PART I

 

PART II

 

PART III

 

 

 

 

 

 

 

 

 

Leading provider of telecom management solutions for more than 25 years

Innovator in IT financial management

Thousands of customers, from small businesses to global enterprises, educational institutions, government agencies and the military

Leading investment in new technology for expense management — in 2009 over 24% of revenue was invested in R&D and product innovation

Subject matter experts average more than 10 years of experience in network management, software development, business intelligence, finance, and telecommunications

Software products for the full procure-to-pay lifecycle for expense management with the VeraSMART Expense Management Suite (Veramark’s proprietary software that provides a modular, scalable software platform) including support for TEM, Call Accounting and ITFM

Services for the full procure-to-pay lifecycle for expense management with software deployment, SaaS, managed services and business process outsourcing (BPO) services.

The Company’s products address the corporate need to manage expenses associated with communications networks including wireless, VoIP, fixed wireline, mobile/cellular and video/voice/data.

Veramark offers BPO services covering the procure-to-pay processes for TEM.

Veramark is extending TEM into the emerging market Information Technology Financial Management (ITFM). ITFM includes the enabling software and services for managing the total cost of ownership of information technology. Veramark intends to develop and introduce products and services to serve the ITFM market. ITFM addresses three to five times the amount of operating expenses as compared with TEM.

Contract and Sourcing Management — Contract and vendor performance management and sourcing of telecom equipment and services

Ordering and Provisioning Management — Self-service ordering of telecom devices and service plans and provisioning workflow automation

Inventory Management — Tracking and management of telecom services, circuits, wireless devices, and other IT assets

Invoice and Dispute Management — Automated invoice receipt, validation, and approval processing; dispute workflow management and resolution

Usage Management — Wireless and wireline call accounting and cost allocation

TEM Process Automation — Workflows for MACD, help desk, and other TEM processes boost productivity, eliminate errors, and reduce operating costs

Integrated Contract Management — Provides visibility into contract and vendor performance and control over contract negotiation and commitments; includes invoice-to-contract validation, order-to-contract compliance, contract renewal tracking, and contract performance management

Ordering and Provisioning Management — Lets customers create product catalogs and integrated workflows to streamline ordering and provisioning across their organizations; allows users to order products and services from online catalogs, automatically routes orders to appropriate individuals for review and approval, supports integration with other systems and vendors via Web-based methods, updates inventory upon fulfillment, provides an audit trail of every transaction, and minimize off-contract orders

Process Workflows for Help Desk, MACD, and Dispute — these preconfigured workflows can be deployed quickly to enable and enforce best practices; an integrated business process manager lets customers modify workflows to meet their specific needs

Improved Invoice Processing — improved invoice import wizard, new process workflows, and enhanced capabilities for charge validation and analysis streamline invoice processing and facilitate best practices

Unified Inventory Management — a unified view of telecom services and IT assets — such as wireless devices, network equipment, and computers — help customers facilitate inventory management across their enterprises

Enhanced User Interface — new color palette, navigation scheme, button and link placement, and more efficient use of screen real estate provide improved usability

Expense Analytics — Facilitates TEM cost-saving initiatives by providing multiple ways to analyze expense data collected and managed by the VeraSMART Suite

Contract Analytics — Part of the VeraSMART Contract Management component introduced with VeraSMART 9.0 in 2009, Performance Advisor Contract Analytics provides visibility into contract and vendor performance that helps customers track and manage commitments and negotiate the most favorable terms and conditions

Manage all orders through VeraSMART

Validate orders against negotiated contracts and corporate policies

Authenticate appropriate pricing for standard orders and configurations

Automate the approval routing process

Manage vendor fulfillment to confirm Software License Agreement (SLA) compliance

Receive, charge, pack, and ship wireless devices

Wireless — Our help desk team assists callers in resolving issues related to wireless device problems and usability issues. Every call is answered promptly by trained professionals in our U.S. call center. Our help desk team is committed to providing world class customer service and has the tools and metrics to make certain that we meet our goals

Wireline — If wireline service fails at any customer location, one call or email to our centralized help desk will immediately initiate the process to restore their dial tone. We make it our business to know every local telecom provider servicing each of the customer’s offices, so we know exactly who to call and how to get fast action to resolve connectivity issues

 

Net Sales

 

Net Income (Loss)

 

Net Income (Loss) per Diluted Share

 

Weighted Average Diluted Shares Outstanding

 

Total Assets

 

Long-Term Obligations

Provide software that replaces the heavy dependency on expense management experts and makes scarce in- house resources more productive.

