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TELULAR CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands except when referring to ARPUs, units or share data)
(Edgar Glimpses Via Acquire Media NewsEdge) Forward Looking Information
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Telular includes certain
estimates, projections and other forward-looking statements within the meaning
of section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934 in its reports and in other publicly available material.
Statements regarding expectations, including performance assumptions and
estimates relating to capital requirements, as well as other statements that are
not historical facts, are forward-looking statements. These statements reflect
management's judgments based on currently available information and involve a
number of risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. With respect to these
forward-looking statements, management has made assumptions regarding, among
other things, customer growth and retention, pricing, operating costs and the
economic environment.
The words "estimate", "project", "intend", "expect", "believe", "target" and
similar expressions are intended to identify forward-looking
statements. Forward-looking statements are found throughout Management's
Discussion and Analysis. The reader should not place undue reliance on
forward-looking statements, which speak only as of the date of this
report. Except as required by law, Telular is not obligated to publicly release
any revisions to forward-looking statements to reflect events after the date of
this report or unforeseen events.
Introduction
The following management's discussion and analysis is intended to help the
reader understand the results of operations and financial condition of Telular
Corporation. This discussion is provided as a supplement to, and should be read
in conjunction with, our Annual Report on Form 10-K for the year ended September
30, 2012 and our financial statements and accompanying notes.
Telular develops products and services that utilize wireless networks to provide
data connectivity among people and machines. Telular's software-as-a-service
("SaaS") offerings are created through Telular's competence in developing
complex software systems and wireless electronics that utilize the data
transport capabilities of today's commercial wireless networks. To enable these
services, Telular is a significant reseller of such commercial wireless
services.
We generate a majority of our revenue through the delivery of machine-to-machine
("M2M") services such as event monitoring and asset tracking services through
our Telguard, SkyBitz and TankLink business lines. A portion of our revenue
comes from the sale of specialty wireless hardware products designed by Telular
for use exclusively with its M2M services. Our operating expense levels are
based in large part on our expectations for our future revenues. If anticipated
sales in any quarter do not occur as expected, expenditure and inventory levels
could be disproportionately high, and our operating results for that quarter,
and potentially for future quarters, could be adversely affected. Certain
factors that could significantly impact expected results are described in Item
1A, Risk Factors.
The market for Telular's products is primarily in North and South America and
consists of a number of vertical applications including Telguard security alarm
conveyance, SkyBitz asset tracking; and TankLink storage tank level monitoring.
These markets are addressed primarily through indirect channels consisting of
third party agents, Value Added Resellers ("VARs") and distributors along with
in-house sales and customer support teams. A direct sales model is utilized for
certain large customers in each line of business. Fabrication of Telular's
products is accomplished through contract manufacturers located in China, Mexico
and the United States.
The following details areas of product delivery and research either recently
undertaken or anticipated in fiscal 2013.
Telguard - Telular's engineering team perpetually updates the Telguard product
and service portfolio through incremental feature development, both in hardware
devices and software functionality. In fiscal 2012, Telular completed and
launched the conversion of the entire Telguard hardware product line to 3G/4G
capability. Product innovation within this space is important for the long-term
success of Telguard and we expect to continue to enhance our Telguard software
platform and underlying hardware products going forward. In fiscal 2012, the
Telguard Message Center ("TMC"), which contains the underlying core software for
the Telguard service, was enhanced such that Telular can offer service to
security dealers in Canada. Furthermore, the architecture of TMC will be updated
so that it can support newly developed features and even more end-users and
increased traffic volumes in the future. During fiscal 2013 we plan to enhance
dramatically the interactive services and home automation features of our
Telguard service line and continue to enhance the capabilities of TMC.
