10-Q 1 a06-9624_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended March 31, 2006

 

 

 

OR

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

 

 

 

For the transition period from            to            

 

Commission file number 000-31511

 

@Road, Inc.

 (Exact name of registrant as specified in its charter)

 

Delaware

 

94-3209170

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

47071 Bayside Parkway

Fremont, CA 94538

(Address of principal executive offices, including zip code)

 

510-668-1638

(Registrant’s telephone number, including area code)

 

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  ý    No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large Accelerated Filer o

 

Accelerated Filer ý

 

Non-Accelerated Filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  o    No    ý

 

As of May 1, 2006 there were 61,561,637 shares of the registrant’s Common Stock outstanding.

 

 



 

INDEX

 

PART I.

FINANCIAL INFORMATION

1

 

Item 1. Financial Statements.

1

 

Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005.

1

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005 (As Restated).

2

 

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2006 and 2005 (As Restated) and the nine months ended December 31, 2005 (As Restated).

3

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 (As Restated).

4

 

Notes to Condensed Consolidated Financial Statements.

5

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

21

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

40

 

Item 4. Controls and Procedures.

41

PART II.

OTHER INFORMATION

43

 

Item 1. Legal Proceedings.

43

 

Item 1A. Risk Factors.

43

 

Item 6. Exhibits.

43

 



 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

@Road, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share data) (unaudited)

 

 

 

March 31,
2006

 

December 31,
2005

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

24,177

 

$

25,773

 

Short-term investments

 

75,975

 

77,643

 

Accounts receivable, net

 

10,798

 

12,475

 

Inventories

 

10,341

 

6,087

 

Deferred product costs

 

17,468

 

16,187

 

Deferred tax assets

 

1,488

 

1,448

 

Prepaid expenses and other

 

1,691

 

2,566

 

Total current assets

 

141,938

 

142,179

 

Property and equipment, net

 

6,185

 

6,195

 

Deferred product costs

 

17,425

 

16,995

 

Deferred tax assets

 

40,771

 

40,531

 

Goodwill

 

13,341

 

13,341

 

Intangible assets, net

 

26,323

 

27,333

 

Other non-current assets

 

721

 

400

 

 

 

 

 

 

 

Total assets

 

$

246,704

 

$

246,974

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

9,501

 

$

6,653

 

Accrued liabilities

 

7,492

 

8,751

 

Deferred revenue and customer deposits

 

14,451

 

15,495

 

Derivative instrument

 

4,065

 

1,457

 

 

 

 

 

 

 

Total current liabilities

 

35,509

 

32,356

 

Deferred revenue

 

17,188

 

17,333

 

Deferred tax liabilities

 

 

323

 

Derivative instrument

 

 

1,457

 

Other long-term liabilities

 

428

 

461

 

Total liabilities

 

53,125

 

51,930

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 10,000 shares authorized, 98 shares designated as redeemable preferred stock, shares issued and outstanding: 78 at March 31, 2006 and December 31, 2005

 

8,308

 

8,184

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.0001 par value, 250,000 shares authorized, shares issued and outstanding: 61,233 at March 31, 2006 and 61,154 at December 31, 2005

 

266,346

 

265,347

 

Note receivable from stockholder

 

(6

)

(7

)

Accumulated other comprehensive loss

 

(99

)

(78

)

Accumulated deficit

 

(80,970

)

(78,402

)

 

 

 

 

 

 

Total stockholders’ equity

 

185,271

 

186,860

 

 

 

 

 

 

 

Total liabilities, redeemable preferred stock and stockholders’ equity

 

$

246,704

 

$

246,974

 

 

See notes to condensed consolidated financial statements.

 

1



 

@Road, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data) (unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2006

 

2005

 

 

 

 

 

As Restated
(See Note 1)

 

Revenues:

 

 

 

 

 

Hosted

 

$

20,963

 

$

19,490

 

Licensed

 

3,782

 

502

 

 

 

 

 

 

 

Total revenues

 

24,745

 

19,992

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

Cost of hosted revenue (excluding intangibles amortization included below)

 

11,002

 

9,524

 

Cost of licensed revenue (excluding intangibles amortization included below)

 

1,230

 

700

 

Intangibles amortization

 

1,010

 

457

 

Sales and marketing

 

5,918

 

4,647

 

Research and development

 

3,669

 

2,575

 

General and administrative

 

4,942

 

4,447

 

In-process research and development

 

 

5,640

 

 

 

 

 

 

 

Total costs and expenses

 

27,771

 

27,990

 

 

 

 

 

 

 

Loss from operations

 

(3,026

)

(7,998

)

 

 

 

 

 

 

Other expense, net:

 

 

 

 

 

Interest income, net

 

1,036

 

618

 

Change in derivative instrument liability

 

(1,151

)

(741

)

Other expense, net

 

(17

)

2

 

 

 

 

 

 

 

Total other expense, net

 

(132

)

(121

)

 

 

 

 

 

 

Net loss before income taxes

 

(3,158

)

(8,119

)

Benefit from income taxes

 

590

 

 

Net loss

 

(2,568

)

(8,119

)

Preferred stock dividends

 

(124

)

(57

)

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(2,692

)

$

(8,176

)

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

Basic

 

$

(0.04

)

$

(0.14

)

 

 

 

 

 

 

Diluted

 

$

(0.04

)

$

(0.14

)

 

 

 

 

 

 

Shares used in calculating net loss per share:

 

 

 

 

 

Basic

 

61,198

 

57,385

 

 

 

 

 

 

 

Diluted

 

61,198

 

57,385

 

 

See notes to condensed consolidated financial statements.

 

2



 

@Road, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

For the Three Months Ended March 31, 2006 and 2005 (As Restated)

and the Nine Months Ended December 31, 2005 (As Restated) (See Note 1)

(In thousands) (unaudited)

 

 

 




Common Stock

 

Note
Receivable
From
Stockholder

 

Accumulated
Other
Comprehensive
Loss

 

Accumulated
Deficit

 

Stockholders’
Equity

 

Total
Comprehensive
Income (Loss)

 

Shares

 

Amount

BALANCES, January 1, 2005

 

54,805

 

$

232,016

 

$

 

$

(179

)

$

(107,001

)

$

124,836

 

 

 

Net loss (As Restated) (See Note 1)

 

 

 

 

 

 

 

 

 

(8,119

)

(8,119

)

$

(8,119

)

Change in unrealized gain on short-term investments

 

 

 

 

 

 

 

31

 

 

 

31

 

31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(8,088

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued upon acquisition of Vidus, net of issuance costs of $478

 

5,454

 

24,228

 

 

 

 

 

 

 

24,228

 

 

 

Fully vested options issued upon acquisition of Vidus

 

 

 

531

 

 

 

 

 

 

 

531

 

 

 

Exercise of stock options

 

50

 

172

 

 

 

 

 

 

 

172

 

 

 

Issuance of note receivable to stockholder

 

 

 

 

 

(11

)

 

 

 

 

(11

)

 

 

Collection of note receivable from stockholder

 

 

 

 

 

1

 

 

 

 

 

1

 

 

 

Dividends on preferred stock

 

 

 

(57

)

 

 

 

 

 

 

(57

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES, March 31, 2005 (As Restated) (See Note 1)

 

60,309

 

256,890

 

(10

)

(148

)

(115,120

)

141,612

 

 

 

Net income (As Restated) (See Note 1)

 

 

 

 

 

 

 

 

 

36,718

 

36,718

 

$

36,718

 

Change in unrealized loss on short-term investments

 