Provide software that creates corporate value that is absent in a pure services scenario.

Develop innovative software that is essential to maintaining preferred partner status with strategic partners such as AT&T, Avaya, and Cisco.

Provide the tools required to assist organizations in reducing their costs and optimizing expenditures across their telecom and IT networks.

Gross Expenditures for Engineering and Software Development

 

Less: Software Development Costs Capitalized

 

 

Net Expenditures for Engineering and Software Development

 

Plus: Software Development Costs Amortized and Charged to Cost of Sales

 

 

Total Expense Recognized

 

Restructuring of the executive management team, customer services organization, and the direct sales group, resulting in increased operating efficiencies and reducing operating expenses by 13% from the prior year.

Devoting additional resources to product development and marketing programs, thereby expanding Veramark’s presence and positioning in the TEM marketplace.

Accelerating major new product releases which significantly enhance our VeraSMART Communications Management Suite with new capabilities for international applications, wireless device management and procurement, and flexibility of use.

Establishing new sales and marketing partnerships with AT&T and Ingram Micro.

Opening a west coast sales office, expanding our efforts nationally, and increasing accessibility to the Company’s west coast clients.

 

Gross Expenditures for Engineering and Software Development

 

Less: Software Development Costs Capitalized

 

 

Net Expenditures for Engineering and Software Development

 

Plus: Software Development Costs Amortized and Charged to Cost of Sales

 

 

Total Expense Recognized

 

 

2010

2011

2012

2013

2014

2015-2019

Revenue recognition

Capitalization of software development costs

Allowance for Doubtful Accounts

Pension liability

In December 2007, the Financial Accounting Standards Board issued Accounting Standards Codification (“ASC”) 805-10, formerly Statement of Financial Accounting Standards (“SFAS”) No. 141(R), “Business Combinations”. ASC 805-10 establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. ASC 805-10 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. As such, the Company adopted these provisions at the beginning of the fiscal year ending December 31, 2009. Adoption of ASC 805-10 did not have a material effect on the Company’s financial statements.

In December 2007, the Financial Accounting Standards Board issued ASC 810-10, formerly SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. ASC 810-10 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. As such, the Company adopted these provisions at the beginning of the fiscal year ending December 31, 2009. Adoption of ASC 810-10 did not have a material effect on the Company’s financial statements.

In March 2008, the Financial Accounting Standards Board issued ASC 815-10, formerly (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”. ASC 815-10 requires enhanced disclosures about an entity’s derivative and hedging activities. ASC 815-10 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. As such, the Company adopted these provisions at the beginning of the fiscal year ended December 31, 2009. Adoption of ASC 815-10 did not have a material effect on the Company’s financial statements.

In May 2008, the Financial Accounting Standards Board issued ASC 944, formerly SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60” (“SFAS 163”). ASC 944 interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement. ASC 944 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. As such, the Company adopted these provisions at the beginning of the fiscal year ended December 31, 2009. Adoption of ASC 944 did not have a material effect on the Company’s financial statements.

In June 2008, the Financial Accounting Standards Board issued ASC 260-10, formerly FASB Staff Position (FSP) EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities”. ASC 260-10 clarifies that share-based payment awards that entitle their holders to receive non-forfeitable dividends or dividend equivalents before vesting should be considered participating securities. We have granted and expect to continue to grant restricted stock that contain non-forfeitable rights to dividends and will be considered participating securities upon adoption of ASC 260-10. As participating securities, we will be required to include these instruments in the calculation of our basic earnings per share (“EPS”), and we will need to calculate basic EPS using the “two-class method.” Restricted stock is currently included in our dilutive EPS calculation using the treasury stock method. The two-class method of computing EPS is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. ASC 260-10 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. As such, the Company adopted these provisions at the beginning of the fiscal year ended December 31, 2009. Adoption of ASC 260-10 did not have a material effect on the Company’s financial statements.