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SkyBitz - On February 1, 2012, SkyBitz released to the market its newest
hardware device, the GTP series, which for the first time provides global
satellite tracking capability via the Iridium satellite network. Subsequent to
the release of the first GTP model, additional work was undertaken to complete
variations of that device that allowed for GPS location capability, remote
antenna mounting and cargo sensing capability. For fiscal 2013, we upgraded the
SkyBitz terrestrial device to operate on 3G/4G networks and are developing
internally a terrestrial device that is expected to deliver superior cellular
service at a lower cost than the current terrestrial solution. In 2013, we are
also working on updating the version of SkyBitz's InSight SaaS application.
TankLink - In fiscal 2013, we released the TankLink 90, the industry's first
3G/4G wireless tank monitoring solution. Telular plans to further enhance all
elements of the TankLink portfolio during fiscal 2013 to update the hardware as
well as support additional customer use cases for the solution.
Other M2M Solutions -Telular continues to evaluate additional M2M markets to
determine the viability of creating or acquiring M2M service in these markets.
Competition
Telular believes our advantages over the competition include:
Greater Focus -Telular is focused on creating M2M solutions, which we develop by
combining our historical competency in designing wireless networking electronics
and real-time transaction processing software with the data transport
capabilities of commercial wireless networks. This focus allows us to develop
high functioning software and products best suited to our customers' needs,
resulting in products that are easier to install and maintain and are more
reliable. Our primary competitors have the bureaucracy normally associated with
large companies and the management distraction associated with overseeing a
broad array of products and services; many of which are unrelated to one
another.
More Experience - Telular has been in the wireless electronics business for over
20 years. We have been creating and operating real-time transaction processing
software for over a decade and understands the importance of high reliability in
that regard. We have deployed products in more than 130 countries worldwide,
reflecting the quality, reliability and innovation of our product portfolio.
Broader Product line -Telguard, our largest line of business, includes targeted
software features and a more diverse set of hardware products than any of our
competitors and we believe this gives our customers a greater selection of
features and hardware devices from which to choose. Similarly, SkyBitz has an
array of satellite and terrestrial wireless radio devices that support the asset
tracking services it provides, which we believe encompasses a wider selection of
application-specific devices than most of its competitors.
Economies of Scale -Telguard's fully integrated end-to-end wireless solution is
now utilized by over 622,000 individual subscribers, which helps to minimize
costs on a per user basis. This large customer base also reflects our
significant experience and demonstrates credibility to the market.
Service and Support - Telular provides customers with comprehensive customer
service and product support. We believe that our commitment and ability to
provide superior service differentiates us from our competition.
There are several firms that compete with Telular's Telguard products and
services. These primary competitors include: Honeywell, Alarm.com, DSC and
Numerex. Based on internal estimates, we believe it has a portion of the market
share for all currently active cellular alarm communicators in the United
States, having introduced the first such device for digital cellular networks in
April 2005 and the first such device for 3G/4G networks in November 2012. Demand
for cellular communicators has increased markedly over the past few years. We
believe this is due to consumers eliminating traditional telephone lines and
therefore, requiring an alternative communication method to enable a home
security system. If this trend continues, we believe that we and our competitors
will continue to see substantial demand for products and related services.
Telular's Telguard hardware products will only interface with Telular's
proprietary message center, which interprets and forwards any alarms received to
our security monitoring customers in near real-time. We believe its competitive
advantages for this service are the fact that our hardware products interface
with the vast majority of alarm panels on the market and that installers can
quickly activate the hardware and service.
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Telular's SkyBitz offering has several primary competitors in asset tracking for
truck trailers. These include: ID Systems, Qualcomm and FleetLocate. In
addition, there are a number of other, smaller competitors making the market for
truck trailer asset tracking increasingly competitive. Telular differentiates
its SkyBitz solutions by providing advanced features on the web portal through
which its customers receive tracking data, maximizing battery life on the
tracking units to minimize the frequency of changing batteries and through
efficient design and manufacturing of our products to enable a low cost solution
for our customers. Positively, we are seeing new demand for SkyBitz's services
in other sectors, including oil/gas field services and intermodal
transportation.