 

 

 

 

 

 

70

 

 

 

70

 

70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

$

36,788

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued under employee stock purchase plan

 

580

 

1,678

 

 

 

 

 

 

 

1,678

 

 

 

Exercise of stock options

 

265

 

406

 

 

 

 

 

 

 

406

 

 

 

Collection of note receivable from stockholder

 

 

 

 

 

3

 

 

 

 

 

3

 

 

 

Dividends on redeemable preferred stock

 

 

 

(379

)

 

 

 

 

 

 

(379

)

 

 

Tax benefit on the exercise of employee stock options

 

 

 

6,752

 

 

 

 

 

 

 

6,752

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES, December 31, 2005

 

61,154

 

265,347

 

(7

)

(78

)

(78,402

)

186,860

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

(2,568

)

(2,568

)

$

(2,568

)

Change in unrealized loss on short-term investments

 

 

 

 

 

 

 

(21

)

 

 

(21

)

(21

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(2,589

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

79

 

194

 

 

 

 

 

 

 

194

 

 

 

Stock-based compensation

 

 

 

929

 

 

 

 

 

 

 

929

 

 

 

Collection of note receivable from stockholder

 

 

 

 

 

1

 

 

 

 

 

1

 

 

 

Dividends on redeemable preferred stock

 

 

 

(124

)

 

 

 

 

 

 

(124

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES, March 31, 2006

 

61,233

 

$

266,346

 

$

(6

)

$

(99

)

$

(80,970

)

$

185,271

 

 

 

 

See notes to condensed consolidated financial statements.

 

3



 

@Road, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands) (unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2006

 

2005

 

 

 

 

 

As Restated
(See Note 1)

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(2,568

)

$

(8,119

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,804

 

999

 

Change in derivative instrument liability

 

1,151

 

741

 

Stock-based compensation

 

929

 

 

Provision for doubtful accounts and sales returns

 

32

 

201

 

Provision for inventory reserves

 

22

 

25

 

Loss on disposal of property and equipment

 

11

 

33

 

In-process research and development

 

 

5,640

 

Deferred taxes

 

(590

)

 

Change in assets and liabilities, net of effect of acquisition:

 

 

 

 

 

Accounts receivable

 

1,680

 

1,230

 

Inventories

 

(4,276

)

(134

)

Deferred product costs

 

(1,746

)

(1,270

)

Prepaid expenses and other

 

554

 

93

 

Accounts payable

 

2,848

 

379

 

Accrued and other liabilities

 

(1,305

)

(391

)

Deferred revenue and customer deposits

 

(1,189

)

(499

)

 

 

 

 

 

 

Net cash used in operating activities

 

(2,643

)

(1,072

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of property and equipment

 

(795

)

(848

)

Purchase of short-term investments

 

(16,580

)

(35,132

)

Proceeds from the sale of short-term investments

 

18,227

 

63,372

 

Acquisition of Vidus, net of cash acquired

 

 

(5,229

)

 

 

 

 

 

 

Net cash provided by investing activities

 

852

 

22,163

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from sale of common stock

 

194

 

172

 

Proceeds from payments on notes receivable issued to stockholders

 

1

 

1

 

Net cash provided by financing activities

 

195

 

173

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(1,596

)

21,264

 

Cash and cash equivalents:

 

 

 

 

 

Beginning of period

 

25,773

 

14,494

 

End of period

 

$

24,177

 

$

35,758

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Dividends accrued on redeemable preferred stock

 

$

124

 

$

57

 

Change in unrealized loss on short-term investments, net of tax effects

 

$

(21

)

$

31

 

Cash paid for income taxes

 

$

20

 

$

30

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Issuance of common stock, preferred stock and options in connection with the acquisition of Vidus

 

$

 

$

38,155

 

 

See notes to condensed consolidated financial statements.

 

4



 

@Road, Inc.

Notes To Condensed Consolidated Financial Statements

(unaudited)

 

Note 1 —Summary of Significant Accounting Policies

 

Restatement of Financial Statements

 

Subsequent to December 31, 2005, the Company determined that its unaudited quarterly condensed consolidated financial statements for the periods ended March 31, 2005, June 30, 2005 and September 30, 2005 contained errors resulting from the improper accounting for the common and redeemable preferred stock issued in connection with the Vidus acquisition. See “Note 6—Derivative Financial Instrument Liabilities” for further discussion.

 

The impact on the Company’s consolidated statement of operations for the three months ended March 31, 2005 was an increase in net loss of $741,000. As a result, the accompanying condensed consolidated financial statements for the three months ended March 31, 2005 have been restated from the previously reported results to correct this error. The following is a summary of the significant effects of the restatement (in thousands, except per share data):

 

 

 

As Previously
Reported

 

As Restated

 

Change

 

Change in derivative instrument liability

 

$

 

$

(741

)

$

(741

)

Total other income (expense), net

 

 

620

 

 

(121

)

 

(741

)

Net loss before taxes

 

(7,378

)

(8,119

)

(741

)

Net loss

 

(7,378

)

(8,119

)

(741

)

Net loss attributable to common stockholders

 

$

(7,435

)

$

(8,176

)

$

(741

)

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

Basic

 

$

(0.13

)

$

(0.14

)

$

(0.01

)

Diluted

 

$

(0.13

)

$

(0.14

)

$

(0.01

)

 

Basis of Consolidation and Presentation

 

The accompanying condensed consolidated financial statements include @Road, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). Intercompany accounts and transactions are eliminated upon consolidation.

 

The accompanying condensed consolidated financial statements were prepared by the Company, without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures made herein are adequate to make the information presented not misleading.

 

In the opinion of management, the financial statements include all adjustments, consisting only of normal recurring adjustments (except for the adjustments to restate these financial statements for the three months ended March 31, 2005 discussed above) necessary to fairly present the financial condition, results of operations, and cash flows for the periods presented. Results of operations for the periods presented are not necessarily indicative of results to be expected for any other interim period or for the full year. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto in its Form 10-K for the year ended December 31, 2005 (Commission File No. 000-31511), dated March 22, 2006 and filed with the SEC.

 

5



 

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, liabilities, revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, stock-based compensation, intangible assets and goodwill, allowance for doubtful accounts, income taxes and legal and other contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

 

Certain Significant Risks and Uncertainties

 

The Company participates in a dynamic high-technology industry and believes that adverse changes in any of the following areas could have a material adverse effect on its future financial position, results of operations or cash flows: the ability of @Road to integrate Vidus operations successfully; the ability of @Road to accelerate or continue to grow as a result of its investment initiatives; the ability of @Road and its alliances to market, sell and support @Road solutions; the timing of purchasing and implementation decisions by prospects and customers; competition; the dependence of @Road on mobile data systems technology, wireless networks, network infrastructure and positioning systems owned and controlled by others; advances and trends in new technologies and industry standards; market acceptance of the Company’s existing or new solutions; development of sales channels; changes in third-party manufacturers, key suppliers, certain strategic or customer relationships; litigation or claims against the Company based on intellectual property, product, regulatory or other factors; and the Company’s ability to attract and retain employees necessary to support its growth.

 

Motorola is the sole supplier of microcontrollers and certain modems used in the Company’s products. Micronet is the sole supplier of our Internet Data Terminal (“iDT”) device. Everex is the sole supplier of our Internet Location Manager—WiFi (“iLM-W”) device. The Company expects to rely on these suppliers as the sole source for these components and devices for the next several years.