In December 2008, the Financial Accounting Standards Board issued ASC 715-20, formerly FASB Staff Position (FSP) SFAS 132(R)-1, “Employer’s Disclosures about Postretirement Benefit Plan Assets,” (“FSP SFAS 132(R)-1”). ASC 715-20 requires additional disclosures about assets held in an employer’s defined benefit pension or other postretirement plan. ASC 715-20 is effective for fiscal years ending after December 15, 2009. As such, the Company adopted these provisions at the beginning of the fiscal year ended December 31, 2009. Adoption of ASC 715-10 did not have a material effect on the Company’s financial statements.

In May 2009, the Financial Accounting Standards Board issued ASC 855-10, formerly SFAS No. 165, “Subsequent Events” (“SFAS 165”). ASC 855-10 establishes principles and requirements for the reporting of events or transactions that occur after the balance sheet date, but before financial statements are issued or are available to be issued. ASC 855-10 is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009. As such, the Company adopted these provisions at the beginning of the interim period ended June 30, 2009. Adoption of ASC 855-10 did not have a material effect on the Company’s financial statements.

In June 2009, the Financial Accounting Standards Board issued ASC 105-10, formerly SFAS No. 168, “The FASB Accounting Standards Codification ^TM and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162” (“SFAS 168”). ASC 105-10 replaces Statement 162 and establishes the FASB Accounting Standards Codification^TM (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. ASC 105-10 is effective for financial statements issued for fiscal years and interim periods ending after September 15, 2009. As such, the Company adopted these provisions at the beginning of the interim period ending September 30, 2009. The adoption of ASC 105-10 did not have a material effect on the Company’s financial statements.

In August 2009, the FASB issued the FASB Accounting Standards Update No. 2009-05, Fair Value Measurement and Disclosures Topic 820 — Measuring Liabilities at Fair Value, which provides amendments to subtopic 820-10, Fair Value Measurements and Disclosures — Overall, for the fair value measurement of liabilities. This Update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of several specific techniques. ASC 820-10 is effective upon the first reporting period, including interim periods, beginning after issuance. As such, the Company adopted these provisions at the beginning of the interim period ending September 30, 2009. The adoption of ASC 820-10 did not have a material effect on the Company’s financial statements.

In September 2009, the FASB issued the FASB Accounting Standards Update No. 2009-06, Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities, which provides amendments to Topic 740, Income Taxes. This update provides additional implementation guidance. ASC 740 is effective for financial statements issued for fiscal years and interim periods ending after September 15, 2009. As such, the Company adopted these provisions at the beginning of the interim period ending September 30, 2009. The adoption of ASC 740 did not have a material effect on the Company’s financial statements.

In September 2009, the FASB issued the FASB Accounting Standards Update No. 2009-12, Fair Value Measurements and Disclosures Topic 820 — Investment in Certain Entities That Calculate Net Assets Value Per Share (or Its Equivalent), which provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures-Overall, for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). The amendments in this Update permit, as a practical expedient, a reporting entity to measure the fair value of an investment that is within the scope of the amendments in this Update on the basis of the net asset value per share of the investment (or its equivalent) if the net asset value of the investment (or its equivalent) is calculated in a manner consistent with the measurement principles of Topic 946 as of the reporting entity’s measurement date, including measurement of all or substantially all of the underlying investments of the investee in accordance with Topic 820. The amendments in this Update also require disclosures by major category of investment about the attributes of investments within the scope of the amendments in this Update, such as the nature of any restrictions on the investor’s ability to redeem its investments a the measurement date, any unfunded commitments (for example, a contractual commitment by the investor to invest a specified amount of additional capital at a future date to fund investments that will be make by the investee), and the investment strategies of the investees. The major category of investment is required to be determined on the basis of the nature and risks of the investment in a manner consistent with the guidance for major security types in U.S. GAAP on investments in debt and equity securities in paragraph 320-10-50-1B. The disclosures are required for all investments within the scope of the amendments in this Update regardless of whether the fair value of the investment is measured using the practical expedient. ASC 820-10 is effective for financial statements issued for fiscal years and interim periods ending after December 15, 2009. As such, the Company adopted these provisions at the beginning of the period ending December 31, 2009. The adoption of ASC 820-10 did not have a material effect on the Company’s financial statements.

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.