There are numerous, small competitors to Telular's TankLink offering. The most
significant of these is Centeron, a division of Robertshaw Industries, which in
turn is a subsidiary of Invensys, Inc. More often, the TankLink offering
competes against the pre-existing, manual methods utilized by tank owners to
determine the fill level and reorder timing for products held within tank
vessels. Telular believes the key to growing our TankLink revenue is lowering
our prices to the greatest extent possible in order to cost justify
implementation of the TankLink solution. While we have lowered prices somewhat
to spur demand, we may further test the price elasticity of our TankLink
solution in fiscal 2013.
OUTLOOK
The statements contained in this outlook are based on current expectations.
These statements are forward looking, and actual results may differ materially.
We expect to expend most of our marketing and product development resources on
the M2M space, including continuing to capitalize on our favorable market
position in the domestic security alarm market by virtue of our well-regarded
Telguard offering, as well as continuing to improve overall penetration in the
asset tracking and tank level monitoring markets through SkyBitz and TankLink,
respectively.
UNIT SALES
During the first quarter of fiscal 2013, Telular sold approximately 37,300
Telguard units, compared with approximately 30,800 Telguard units for the same
period in fiscal 2012. This increase was primarily due to continued demand for
Telguard's 3G/4G products and for increased sales of the Personal Emergency
Response System ("PERS") units. On a consolidated basis for the first quarter of
fiscal 2013, Telular sold approximately 50,800 monitoring and asset tracking
units with an average selling price ("ASP") of $204 compared with 32,100 units
sold with an ASP of $152 in the same period of fiscal 2012. This increase is
primarily due to product mix. We expect Telguard sales of between 30,000 and
40,000 units on a quarterly basis throughout fiscal 2013.
SERVICE REVENUE
Service revenues have grown consistently, increasing to $13,979 in the first
quarter of fiscal 2013 compared to $8,286 of the same period in fiscal 2012.
This increase is due to increased activations in the event monitoring segment
and the inclusion of the services revenues of the asset tracking segment, which
is represented by SkyBitz. Service revenues represent 56% of total sales in the
first quarter of fiscal 2013compared to 61% for the same period of fiscal 2012.
Telguard service average revenue per unit ("ARPU") was $4.45 for the first
quarter of fiscal 2013 as compared to $4.30 for the same period of fiscal 2012.
The increase in ARPU was due to the combination of adding new subscribers and
customer mix. Specifically, new customers are being activated with a higher ARPU
as compared to those customers who are being deactivated. Our Telguard
subscriber base rose in the quarter to approximately 621,800, from 617,500
subscribers at the end of the fourth quarter of fiscal 2012. This increase was
due primarily to a strong overall demand of our Telguard products. Telular, on a
company-wide basis, ended the first quarter of fiscal 2013 with approximately
851,000 billable units, with an ARPU of $5.51 as compared to 593,000 billable
units and an ARPU of $4.69 for the same period of fiscal 2012.
RECENT DEVELOPMENTS
On January 31, 2013, Telular announced the declaration of a regular quarterly
dividend of $0.12 per share, payable on February 26, 2013 to shareholders of
record at the closing of business on February 19, 2013. Telular estimates the
cost of this dividend to be approximately $2,100 depending on the number of
shares outstanding at the time of the dividend.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
First quarter fiscal year 2013 compared to first quarter fiscal year 2012
Revenues and Cost of Sales
Change
2013 2012 Amount Percentage
Revenues by Segment:
Event monitoring $ 15,578 $ 13,705 $ 1,873 14%
Asset tracking 9,204 - 9,204 >100%
Total revenues $ 24,782 $ 13,705 $ 11,077 81%
Change
2013 2012 Amount Percentage
Revenues
M2M service revenue $ 13,979 $ 8,286 $ 5,693 69%
M2M hardware sales 10,789 5,031 5,758 114%
Subtotal M2M 24,768 13,317 11,451 86%
Other product sales 14 388 (374 ) -96%
Total revenue 24,782 13,705 11,077 81%
Cost of sales
M2M service cost of sales 4,024 2,310 1,714 74%
M2M hardware cost of sales 8,323 3,233 5,090 157%
Subtotal M2M 12,347 5,543 6,804 123%
Other product cost of sales 12 648 (636 ) -98%
Total cost of sales 12,359 6,191 1,078 17%
Gross margin $ 12,423 $ 7,514 $ 9,999 133%
Revenues
Segment
Event Monitoring ("EM") revenues increased 14% primarily due to the 23% increase
in EM hardware sales, which was driven primarily by Telguard hardware sales.