 

Foreign Currency Transactions

 

The functional currency of the Company and its foreign subsidiaries is the United States dollar. Accordingly, all monetary assets and liabilities are translated at the current exchange rate at the end of the period, non-monetary assets and liabilities are translated at historical rates and revenues and expenses are translated at average exchange rates in effect during the period. Transaction gains and losses have not been significant to date and are included in Other income, net on the Company’s Consolidated Statement of Operations.

 

Revenue Recognition

 

The Company follows specific and detailed guidelines in recognizing revenue in accordance with the provisions of AICPA Statement of Position 97-2, Software Revenue Recognition, as amended by Statement of Position 98-4, Deferral of the Effective Date of a Provision of SOP 97-2 and Statement of Position 98-9, Modification of SOP 97-2, as well as Accounting Research Bulletin No. 45, Long-Term Construction-Type Contracts and Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. The Company recognizes revenue when the price is fixed and determinable, persuasive evidence of an agreement exists, the obligations under any such agreement are fulfilled and collectibility is probable.

 

The Company’s revenues are comprised of hosted revenue and licensed revenue. Hosted revenue is derived from monthly fees for the Company’s Field Force Management (“FFM”) and Field Asset Management (“FAM”) solutions and monthly or upfront fees for in-vehicle hardware devices enabling a mobile resource to utilize these FFM or FAM solutions. Licensed revenue is comprised of license fees, installation, training and related post-contract customer support (“PCS”) services fees relating to our Field Service Management (“FSM”) TaskforceTM software solution.

 

Monthly fees for the Company’s hosted solutions are recognized ratably over the contract period, which commences (a) upon installation of our proprietary hardware devices in our subscriber’s mobile worker vehicles, or (b) upon the creation of subscription licenses and a subscriber account on its website where subscribers have elected to use its solution with a mobile telephone. Upfront fees for the Company’s hosted solution primarily consist of amounts for the in-vehicle enabling hardware device and peripherals, if any. The Company defers upfront fees at installation and recognizes them ratably over the minimum service contract period, generally one to five years. Product costs are also deferred and amortized over such period. Renewal rates for its hosted solutions not considered priced at a bargain in comparison to the upfront fees (as described in Staff Accounting Bulletin No. 104, Revenue Recognition). If the Company cannot objectively determine the fair value of any undelivered element included in hosted arrangements, it defers revenue until all elements are delivered, all services have been performed or fair value can objectively be determined.

 

Licensed revenue associated with the fees for the license of the Company’s FSM taskforce product and related customization and installation services is generally recognized using the percentage-of-completion method of accounting over the period that services are performed. For agreements accounted for under the percentage-of-completion method, the Company determines progress to completion based on actual direct labor hours incurred to date as a percentage of the estimated total direct labor hours required to complete the project. The Company periodically evaluates the actual status of each project to ensure that the estimates to complete each contract remain accurate. A provision for estimated losses on contracts is made in the period in which the loss becomes probable and can be reasonably estimated. To date, the Company has not incurred any such losses. If the amount of revenue recognized exceeds

 

6



 

the amount billed to customers, the excess amount is recorded as unbilled accounts receivable. If the amount billed exceeds the amount of revenue recognized, the excess amount is recorded as customer deposits.

 

The Company derives PCS fees from PCS agreements, which are generally initially purchased at the same time as a license for its Taskforce product. PCS can include telephone and email support and the right to receive unspecified upgrades on a when-and-if-available basis. PCS agreements may generally be renewed on an annual basis. The Company recognizes revenue for PCS, based on vendor specific objective evidence (“VSOE”) of fair value, ratably over the term of the PCS period. It generally determines VSOE of PCS based on the stated fees for PCS renewal set forth in the original license agreement. If the Company is unable to establish VSOE of fair value, it recognizes all fees ratably over the term of the PCS, when the only undelivered element is PCS.

 

For arrangements with multiple elements, such as licenses, customization services and PCS services, the Company allocates revenue to each element based upon its fair value as determined by VSOE. VSOE for each element is based on normal pricing and discounting practices when the element is sold separately. VSOE for PCS services is measured by the stated renewal rate. If the Company cannot objectively determine the fair value of any undelivered element included in license arrangements, it defers revenue until the earliest of either: (a) all elements are delivered, (b) all services have been performed or only PCS services remain to be delivered, or (c) fair value can objectively be determined. When the fair value of a delivered element has not been established, we use the residual method to record license revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the fee is allocated to the delivered elements and is recognized as revenue, assuming all other criteria have been met.

 

Comprehensive Loss

 

SFAS No. 130, Reporting Comprehensive Income, requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from non-owner sources.  Accumulated other comprehensive loss was comprised of unrealized losses of $99,000 and $78,000 on short-term investments at March 31, 2006 and December 31, 2005, respectively.

 

Intangible Assets and Goodwill

 

Intangible assets resulting from the acquisitions of entities accounted for using the purchase method of accounting are estimated by management based on the fair value of assets received. Identifiable intangible assets are comprised of core developed technology, order backlog, customer relationships, trademarks and trade names and other intangible assets. Identifiable intangible assets that have finite useful lives are being amortized over their useful lives of ten years for core developed technology, three years for order backlog and ten years for customer relationships. Trademarks and trade names have indefinite lives and as such are not amortized but are tested at least annually for impairment.

 

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The Company follows the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), under which goodwill is no longer subject to amortization.

 

Impairment of Long-Lived Assets

 

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An asset is considered impaired if its carrying amount exceeds the future net cash flow that the asset is expected to generate. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. The Company assesses the recoverability of long-lived and intangible assets by determining whether the unamortized balances can be recovered through undiscounted future net cash flows of the related assets. The amount of impairment, if any, is measured based on projected discounted future net cash flows.

 

The Company evaluates goodwill, at a minimum, on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilize comparable companies’ data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. The Company conducted its initial annual impairment test as of August 31, 2005 and determined there was no impairment. During the fourth quarter of 2005, the Company determined that the Vidus trade name was impaired. There were no events or circumstances during the three months ended March 31, 2006 indicating that a further assessment was necessary.

 

Derivative Financial Instruments

 

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), certain derivatives are

 

7



 

embedded in our Series B preferred stock that must be bifurcated and accounted for separately. The original host instruments were initially reported, at fair value, as Preferred Stock and the embedded derivatives were initially reported, at fair value, as liabilities. Because these derivatives do not qualify as hedging instruments, changes in fair values of such derivatives are reported as charges or credits to income.

 

Major Customers

 

For the three months ended March 31, 2006 AT&T Inc. represented 15% of total revenues. For the three months ended March 31, 2005, Verizon accounted for 15% of total revenues. During the three months ended March 31, 2006 and 2005, no other customer represented 10% or more of total revenues.

 

Recently Issued Accounting Pronouncements

 

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), that addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The statement eliminates the ability to account for stock-based compensation transactions using the intrinsic value method as prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and generally requires that such transactions be accounted for using a fair value based method and recognized as expense in the consolidated statement of operations. SFAS 123R also requires additional accounting for the tax benefit on employee stock options and for stock issued under the Company’s employee stock purchase plan. The adoption of SFAS 123R on January 1, 2006, had a material impact on the Company’s consolidated results of operations and financial position. See Note 9 — Employee Benefit Plans for additional disclosure related to FAS 123R.

 

In November 2005, the FASB issued FASB Staff Position (“FSP”) Nos. SFAS 115-1 and SFAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of other-than-temporary impairments. The adoption of the FSP did not have a material impact on the Company’s consolidated statement of operations and financial condition.

