C. Mazzullo
|
|
|
President and CEO |
|
|
Date: May 13, 2010
| |
|
|
/s/ Ronald C. Lundy
Ronald C. Lundy
|
|
|
Vice President of Finance and CFO |
|
|
22