Asset Tracking ("AT") revenues were $9,204 for the first quarter of fiscal 2013.
SkyBitz is the sole line of business in the AT segment. Because Telular
purchased SkyBitz on February 1, 2012, there were no revenues for the AT segment
in the first quarter of fiscal 2012.
Type
M2M service revenues increased 69% showing steady growth as a result of an
increase in activations, an overall higher ARPU and the inclusion of asset
tracking services revenues. Telguard activated approximately 35,400 new
subscribers during the first three months of fiscal 2013 increasing its
subscriber base to approximately 621,800. Telguard's ARPU increased to $4.45 for
the first three months of fiscal 2013, compared to $4.30 for the same period of
fiscal 2012. This increase was due to a more favorable customer mix. New
customers are being activated with a higher ARPU as compared to those customers
who are being deactivated.
M2M hardware sales increased 114% primarily due to the inclusion of SkyBitz in
the first quarter of fiscal 2013 and an increase in sales of Telguard units.
Telular sold approximately 37,300 Telguard units during the first three months
of fiscal 2013, compared to 30,800 units during the same period of fiscal 2012.
This increase was primarily due to stronger overall demand of our Telguard 3G/4G
and PERS products. The ASP for Telguard units increased slightly to $137 for the
first three months of fiscal 2013 compared to $134 for the same period of fiscal
2012 due to a more favorable product mix. TankLink hardware revenues increased
22% for the first quarter of fiscal 2013 as compared to the same period of
fiscal 2012. This increase is primarily due to increased unit volume. TankLink
is focusing efforts to increase its revenue through its indirect sales channels
which should result in increased unit sales, possibly at a lower ASP. Other
product sales, which were primarily terminal products, decreased 96% because
Telular is no longer selling these products.
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--------------------------------------------------------------------------------Cost of Sales
M2M service cost of sales increased 74% primarily as a result of including
SkyBitz. As a percentage of service revenue, service cost was 29% for the first
quarter of fiscal 2013 and 28% for the same period of fiscal 2012. Gross margin
for M2M service was 71% for the first quarter of fiscal 2013 and 72% for the
same period of fiscal 2012.
M2M hardware cost of sales increased 157% primarily as a result of including
SkyBitz and an increase in sales volume for both Telguard and TankLink.
Contributing to an increase in hardware costs was the higher per unit cost to
manufacture the 3G/4G units. Gross margin for monitoring hardware was
approximately 23% for the first quarter of fiscal 2013, compared to 28% for the
same period of fiscal 2012. The decrease in gross margin was primarily due to
increased per unit production costs for the 3G/4G units and due to reduced ASPs
related to favorable pricing for important high volume customers.
Other product cost of sales decreased primarily as a result of decreased sales
of other products.
Operating Expenses
Change % of Revenues
2013 2012 Amount Percentage 2013 2012
Engineering
and
development $ 2,095 $ 1,287 $ 808 63 % 8 % 9 %
Selling and
marketing 3,165 1,785 1,380 77 % 13 % 13 %
General and
administrative 3,531 1,874 1,657 88 % 14 % 14 %
$ 8,791 $ 4,946 $ 3,845 35 % 36 %
Engineering and Development
The increase of $808 (63%) in engineering and development was primarily due to
the inclusion of SkyBitz's expenses in the first quarter of fiscal 2013 of $782
and the increase of $26 for Telular's Telguard business line and TankLink,
primarily related to an increase in expenses for prototype builds.