 

On June 7, 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements (“SFAS 154”). SFAS 154 changes the requirements for accounting and reporting, a change in accounting principle. Previously, most voluntary changes in accounting principles were required to be recognized by way of a cumulative effect adjustment within net income during the period of the change. SFAS 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005; however, SFAS 154 does not change the transition provisions of any existing accounting pronouncements.

 

Note 2 — Basic and Diluted Net Loss per Share

 

Basic net loss per share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares, composed of unvested restricted common stock and incremental common shares issuable upon the exercise of stock options, are included in diluted net loss per share (using the treasury stock method) to the extent such shares are dilutive. Potentially dilutive shares that are anti-dilutive, as calculated based on the weighted average closing price of the Company’s common stock for the period, are excluded from the calculation of diluted net loss per share. Common share equivalents are excluded from the computation in loss periods, as their effect would be anti-dilutive.

 

8



 

The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (in thousands, except per share amounts):

 

 

 

Three Months Ended
March 31,

 

 

 

2006

 

2005

 

 

 

 

 

(As Restated)

 

Net loss attributable to common stockholders (numerator)

 

$

(2,692

)

$

(8,176

)

Shares (denominator):

 

 

 

 

 

Basic

 

 

 

 

 

Weighted average common shares outstanding

 

61,198

 

57,385

 

Weighted average common shares outstanding subject to repurchase

 

 

 

 

 

 

 

 

 

Shares used in computation

 

61,198

 

57,385

 

Diluted

 

 

 

 

 

Dilution impact from option equivalent shares

 

 

 

Dilution impact from employee stock purchase plan

 

 

 

Add back weighted average common shares subject to repurchase

 

 

 

 

 

 

 

 

 

Shares used in computation

 

61,198

 

57,385

 

 

 

 

 

 

 

Net loss per share

 

 

 

 

 

Basic

 

$

(0.04

)

$

(0.14

)

Diluted

 

$

(0.04

)

$

(0.14

)

 

For the periods presented, the Company had securities outstanding which could potentially dilute basic income per share in the future, but which were excluded from the computation of diluted net loss per share in the periods presented, as their effect would have been anti-dilutive due to the Company being in a loss position or due to the shares being subject to repurchase by the Company on outstanding options with exercise prices greater than the average fair market value for the respective periods presented. Such outstanding securities consist of the following (shares in thousands):

 

 

 

Three Months Ended
March 31,

 

 

 

2006

 

2005

 

Outstanding options

 

9,359

 

9,388

 

Weighted average exercise price of outstanding options

 

$

4.82

 

$

5.06

 

 

Note 3.  Business Combinations, Goodwill and Intangible Assets

 

On February 18, 2005, the Company completed the acquisition of Vidus Limited (“Vidus”) in a transaction accounted for as a business combination using the purchase method. As consideration for the acquisition, the Company issued approximately 5.5 million shares of its common stock valued at $24.7 million, newly created redeemable preferred stock (“preferred stock”) valued at approximately $12.9 million, extinguished for cash existing debt of approximately $5.5 million in exchange for all of the outstanding shares of Vidus capital stock, and issued approximately 146,000 vested options with a fair value of $531,000. Under the terms of the stock option grants, each option has been classified as a non-qualified stock option, is fully vested, has an exercise price ranging from $0.67 to $2.00 per share and has a one-year term. The Company incurred acquisition related costs of $2.6 million, of which $478,000 was allocated to the issuance of common stock. The purchase price of approximately $46.3 million was allocated among the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the acquisition date.

 

The shares of common stock issued in the acquisition were valued in accordance with Emerging Issues Task Force Issue No. 99-12, Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination (“EITF 99-12”). In accordance with EITF 99-12, the Company established the first date on which the number of the Company’s shares and the amount of other consideration became fixed as of February 18, 2005. Accordingly, the Company valued the transaction using the average closing price of the Company’s common stock for the two-day period ending on February 18, 2005, or $4.53 per share.

 

The shares of redeemable preferred stock issued in the acquisition contain a provision whereby the redemption value may be increased based on the future price of the Company’s common stock (the “top-up” amount) and were recorded at fair value as required by SFAS No. 141, Business Combinations (“SFAS 141”) and Emerging Issues Task Force Issue No. 97-8, Accounting for Contingent Consideration Issued in a Purchase Business Combination (“EITF 97-8”). The fair value of the redeemable preferred stock was determined to be the aggregate of the redemption value of the preferred stock discounted at 6.5%, plus the estimated value of the embedded put and call options and the estimated top-up, discounted at the Company’s estimated cost of equity of 14.87%. See “Note 6—Derivative Financial Instrument Liability” and “Note 7—Redeemable Preferred Stock” for further discussion of the top-up.

 

The fair value of the stock options was determined using the Black-Scholes option pricing model with the following assumptions: no dividend yield, expected volatility of 96%, expected life of one year and a risk-free interest rate of 3.09%.

 

The Vidus acquisition was accounted for under SFAS No. 141, and certain specified provisions of SFAS 142. The results of operations of Vidus are included in the Company’s Condensed Consolidated Statement of Operations beginning February 19, 2005.

 

9



 

The following table summarizes the estimated fair values of the tangible assets acquired and the liabilities assumed at the date of acquisition (in thousands):

 

Cash

 

$

1,269

 

Accounts receivable

 

1,669

 

Prepaid expenses and other

 

412

 

Property and equipment

 

1,022

 

Notes receivable from stockholder

 

11

 

Total tangible assets acquired

 

4,383

 

Accounts payable

 

(540

)

Accrued liabilities

 

(2,148

)

Deferred revenue

 

(4,270

)

Total tangible liabilities assumed

 

(6,958

)

Net tangible liabilities assumed

 

$

(2,575

)

 

Under the purchase method of accounting, the Company allocated the total purchase price to the acquired net tangible and intangible assets based upon their fair market value as of the date of acquisition, February 18, 2005. The intangible assets recognized, apart from goodwill, represented contractual or other legal rights of Vidus and those intangible assets of Vidus that could be clearly identified. These intangible assets were identified and valued through interviews and analysis of data provided by Vidus concerning development projects, their stage of development, the time and resources needed to complete them and, if applicable, their expected income generating ability. There were no other contractual or other legal rights of Vidus clearly identifiable by management, other than those identified below.

 

The allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed was as follows (in thousands):

 

Fair value of net tangible liabilities assumed

 

$

(2,575

)

Intangible assets acquired:

 

 

 

Core developed technology

 

18,410

 

Order backlog

 

5,500

 

Customer relationships

 

3,660

 

Trademarks

 

3,250

 

Trade names

 

2,270

 

 

 

33,090

 

 

 

 

 

In-process research and development

 

5,640

 

Costs allocated to common stock issued

 

478

 

Deferred tax liability, net

 

(3,693

)

Goodwill

 

13,341

 

Purchase price

 

$

46,281

 

 

Core Developed Technology

 

Core developed technology of approximately $18.4 million relates to the Taskforce technology. At the date of acquisition, the developed technology was complete and had reached technological feasibility. Any costs to be incurred in the future will relate to the ongoing maintenance of the developed technology and will be expensed as incurred. To estimate the fair value of the developed technology, an income approach was used with a discount rate of 35%, which included an analysis of future cash flows and the risks associated with achieving such cash flows. The developed technology is being amortized over its estimated useful life of ten years.

 

Order Backlog and Customer Relationships

 

The order backlog of approximately $5.5 million and the customer relationships of approximately $3.7 million represented the fair value of the PCS obligations and existing customer relationships. To estimate the fair value of the order backlog and the customer relationships, an income approach was used with a discount rate of 30%. The order backlog and customer relationships are amortized over their estimated useful lives of three and ten years, respectively.