 

Bond Funds

US Government Securities

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

Cash and cash equivalents

Investments

Accounts receivable, trade (net of allowance for doubtful accounts of $24,000 and $30,000)

Inventories, net

Prepaid expenses

Other current assets

 

 

Total current assets

 

 

PROPERTY AND EQUIPMENT:

Cost

Less accumulated depreciation

 

 

Property and equipment, net

 

 

OTHER ASSETS:

Software development costs (net of accumulated amortization of $2,497,948 and $3,332,886)

Pension assets

Deposits and other assets

 

Total other assets

 

 

TOTAL ASSETS

 

 

CURRENT LIABILITIES:

Accounts payable

Accrued compensation and related taxes

Deferred revenue

Current portion of pension obligation

Other accrued liabilities

 

 

Total current liabilities

 

Long-term portion of pension obligation

 

 

Total liabilities

 

 

STOCKHOLDERS’ EQUITY:

Common stock, par value, $0.10; shares authorized, 40,000,000; 10,028,952 shares and 9,852,954 shares issued

Additional paid-in capital

Accumulated deficit

Treasury stock (80,225 shares at cost)

Accumulated other comprehensive income

 

 

Total stockholders’ equity

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

NET SALES

Product Sales

Service Sales

 

Total Net Sales

 

 

COSTS AND OPERATING EXPENSES:

Cost of sales

Engineering and software development

Selling, general and administrative

 

 

Total costs and operating expenses

 

 

LOSS FROM OPERATIONS

 

INTEREST INCOME

 

 

LOSS BEFORE INCOME TAXES

 

INCOME TAXES

 

 

NET LOSS

 

 

NET LOSS PER SHARE

Basic

 

Diluted

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC)

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING (DILUTED)

 

 

BALANCE — December 31, 2006

 

Change in other comprehensive income

Net Loss

 

Total comprehensive Income (loss)

 

Stock purchase plan

Exercise of stock options

Compensation expenses — stock options

 

BALANCE — December 31, 2007

 

 

Change in other comprehensive income

Net loss

 

Total comprehensive Income (loss)

 

Stock purchase plan

Exercise of stock options

Issuance of restricted stock

Compensation expenses — stock options

 

BALANCE — December 31, 2008

 

 

Change in other comprehensive income

Net loss

 

Total comprehensive Income (loss)

 

Stock purchase plan

Issuance of restricted stock

Compensation expenses — stock options

 

BALANCE — December 31, 2009

 

OPERATING ACTIVITIES:

Net Loss

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization

Expense (Recovery) of bad debts

Compensation expense — equity grants

Loss on disposal of fixed assets

Unrealized Gain (Losses) on investments

Pension assets

Changes in assets and liabilities:

Accounts receivable

Inventories

Prepaid expenses and other current assets

Deposits and other assets

Accounts payable

Accrued compensation and related taxes

Deferred revenue

Other accrued liabilities

Pension obligation

 

Net cash provided by operating activities

 

INVESTING ACTIVITIES:

(Purchase) Sale of investments

Additions to property and equipment

Capitalized software development costs

 

Net cash used in by investing activities

 

FINANCING ACTIVITIES:

Exercise of stock options

Employee stock purchase plan

 

Net cash provided by financing activities

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

 

CASH AND CASH EQUIVALENTS, END OF YEAR

 

 

Cash Transactions:

Income taxes paid (refund)

Interest paid

Description of business — Veramark Technologies, Inc., (the “Company”) designs and produces communications management and operation support software for users and providers of telecommunication services in the global market. The Company operates in one segment.

Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and cash equivalents — The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The fair value of the Company’s cash and cash equivalents approximates carrying value, which, due to the relatively short maturities and variable interest rates of the instruments, approximates current market rates.

Investments — The Company records its investments in accordance with ASC 320-10, formerly Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Certain Debt and Equity Securities.” As of December 31, 2009 and 2008, the Company has classified its portfolio as available-for-sale securities. These securities are recorded at fair value, based on quoted market prices in an active market, with net unrealized holding gains and losses reported in stockholders’ equity as accumulated other comprehensive income. At December 31, 2009 and 2008 the carrying value of investments approximated fair market value, and are classified as Level 1 Assets as defined by ASC 820-10, formerly SFAS No. 157, “Fair Value Measurements.”

Investments at December 31, 2009 and 2008 consisted of the following:

Bond Funds

US Government Securities

 

 

 

The contractual maturities of the Company’s investments as of December 31, 2009 are primarily due within one year.