Selling and Marketing
The increase in selling and marketing of $1,380 (77%) was primarily due to the
inclusion of SkyBitz's expenses of $1,253 in the first quarter of fiscal 2013,
and the following increases in selling and marketing expenses for Telular's
Telguard business line and TankLink:
$51 increase in payroll expenses primarily due to increase in salaries
and commission expense;
$27 increase in facility related expenses. These expenses are
allocated between departments and selling and marketing allocation
percentage increased in fiscal 2013;
$21 increase in marketing expenditures such as tradeshows and related
collateral;
$28 increase in outside services and travel.
General and Administrative
The increase of $1,657 (88%) was primarily due to the inclusion of SkyBitz's
expenses in the first quarter of 2013 of $1,678 and the decrease of $21
of general and administrative expenses related to Telular's Telguard business
line and TankLink, primarily due to reduction of allowance for bad debts.
Other Expense
Other expense for the three months ended December 31, 2012 increased $215
compared to the same period of fiscal 2012. This increase was primarily due to
interest expense related to the Second Amended Loan Agreement with SVB entered
into in connection with the acquisition of SkyBitz on February 1, 2012.
Income Taxes
The provision for income taxes increased $276 to $1,220 for the first quarter of
fiscal 2013 as compared to $944 for the same period of fiscal 2012 primarily as
a result of increased net income before taxes.
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--------------------------------------------------------------------------------LIQUIDTY AND CAPITAL RESOURCES
Management regularly reviews net working capital in addition to available cash
to determine if it has enough cash to operate the business. On December 31,
2012, Telular had $9,160 of cash and cash equivalents and working capital of
$16,906, compared to cash and cash equivalents of $12,676 and working capital of
$16,630 on September 30, 2012. Simultaneous with the acquisition of SkyBitz on
February 1, 2012, Telular executed a Second Amended and Restated Loan and
Security Agreement (the "Second Amended Loan Agreement") with SVB. Under the
Second Amended Loan Agreement, Telular borrowed $30,000 in the form of a term
loan that was applied as a portion of the cash consideration for the acquisition
of SkyBitz. The term loan matures on February 1, 2017, the 5th anniversary of
the amendment. The loan requires quarterly payments of interest and principal,
with annual principal amortization of 10%, 15%, 20%, 20% and 25% in each of the
first five years, respectively, with the final 10% due on the maturity date. At
the option of Telular, interest will be incurred based on a rate ranging from
2.25% to 2.75% (depending on the calculation of the senior leverage ratio) above
the published LIBOR rates, or at a rate of .25% to .75% above the Prime interest
rate. The interest rate was 3% as of December 31, 2012. The Second Amended Loan
Agreement requires Telular to comply with certain financial covenants such as
maintaining a maximum senior leverage ratio and a minimum fixed charge coverage
ratio. As long as the senior leverage ratio is greater than 1.0 to 1.0 as of
any fiscal year-end, Telular must make additional principal payments based on
excess cash flow, as defined, calculated on an annual basis. During January
2013, Telular repaid $1,612 of principal based on this excess cash flow
calculation. The loan is secured by substantially all of the assets of Telular.
The loan is secured by substantially all of the assets of Telular. At December
31, 2012 the outstanding loan balance was $27,750 and Telular was in compliance
with all financial covenants. Loan fees and related costs of $338 are being
amortized over the term of the loan.
Management expects trade accounts receivable and inventory to turn into cash in
short periods of time. As such, given Telular's level of cash and cash
equivalents, trade accounts receivable and inventory, management believes
Telular has adequate resources to fund current and planned operations in a
manner consistent with historical practices.