 

Trademarks

 

The taskforce solution has strong name recognition in European field service management, telecommunications, cable and utilities markets. To estimate the fair value of the trademark an income approach was used with a discount rate of 40%. The Company expects to continue to produce and market the Taskforce product. Therefore, an analysis of various economic factors indicated there period of time the trademark would contribute to future cash flows. Because cash flow is expected to continue indefinitely, the trademark is not being amortized, but is tested for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

 

Trade Names

 

The Vidus trade name had strong name recognition in European markets. At the time of the acquisition, the Company expected to continue to utilize the Vidus trade name in Europe. The fair value was determined using an income approach with a discount rate of 40% and based on an analysis of various economic factors the Company determined that the useful life of the trade name was indefinite. During the fourth quarter of 2005, management determined that the acquired Vidus trade name would no longer be utilized. As a result, the Company recorded an impairment charge of $2.3 million.

 

10



 

In-Process Research and Development

 

Development projects that had reached technological feasibility were classified as developed technology, and the value assigned to developed technology was capitalized. In-process research and development of approximately $5.6 million reflected research projects that had not reached technological feasibility or had no alternative future use at the time of the acquisition and was immediately expensed. In order to achieve technological feasibility, the Company estimated the hours required to complete the projects would cost approximately $5.7 million. The Company estimated the fair value assigned to in-process research and development using the income approach, which discounts to present value the cash flows attributable to the technology once it had reached technological feasibility using a discount rate of 40%. The stages of completion were determined by estimating the costs and time incurred to date relative to the costs and time expected to be incurred to develop the in-process technology into a commercially viable technology or product, while considering the relative difficulty of completing the various tasks and overcoming the obstacles necessary to attain technological feasibility. The weighted average stage of completion for all projects, in the aggregate, was approximately 80% as of the acquisition date. Cash flows from sales of products incorporating those technologies commenced in fiscal 2005. Expenditures to complete the acquired in-process research and development approximated the original estimates.

 

Goodwill

 

Goodwill of approximately $13.3 million represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition allows the Company to integrate its technology with Vidus’ technology for dynamic scheduling, dispatching, routing and appointment booking of mobile workers, cross-sell the companies’ solutions and further develop the combined technologies to provide customers with seamlessly integrated solutions. The acquisition also creates the ability to expand the Company’s business to Europe and other international markets. These opportunities, along with the ability to hire the Vidus workforce, were significant contributing factors to the establishment of the purchase price, resulting in the recognition of a significant amount of goodwill. The goodwill and intangible assets were allocated to the licensed reporting segment. The goodwill is not deductible for tax purposes.

 

The results of operations of Vidus are included in the Company’s Consolidated Statement of Operations from the date of the acquisition. If the Company had acquired Vidus at the beginning of the periods presented, the Company’s unaudited pro forma revenue, net loss, net loss attributable to common stockholders and net loss per share would have been as follows (in thousands, except per share amount):

 

 

 

Three Months Ended
March 31, 2005 (As
Restated)

 

Revenue

 

$

20,685

 

 

Net loss

 

(10,804

)

 

Net loss attributable to common stockholders

 

(10,930

)

 

Net loss per share (basic and diluted)

 

(0.18

)

 

Shares used in computing net loss per share (basic and diluted)

 

60,294

 

 

 

These results are not necessarily indicative of what the actual results of operations would have been if the acquisition of Vidus had in fact occurred on the dates or for the periods indicated, nor do they purport to project the results of operations for any future periods or as of any date.  These results do not give effect to any cost savings, operating synergies, and revenue enhancements which may result from the acquisition of Vidus or the costs of achieving these cost savings, operating synergies, and revenue enhancements.  The in-process research and development charge of approximately $5.6 million is included in the net loss attributable to common stockholders for the three months ended March 31, 2005.

 

Intangible Assets

 

SFAS 142 requires purchased intangible assets other than goodwill to be amortized over their expected useful lives unless these lives are determined to be indefinite.  Purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally two to ten years.

 

Intangible assets were as follows (in thousands):

 

 

 

As of March 31, 2006

 

As of December 31, 2005

 

 

 

Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Core developed technology

 

$

23,462

 

$

(7,101

)

$

16,361

 

$

23,462

 

$

(6,641

)

$

16,821

 

Order backlog

 

5,500

 

(2,041

)

3,459

 

5,500

 

(1,582

)

3,918

 

Customer relationships

 

3,660

 

(407

)

3,253

 

3,660

 

(316

)

3,344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

32,622

 

$

(9,549

)

$

23,073

 

$

32,622

 

$

(8,539

)

$

24,083

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

$

3,250

 

$

 

$

3,250

 

$

3,250

 

$

 

$

3,250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total intangible assets

 

$

35,872

 

$

(9,549

)

$

26,323

 

$

35,872

 

$

(8,539

)

$

27,333

 

 

11



 

During the fourth quarter of 2005, management determined that Vidus Limited would officially change its name to @Road, Ltd.  Therefore, the acquired Vidus trade name will no longer be utilized.  The name change is intended to leverage the @Road brand equity and more closely reflect the Company’s objective of adding end-to-end MRM solutions offerings in Europe.  As a result, the Company reduced the carrying value to zero resulting in an impairment charge of $2.3 million during the three months ending December 31, 2005.

 

For the three months ended March 31, 2006 and 2005, amortization of intangible assets was $1.0 million and $457,000, respectively. The estimated future amortization expense of purchased intangible assets as of March 31, 2006 is as follows (in thousands):

 

Remainder of 2006

 

$

3,030

 

2007

 

4,040

 

2008

 

2,458

 

2009

 

2,207

 

2010

 

2,207

 

Thereafter

 

9,131

 

 

 

 

 

Total

 

$

23,073

 

 

Note 4 — Short-Term Investments

 

Short-term investments included the following available-for-sale securities at March 31, 2006 and December 31, 2005 (in thousands):

 

 

 

March 31, 2006

 

 

 

Amortized
Cost

 

Unrealized
Gains

 

Unrealized
(Losses)

 

Estimated
Fair Value

 

U.S. Government debt securities

 

$

38,273

 

$

 

$

(94

)

$

38,179

 

Municipal debt securities

 

36,157

 

 

(5

)

36,152

 

Corporate debt securities

 

1,644

 

 

 

1,644

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

76,074

 

$

 

$

(99

)

$

75,975

 

 

 

 

December 31, 2005

 

 

 

Amortized
Cost

 

Unrealized
Gains

 

Unrealized
(Losses)

 

Estimated
Fair Value

 

U.S. Government debt securities

 

$

39,276

 

$

 

$

(72

)

$

39,204

 

Municipal debt securities

 

36,802

 

 

(6

)

36,796

 

Corporate debt securities

 

1,643

 

 

 

1,643

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

77,721

 

$

 

$

(78

)

$

77,643

 

 

In accordance with EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, the following table shows gross unrealized losses and fair value for those investments that were in an unrealized loss position as of March 31, 2006 and December 31, 2005, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in thousands):

 

 

 

As of March 31, 2006

 

 

 

Less than 12 Months

 

12 Months or Greater

 

Total

 

 

 

Fair Value

 

Unrealized Loss

 

Fair Value

 

Unrealized Loss

 

Fair Value

 

Unrealized Loss

 

U.S. Government debt securities

 

$

38,179

 

$

(94

)

$

 