Accounts receivable and allowance for doubtful accounts — The Company extends credit to its customers in the normal course of business and collateral is generally not required for trade receivables. Exposure to credit risk is controlled through the use of credit approvals, credit limits and monitoring procedures. Accounts receivable are reported net of an allowance for doubtful accounts. The Company estimates the allowance based on its analysis of specific balances, taking into consideration the age of the past due account and anticipated collections resulting from legal issues. An account is considered past due after thirty (30) days from the invoice date. Based on these factors, there was an allowance for doubtful accounts of $24,000 at December 31, 2009 and $30,000 at December 31, 2008. Changes to the allowance for doubtful accounts are charged to expense and reduced by charge-offs, net of recoveries.

Concentrations of credit risk — Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of investments and accounts receivable. The Company places its cash and investments with quality financial institutions and, by policy, limits the amount of investment exposure to any one financial institution. The Company has not experienced any significant losses to date on its invested cash and investments.

The Company’s customers are not concentrated in any specific geographic region, nor in any specific industry. As of December 31, 2009, four customers accounted for approximately $433,000 of the total accounts receivable balance. As of December 31, 2008, three customers accounted for approximately $336,000 of the total accounts receivable balance. The Company performs periodic credit evaluations of its customers’ financial conditions but does not require collateral to support customer receivables. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. Such losses to date have been within managements’ expectations.

The Company maintains cash deposits with major banks, which may from time to time exceed federally insured limits. The Company periodically assesses the financial condition of the institutions and believes that the risk of any loss is minimal.

Inventories are stated at the lower of cost (first-in, first-out) or market. The Company evaluates the net realizable value of inventory on hand considering deterioration, obsolescence, replacement costs and other pertinent factors, and records adjustments as necessary.

Prepaid Expenses consist of cash outlays made by the Company for economic benefits to be realized in future periods. These benefits typically include the unutilized portions of current business insurances, maintenance contracts on Company-owned equipment, and prepaid commissions. Prepaid expenses are generally expensed on a straight-line basis over the corresponding life of the underlying asset, with the exception of prepaid commissions which are expensed at the time the revenue that gave rise to the commission is recognized.

Other Current Assets of $509,000 at December 31, 2009, represent funding held by the Company on behalf of a single customer for whom we provide bill payment services as a component of their BPO services agreement. This asset is offset by an identical balance in other accrued liabilities.

Property and equipment is recorded at cost and depreciated on a straight-line basis using the following useful lives:

Computer hardware and software

Machinery and equipment

Furniture and fixtures

Leasehold improvements

All maintenance and repair costs are charged to operations as incurred. The cost and accumulated depreciation for property and equipment sold, retired, or otherwise disposed of are removed from the accounts, and the resulting gains or losses are reflected in earnings.

Long-lived assets — In accordance with ASC 360-10, formerly Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company tests long-lived assets for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No impairment charges were recorded in 2009, 2008, or 2007.

Software development costs meeting recoverability tests are capitalized, under ASC 985-20, formerly SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,” and amortized on a product-by-product basis over their economic life, ranging from three to five years, or the ratio of current revenues to current and anticipated revenues from such software, whichever provides the greater amortization in a particular period. The Company capitalized $1,312,772 of development costs in 2009, $834,973 of development costs in 2008 and $796,194 of development costs in 2007. The Company amortized $1,126,054 of development costs in 2009, $1,153,596 of development costs in 2008 and $933,169 of development costs in 2007. 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. No charges for impairment were required in 2009, 2008 or 2007.

Fair Value of Financial Instruments — ASC 825-10, formerly Statement of Financial Accounting Standards (“SFAS”) No. 107, “Disclosure About Fair Value of Financial Instruments,” requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value. ASC 825-10 defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. At December 31, 2009 and 2008, the carrying value of certain financial instruments (accounts receivable and accounts payable) approximates fair value due to the short-term nature of the instruments or interest rates, which are comparable with current rates. At December 31, 2009 and 2008, the Company has no long-term debt.

On January 1, 2008, the Company adopted ASC 820-10, formerly FASB Statement No. 157, “Fair Value Measurements” (SFAS No. 157) which defines fair value, establishes a framework for measuring fair value, and requires additional disclosures about fair value measurements. The criterion that is set forth in ASC 820-10 is applicable to fair value measurement where it is permitted or required under other accounting pronouncements.