Operations
Telular used $1,040 of cash from operations during the first three months of
fiscal year 2013 compared to cash generated of $2,603 during the same period of
fiscal year 2012. The decrease in cash generated was primarily due to a payment
of prepaid licensing fees of $2,500 and the payment of certain accrued
liabilities. The components of cash generated for the first three months of
fiscal 2013 are as follows:
$ 2,197 Net income for the period
The increase in trade accounts receivable is due to primarily
(65 ) increased sales.
(1,837 ) The increase in inventory reflects the minimum purchase requirements
of one of Telular's contract manufacturers and an increase in
certain products to facilitate increased Telguard sales volumes.
614 The increase in trade accounts payable reflects increased purchasing
levels from Telular's contract manufacturers to facilitate increased
Telguard sale volumes.
(2,435 ) The decrease in accrued liabilities was primarily due to payments
made in the first quarter of fiscal 2013 for bonuses earned in the
prior fiscal year, a decrease in accrued payroll andvacation, a
decrease in accrued warranty related to the expiration of extended
warranty and the decrease of accrued legal and accounting fees as a
result of payments made in the first quarter of fiscal 2013.
2,761 Non-cash expenses: $323 from stock based compensation; $386
depreciation expense; $1,571 of amortization expense, $9 related to
loss on disposal of operating assets and $472 related to the
decrease in deferred tax assets.
(2,275 ) Net cash used by other working capital items is primarily as a
result of the prepayment of licensing fees and development related
to a strategic vendor and the prepayment of company insurance
policies which are renewed on October 1. The expenseassociated with
Telular's insurance policies is recognized ratably over the fiscal
year.
$ (1,040 ) Total cash provided by continuing operations
24--------------------------------------------------------------------------------Investing Activities
Investing activities used $803 of cash for the first three months of fiscal 2013
for the acquisition of capital equipment. This compares to cash used by
investing activities of $252 for the same period of fiscal 2012 for the purchase
of capital equipment. The capital equipment purchases for the first quarter of
fiscal 2013 were primarily for the re-architecture of the Telguard website, the
establishment of the Telguard message center at a secure offsite location and
improvements in Telular's internal technology network.
Financing Activities
Financing activities used $1,673 of cash for the first three months of fiscal
2013 as a result of the payment of a cash dividend of $2,036 and the repayment
of loan principal of $750. Offsetting these payments was $1,113 of cash received
from the exercise of stock options. For the same period of fiscal year 2013,
cash of $1,660 was used for the payment of dividends and $10 was generated from
the exercise of stock options. Telular expects to use approximately $2,100 of
cash per quarter going forward for dividend payments, dependent on the number of
shares of common stock outstanding.
Critical Accounting Policies
Telular's financial statements are based on the selection and application of
significant accounting policies, which require management to make significant
estimates and assumptions. Telular believes that the following represent the
critical accounting policies that currently affect the presentation of Telular's
financial condition and results of operations.
Revenue Recognition
Telular's revenue is primarily generated from three sources:
· The sale of hardware units, under non-recurring agreements;
· The provision of monitoring services, under recurring agreements; and,
· The provision of ancillary services such as installation and non-warranty
repairs and royalty revenue.
Revenue is recognized when persuasive evidence of an agreement exists, the
hardware unit or the service has been delivered, fees and prices are fixed and
determinable and collectability is probable when all other significant
obligations have been fulfilled.
Telular recognizes revenue and associated costs from hardware unit sales at the
time of shipment of products which is when title transfers. Hardware unit
discounts are recorded as a reduction in revenue in the same period that the
revenue is recognized. Telular offers customers the right to return hardware
units that do not function properly within a limited time after delivery, see
the section entitled "Reserve for Warranty" below. Telular continuously monitors
and tracks such hardware unit returns and records a provision for the estimated
amount of such future returns, based on historical experience. While such
returns have historically been within expectations, Telular cannot guarantee
that it will continue to experience the same return rates that it has
experienced in the past. Any significant increase in hardware unit failure rates
and the resulting credit returns could have a material adverse impact on
operating results for the period or periods in which such returns materialize.