$

 

$

38,179

 

$

(94

)

Municipal debt securities

 

36,152

 

 

 

 

36,152

 

 

Corporate debt securities

 

1,644

 

(5

)

 

 

1,644

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

75,975

 

$

(99

)

$

 

$

 

$

75,975

 

$

(99

)

 

12



 

 

 

As of December 31, 2005

 

 

 

Less than 12 Months

 

12 Months or Greater

 

Total

 

 

 

Fair Value

 

Unrealized Loss

 

Fair Value

 

Unrealized Loss

 

Fair Value

 

Unrealized Loss

 

U.S. Government debt securities

 

$

39,204

 

$

(72

)

$

 

$

 

$

39,204

 

$

(72

)

Municipal debt securities

 

36,796

 

(6

)

 

 

36,796

 

(6

)

Corporate debt securities

 

1,643

 

 

 

 

1,643

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

77,643

 

$

(78

)

$

 

$

 

$

77,643

 

$

(78

)

 

The company reviews investments in debt securities for other than temporary impairment whenever the fair value of an investment is less than amortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time. The decline in value of these investments is primarily related to changes in interest rates and is considered to be temporary in nature. When evaluating the investments, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, compliance with the Company’s investment policy, the severity and duration of the impairment, changes in the value subsequent to year-end and forecasted performance of the investee. The Company has reviewed those securities with unrealized losses as of March 31, 2006 and December 31, 2005 for other-than-temporary impairment, and has concluded that no other-than-temporary impairment existed as of March 31, 2006 and December 31, 2005.

 

Note 5 — Balance Sheet Components

 

Inventories consist of raw materials, work in process and finished goods, are stated at the lower of cost (average cost) or market and consist of (in thousands):

 

 

 

March 31,
2006

 

December 31,
2005

 

Raw materials

 

$

2,692

 

$

1,796

 

Work in process

 

2,403

 

2,013

 

Finished goods

 

5,246

 

2,278

 

 

 

 

 

 

 

Total

 

$

10,341

 

$

6,087

 

 

Property and equipment, net consist of (in thousands):

 

 

 

March 31,
2006

 

December 31,
2005

 

Computers and software

 

$

15,076

 

$

14,424

 

Manufacturing and office equipment

 

796

 

663

 

Furniture and fixtures

 

455

 

455

 

Leasehold improvements

 

695

 

695

 

 

 

 

 

 

 

Total

 

17,022

 

16,237

 

Accumulated depreciation and amortization

 

(10,837

)

(10,042

)

 

 

 

 

 

 

Property and equipment, net

 

$

6,185

 

$

6,195

 

 

Accrued liabilities consist of (in thousands):

 

 

 

March 31,
2006

 

December 31,
2005

 

Accrued compensation and related benefits

 

$

3,240

 

$

3,629

 

Other accrued expenses

 

4,252

 

5,122

 

Total

 

$

7,492

 

$

8,751

 

 

Note 6 — Derivative Financial Instrument Liabilities

 

In connection with the Vidus acquisition, the Company issued shares of its Series B-1 and B-2 redeemable preferred stock with an embedded feature indexed to the Company’s common stock, the top-up amount, that is payable to the holders of the redeemable preferred stock upon redemption. See “Note 7—Redeemable Preferred Stock” for further discussion. In accordance with SFAS 133, the top-up amount is considered a derivative instrument that should be bifurcated from the preferred stock host and recognized as either an asset or liability, depending on the rights and obligations under the contract, and should be measured at fair value. The Company accounted for changes in the fair value of the derivative instrument, which is not designated as a hedging instrument, through the current period earnings.

 

The Company uses the Monte Carlo simulation of its stock price with the movements in its stock price following a geometric Brownian motion to value the derivative instrument that is recorded as a derivative liability. In valuing the embedded derivative, the

 

13



 

Company used the market price of its common stock on the date of valuation, a historical volatility and the expected remaining period to the expiration date of the top-up period. The Company used the following valuation assumptions:

 

 

 

As of

 

As of

 

As of

 

As of

 

 

 

March 31,

 

December 31,

 

March 31,

 

February 18,

 

 

 

2006

 

2005

 

2005

 

2005

 

Historical volatility

 

47

%

54

%

88

%

88

%

Expected remaining period

 

6 months

 

9 months

 

15 months

 

15 months

 

Valuation date market price of common stock

 

$

5.07

 

$

5.23

 

$

4.10

 

$

4.50

 

Risk-free interest rate

 

4.75

%

4.33

%

3.32

%

3.07

%

Discount rate

 

15.97

%

16.07

%

15.12

%

14.87

%

 

The fair value of this derivative instrument was estimated at $4.1 million at March 31, 2006 and at $2.9 million at December 31, 2005. The change in the fair value of $1.2 million was recorded in total other income, net in the consolidated statement of operations for the three months ended March 31, 2006.

 

Based on the highest ten consecutive trading days average closing price of the Company’s common stock of $5.44 per share through March 31, 2006, the aggregate top-up, as if determined on March 31, 2006, is $8.7 million. The top-up amount will further decrease if, and to the extent that, the average closing price of our common stock for any ten consecutive trading day period ending on or before September 25, 2006 is greater than $5.44 per share.

 

Note 7 — Redeemable Preferred Stock

 

On February 18, 2005, the Board of Directors of the Company authorized the creation of four series of preferred stock and designated approximately 44,000, 44,000, 5,000 and 5,000 shares as Series A-1, A-2, B-1 and B-2 preferred stock, respectively, of which approximately 24,000, 44,000, 5,000 and 5,000 shares of Series A-1, A-2, B-1 and B-2 preferred stock, respectively, were issued and outstanding as of March 31, 2006.

 

Dividends

 

The holders of the Series A-1, A-2, B-1 and B-2 preferred stock are entitled to receive dividends at the rate of $6.50 per share annually. The dividends accrue day to day, whether or not earned or declared, from February 18, 2005. The dividends are payable when and if declared by the Board of Directors or when shares are redeemed. Any accumulation of unpaid dividends on the preferred stock does not bear interest. Accrued dividends totaled $560,000 as of March 31, 2006.

 

Redemption

 

The holders of the Series A-1 and B-1 preferred stock may elect to redeem all or a portion of the shares at any time, and the holders of the Series A-2 and B-2 preferred stock may elect to redeem all or a portion of the shares on or after February 18, 2007.

 

Each share of Series A-1 and A-2 preferred stock is redeemable for an amount equal to (i) $100 plus (ii) all declared or accumulated but unpaid dividends. Each share of Series B-1 and B-2 preferred stock is redeemable for an amount equal to (i) $100, plus (ii) all declared or accumulated but unpaid dividends, plus (iii) the top-up amount, if there is no consecutive ten trading day period from September 25, 2005 to September 25, 2006 during which the average per share closing price of the Company’s common stock is greater than or equal to $7.00. The top-up amount is calculated as follows: $54.2 million less the greater of (i) $38.0 million and (ii) the sum of 5.6 million multiplied by the highest average closing price for the Company’s common stock for any ten consecutive trading day period from September 25, 2005 to September 25, 2006 plus $15 million.

 

On or after February 18, 2009, the Company may redeem all or any portion of the Series A-1, A-2, B-1, and B-2 preferred stock.

 

Conversion

 

None of the issued series of preferred stock is convertible.

 

Liquidation

 

Series A-1, A-2, B-1 and B-2 preferred stockholders are entitled to receive, upon liquidation, an amount equal to their respective redemption price. The holders of the Series A-1, A-2, B-1 and B-2 preferred stock rank on a pari passu basis as to the receipt of such distributions and in preference to the holders of common stock.