ASC 820-10 defines fair value as the exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on inputs of observable and unobservable market data that a market participant would use in pricing the asset or liability. The use of observable inputs is maximized where available and the use of unobservable inputs is minimized for fair value measurement. As a means to illustrate the inputs used, ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes inputs to valuation techniques used for fair value measurement.

Level 1 consists of observable market data in an active market for identical assets or liabilities.

Level 2 consists of observable market data, other than that included in Level 1, that is either directly or indirectly observable.

Level 3 consists of unobservable market data. The input may reflect the assumptions of the Company of what a market participant would use in pricing an asset or liability. If there is little available market data, then the Company’s own assumptions are the best available information.

In the case of multiple inputs being used in a fair value measurement, the lowest level input that is significant to the fair value measurement represents the level in the fair value hierarchy in which the fair value measurement is reported.

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.

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”, 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. We use 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 us through the date of cancellation are due and payable under the contract terms.

Income taxes are provided on the income earned in the financial statements. In accordance with ASC 740-10, formerly SFAS 109, “Accounting for Income Taxes,” the Company applies the liability method of accounting for income taxes, under which deferred income taxes are provided to reflect the impact of “temporary differences” between the amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not, that such assets will be realized.

Net income (or loss) per common share (“EPS”) is computed in accordance with the provisions of ASC 260-10, formerly SFAS No. 128, “Earnings Per Share.” Basic EPS is computed by dividing net income (loss) by weighted average shares outstanding. Diluted EPS includes the dilutive effect of stock options issued. There were no dilutive effects of stock options in 2009, 2008 or 2007 as the effect would have been anti-dilutive, due to the net loss incurred for those years.

Comprehensive Income — Comprehensive income includes all changes in stockholders’ equity during the period except those resulting from investments by owners and distribution to owners. The Company’s comprehensive income includes net loss or earnings, unrealized gains or losses on available for sale investments, and any gain or loss associated with the Company’s Supplement Executive Retirement Program.

Research and Development Costs — Research and development costs, other than certain software development costs previously disclosed in Note 1, are expensed as incurred. For the years ended December 31, 2009, 2008, and 2007, research and development costs expensed were $1,149,629, $1,410,086, and $1,226,898, respectively.

Stock-Based Compensation — The Company’s primary type of share-based compensation consists of stock options and restricted stock. For the year ended December 31, 2009 the company issued 40,000 stock options, and 107,000 new restricted shares. During 2009, 8,000 restricted shares, granted previously, were cancelled.

The Company records its stock-based compensation expense in accordance with ASC 718-10, formerly SFAS 123R, “Share Based Payment.” In estimating the value of stock options issued, the Company uses the Black-Scholes option pricing model. The following table provides the range of assumptions used by the Company, at the time stock options were issued.

Risk Free Rate*

Volatility

 

Dividend Yield

Expected Life In Years

A summary of the status of the Company’s stock option plan as of December 31, 2009 is presented below:

Outstanding as of December 31, 2008

Granted

Exercised

Canceled

 

 

Outstanding as of December 31, 2009

 

 

Options exercisable at December 31, 2009

 

As of December 31, 2009, there was $40,150 of unrecognized compensation cost related to non-vested stock options granted under the Plan. That cost is expected to be recognized over a weighted-average period of 1.25 years. As of December 31, 2009, there was $129,791 of unrecognized compensation cost related to restricted stock, the cost of which is expected to be recognized over a weighted-average period of 0.9 years.

In December 2007, the Financial Accounting Standards Board issued Accounting Standards Codification (“ASC”) 805-10, formerly Statement of Financial Accounting Standards (“SFAS”) No. 141(R), “Business Combinations”. ASC 805-10 establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. ASC 805-10 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. As such, the Company adopted these provisions at the beginning of the fiscal year ending December 31, 2009. Adoption of ASC 805-10 did not have a material effect on the Company’s financial statements.

In December 2007, the Financial Accounting Standards Board issued ASC 810-10, formerly SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. ASC 810-10 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. As such, the Company adopted these provisions at the beginning of the fiscal year ending December 31, 2009. Adoption of ASC 810-10 did not have a material effect on the Company’s financial statements.

In March 2008, the Financial Accounting Standards Board issued ASC 815-10, formerly (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”. ASC 815-10 requires enhanced disclosures about an entity’s derivative and hedging activities. ASC 815-10 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged. As such, the Company adopted these provisions at the beginning of the fiscal year ended December 31, 2009. Adoption of ASC 815-10 did not have a material effect on the Company’s financial statements.