Monitoring service revenue is recognized at the time the service is
provided. Payments received in advance of providing monitoring services are
deferred and recognized over the period in which the service is delivered. Costs
associated with providing the monitoring service are recorded when the service
is provided.
For those arrangements that include multiple deliverables, Telular follows the
guidance in Accounting Standard Codification ("ASC") Subtopic 605-25, as amended
by Accounting Standards Update ("ASU") 2009-13. ASC Subtopic 605-25 established
criteria for determining if a revenue arrangement has multiple deliverables. ASU
2009-13 amended the multiple-element revenue guidance to (1) modify the
separation criteria by eliminating the criterion that requires objective and
reliable evidence of fair value for the undelivered item, and (2) eliminate the
use of the residual method of allocation and instead required that arrangement
consideration be allocated, at the inception of the arrangement, to all
deliverables based on their relative selling price. Certain multiple-element
revenue arrangements include both product and monitoring services. Telular has
determined that the revenue from multiple-deliverable arrangements has met the
criteria for treating each revenue source as a separate element. Consideration
is allocated to the deliverables at inception of an arrangement using the
relative selling price method, based on Telular's best estimate of selling
price. Key factors that are considered when establishing a selling price are the
industry segment to which the products and services are sold, estimated selling
price of our competitors, where available, and an internally established gross
margin range. Product revenue is billed and recognized upon shipment to the
customer while monitoring services revenue is billed periodically, usually
monthly, and recognized when the service is provided.
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Telular recognizes ancillary service revenues when the service is
delivered. Costs associated with these services are recorded in the period the
service is delivered. Royalty revenue, which is based on a percentage of sales
by the licensee, is estimated by Telular, based upon historical data provided by
the licensee, in the period in which management estimated the sales have taken
place. Telular periodically reconciles these estimates to the actual payments
received from the licensee, adjusting revenue accordingly. Historically,
Telular's estimates have not been materially different than the payments
received from the licensee.
Allowance for Doubtful Accounts
Telular maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of customers to make payment for products and
services. Telular evaluates the collectibility of customer receivables by
considering the payment history and the financial stability of its customers. If
Telular believes that an account receivable may not be collected, a charge is
recorded to the allowance account. At December 31, 2012 and September 30, 2012,
the allowance for doubtful accounts related to trade accounts receivable was
$357 and $351, respectively.
Reserve for Obsolescence
Significant management judgment is required to determine the reserve for
obsolete or excess inventory. Telular currently considers inventory quantities
greater than a one-year supply based on current year activity, to be excess
unless that inventory has alternative uses. Telular also provides for the total
value of inventories that are determined to be obsolete based on criteria such
as customer demand and changing technologies. At December 31, 2012, and
September 30, 2012, the inventory reserves were $411 and $283, respectively.
Changes in strategic direction, such as discontinuance or expansion of product
lines, changes in technology or changes in market conditions, could result in
significant changes in required reserves.
Reserve for Warranty
Telular maintains a reserve for products that are returned within Telular's
warranty period due to inoperability. Telular has different warranty periods for
its different product groups: the security monitoring products has a 24 month
warranty period; the asset tracking and tank monitoring products typically have
a 12 month warranty period. Significant management judgment is required to
determine the warranty reserve. Telular utilizes historical information
regarding units returned within the appropriate warranty period and the costs
incurred to repair returned units. Telular then estimates required warranty
reserves for future products that may be returned. As of December 31 2012 and
September 30, 2012, the warranty reserve was $1,430 and $1,542, respectively.
The decrease in the warranty reserve is primarily a result of the continued
expiration of SkyBitz units that were sold under a five-year warranty. Telular
is no longer offering such warranties for SkyBitz products.
.