 

14



 

Voting

 

Each outstanding share of preferred stock is entitled to eleven (11) votes on all matters, voting with the shares of common stock as a class.

 

The following table illustrates the activity for each series of preferred stock through March 31, 2006 (in thousands):

 

 

 

Series A-1

 

Series A-2

 

Series B-1

 

Series B-2

 

Total

 

Issued at fair value

 

$

2,352

 

$

4,424

 

$

3,205

 

$

2,937

 

$

12,918

 

Reclass of bifurcated derivative instrument, at fair value at issuance

 

 

 

(2,719

)

(2,451

)

(5,170

)

Amounts accrued for dividends for the three months ended March 31, 2005

 

17

 

32

 

4

 

4

 

57

 

Balance March 31, 2005 (As Restated, See Note 1)

 

$

2,369

 

$

4,456

 

$

490

 

$

490

 

$

7,805

 

Amounts accrued for dividends for the nine months ended December 31, 2005

 

114

 

217

 

24

 

24

 

379

 

Balance December 31, 2005

 

$

2,483

 

$

4,673

 

$

514

 

$

514

 

$

8,184

 

Amounts accrued for dividends for the three months ended March 31, 2006

 

39

 

71

 

7

 

7

 

124

 

Balance March 31, 2006

 

$

2,522

 

$

4,744

 

$

521

 

$

521

 

$

8,308

 

 

Note 8 — Common Stock

 

The Company’s Certificate of Incorporation, as amended, authorizes it to issue 250,000,000 shares of common stock.  At March 31, 2006 and 2005 there were approximately no shares subject to repurchase rights.

 

At March 31, 2006, the Company had reserved approximately 16,587,000 shares of common stock available for future issuance under its stock option plans, including approximately 9,359,000 shares related to outstanding stock options. In addition, the Company had reserved approximately 2,422,000 shares of common stock available for future issuance under the employee stock purchase plan.

 

Note 9 — Employee Benefit Plans

 

Adoption of SFAS 123R

 

The Company adopted the provisions of SFAS 123R, on January 1, 2006. Under SFAS 123R, stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award at that date, and is recognized as expense over the employee’s requisite service period (generally over the vesting period of the award) on a straight-line basis. The Company has no awards with market or performance conditions. The Company adopted the provisions of SFAS 123R using a modified-prospective approach. Under the modified prospective approach, prior periods are not revised for comparative purposes. The valuation provisions of SFAS 123R apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. Estimated compensation expense for awards outstanding at the effective date will be recognized on a straight-line basis over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under SFAS 123 as adjusted for estimated forfeitures.

 

The effect of recording stock-based compensation for the three months ended March 31, 2006 was as follows:

 

 

 

Three months
ended
March 31,
 2006

 

Stock-based compensation expense by type of award:

 

 

 

Employee stock options

 

$

800

 

Employee stock purchase plan

 

130

 

Amounts capitalized as inventory

 

(1

)

Total stock-based compensation

 

$

929

 

 

 

 

 

Tax effect on stock-based compensation

 

$

137

 

Net effect on net loss

 

$

792

 

 

 

 

 

Effect on earnings per share:

 

 

 

Basic

 

$

0.01

 

Diluted

 

$

0.01

 

 

The Company recorded $929,000 of stock-based compensation expense in its unaudited statement of operations for the three months ended March 31, 2006. A total of $905,000 of this expense relates to prior year awards vesting after January 1, 2006 and $24,000 relates to options granted after the adoption of SFAS 123R.

 

15



 

As of March 31, 2006, there was $5.2 million of total unrecognized compensation cost related to non-vested stock-based employee compensation arrangements. The cost is expected to be recognized over a weighted-average period of 2.6 years. Stock-based compensation totaling $1,000 was capitalized as inventory.

 

Valuation Assumptions

 

The weighted-average estimated fair value of employee stock options granted during the three months ended March 31, 2006 and 2005 was $3.00 and $3.39 per share, respectively. The Company calculated the fair value of each option award on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions (annualized percentages):

 

 

 

Three months ended

 

 

 

March 31, 2006

 

March 31, 2005

 

Stock option plans:

 

 

 

 

 

Volatility

 

69.60

%

104.00

%

Risk-free interest rate

 

4.49

%

3.77

%

Dividend yield

 

0.00

%

0.00

%

Expected life (in years)

 

5.00

 

5.00

 

Forfeiture rate

 

20.00

%

0.00

%

 

 

 

Three months ended

 

 

 

March 31, 2006

 

March 31, 2005

 

Employee stock purchase plans:

 

 

 

 

 

Volatility

 

60.06

%

117.00

%

Risk-free interest rate

 

4.30

%

2.05

%

Dividend yield

 

0.00

%

0.00

%

Expected life (in years)

 

0.50

 

0.50

 

 

Expected volatility is determined using a 50% weighting to both historical volatility of the Company’s common stock over a period of 4.5 years following the Company’s initial public offering and implied volatility based on the Company’s traded stock options. The risk-free interest rate is calculated using zero coupon rates on treasury notes stripped principal for each grant date given the expected life. The dividend yield of zero is based on the fact that the Company expects to invest cash in operations and has never paid cash dividends on common stock. The expected life is calculated for the period from the Company’s initial public offering using the interval between the grant date and the exercise date weighted by the number of shares exercised. The expected life is adjusted for the anticipated behavior in relation to unexercised options.

 

As stock-based compensation expense recognized in the statement of operations for the first quarter of fiscal 2006 is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated to be approximately 20% in the first quarter of fiscal 2006 based on a weighted average historical forfeiture rates. Under the provisions of SFAS 123R, the Company will record additional expense if the actual forfeiture rate is lower than estimated, and will record a recovery of prior expense if the actual forfeiture is higher than estimated. In the Company’s pro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.

 

Pro Forma Information under FAS 123 for Periods Prior to Fiscal 2006

 

Prior to adopting the provisions of SFAS 123R, the Company provided the disclosures required under SFAS 123 as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation — Transition and Disclosures (“SFAS 148”).

 

16



 

For purposes of pro forma disclosures under SFAS 123 for the three months ended March 31, 2005, the estimated fair value of the stock options was assumed to be amortized to expense over the stock options’ vesting periods. The pro forma effects of recognizing estimated compensation expense under the fair value method on net loss and loss per common share for the three months ended March 31, 2005 were as follows:

 

 

 

Three Months
Ended March 31,

 

 

 

2005

 

Net loss as reported (as restated)

 

$

(8,119

)

Add: stock-based employee compensation expense included in reported net loss, net of tax effect

 

 

Less: stock-based employee compensation expense determined under fair value based method, net of tax effect

 

(2,578

)

 

 

 

 

Pro forma net loss income

 

(10,697

)

Preferred stock dividends

 

(57

)

 

 

 

 

Pro forma net loss attributable to common stockholders

 

$

(10,754

)

 

 

 

 

Basic net loss per share:

 

 

 

As reported

 

$

(0.14

)

 

 

 

 

Pro forma

 

$

(0.19

)

 

 

 

 

Diluted net loss per share:

 

 

 

As reported

 

$

(0.14

)

 

 

 

 

Pro forma

 

$

(0.19

)

 

Equity Incentive Plans

 

The Company has equity incentive plans for directors, officers and employees. Stock options granted under these plans generally vest 25% one year from the date of grant and the remainder vest at a rate of 2.08% per month thereafter. Grants to existing employees generally vest 25% per year on the anniversary of the grant. Non-employee directors upon becoming a director receive an initial grant of options to purchase 40,000 shares vesting over 4 years and annual grants of options to purchase 10,000 shares vesting over one year. Options generally expire 10 years from the date of grant. The Company’s equity incentive plans contain a provision that automatically increases through 2010, on each January 1, the number of shares reserved for issuance under these plans by the lesser of 2,500,000 shares or four percent of the total shares outstanding on the last day of the preceding year.