In May 2008, the Financial Accounting Standards Board issued ASC 944, formerly SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No. 60” (“SFAS 163”). ASC 944 interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement. ASC 944 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. As such, the Company adopted these provisions at the beginning of the fiscal year ended December 31, 2009. Adoption of ASC 944 did not have a material effect on the Company’s financial statements.

In June 2008, the Financial Accounting Standards Board issued ASC 260-10, formerly FASB Staff Position (FSP) EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities”. ASC 260-10 clarifies that share-based payment awards that entitle their holders to receive non-forfeitable dividends or dividend equivalents before vesting should be considered participating securities. We have granted and expect to continue to grant restricted stock that contain non-forfeitable rights to dividends and will be considered participating securities upon adoption of ASC 260-10. As participating securities, we will be required to include these instruments in the calculation of our basic earnings per share (“EPS”), and we will need to calculate basic EPS using the “two-class method.” Restricted stock is currently included in our dilutive EPS calculation using the treasury stock method. The two-class method of computing EPS is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. ASC 260-10 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years. As such, the Company adopted these provisions at the beginning of the fiscal year ended December 31, 2009. Adoption of ASC 260-10 did not have a material effect on the Company’s financial statements.

In December 2008, the Financial Accounting Standards Board issued ASC 715-20, formerly FASB Staff Position (FSP) SFAS 132(R)-1, “Employer’s Disclosures about Postretirement Benefit Plan Assets,” (“FSP SFAS 132(R)-1”). ASC 715-20 requires additional disclosures about assets held in an employer’s defined benefit pension or other postretirement plan. ASC 715-20 is effective for fiscal years ending after December 15, 2009. As such, the Company adopted these provisions at the beginning of the fiscal year ended December 31, 2009. Adoption of ASC 715-10 did not have a material effect on the Company’s financial statements.

In May 2009, the Financial Accounting Standards Board issued ASC 855-10, formerly SFAS No. 165, “Subsequent Events” (“SFAS 165”). ASC 855-10 establishes principles and requirements for the reporting of events or transactions that occur after the balance sheet date, but before financial statements are issued or are available to be issued. ASC 855-10 is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009. As such, the Company adopted these provisions at the beginning of the interim period ended June 30, 2009. Adoption of ASC 855-10 did not have a material effect on the Company’s financial statements.

In June 2009, the Financial Accounting Standards Board issued ASC 105-10, formerly SFAS No. 168, “ The FASB Accounting Standards Codification ^TM and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162” (“SFAS 168”). ASC 105-10 replaces Statement 162 and establishes the FASB Accounting Standards Codification^TM (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. ASC 105-10 is effective for financial statements issued for fiscal years and interim periods ending after September 15, 2009. As such, the Company adopted these provisions at the beginning of the interim period ending September 30, 2009. The adoption of ASC 105-10 did not have a material effect on the Company’s financial statements.

In August 2009, the FASB issued the FASB Accounting Standards Update No. 2009-05, Fair Value Measurement and Disclosures Topic 820 — Measuring Liabilities at Fair Value, which provides amendments to subtopic 820-10, Fair Value Measurements and Disclosures — Overall, for the fair value measurement of liabilities. This Update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of several specific techniques. ASC 820-10 is effective upon the first reporting period, including interim periods, beginning after issuance. As such, the Company adopted these provisions at the beginning of the interim period ending September 30, 2009. The adoption of ASC 820-10 did not have a material effect on the Company’s financial statements.

In September 2009, the FASB issued the FASB Accounting Standards Update No. 2009-06, Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities, which provides amendments to Topic 740, Income Taxes. This update provides additional implementation guidance. ASC 740 is effective for financial statements issued for fiscal years and interim periods ending after September 15, 2009. As such, the Company adopted these provisions at the beginning of the interim period ending September 30, 2009. The adoption of ASC 740 did not have a material effect on the Company’s financial statements.