Goodwill and Intangible Assets
Telular evaluates the fair value and recoverability of its goodwill in
accordance with Accounting Standards Update No. 2011-08, Intangibles - Goodwill
and Other (Topic 350), at least annually or whenever events or changes in
circumstances indicate the carrying value of goodwill may not be recoverable. In
determining fair value and recoverability, Telular makes projections regarding
future cash flows. These projections are based on assumptions and estimates of:
· growth rates for net revenues, cost of sales and operating expenses for the
monitoring businesses:
· anticipated future economic conditions:
· the assignment of discount rates relative to risk associated with companies
in similar industries: and,
· estimates of terminal values.
An impairment loss is assessed and recognized in operating earnings when the
fair value of the asset is less than its carrying amount. As of December 31,
2012 and September 30, 2012, goodwill was not impaired.
Telular reviews for the impairment of intangible assets whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. Telular evaluates recoverability of other intangible assets by
comparing the carrying amount of the intangible asset to future net undiscounted
cash flows generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets calculated using a
discounted cash flow analysis.
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--------------------------------------------------------------------------------Income Taxes
In determining income for financial statement purposes, Telular must make
certain estimates and judgments. These estimates and judgments affect the
calculation of certain tax liabilities and the determination of the
recoverability of certain of the deferred tax assets, which arise from temporary
differences between the tax and financial statement recognition of revenue and
expense.
In evaluating the ability to recover its deferred tax assets, Telular considers
all available positive and negative evidence including its past operating
results, the existence of cumulative losses and its forecast of future taxable
income. In estimating future taxable income, Telular developed assumptions
including the amount of future federal and state pre-tax operating income, the
reversal of temporary differences, the utilization of net operating loss
("NOLs") carryforwards to offset taxable income and the implementation of
feasible and prudent tax planning strategies. These assumptions require
significant judgment about the forecasts of future taxable income and are
consistent with the plans and estimates Telular is using to manage the
underlying business.
Telular has recorded significant valuation allowances that are intended to be
maintained until it is more likely than not the deferred tax asset will be
realized. The valuation allowance as of December 31, 2012 of $5,710 is primarily
for state net operating losses that will expire before they can be realized. The
realization of the remaining deferred tax assets is primarily dependent on
future taxable income in the appropriate state jurisdiction. Significant factors
that could negatively impact Telular's determination of the recognition of the
net deferred tax assets would be changes in the ownership of Telular and changes
in tax laws and rates. Based on Internal Revenue Code Section 382 ("Section
382"), changes in the ownership of Telular may limit the utilization of net
operating loss carryforwards. Any Section 382 limitation may require that
Telular record an additional valuation allowance against its deferred tax
assets. Management is not aware, at this time, of any such ownership changes
that would have a negative impact on the recognition of the net deferred tax
assets. Any reduction in future taxable income may require that Telular record
an additional valuation allowance against the deferred tax assets. An increase
in the valuation allowance would result in additional income tax expense in such
period and could have a material impact on Telular's future earnings.
Changes in tax laws and rates could also affect recorded deferred tax assets and
liabilities in the future. The State of Illinois increased its corporate income
tax rate from 7.3% to 9.5% in January 2011. The State also suspended the use of
net operating losses to offset current taxable income for three years. Telular
implemented a tax strategy that would lower taxable income apportioned to
Illinois, thereby lowering the current state tax payable. This strategy reduced
Telular's estimated use of future net operating losses in Illinois, resulting in
the increase in the valuation allowance against the net deferred tax assets
which increased Telular's deferred tax provision.
In December 2011, the State of Illinois passed tax legislation allowing for the
utilization of $100,000 of NOLs per year for the period over which the State
suspended use of NOLs.
Under the uncertain tax position provisions of ASC 740, Income Taxes, Telular
would recognize liabilities for tax issues in the U.S based on Telular's
estimate of whether, and the extent to which, additional taxes will be
due. These tax liabilities would be recorded in income taxes in the Consolidated
Balance Sheets. As of December 31, 2012, Telular has no uncertain tax positions
recorded in its financial statements. Telular does not include interest and
penalties related to income tax matters in income tax expense.
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