 

17



 

The following table summarizes activity under the Company’s equity incentive plans for the three months ended March 31, 2006 (in thousands, except per share amounts):

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

Number of

 

Exercise

 

Contractual

 

Intrinsic

 

 

 

Shares

 

Price

 

Life (Years)

 

Value

 

Outstanding at January 1, 2006

 

9,571

 

$

4.81

 

 

 

 

 

Granted

 

234

 

4.91

 

 

 

 

 

Exercised

 

(79

)

2.44

 

 

 

 

 

Canceled

 

(367

)

5.16

 

 

 

 

 

Outstanding at March 31, 2006

 

9,359

 

$

4.82

 

7.07

 

$

11,959

 

Vested and expected to vest at March 31, 2006

 

8,332

 

$

4.94

 

6.87

 

$

10,713

 

Options exercisable at March 31, 2006

 

5,564

 

$

5.45

 

5.94

 

$

7,351

 

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for the 6.9 million options that were in-the-money at March 31, 2006. As of March 31, 2006, the closing price of the Company’s common stock was $5.07 per share. In-the-money options are options with an exercise price lower than the $5.07 closing price. Out-of-the-money options are options with an exercise price greater than the $5.07 closing price. The total intrinsic values of options exercised during the three months ended March 31, 2006 and 2005 were $193,000 and $115,000, respectively, determined as of the date of option exercise. The total cash received from employees as a result of employee stock option exercises during the three months ended March 31, 2006 and 2005 was approximately $194,000 and $172,000, respectively.

 

Additional information regarding options outstanding as of March 31, 2006 is as follows (shares in thousands):

 

 

 

Options Outstanding

 

Options Exercisable

 

Exercise Price

 

Number

 

Weighted
Average
Remaining
Contractual
Life (Years)

 

Weighted
Average
Exercise
Price

 

Number

 

Weighted
Average
Exercise
Price

 

$0.07 - 1.63

 

794

 

4.18

 

$

1.22

 

794

 

$

1.22

 

1.97 - 2.00

 

859

 

5.40

 

2.00

 

859

 

2.00

 

2.07 - 3.20

 

912

 

8.83

 

2.77

 

125

 

2.20

 

3.40 - 3.69

 

1,596

 

7.60

 

3.54

 

637

 

3.69

 

3.85 - 4.36

 

1,377

 

8.69

 

4.02

 

280

 

4.10

 

4.48 - 5.20

 

1,423

 

7.32

 

4.89

 

701

 

4.96

 

5.30 - 6.38

 

365

 

7.62

 

5.75

 

135

 

5.86

 

6.40 – 9.00

 

977

 

6.10

 

7.70

 

977

 

7.70

 

9.90 - 14.58

 

1,056

 

6.54

 

11.51

 

1,056

 

11.51

 

 

 

9,359

 

7.07

 

$

4.82

 

5,564

 

$

5.45

 

 

 

 

Options Exercisable

 

Options Unexercisable

 

Total Options

 

 

 

Number
of
Shares

 

Weighted
Average
Exercise
Price

 

Number
of
Shares

 

Weighted
Average
Exercise
Price

 

Number
of
Shares

 

Weighted
Average
Exercise
Price

 

In-the-money

 

3,298

 

$

2.84

 

3,559

 

$

3.78

 

6,857

 

$

3.33

 

Out-of-the-money

 

2,266

 

9.26

 

236

 

5.67

 

2,502

 

8.92

 

Total options outstanding

 

5,564

 

5.45

 

3,795

 

3.89

 

9,359

 

4.82

 

 

The Company settles employee stock option exercises with newly issued common shares.

 

Employee Stock Purchase Plan

 

The Company has an employee stock purchase plan for all eligible employees. This plan is considered compensatory under SFAS 123R. Under the plan, shares of its common stock may be purchased over an offering period with a maximum duration of two years at 85% of the lower of the fair market value on the first day of the applicable offering period or on the last day of the six-month purchase period. Employees may purchase up to 1,800 shares having a value not exceeding 20% of their gross compensation during an offering period. During the years ended December 31, 2005, employees purchased approximately 580,000 shares at an average price of $2.89 per share. There were no shares purchased during the three months ended March 31, 2006. At March 31, 2006, approximately 2,422,000 shares of common stock were reserved for future issuance. The Company’s employee stock purchase plan contains a provision that automatically increases, on each January 1, the number of shares reserved for issuance under the employee stock purchase plan by the lesser of 900,000 or two percent of the total shares outstanding on the last day of the preceding year.

 

18



 

Receivable from Sales of Stock

 

As a result of the Vidus acquisition, the Company has one note receivable outstanding from an employee that is secured by common stock. The note receivable totals $6,000 which will be fully paid by 2007.

 

401(k) Saving and Retirement Plan

 

The Company sponsors a 401(k) Saving and Retirement Plan (“Plan”) for all employees who meet certain eligibility requirements. Participants may contribute, on a pre-tax basis, between 1 percent and 15 percent of their annual compensation, but not to exceed a maximum contribution amount pursuant to Section 401(k) of the Internal Revenue Code. The Company is not required to contribute, nor has it contributed, to the Plan for any of the years presented.

 

Note 10 — Segment Reporting

 

Reportable segments are based upon the Company’s internal organization structure, the manner in which the operations are managed, the criteria used by the Company’s chief operating decision-maker to evaluate segment performance, the availability of separate financial information. The Company’s chief operating decision-maker is its Chief Executive Officer.

 

Effective with the acquisition of Vidus, the Company reports the results of its operations in two segments: Hosted and Licensed. The segments are managed separately because each offers different products and serves different markets. The Hosted segment provides FFM and FAM solutions that connect mobile workers in the field to corporate data on demand, help measure overall mobile workforce performance and manage mobile assets. The Licensed segment provides customers with the Company’s FSM Taskforce solution which is designed to enable a predictable and reliable customer experience from commitment to service fulfillment; and to help synchronize the call center and field service operation.

 

The financial information used by the Company’s chief operating decision-maker includes net revenue from external customers, gross margins and net loss for each of these segments.

 

Information about operations by reporting segment is as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2006

 

2005 (As Restated)

 

 

 

Hosted

 

Licensed

 

Consolidated

 

Hosted

 

Licensed

 

Consolidated

 

Net revenue from external customers

 

$

20,963

 

$

3,782

 

$

24,745

 

$

19,490

 

$

502

 

$

19,992

 

Cost of revenue

 

11,002

 

1,230

 

12,232

 

9,524

 

700

 

10,224

 

Intangibles amortization

 

 

1,010

 

1,010

 

 

457

 

457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin

 

$

9,961

 

$

1,542

 

$

11,503

 

$

9,966

 

$

(655

)

$

9,311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin percentage

 

48

%

41

%

46

%

51

%

(130

%)

47

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

$

(951

)

$

(2,207

)

$

(3,158

)

$

(364

)

$

(7,755

)

$

(8,119

)

Provision for (benefit from) income taxes

 

344

 

(934

)

(590

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(1,295

)

$

(1,273

)

$

(2,568

)