In September 2009, the FASB issued the FASB Accounting Standards Update No. 2009-12, Fair Value Measurements and Disclosures Topic 820 — Investment in Certain Entities That Calculate Net Assets Value Per Share (or Its Equivalent), which provides amendments to Subtopic 820-10, Fair Value Measurements and Disclosures-Overall, for the fair value measurement of investments in certain entities that calculate net asset value per share (or its equivalent). The amendments in this Update permit, as a practical expedient, a reporting entity to measure the fair value of an investment that is within the scope of the amendments in this Update on the basis of the net asset value per share of the investment (or its equivalent) if the net asset value of the investment (or its equivalent) is calculated in a manner consistent with the measurement principles of Topic 946 as of the reporting entity’s measurement date, including measurement of all or substantially all of the underlying investments of the investee in accordance with Topic 820. The amendments in this Update also require disclosures by major category of investment about the attributes of investments within the scope of the amendments in this Update, such as the nature of any restrictions on the investor’s ability to redeem its investments a the measurement date, any unfunded commitments (for example, a contractual commitment by the investor to invest a specified amount of additional capital at a future date to fund investments that will be make by the investee), and the investment strategies of the investees. The major category of investment is required to be determined on the basis of the nature and risks of the investment in a manner consistent with the guidance for major security types in U.S. GAAP on investments in debt and equity securities in paragraph 320-10-50-1B. The disclosures are required for all investments within the scope of the amendments in this Update regardless of whether the fair value of the investment is measured using the practical expedient. ASC 820-10 is effective for financial statements issued for fiscal years and interim periods ending after December 15, 2009. As such, the Company adopted these provisions at the beginning of the period ending December 31, 2009. The adoption of ASC 820-10 did not have a material effect on the Company’s financial statements.

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.

Stock Purchase Plans — Under the Company’s Employee Stock Purchase Plan (“ESPP”), employees can purchase Veramark stock at a 15% discount to market price at the ending date of the six-month periods ending approximately June 30^th and December 31^st. Employees may elect to make after-tax payroll deductions of 1% to 10% of compensation as defined by the Plan, to the extent that his or her rights to purchase stock under this Plan do not exceed Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the full market value of the shares at the time such purchase would occur), and only to the extent that, immediately after the purchase, such employee would not own stock or hold outstanding options to purchase stock, such that his or her combined voting power would exceed 5% of all classes of capital stock of the Company. Employee payroll deductions are for six-month periods beginning approximately each January 1 and July 1. Shares of the Company’s common stock are purchased on or about June 30 or December 31, unless the participant has either elected to withdraw from the Plan or was terminated. Purchased shares are restricted for sale or transfer for a six-month period. All participants funds received prior to the ESPP purchase dates are held as Company liabilities without interest or other increment. No dividends are paid on employee contributions until shares are purchased. Plan participants purchased 76,998 shares at an average purchase price of $0.30 in 2009, 94,861 shares at an average purchase price of $0.26 in 2008 and 23,917 shares at an average purchase price of $0.65 in 2007.

The major classifications of property and equipment as of December 31, 2009 and 2008 are:

 

Machinery and equipment

Computer hardware and software

Furniture and fixtures

Leasehold improvements

 

 

 

Depreciation expense was approximately $283,000, $291,000 and $258,000 for the years ended December 31, 2009, 2008 and 2007, respectively.

Engineering and software development costs incurred during the years ended December 31, 2009, 2008 and 2007 were recorded as follows:

Engineering and software development expenses included in the statements of operations

 

Amounts capitalized and included in the balance sheets

 

 

Total costs for engineering and software development

 

Additionally, the Company recorded amortization of capitalized software development costs of approximately $1,126,000, $1,154,000 and $933,000 for the years ended December 31, 2009, 2008 and 2007, respectively. Such amortization is included in cost of sales in the consolidated statements of operations. Estimated aggregate minimum amortization expenses for each of the next five years is:

2010

2011

2012

2013

2014

Comprehensive loss for years ended December 31, 2009, 2008 and 2007 was as follows:

 

Net loss

Adjustments for FASB No. 158

Reclassification to net periodic benefit cost

Unrealized gain (loss) arising during the period

Unrealized gain (loss) on investments

 

 

Comprehensive loss

 

Accumulated comprehensive income (loss) consisted of the following as of December 31, 2009, 2008 and 2007:

 

Unrecognized prior service cost

Unrecognized actuarial gain

Unrealized gain on investments

 

 

Total

 

 

ASC 260-10 (SFAS 128) “Earnings Per Share” requires the Company to calculate its 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 generally have a dilutive effect when the average market price of common stock during the period exceeds the exercise price of the options.

 

Net Loss

 

 

Weighted average common shares outstanding